home → Organic world What theory of money did Keynes adhere to? Quantity theory of money. Theories of demand for money

What theory of money did Keynes adhere to? Quantity theory of money. Theories of demand for money

?Keynesian theory and Russian economy
2nd edition, revised and expanded
M., URSS, 2010, 222 pages

annotation
The macroeconomic analysis of the Russian economy presented in this book is based on the doctrine of J. M. Keynes, as well as the concepts of Keynesian-neoclassical synthesis, left Keynesians, and disequilibrium analysis. The specificity of the manifestation in the Russian economy of the main dependencies formulated by Keynesians, such as the elasticity of aggregate demand for interest and income, the dependence of interest on the supply of money, the multiplier effect of independent demand, the influence of external factors on distribution, investment, economic growth. The need for modification of traditional methods of economic policy recommended by Keynesians is substantiated.
For researchers, teachers of economic disciplines, graduate students and students of economic universities.

Abstract
At the bottom of macroeconomic analysis of the Russian economy presented in this book posits Keynes’ doctrine, as well as concepts Keynesian-neoclassical synthesis, left Keynesians, and theorists of disequilibrium analysis. Author examines specific character of expression in Russian economy of the main relationships formulated by Keynesians, such as aggregative interest and income elasticity of demand, the money-supply dependence of rates of interest, multiplier effect of the independent demand, impacts of external factors on the distribution, investments, and on economic growth. Author proves of the necessity of modification the traditional methods introduced by Keynesians.
This book is designed for scientists, lecturers, postgraduates, and students of economic colleges.

Table of contents:
Maintaining
Chapter 1. The principle of effective demand
1.1. Functions of aggregate demand and aggregate supply in the Keynes system
1.2. Prices of production factors and dynamics of aggregate demand
1.3. E. Hansen on cost dynamics and economic growth
1.4. Components of aggregate demand. Incentive to invest
1.5. Functions of aggregate demand and aggregate supply in the Russian economy
1.5.1. Aggregate bid price function
1.5.2. Aggregate demand price function. Consumer demand and distribution system (Kalecki's theory and distribution in the Russian economy)
1.5.3. Investment demand and interest rate
1.5.4. Specifics of exports as a component of final demand
1.5.5. External demand and export premium.
1.6. Cartoonist
1.6.1. The multiplier principle in Keynes's system
1.6.2. Total cost coefficients as a multiplier (V. Leontiev system)
Chapter 2. Theory of money
2.1. Quantity of money and inflation as interpreted by Keynes
2.2. Fundamentals of Keynesian theory of interest and money
2.3. Development of the Keynesian theory of interest and money by Hansen
2.4. Share premium
Chapter 3. Savings and investments. Combination of financial and monetary policy
3.1. Keynesian interpretation of equality of savings and investment
3.2. Keynesian - neoclassical synthesis. J.R. Hicks model
3.3. E. Hansen's contribution: interpretation of the IS-LM model
3.4. Internal and external equilibrium (Mundell model applied to the Russian economy)
Chapter 4. Fundamentals of the Keynesian theory of economic dynamics (R. Harrod’s model)
4.1. Basic assumptions of the Harrod model
4.2. Fundamental equation of economic dynamics
4.3. Three growth rates
4.4. Goal Conflicts
4.5. Interest rate
4.6. International trade
4.7. International capital movements
4.8. Secured and real growth rate of the Russian economy
Chapter 5. Monetary dynamic model of D. Tobin
5.1. Features of the Tobin model (Harrod and Tobin)
5.2. Features of the Tobin model (Hicks and Tobin)
5.3. Monetary dynamic model
5.4. Portfolio choice and q – investment theory
5.5. Monetary and financial policy instruments
Chapter 6. Modification of the Tobin model and analysis of dynamic processes in the Russian economy
6.1. Analytical scheme. Three variants of the Tobin model
6.2. Differentiation of economic sectors with demand for assets
6.3. Asset differentiation
6.4. Yield vector
6.5. Determination of demand functions for assets
6.6. Modification of asset demand functions
6.6.1. Resource constraint versus wealth constraint
6.6.2. Modification of the demand function for real capital
6.6.3. Modification of demand functions for high efficiency money and other financial assets
6.6.4. Demand for foreign assets
6.7. Statistical representation of demand for assets in the Russian economy
6.8. Asset supply
6.8.1. Sources of Asset Supply
6.8.2. High efficiency money offer
6.8.3. Offer of deposits and loans
6.8.4. Supply of real capital
6.8.5. Supply of foreign assets
6.9. System of equations of the monetary dynamic model
6.10. Designations
Chapter 7. Nonequilibrium analysis
7.1. Marshall's theory of equilibrium and elements of nonequilibrium analysis
7.2. Hicks on disequilibrium prices
7.3. Elements of nonequilibrium analysis in Patinkin
7.4. Nonequilibrium analysis by Klauer and Leijonhufvud
7.5. Barrow and Grossman: General Disequilibrium Model
7.6. Review of nonequilibrium analysis models
7.7. Market equilibrium and disequilibrium of the Russian economy

Conclusion

Introduction

In modern Russian economic literature, there is a complex process of mastering the theoretical wealth and tools of world economic science of the twentieth century, and the creative refraction of this wealth in relation to the analysis of the Russian economy. Much has been done to master the achievements of modern institutionalism, evolutionary economics, and the theory of the firm. However, the area of macroeconomics still remains the least developed section of economic theory, despite the fact that it is this area that is most relevant for economic and social policy and ensuring balanced sustainable growth. It is possible that the lag of macroeconomics as a branch of economic science is associated with the dominance in economic policy and journalism in the 1990s of conservative movements (primarily monetarism), which significantly simplified and schematized macroeconomic analysis. These trends were sufficiently discredited by the long depression of the 1990s in Russia (and economic crises in the West), but they were not clearly rejected in Russian economic literature, nor were they replaced by an alternative theoretical concept. Currently, monetarism is not as popular among economists and publicists as in the 1990s, but it still largely determines the vision of economic processes characteristic of the Russian monetary authorities, the heads of the Ministry of Finance and the Central Bank. Appeal to the works of Keynesians can greatly contribute to the development of an alternative theoretical concept and an alternative paradigm of economic policy in Russia.
Keynesianism is, first of all, a macroeconomic theory that has wide access to practice and assumes an active role of the state in determining the volume of investment, regulating interest rates, and income policy. As J.C. Galbraith writes, during the Great Depression, “Keynesianism proved to be a cure for the despair that was in close proximity. It did not reject the system, but saved it.”
Keynes's book "The General Theory of Employment, Interest and Money", published in 1936, marked the beginning of a revolution in economic theory - the "Keynesian revolution" - which consisted in the rejection of a number of postulates of the then dominant neoclassical theory developed by Marshall, Walras, Fischer. We are talking, firstly, about the postulate of “voluntary unemployment”, according to which workers refuse to work if they find that the utility of wages is less than the marginal burden of labor. Keynes, in accordance with obvious facts, builds his theoretical system on the basis of the recognition of involuntary unemployment and disequilibrium in the labor market. Secondly, Keynes rejected “Say’s law”, according to which supply itself generates demand, and, therefore, demand is always equal to supply, with the exception of random deviations that mutually balance each other. Third, Keynes rejected the quantity theory of money, which (with a number of reservations) argued that there was a direct and immediate connection between the quantity of money and the general price level.
However, it must be borne in mind that Keynes himself came from the Marshall school and largely adopted, if not his theoretical conclusions, then the method of scientific thinking and evidence. In particular, Keynes accepted the “first postulate” of neoclassical theory, according to which wages tend to the marginal productivity of labor. Keynes did not generally revise the microeconomic foundations of economic theory developed by Marshall. However, Keynes largely generalized Marshall's method of analysis in relation to the study of macroeconomic processes.
Keynesianism is not a unified economic doctrine. Already in 1937 D.R. Hicks made the first, significant attempt to combine some of the tenets of Keynes's theory with neoclassical doctrine. In his famous article "Keynes and the Classics," Hicks sought to interpret Keynes's concept not as a general theory, but as a special case of neoclassical doctrine applicable in conditions of deep depression. The basis for the proposed synthesis of Keynesian and neoclassical theory was to be a model describing the interdependence of total income and interest rates (IS – LM model).
In subsequent decades, thanks to the works of Hicks, Hansen, Pigou, Samuelson, Patinkin, Modiliani, and Tobin, a direction emerged called the Keynesian-neoclassical synthesis or orthodox Keynesianism. Some of the authors of this trend were closer to Keynes than to the neoclassicals (for example, Hansen), others (Pigou and Patinkin) were closer to the neoclassicals than to Keynes. The “Great Neoclassical Synthesis” declared in the 50s by Paul Samuelson meant that the field of microeconomic analysis remained within the framework of the neoclassical school, while macroeconomic analysis was based mainly on the principles of Keynes.
It is necessary to especially emphasize the role of E. Hansen in the development of Keynesian theory, in its dissemination and practical application in the United States (he was often called the “American Keynes”). According to Galbraith, for Hansen, economic ideas were inseparable from their practical use. “This is the man who follows Keynes, to whom we are indebted for that (social order) that even conservatives call capitalism.”
Hansen’s contribution to the development of Keynesian theory, as we see it, can be considered in the following areas:
(1) Development of the Keynesian theory of interest and money.
(2) A new interpretation of the IS-LM model, closer to reality. Analysis of mutual complementarity and optimal combination of financial and monetary policies.
(3) A combination of elements of macro- and microanalysis in the study of cost dynamics. Refusal of the postulate of diminishing marginal productivity of labor.
(4) Inclusion of monopolistic competition and prescriptively set prices into Keynesian analysis.
At the same time, within the Keynesian direction there have always been schools opposed to the neoclassical synthesis. This is, first of all, the school of “left Keynesians,” whose leaders were Joan Robinson and Mikhail Kaletsky, who drew their ideas not only from Keynes, but also from Ricardo and Marx. Left Keynesians abandon the theory of marginal productivity of labor, borrowed by Keynes from the neoclassicals, and develop their own theory of distribution. In the 60s of the twentieth century, the movement of “new Keynesians” (which can also be called the school of disequilibrium analysis) emerged. New Keynesians reject not only the macroeconomic neoclassical theory based on Say's Law, but also its microeconomic foundations developed by Marshall. The leaders of this school were Robert Klauer and Axel Leijonhufvud.
Keynes created his system in the 30s, when the international monetary system based on gold collapsed, and all major countries tried to get out of the crisis one by one. In the 60s, the economies of Western countries were more open, international ties were much stronger and played a greater role, and the situation was much more favorable than in the 30s. Therefore, in the models of the 60s and 70s, more attention is paid to the influence of traditional Keynesian methods of stimulating growth on external economic equilibrium. We are referring to the Tobin and Mundell-Fleming models, in which Keynesian analysis is organically complemented by the study of foreign economic relations and factors determining foreign economic equilibrium. (Mundell, who did much to develop Keynesian analysis in the 60s, acted as an adherent of the conservative theory of “supply-side economics” in the 90s).
Particularly important results for the analysis of the Russian economy, in our opinion, can be obtained by referring to the works of Vasily Leontiev, including not only his main, widely known works, but also a number of articles that treat special problems of the structure of final demand and distribution issues. We rely on Leontiev's theory when considering the multiplicative process in the Russian economy.
Leontiev did not consider himself to be in the Keynesian direction, but, as it seems to us, he is close to it in a number of aspects. We strive for a fruitful synthesis of quantitative methods and theoretical formulations of Leontief with the theoretical system of Keynes.
An important area that has significantly enriched Keynesian analysis is the theory of economic dynamics. We will consider in detail the dynamic models of Harrod and Tobin, which we believe are relevant for the analysis of processes occurring in the Russian economy.

In the 1960s, the influence of Keynesianism seemed undeniable. Keynesianism dominated university teaching, journalism, and determined the economic policy of Western countries. The most stringent version of Keynesian policy was carried out by Japan, which achieved unprecedented economic growth in the 50-60s. However, starting from the 70s, the influence of Keynesianism began to weaken rapidly. During the 70s and early 80s, anti-Keynesian, conservative trends apparently prevailed in Western economic science, journalism, teaching, and economic policy. In the 70s - 90s of the twentieth century, Keynesianism developed in conditions of intense competition with a number of conservative trends in economic science. During this period, James Tobin became the generally recognized leader of the Keynesian trend in the United States (and probably not only in the United States). It was Tobin who resisted the onslaught of monetarists, new classics, and supporters of “supply-side economics.” Therefore, his works of the 80-90s are sharply polemical in nature.
The revival of conservative movements, which regained, at least for a time, a dominant position, was called the “anti-Keynesian counter-revolution.” What are the reasons for this phenomenon? Keynesianism arose as a movement that rejected the “classical” postulates, which turned into a set of dogmas that clearly contradicted reality. However, having achieved a dominant position, Keynesianism itself turned into a “classic”, a set of dogmatic postulates and recommendations, the manipulation of which was expected to automatically produce the same, positive results. Keynes himself once warned against such a perception of scientific theory. But, apparently, this is the fate of any economic theory that has gained undeniable dominance in society - it inevitably becomes dogmatized, simplified, its recommendations are perceived as unambiguous techniques, effective in any circumstances and at any time. And when the set of its recommendations, which has turned into dogma, misfires (and such a moment inevitably comes), public opinion turns against the prevailing economic theory as such. Such a moment came in the first half of the 70s, when, as a result of the oil shock, an economic recession began, accompanied by inflation (this phenomenon was called “stagflation”), which contradicted one of the dogmatically interpreted provisions of Keynes, according to which true inflation is possible only in conditions of boom and full employment. All the policies of economic “activism” and “fine-tuning” recommended by the Keynesians began to be accused of not being able to ensure sustainable growth, but only generating inflation. “The stagflation of the 1970s was to Keynesian theory what the Great Depression was to classical orthodoxy,” writes Tobin.
However, the methods of monetarists, “new classics” and supporters of “supply-side economics” did not justify themselves in practice. Reagan's sweeping tax cuts led to an avalanche of national debt that swallowed up the private sector savings released by the tax cuts. The increase in government borrowing increased the interest rate. The simultaneous contraction of the quantity of money sharply limited credit. Contrary to the forecasts of the authors of the “supply theory”, investment fell and unemployment increased. The deepest depression of the post-war era began. True, high interest rates attracted foreign capital, which was practically the only source of industrial investment.
The cyclical recovery of the American economy, which began in 1983, is sometimes seen as the merit of conservative, anti-Keynesian currents of economic thought. However, in reality, the course of events is quite explainable from a Keynesian perspective. Government spending and deficit financing under the Reagan administration not only did not decrease, but on the contrary increased sharply (although, unlike, say, Kennedy, Reagan emphasized military rather than social programs). Accordingly, aggregate demand increased, stimulating recovery from the depression. Since 1982, the Federal Reserve System (the central bank of the United States) has abandoned the blind rule proposed by the monetarists (a constant increase in the quantity of money by 3-5% per year), and returned to the “fine-tuning” of the money supply and interest rates recommended by the Keynesians. Western European countries adhered to monetarist recommendations for a number of years, and the depression lasted longer in these countries than in the United States.
As Tobin writes, “Keynesian ideas have regained some of the public's credibility. Theorists returned to building models, trying to seal the cracks in Keynesian theory that were vulnerable to counter-revolutionary attacks."
Currents alternative to Keynesianism, which became widespread in the last decades of the twentieth century - monetarism, the school of “new classics”, “supply theory” - seek to prove the ineffectiveness and undesirability of active government policy and focus on self-regulation of the market.
It should be noted that all these theories, at their core, are not new. As James Tobin writes, “Monetarism is the oldest of these movements. Its main ideas go back to David Hume. ...It owes its modern revival, in the greatest degree, to Milton Friedman, who kept its tradition intact during the heyday of Keynesianism. He was waiting behind the scenes for his time, when Keynean theory and politics would stumble over some obstacle. Friedman objected to fine-tuning and all active policy and advocated a blind rule: just keep the money supply at a non-inflationary level, regardless of what happens in the economy from month to month."
Attempts to follow monetarist recommendations made in the late 70s and early 80s by central banks and governments of some Western countries yielded negative results and were soon abandoned.
The main provisions of the other two anti-Keynesian trends, dating back to Smith and Ricardo, are not new. “Supply-side theory” opposes government spending to the policy of reducing taxes as a tool to encourage private enterprise. Actually, the thesis that high taxes are not always effective is nothing new: you can read about this in Adam Smith. What is new is the assertion of the leader of the “supply theory” school, Laffer, that state budget revenues naturally increase as tax rates decrease (after tax rates have reached a certain level). This statement can be true only in specific situations and on a limited range of values, both tax rates and budget revenues. There is hardly any reason to elevate it to the rank of economic law.
The only country that followed the recommendations of the “supply theory” was the United States under the Reagan administration. It is clear that a sharp reduction in tax rates (while maintaining huge social programs and military spending) did not lead to an increase in tax revenues, but to a gigantic increase in public debt. At the same time, the tax cut did not cause a surge in investment activity: Americans prefer to invest their savings in government bonds, while investments in fixed capital are carried out through the import of capital and the corresponding trade balance deficit.
However, the United States is the only country that could afford such an experiment, because only the United States is able to service and repay both internal and external debt through the issue of national currency.
The assertions of the “new classics” about the omnipotence of automatic market processes are based on the premises they accept (absolute price flexibility, continuous and instantaneous “clearing of markets”, publicly available comprehensive information, rational expectations), and are completely arbitrary without these unrealistic premises. “In their adherence to the view that prices clear all markets, they (the new classics) are more solid than their predecessors 60 years ago and even than Friedman. One application of this theory is that there can never be involuntary unemployment. ...It is obvious that according to the “new classics” there should be no place for macroeconomic policy; they do not see the point of its application.”
The simplicity and absolute “sterility” of the premises of the “new classics” school make their theory convenient for teaching, but useless for analyzing economic reality. However, a concept that denies all government regulation does not require realistic macroeconomic analysis.
The school of “new classics” should not be identified with the neoclassical movement in economics of the second half of the 19th – early 20th centuries. The premises adopted by the “new classics” are very far from the scientific realism characteristic of microeconomic analysis given by Marshall, Chamberlin, Hicks, Pigou and other neoclassical economists. Hicks and Pigou took a lot from Keynes and laid the foundation for the synthesis of Keynesianism and neoclassicalism. As James Tobin writes, “Keynes’s classical opponents in the 1930s were much more moderate than their current followers. …Neither Pigou nor other orthodox economists of the time argued that the model in which prices “cleared” all markets at any given time actually applied to the real economy and could serve as a practical guide to government policy. …Pigou rejected the position that Keynes’s world is truly a “common” world. But in practical terms, he agreed with Keynes that spending on public works was a means of reducing unemployment. On the contrary, theorists of the new classical school do not currently admit that the problem of excess supply over demand can be in the foreground."
This does not mean that within the framework of anti-Keynesian trends in economic science, useful research is not being carried out on certain practical and theoretical problems. Within the framework of monetarism, the interdependencies between various monetary aggregates and bank reserves are studied; within the framework of the “theory of supply”, a search is being made for the optimal combination of various forms of taxation, direct and indirect taxes. However, as a justification for macroeconomic policy, all these directions ultimately turned out to be untenable, and not only in Russia. Referring to the failure of these concepts as a basis for macroeconomic policy, James Tobin wrote: “It is a shame that there are still “schools” of economic thought that have escaped the real test of experience.”
The echo of the “anti-Keynesian counter-revolution” reached Russia with the beginning of the era of reforms, when in the West the “counter-revolution” in economic theory had largely exhausted itself. During almost all the years of reform, the economic policy pursued in Russia was based on the postulates of deregulation and minimal government intervention in the economy. The theoretical (or ideological) justification for this course of economic policy was the currents of Western economic thought, which temporarily prevailed over Keynesianism in the 70-80s.
It is important to note that none of the modern anti-Keynesian trends claims to dismantle the socio-economic system that developed in Western countries in the 40s - 60s, largely under the influence of Keynesian theory. This system includes large social programs, huge government spending, including through deficit financing, regulation of interest rates through the operations of central banks on the open securities market, and income policy. In fact, we are talking only about limiting further growth of government spending and a more restrained response to cyclical fluctuations.
On the contrary, in Russia, a dogmatic appeal to anti-Keynesian theories was accompanied by the shock destruction of the existing economic system, the withdrawal of the state from the economy, the abandonment of social obligations, and did not serve as a scientific justification, but rather as an ideological cover for the implemented version of reforms. In no other country has the monetarist experiment been carried out with such persistence and such destructive consequences as in Russia in the 90s of the twentieth century. As a result, the Russian economy found itself in a state of protracted, destructive crisis, which in its depth surpassed the Great Depression of the 30s in the economies of capitalist countries. The need for a paradigm shift in economic policy is more than obvious.
Recently, the President and the Government have declared broad social and investment programs and corresponding government spending plans. At the same time, a number of economists and senior officials (including some ministers) are warning that speeding up government spending can only lead to a surge in inflation. With some degree of convention, we can say that the dispute between Keynesians and anti-Keynesians, consciously or unconsciously, is being transferred to Russian soil.
However, recourse to Keynesian theory and the traditional recommendations of Keynesians should not be as uncritical as the use of anti-Keynesian doctrines was in the 90s. Not a single theoretical doctrine can serve as an infallible guide to economic policy without a preliminary analysis of the adequacy of its premises and conclusions of the specific historical situation in a particular country.
In this book, we sought, firstly, to provide a critical analysis of the Keynesian doctrine, secondly, to show the adequacy of certain of its premises and recommendations to the realities of the Russian economy, thirdly, based on Russian realities, to propose the necessary modifications of traditional methods of economic policy, recommended by Keynesians.
As already emphasized, historical experience shows that not a single economic doctrine is capable of developing universal recommendations, blind adherence to which ensures the success of economic policy. In any case, a preliminary analysis of the real economic situation is necessary in order to find out to what extent the premises of a particular doctrine correspond to this situation, and, therefore, what consequences may be caused by certain recommendations and practical measures. Our task is not only to provide a critical overview of the Keynesian theoretical system (of course, not exhaustive). We also strive to show what effect traditional Keynesian recommendations can have on economic dynamics in the current Russian conditions: an increase in government spending and a reduction in interest rates, what fundamental changes in economic conditions are necessary for a change in economic policy paradigms to be truly effective, and not limited to broadcast, but , essentially, cosmetic changes.
The Keynesian concept can be summarized as follows.
1. The level of employment and output is determined by effective demand, i.e. the level of demand at which equilibrium is achieved between the aggregate demand price and the aggregate supply price.
2. Since the equilibrium of aggregate prices of supply and demand under conditions of full employment is only a particular, and limiting, case, the equilibrium of supply and demand under conditions of underemployment (forced unemployment) can be taken as a general case.
3. Keynes did not dispute the postulate of the classical theory, according to which the market automatically establishes equality between the demand price and the supply price. He disputed, firstly, the position according to which this equality is achieved at any level of demand, and secondly, that automatically acting market forces lead to the establishment of equality of supply and demand at the level of full employment.
4. The form of the supply function is determined by the dynamics of costs, which are based on the diminishing marginal productivity of labor. Since, over a short period of time, the marginal productivity of labor can be considered as a given value, the aggregate supply price function can also be considered as given, and its further analysis can be neglected.
5. Aggregate demand consists of consumer and investment demand, and the dynamics of each of them is determined by specific factors. Consumer demand is a stable function of income under a given distribution system. The distribution system that dominates society, in which wages tend toward the marginal productivity of labor, can be seen as given.
7. Investment demand is determined by the ratio of profits (current and expected) and interest rates. Investment demand is that component of aggregate demand that is least certain and stable and is most susceptible to cyclical fluctuations.
8. Keynes's theoretical analysis is focused on those factors and conditions that make it possible to raise the level of aggregate demand to a state that ensures full employment, in other words, to tighten the aggregate demand price curve to such a level that the point of its intersection with the aggregate supply price curve and the effective efficiency determined by it demand corresponded to output at full employment. In this case, the aggregate supply price curve and the consumer demand curve are actually taken as the given functions included in the model.
9. Aggregate demand can be increased, firstly, with the help of monetary policy aimed at reducing the interest rate, and secondly, with the help of direct government spending
etc.................

The Keynesian view of money is an approach according to which the state’s monetary policy, due to an insufficiently effective and weak transmission mechanism, cannot have any positive impact on the economy of a country in a state of depression.

According to John Maynard Keynes, the weakness of the transmission mechanism lies in the fact that the existing demand curve for money at its lower part looks like a horizontal straight line, indicating its high elasticity with respect to the existing interest rate on bonds, which is caused by the tendency of people to move their wealth to money when interest rates on bonds reach their normal level.

The horizontal appearance of the curve at the bottom creates a situation at which the interest rate is not able to fall low enough for the reduced interest rate to stimulate investment in the economy. The second reason for the weakness of the transmission mechanism is that the existing curve of planned investments on the graph is almost vertical, i.e. is almost completely inelastic and, thus, is not associated with changes in the interest rate, but only in income.

As can be seen from the graph, an increase in the money supply from MS1 to MS2 does not cause any changes in planned investments in the model of D. M. Keynes.

Quantity theory of money

This economic doctrine explains the level of commodity prices and the value of money by their quantity in circulation.

This hypothesis was first put forward by the French scientist J. Bodin in the 16th century. He explained the high cost of goods in Western Europe by an increase in the influx of precious metals. This idea was followed in the 17th century. S. L. Montesquieu, D. Hume, J. Mill, who, however, emphasized the proportionality between changes in the amount of money in circulation and their value.

In the 18th century A prominent representative of the quantitative theory of money was D. Ricardo. Moreover, it should be noted that his views were dual in nature: on the one hand, he recognized that the value of money is determined by the labor costs for its production, and on the other, he believed that in certain periods the value of a monetary unit changes depending on changes in the quantity of money. Thus, Ricardo explained, in particular, the reasons for the depreciation of Bank of England notes after the abolition of their exchange for gold in 1797.

By the beginning of the 20th century. The quantity theory of money came to dominate Western economic thought as an important component of the neoclassical theory of reproduction. The two most popular options are transactional and Cambridge.

The transaction option (from the English Transaction - deal), developed by the American economist I. Fisher, is based on a twofold expression of the amount of commodity exchange transactions for a certain period - as the product of the amount of money M by the average speed of their circulation Y and as the product of the number of goods sold Q by their average price P. This dependence is expressed by the “equation of exchange”: MY = PQ.

Using an equation in the spirit of the quantity theory of money, Fisher made a number of assumptions that “turned off” the influence of two elements: Y - the velocity of money and Q - the quantity of goods sold. He assumed that during short periods the indicated values are unchanged: the speed of circulation of money is determined by long-term factors (the degree of development of credit, the state of communications, etc.), and the production of goods cannot be increased, since, according to the neoclassical doctrine, capitalism is characterized by full employment of resources.

Having eliminated Y and Q from the analysis, Fisher left one causal relationship - from M (the quantity of money) to P (the price level), which is the essence of the quantitative theory of money.

The Cambridge version of the quantity theory of money (or the theory of cash balances) was developed in the works of English economists A. Marshall, A. Pigou, D. Robertson. Unlike Fisher, they based their version not on the circulation of money, but on its accumulation by economic entities.

The basic principle of the Cambridge version is expressed by the formula:

M = kPO,
where M is the amount of money;
p - price level;
Q is the physical volume of goods included in the final product;
k is the part of the annual income that participants in the turnover wish to keep in the form of money.

The Cambridge formula is essentially identical to the “equation of exchange”, since k is the reciprocal of the velocity of money (k = 1/Y). The difference in the two approaches was that if Fisher associated the constancy of the speed of circulation of money with the constancy of turnover factors, then the English economists associated it with psychology, i.e. habits of participants in the turnover. However, the final conclusion of both options is the same - a change in the quantity of money is the cause, not the consequence, of a change in prices.

The main mistake of the representatives of the quantitative theory of money is that, as K. Marx pointed out, that, in their opinion, goods enter into circulation without a price, and money without a value, “then in this process a certain part of the commodity mixture is exchanged for the corresponding part of the metal pile.”

In the 20-30s. The inconsistency of the quantitative theory of money was revealed - it turned out that the velocity of circulation of money, which the representatives of this theory considered unchanged, was subject to sharp fluctuations. In addition, the crisis of 1929-1933. showed the fallacy of another premise - about the maximum use of resources. Moreover, this concept does not take into account the impact of monopolistic associations on pricing practices, but considers such a process only the result of changes in the amount of money in circulation. All this determined the decline in the popularity of this concept.

However, in 1960-1980. There is a revival of the quantitative theory of money in the form of one of the neoclassical trends in political economy - monetarism.

Money Employment Theory

In his work “The General Theory of Employment, Interest and Money,” J. M. Keynes proposed the idea and methods of state regulation of the economy, substantiated the basic principles of the formation and organization of the information system necessary for the analysis of market relations. Thus, he formulated the basic principles of the future system of national accounting and the theory of information management for an objective reflection of processes and phenomena. He convincingly proved that without accounting and measurement it is impossible to manage and regulate socio-economic processes.

J.M. Keynes convincingly proved that:

The market is not a self-regulating system capable of endless prosperity;
the market cannot create equilibrium in the economy without government intervention;
the market has no mechanism for interest rates, prices and income;
oligarchs will not invest their funds for government needs and problems of the population;
money is a secondary factor, the main thing is the growth of consumption and savings, only from them do investments arise to expand production and increase the income of the population.

Previously, two opposing approaches were considered - Keynesians and neoclassicals - to explaining the aggregate supply curve. Since the volume of production depends on the size of the labor force, i.e. depending on how many people are involved in the production process, we can talk about two approaches to considering the problem of employment and unemployment.

Keynesians assume that there is a lot of unused capacity in the economy, so increasing national output will reduce unemployment. To increase production it is necessary to stimulate aggregate demand.

This can be done using the following methods:

Through government spending on organizing public works and purchasing goods and services from the private sector;
due to cheaper loans (lower interest rates), stimulating investment demand.

As a result of this method of combating unemployment, a budget deficit appears, the constant existence of which worsens the economic situation in the country. Neoclassical economists assume that the economy operates at full employment, but they do not deny the possibility of cyclical unemployment. Their position is that the market mechanism is capable of self-regulation and elimination of cyclical unemployment. In conditions of a cyclical recession, the state must help the crisis quickly fulfill its functions of forming new economic proportions and creating conditions for a new stage of economic growth on a more efficient basis. With the development of new industries, the demand for labor will increase and unemployment will drop to the natural level.

According to this theory, the state should pursue a strict monetary policy: reduce the budget deficit by cutting government spending and increase the interest rate. These measures will lead to the fact that only strong producers will remain in the market, which will then be encouraged by lower tax rates. A healthy, efficient market will be created - the basis for expanding production.

It should be taken into account that at the beginning of such a program the living standards of the population sharply deteriorate, so its use is appropriate in cases where the crisis is not of a deep, protracted nature.

General theory of money

The connection between money and production has been noticed for a long time. Money is an important element of any economic system, facilitating the functioning of the economy. Depending primarily on the assessment of the role of money and the monetary system in the development of the economy, there are various theories of money. These theories arise, are confirmed and dominate for some time. However, some of them, on the contrary, do not become widespread, since practice does not confirm or even simply refutes them.

There are three main theories of money: metallic (commodity), nominalistic and quantitative. These three theories are also called bourgeois theories of money, since they express the views of bourgeois economists on the essence of money, its functions and the laws of monetary circulation and contain the basic requirements of capitalists for monetary and monetary policy. These theories of money were modified with the development of capitalism.

This theory arose in England during the period of primitive accumulation of capital in the 16th-12th centuries. One of the founders of the metallic theory was W. Stafford (1554-1612). The metallic theory of money was characterized by the identification of the wealth of society with precious metals, which were credited with the monopoly of all the functions of money. Supporters of this theory did not see the need and logic of replacing full-fledged money with paper money; therefore, later they opposed paper money that could not be exchanged for metal.

The metallic theory of money developed in the era of primitive accumulation of capital, playing a certain progressive role in the fight against coin deterioration (reduction in the weight of metal). It was developed in its most complete form by the mercantilists (T. Men, D. Horse and others in England; J. F. Melon, A. Montchretien in France), who put forward the doctrine of full-fledged metallic money as the wealth of the nation. A stable metal currency, in their opinion, was one of the necessary conditions for the economic development of bourgeois society. The mistake of the supporters of the metallic theory was in identifying money with goods, not understanding the difference between money circulation and commodity exchange, not understanding that money is a special commodity that serves as a universal equivalent. Representatives of the metallic theory denied the possibility of replacing full-fledged metallic money with their signs in internal circulation.

With the development of capitalist production, bourgeois economists faced new problems: the need arose to develop credit money for internal circulation. The theory of money as wealth is disappearing from the scene. Critics of mercantilism denied the commodity nature of money and developed a nominalistic theory of money.

A theory that states that prices (and therefore the value of money) change, other things being equal, depending on the amount of money in circulation.

Quantity theory is, first of all, a theory of the demand for money. It is not a theory of production, or money income, or the price level. Any statement concerning these variables requires the combination of the quantity theory with special conditions imposed on the supply of money and other variables.

For economic units, the primary owners of wealth, money represents one of the forms of possession of wealth. For manufacturing enterprises (firms), money is a capital good, a source of production services, which, when combined with other goods, create products sold by firms. Thus, the theory of demand for money represents one of the sections of the theory of capital and, as such, acquires, perhaps, features not inherent in it itself when it is combined: with the price of each individual form of capital; with the supply of capital; with the demand for capital.

The founder of the quantity theory of money was the French economist J. Bodin. This theory was further developed in the works of the Englishmen D. Hume and J. Mill, as well as the Frenchman C. Montesquieu. D. Hume, trying to establish a causal and proportional connection between the influx of precious metals from America and the rise in prices in the 16th-17th centuries, put forward the thesis: “The value of money is determined by its quantity.” Proponents of this theory saw money only as a means of exchange. The quantity theory of money establishes a direct relationship between the growth of the money supply in circulation and the growth of commodity prices.

The foundations of the modern quantity theory of money were laid by the American economist and mathematician Irving Fisher (1867-1947). I. Fischer denied labor value and proceeded from the “purchasing power of money.” He identified six factors on which this “purchasing power of money” depends: the amount of cash in circulation, the speed of circulation of money, the weighted average price level, the quantity of goods, the amount of bank deposits, the speed of deposit and check circulation.

The modern quantity theory of money, studying macroeconomic models and the general relationship between the mass of goods and the price level, argues that the basis for changes in the price level lies mainly in the dynamics of the nominal money supply. It puts forward appropriate practical recommendations for stabilizing the economy through control of the money supply.

K. Marx gave a devastating critique of the quantity theory of money. He showed that adherents of this theory do not understand that precious metals, like other commodities, have intrinsic value. K. Marx emphasized that representatives of the quantitative theory did not understand the functions of money as a measure of value and a means of accumulation.

A variation of the quantity theory of money is monetarism.

The main features of the monetary regulation technique, which is carried out in accordance with neo-Keynesian recommendations, are the change in the official discount rate of the National Bank; tightening or weakening direct restrictions on the volume of bank loans depending on the size of aggregate demand and employment, the level of the exchange rate, and the scale of inflation; the use of transactions with government bonds primarily to stabilize their exchange rates and lower the price of government credit. The fundamental difference between the technique of monetary control based on the monetarist approach is the introduction of quantitative regulatory guidelines, changes in which change the direction of monetary policy. This or that indicator as a guideline for monetary policy largely determines both the main objects and the very technique of monetary control. Such indicators can be both the total money supply and its individual aggregates. Monetary policy allows for the accumulation of available funds of the state, enterprises, and the population and their use in the most rational and efficient manner. This is primarily determined by the fact that the products of enterprises cannot compete with similar imported goods.

There are two main reasons:

1) outdated production technology, as well as high additional costs associated with storage, transportation, and the sales process, make domestic products much more expensive than imported ones;
2) the low standard of living of Ukrainian citizens, a persistent downward trend in per capita income leads to a drop in purchasing power. Basically, the population buys low-quality but cheaply imported goods, while domestic products have no sales. Therefore, the main task of the state’s monetary policy is to create conditions for the breakthrough of domestic producers into the national and international commodity markets.

Such conditions in the situation that has developed in the economy may be:

Determining priorities in economic restructuring;
- preferential lending to priority areas and enterprises. Establishment of state control over the obligatory provision of loans by commercial banks to state-defined enterprises on preferential terms;
- creation of a more flexible taxation system that would allow stimulating the use of part of the profit for the development of production;
- creation of an appropriate legislative framework that makes it possible to simultaneously realize the interests of the entrepreneur and the state as a whole.

Economic theory of money

The economic literature discusses three concepts of money: metallic, nominalistic and quantitative.

Metal theory of money. It arose in England during the period of primitive accumulation of capital in the 16th-17th centuries. One of its founders is W. Stafford (1554-1612). Characteristic of this theory was the identification of wealth with precious metals, which were credited with performing all the functions of money. Proponents of this theory could not see the need to replace high-grade money with inferior paper money, and therefore were opponents of paper money that could not be exchanged for metal.

Nominalistic theory of money. The founders of the theory are the Englishmen J. Berkeley (1685-1753) and J. Stewart (1712-1780). There are two main provisions of their theory. First: money is created by the state; second: the value of money is determined by its face value. The most prominent representative of nominalism was the German G. Knapp (1842-1926). He believed that money has a purchasing value that is given to it by the state. At the same time, Knapp based his theory not on full-fledged coins, but on paper money, while in the latter he saw exclusively government treasury notes and change money, ignoring credit money (bill, banknote, check). The disadvantage of the theory was the separation of paper money from the value of goods and gold. The period of hyperinflation in Germany in the 20s showed the inability of the state to give money “purchasing power” and “value” and refuted this theory.

Quantity theory of money. Its founders were J. Bodin (1530-1596), D. Hume (1711-1776), J. Mill (1773-1836), C. Montesquieu (1689-1755). The essence of the quantity theory of money is already clear from its name. D. Hume, trying to establish a causal and proportional connection between the influx of precious metals from America and the rise in prices in the 16th-17th centuries, pointed out that the value of money is determined by its quantity. Representatives of the theory saw money only as a means of exchange and erroneously argued that in the process of exchange the money and commodity masses collide with each other, prices are set and the value of money is determined.

I. Fisher (USA) (1867-1947), mathematical economist, continued his research and laid the foundation for the modern understanding of quantitative theory.

Denying labor value, he proceeded from the “purchasing power” of money, which, in his opinion, depends on:

1) the amount of cash in circulation;
2) speed of money circulation;
3) weighted average price level;
4) quantity of goods;
5) the amount of bank deposits;
6) speed of deposit and check circulation. This theory studies the models and relationships between the mass of goods and the price level and asserts that the basis for changes in the price level lies mainly in the dynamics of the nominal money supply. Hence the recommendations for stabilizing the economy: they boil down to control over the money supply.

Monetarism as a type of quantity theory. The founder of monetarism is the creator of the Chicago school and 1976 Nobel Prize laureate M. Friedman. Monetarism arose in the 50s, was widely used in the USA, England, Germany during the period of stagflation in the late 70s and early 80s, as well as in the early 90s in Ukraine and Russia during the transition to a market economy. The pinnacle of developments of monetarism so-called. "Reaganomics". The fundamental thesis of the theory of monetarism is that the money supply in circulation plays a decisive role in the stabilization and development of a market economy. Modern market relations are a stable, self-regulating system that ensures economic efficiency. The state can intervene in the economy. But not to regulate aggregate demand, but to create a competitive environment with the help of rational monetary policy. Manipulation of the money supply is different for short-term and long-term periods. In the short term, an increase in the money supply leads to a decrease in interest rates and an expansion of demand, reducing unemployment. The long-term plan should include stabilizing inflation and making it fully predictable. Now monetarism is not a complete antipode to the Keynesian concept of economic development, but exists as a kind of neoclassical synthesis.

Directions that explain their nature should be separated from economic theories of money.

Thus, representatives of the rationalist school (Aristotle, Paul Samuelson, John Kenneth Galbraith) argue that money arose as a result of agreement between people, is the product of their agreement, i.e. social contract.

Representatives of the evolutionary movement (Adam Smith, David Ricardo, Karl Marx) believed that money arose as a result of an evolutionary process, which, regardless of the consciousness and will of people, led to the separation of individual items from the general mass, which took a special place as equivalent goods. Gradually, the role of such a commodity is assigned to noble metals and gold. Gold money reaches its highest point of development when coins appear.

It is believed that the first coins appeared in China and in the ancient Lydian state in the 7th-8th centuries. BC. These were copper coins. About 4 thousand years ago, gold coins began to be issued in Assyria. On the territory of Kievan Rus, metal money was in circulation in the 9th-10th centuries, mainly silver and partially gold. One of the first minted coins of Kievan Rus was the hryvnia - a silver bar weighing 132 grams.

Paper money also appeared in China in the 8th century AD.

The very first banknotes were issued in Stockholm in 1661.

Beginning in 1769, Russia began issuing paper money (assignations). Initially, banknotes were exchanged for silver and copper coins, then the constant increase in the issue of paper money led to their sharp depreciation and coins again became the main monetary unit (until the 18th century).

Electronic money became widespread in the 70s of the 20th century, when the US Congress gave permission to create a national commission on an electronic money transfer system.

Thus, money is something that can be used to purchase goods and services, to pay debt obligations, and also as a means of accumulation and savings.

The role of money in a market economy is expressed in the fact that it turns into capital or self-increasing value. Money serves the production and sale of social capital.

Since the 80s, the role of money as a tool for regulating the economy has increased, when developed countries began to implement monetary policy. In the economies of developed countries, money is essentially debt obligations of the state and commercial banks. Debt obligations successfully perform the functions of money as long as their value (purchasing power) is relatively stable.

Theories of demand for money

In economic theory, two main approaches have emerged when analyzing the demand for money: monetarist and Keynesian.

The monetarist theory of demand for money is based on neoclassical traditions. The founder of monetarism is I. Fischer (1867-1947). Modern monetarism arose as a new version of the quantity theory. Its founders are representatives of the Chicago school M. Friedman, K. Brunner.

The essence of monetarism comes down to two main provisions:

Money plays a decisive role in economic development.
- The Central Bank can exert a regulatory influence on the money supply, i.e., on the amount of money in circulation.

I. Fisher’s equation is usually taken as the basis for demand: MV = PQ,
where M is the amount of money in circulation; V - velocity of money circulation; (2 - number of goods sold; P - price level.

In this equation, Q, the quantity of goods sold, corresponds to real income. Nominal income is the product of real income Q and the absolute price level P. Consequently, the amount of money in circulation is equal to the ratio of nominal income to the velocity of circulation of money.

If M is the amount of money in circulation, replace it with the MB parameter (the amount of demand for money, i.e., the amount of money needed by enterprises, firms and individuals).

From this we can conclude that the amount of money demand depends on three factors:

From the absolute price level.
- From the level of real production volume.
- On the speed of money circulation.

Later, I. Fisher supplemented his exchange formula, in which he took into account not only the mass of money in circulation, but also the amount of money held in checking accounts in banks.

The exchange equation taking into account deposit circulation is as follows:

MV + MV = PQ = RT,
where M is the amount of funds in checking accounts; V is the speed of circulation of cash balances on accounts during a given period; P - weighted average price level; T - the sum of all goods (trade index).

The founder of modern monetarism is the American economist M. Friedman. A distinctive feature of modern monetarism is that when developing the theory of demand for money, the main attention of researchers is focused on the behavior of an individual economic entity, and then the findings are interpreted for analysis at the macro level (i.e., the demand for money is taken into account both at the level of society as a whole, and at the individual level).

In solving the problem of demand for money, modern monetarism relies on I. Fisher’s equation MV = PQ, which focuses on the relationship between the money factor and prices. M. Friedman links the dynamics of the money supply with nominal GNP. His theory is known as the pure theory of money demand. M. Friedman argued that the demand for money is determined not by ordinary “fixed” income, but by its stable part, the so-called permanent income, calculated as a weighted average based on the level of income for the current and previous years. In this regard, he proposed a new interpretation of the quantity theory of money: MV = РХ

Where M is the money supply; V is the velocity of income circulation; P - price level; Y is the rate of real income; PY is actually nominal GNP.

The value of V is stable, that is, it is not constant in the short term, but changes smoothly in the long term. In this case, the connection between the money supply and nominal GNP is direct. If V is stable, then the money factor can be written with a certain coefficient “K”, then:

MK = GNP.

To explain the connection between the money supply and GNP, M. Friedman introduces the category of a portfolio of assets, that is, the totality of all resources that an individual possesses. He noted that each person gets used to a certain ratio of money and other types of assets in his “asset portfolio.” Based on this, M. Friedman proposed a “monetary rule” for a balanced long-term monetary policy, that is, maintaining a reasonable increase in the money supply in circulation. The magnitude of this increase is determined by M. Friedman’s equation:

DM = AR + DH

Where DM is the average annual growth rate of the money supply; AR - average annual rate of expected inflation; DY is the average annual growth rate of GNP over a long period.

M. Friedman's monetary rule assumes a stable and moderate growth of the money supply by 3-5% per year.

Practical testing of this theory was carried out in stable functioning economies. In our country, it did not produce positive results, since during its implementation there were other factors that negatively affected the economy.

Nominalistic theory of money

The nominalistic theory of money arose under the slave system; it denied the intrinsic value of money to justify the destruction of coins in order to increase treasury revenues. This theory was formed in the XVH-XVIII centuries, when monetary circulation was flooded with inferior coins. The first representatives of nominalism were the Englishmen J. Berkeley and J. Stewart. They believed that, firstly, money is created by the state, secondly, its value is determined by its face value, and thirdly, the essence of money comes down to the ideal price scale. For example, J. Stewart defined money as a price scale with equal divisions. K. Marx, criticizing these provisions, wrote that weighing a sugar loaf can only be done using a weight, which itself has a weight taken as a unit. Likewise, money can measure the value of goods, having an independent value.

Consequently, the nominalists completely denied the value nature of money, considering it as a technical instrument of exchange.

Nominalism took a dominant position in political economy at the end of the XDC - beginning of the 20th century. But unlike early nominalism, the object of his defense was not inferior coins, but paper money (treasury notes).

The essence of nominalism was most clearly manifested in the theory of money of the German economist G. Knapp (“State Theory of Money”).

Its main provisions were as follows:

Money is a product of the state legal order, a creation of state power;
- money is a charter means of payment, i.e. signs endowed with payment power by the state;
- The main function of money is as a means of payment.

Knapp wrote that the essence of money lies not in the material of signs, but in the legal norms governing their use.

The fallacy of Knapp's state theory of money was that: firstly, money is not a legal category, but an economic one; secondly, metallic money has an independent value, and does not receive it from the state; the representative value of paper money is also not determined by the state, but is determined by objective economic laws; thirdly, the main function of money is not a means of payment, but a measure of value.

The Austrian economist F. Bendixen in his works (“On the value of money”, “On money as a universal denominator”) tried to provide an economic justification for the state theory of money, evaluating money as evidence of the provision of services to members of society, giving the right to receive reciprocal services. But his attempt to economically substantiate nominalism failed, since when assessing the essence of money he ignored the theory of value.

During the economic crisis of 1929-1933. Nominalism was further developed as a theoretical basis to justify the departure from the gold standard. Thus, J.M. Keynes (“Treatise on Money,” 1930) declared gold money “a relic of barbarism,” “the fifth wheel of the cart.” He proclaimed ideal paper money, which is more elastic than gold, and supposedly should ensure the constant prosperity of society. He considered the displacement of gold from circulation by paper money as the emancipation of money from gold and the victory of the Knagsch theory. Keynes believed that all civilized money is chartal and Knappian chartalism is fully realized.

What was wrong with Keynes's theory was the assertion that metallic circulation is inelastic: in reality it is achieved by issuing banknotes redeemable for gold. The practical goal of Keynes's nominalism was the theoretical justification for the abolition of the gold standard, the transition to paper money circulation and the regulation of the economy through the management of the inflationary process.

Currently, nominalism is one of the dominant theories of money on the question of its essence. Thus, the famous American economist P. Samuelson believes that money is a symbol. In his work “Economics” he writes: “The era of commodity money was replaced by the era of paper money. Paper money personifies the essence of money, its inner nature... Money is an artificial social convention.”

Thus, all varieties of nominalism are characterized by the same defects: ignoring the commodity origin of money, abandoning its most important functions, identifying money with the scale of prices, the ideal unit of account, etc.

Keynesian theory of money

The main provisions defended by Keynesians in the field of monetary theory are as follows:

1 . The market economy within itself is an unstable system with many “vices”. Therefore, the state must regularly use various instruments to regulate the economy, including monetary policy.

2. The chain of cause-and-effect relationships between the supply of money and nominal GNP is such that a change in the money supply causes a change in the level of the interest rate, and this, in turn, leads to a change in investment demand and, through the multiplier effect, to a change in nominal GNP.

3. The basic theoretical equation of Keynesianism:
GNP = C + I + G + NX,
where C is consumer expenditures of the population;
I - investment;
G - government spending on the purchase of goods and services;
NX is a pure export.

4. Keynesians recognize that the chain of cause and effect between the money supply and nominal GNP is large. When conducting monetary policy, the central bank must have comprehensive information (for example, how a change in the interest rate will affect investment demand and, accordingly, how much the GNP will change) so as not to find itself in a “liquidity trap.”

5. Keynesians believe that monetary policy is not as powerful a means of stabilizing the economy as, for example, fiscal or budget policy.

6. In the long term, the state, according to Keynesians, carries out inflationary financing. But they believe that the main problem in government regulation is to spur effective demand, and not to fight inflation, which should be regulated (the economy needs inflation, since it is an additional generator of effective demand).

But there are no guarantees that inflation will not get out of control. For example, a situation may arise when, in order to further increase production volume, the money supply is increased. The first reaction of the market will be an increase in prices for goods and services. Buyers have increased demand associated with the expected further rise in prices. And when new goods appear, demand will be increased and, as a result, prices will continue to rise.

Theories of the origin of money

There are two concepts of the origin of money: rationalistic and evolutionary.

The rationalistic concept explains the origin of money as the result of an agreement between people who were convinced that special tools were needed in the process of exchanging goods. This concept is based on a subjectivist-psychological approach to the origin of money. This approach was first found in Aristotle and prevailed until the 17th century. It is also present in many modern economists. For example, the famous American economist P. Samuelson defines money as an artificial social convention.

According to another concept - evolutionary, money appeared as a result of an evolutionary process, which, against the will of people, led to the fact that some objects stood out from the general mass and took a special place as an intermediary in the exchange of goods. This concept is most scrupulously set out in the works of K. Marx. In a laconic form it can be presented as follows.

In prehistoric times, when the exchange of goods was not universal and systematic, but was a separate, random phenomenon, one product was directly exchanged for another product, for example, 2 goats = 16 bags of wheat.

With the increasing division of labor in society, non-monetary exchange encountered a number of difficulties:

A) the interests of the producers entering into an exchange transaction may not coincide (for example, the owner of grain exchanged it only for livestock, and the owner of livestock needed pottery; the potter wanted to receive grain or even firewood or fabric);
b) the proportions of exchange depended on the consumer properties of the goods (it was impossible, for example, to exchange half a pot or a quarter of an axe).

These contradictions of natural exchange created the conditions for the isolation of a special commodity from the commodity world, which was able to perform all the functions of money and, because of this, became money.

Money became a commodity that did not change its properties over time and had a constant value. These were most often metal ingots, sea shells, precious and semi-precious stones. In Europe, metal most often acted as a medium of exchange, because it was compact, easily stored and transported, did not deteriorate over time, and was easily divided into the required number of parts.

The special nature of money is that the value of any product can be expressed in it and any product can be purchased with money. The nature of money is revealed through its functions.

Since ancient times, money has attracted the attention of human thought. The Austrian economist K. Menger calculated that 5-6 thousand special works were published in the world on the problems of money, from ancient times until the beginning of the 20th century. By now, their number has at least doubled.

However, many questions of the theory of money still remain unclear, including the question of the appearance of money.

There are even completely unthinkable statements. For example, a French religious publication from 1554 claims that Adam invented money.

In economic theory, there are 2 theories of the origin of money:

Rationalistic;
evolutionary.

The first explains the origin of money as the result of an agreement between people who invented it in the form of a special instrument used to move values in exchange. This theory was first outlined in Aristotle’s work “Nicomachean Ethics”. He wrote: “everything that participates in the exchange must be somehow comparable: by common agreement a coin appears: that’s why its name is “nomisma”, because it exists not by nature, but by institution.” Aristotle argued that for exchange there must be some kind of unit of measurement, moreover, based on convention.

The idea of money as a contract reigned supreme until the 18th century, when advances in archeology shook it. However, this approach to understanding the issue of the origin of money is still present. In particular, the American economist P. Samuelson defines the concept of “money” as an artificial social convention. Economist J.C. Galbraith believes that "the assignment of monetary functions to precious metals and other objects is the product of agreement between people."

Evolutionary theory explains the appearance of money as the result of an evolutionary process, which in itself, regardless of the desire of people, led to the fact that some objects stood out from the crowd and took a special place. The discovery was the views of the classics of economic theory A. Smith and D. Ricardo, generalized and developed by K. Marx, about the origin of money from the exchange process as a result of the division of social labor.

K. Marx explains the origin of money as an objective spontaneous process of development of a certain form of production relations. Money is a necessary product and an indispensable condition for the development of commodity production. Arising on the basis of the value commensurability of the products of labor, money serves as an external form for expressing their value proportions.

An important conclusion of this theory is the conclusion about the commodity origin of money.

Currently, the question of the origin of money is open. On the one hand, evolutionary theory is confirmed by the history of the emergence of money. On the other hand, the existence of modern money (paper and credit), which does not have a real value corresponding to its nominal value indicated on banknotes, confirms the subjectivist-psychological approach to explaining the origin of money, based on the form of a social contract, resulting in the need to recognize the function of money universal equivalent and widespread acceptance of them as payment for goods and services.

Money is an eternal companion of the sphere of circulation. The emergence of money is the result of the development of exchange and the evolution of forms of value. The history of the development of exchange relations allows us to derive the following forms of value.

A simple or random form of value is characteristic of a low stage of development of productive forces. This form can be presented as follows:

X product A = Y product B

In subsistence farming, surplus products arose only periodically from case to case. Goods to be exchanged accidentally measured their value through the medium of another good. Exchange value, i.e. the proportion in which one commodity is exchanged for another fluctuated sharply in time and space. However, the simple form of value contains the foundations of future money.

Full or expanded form of cost. On the one hand, the continuing division of labor, on the other, the growth of labor productivity and production volumes create conditions when, during the exchange, one product meets with many other equivalent goods. This form can be presented as follows:

X product A = Y product B = Z product C = : = H product D

The existence of this form of value is confirmed by the experience of exchange transactions by Indonesian aborigines in the 18th and 19th centuries. To exchange them, a place was determined where each tribe left its product for exchange and took the necessary things from the items left by other tribes. Thus, each tribe received the product it needed through several exchange transactions.

The existence of this form of value during exchange transactions was observed and described by the Englishman Verney Lovett Cameron, who led the African expedition of the London Geographical Society in 1873. In order to get boats to cross the lake, V.L. Cameron had to make the following exchange transactions:

Wire = clothes and shoes = elephant tusks = boats.

It took more than 10 days to complete these transactions.

The incompleteness and heterogeneity of the expression of value gradually and inevitably led to the separation of goods, for which other goods increasingly began to be exchanged.

The allocation of a universal equivalent is not the result of an agreement between people or someone's will. This is a spontaneous economic process. In the process of the historical evolution of commodity circulation, a wide variety of goods acquired the form of universal equivalent. Each commodity-economic structure put forward its own equivalent product. But always a privileged position was occupied by goods that served as the most important objects of exchange.

As a rule, they fall into 2 categories:

Essential items;
decoration items.

The first equivalent goods include:

Cod among the peoples of ancient Iceland;
North American Indian boats;
skins from the peoples of ancient Scandinavia;
cattle among many peoples, including ancient Rus';
"brick" tea in Mongolia;
slaves in the slave states of the ancient world, etc.

Among the goods equivalent to jewelry are:

Cowrie shell, which was used as an equivalent commodity in India, Ceylon, Siam and Africa;
wampum (embroidered leather belt) among the Indians of North America;
fur in ancient Rus', etc.

These items had two important features:

They served equally for direct consumption and as an instrument of circulation;
were quite rare and therefore highly valued.

As a result of the development of exchange, one commodity becomes the universal equivalent over a long period. This function is assigned to metal (gold, silver). This is a sign of the monetary form of value.

There are archaeological finds confirming that silver ingots were already in circulation in Ancient Babylon in 3-2 thousand BC. In Egypt in 4 thousand BC. The money was small gold bars weighing about 14 grams. with the mark of Pharaoh Menes. The oldest Lydian coin of the 7th century BC is known. - gold stater (it is most often considered the first coin). The ancient Greek island of Aegina in the domain of the Argive king Phaidon is also called the birthplace of the first coin, where coins appeared around 748 BC.

To transform a product into money you must:

General recognition of the equivalent function by the seller and buyer and the possibility of their refusal to make an exchange when used as an equivalent of money;
the presence of special physical properties of the commodity-money, making it suitable for constant exchangeability.

Theories of the price of money

Prices are important in establishing economic relations between commodity producers. There are different approaches to determining the essence of price as a measure of product evaluation.

From the standpoint of the labor theory of value (A. Smith, D. Ricardo, K. Marx), price acts as an estimate of labor costs. According to this approach, price is the monetary expression of the value of a product, i.e. the totality of socially necessary costs of living and embodied labor spent on the production of a given product. The labor theory of value recognizes that price and pricing are influenced by the laws of value, supply and demand. But the analysis of the influence of market factors on price in this concept has not been developed.

Another well-known price paradigm is consumer, or subjective psychological. It denies the connection between labor costs and the price of goods on the grounds that the prices of many goods deviate from the costs of production, and some of the goods consumed do not require any costs at all (water, atmospheric oxygen). According to this theory, the basis of price is the subjective utility of the product, which is determined exclusively subjectively by the seller or buyer. Consequently, price acts as a monetary expression of the utility of a product. The most famous concepts of this paradigm include the theory of marginal utility.

The third approach to determining the essence of price expresses the exchange paradigm, according to which the price is entirely determined by the relationship between supply and demand for a given product on the market, i.e. the ability of a given good to be exchanged for a certain amount of another good or money. Since with an increase in demand and a decrease in supply, the price increases and vice versa, it expresses only a change in market conditions and does not depend on the amount of labor input and expressed utility. In various modifications, this paradigm is present in the theory of monetarism and theories of market competition.

The multiplicity of approaches to determining the essence of price indicates that prices have a diverse impact on economic life. This can be established based on an analysis of the functions performed by prices. The main functions of price include the following: accounting, revenue, strategic, regulatory, incentive, redistribution, balancing supply and demand.

In any society there are various types of prices that form their system.

So, depending on the form of trade, prices are:

Wholesale prices – at which manufacturers sell their products to wholesale intermediaries;
- procurement prices - government agencies purchase goods and pay for services for their consumer needs;
- retail, world, list, contract, free, monopoly, republican, local, zonal, seasonal and other prices.

The early quantity theory of money is still popular in economic literature. She tries to answer the question about the relative cost of goods, the purchasing power of money and the reasons for its change. Certain provisions of this theory were formulated by J. Locke (1632-1704). In a more developed form, it is set out by J. Vanderlint, C. Montesquieu (1689-1755) and D. Hume (1711 - 1776). D. Ricardo was also a supporter of the quantitative theory.

Unlike mercantilists, who believed that the increase in money in a country stimulates the development of trade and industry, Hume sought to prove that an increase in the amount of money in circulation does not mean an increase in the country’s wealth, but only contributes to an increase in prices for goods. Therefore, he believed that the value of money is determined by its quantity in circulation and is a fictitious value. The immediate cause of the emergence of the quantity theory of money was the “revolution of money” in Europe in the 16th-17th centuries. The importation of cheap American gold and silver into Europe contributed to the rapid rise in commodity prices. Hume considered these exceptional conditions as typical, while scientific analysis required the exact opposite approach. Under the gold coin standard, the amount of money in circulation depended primarily on the cost of goods sold or on the sum of their prices. Thus, the early quantity theory was characterized by the following statements:

causality (prices depend on the amount of money);
proportionality (prices change in proportion to the amount of money);
universality (a change in the quantity of money has the same effect on the prices of all goods).

Meanwhile, it is obvious that as forms of money develop, the structure of the money supply becomes far from homogeneous, since it includes not only cash, but also bank deposits. Different groups of goods, which grow unevenly, react differently to an increase in the money supply and prices. Further development of the quantitative theory of money is associated with the inclusion in it of the apparatus of economic analysis and elements of the microeconomic theory of price.

A significant contribution to the modernization of this theory was made by I. Fischer (1867-1947). In his work “The Purchasing Power of Money, Its Definition and Relation to Credit, Interest and Crises” (1911), he tried to formalize the relationship between the supply of money and the level of commodity prices. Since the amount of money paid for goods and the sum of the prices of goods sold are equal, Fischer draws an analogy with scales:

M x V = P x Q,

M is the average amount of money in circulation in a given society during the year;
V is the average number of turnovers of money in its exchange for goods;
P is the average selling price of each individual product purchased in a given society;
Q - the entire quantity of goods.

Fisher's formula is incorrect for the conditions of the gold coin standard, since it ignores the internal value of money. However, when circulating paper money that is not redeemable for gold, it acquires a certain rational meaning. Under these conditions, changes in the money supply affect the level of commodity prices. Fisher started from the model of perfect competition and extended his conclusions to an economy in which monopolies existed and prices had already largely lost their elasticity. He exaggerated the influence of money on commodity prices. From his formula it follows that the money supply plays an active role, and prices play a passive role. For Fisher, the money supply appears as an independent variable, whereas in reality there is an interaction. In conditions of monopolistic pricing, an increase in commodity prices is often the reason for the expansion of money turnover.

The quantity theory of money was further developed in the works of English economists A. Marshall, A. Pigou, D. Robertson. Unlike Fischer, they based their version not on the circulation of money, but on its accumulation among subjects of economic relations:

M = k x P x Q,

M- amount of money;
R- price level;
Q- volume of goods included in the final product;
To- part of the annual income that participants wish to save in the form of money.

This formula is essentially identical to the exchange equation. The differences between the above formulas are as follows: if Fisher associated the constancy of the speed of circulation of money with the constancy of the factors of turnover, then Marshall had in mind the psychological factors of the participants in the turnover. The final conclusion in both options is the same: a change in the quantity of money is the cause, not the consequence, of a change in prices. The main mistake in this theory is that economists believe that goods enter into circulation without a price, and money without value, then a certain part of the product is exchanged for a certain part of money. The inconsistency of this theory is proven by the fact that

that the velocity of circulation of money has various fluctuations, the theory does not take into account the impact of monopolistic associations on pricing practices.

The "regulated currency" theory developed on the basis of two theories of money - nominalistic and quantitative. According to Keynes, money is a “barbaric relic,” since paper money is not only no worse, but much better than metal money. Keynes sees the advantage of paper money in the fact that its quantity in circulation can be regulated by the state and, therefore, the level of commodity prices, the level of wages and the entire economy can be regulated. The theory of “regulated currency” is an integral part of the “theory of regulated capitalism”. Both theories do not stand up to the test of practice. Paper money is not a “regulated currency” capable of eliminating unemployment and crises, but a form of units of currency. By extolling the virtues of paper money, proponents of this theory justify the excessive issue of paper money.

Quantity theory of money

The quantity theory of money explains the level of commodity prices and the value of money by their quantity in . Many important provisions of the theory of money, indicating their role in the reproduction process, originated in the 16th-18th centuries. based on the provisions of the quantity theory of money. Before the widespread adoption of the Keynesian model, quantity theory was the dominant macroeconomic theory. Its proponents dealt with such problems as the factors determining the absolute level of prices and the rate of interest, the theory of supply and demand for money. However, in the process of development of this concept, various

directions that differently interpret certain issues of monetary theory. In this regard, the statement of L. Harris is true that “... the quantitative theory should be approached not as a single theory, but as a paradigm, concept or school of economic thought, within the framework of which different authors considered different problems and came to different conclusions” .

The founders of this theoretical concept of money were the French thinkers J. Woden (1530-1596), C. Montesquieu (1689-1755) and the English philosopher D. Hume (1711 - 1776). The concept is based on the belief that the establishment of prices for goods and the determination of the value of money occurs only when the mass of money and the mass of goods collide. The works of this period are characterized by the denial of the reverse influence of the monetary sphere on the production process. In the works of the largest economists of that time, all the most important economic problems were analyzed in natural-material (real) categories. Money was only formally present in the analysis. The economic system in all its most important manifestations was reduced to natural commodity exchange.

The quantity theory of money organically fit into the classical direction of the theory of reproduction, which proceeded from the fact that under conditions of perfect competition and complete price elasticity in all markets, the system automatically, without any outside intervention, comes to equilibrium with the full use of all production resources.

The founders of the classical movement believed that the cost of monetary metals is determined by labor costs. Nevertheless, D. Ricardo argued that the number of metal coins in circulation can influence their value (purchasing power) and the prices of goods. The principles of the quantitative theory were also adhered to by D. Ricardo’s follower, J. St. Mill. In his writings, he wrote that, other things being equal, the value of money changes in inverse proportion to its quantity. This position of representatives of the classical theory of reproduction developed as a result of the understanding of money as a technical means of exchange. Therefore, the secondary role assigned to money by the classical school is not accidental.

K. Marx studied monetary problems in connection with the study of the economic mechanism as a whole. The basis of his research are historical and logical methods. For him, the problem of money arises several times: initially as a result of studying the essence and nature of the commodity and the process of exchange, and then in the process of the functioning of capital.

Money and monetary circulation in Marx's works are considered as the starting point of the captain's analysis. From the point of view of Marxist theory, money is secondary in relation to production, however, its role is very significant. In the circulation of industrial capital, money capital, on the one hand, creates the necessary conditions for production, and on the other, serves as a form of realization of commodity capital. In the process of capital movement and the sale of social product, money contributes to the redistribution of production factors between industries, and therefore influences structural changes in the economy. In the development of money circulation, Marx thus sees an objective process of the evolution of certain forms of production relations.

In a number of works, Marx showed that with the advent of full-fledged metallic money, the exchange of goods was transformed into commodity-money circulation, where the commodity market and money circulation mutually determine each other. In this logical sequence, commodity circulation is the initial prerequisite for money circulation. Being secondary, money circulation only reflects and consolidates those processes that develop in commodity production and commodity circulation.

At the same time, according to Marx, money circulation cannot be assigned only a passive, dependent role, since it has its own laws of development and has a reverse effect on commodity circulation and commodity production. In addition, there is one more circumstance. The emergence of metallic currency placed it under the influence of strict state control, while the commodity market was subject to only indirect influence of state policy.

In general, according to Marx, money has the opposite effect on production. In particular, from the functions of money as a means of circulation and payment, K. Marx deduced the possibility of crises, which was explained by the appearance of a gap in time and space between the sale and purchase of goods. In accordance with the theory of K. Marx, in order to service the circulation of a certain commodity mass, a certain amount of metallic money is required, which is determined by a number of factors (parameters) of reproduction:

sums of prices of goods;
speed of turnover of monetary units when servicing transactions;
development of credit relations.

K. Marx proposed the following formula for the law of monetary circulation (determining the amount of cash):

K n - the amount of money needed for circulation;
C- the sum of prices of goods sold;
TO- the sum of prices of goods sold on credit;
P- the amount of payments for which payment is due;
VP - the amount of mutually extinguishing payments;
CO - the average number of money turnover, or the speed of money turnover.

With regard to paper money, the following is defined: if their quantity is equal to the amount of gold money needed for circulation, then they function in the same way as gold money and have the same purchasing power. But if the money circulation channels are filled with an excess amount of paper money (more than gold required), then their purchasing power decreases, which is manifested in an increase in the prices of goods. As a result, it was concluded that while the quantity of gold in circulation increases or decreases with the rise or fall of commodity prices, the latter begin to change under the influence of changes in the supply of paper money, since such can come into circulation in any quantity.

It should be noted that the law of monetary circulation presented above is formulated in relation to metallic monetary systems. For the modern period of paper-credit monetary systems, the sum of the prices of goods, expressed in fiat paper money, cannot serve as a starting point for determining their required quantity.

Development of quantitative theory at the end of the 19th and beginning of the 20th centuries. reflected in the works of Marshall's students - Livington, Pigou, Robertson, Keynes, who studied the factors (determinants) of the demand for money. The most complete study in this direction were the works of the American economist J. M. Keynes (1883-1946).

Keynesian theory of money

Keynesian theory of money and monetary regulation - This is a theory about the essence of money and its impact on capitalist production, proposed by Keynes in the late 20s - early 30s of the XX century. Keynes, denying the commodity nature of money, following the German economist G. Knapp, declared money “chartal”, having a “designated value”. Having opposed a number of provisions of neoclassical theory, Keynes formulated his own understanding of the role of money in the economy. He modified the Cambridge version of the quantity theory in his doctrine of “liquidity preference.” The main components of the concept are set out in two of the most famous works: “A Treatise on Money” (1930) and “The General Theory of Employment, Interest and Money” (1937).

In the Keynesian scheme of cause and effect, monetary factors played an important role. Keynes considered the process of accumulation of money among economic entities as a factor in the decoordination of the reproduction mechanism. He associated the role of money with the presence of uncertainty in the processes of making economic decisions. The main form of connection between the process of circulation of money and the real sector of the economy, according to Keynes, is the rate of interest, which depends on the laws of the money market and at the same time influences the propensity of economic entities to invest.

Keynes formulated and justified three main motives for hoarding (accumulation of money):

transactional ( transactionaly);
precautions ( precautionary);
speculative ( speculative).

The first two reflect the traditional role of money as a means of circulation and a means of payment (transactional demand) and depend on commodity exchange transactions (), which corresponds to the provisions of the Cambridge version of the quantity theory of money. The demand for speculative balances is made dependent on the interest rate factor. In this regard, the aggregate demand for money () was defined as the sum of two elements transactional (), which is a function of income, and speculative (), which is a function of the interest rate. Keynes's model was presented as follows:

Keynes defined the transaction motive as the desire to fill the time gap between receiving income and spending it. The degree of influence of this motive depends on the amount of income and the normal length of the time interval between its receipt and use.

Keynes further determines that the amount of nominal cash balances that a person wishes to have to implement his transaction motive represents a constant share of money income and is equal to where is a constant. This conclusion is made along with the assumption that the time interval between receiving income and spending it is constant. Changing this interval leads to the need to manage cash balances on the part of the economic entity, which are then considered as desirable transaction balances, since this concept implies the possibility of choice. The desired size of balances means that an economic entity can choose the optimal expenditure model, and therefore determine the amount . In this case, it is necessary to pay attention to the differences in interpretation in the pre-Keynesian quantitative theory and in the Keynes model. In classical quantity theory, as shown above, it is the reciprocal of the velocity of circulation of the entire money supply. In Keynes's model, it refers only to the speed of circulation of transaction balances; the velocity of circulation of all monetary balances is also affected by the demand for speculative monetary balances, and, as a consequence, the velocity of circulation of money is a function of the interest rate.

The Keynesian theory of speculative demand significantly diverges from monetary theories (their essential features that determine the role of money in the economy will be discussed below). The demand for money in Keynesian theory becomes an unstable and unpredictable quantity. It is the preference for liquidity and the size of the money supply (money supply), according to Keynes, that determine the rate of interest, which affects the amount of investment. Changes in investment, in turn, affect the volume of aggregate demand, which forms the main parameters of the economic system (employment, production volumes and national income). The interest rate is considered as a factor mediating the influence of money on the economy. Thus, Keynes rebuilt the theory of money by introducing the rate of interest. He introduced money as one of the most important factors in the formation of investment demand and shifted the traditional connection between money and prices into the background.

This is interesting: