"The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true."
I agree with Mises, but not the way you seem to agree with him. I actually gave critical thought to what Mises wrote, which is why I agree with him, and have no conflict with what he wrote. Mises said,
"It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available." And I agree.
Did you even read that sentence and think it through for yourself, or did you just buy into Mises' authority and agree with his conclusion because it appeared to agree with your premise? Mises used the words, "must" change, "other things being equal" and "total supply of money available" (static supply), none of which are my assumptions.
And btw, stow the whole 'crackpot' thing - it's ad hominem and argument by ridicule. It's as completely meaningless as your appeals to authority (Mises) and attempts to poison the well (Fisher). Whatever anyone says - you, me, Mises, Fisher or anyone else - can be addressed on their own merits.
I'm not a monetarist, as central control over the supply of money entails artificial systemic choices between winners and losers. It distorts the entire market in numerous ways, as the very movement of that controlled supply, and especially the channels and ways it is introduced into the market, are decided mostly by banks, and vary the pressure (up or down, never evenly distributed) that is placed on prices throughout the entire system. Not that prices "must" change, as some believe. And it's not control (price "must" change), as there is no such requirement. Only influence. Pressure. How individuals in the market respond to that pressure will always be different, but it's
not the same pressure felt throughout "the whole economic system", and the very process of malinvestment is proof enough of that - regardless of the aggregate effect.
I like and adhere to the Austrian school because it approaches the market from, and deals directly with, individual behavior and choice, whereas other schools attempt to dissect and understand the economy (and controls over it) in the aggregate, using a more physics-based model approach. Wonderful for me, as my primary background happens to be physics, not economics. What I have learned, however, is that mainstream economists (and others in the soft sciences) like very much to mimic physics, as it gives a prestige-borrowing 'scientificish air' about their work. I have read many published papers by economists, only to come away with nothing but astonishment. Like a gibbering, babbling children At Play In The Field of Scientists, most of whom (I conclude) really have absolutely no idea what they're talking about. They aren't talking about economics
or physics that I can see. They look like they're shuffling unnecessarily complicated toy blocks around as they speak to each other in a language only they
appear to understand. Not that they even agree with each other, or can put their theories to any meaningful tests! As such, this is what most economists look like to me when they speak with each other:
Whatever they were saying, they meant that, baby! They are as certain in their responses as Paul Krugman ever was. It is also no wonder to me that, unlike basic physics, there are so many schools of economic thought, and myriad factional (and contradictory) theories! Since most economists are not actually grounded in physics a lot of what they expound appears to be gibberish, with faulty assumptions, misplaced or meaningless variables, and equally meaningless equations. If you're going to borrow from physics, at least have an understanding of the basic fundamentals.
I understand the relationship, for example, between things like force, mass and acceleration. With a simple Newtonian equation, F=ma, I can understand clearly - without mistaking it for crackpottery or magic - how a 1 kilogram rock can have
the exact same force as 1,000 kilogram rock, by simply varying the acceleration of each. Whatever the acceleration of the 1,000 kilogram rock, multiply that by 1,000 for the 1 kilo rock, and it will have same effective force, the same kinetic energy. That's simple Newtonian physics, like leverage - where a 90 lb. weakling can move 10 tons with a well-placed lever. Not magic. Simple Newtonian physics.
The F=ma analogy deals with single blobs with single forces. For the velocity of money in a system, a physics analogy of which deals with the kinetic energy of many units in motion is more fitting - like the relationship between air (MONEY), heat (FIDUCIARY MEDIA), and temperature (VELOCITY).
Take two hot air balloons with the same amount of lift, each having the same quantity of hot air at the same temperature (velocity of molecules). You can remove half the air (MB) from one balloon, and all else being equal the entire balloon system will deflate and lose lift. However, you can add heat, increasing the temperature (average motion, or kinetic energy) to half the molecules extant until they expand to twice their volume. Half the molecules, twice the heat and temperature, expanding to twice their volume (inner velocity), and you'll get back more than your original lift, because the density of the entire system is less than it was.
That's the aggregate, as temperature is nothing but an average measure of motion. In localized reality, individual molecules in the same gaseous system are another story altogether. Some are moving at tremendous velocity while others are standing relatively still.
In my example, I talked about localized velocity (read=frequency variances with which goods and services are exchanged for money
within my industry or economy). In individual terms, and accounting for the time value of money, if a particular part of the economy slows down, such that the frequency of demand for my goods or services decreases, fewer orders (per unit of time) is deflationary TO ME. "THE" money supply didn't dry up. "MY" money supply did. It's not that the same orders are not pending - in many cases they are. It's that my customers are waiting, because their frequency of exchange has also slowed. So they aren't getting the same money-per-unit-of-time either. And when that happens to large enough sectors of the economy, it can appear in aggregate as a strong correlation between M2, velocity and inflation (the chart I posted that you ignored, and never addressed except by dismissal).
In other words, you can have all the "otherwise demand" in the world - you have many of the orders, but not the capital to fill them, or your customers are waiting for funds to finally release a purchase order - but if everyone is waiting longer and longer for their own money (e.g., credit is tightened), this will, in the aggregate, have an affect on the value of the currency (up or down - in relation to the units available but NOT exchanged, and all for want of timely money).
That isn't Fisher, nor is it a simplistic, rigid, Quantity Theory, nor is necessarily contradictory to what Mises wrote. It could well be argued that it conflicts with what Hazlitt wrote [
LINK] - but that's another discussion altogether. I think Hazlitt split some hairs, as he tied everything into individual expectations and fears. And while I think that's a valid approach with merit, it appears to me as just the mechanism behind the fundamentals.
Henry Hazlitt said:
The value of a unit of money is determined, like the value of a unit of a commodity, primarily by psychological factors, and not merely by mechanical or mathematical factors.
I agree with Hazlitt that all these are factors. I strongly question his premise that psychological factors, not physical fundamentals, are the primary factors...
Henry Hazlitt said:
As with commodities, the value of money is influenced not merely by the present quantity, but by expectations concerning the future quantity as well as the future quality.
And that's precisely why. Because my individual expectations as a merchant don't necessarily change unless my individual fundamentals (actual frequency and magnitude of orders) change. And Hazlitt goes onto write:
Henry Hazlitt said:
At the beginning of an inflation, many prices and wages remain as they are through habit and custom, and also because, even when the increase in the money supply is noticed, it is assumed to be purely a past event that is now over. Confidence in a sort of fixed value of the monetary unit remains high. Of course an increase in the supply of money will probably raise some prices, though the average of prices will not necessarily rise as much as the monetary increase.
See that? "the increase in the money supply is noticed". How is it "noticed" at the individual level? As a merchant, I don't look at "money supply". I look at ORDERS. MY money supply. That's how I notice an increase or decrease - as it relates to me.
Henry Hazlitt said:
In the middle stage of an inflation, prices may respond rather directly to an increase in the supply of money. But as the inflation goes on, or perhaps becomes accelerative, fears begin to spread that the inflation will continue into the future, and that the value of the monetary unit will fall further. These fears for the future are reflected in the present. There is a flight from money and a flight into goods. People fear that prices are going to rise even further, and that the value of the monetary unit is going to fall even further. Their own fears and actions help to produce that very consequence.
And I agree.
Henry Hazlitt said:
Now when such developments are called to the attention of, or noticed by, the adherents of a rigid quantity theory, these adherents have a ready answer. The discrepancy, they say, is accounted for by changes in V, the "velocity of circulation." And they state or assume that these changes in the velocity of circulation are of the exact mathematical extent necessary to account for the discrepancies between the increase in the supply of money and the increase in the price level.
And there's where Hazlitt parts from me, as I am NOT an adherent to "rigid quantity" theory. To me the rigid quantity of money is, as Hazlitt claimed, but one factor among others, such that there is no direct correlation (especially real time) required between the supply of money and inflation. And not that Hazlitt FULLY believes that the quantity of money affects the value of the currency - just not for the reasons Fisher claimed. And on both those counts we fully agree.
It's interesting to note that Hazlitt further states (regarding rigid quantity proponents) "They do not offer any mathematical proof of this. As we shall see, such mathematical proof does not and cannot exist."
And he is correct. What he fails to note is that there can be no mathematical proof for his own assertions (that psychological affects are the primary factor of inflation), and for the same reasons.
