With Dr Tim Evans joining the Cobden Centre as Chief Executive and after the publication of a number of substantial new Insight articles, it has been quite a week for The Cobden Centre.
Today, Toby Baxendale has published a refutation of the mechanistic Quantity Theory of Money, the theory on which QE is based:
The mainstream economists hold that the volume of money in circulation, times its velocity is equal to the prices of all goods and services added up. This is the famous Theory of Exchange, MV=PT, or the mechanistic Quantity Theory of Money, where:
- M is the stock of money,
- V is the velocity of circulation: the number of times the monetary unit changes hands in a certain time period,
- P is the general price level,
- and T is the “aggregate” of all quantities of goods and services exchanged in the period.
It is held by the overwhelming majority of all economists, that if the velocity of money falls, the price level will fall and thus it is the duty of government, the monopoly issuer of money, the chief Central Planner of the Money Supply, to create more money to keep the price level where it is and thus preserve the existing spending habits of the nation.
In a nutshell:
- The monetary authorities do not have an adequate measure of the money supply.
- The velocity of circulation makes no economic sense.
- The general price level aggregates away a vital factor: the relative structure of prices.
- The aggregate quantity of goods and services sold is an impossible sum.
- The mechanistic Quantity Theory of Money is not a causal relation but a tautology.
Please see the main article for details. I have commented extensively there.