August 26, 2015

Common non-sense

Comment on Tim Worstall on ‘On not understanding the quantity theory of money’

Blog-Reference

The current economic situation is a clear refutation of both commonplace employment and Quantity Theory. When things get tough everyone can see that economists have no idea how the economy works.

The Quantity Theory falls into the class of flat-earth theories, which are immediately convincing to common sense. The first thing an economist has to realize, though, is that common sense is not the best guide in economic matters. This is known since J. S. Mill: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (Mill, 2006, p. 783)

The MV=PQ equation provides one of the silliest of the numerous common sense explanations. The correct equation for the determination of the price level is given here. Note well: the quantity of money does not appear as independent variable in this equation. For the rectification of the commonplace Quantity heory see (2011a; 2011b).

There is not much use in discussing defunct theories any further. In particular, it should be evident after 100 years that from all scientifically incompetent economists the worst are assembled in Mises’s Austrian school.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–20. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.