New Palgrave Dictionary of Economics, Volume 4: Q-Z

Author: Israel M. Kirzner
Publisher:
Publication Date: 1996-12-01
Features: Yes, Kevinton is right—the mathematical and theoretical entries in this book are excessively difficult, and even most economists may not be able to understand them. It seems that this is the only way to demonstrate its unattainable height. However, the value of this book lies in the fact that it is written by masters, each expressing their own views. For example, Friedman wrote "The Quantity Theory of Money," Buchanan wrote "Constitutional Economics" and "Opportunity Cost," Stigler wrote "Market Competition," Armentrout wrote "Property Rights," Galbraith wrote "Price Controls," Shavell wrote "Rational Expectations," Rothbard wrote "Mises," Becker wrote "The Family," and Allingham wrote "Public Choice," Leontief wrote "Input-Output," and Zhang Wei Chang wrote "Coase," "Armentrout," "Economic Organization and Transaction Costs," and "Common Property," and so on.
Excerpt: The two characteristics of the adjustment of money supply and demand have obscured this parallelism. First, the analysis of the supply and demand of special goods is particularly related to flow—for example, the number of shoes produced annually or the number of people getting haircuts, while the quantity equation is related to the money stock at a specific point in time. In this regard, a correct analogy would be, for instance, the demand for land, which is similar to the demand for money, though it derives its value from the service flow it provides, it has a purchase price rather than just a rental price. Second, there is a common tendency to conflate "money" with "credit," which has led to misunderstandings of related price variables. The "price" of money is the amount of goods and services that must be given up to obtain one unit of money—it is the inverse of the price level. This is a price similar to that of land, copper, or haircuts. This "price" of money is not the interest rate but the "price" of credit. The interest rate links the stock to the flow—i.e., it links the rental value of land to its price, or the service value generated by one unit of money to its price. Of course, the interest rate can affect the quantity of money demanded—just as it can affect the demand for land—but many other variables can also affect the demand for money. The interest rate has received particular attention in monetary analysis because fragmented reserve banks, in the process of acting as intermediaries between lenders and borrowers, have generated a portion of the money stock without fully understanding the interest rate. As a result, changes in the money supply are often transmitted through credit markets, during which the interest rate is temporarily significantly affected. On a deeper level, the critique of the transmission mechanism applies equally to money and other goods and services. In all cases, the ideal situation is to go beyond the supply and demand equation that determines the static equilibrium position to study the variables that affect the quantity of demand, supply, and temporary dynamic processes, thereby eliminating actual or potential differences. The study of variables affecting supply and demand has advanced more for money than for most other goods and services. However, neither for the former nor for the latter has there yet been a satisfactory, widely accepted, and precisely quantifiable description of the temporary dynamic adjustment process. In recent decades, more research has been devoted to this issue; yet, it remains a challenging field (for an overview of some of the literature, see Rees, 1985; Udey and Scadding, 1982).