New Palgrave Dictionary of Economics: (Volume 4 Q-Z)

Author: John Eatwell
Publisher:
Publish Date: Not Available
Features: Yes, Kevinton is right—the mathematical entries in this book are overly 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 and reflects their own perspectives. For example, Friedman wrote on "Quantity Theory of Money," Buchanan on "Constitutional Economics" and "Opportunity Cost," Stigler on "Market Competition," Hayek on "Property Rights," Galbraith on "Price Controls," Shy on "Rational Expectations," Rothbard on "Mises," Becker on "The Family," Nozick on "Public Choice," Leontief on "Input-Output," and Zhang Wu-Chang on "Coase," "Hayek," "Economic Organizations 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 supply and demand for 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 land demand—it is similar to money demand in that it derives value from the service flow it provides, but 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—linking 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 criticism 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 and 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 further for money than for most other goods and services. However, neither in the case of money nor in the case of other goods and services 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, 1985:, 1982).