Re: [Pen-l] Quiggin on the Austrian Business Cycle

[Jim Devine <jdevine03@xxxxxxxxx>]

Max Sawicky wrote:
> "Both Marxism and classical economics were characterized by the
> assumption that money is neutral, a ‘veil’ over real transactions."
>
> True?

Not.

Marx did assume in volume I of CAPITAL that the money was gold and
that the value of gold was given independently, so that a fall in the
value of gold would cause an equiproportional increase in the price
(value/value of gold) of all other items, having no impact on "real"
transactions. But that was a simplifying assumption. Since money
itself is "real" under his assumptions, he did not really make the
hard-and-fast distinction between "real" and "monetary" that the
Classicals did.  (See Suzanne de Brunhoff's book on Marx & Money.)

On top of that, he assumed that the supply of gold was elastic
(because it was produced by profit-driven mines), responding to the
demand created by the "real" economy (accumulation). The velocity of
gold-money was also endogenous, i.e., responding to the real economy.

Marx's line of causation was thus the opposite of that of the
Classicals. The Classicals imagined that if money were thrown out of
helicopters (to use MF's story), it would lead to inflation but not
any kind of real increase in the economy. (I'm imagining gold ingots
falling from the sky. Ouch!) Marx, on the other hand, has the real
economy in charge, pulling the money supply and its velocity behind it
(at least until capacity constraints hit in the gold industry).

In any event, his analysis of money almost starts with a critique of
Say's Law (vol. 1, ch. 3, s. 2), a central basis for Classical
economics.

In volume III, he assumed that increases in the quantity of
convertible paper money would cause the fall of its price (in terms of
gold) so that the prices of all other items would rise in step (in
terms of the fiat money). But that was an incomplete analysis in an
book published only after his death. He also sides with the "Banking
school," which saw the supply of money as tailing the demand for it
and thus the "real" economy.

By the way, I doubt that Classical economists really believed in
neutral money. Rather, as empirically-oriented types, they saw it as a
first approximation. It's only with the rise of the obsession with
mathematical models in economics, and their belief that the models
correspond to reality, that we see such phenomena as the "new
Classical" economists who believe that money is _really_ neutral.
-- 
Jim Devine / "If heart-aches were commercials, we'd all be on TV." -- John Prine
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