On the Money Yield and the Monetary Equilibrium Theory

The recent nasty attack of Robert Wenzel on a fellow Austrian Steve Horwitz (I won’t link to it), while being unfortunate and almost childish, nonetheless raised the question of the soundness of the monetary equilibrium approach to monetary economics of which Steve Horwitz is one of the most prominent defenders.

I think the biggest flaw of this approach is the underlying notion that it is possible for a person to decide to hold money without even a vague idea about what she is planning to spend it on in the future.

This theory is superficially plausible but in fact mistaken. It is not possible to choose between spending a certain amount of money on some determinate good now and holding it to spend on something completely indeterminate in the future. What looks like the second alternative is just not an alternative at all. It’s like a “choice” between going to the cinema now and doing something completely indeterminate tomorrow. It is impossible to make.

Now this doesn’t mean that the plans for spending money in the future must be completely fixed. A person choosing to hold money for a period of time to spend at some future point probably bears in mind the possibility of a future choice to spend it on something different from what she originally envisaged. But this is a far cry from saying that it is possible to choose to hold money just for the sake of holding it.

A qualification is required that a strange preference may be imagined under which a person would accumulate the objects serving as money for the sake of it. But such a person will not be treating such objects as money.

But doesn’t what I’m saying negate what some monetary economists call “the money yield”? For instance in this paper Steve Horwitz, drawing on William Hutt, defines the money yield as “being a subjectively valued service of availability”. I hope I’ve already shown above that money at least can’t be valued for this reason alone.

The special character of money comes from the fact that it can be relied on to exchange it for goods in the future. For money to perform its function of being a means of exchange, it doesn’t need to be valued for uncertain purchases only. But it can be partly valued for this reason.

The above analysis allows us to address the idea that, if it were possible to supply money precisely to those who choose to hoard it so as to offset their hoarding, such increases in money supply would not be distortionary. Even if it were possible to achieve this goal, this would mean that over a certain period of time the purchasing power (and ultimately the power to consume) would be arbitrarily increased not in accordance with their prior or expected contribution to production. This is distortionary by default.

In addition to this, a decision by a consumer to hoard some money for a period of time is necessarily a choice expressing her lower subjective valuation of certain current goods vis-a-vis certain future goods. The declines in prices of certain goods resulting from such choices are important signals for market coordination that must not be suppressed. Thus, there is no need to offset the changes in money balances and the monetary equilibrium approach is to be discarded.


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