Criticism of the Quantity Theory of MoneyFitness Gear & Equipment
Criticism of the quantity theory of money
This theory has been subjected to a great deal of criticism. In fact, modern economists do not accept it without serious reservations.
(i) So long as the quantity theory describes a tendency, it is all right. But when it proceeds to lay down an inflexible mathematical formula, it falls to the ground. Only under very special circumstances will a doubling of the amount of money exactly double the price level. The price level may go up to more or fall down to less than that.
(ii) A change in M (money) in reality is almost certain to cause a change i, V (velocity of circulation) and f (number of transactions). A change in P (price level) has also its effects on both V and T. There is bound to be action ant reaction. Therefore, the assumption that changes in M. V and T alone produce changes in P and not on each other does not hold good. If that had been sp, "W. could have safely predicted price changes and this would have served as a guide to official control of price level."
(iii) Further, the price level does not depend on the quantity of money i circulation as such. It is influenced by income which the consumers spend in the market. In the Great Depression (1929-33), the U.S.A. created huge quantity of money to step up prices. No doubt the income of the people increased, but they did not spend more. That is why prices did not rise. The modern^ economists are, therefore, of the view that the value of money, in fact, is consequence of the total incomes rather than that of the quantity of money.
(iv) Another criticism leveled at the theory is that it considers only the medium of exchange function of money and ignores its function as a store of value. But we know that people use money not to effect transactions, i.e., as medium of exchange, but also hold it with them as a store of value.
(v) The value of money can change as a result of many other causes such a wars. But the quantity theory takes no notice of them. ;
(vi) Professor Hayek thinks that the quantity theory has unduly usurper the central place in monetary theory
(vii) The late Lord Keynes's objection to the theory is that it does not treat the problem dynamically.
(viii) The theory is also objected to on the ground of the heterogeneous character of the equation of exchange. For example, in Fisher's formula, credit money and metallic money are bulked together.
(ix) Finally, it is objected that the number of commodity transactions which the theory seeks to explain, is very small as compared with transactions which are financial, commercial and industrial.