The Supply of Money

0:00As I mentioned yesterday, and you all know this by reading Man Economy and State, Rothbard lays things out in a very logical and complete way. And so topics that he begins early in the book only culminate much later on. In this section of Chapter 11, we get the culmination finally, I use Man Economy and State as a textbook in my Principles of Macroeconomics class and on the very first day, these are freshmen, students mainly, I warn them of this, I say, you know, this book is a treatise, this is a real, this is not a textbook, this is a real treatise in economics and treatises start with first principles, first principles of economics.

0:53and then they move logically to the next step and then they build right as they go and so you you know you get the big pay off at the end when everything culminates and as you're going along you're just doing this sort of building the edifice and this goes right like that to them but you've read the book so you know that this is true and they're just a couple of last intermediate steps that Rothbard takes before he gives us this statement of the determination And the first is the stock of the money commodity and here remember he's talking about the unhampered market economy and the point that he's making about the stock of the money commodity in the unhampered market is that just since it is a good, just like any other good in the market economy, its production is regulated by profit, the entrepreneurs that make decisions about what the money commodity will be, the best satisfies consumers, How much of the money commodity is produced then depends upon consumer demands.

1:57And as he points out, these demands exist throughout the economy and the various uses of the money commodity. And so the entrepreneurs not only produce the right amount of gold, let's say, that consumers prefer, but they produce the amounts of gold that are preferred in the various uses of it and allocate the proper amount of the total stock of the money commodity into those different uses. So the right amount of gold is going into industrial uses, into dentistry, into the various, what we think of as monetary forms of gold, right? This too depends upon consumer preferences. He points out, for example, if there's coinage in the, if people are willing to pay fees to have money, commodity certified in the form of coins, then entrepreneurs will be glad to provide this. They can earn profit through this production process.

2:50to sell the coins at a premium to reflect the fact that consumers prefer this form of the money commodity. But as he points out, in other circumstances, it might be bullion or jewelry or whatever, right? This is just, again, a reflection of consumer preferences, what the form of the money commodity takes at any given point. But it's extremely important in Rothbard's theory to keep in mind that in the unhampered market, The production of money, the stock of money and the amount of it exists is just determined in exactly the same way as the production and the stock of all of the goods. Then the other point that he makes about the stock of money, of course, is claims to money.

3:37And here he makes the basic distinction of two different types of claims that we can have on money. One we've talked about already, that's a claim to future money, so we can have credit claims, right? These claims, of course, are not actionable in the present, but only on maturity of the loan. So you have an IOU that you hold as a claim of future money. So that would be one type. And then the second type, obviously, would be a claim on present money. And, as Rothbard points out, a claim on present money is not an indication of the IOU that somebody, you know, that you hold against someone who will deliver future money to you. A claim on present money has to be a claim indicating that you are, in fact, the owner of present money.

4:27So this gets into, then, the idea of a money warehouse, of an issuer of these claims. The power of claims on present money must be like a money warehouse that's storing money for the owners of money who possess the claims. Because a claim on present money simply is a, well, we might say a legal title of ownership to money. It's just an identification of who the owner of the money is. Okay, then as he points out, a claim to money could also then serve as a medium of exchange. It could become a money substitute. This, too, depends upon consumer preferences. It just depends upon whether or not people who use a medium of exchange prefer it. Why might they prefer it?

5:12Well, they might prefer it because they find it more convenient, especially for large purchases, let's say. They might prefer to have a single bill as a claim on money or $10,000 or something. They want to buy a used car as opposed to hauling around gold. Or they might, well it's a similar kind of thing, but they might have a preference for the claim as a medium of exchange because it doesn't require the movement of the money, right? So you don't have transportation costs involved in moving the physical gold. So the claim can simply serve as the medium of exchange as long again as other people in the economy accept the validity of the claim. So it does depend, again, upon just consumer valuations and things.

6:03Now, the next point he makes, of course, is that it is possible, once we have issuers of claims to money, that fraudulent claims could be produced. So a claim to money could be produced where there is no money commodity as property to which that claim refers. Now that obviously then would be fraud. So it would be as if I own my house and I have a title of ownership, I have a deed to my house, and I produce a second identical deed to my house, right? That would be fraudulent. If I sold it to someone, I'd be, you know, perpetrating a fraud upon them. There can't be two legitimate titles of ownership to a single piece of property, or as Rothbard puts it here, There can't be legitimate claims of ownership or deed titles of ownership to things that don't exist.

6:58Okay, so this is the status, then, of these, what do you call, pseudo receipts. Now, as he points out with money, it's more likely that the issuer of a claim to money would, in fact, engage in this kind of fraudulent behavior Then it would be for other warehousing goods, other goods that are warehoused. So, for example, you're all familiar, especially as students, right, with these little storage facilities that exist around major interstates and so on. These are in every town, even Gross City, a little town has these things. Where do you store your personal goods? So, you're a student, you go home for the summer and you store all your belongings in these little garages, basically.

7:47Right, and they lock them and protect them and so on. Well, these goods, since they're highly specific, it would be very difficult for the owner of the warehouse to issue pseudo receipts with respect to these goods, you know, to lend them out, in other words, for usefulness to other people. I mean, they could, maybe could do this, but it's more likely that something like this would happen with money than it is with goods of these sorts. This is because if I put my personal effects in one of these storage sheds, I can come back at any time and redeem my goods, right? Since they're my goods, the usefulness of the goods can only accrue to me if I have them and use them, right?

8:33So I am, in fact, likely, I'm very likely to come back, eventually, in fact, I will come back and redeem my goods. But with money, I don't have to redeem money in order to get the usefulness of the money, Because I can trade the money substitute, right? I can trade the claim to money. And so it's less likely that people will come in for redemption, and therefore easier to perpetrate a fraud of this sort. The second reason is because money is homogeneous, right? All the units of money are identical, and so the claims to money can be what are called general warrants. So you get a claim, let's say a bank note, And when you go for redemption of your $10 bank note, it's, let's say, $10 of gold, the banker can give you any $10 gold coin that he happens to have in the vault, right?

9:23It's not a claim to a specific coin, but a claim to any coin that he happens to have. And so it makes it, again, much more likely that he can, let's say, on the sly, lend out the coins that you deposited personally in his vault. Well, as, again, with personal goods, this won't happen, but I give the guy... I have a couch, and it's in this storage shed, and, you know, it's... I know my own couch, right? And so the guy lends out the couch, and then when I come and redeem, he gives me the couch out of the storage shed next to mine, and I say, well, that's not my couch, I don't want... that one I don't want, right? So it's less likely that he's lending out couches, more likely that you're lending out money, or that you're issuing pseudo receipts for money.

10:08Okay, now obviously the issue of fraudulent receipts creates certain effects and Rothbard here only mentions one. I think Professor Murphy talks, we'll talk about the business cycle in a different lecture so we won't go into this, but he mentions the financial effects on the issuer, right? So if we have a bank that's issuing, it's a fractional reserve bank, so it's issuing fiduciary media, then this creates the problem of the bank run. creates illiquidity in the bank. And as he points out, this is in the nature of the issue of the fraudulent claim. In other words, this isn't a management problem, right, where as a matter of entrepreneurial error, the manager of the bank or the entrepreneur has unfortunately lent too long into one part of the market when he needs the money, it turns out, in the short term.

11:04And he's caught illiquid because he's made an entrepreneurial error. This is just in the nature of the issue of the pseudo receipt. Once you issue a pseudo receipt, since it's available on demand, it's instantaneous. In other words, you create illiquidity. You can't, this is unavoidable or it's categorical. Okay, then the other point that he makes here about the difference is that once it happens that an issue of pseudo receipts occurs, It's possible for the banks that are issuing these pseudo receipts to affect the stock of money. Since this is the main task, right? So in a completely unhampered market, 100% reserve banking, no fraud is being committed by the issue of these claims.

11:50Then the issue of the claims will not affect the stock of money. It will affect, again, according to consumer preferences, it will affect the form of money, but not the overall amount. and all amount. So the gold that's being held in reserve or the commodity that's held in reserve is not serving the medium of exchange function. It's being substituted for dollar for dollar or gold ounce for gold ounce with the money substitute. But if pseudo receipts can be issued, that would add to the money stock. You would have the given, fully backed money substitutes in use as a medium of exchange. Exchange, and then in addition you'd have this, you'd have these new pseudo receipts adding to the money stock. Now here's where we get to the point that I made at the beginning about the regulation of the stock, of the production of the stock of money in the unhampered market by a profit.

12:46This is another indication we might say of the inability we have to logically to reconcile The issue of these pseudo receipts with the unhampered market. This isn't just a legal violation, but it leads to certain inconsistencies like categorical illiquidity, right? This doesn't exist in other areas of the market. But another one that Rothbard points out is that once an institution can issue these pseudo receipts, they cannot regulate the production of the pseudo receipts by profit. Because the issue of every additional pseudo-receipt is profitable, no matter how many you issue, right? You issue the pseudo-receipt and you get to spend it, or as in the case of a business cycle, you lend it out through the credit markets and you earn the rate of interest.

13:37And the cost is minimal. What does it take to print the receipt? What does it take to create an electronic accounting of these receipts, right? The bank can no longer regulate the production of these receipts by profitability. Now, that should send up a red flag to us. In what other area of the economy is that true? Something must be wrong here, right? This must not be, in fact, part of the unhampered market. Okay, then he deals with two criticisms of this claim that he makes, that on the unhampered market there must be 100% reserved banking. The first is that banks can't make profit if they do this, right? They can't, you know, they make a profit on the interest spread. When they engage in financial intermediation, they borrow from savers at one interest rate and then lend at the market rate, performing the middleman function to earn the interest spread.

14:31But if they print up a pseudo, I mean, print up claims to money, they don't, they don't earn any interest, right? The money that they're holding just sits in the vault, idle, and yet they have to bear the cost of printing the banknote or accounting for the checking account balances and so on. But as Rothbard already explained earlier, banks do this only if customers pay fees. So the profitability depends upon customer payment of fees to administer the checking account or to print the banknote or whatever the form of the money substitute might be so this is not problematic and then the second is that 100% reserve isn't this a the argument would be isn't this a sort of a restriction of the freedom of contract in the market so bankers or we have a free unhampered market shouldn't they be able to offer any possible type of deposit or service that they, that they, that they want. So if you restrict them by law, you could say you cannot offer a fractional reserve account.

15:42Wouldn't this be a restriction on their right of contract? And I think as Walter Block mentioned earlier, well, this is just, this is just sort of a confusion about the nature of private property on the market, right? So, we wouldn't say that it's a restriction of the unhampered market if we have a law against a four-murder contracts, right? No, the private property is more basic than contract, and not all sorts of contracts could be upheld in the unhampered market, only contracts that don't violate private property. And if this activity of this issue of the pseudo receipt is in fact fraudulent, fraudulent, well then it would be ruled out of bounds automatically, legally in the unhampered market. Okay and then, so after going through this discussion about the stock of money, there's one last, as I mentioned, intermediate step that he takes before he gives us his full price theory statement. And this is what, well we might call this the second way in which money is non-neutral.

16:49Professor Salerno already gave us the portion of the chapter where Rothbard is assuming that money is neutral. So here he relaxes this assumption and he gives us the kind of standard Misesian account of the non-neutrality of money. But let me remind you that he's already talked about another sense in which money is neutral. This is back in Chapter 4 when he said just the existence of money is non-neutral to the market. In other words, if we have a barter economy, we would have a certain array of prices, exchange rates, barter prices of things. But if instead we have a money economy, then that would change the whole array of prices. All these sort of implicit barter prices that you could calculate in a monetary economy would be entirely different. And remember, his argument is, this is because all the preference ranks of goods against money would be different than the preference ranks of goods against goods, right?

17:43Right? Because money is an entirely different good that would have a different value to people, and so everything is changed by this. So that's one sense in which we might say that money is non-neutral. Here he's talking about the sort of standard sense in which money is non-neutral, where the question is this. What happens when we produce more money? What happens when the stock of money increases? What effect do we get on prices and production? So, as the economy adjusts to the increase in the stock of money, due prices in fact all doubled, all increase in proportion, whatever the relevant proportion is, so that decisions about production and consumption and so on wouldn't change. Now, here's the answer, remember, again, is just taken from Mises, it's exactly the same answer, he says.

18:33Since money is valued on preference ranks since, right, we have, we have, everyone is saying, oh, these good, here I have a certain amount of good, and rank it against a certain amount of money. When the stock of money increases, these rankings will all be changed, right? The rankings will be rearranged, so they're diminishing marginal utility of money or whatever, and people would begin to value any particular unit of money less, let's say, just as an example. So all the rank, all the preference rankings begin to change. Well, when all the preference rankings begin to change, well, all demands change. And then prices begin to change, right? And so the question is how exactly, you know, what are the conditions, what are the sort of praxeological conditions on the way in which these changes take place?

19:24Could we imagine that these changes would in fact result in neutrality? And Rothbard says, okay, no, they wouldn't. And he says we can imagine three different scenarios here of increasing strictness of assumptions. And even under the most strict conditions of assumptions, we would not get neutrality of money. So he says the first case is the realistic case. The first case is we have a division of labor, right? And over here in the economy, here we have the specialized money producers. This might be the state, but in the unhampered market, of course, it's not. It's not, it's just a group of entrepreneurs. So when money is produced, they're the ones who get the new money first. And so their value scales then are changed or their, you know, calculations, if they're entrepreneurs, their economic calculations are changed first.

20:16And then they begin, their demands change. So we get the more, you know, the, what a technological breakthrough occurs for the cost of gold The Theory of Money and Credit

20:55World Case, right? Okay, so that's not a problem. The second case is, I think, Professor Salerno mentioned, is the Friedman case, the equally spread money proportionately to everyone, you know, black helicopter model or the, you know, the Angel Gabriel, if you prefer, the more noble version of this from Hume. So, but the idea is that we don't have specialized money producers where the The money is emanating out from a given point in the economy, but everybody gets the new money equally somehow, proportionately equally somehow, through this process. He says, well, okay, in this case, we wouldn't have non-neutrality either. In other words, as people then, you know, go and begin to spend the new money, we wouldn't see an equal proportionate rise in all prices and therefore neutrality in production and consumption patterns.

21:49This is because people's preference ranks differ. The marginal utility that they place on money differs. In other words, if you woke up with an extra $100, you wouldn't just take it out and spend it equally proportionately on all the things you've already spent. I spend 1% of my income on DVDs or whatever, and so I take $1 of the $100 and spend it on a DVD. No, you'd spend it in an entirely different way. And so this will change relative prices, create non-neutrality. So even in that case, we don't have non-neutrality. And then Rothbard says, well, what if, even more restrictive, what if we had the case where the money was equally distributed and everybody in fact did spend the money equally proportionately in every direction? What about that case? Would we have neutrality in that case?

22:34He says, no. He says, and the reason we wouldn't have neutrality in that case is the reason, I don't know if Professor Salerno meant to say that, meant to apply it to this case, but he mentioned this point, is that the adjustment process takes time and the time of adjustment won't be the same in every production process right the time the time of adjustment of prices and so on and how people would react to this wouldn't be the same and so even if everyone went out and began to spend equally proportionately it wouldn't necessarily I mean maybe again under certain more restrictive assumptions it would but not just under the bare assumption that prices the spending on or demands throughout the economy would be equally proportionally rising this is because the The actual effect of this would not necessarily be the same in every market across time.

23:22Okay, so then he gets to this culmination of his theory of price. And remember the point of all this, what's distinctive about this is that Rothbard has built this system in a completely integrated way. The theory of prices of all goods is completely integrated with the theory of the purchasing power of money. So these things are all determined together in the same causal process moving through time. So this is the way he pictures it, these are statements that he makes about it. So let's start with the first, this is the beginning part of the logic of his claim, right? He says, let's look at each good or any particular good, The price of a good, as we know, is determined by total demand for the good and total stock.

24:13Total demand for the good is the two parts of exchange demand and reservation demands, what Professor Salerno was talking about last lecture. Okay, the exchange demand for any good, this is the total, this is not the demand an individual person has, but the total market exchange demand, for any good is the total stock of money, minus the exchange demand for all other goods, minus the reservation demand for money, right? The total amount of money that exists and people possess, and out of that total stock of money, they reserve some, the reservation demand for money. Then they spend some of the stock on other goods, so that's the exchange demand for other goods. And then whatever else they're not spending on other goods, they have to exchange for this good. So that's the exchange demand for this good. Then there's the reservation demand for the good, right?

25:01So those two things make up the total demand for any particular good. Then he moves to the next step. The next step is, what about the prices of all goods? Okay, so the prices of all goods are determined by, and this is, I use different symbols from Joseph Salerno, so, but anyway, this is total demand for all goods and the total stock of all goods, right? So what's the total demand for all goods? The total demand for all goods is the exchange demand for all goods plus the reservation demand for all goods. Exchange demand for all goods, of course, This is just the total stock of money minus the reservation demand for money. You can solve this algebraically from the first equation, the exchange demand for any one good, right, just by adding to both sides the exchange demand for all the other goods.

25:48Or you can just see this logically. The total stock of money and the total reservation demand for money is the amount of money we hold in our cash balances. And then the exchange demand for all other goods must be the residual, right, the amount that we're spending on all the goods. and the Reservation Demand for All Goods. Okay, so we have just these three factors that determine the prices of all goods. The exchange demand for all goods, total stock of money, reservation demand for money, and the reservation demand for goods, those three factors. Now, let's do the same thing for the PPM. PPM is determined by the total demand for money and the total stock of money. Okay, so the total demand for money, we can break down into these two components. Exchange Demand for Money and Reservation Demand for Money What's the exchange demand for money?

26:36What's just the inverse of the case for the exchange demand for all goods, right? Exchange demand for money is the total stock of all goods minus the reservation demand for all goods. I have a total stock of goods, the reservation demand for all goods. The difference is the goods that I supply. But the goods that I supply, this is just exchange demand for money, right? Okay, I'm supplying these goods in order to get the exchange demand for money. Okay, so he says that, summing this up, right, he says the ultimate determinants of the prices of goods and the PPM then are these four factors. The total stock of money and the reservation demand for goods. These are the factors of increase for prices, right? In other words, if these factors increase, prices go up. And these are factors of decrease, he says, for the PPM.

27:22So if you increase the total stock of money, prices for goods will rise, PPM will go down. If you increase the reservation demand for goods, same thing. Prices of goods would go up. People are more reluctant to sell them, right? Prices of goods will go up, PPM will go down. Then the total stock of goods and the reservation demand for money are the factors of decrease for prices and the factors of increase for the PPM. So we can reduce the whole analysis, or we can summarize, I guess, better word, the whole analysis into these four factors. Now, I want to mention this in some additional detail. tomorrow, so I won't go into this, but there are implications of this, and Joseph Salerno has written a great article on, I don't remember the title now, but the sort of working title had something to do with Rothbard's equation, but I don't think that made it into the final title.

28:16But anyway, applying these insights, this framework, then to a couple of interesting macro questions, and I'll talk about that a little bit tomorrow on the research panel but it's not that this is just a sort of intellectual exercise. This can be actually applied to interesting questions in macroeconomics. Okay, now there are four other topics that I just want to briefly mention. The first one is one that I want to mention because there was a question about this and this has to do with the purchasing power parity theory of exchange rates. Okay, so the analysis that Rothbard goes through is this, right?

29:01Throughout the whole book, he's focusing, well, one of the focal points of analysis is this idea that all action is aiming at the acquisition of a value difference. But even the simplest actions are just, what will you do this evening and, you know, study Man Economy and State, right? You're choosing between that and some other option that you value less highly. And so you're aiming at this value difference. And then as you act and realize this value, if there is a possibility of additional action that is also beneficial on the basis of a difference value, this difference in value will diminish. The rank orders, in other words, will diminish, right? There's diminishing marginal utility of both goods as you move in the direction of exchanging them, one for another.

29:51And so this happens then in markets. This is the principle of arbitraging, right, across different prices. We have different factor input prices and output prices. And so production is guided by the differences here to exploit these. And these two come down then together to some particular point, right? They may be far apart and then action brings them closer and closer to get. In other words, the gains are acquired and fewer and fewer gains are available. Okay, so the same thing happens then in the law of one price. This is the same principle. So we have arbitrage opportunities between goods that are selling at different prices and the arbitrage then brings the prices together as those gains are realized, right? And as Rothbard points out, for goods, this arbitrage process will be somewhat incomplete.

30:40It won't be entirely complete. The goods prices might not come completely together. And this is because of locational differences in the main. The locational differences would create different prices, let's say, for maybe for gasoline near the point of production, then farther away, the transportation costs or something of this sort, right? Because we can categorize, the goods actually become categorized differently. The good would be, let's say, if I'm in Pennsylvania, I want gasoline, and the gasoline's in Texas where it's being produced. Gasoline in Texas is a capital good, not a consumer good, right? In order to make it a consumer good, you have to deliver it to me. It's an extra step of production. And so naturally, its price differs by this transportation cost.

31:26Well, what if we apply this to money? Okay, well, there aren't transportation costs, especially with redemption claims. There are almost no transportation costs of money. Nobody needs, at least, to engage in the transportation costs of moving gold around. They can exchange claims. And there's no distinction between money in one place is a capital good Capital Good and Money in another place is a consumer good, right? This capital consumption distinction doesn't apply to money. Money is always and everywhere the medium of exchange. So we would expect, in fact, we theoretically know that the purchasing power of money in any place must be roughly the same. Any one money in any one market area, the purchasing power of money must be the same in every place in the market area, right?

32:12Every place in the United States, the purchasing power of money is the same. Now, this doesn't seem to, this seems to find the face of empirical experience though. We go to New York City and, you know, we buy lunch at some place in New York City or we pay a much higher price than we do here in Auburn, or we rent an apartment there and a higher apartment. So that has to be explained in a different way. We won't go back through the arguments about this, but you see the basic point, right? There are other explanations that differences in the nature of the goods and differences in subjective values of the experience surrounding the goods and so on. So we don't need to repeat any of that. Okay, so now we get to the purchasing power parity.

32:57So let's suppose that we have two different locations where two different monies are used, two different market locations. We have the euro and the area and the dollar area. Suppose we have an unhampered market where the, you know, we have free exchange of the of Currencies, and so on, that it must also be the case that arbitrage opportunities would exist as long as the purchasing power of money, of the dollar, let's say in Europe, differed from the purchasing power of the dollar in the U.S., and so that the purchasing power, since, again, as long as there aren't, again, transportation costs and moving money or other sorts of transactions costs, then we should, we should know, we should know theoretically that the purchasing power of the dollar would be the same everywhere through exchange rates. Now, the question that was asked about this was regarding empirical Is there any empirical evidence of this?

33:43And, you know, and if so, does this sort of, you know, raise the stature of the Austrian school on this point? And this is a very good question. There are sort of many aspects to it that I want to just mention. One aspect is that you should remember from Rothbard's discussion here that here we have another case Another case where theory is an underlying factor that's working out a particular result. This is like, let's say, the equalization of the pure rate of interest. That is very difficult to see manifest in empirical evidence. Even the equality of the purchasing power of money, again, as we've already seen, is very difficult to see empirically in prices.

34:33The price of the meal in New York, again, is higher than it is here. And so people naturally think the purchasing power of money is lower in New York City. It's not. We know it's not, right, theoretically. And so it's very difficult to test empirically. What sort of empirical test would you arrange to see this, to perceive this? And, of course, value is always changing and so on, so it's a very difficult thing. Secondly, this idea of the purchasing power parity theory of money is held across different schools of thought. It's not like only Austrians hold this theory. And so, you know, this is held by a large group of the mainstream as well. And so it isn't, I mean, if, even if this theory were empirically verified somehow, it wouldn't be as if it shows the superiority of the Austrian view.

35:23But with those caveats, though, I did want to, I do want to mention this particular piece. piece, this is a, y'all see that? You need to be bigger? I don't want to, I mean, I don't want you to read the whole thing, but just to see, just to see, because somebody asked for a citation on this, right, so this is Kenneth Rogoff, it's JEL, it's a dated piece, June 1996, but he cites in the later part of the article, all sorts of stuff, here's the key point that he makes, he says, There is today an enormous and ever-growing empirical literature on PPP, one that has arrived at a surprising degree of consensus on a couple of basic facts.

36:10First, at long last, notice how he says it, at long last we have empirical evidence that purchasing power parity does in fact rule real exchange rates. You get the sense, right, that he too is sort of a praxeologist. We've mentioned this at a couple of other guys, right? They seem empirical evidence, but they really think that it should look a different way if it violates their suppositions about what theory says. So long last we have this, you know, evidence that, okay, persuasive evidence of real exchange rates, tentor purchasing power parity in the very long run. And then the second point he makes is that there's a tremendous amount of volatility in the short run. And so he's trying in this article to work out the, you know, says this is sort of a puzzle and we have to work it out.

37:00But anyway, I thought I'd throw that up for the one who asked about a citation. So he cites, in other words, he cites this empirical literature. You can go look at it. And I'm sure there are updated things that I didn't bother to try to find. OK, so that was one thing. The second is the fallacies of the equation of exchange. So Rothbard's got a great section on this, right? He uses the Fisher version of this. M.V. is equal to P.T., and he points out the following things. He says, look, this is just an identity. If we're going to say anything causally or, you know, theoretically about this, we have to provide the theory. The theory from the Austrian view, of course, comes from the basis of human action.

37:49Then he points out, secondly, there's this aggregation problem, right? Right on the right hand side, we can aggregate P, the array of P's and the array of T's, we can aggregate what Joseph Salerno calls the inner product of them, right? We take the price of something and multiply it by the transaction or by the quantity, then we can add up P's, we can add up the P's times Q's, but we can't add up the arrays of P's or the arrays of T's. This is because they're denominated differently. So prices are ratios, right? Prices $4 per gallon of gasoline, or it's $2 per loaf of bread. Well, we can't add those together. We can only add monetary sums that are sums of money.

38:35Money itself, right? Not ratios of money to goods. So we can't even add up the P's. Nor could we add up the T's, since, again, they would be denominated differently. And then he points out that V, the concept of V from the viewpoint of individual action simply doesn't exist. It's just an absurdity. There's no such thing as a velocity of a single transaction, right? So we can't even understand this in any sense of human action whatsoever. So V is just defined, of course, as Pt divided by M. But as Rothbard points out, if you define V that way, well then you can create an innumerable Number of Equations of Similar Type, right? You can say, let's take the stock of sugar, multiply it by V, and we'll get Pt, if we define V as Pt divided by S, right?

39:30So we'd have sugar velocity, you know? And then the stock of sugar would be a determinant of the price level, you know? This is just, right? This is classic Rothbard, but it shows the idiocy of this. And then he points out, of course, finally, that this is a static condition. Even if it's true, it's just a static condition. And we're interested in, mainly, we're interested in the question of dynamics here, so to speak, or in, you know, what's happening to the process over time, right? We increase the money supply, in other words. We don't just sort of jump from one static position to another. We want to know what's the process that the economy goes by or through when M is increased and, you know, the right-hand side, we get changes in P and T. Okay, then the third thing is the fallacies.

40:17He has a section on the fallacies of measuring and stabilizing the PPM. And here are just a couple of points to make. He says, before economic science came along, people thought it was just sort of a natural inclination that they had to think that money's value was constant. Those are some objective fixed value for money. He says economic science has debunked this and showed that, right, that money's value depends upon demand and supply, or it's variable at least. But what he points out is that only this sort of Misesian line that he's adopted and developed, only this Rothbardian theory of money, has fully demonstrated the sort of underpinnings of the causal factors involved in this relationship.

41:05So the other position, sort of a quantity theory position, is simply left with this unacceptable dichotomy between, again, the barter exchange ratios on the one hand and the price level on the other. The price level is just somehow, you know, it is variable, but it's determined over here by these mechanical factors and isn't part of the process of the market itself. So we have this dichotomy that he considers unacceptable. And here he says, well, the correct view again is to simply reiterate, as the analysis has shown, that the money relation, the total demand and total stock of money, is constituted in the demands and the supplies of goods.

41:50In other words, these things are all entirely intermixed, right? They're interrelated. And the reason for this is because the preference rank is unitary. So you have a bag of apples ranked against $5. So you get the integration right here, right? And so the demand for apples implies the supply of money. These are just completely integrated aspects of your action. They cannot be separated, right? So you can't say, oh, the price of apples is determined by the demands and supplies of apples, Then money is determined over here by the quantity of money and the velocity and transactions and so on. So he makes this very important argument that he makes.

42:40Then he also mentions that some of the things that you also would find in Mises about price indices. You know, price indices are an attempt to say, Let's find a set of goods for which we presume that the value of this set of goods is unchanged. And so that any change that we do see in the prices of these goods would have to be due to changes in the money, right? Would have to be a money phenomena. But, as Rothbard points out, this doesn't work. If you set up a market basket of goods and you say, okay, we keep the market basket fixed, and then we see over time like a consumer price index you know what happens to the amount of money necessary to purchase the market basket of goods and we and we say that the difference in the amount of money that's necessary to purchase the basket of goods over time is by our calculation the change in the PPM the sort of change in the PPM driven by the money relation then we've made a basic fundamental error in thinking right because there isn't any way for us to disentangle

43:47In the empirical evidence of the change in the price and the money paid for these goods, the sort of good side effect from the money side effect, right? Let's say again we have a bag of apples ranked against five dollars. So it's like this.

44:08One bag ranked against five dollars. And then, so this is yesterday. And then today, suppose the ranking is $5 against one bag of apples, so it reverses. Now, do we know why it reversed? If we see a guy who goes into a store and he buys a bag of apples at $5 this day and he doesn't the next, do we know that he's not buying the bag of apples the second day because the value of the bag of apples fell? Or that the value of the money went up? Can we disentangle which one it was that reversed his rank order? The answer is clearly no, we can't, right? We simply don't know. And so no assumption about a market basket of goods can do this for us and disentangle these two effects.

44:59So this is totally useless enterprise to engage in. And then finally, the last thing are business fluctuations. And here again, I just want to mention the kind of basic introductory The basic distinction, at least in the overall sense, is between what he calls business fluctuations and then the business cycle. And here he's just introducing this distinction. He says, look, business fluctuations occur when there are changes in specific demands that exist. Not a change in the money relation, but just changes in specific demands for goods and factors of production and so on.

45:47We can increase in demand for apples and, of course, this involves a change in the rank order of apples against money, but not a change in the money relation. Theoretically, we can make this distinction, right? Just empirically, we can't. So he says, okay, so what would happen? We've analyzed this already. We get the change in the price of apples and then we get production changes. If this is unabated, we would get the final state of rest and so on and so forth. That's a business fluctuation. This occurs all the time in the economy. This is the way that entrepreneurs adjust to better satisfy consumer preferences when they're changing. Separate from this would be a change in the money relation. What happens if there's a change in the money relation? What demand for money goes up or the stock of money increases or something like this? Then the changes that occur in the economy occur throughout the economy.

46:33They occur in every direction throughout the economy. So if the demand for money falls, then the increased spending and increased demands for goods would be throughout the economy. So he says, since the business cycle is affecting the economy as a whole, it would only be through the changes in the money relation. So it can't be that a business cycle is some like a business fluctuation on steroids. It's sort of a Keynesian kind of claim, right? the multiplier process and we get this, you know, it's a little teeny tiny 98 pound weakling change and then it turns into a Arnold Schwarzenegger change. No, it can't happen like that. It's got to be a change in the money relation to change everything throughout the economy all at once, right? And then he says, well, what other restrictions theoretically would have to be placed on it to count as a cycle?

47:24And he says, for example, we could imagine that their external events could occur in the economy, which might create a single, a one-time boom and bust. So, you know, it kind of looks like a boom bust, right? So one time we get something and, okay, the economy expands because of this and then it falls back. He says, but that can't explain an ongoing cycle. That just explains a one-time event, right? right so if that's the way the world was we would just have you know regular economic progress punctuated by these one-time events right so there we would have here we have a little crisis or whatever and then we go along for a couple decades nothing bad then there would be another boom and and so on so he says that that's not what the cycles like the cycles perpetual it's ongoing every every year we're in the boom or crisis or bust or recovery and then he And he says the next step that economists take in their thinking about this is, well, maybe

48:21it's a flaw internally in the market, maybe there's just something sort of, maybe the market's just subject to this through some sort of institutional or internal flaw. And he says this cannot be the case, because as he points out, this is the crucial point that he makes about the business cycle, the business cycle is characterized as a cluster Cluster of Entrepreneurial Error And a cluster of entrepreneurial error cannot be explained on the normal functioning of the market economy. There just is no such thing, right? The normal functioning of the market economy, some entrepreneurs are precisely doing better than others by better anticipating consumer demands. And so entrepreneurial errors don't cluster, right? These entrepreneurs who are less adept at anticipating are being overcome by those that are better.

49:15And so we don't see clustering of entrepreneurial error. And furthermore, even if it were true that you could get sort of by fluke, you could get a cluster of entrepreneurial error on the market, this would not explain the cycle. The cycle is boom and bust, right? What would a cluster of entrepreneurial error do but just give us a bust? Or maybe something else, right? In other words, it wouldn't move in the opposite direction. It wouldn't sort of reverse itself and then become something else. We would think if the cluster of entrepreneurial error were some inefficiency that all entrepreneurs engaged in together, we would just get a collapse. But that's not the boom-bust cycle, right? The boom-bust cycle is first up and then down. And then he says, finally, what this led economists to, of course, is a psychological explanation. This is the only thing left. It must be a psychological mood swings, it must be optimism followed by pessimism that leads us to the cycle.

50:11It must be this animal spirit's explanation of Keynes or something like this. It must be driven by over-optimism and then an orgy of investment and then pessimism and pulling back. And again, I want to go into the further arguments about this, but he nicely lays out this, what's to be covered.