Prices and Production: Lecture I, Part III
Once the
historical timeline arrives at Knut Wicksell, it no longer becomes productive
chronologically, following the ways by which his theories were transformed.
Instead, it is best to assess the errors of the Wicksellian theory, and to
follow the necessary corrections to their logical conclusion: the reexamination
of what monetary economics means.
Wicksell’s
most serious error was his assumption that as long as the money rate of
interest correlates with the natural one, the price level will remain constant.
To Wicksell, the natural, or equilibrium rate of interest was the rate at which
the supply, and the demand for real capital and the quantity of savings would
be equalized, and when the price level would be stabilized. However, the errors
of this conclusion are easily revealed once one takes into account the fact
that if the interest rate were to remain at its equilibrium level, banks would
have to limit their loans to the amount that had been deposited with them, and,
as a result, there must never be a change in the amount of money in
circulation. However, for the price level to remain constant, the quantity of
money in circulation would have to change with respect to production in order
to ensure that prices do not decrease as more efficient methods are adopted.
Hence, it is either possible to limit the demand for capital in accordance with
savings, or it is possible to keep the price level stable – the two are
mutually exclusive.
Indeed,
almost any change in the amount of money, though it may not affect the general
price level, will have an influence on relative price. Due to the fact that it
is relative prices, not the general price level, that influence the amount, and
direction of production, it also follows that any alteration in the quantity of money will have an impact upon
production. In addition, since relative price levels may change under a stable general
price level it is necessary to completely renounce the doctrine that there are
no monetary influences on prices as long as the price level remains constant.
In fact, once economics rightfully focuses on the influence of money upon
individual prices, it becomes evident just how superfluous a theory of money
that focuses on the value of money as the reverse of the general price level
is. Monetary theory will have to reject explanations that are based on the
direct relationship between money, and the general price level, substituting
for it an investigation into the causation of changes in relative price levels
and their effect upon production. The end result would be a theory of money
that is no longer a theory of the value of money in general, but “a theory of
the value of the influence of money on the different ratios of exchange between
goods of all kinds…” (Hayek, pg 29).
For the
further lectures of Prices and Production,
it will be shown how it is possible to solve some of the most important questions
in monetary economics without any recourse to the concept of the value of money
in general. Since the following lectures is interested in how the individual
prices of capital display how far the demand for capital can be satisfied,
there is no absolute need for money. Truly, there is no objective value of
money as one would speak of the value of capital, and other goods. Ergo, “what
we are interested in is only how the relative value of goods as sources of
income or as means of satisfaction of wants are affected by money.” (Hayek,
31).