Dichotomies of the Pricing Process in Economic Theory

In a recent paper it was argued that classical economics attempted dichotomize the economic processes of a monetary economy into a real sector, dependent upon and determining relative prices, and a money sector, dependent upon and determining absolute prices In the event that the operations of the latter sector are described by the quantity theory of money, such a dichotomization is involved in a logical contradiction. Specifically, the classical quantity theory attribute[s] a fundamental role to the effect of real cash balances on demand, for this effect is the vehicle by which . . . a change in the amount of money [is presumed] to influence the absolute price level ; on the other hand, the assumption that the demand function depends only on relative prices implies that [demand] is independent of real cash balances The assumption of Say's Identity does not remove this contradiction.' Abandoning the quantity theory of money does not resolve this difficulty. For the assumption that commodity demand functions depend only on relative prices is inconsistent with any monetary theory which attempts to make money prices determinate. This can be seen simply in the following way: Consider an economy in which excess demand depends only on relative prices, and assume it to be in equilibrium at a certain set of money prices. Assume now that all money prices are changed in the same proportion. This does not change relative prices. Hence, by assumption, the commodity markets are still in

Cash · Commodity · Contradiction · Demand curve · Economics · Endogenous money · General equilibrium theory · Macroeconomics · Market economy · Microeconomics · Monetary economics · Monetary policy · Price level · Quantity theory of money · Relative price · Economic theories and models · Economic Theory and Institutions · Economic Theory and Policy

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