Positivism and The Quantity Theory of Money

I believe that within this world we are forced into boxes and categories, believing we should act and behave within certain parameters and fit into models created on previous action. I posit that this is not the case, that we are human beings with souls and we can act in an infinite number of ways on a finite timeline, not in a finite number of ways on an infinite timeline. Positivism has no place in a free thinking and flowing world but one entrenched in a blockaded and statist world.

Courtesy of  Sandeep Jaitly @ FeketeResearch.com:

What is positivism and how does the quantity theory of money fit in with it? The doctrine of positivism is a form of arch-empiricism that tries to crystallise the supposed process of ‘scientific thought’. An adherent of positivism believes that there are general ‘laws’ of cause and effect in the natural/social sciences and the only way to uncover these ‘laws’ is via the tool of research. An adherent of positivism believes that objective analysis – whatever is meant by this – is the only form of analysis; indeed there exists a zero possibility of the observer influencing the observed. Nature is orderly and regular; scientific knowledge is cumulative in character and all objective phenomena are eventually knowable – all characterize the approach of positivism.

Whilst it may seem to be a sound basis for a doctrine, positivism is utterly flawed and mischaracterizes the process of natural/social scientific thought. Simple examples shall be described to show why the approach of positivism is flawed. Take Newton’s ‘law’ of gravity. Newton’s observations of the movement of the visible planetary bodies seemed to fit with a certain type of mathematical relationship related to the masses of the bodies, and their distances apart. In slightly further detail, the relationship involves the inverse square of the distances apart. In the context that Newton was working, this ‘law’ was more than adequate. Indeed, centuries later, the ‘law’ was sufficient to send rockets into (near) outer space and back. However the nature of the establishment of this ‘law’ should not be mischaracterised – as a positivist approach did indeed cause with the observations of Einstein at the turn of the twentieth century. Newton’s ‘law’ is invalid over super-massive distances. When Einstein changed the context further beyond Newton, Newton’s observations did not quite fit the bill and scientific squabbling ensued. To the benefit of the physicists however, this supposed dichotomy was resolved – Einstein is appropriate in a broader context than Newton.

Another simple example can be found with the ‘philosophy’ of objectivism. This presumes at the outset that you can know – indeed it is possible to know – the true characteristics of an object from our senses. “A chair is a chair” is a statement that means something in the world of objectivism. This is a patently flawed philosophy. One shouldn’t confuse ‘an object with which to be sedentary’ for what we call a ‘chair’. There are many objects with which one can be sedentary – like a wall or a large boulder. The total set of characteristics that will define an object in question can never be fully known – there are many characteristics for that object which we call a ‘chair’ beyond ‘an object with which to be sedentary’ – for example as a tool to hold a door open.

With these ready examples in mind, it’s relatively easy to see how the quantity theory of money falls into the positivist camp. The quantity theory of money states relationships between: the total amount of money in circulation (M); the ‘velocity’ or frequency of transaction with this money (V); the general price level (P) and the volume of transactions of goods and services (T). The theory states that M●V = P●T. As a first guess to fit the relationship of these variables – in as much and so far as these variables can be observed – it might seem fair. However, one mustn’t confuse this approximation to a general economic ‘law’ that holds in all contexts. Under an unadulterated gold standard, the total amount of money (gold) and near money (gold bills) in circulation can never truly be known. The portfolios of clearing banks would only contain a slice of the total bills outstanding, there might be and is likely to be a sizeable amount of private bills in a local circulation only. As for the ‘frequency of transactions’ this is likely to be even more opaque.

What is supposedly measured as the total number of transactions can only be part of the whole. There is likely to be a multitude of transactions outside of the sphere of immediate measurement. Even as a first approximation to the relationship between these variables, the quantity theory would be exceptionally hard to verify. The quantity theory doesn’t even fit into the same class as Newton’s observations: it cannot be verified even in the simplest of cases.

If one assumes that the quantity theory holds true indefinitely, then one can understand the reasoning of quantitative easing to fight supposed deflationary forces. A simple rearrangement of the equation shows that prices should be proportional to the amount of ‘money’ in circulation assuming that the other factors are more or less constant. However, the other factors being more or less constant cannot be assumed and consequentially the action of creating ‘money’ may not have the desired consequences. Indeed, if the newly created ‘money’ is hoarded and the resulting ‘velocity’ of the money decreases at a much faster rate, then prices, according to this relationship may indeed fall (1). Conversely, the ‘velocity’ might move up much higher than expected causing a small increase in ‘money’ leading to a disproportionately large increase in general prices.

Of course, the quantity theory of money over looks the origin of price from a Mengerian perspective (2). Price is born from the comparison by exchange of defined units of a substance against a defined unit of (constant marginal utility) gold. Price – per se – has nothing to do with the volume of gold in existence. Menger would have been horrified with the positivist approach as has developed in economics – his thought processes being far removed from such restrictions.

It can be seen that the positivist approach has infected many areas of research – of which economics is just one. However, whereas in the harder sciences such as physics and chemistry it has been acknowledged for what it isn’t, the same cannot be said to hold true of economics.

Sandeep Jaitly, Fekete Research, London, 27th December, 2012.

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4 thoughts on “Positivism and The Quantity Theory of Money

  1. Pingback: On Positivism | From guestwriters

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  3. Pingback: Misleading world, stress, technique, superficiality, past, future and positivism | From guestwriters

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