One of the few non Austrian economics ideas that makes sense to me is velocity is money. The more often the same unit of money is used in transactions, the larger it’s impact on things like inflation. However, per my understanding, Austrian economics does not use this concept. Can anyone explain how Austrian economics addresses this? #economics #asknostr
Discussion
If the velocity is low then it means very few people are spending. If very few people are spending it means that very few needs/want are fulfilled by the economy which mean not many people are creating value. Essentially, the people are poor.
Velocity is important, but not as a way to control inflation.
Low velocity can result from lots of factors, including what you describe. What I’m asking about though is: am I correct that Austrians don’t use this concept in discussions of monetary policy, and if not, how do they address it?
You're right they don't. Because they don't believe in dictating monetary policy.
If people don't spend Because they don't want to, no artificial economic stimulus will create sustain economic growth and fix the actual problem.
I agree with not dictating monetary policy. But velocity of money would still be useful in analysis of the economy, e.g. “despite the fact that the money supply itself did not increase, we experienced an increase in velocity of money due to introduction of faster payment settlement technologies which resulted in an increase in the average price level.”
Not at all saying that statement is accurate, just saying velocity could be used as a tool of analysis.
I would refer back to this note.
I don't see what else could be analized.
Sure, if there is less barrier to commerce with easier money to use then I would generaly say it's good. But again we're really just saying it's good when more people fulfills each others needs.
What more would you expect from knowing that people are spending more or less?
The example I gave would be one. We like to understand what changes will lead to which outcomes. There’s value in understanding that a change in payment technology or consumer behavior may result in an increase in average prices, for example. It helps us make intelligent business planning decisions, as well as providing useful models for understanding history. That can be vital in shooting down BS monetary theory from the Keynesian side.
To make sure I’m being clear, I’m not disagreeing with your statements overall. I’m simply trying to understand if I’m correct that Austrian economics generally doesn’t use this paradigm and, if that’s the case, how they would explain changes in the economy that a Keynesian would attribute to velocity of money.
It's not that they wouldn't use the concept at all. It's that they wouldn't give it a causal status.
"How would they explain changes in the economy that à keynesian would attribute to velocity"
The wouldn't attribute changes in the economy to the Velocity of money. They might use it to see a change but it stops there. It's different to say that the Velocity caused à change rather than it beign a reflection a change.
I don't think any austrian would disagree with the Statement that faster paiements made for a higher Velocity of money. There's just not much to extrapolate from there. The higher number of transactions is à is caused by a réduction of friction between economic actors.
Any austrian would say that a réduction in friction between econonomic actors (faster payments) is most likely to grow the amount of transactions.
Saying that it would drive prices up or down is not necessarily true. Tho I would say it is very likely to reduce prices as it may open businesses to bigger markets and therefore more profits and therefore more growth and therefore more economies of scale.
But again, the Velocity of money is not the part where the big analizes are made other than acknowledging their is more transactions than yesterday.
Skepticism of Aggregates: Most Austrians, would be wary of oversimplified macroeconomic aggregates such as the velocity of money. The velocity of money is calculated as the ratio of nominal GDP to the money supply, but an Austrian might argue that it obscures the nuanced, individual decisions about saving, spending, and investing that drive economic activity.
2. Focus on Individual Action: Austrian economics emphasizes methodological individualism—the study of economic phenomena as the result of individual choices. An Austrian would likely point out that the velocity of money is a statistical artifact that cannot fully explain the dynamic processes of human action and market coordination.
3. Misesian Critique: Following Ludwig von Mises, An Austrian would argue that money's demand and supply are what matter most in determining purchasing power. The concept of velocity might give the impression that money is somehow circulating faster or slower independent of human action, which is misleading in the Austrian view.
4. Time Preference and Capital Structure: An Austrian would likely stress the importance of time preference (how individuals value present goods versus future goods) and the structure of production in the economy. Changes in what mainstream economists interpret as changes in velocity are more accurately reflections of changes in individuals’ saving and spending behavior, driven by these deeper factors.
5. Critique of Keynesianism: An Austrian would probably critique Keynesian economics for treating the velocity of money as a variable that policymakers can influence to achieve desired outcomes like increased GDP. From an Austrian perspective, this approach neglects the distortions that monetary manipulation can create, particularly in capital markets.
6. Role of Cantillon Effects: An Austrian might emphasize Cantillon effects—how new money enters the economy and impacts different sectors unevenly—over the simplistic notion of velocity. The path of new money matters far more in Austrian theory than the aggregate measure of how often money "turns over."
Thank you for the detailed response. Trying to translate it to my own world view: the velocity of money in Keynesian terms is a specific statistic that can be measured and influenced by policy makers. Austrians would avoid that for many of the reasons you mentioned. That makes sense to me. Instead, they would subsume those kinds of effects under other behavior.
I think my misunderstanding was thinking of velocity not as an aggregate statistic, but as a general trend, similar to say “the money supply went up.” But maybe even there I’m still thinking too Keynesian-ly and thinking we can make broad predictions based on these trends.
Anyway, thank you for the thoughtful response.