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The Demand for Money

September 9, 2008

Gilligan says, in response to On The Demand for Money:

I don’t think one flows from the other.

A true free market will not alter the prices of something simply because one individual’s desire for more money.

Unless you were talking about enough people demanding more money, where the shopkeeper notices revenue dropping and is forced to drop the prices of cheeseburgers and grape soda to entice you back, right?

If people want more money, they usually think in terms of working extra hours or lottery payouts rather than dropping their levels of consumption, no?

Did I miss something?

I said, it sounds like Gilligan is mixing his macro and his micro. Of course it doesn’t seem like market will alter the prices of goods and services as a result of one individual’s desire for more (or less) money, nor for more (or fewer) goods or services. However, market prices are essentially determined at the margins, that is, by the marginal buyers and sellers.

Those individuals willing to pay more will bid prices up, and those individuals eager to sell all of their product and take an early afternoon, will keep prices in check.

Gilligan replies,

Maybe our view of demanding more money is distorted because if I demand more money, I can get it, thanks to fiat money/fractional reserve banking

Now you got it!

Broadly speaking, if the macro “demand” for money has increased, expansionary monetary policy notwithstanding, something has to give. Maybe the workers simply work more, but this means they’re producing more, and so there’s more stuff for sale, and since the demand for “stuff” hasn’t changed, these things can only be sold if they’re offered less expensively. Maybe the workers/owners decide that they can’t profitably sell things less expensively. Under these circumstances, there’s no more work to be had.

The “demand for money” as contemporarily conceived is a macro concept, even though, like the rest of economics, it’s ultimately determined by millions of disparate market participants, on their own atomistic “micro” levels. We simply don’t discuss an individual’s “demand” for money, although it is manifested in his propensity to save or to invest, or to work or to consume. The “demand for money” isn’t a demand for debt slavery.

So my point is, that if you want more money, you generally need to be content with less of something else.

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