Classical Theories of Money, Output and Inflation.

Rashid, Salim

This well-written book has a definite purpose--it is to examine "the historical antecedents of monetarism" by studying monetary controversies in Britain over the past two centuries. In the course of the analysis Green challenges the notion that the quantity theory of money is a necessary part of classical analysis while providing his own exposition of classical (and Marxian) framework. The distinction can be readily described by referring to the equation of exchange MV = PY, where variables have the standard denotations. According to Green the classical school took Y to be fixed by Say's Law and V to be externally given. So far there is agreement with the neoclassicals. However, P was given to the classicals by some form of real cost theory. Hence P was independent and M was dependent, not vice versa. As Green puts it, "Causation ran from prices to money in classical economics and not the reverse as we find in neoclassical monetarism".

The use of a fixed level of output by both classical and neoclassical economists hides a significant difference. While neoclassical economics possesses a theory of output through the use of Says Law and the savings-investment process, classical economics determined current output by the prior level of accumulation, which is appropriately termed by Green the absence of a theory of output. From a policy viewpoint, Green thinks the quantity theory applies only in the short-ran and sees hope for effective monetary policy in the integration of a principle of effective demand within the classical framework. As Milton Friedman's version of the Quantity Theory explicitly allows for substantial quantity responses in the short-run and applies the Quantity Theory rigorously only in the long-run, it is not clear to me that Green has effectively differentiated his own policy framework from that of the Quantity Theory.

Two methodological aspects of Green's approach should be noted. First, he sees great merit in focusing on permanent forces, or the long run. Secondly, he thinks demand-supply analysis provides a vacuous explanation, serving only to shift the unknowns. Since an evaluation of the merits of this book as analysis depend in considerable part upon one's acceptance of the two above principles, it would have helped if Green spent a few pages on these central points. For example, a suitable place for such a discussion would have been on page 153 where Viner's comment upon Ricardo's neglect of the transition to the long-run is noted.

However, the substance of this book is concerned with the history of monetary debates. It is a pleasure to note the care with which issues are set forth. Fully aware of the unorthodox approach he is taking, Green takes pains to clarify the assumptions behind his own approach. The surplus viewpoint, for example, is clearly described before getting into the Classical framework and it is conveniently recapitulated when necessary. I especially valued the bold judgements about several figures normally put into the background. John Law and, more particularly, Sir James Steuart, are sympathetically portrayed. So too is the Banking School. However, it is curious that some of this discussion is not linked with arguments on Free Banking. Green makes a considerable effort to present Marx's monetary thought, but with the exception of a quote on page 96 dealing with the ever lengthening chain of payments, I failed to find any worthwhile insight by Marx.

This clear and well-written book deserves to be read by anyone concerned with the history of monetary thought or with classical economics.

Salim Rashid University of Illinois