Famous Figures and Diagrams in Economics
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Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.
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Chapter 52: The Demand Curve for Money

David Laidler

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52. The demand curve for money David Laidler It is nowadays uncontroversial that the demand equation for money determines the demand for a stock of the economy’s means of exchange and some of its close substitutes as a function of some ‘scale’ variable (real wealth or national income, say), the opportunity cost of holding it (the difference between its own rate of interest and representative returns on other assets) and the general price level. This last relationship is one of strict proportionality, because rational agents make choices about real quantities that are independent of the units in which they are measured. Even so, an extensive literature – see Laidler (1993) – has debated such empirical matters as money’s precise definition and this function’s stability. Under the gold standard, the classical explanation of the price level as depending upon the cost of production of the precious metals had always co-existed uneasily with the quantity theory of money, which stated that, if money’s velocity of circulation and the level of real output were held constant, the price level would vary in strict proportion to the quantity of money in circulation, But by the late nineteenth century, the cost of production theory of value was being superseded by one based on the idea of marginal utility and sometimes articulated in terms of a supply and demand apparatus. Thus, though relative prices and the price level had once seemed explicable by a single theory, they now required separate and apparently unrelated approaches. Alfred Marshall, a leading...

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