Question

4. Compare the approaches of Fisher’s transactions and Pigou’s cash balances to the quantity theory. Are there any similarities between them? If so, in which respects? Or should they be treated as different approaches altogether?

Answer 1

Fisher's transactions and Pigou's cash balances are two approaches to the quantity theory of money.

Similarities

• Formula of Fisher is P=MV/T whereas formula of Pigou is P=M/KT. Here, the formulas of both are using the same symbols. The meaning of these symbols are the same. The variation in the symbol is seen in the variable used in both formulas, ie; K and V.

where, K= extend of storage of money.

V= rate of spending, not storing.

In short, we can say that they both are reciprocal to each other.

• During the time when people expend more cash, the variable 'V' will increase. When V increases, they don't want to store much money. Hence, circulation of cash in the economy will rise. Hence, K will be replaced by 1/V and V will be replaced as 1/K.
• Both of these approaches deals with the supply of money in the economy, whether it is increasing or decreasing.
• The result of the findings of this approach gives similar conclusions as both the approach is made for evaluating the money supply. Fisher's equation is used to determine the money supply with the help of amount of money spend and Pigou's equation is used for determining the money supply with the help of amount of money storage.
• Fisher's approach consider money for storage and Pigou's approach consider money for spending so that cash flow will rise. Basis of both the approaches are similar. Both the approach studies the two sides of the same thing, ie; money supply. Hence, the variables K and V are the two sides of same study.

Dissimilarities

• Fisher's approach deals with the exchange function of cash whereas Pigou's approach deals with the value function.
• Fisher's approach give importance and make study specifically regarding the supply of cash whereas Pigou's approach make exclusive study regarding demand of cash.
• Fisher's approach deals with cash flow concept whereas the other deals with cash stock concept.
• Fisher's study the significance of depth of circulation of money whereas Pigou deals with money saved as cash balance.
• In the formula of Fisher's approach, the price level indicates that of average level of price for the entire goods whereas in the formula of Pigou, the price level will be that of the consumer goods.
• Fisher's approach rely on inventory theory of money whereas Pigou rely on capital theoretic approach.

Conclusion

Hence, in short, even though they have certain similarities, both of them should be treated as two separate approaches. Among the two, Pigou's approach is considered as better due to certain reasons:-

1. It considers the supply and demand aspects of money.
2. It bring more realistic approach.
3. It deals with a more exclusive study and consider the variations in income and continue the study as that variation determines the level of price of consumer goods.
4. The explanation of cash value by Pigou was more useful.
5. It helps to develop the liquidity preference theory