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Home History of Money Definition of Money According to Classical Economists

 

Definition of Money According to Classical Economists:

 

According to classical economists money is just a medium of exchange and it can not influence the income and employment of a country. In other words, the money supply which is in circulation just performs the function of exchange of goods and services. People keep money with themselves so that they could transact goods and services. Thus, according to them money is just a token and it has nothing to do with economic activity of a country. They further say that money is like a veil which wraps the goods and services in itself. Money has been accorded as a veil because it has camouflaged the operation of real economic forces. Classical economists do not rule out the act of savings or borrowing. They think the savings, borrowings and lendings take place under the shield of a veil. It means that they have attached the problems of savings, borrowings and lendings with the transactive motive of holding money. Whether any body purchases the goods or services or borrows, both are similar functions. The funds are borrowed or lent with the help of money but they do not influence the economic activity in any way. In this respect, Adam Smith writes:

 

"Money is like a road which helps in transporting the goods and services produced in a country to the market, but this road does not itself produce any thing".

 

Again classical economists:

 

"Accord money like an agent which expedites the chemical action of any process, but it can not change the components of chemical action".

 

Thus classical economists are of the view, that money facilitates the transaction of goods and services, but it does not influence the quantity of goods and services in any way. It means that money can not influence the real variables like production, income and employment. It can only influence the monetary variables like monetary wages and prices. In other words, if the supply of money in a country is increased the income and employment will remain unaffected. The increase in supply of money will lead to increase the prices, hence monetary wages. When prices and wages increase in the same proportion real wages will remain the same. As a result, the employment and output will remain the same.

 

All above discussion shows that the ideology that money cannot influence economy was a corner stone of classical economics. This philosophy remained popular till before and after I world war. But when classical utopia of nonintervention collapsed during 1970's depression the concept of money as a veil disappeared and money was accorded a dynamic element. AH the problems which emerged during 1930's were attributed to money. Because of this reason, "Money was accorded Evil Genius". The money which got the importance by putting to an end the problems of barter system, was later on accorded as veil and finally it was held responsible for inflation and deflation.

 

Relevant Articles:

 

Barter System and its Inconvenience
Evolution of Money and Different Standards of Payments
Definition and Concept of Money
Definition of Money According to Classical Economists
Definition of Money According to Keynesian Economists
Definition of Money According to Monetarists
Representative Money or Modern Money/Plastic Money/Electronic Money
Functions of Money
Role and Importance of Money
Properties/Qualities/Merits of Good Money
Demerits of Money
Money and Near Money
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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