Abstract
Using Ramsey’s formulation of the probability theory, this study considers the plausibility of alternative monetary theories—Keynesian and monetarism, which is defined by the people’s confidence in such theories. It is naturally assumed that the more complicated theory entails a dearer cost to understand. Keynesian equilibrium is supported only through belief in the stable intrinsic value of money. Conversely, monetarism requires that laypeople have special and difficult knowledge so as to be confident about its assertion; namely, the linear relationship between nominal money supply and price; the actual value of Marshallian k and the volume of nominal money supply. As such, the Keynesian belief is far more prevalent in the actual economy.
Highlights
The familiar probability theory, which is established by Kolmogrov relying on the measure theory, and Ramsey’s [1] theory depends on the frequency theory of probability
As long as people rationally believe the intrinsic value of money, money becomes non-neutral. In contrast to such a simple structure of Keynesian economics, as Otaki [4] shows, monetarism requires much information and complex processing to understand and believe it; every individual is incessantly concerned about the movement of nominal money supply and all must investigate whether the price level increases proportionately to nominal money supply; and they all must exactly know the value of Marshallian k
2) For monetarism a) the layperson must be able to confirm that the current price level changes proportionately with the nominal supply as in Equation (11), b) he must be conversant with the linear function to understand the relationship in a), and c) he must know the value of the proportional constant κ (Marshallian k) and the exact quantity of nominal money supply, Mt
Summary
The familiar probability theory, which is established by Kolmogrov relying on the measure theory, and Ramsey’s [1] theory depends on the frequency theory of probability. The most prominent feature of his theory is that he connects the subjective probability with one’s action towards the proposition in question He assumes that one can know whether the proposition is right if one pays some investigation cost, f (d ) , where d denotes the difficulty of knowing the true causality. As long as people rationally believe the intrinsic value of money, money becomes non-neutral In contrast to such a simple structure of Keynesian economics, as Otaki [4] shows, monetarism requires much information and complex processing to understand and believe it; every individual is incessantly concerned about the movement of nominal money supply and all must investigate whether the price level increases proportionately to nominal money supply; and they all must exactly know the value of Marshallian k.
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