The Classical Monetary Theory: The Outcome of the Discussion

Abstract

I. INTRODUCTORY Recently a number of economists have shown a revived interest in the monetary theory of the classicists and of the members of the Lausanne School and their successors.2 It has been maintained that all of these authors held basically common views which have been called the classical system . Moreover, it has been argued that this system suffers from serious formal shortcomings, in particular that either it is inconsistent or it must leave the absolute price level indeterminate. We believe a summary of the results of the discussion is now appropriate, and that the conflicting views can be evaluated and to some extent reconciled. Moreover, the arguments can be stated rigorously without recourse to the mathematical apparatus which has been employed. A detailed restatement is therefore included in the belief that the discussion will become available to many who did not follow it before. For our purposes we may consider the attack on the earlier writers to have been opened by Lange [I3], although the discussion, as is indicated below, goes back much further. However, the immediate centre of contention is Patinkin's restatement and refinement of the Lange position. We shall therefore describe the Lange-Patinkin version of the classical system and the difficulties which they have shown to be inherent in it. A more satisfactory structure which Patinkin has called the modified classical system will then be outlined. Finally, it will be argued through reexamination of some of the classical writings that most of the group probably never held views like those ascribed to 1 The authors are indebted to Professors Viner and Brunner for their comments and suggestions.