A Review of the New Monetary Quantity Theory

The new quantity theory of money was put forward by Friedman in the article Restatement of Quantity Theory of Money published in 1956. In this article, Friedman interprets the theory of money quantity as the theory of money demand, not the theory of output, nor the theory of money income or the theory of price level.

Friedman regarded money as an asset and thought it was just a way to keep wealth. Therefore, Friedman regarded the demand for money as basically determined by the total wealth and the rewards of various forms of wealth. However, when Friedman emphasized that the restrictive factor of budget is wealth rather than income, he was faced with the problem of finding an acceptable measure of wealth. In order to solve this problem, Friedman does not regard current income as the representative of wealth, because this indicator will fluctuate irregularly in the short term. On the contrary, Friedman introduced a longer-term income concept in monetary analysis, which is his long-term income concept. Permanent income is the average of past, present and future income, which has a strong consistency with personal expected income or normal income. Friedman included permanent income as the representative of wealth in the function of money demand.

In Friedman's view, wealth is important not only because it is a related budget constraint, but also because it can be maintained in various forms, thus having a significant impact on money demand. In this regard, maintaining various forms of wealth, especially human wealth or non-human wealth, are the other two decisive factors that play a role in the demand for money.

Because some forms of wealth are easier to realize than others, it is necessary to consider the ratio of human wealth to strength wealth. Human wealth is hard to realize. For example, when the demand for labor is low (when unemployment is serious), it is difficult to turn human wealth into income. Therefore, the greater the proportion of human wealth in the total wealth, the greater the demand for money, so as to prepare for the difficulty of selling human wealth.