A wonderful exposition of Austrian Economics by Frank Shostak and the dangers of seemingly innocuous mathematical economics in this article: https://mises.org/wire/problem-velocity-money. I’ll re-hash so that I solidify this critical concept in my own head… This is unlikely to be valuable to those who haven’t studied formal economics.
Mathematical economists manipulate;
(1) Velocity (V) = Value of Transactions / Money (M) to,
(2) V = Quantity of Transactions (T) * Average Price (P) / M to,
(3) M*V=T*P and thereafter
(4) M*V = Gross Domestic Product (GDP).
The final equation suggests that increasing money & velocity can result in higher GDP, and that higher velocity increases the value of money. These are incorrect & dangerous conclusions.
Velocity is not the value of money. Money’s value is determined by its purchasing power in terms of goods and services. Money is a MEDIUM of exchange, not the MEANS of exchange. The actual means of exchange is the previous good or service that was exchanged to get hold of money. Hence why money’s value always relates back to the purchasing power of goods & services.
Prices are the outcome of purposeful action, demand and supply. Velocity and the number of transactions has nothing to do with how prices are determined. Who cares who many times this $ has been used?! The purchasing power of money is dependent on inflation, not its velocity.
High velocity merely states that the value of transactions is higher relative to money and low velocity that the value of transactions is low relative to money. Neither is necessarily a good or a bad thing. There will reasons for each outcome, depending on proclivity to saving and inflation, amongst other factors. But its these other factors that deserve attention, not velocity.
If economics where are simple as M*V=GDP, then global poverty would easily be eradicated by Mugabe-economics. Authorities can create lots of money & make it circulate, quickly, to produce GDP. That sounds familiar… Of yes, that’s is what we’re doing at the moment! Logically, historically and theoretically, we know that money creation doesn’t work, but an innocuous mathematically trick has mislead many into arguing for these dangerous economic policies that destroy society.