CH. 21

THE THEORY OF PRICES

3°5

elasticity, namely the elasticity, of effective demand inresponse to changes in the quantity of money,

_ MiDe * D*/M’

This gives us

e v .e d where e v = 1 - e t .e 0 (1 - e^)\

6 = C d — (\ ” &w)('d * • ^0

= &d (l — • ^0 • ^u>)

where e without suffix ^ s ^ an ds for the apex of

this pyramid and measures the response of money-prices to changes in the quantity of money.

Since this last expression gives us the proportionatechange in prices in response to a change in the quantityof money, it can be regarded as a generalised statementof the Quantity Theory of Money. I do not myselfattach much value to manipulations of this kind; andI would repeat the warning, which I have given above,that they involve just as much tacit assumption as towhat variables are taken as independent (partial dif-ferentials being ignored throughout) as does ordinarydiscourse, whilst I doubt if they carry us any furtherthan ordinary discourse can. Perhaps the best purposeserved by writing them down is to exhibit the extremecomplexity of the relationship between prices and thequantity of money, when we attempt to express it in aformal manner. It is, however, worth pointing outthat, of the four terms e d , e w , e e and e 0 upon which theeffect on prices of changes in the quantity of moneydepends, e d stands for the liquidity factors which deter-mine the demand for money in each situation, e w forthe labour factors (or, more strictly, the factors enteringinto prime-cost) which determine the extent to whichmoney-wages are raised as employment increases, ande e and e 0 for the physical factors which determine the

x

M dppdNLso that