Superiority of Cambridge Quantity Theory of Money Over Fisher's Version



The cash-balances approach represents an advance over the cash transactions approach in many respects:

1. Humanistic Approach:

The Cambridge equations emphasise K or cash-balances and consider human motives as important factors affecting the price level, as opposed to the mechanistic nature of the cash-transactions equation.

Fisher's equation, on the other hand, is mechanistic in the sense that it does not explain how changes in the volume of money bring about alterations in the price level.

The Cambridge equations attempt to bring out the causal factors involved; a change in the desire to hold money may bring about alterations in the price level, even without there being any change in the quantity of money.

2. Better Mode of Thinking:

The Cambridge version is concerned with the level of income as against Fisherian consideration of the total number of transactions. This notion has paved the way for a new mode of thinking in modern economics.

3. Integration of the Theory of Money with the General Theory of Value:

Fisher's approach is only one-sided in the sense that it considers supply of money to be the only effective element in determining the value of money. The Cambridge equations, on the other hand, are stated in terms of supply and demand both following the general theory of value.

4. More Realistic Approach:

The cash-balances equation emphasises the psychological factors or subjective valuations as chief determinants of the demand for money, in contrast to the Fisherian approach which stresses the institutional, objective and technological [factors only. Thus, the former is more realistic, because [the fundamental truth about money is that someone always holds it.

5. Foundation of Modern Theory of Interest and Demand for Money:

The cash-balances theory has sown the seeds of the Keynesian Liquidity Preference Theory of Interest as well as the modern concept of the demand for money. It points out two of the three liquidity motives, viz., the transactions and precautionary motives.

6. More Convenient Equation:

Kurihara states that the Cambridge equation P = KT/M is far better than the cash-transactions equation P = MV/T in explaining money value, because it is more convenient to know the amount of the cash-balances individuals hold relative to total expenditure than to know how much they spend for a multitude of transactions.