THE OPTIMUM QUANTITY OF MONEY: A COMMENT

by Jorge O. Bonvicini*

The article by John R. Tyler on The Optimum Quantity ofMoney represents

an interesting contribution to the literature on the subject of monetary theory,
as far as it focuses the problem of utility maximization within a dynamic frame
work, and uses the tools of dynamic programming to track the time path of
several variables in a controlled experiment.

However, there seems that many obscurities remain in his criticism of the
classical and neo-classical position in monetary theory, as presented by several
authors. Tyler appears to simply state that their argument is incorrect, without
substantiating such a conclusion anywhere in the article. As initially stated,
the study makes a useful contribution in the sense of approaching the problem
from the standpoint of dynamic optimization, but I consider that the author
should have expressed his conceptual framework with clarity, and explicitly
justify his attack on previous works.
He asserts that P. Samuelson is wrong when, in the following individual
utility function :
U = U(qi, . . ., q?; M, FKK + ?TT, WL, Pu . . , Pn),

subject to the constraint,

Piqi + . . .+ Pnqn + rM = WL + r(PK# + PTT + M*),

he includes the terms rM* in the individual's budget constraint. Tyler argues
that rM* ? which, as I understand it, represents the potential services to be
expected from the holding of M*, the amount of money in the hands of the
individual at the beginning of the period ? is incorrectly incorporated in the
constraint together with the other terms, which he refers to as actual income.
Now, it seems that the term rM* represents an income as actual as any other, at
least as long as money serves as a medium of exchange. I cannot understand

clearly why Tyler makes a conceptual difference between rM* and the other
elements in the constraint. From the individual's point of view, money, as well
as other assets, renders certain services, and the individual does consider them
within his budget constraint. As Samuelson correctly points out, the introduc
tion of money in a static analysis is a short cut for the effect of transaction costs
and uncertainty on the amount of consumption over time yielding substantially
the same results.

Similarly, his attack on Friedman fails to show why, within the assumptions
underlying this author's model, the results are incorrect. Moreover, the criticism
of the work of Feige and Parkin also appears very weak. Firstly, even con
sidering neutral allocation consequences, why is it that the individual consumer
does not consider taxes as given?, and, secondly, how does the introduction of
the tax function in the individual budget constraint make the individual identical
to the social optimum?

Even more important than the fact that the classical and neo-classical
seems to state repeatedly that it is
position may be correct or not, the author
incorrect without satisfactorily explaining why it is so. Fundamentally, the
article seems to be devoid of a sound conceptual apparatus with which the author
could justify his attack upon the classical and neo-classical monetary theory.

^Louisiana State University

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