… is from page 47 of Gerald P. O’Driscoll, Jr.’s 1977 book, Economics as a Coordination Problem (footnotes deleted; ellipses and emphasis original to O’Driscoll; links added):
But like Wicksell, Thornton, Malthus, and many others before him, Hayek believed the quantity theory overlooked essential details. The quantity theory had “usurped the central place in monetary theory…. Not the least harmful effect of this particular theory is the present isolation of the theory of money from the main body of general economic theory.”
Hayek deplored the lack of attention paid by quantity theorists to relative price changes. The title Prices and Production was surely chosen to emphasize this argument. Relative prices are what guide production, but, in the divorce of monetary theory from value theory, money is assumed to have no effect on relative prices. Thus by hypothesis money is viewed as having no influence on production. Such was the blind alley into which, Hayek argued, the quantity theory had led economists. Vestiges of the long-run, comparative static approach of classical value theory remained embedded in the quantity theory. It was to this barter model that ignored financial markets that Hayek objected.
Now ‘in the long run’ this [the quantity theory of money] is probably true…. But this “long run” is a misleading guide to current affairs. “In the long run” we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
Milton Friedman and Anna Schwartz (if I recall correctly) somewhere in their justly celebrated 1963 A Monetary History of the United States quote this passage from Keynes and take it as sort of a challenge to show why Keynes was wrong on this matter, or show at least why Keynes’s dismissal of classical quantity-theory reasoning was over-done. I fall somewhere between Keynes and Friedman & Schwartz.
Classical quantity-theory reasoning reveals enormously useful insights about money and monetary policy: understanding the long-run consequences of today’s policies is indispensable for making sound policies – sound policies that make not only for a better long-run but for better future short-runs as well. And Keynesians, sadly, as a practical matter too often ignore this fact. (See, e.g., Mario Rizzo.)
But understanding also just what happens at the micro level in the short-run when the money supply is altered is important, as Keynes in 1923 understood. The short-run changes brought on by active monetary policy – the changes in relative prices, changes in spending and investment decisions, etc., – that disappear, wash-out, cancel each other out in the long-run and, hence, are not revealed by the equation MV=PQ likely have significant economic consequences that are worthy of more attention than many quantity theorists give to such matters.