Money, Markets and Capital

The Case for a Monetary Analysis

Jean Cartelier

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781351129220
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Money and payments are familiar to everybody. Economists however are often at a loss in assessing the extent to which money matters. As a matter of fact, money is at the origin of the main cleavage in economic theory. Beyond sophisticated models what is at stake is whether money is just an appearance which hides the essence of economic life (value and happiness of people) or, on the contrary, the very substance of economic relations, not limited to exchanges, in which power and sovereignty are ever present.

In a first part, the author shows how fragile and shaky are the attempts made by value theoreticians to integrate money into their analysis. In a second part, he develops a rigorous alternative theory by giving strong logical foundations to a monetary analysis in the spirit of Keynes. Many important economic phenomena left unexplained by academic theory are accounted for (involuntary equilibrium unemployment), a new method in dynamics is resorted to (viability theory) and various economic relations are elucidated which are not reducible to exchange, the only one dealt with by academic theoreticians. This is the case of the wage relationship.

Although written in view of an audience acquainted with economic theory, this book can be read nevertheless by a larger circle since the technicalities have been reduced to what is strictly necessary to understand what is at stake.

Part I
Money in value theory

Value theories in general, and modern theories of value in particular, proceed from the conviction that money is an “artificial” wealth opposed to a “natural” one, as Nicolas Oresme (1990) once wrote. Commodities (Classics’s use values or Debreu’s commodity space R^l) are thought of as being natural; their presence in a social science does not need any justification. By contrast, money is a social device; it has to be defined; its existence and its use have to be explained. Thus, money is an optional (and special) commodity. Its existence alongside other commodities is a problem to be solved: its (positive) price and neutrality of its quantity (hopefully) have to be proved; the reason for its presence has to be explained and its essence (what money does) elucidated. Commodities and money are not on the same footing.

Relevant prices for evaluating wealth are not money prices but real (relative) prices. They are solutions of systems of equations in which money does not enter. Money – to assess whether it is or not an element of wealth is sometimes a bone of contention – enters value theory on a particular footing. It has to be a commodity – if not, nothing could be said on it – but not a usual one – if it were, money theory would not make any sense. Money in modern value theory is not an empirical object but a concept whose intelligibility is internal to a real analysis. Money does not exist here but as fiat money, the definition of which is linked to the use it is designed for.

The research program for the academic theory of money forms a diptych; one part is devoted to integration and neutrality of fiat money, the other to its functions and essence. The intricacies and complexities of the matter should not make us forget the logical nexus which gives sense to academic money theory.

Chapter 1
A bird’s-eye view

The following propositions form the background of modern academic value theory:

• Society should not be considered as an entity per se: society is a set of inter-individual relations based upon the voluntary exchange of commodities; money, if any, is one of these commodities; money has nothing to do with the State and should not be manipulated by any authority.
• Society should be considered from the point of view of its members only (their happiness or utility) and not from the point of view of the State (wealth and political strength).
• The myth of a social contract provides the philosophical basis for that view. Society proceeds from its members only: society is the involuntary outcome of voluntary individual actions.
• Value theories pretend to be scientific because they go beyond the monetary appearances of economic affairs and reveal their essence, i.e. the relative values are determined either through production relations (Ricardo-Sraffa) or through generalized exchange (Walras-Arrow-Debreu); relative values are expressed in a numéraire which can be any commodity (fiat money included but not exclusively).

The propositions above are not to be discussed as such. They have been listed here only to clarify the intellectual context which gives its meaning to mainstream monetary theory. We should take that context as granted and we do not need to discuss or criticize it now.

The most outstanding outcomes of value theory – determination of the rate of profit and prices of production for the Ricardo-Sraffa theory or existence of general competitive equilibrium prices and Pareto-optimality of these equilibria for the Walras-Arrow-Debreu theory – are demonstrated in a moneyless economy. Money appears in value theory as a second thought.

What economic theory tells us about economic relations (their essence or nature) is to be discovered less by examining the philosophical convictions of the theoreticians than by scrutinizing the assumptions necessary to the system of equations whose relative prices are the solution. In the general competitive equilibrium theory of value – the one mainly considered here – relative prices reflect relative scarcities, i.e. equilibrium rates of marginal substitution between commodities.

Economic theory deals with relative prices established for natural commodities. Can it apply to money prices, which amounts to determining a price for money? Clearly it should be. Money exists and it must find room in value theory. Integration of money into value theory is the most traditional issue in standard monetary theory. Basically, this means that the system of equations designed for commodities should be extended to fiat money in order to determine its price (in terms of a numéraire). The integration of money into value theory is considered to be achieved when fiat money is proved to have a positive price at equilibrium along with the other commodities in the general model.

Classical (Sraffian) and modern general competitive equilibrium systems of equations leave no room for fiat money. In order to deal with money, an equation at least should be added or appended to these original systems. Commodity equations reflect production (and production techniques) or consumption (and individual preferences and allocations). As it is not introduced from the start in these systems, money should be deprived from any use for production or for consumption. Consequently money has to be thought of as not entering production functions and utility functions (it is improperly said to have no intrinsic utility). Moreover, money, not being a natural commodity, cannot be privately produced.¹ Such a special commodity, not used for production and consumption and not privately produced, is called fiat money. The fact that money appears as fiat money is neither a deliberate abstraction nor an induction from observed facts; it is the unavoidable consequence of the internal logic of value analysis, namely of the commodity space postulate.

Thus, the only use fiat money may have is to circulate commodities. Circulation is the third of the traditional fields of economic theory, production and consumption being the other two. In spite of what has been often maintained, introducing a money equation into the system of production and consumption equations does not raise any difficulty in principle. Taking into account the circulation or transaction technique, in addition to production techniques and utility functions, makes it possible to add an l + 1th equation to the l commodity-equations to form a complete system of l + 1 equations (of which l are independent as a consequence of Walras’s law) determining l relative prices, the price of money included. By contrast with that thesis, most commentators (and sometimes eminent authors) have maintained that money integration into value theory was an intrinsically difficult, even impossible, task. Hahn’s celebrated paper of 1965 is an outstanding example of that position. We will show that it relies on a misunderstanding of the Walrasian tradition unduly restricted to the Arrow-Debreu model.

But determining a positive relative price for fiat money (i.e. integrating money into value theory) is not the end of the story. Since money is not generally considered as a necessary ingredient for value theory, it would be embarrassing if introducing money would change the emblematic propositions established for a moneyless economy. The founding act of value analysis – getting rid of money – has to be justified by demonstrating that integrating money into value theory does not alter its main propositions. Money should be neutral in that precise sense: different quantities of money should not have any influence on non-monetary variables. Neutrality of money is a fundamental issue which is hardly separable from money integration into value theory. Quantitative theory of money is providential in this perspective. Its main proposition is that the quantity of money variations leave unchanged the equilibrium relative prices; they proportionally affect money prices. However, neutrality, if it justifies a posteriori an a priori exclusion of money at the very starting point (the Occam’s razor argument), may require unduly restrictive assumptions, as we shall see. Let us accept these restrictions for the moment.

Showing that fiat money has a positive price at equilibrium and that it is neutral is the joint product of the exercise called “integration of money into value theory”. From Walras (1988) to Patinkin (1987) via Hayek (1967),² integration has been the central objective of monetary theory. This must be kept in mind in order to understand what money theory has been about during a long time and is still about nowadays. However, even if that objective were fulfilled – which is far from being the case – it would not be the last word. As fiat money is a social entity, it is not enough to prove the existence of a general equilibrium with a positive price for fiat money and to show that money is neutral. Theoreticians have also found it highly desirable to explain why or how fiat money could be an element of the entire commodity space. The solution is straightforward for some modern academic theoreticians: since money is introduced into value theory as a transaction technique, it has to be proved that money has been chosen against other available transaction techniques (typically barter). In the current modern terminology this is called “giving microeconomic foundations” to monetary theory.

Modern theoreticians affirm:

1. Money has a positive price at equilibrium because it is an equilibrium technique of transaction. If money allows for having better equilibrium allocations than other available techniques, money is said to be essential (in the sense of Wallace).
2. Essentiality of money is the cause of its adoption by the whole economy.

Even if the preceding proposition were acceptable – which is doubtful as we shall see – it would still remain much to do. We do not yet understand what money really does. We know only that it is the best technique of transaction from the point of view of welfare but we do not know its essence. The common saying in money theory runs: money is what money does. But precisely what does money really do?

Here again, the answer modern theoreticians propose is simple. They take Arrow-Debreu’s model as a benchmark. In that model transactions are centralized; a clearing institution makes sure that individuals respect their budgetary constraints. Moreover, transactions are costless. By contrast with that benchmark, transactions do not go as smoothly in a market economy. Transactions take time, are co...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of schemas
• Introduction
• PART I Money in value theory
• PART II The case for a monetary analysis
• Conclusion
• References
• Index