Money, Interest and Capital

Abstract

This book presents a study in the foundations of monetary theory with several unique features. It consists of two parts: a critique of the varieties of neoclassical monetary theory, and a rigorous statement of the foundations of Post Keynesian monetary theory. The two parts reflect Joseph Schumpeter's distinction between monetary theories in the divergent traditions of Real and Monetary Analysis. Part I offers a novel critique of Wicksellian and neo-Walrasian general equilibrium versions of Real analysis. The critique of Wicksell's monetary theory demonstrates the general impossibility of defining the natural rate of interest without which the loanable funds theory collapses. The critique of neo-Walrasian monetary theory, on the other hand, exploits the inessential role of 'money' in temporary equilibrium and overlapping generations models and develops a novel interpretation of the Patinkin controversy and the Clower finance constraint. The implications of these developments are then traced through the debates between monetarists and Keynesians. Part II presents a rigorous argument for securing the foundations of Post Keynesian monetary theory in the tradition of Monetary Analysis. In the context of the evolution of the monetary system from commodity money to credit money. Wicksell's natural rate of interest is replaced by Keynes's marginal efficiency of capital which is in turn applied to Myrdal's notion of monetary equilibrium to derive a formal definition of Keynes's point of effective demand. This leads to the most novel feature of the book: the demonstration of the existence of a long-run unemployment equilibrium without the assumptions of rigid wages. The principle of effective demand is shown to break Say's Law by placing a limit on the profitable expansion of output before full employment is reached.

Classical Macrodynamics and the Labor Theory of Value

“…71) before full employment is reached. Many authors have noted that Keynes' vision of a capitalist economy as a 'monetary production economy' is along many dimensions consistent with Marx's analysis (e.g., (Reati, 2000;Hein, 2009;Rogers, 1989;Smithin, 2009)). …”

On the Underdevelopment of the 'Sociology of Money'

“…Indeed, one of his enduring intellectual contributions was to insist that the differentia specifica of capitalism, as opposed to simple commodity production, is the appropriation of value in the form of abstract wealth (M-C-M). It is this characterization of capitalism as an essentially money economy that has led some post-Keynesian economists to use Marx's work as an exemplar of 'monetary analysis' -that is to say, of the view that 'money matters', and is not merely a neutral veil (Rogers 1989;Wray 1990). However, post-Keynesian monetary analysis focuses on the autonomous role of banks in the creation of 'endogenous' credit-money in capitalism.…”

Financial repression and economic development: towards a post-Keynesian alternative∗

“…The inadequacy of mainstream economics when dealing with monetary phenomena has been widely documented in the economic literature (see, for instance, Hahn, 1981;Davidson, 1978;Rogers, 1989). The development of macroeconomic theory based on the Walrasian general equilibrium approach, which started with the Hicksian neoclassical synthesis (see Hicks, 1937) and went on to the capitulation of Keynesianism to neoWalrasian and the new classical economics, has led to a theory where 'the best developed model of the economy cannot find room for [money]' (Hahn, 1981: 1).…”

“…The development of macroeconomic theory based on the Walrasian general equilibrium approach, which started with the Hicksian neoclassical synthesis (see Hicks, 1937) and went on to the capitulation of Keynesianism to neoWalrasian and the new classical economics, has led to a theory where 'the best developed model of the economy cannot find room for [money]' (Hahn, 1981: 1). Consequently, one of the peculiar aspects of mainstream macroeconomics, even in its Keynesian version, is that its main theoretical basis in monetary analysis continues to be the loanable funds theory of the interest rate (Rogers, 1989). The latter theory is in fact an attempt to extend the relevance of the classical theory of the interest rate to an economy with a well-developed banking system.…”