The weird absence of money and finance in economic theory

26 Jun, 2019 at 14:45 | Posted in Economics | 8 Comments

Consider the problem of money. Money is of central importance to any modern capitalist market economy. Yet it is mainly sociologists, philosophers and dissenters that have maintained an interest in what money “is” with a view to continued critique and development … One might think this is because economics has already provided an agreed clear concept of money. But this is not the case. Contemporary economics defines money in terms of function (unit of account, store of value, medium of exchange), but puts aside both the actual history of money (after an origin story) and the conceptual problem of money, both of which likely affect the functionality of money in the broader sense of its role and consequence in real systems …

barterWhat appears weird to those outside of the mainstream is that in economic theory in general money is typically absent. It is usually assumed that in a properly functioning market system prices express the value of output such that all prices effectively become representative of ratios between goods and services (and inputs), and this ultimately means a market system operates as though it were barter. Money simply becomes the convenient symbol (in its medium of exchange guise) that expresses these ratios. As such, it has no independent significance, and one ought to look through money to the operation of “real” economic factors, and can in effect ignore money as a contributory, contextualising or significant component in a system …

The role of money in real systems has generally been peripheralised because of an arbitrary limitation created by the assumption that money is separate from and then circumspectly significant to “real” factors. This statement may seem odd to a non-economist, since we live in a world where monetary policy is high profile, and a great deal of attention is paid to central bank policy (inflation targeting for price stability), and to the existence and activity of banks.

Jamie Morgan / RWER

Yes indeed — money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

What is also ‘forgotten’ in mainstream economic theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies​ and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities nowadays depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling money/savings/credit — are more or less left in the dark in modern mainstream formalizations.


  1. Äntligen någon som skriver om vad “pengar” egentligen är. Tack!

  2. Pengar är väl vad det alltid varit – ett utbyte av tjänster.
    Utbytet följer då önskningar/köpkraftens “själ”?
    Och så plötsligt, så förvandlades önskningen till en handelvara.
    Lyx då – att plötsligt ha det så materiellt så bra – att man börjar handla med.. drömmar?
    Tulpaner som en början – och sen rullade det på?

  3. As a mainstream economist, I don’t see this analysis as true. Money is not mysterious.

    Money has some unique features as medium exchange and unit of measure properties as you describe, but it’s not purely these.

    Money is also an asset. As an asset it’s the most liquid asset. The difference between money and other assets is not sharp either. There is continuity from cash to less and less money-like assets.

    You can demonstrate that if you have a society without money, the most liquid asset or assets start to acquire the role of the money. If it can be divided into units and transported it becomes relatively good money. Pots of grains or standard sized animal skins have used as assets that were money-like in the past.

    In modern society huge number of financial instruments are very money like. The very thing that matters is liquidity in crisis. When economy takes sudden downturn, suddenly nobody wants to buy your bonds or advanced short maturity securities that are almost money in more normal times. But everyone accepts money.

    • No-one thinks money is ‘mysterious’, though they can’t agree on what it is, how it came about, or who should have it.
      What is mysterious is why mainstream economics thinks it can ignore it.

      You provide a clue though. You talk of animal skins and financial instruments as if they are the same sort of thing. In fact the real-thing barter-proxies used for external trade and the accounting-entries used for internal trade are of fundamentally different kinds.

    • “When economy takes sudden downturn”
      It isn’t because of a scarcity of real goods being “bartered”; downturns are the result of psychological hoarding of liquidity for fickle and arbitrary reasons that could easily go another way depending on personalities, etc. The psychology of traders in downturns creates an artificial scarcity of money.
      The fact that the Fed has a vertical supply curve for reserves means that the price of the best money is dependent on policy, not supply and demand or other economic factors.
      The existence of vertical supply curves for money means that prices are arbitrary, fickle, policy constructs not efficient discoveries of fundamental values.


    posted on 21 May 2018

    Some Preliminary Questions For MMT
    by Steve Keen, Steve Keen’s Debtwatch

    I had an impromptu debate with Warren Mosler (see end of this article), the founder and still one of the leading figures of “Modern Monetary Theory” recently. We disagreed on the role of trade deficits, and this has led another MMT luminary, Bill Mitchell, to write two commentaries critiquing my position (see “Trade and external finance mysteries – Part 1” and “Trade and finance mysteries – Part 2”.


    Neo-Liberalism, Billy No Mates? , or, just misunderstood and kind to small children and animals
    Discussion with Founder member of The peoples party/Ecology Party and Now The Greens Clive Lord.
    In the recent hustings for the Green Party leadership for the Green Party of England and Wales I have had a few interesting dialogues with Clive Lord and sought out some of his writing to see what made and still makes him Tick. I have also had a similar exchange of tweets and comments with Dereck Wall another former speaker candidate for the Green Party of England and wales.

    Clives Stich is citizens income or universal basic income. Its mine too so we have a common objective and our reasoning to get to that place one would think would be similar. Well to answer that yes and no. Clive and I agree that exponential growth on a finite planet is impossible and that the strain on the Common resources of the planet is to great and decisions uninformed by externalities are less than sensible. We are in a completely different place on Political Economy though and our understanding of Money and Money creation.

  6. colgo l’occasione di questa discussione per chiarire una mia opinione in merito che avevo già avuto modo di esprimere nei commenti ,riguardo alla possibile incoerenza matematica riguardo il sistema monetario nella sua complessità. Provo brevemente: Riduciamo il sistema per esemplificazione a due soggetti costretti in un sistema chiuso,diciamo il soggetto prestatore e ed il soggetto debitore vivano in un isola deserta e inizialmente utilizzino come moneta l’oro ,quindi inizialmente il prestatore presta 10 unità di oro al debitore chiedendone undici alla scadenza del prestito,(n.d.r. cosa ci facci in un isola deserta non è rilevante)…,il debitore per poter assolvere al suo onere si mette a scavare e trova l’unità mancante sottoterra….all’anno successivo il prestito richiesto è maggiore diciamo 100 unità e per interesse 10 comunque alla fine riesce a scavare e trovare etc….mettiamo che siccome l’anno successivo il prestito richesto sia di una cifra enorme tale che si decide di non usare più l’oro direttamente come moneta perchè pesante da trasportare allora si mette su carta una valuta equivalente … ora succede che un certo anno il prestito emesso in carta ed il relativo interesse superano di gran lunga l’oro realmente esistente e scava e riscava non se ne trova abbastanza sottoterra per compensare l’interesse e restituire il prestito ,dunque dove il debitore può trovare ciò che gli viene richiesto indietro da restituire se non esiste?Ricordo che il sistema è volutamente chiuso e ridotto a due soggetti,chiaramente se si considerano molti più soggetti e/o più isole la cosa potrebbe sembrare diversa e risolvibile ma la questione è proprio questa il sistema monetario è chiuso e dunque così come è risulta matematicamente incoerente.Andando oltre la critica come semplice soluzione si propone che l’interesse sia messo in circolazione nel sistema alla sua origine. Per ulteriori chiarimenti ….

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