Money. Geoffrey Ingham

1 Money’s Puzzles

      The modern world without money is unimaginable. Most probably originating with literacy and numeracy, it is one of our most vital ‘social technologies’ (Ingham, 2004). Obviously, money is essential for the vast number of increasingly global economic transactions that take place; but it is much more than the economists’ medium of exchange. Money is the link between the present and possible futures. A confident expectation that next week’s money will be the same as today’s allows us to map and secure society’s myriad social, economic, and political linkages, including our individual positions, plotted by income, taxes, debts, insurance, pensions, and so on. Without money to record, facilitate, and plan, it would be impossible to create and maintain large-scale societies. In Felix Martin’s apt analogy, money is the modern world’s ‘operating system’ (Martin, 2013).

However, despite money’s pivotal role in modern life, it is notoriously puzzling and the subject of unresolved – often rancorous – intellectual and political disputes that can be traced at least as far back as Aristotle and Plato in Classical Greece and the third century BCE in China (von Glahn, 1996). Many of the innumerable tracts and treatises on money begin with lists of quotations to illustrate people’s bewilderment (see the fine selection in Kevin Jackson’s The Oxford Book of Money [Jackson, 1995]). With characteristic whimsy, the great economist John Maynard Keynes (who knew a great deal about money) said that he was aware of only three people who understood it: one of his students; a professor at a foreign university; and a junior clerk at the Bank of England. The banker Baron Rothschild had made a similar observation a century earlier (quoted in Ingham, 2005, xi), adding that all three disagreed!

      We shall see that one of the most puzzling and counterintuitive conceptions of money lies at the core of mainstream economics. We experience money as a powerful force; it ‘makes the world go around’ – and sometimes almost ‘stop’. Governments stand in awe of monetary instability, constantly monitoring rates of inflation and foreign exchange, and levels of state and personal debt. Central banks strive to assure us that they can deliver ‘sound money’ and stability; but – like their predecessors – they are constantly thwarted. Paradoxically, however, from the standpoint of mainstream economic theory, money is not very important. In mathematical models of the economy, money is a ‘neutral’, or passive, element – a ‘constant’ not a ‘variable’. Money is not an active force; it does no more than facilitate the process of production and exchange. Here, the sources of economic value are the ‘real’ factors of production: raw material, energy, labour, and especially technology; money does no more than measure these values and enable their exchange. This conception, which can be traced to Aristotle, had become the established orthodoxy by the eighteenth century. David Hume could confidently declare in his tract ‘Of Money’ (1752) that ‘it is none of the wheels of trade. It is the oil which renders the motion of the wheels more smooth and easy’ (quoted in Jackson, 1995, 3). A little later, in The Wealth of Nations (1776), Adam Smith consolidated the place of ‘neutral money’ in what became known as ‘classical economics’.

      Joseph Schumpeter’s mid-twentieth-century identification of the differences between ‘real’ and ‘monetary’ analysis and his summary of the latter’s assumptions has never been bettered:

Real analysis proceeds from the principle that all essential phenomena of economic life are capable of being described in terms of goods and services, of decisions about them, and of relations between them. Money enters into the picture only in the modest role of a technical device … in order to facilitate transactions…. [S]o long as it functions normally, it does not affect the economic process, which behaves in the same way as it would in a barter economy: this is essentially what the concept of Neutral Money implies. Thus, money has been called a ‘garb’ or ‘veil’ over the things that really matter…. Not only can it be discarded whenever we are analyzing the fundamental features of the economic process but it must be discarded just as a veil must be drawn aside if we are to see the face behind it. Accordingly, money prices must give way to the ratios between the commodities that are the really important thing ‘behind’ money prices. (Schumpeter 1994 [1954], 277, original emphasis)

      This view remains at the core of modern mainstream macroeconomics, which argues that money does not influence ‘real’ factors in the long run: that is, productive forces – especially advances in material technology – are ultimately the source of economic value. Therefore, ‘[f]or many purposes … monetary neutrality is approximately correct’ (Mankiw and Taylor, 2008, 126, which is a representative text). However, there is an alternative view: ‘monetary analysis’ follows a view of money which prevailed in the practical world of business before the classical economists’ theoretical intervention (Hodgson, 2015). Here money is money-capital – a dynamic independent economic force. Money is not merely Hume’s ‘oil’ for economic ‘wheels’; it is, rather, the ‘social technology’ without which the ‘classical’ economists’ physical capital cannot be set in motion and developed. This distinction, between ‘real’ analysis and ‘monetary’ analysis, is known as the ‘Classical Dichotomy’.

Money itself cannot create value; but in capitalism the wheels are not set in motion and production is not consumed without the necessary prior creation of money for investment, production, and consumption (see Smithin, 1918). In the ‘classical’ view, the ‘real’ economy is in fact an ‘unreal’ model of a pure exchange, or market, economy in which money is the medium for the exchange of commodities: that is, Commodity–Money–Commodity (C–M–C). Here, money enables individuals to gain utility: that is, satisfaction from the commodity. In ‘real-world’ capitalism, money is the goal of production – the realization of money-profit from the employment of money-capital and wage-labour: that is, Money (capital)–Commodity–Money (profit) (M–C–M). As Marx and Keynes stressed, depressions and unemployment are not caused by the failure of ‘real’ productive forces. These can lie idle for want of money for investment and consumption not only in the immediate short term but also in the long run. And as Keynes scathingly remarked, the ‘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’ (Keynes, 1971 [1923], 65, original emphasis).

      For economic orthodoxy,

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