Real and Monetary Analysis in Economic Paradigms: Introduction to Part I

In political economy and in economics the neutrality, or non-neutrality, of money has been a contested area of research right from the beginning of this academic discipline, with no consensus established until present. Relating to this fundamental issue, Schumpeter (1954) made the important distinction between ‘real analysis’ and ‘monetary analysis’.1 In ‘real analysis’ the equilibrium values of the economic system, that is output, employment, distribution and growth, can be determined without any reference to monetary variables: 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 the picture only in the modest role of a technical device that has been adopted in order to facilitate transactions. This device can no doubt get out of order, and if it does it will indeed produce phenomena that are specifically attributable to its modus operandi. But so 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. (Schumpeter 1954, p. 277)