Real and Monetary Analysis in Economic Paradigms: Summary of Part I

In the first part of the book we have surveyed the relationship between the monetary and the real sphere in different economic paradigms applying Schumpeter’s distinction between ‘real analysis’ and ‘monetary analysis’, and we have derived some implications for the relationship between monetary policy, distribution and capital accumulation. We have argued that Classical orthodoxy, Neoclassical economics, Neoclassical Synthesis, Monetarist, New Classical, but also today’s mainstream New Keynesian and New Consensus theories are dedicated to ‘real analysis’. In the long run — in New Classical theory also in the short run — the economic equilibrium is determined by real forces only. Relative prices, income distribution, output, employment and growth are determined by ‘real analysis’. Monetary variables, the quantity of base money or the base rate of interest controlled by the central bank, have real effects in the short run when nominal rigidities prevail. These real effects are therefore confined to short-run disequilibria, and in the long run monetary variables are neutral with respect to real outcomes. In long-run equilibrium, monetary policies only affect the price level or inflation. Therefore, in long-run equilibrium the Classical dichotomy between the monetary and the real sphere and Say’s law are assumed to hold. The real rate of profit, or the ‘natural rate of interest’, determines the monetary rate of interest. Money is neutral with respect to output, employment, distribution and growth.