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An exploration of money & interest in the theory of value

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  • Desai, Milinf
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    1. An important conclusion of this work to be noted is it may not necessary to have an explicit relationship between money and prices- like the quantity theory one. What is necessary and important is that there should be a relation between the growth rates of absolute outputs and money. Money affects output and employment. 2. Wages are not assumed to be rigid. The assumption of a perfectly mobile labour (that fits in with the theory with perfect markets) does not fit in with the assumption of rigid wages. Labour is not always a growable stock as well. The economy has to employ the available stock of labour if it were to maintain its growth momentum. Therefore, effective demand has been abandoned in favour of full demand. Given the level of employment, all people should work, “earn” money and hence “determine” output. 3. A one line conclusion that this exploration leads to is this: Output grows, money does not constrain labour (it cannot) and prices do not constrain distribution; in effect, they all determine level of new money, new outputs, new interest, new employment, new prices and new income distribution. Individuals create wealth by being employed and hence contribute to savings, hence to investment and hence to growth. All this happens because they are in constant pursuit of at least maintaining their wealth. They are not the Walrasian wealth maximisers. In fact, individual wealth in a monetary economy is a by-product of national wealth/ income. In a monetary economy, money alone is able to make entrepreneurs produce and workers work. It is an enabler to the entire economic activity. It is like a catalyst in a chemical reaction. 4. In a monetary economy, a valid question is – does the interest rate get a liquidity trap? The answer could be “it may”. But as we have pointed out in the course of analysis, in a monetary economy, liquidity trap may not have harmful prescriptions for the economic activity. The government and the central monetary authority would ensure that in this situation, enough support would be forthcoming such that it would have minimal implications for the economy as a whole. Finally, money is or can never be a veil in a monetary economy. Real balances cannot be an explanation for disequilibrium in a monetary economy. 5. A monetary economy will always face a disequilibrium if let loose. A regulator is required to manage the entire economic activity. Money calls for a truly integrated economic system with individual roles for producers, workers, monetary & fiscal authorities.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37315.

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    Date of creation: 08 Aug 2010
    Handle: RePEc:pra:mprapa:37315
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    1. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
    2. G. C. Archibald & R. G. Lipsey, 1958. "Monetary and Value Theory: A Critique of Lange and Patinkin," Review of Economic Studies, Oxford University Press, vol. 26(1), pages 1-22.
    3. Jean-Michel Grandmont & Yves Younes, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 39(3), pages 355-372.
    4. L. Randall Wray, 1999. "Theories of Value and the Monetary Theory of Production," Economics Working Paper Archive wp_261, Levy Economics Institute.
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