Alberto Giacomin and
Maria Cristina Marcuzzo (eds.),
Money and Markets: A Doctrinal Approach,
Oxon and New York: Routledge, 2007, pp. 252.
Toshiaki Hirai (Sophia University, Tokyo)
This book brings together a selection from the papers read at the 2004 ESHET conference.
“What is money and what is market? How should we understand the relation between the two?” – these are fundamental questions for us. In the Seng period (China), the Edo period (Japan), to take but two examples, markets developed fully where goods were exchanged for money.
The history of economics as social science, however, goes back no more than 230 years. Classical economics ruled the roost in the first half of the 19th century, followed by neoclassical economics from the third quarter of the century right up to the present day.
As an alias of neoclassical economics, “catallactics”, shows, this school focuses research on markets where economic agents buy and sell goods. Essentially, it boils down to Walras’s general equilibrium theory (GE), which was to occupy a central place in neoclassical economics. It is a system in which money does not work, so the quantity theory of money was adopted as monetary theory in order to adapt it to the real world. This system has dominated the economics field over many years. Moreover, the so-called New Classical Macroeconomics (NCM), similar to the above system in some respects, has prevailed over the last thirty years in the macroeconomics field.
1. Presentation of Alternative Theories
What attracts the reviewer most are six papers in support of theories which come to grips with the economic system from alternative points of view, criticizing GE and/or NCM paradigm.
In Chapter 2 Goodhart criticizes NCM, arguing that because it tries to construct economic models based on assumptions disregarding reality, it is empirically absurd, lacking in relevance to the real world. He favors the line which Shubik takes, combining theory with the empirical realism. In Chapter 3 Davis stresses ‘socially embedded individuals as a network conception’ envisaged by the complexity theory, differing from the picture of individuals envisaged by GE and game theory.
In Chapter 4 Israel appeals for the reinstatement of ‘genuine’ game theory. He argues that the axiomatic methodology adopted by GE does not explain actual economic phenomenon and, what is more, that economics had been and is moving in the wrong direction due to (i) Debreu’s elaboration of GE; (ii) the tendency for game theory to be incorporated into GE through ‘Nash equilibrium’; (iii) the argument that cooperative games can be reduced to non-cooperative ones. Israel insists that it is the ‘genuine’ game theory based on cooperative games which von Neumann and Morgenstern aimed at that should be pursued.
In Chapter 5 Heinsohn and Steiger advocate property economics, criticizing the view on the relation between money and markets taken by the classical and neoclassical schools that “First markets emerged. Then money came into being to reduce transaction cost”. They argue that the right of possession is the source from which money and markets derived, stressing the right of possession - a legal right based on which its possessor is endowed with non-physical rights - in all types of economic activities including the right to issue money and the right to procure it (borrowing).
In Chapter 6, “Money and markets as twin concepts?”, Cartelier answers “in the case of Arrow-Debreu and Neo-Walrasian models the answer should be ‘no’, while in the case of ‘monetary approach’ represented by Shapley-Shubik ‘yes’”.
In GE transaction can be made only in equilibrium and there is no place for money. In the 1970s, moreover, it was demonstrated that the Arrow-Debreu model might not attain equilibrium and global stability – the Sonnenshine-Mantel-Debreu theory. Attention then turned to modeling GE under disequilibrium – the Neo-Walrasian model which reveals the dichotomy between price determination and transaction realization.
In both models Cartelier sees divergence from the actual markets and favors the ‘monetary approach’ of Shapley and Schubik, without this shortcoming.
In Chapter 10 Spahn emphasizes money as a social bookkeeping device, which indicates the following properties in the market economy: (i) the principle of efficiently guided incentives; (ii) the need for money as a medium of payment due to lack of information and mutual trust; (iii) a social mechanism or convention that ensures the overall acceptance of money. Although the view was to come into discredit due to the prevalence of GE, Spahn argues that it merits attention.
To sum up, the above chapters share the perception that the methods of analysis in orthodox economics suffer from fatal shortcomings in analyzing the actual economy.
2．Various Aspects of Economists
Next we will turn to the chapters focusing on certain economists.
2.1 Certain Theoretical Thought
In Chapter 9 a reappraisal of Jean Bodin, a 16th-century French thinker, is conducted from the point of view of his theory of money. Blanc argues that Bodin should not be regarded as the founder of the quantity theory of money and that his originality lies in aiming at constructing an ideal system - a part of his theoretical system of sovereignty - which would exclude all forms of false money.
Chapter 12 offers a reappraisal of Adam Smith’s theory of money. So far Smith’s has been regarded as a convertible paper money theory. Giacomin emphasizes that it should be evaluated, rather, as an inconvertible paper money theory. Smith derived this inspiration from the monetary system in Pennsylvania, America.
Then come two chapters focusing on Keynes’s ideas.
In Chapter 7 Rossi first states that the international monetary system should be reformed along the lines of the International clearing union plan (the Keynes plan). He then argues that the Keynes plan pays attention only to the ‘money purveyor’ in negligence of the ‘credit purveyor’, and the creation of a genuine monetary system requires two divisions (Rossi stresses Schumacher’s remarks on the Keynes plan).
In Chapter 8, “Price and prejudice”, Simonazzi and Vianello, referring to the deflation which afflicted the Japanese economy, focus on how the ‘prejudice’ that downward flexibility in money wages (and prices) can bring about full employment has survived Keynes’s criticism. On the basis of the ‘dynamic’ argument in chapter 19 of the General Theory, they criticize the ‘static arguments’ (‘prejudice’) developed later, stating that the static arguments neither address the present economic situation nor put forward economic policies to be implemented.
In Chapter 13 attention turns to Lavington, an economist active in interwar Cambridge. Dangel-Hagnauer and Raybaut emphasize that Lavington’s fundamental view on the market economy is that money exists there right from the beginning and economic agents have a limited capacity to see through the future. Lavington sees entrepreneurs as the most important economic agents. They conduct their business activities in the opacity of a situation in which the future is evolving from the present. He sees that this ‘incalculability’ entails ‘risk and uncertainty’. Well-known is his distinction between risk (decrease in efficiency of production) and uncertainty (irregularity of incomes).
Lavington, moreover, argues that the market economy, as compared with state socialism, brings about effective production, while, since many entrepreneurs conduct their business activities independently, adjustment in the markets is open to uncertainty; consequently, the market economy can not prevent individual incomes from fluctuating.
Chapter 14 offers some considerations on Marco Fanno, an Italian economist of the first half of the 20th century.
The theory of cumulative process developed by Wicksell had a great influence on theoretical economics in the interwar period. It seems to be worth stressing, as Spiller and Pomini argue, that Fanno put forward his own theory of business fluctuations as early as 1912, succeeding Wicksell’s theory critically.
After WW2 Fanno turned his focus on economic growth, which he analyzed applying the ‘progressive economy’ concept and distinguishing three kinds of growth lines, adopting an approach similar to Harrod’s and the Keynesian analysis of economic fluctuations by means of an accelerator factor and multipliers but developing his own analysis by bringing in changes in income distribution.
2.2 Way of Life
In Chapter 11, as the subtitle announces, attention turns to John Law as art collector, monetary theorist and corporate financier.
Law, who was sentenced to death in relation to a duel, fled from London to the Continent, where he came to show an interest in the banking system in Italy and the Netherlands. He rapidly worked out and sent to several governments his financial proposal, which argues that money is not to be regarded as possessing intrinsic value, and that, should it run short, the government can vitalize the economy by printing more paper money. The Law System, as it came to be known, was adopted by France but came to a sorry end with the Mississippi bubble, and Law fled to Venice.
Murphy argues that given his financial innovations in money and the capital market he might well be called the father of corporate finance.
During his stay in Venice Law collected many works of art. Murphy describes Law as showing keen appreciation, with some interesting episodes.
In Chapter 15 the focus falls on Ezra Pound, a Fascist and anti-Semite who came close to being executed by the US. He came to take an interest in money under the influence of Silvio Gesell. As regards the banking system, however, he waxed increasingly critical as time went by. Pound insisted that interest should be kept at zero, and the state should achieve full employment by printing money.
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The book collects papers which show a wide range of views on “Money and Markets”. The reader has the opportunity, among other things, to encounter various new and stimulating theories which he or she can explore further by following up the references.
