Money, Interest and Capital

INTRODUCTION

The previous chapter outlined the Marshallian microfoundations of the concept of monetary equilibrium. We now move on to consider the implications of that concept for macroeconomic analysis. There are three areas of application that will repay attention. These are: (i) the Fundamental Equations of the Treatise on Money;(ii) the Weintraub- Davidson analysis of aggregate demand and supply; and (iii) the IS–LM model of the mainstream Keynesians. The concept of monetary equilibrium can be employed to reinterpret all these structures from the perspective of Monetary rather than Real Analysis.

The application of the concept of monetary equilibrium to the Fundamental Equations avoids the contradictions encountered by Keynes, and explains the significance of the principle of effective demand for the development of the General Theory. A useful spin- off from this reassessment is that the quantity theory is seen to be a special case or interpretation of monetary equilibrium. It is easily shown that the quantity equation holds at all monetary equilibria. The quantity theory then appears as the restriction of monetary equilibrium to full employment in the case where the money stock is exogenous.

A similar application of the concept of monetary equilibrium to the macroeconomic models of both Post Keynesians and more mainstream Keynesians can then be made to provide a unified theoretical structure for the Keynesian position.