Smith, Marx, Keynes, Chartalism and Modern Money Theory
Smith, Marx, Keynes, Chartalism and Modern Money Theory
Learning Objectives
By the end of this section, you will be able to:
- Explain and compare the two views of money’s origin and its value
The answers to the questions of value raised in the previous section can be found by examining the following two quotes, from arguably the two most significant characters in the history of political economy. The first comes from Adam Smith’s The Wealth of Nations:
A prince, who should enact a certain proportion of his taxes be paid in a paper money of a certain kind, might thereby give a certain value to this paper money.[1]
The second quote, similar in theme, comes from Karl Marx’s Capital Vol. I, and reads:
The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is–their national debt. Hence as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.[2]
From these two quotes, the primary difference between the Metallists and Chartalists approaches to understanding money is revealed. Money is not a commodity. Money is, in the words of the legal scholar Friedrich Knapp, a creature of the state.
What may seem to be a subtle difference is in reality substantial. The reorientation of money as a state phenomenon, rather than a market solution to the double coincidence of wants requires a completely different framework for analyzing the economy. The economy can no longer be modeled as a barter system. Real analysis fails to capture the complexity of money, and thus even the existence of general equilibrium itself is called into question. Returning to Schumpeter, if the modus operandi of money is not simply a facilitator role, then we must conduct monetary analysis. Simply put, this requires the abandonment “of the idea that all essential features of economic life can be represented by a barter-economy model” (Schumpeter 1954).
We can begin to appreciate the difference between the analysis of a barter system and a money economy by applying Marx’s notation and modeling of the circuit of money capital.This notation is simple and straightforward (see also Chapter 16: “The Megacorp”).
[latex]M\rightarrow C ... P ... C' \rightarrow M'[/latex]
where the first stage M – C is termed purchase and is followed by the production process P culminating with C’ – M’ sale. This analysis of the economy is a monetary analysis. Returning to the barter notation, from above, the transaction would look like this.
[latex]C \rightarrow M \rightarrow C[/latex]
As you can see, the interpretation of how the economy operates is very different. The predictions of outcomes from market activity are also at odds. In the real analysis of neoclassical economics, markets trend toward