MONEY AND GENERALIZED EXCHANGE: A CRITICAL LOOK AT NEO-WALRASIAN THEORY

Resumen

The proof of existence of market clearing equilibrium is the cornerstone of Neo-Classical theory. While it is generally portrayed as a barter framework, the proof actually assumes an accepted system of credits and debits; a system of privately issued IOU’s, or what is the same thing commitments by private agents to deliver a certain quantity of a given commodity at a given equilibrium price. In other words, the proof presupposes the existence of ‘inside money’. Yet a system of generalized exchange with pure inside money is not compatible with the main principles of Neo-Classical monetary theory including that inflation is always and everywhere a monetary phenomenon, the exogeneity of money and also the neutrality of money. This explains the importance and necessity of introducing ‘outside money’ in general equilibrium. Focussing mainly on Patinkin’s ‘invalid dichotomy’ and the real balance effect, and to a lesser extent, on overlapping generation models, I try to show that these attempts have been unsuccessful. In both cases the integration of monetary and value theory amount to collapsing all individuals into a single one. This negates the very economic problem (i.e., multiple exchanges) that gave rise to general equilibrium theory and to the impending requirement to prove the existence of market clearing equilibrium.