Neutrality of Money: A Criticism
Neutrality of money is a widespread if rather flawed assumption which underpins much of mainstream macroeconomics. Political economists disagree with this assumption due to the endogenous nature of monetary supply, encompassing reverse causation and exogenous interest rates.
It would be inappropriate to discuss neutrality of money or the rejection thereof without first discussing money itself. At its most basic, money is something deemed by an economy to have consistent numeraire value suitable for exchange and payment . In this way, a $50 note will always be considered, at least in its nation of origin, to be worth $50 in any transaction. Comparatively, the ‘value’ of a bag of passionfruit may vary dramatically between those it is brought to. Under orthodox economic theory, it is typically assumed that money is both scarce and valuable whilst Keynes focused more heavily on money being a unit of account with a value derived from the willingness by a given state to accept it in payment . The orthodox approach is typically termed the metallist or M-form approach to money, wherein money is a numeraire, whilst Keynes aligned with the C-form or chartalist approach . …show more content…
At its most simple, neutrality of money simply implies that a change in the money supply will only affect nominal, rather than real, variables . For instance, an increased money supply might increase prices, but, under mainstream macroeconomics, it would be assumed to change wages and costs by the same amounts such that aggregate supply and aggregate demand, and real purchasing power, remained unchanged . Neutrality of money is almost universally disregarded by microeconomists but is typically accepted, at least in the long term, by most macroeconomists . Despite this, it is disregarded completely by almost all political
Neutrality of money is a widespread if rather flawed assumption which underpins much of mainstream macroeconomics. Political economists disagree with this assumption due to the endogenous nature of monetary supply, encompassing reverse causation and exogenous interest rates.
It would be inappropriate to discuss neutrality of money or the rejection thereof without first discussing money itself. At its most basic, money is something deemed by an economy to have consistent numeraire value suitable for exchange and payment . In this way, a $50 note will always be considered, at least in its nation of origin, to be worth $50 in any transaction. Comparatively, the ‘value’ of a bag of passionfruit may vary dramatically between those it is brought to. Under orthodox economic theory, it is typically assumed that money is both scarce and valuable whilst Keynes focused more heavily on money being a unit of account with a value derived from the willingness by a given state to accept it in payment . The orthodox approach is typically termed the metallist or M-form approach to money, wherein money is a numeraire, whilst Keynes aligned with the C-form or chartalist approach . …show more content…
At its most simple, neutrality of money simply implies that a change in the money supply will only affect nominal, rather than real, variables . For instance, an increased money supply might increase prices, but, under mainstream macroeconomics, it would be assumed to change wages and costs by the same amounts such that aggregate supply and aggregate demand, and real purchasing power, remained unchanged . Neutrality of money is almost universally disregarded by microeconomists but is typically accepted, at least in the long term, by most macroeconomists . Despite this, it is disregarded completely by almost all political