The Circuit of Money in a Production Economy

Abstract

Explaining the role of money in the economy by means of supply and demand has often seemed inadequate, even awkward. Money is evidently an institution — not just another good whose excess demand equation is to be added to those of the other goods, to form a monetized general equilibrium where before a barter system prevailed. A single excess demand equation, derived from preferences, endowments and technology, hardly seems sufficient to express all the economically relevant differences between a generalized barter system and a monetary economy. Even worse, the equation, when added, appears to create serious problems of interpretation, even of consistency, suggesting that the approach is not adequate to the task.1