This book presents a study in the foundations of monetary theory with
several unique features. It consists of two parts: a critique of the
varieties of neoclassical monetary theory, and a rigorous statement of
the foundations of Post Keynesian monetary theory. The two parts reflect
Joseph Schumpeter's distinction between monetary theories in the
divergent traditions of Real and Monetary Analysis. Part I offers a
novel critique of Wicksellian and neo-Walrasian general equilibrium
versions of Real analysis. The critique of Wicksell's monetary theory
demonstrates the general impossibility of defining the natural rate of
interest without which the loanable funds theory collapses. The critique
of neo-Walrasian monetary theory, on the other hand, exploits the
inessential role of 'money' in temporary equilibrium and overlapping
generations models and develops a novel interpretation of the Patinkin
controversy and the Clower finance constraint. The implications of these
developments are then traced through the debates between monetarists and
Keynesians. Part II presents a rigorous argument for securing the
foundations of Post Keynesian monetary theory in the tradition of
Monetary Analysis. In the context of the evolution of the monetary
system from commodity money to credit money. Wicksell's natural rate of
interest is replaced by Keynes's marginal efficiency of capital which is
in turn applied to Myrdal's notion of monetary equilibrium to derive a
formal definition of Keynes's point of effective demand. This leads to
the most novel feature of the book: the demonstration of the existence
of a long-run unemployment equilibrium without the assumptions of rigid
wages. The principle of effective demand is shown to break Say's Law by
placing a limit on the profitable expansion of output before full
employment is reached.
