Home > Uncategorized > On the non-neutrality of money

On the non-neutrality of money

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like IS-LM and Aggregate Supply-Aggregate Demand models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I doubt that Keynes would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”


One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.

Money doesn’t matter in mainstream macroeconomic models. That’s true. But in the real world in which we happen to live, money does certainly matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

  1. Ikonoclast
    March 29, 2020 at 5:04 am

    There is a simple information science proof, I believe, which shows that money is not and cannot be neutral. As Keynes says, “The importance of money flows from it being a link between the present and the future”. But what kind of link is it? It is not a real link obviously. Money is not a physical real object or force even though it is instantiated or represented in real objects (physical coin, notes) or real electronic force potentials as bits and bytes in a computer or on the wire or cable (photons for modern cable).

    Money in its true form is a formal or notional quantity, not a real quantity at all, except in its physical form instantiations as mentioned above. Money in its true notional form is simply information. Information of this kind is contained in patterns of matter and/or energy. It is the pattern that matters and more particularly the transfer of information by those patterns (enabled by encoding and decoding by human or machine agents or tools).

    We have an incomplete model (many incomplete models in fact) of the real economy in our real economic data. We have other models of the future economy which are mere projections and assumptions. Money performs an information role and informs calculations and transformations from the situation now (e.g. value of inventory now) to the projected situation later (projected earnings.) Money as information passing between the two models (of the real economy now and the future projected economy) informs human (agent) decisions. Information is not and cannot be neutral when human agents use it for decisions which affect real people and real quantities.

  2. March 29, 2020 at 6:52 am

    Or to put it more simply than either Keynes or Ik,

    Money is a token of a promise (to return real value in goods or services to the market). A promise is about the future. The future may or may not turn out the way we expect, and the promise may or may not be fulfilled. Thus money connects the future with the present. In mathematical terms, it involves *time derivatives* and therefore operates on how the economy may change. Furthermore the promise brings in risk.

    Thus money is a powerful influence on how the economy develops in time, potentially the most powerful.

    If more promises are made than can be fulfilled, or if the world does not go according to expectations, then a lot of people are made suddenly poorer than they thought they were. They stop spending, The economy tanks.

    Debt booms and busts are the fundamental recurring feature of 300 years of capitalism. Is it so hard to see why they happen?

    All of this is alien to neoclassical equilibria, because it admits no money, no consequent debt and only slow (‘quasi-static’) changes in time. It is totally useless for describing a real modern monetary economy, as Keynes was struggling to articulate.

    Yes, you can read about this in the green book to the right: Economy, Society, Nature.

    • March 30, 2020 at 1:21 pm

      I cannot but agree: Money is a promise about the future. It therefore follows that money’s worth can be derived from the worth of this promise. In other words, we need to explain the worth (or perception thereof) of this promise if we want to understand money itself.

      The interesting insight from starting with this promise question is rather straightforward: Money is worth as much as the institutions that constitute the monetary system and hence “guarantee” the promise can be trusted to keep the promise. In short: money is trust (in these institutions). If this trust is lost inflation follows.

      • March 31, 2020 at 2:40 am

        Well said Christian. Token money (to give its full description) depends on a trusting community to retain its value. Otherwise you need commodity money (tobacco, pigs, whatever) that has its own intrinsic value.

      • March 31, 2020 at 2:44 am

        Oh and I dream of the day the global financial system has to use pigs as its medium of exchange. If they had to feed and clean up after billions of pigs they might abuse the system less.

      • March 31, 2020 at 2:46 pm

        Dear Geoff, thanks for your appreciation! Actually, I would also like to apply the trust approach to so-called “commodity” money. The logic is as follows: there always is an institutional backing of the trust in the worthiness of money. Modern fiat money relies on rather explicit, formal and easily tangible institutions. The further back in history you go the less explicit and less formal these institutions tend to be. As a tendency, there is a trade-off between the sophistication of the monetary institution (ease-of-use of money) and the degree of abstraction of the trust instilled (roughly the vulnerability of money): in times of crisis there is a tendency to fall back to more robust and harder wired institutions explaining the popularity of “commodity” money in wars and (other) crises.

        Gold is a point in case: there is no formal institutional backing for the value of gold but there is a cultural agreement about its worth. Culture also being an institution (in the sociological sense) thus also fits into this approach. The interesting detail here is that there have been societies in which gold did not have the same connotation it nowadays has and in those societies it didn’t serve as money. Therefore, I do think that the institutional approach (money’s value being determined by the trust in the constituting institutions of the monetary system) transcends the classical categories and is therefore more generally applicable.

  3. March 29, 2020 at 1:29 pm

    Money represents the cost of energy.

  4. yok
    March 29, 2020 at 3:39 pm

    Geoff. Clear Thinking

  5. ghholtham
    March 29, 2020 at 4:36 pm

    The clearest example of monetary non-neutrality is the second world war. Milton Friedman himself blamed the US depression of the 1930s on a collapse of the money supply as banks went bust after the Wall St crash. That led to a recession in Europe and the election of the Nazi Party in Germany. The second world war was a consequence. To believe money is neutral you would be required to believe that if the Fed had prevented the collapse of the money supply and there had been no depression, then the world in, say, 1950 would still have been identical to the one that was realised except the price level would have been rather higher. In fact, no depression, no Nazi election win, no genocide, no world war, and jet engines, rockets and radar all delayed by perhaps 20 years. How non-neutral can you get? You have to be a “trained” economist or an idiot to believe money is neutral.

  6. Edward Ross
    March 29, 2020 at 11:46 pm

    In my humble opinion as an eighty four year old in the real world, who grew up in New Zealand and now enjoy Australian residency.Throughout my life i have been basically a wages person in positions from labourer with no responsibility to dairy farm working farm manager to foreman supervisor in construction. My only formal education was a external B.A..

    While i think the above post and blogs make a lot of sense i would like to make a simple comment in a language that most people in the real world may be able to understand. That is after the second world war, until the early 1970s in NZ under KEYNESIAN IDEALS and the Bretton agreement countries like NZ had control of their own currency and the Bretton Woods agreement enabled them to trade with other countries.

    My argument is this, if a county has control of its own money then in a crisis then it can simply print money and shovel it around where it is needed and later, when the crisis has abated to make the’ funny’ money disappear, they can take steps stop the economy overheating.

    Obviously this requires the Keynesian concept of limiting foreign ownership of local assets and and limiting the amount of money that can be taken out of the country by corporations and individuals.
    My concern is not that governments are literally shoveling out funny money to meet the needs of the people. MY concern is, if that ‘funny’ money is taken out of the country by multi national national corporations the world bank or IMF and their extremely wealthy cronies Then countries that have fallen into that trap loose the ability to make their own decisions and become the slaves of the rich and powerful

    PLEASE NOTE I AM NOT DISAGREEING WITH THE .OBOVE BUT I THINK THIS IS WHERE THE CONVERSATION NEEDS TO START. both in the academic world and in the real world of real people. Ted

  7. Norman Roth
    March 30, 2020 at 6:16 pm

    Mr. Ross,

    There may be an unintentionally satirical/humorous side to your very perceptive comments on the ancient practice of getting the printing presses & coinage stampers going, full tilt, whenever a crisis, real or conspiratorially concocted, arises. Whether one calls such dog-eared ‘solutions’ “funny money”, ‘gifting’, ‘Monetarism’ in action, ‘Social Credit’, enemies of ‘finance capital’, & more recently Greece & Argentina’s ‘progressive’ monetary wizards etc. their most vocal advocates down through the ages have always been easily debunked by saner voices.
    From the time of Cato, Cicero,{“Above all else, do not debase the coin of the realm”} to Sir Thomas Gresham of “Gresham’s ‘law’ fame,& to Keynes, Ralph Hawtray & the British Actuarial Society, circa 1930,such voices have usually gone unheeded until it’s too late. But, As the venerable Japanese haiku puts it: “When the glaciers recede, old weeds bloom afresh.” By the way, I’m hardly a fan of the neo-classical oligarchs. BUT, I don’t think even their junk academic heirs believe in the ‘neutrality of money’ any more. i.e. That’s a bit of a “straw dog’ polemic set-up, no matter how much one thinks they deserve it !

    Than you for your patience. Please GOOGLE: Norman L. Roth

  8. Craig
    March 30, 2020 at 6:19 pm

    Money is non-neutral. The current MONOPOLISTIC paradigm of money creation, Debt ONLY, is WAAAAYY non-neutral. A universal dividend and the 50% discount/rebate price and monetary policy at retail sale, the latter of which is the very expression of the new monetary and financial paradigm of Direct and Reciprocal Monetary Gifting, resolves seeming unresolvable opposite economic realities, universally benefits and unites seeming opposite economic and political constituencies and ironically could enable both a bottom up consumer and top down fiscal means of navigating man made climate change.

    Why in the hell don’t all of you have your hair on fire advocating for it, especially in view of the fact that the corona virus has recently shown the efficacy of fiscal and direct monetary gifting???

  9. ghholtham
    March 31, 2020 at 2:41 pm

    Craig, your question is rhetorical.You’re not really interested in why we are not all proselytising for monetary gifting. You know what you think and it’s a long time since you listened to any counter-argument. T

    • Craig
      March 31, 2020 at 7:36 pm

      I will listen to any argument/theory that adds to the list of policy solutions I have advocated here that the new monetary and financial paradigm of Direct and Reciprocal Monetary Gifting accomplishes.

      Virtually everyone here is engaged only in rhetoric. Several times I have asked for posters here to give their specific policies. Nothing but crickets. Instead of complaining about how arduous a nomadic existence is, how the rains haven’t come, the game is scarce and the lions that lurk are increasingly hungry this name dropping debating society should be looking to discover that if you put seeds in the ground and corral a male and female bovine your world is turned upside down in incredibly beneficial ways. In other words think paradigmatically.

      So please do not lecture me about being rhetorical. Ya know what I mean?

  10. Norman Roth
    April 1, 2020 at 12:55 am

    Really M. Craig,

    I still think Mr. Edward Ross makes some very valid points about the age-old practice of a needy “STATE” shoveling” printed & stamped coinage {plus borrowed money in the form of the glorified I.O.U’s; known as bonds, bills, debentures & notes} at any problem that cannot be solved otherwise. And he does so with a trenchant wit. ‘Monetary gifting” was once called “Prairie freigeld” back in the 1930’s when the social credit government of Alberta started printing the attractively designed stuff, as “social dividends”. But when their pulp ‘n paper product was proscribed as not acceptable as legal ‘coin of the realm’, it suffered the same fate as Confederate dollars during Reconstruction. But, rest assured that Ralph Hawtrey, Keynes & several other chaps from the Cambridge Mathematical Tripos & British Actuarial Society, whom you may not respect very much, were quite gentle in their debunking of the rather temperamental Major Douglas’ s opus magnum.
    “Major Douglas’s monetary theories are about as useful as a misprint in a multiplication table”, said M. Hawtrey. Not to mention the Major’s rather curious misunderstanding about Say’s ‘law of markets’ embodied in the “A + B theorem”. That one can be easily ‘offed’ by a couple of Venn Diagrams’. Thank you for your patience. My critique is intended only as a didactic argument which I hope benefits all; In the old German academic sense of “erklarung”.

    Please GOOGLE: Norman L. Roth, Economics

    • Craig
      April 1, 2020 at 7:06 am

      Hawtrey did not understand money at all and was rebutted quite thoroughly by Douglas. Keynes actually plagiarized Douglas by simply restating one of his major points and claiming it as his own. How convenient and covert it was that the Canadian federal government declared Alberta’s monetary gifts ultra vires.

      I’m not a social crediter by the way. Social crediters are stuck in classical ideas of equilibrium, I’m not, as all of what I advocate aligns with what Steve Keen has written regarding the financial instability hypothesis of Minsky with the exception that he, who even though he has correctly complained that an economist can get his PhD in economics without taking so much as a rudimentary course in accounting, still does not recognize the fact that the entirety of the economy is embedded in an accounting cycle that invalidates the quantity theory of money and the velocity of its circulation.

      Your Telos and Technos is a quite good philosophical book. However, like virtually every present tome on economics its ideas and abstractions need the focus on present time reality that the garden variety accountant, mostly unaware of the underlying economic significances he deals with every day, could bring to it.

      • April 1, 2020 at 3:50 pm

        Craig, you and Norman are here saying some interesting stuff, but as a “jonny come lately” Englishman who can only imagine the history you North Americans are talking about, I would appreciate a few references. For example, I know about Venn diagrams, Norman, but apart from the fact that Douglas has been accused of misunderstanding Say’s Law, not in what way. I didn’t know about the ‘ultra vires’ as against the suggested logical put-down, Craig, but I do know that the financial instability Minsky wrote about and Keen simulates is what happens when one uses PID control logic to achieve an equilibrium, and uses D corrections to avoid danger faster than one uses I feedback to re-correct one’s aims. This is standard chaos theory, applied to (representing) financial entrepreneurs shuffling nominal investments to make monetary profits. I do recognise as fact your bit about the entirety of the economy, but that only explains the error in the theories, not the chaotic implications of the facts.

      • Craig
        April 2, 2020 at 3:54 am

        The instability/chaos comes from the monopolistic onlyness of the monetary and financial paradigm, and allowing private finance to maintain that paradigm is the height of idiocy. There are plenty of legitimate private financial services that can aggregate and find investment for prior-ly created money and savings, but money creation is not one of them

        Money creation either as debt or as monetary gifting must become a public utility guided by the supreme ethical concept of grace as in love in action and its applicable monetary, financial and economic policies. Anything less is folly and/or non-confront.

        Helio-centrism and the discovery of the ellipse ended the unstable anomalies of Ptolemaic cosmology and the policy of a 50% discount/rebate at retail sale and the concept of monetary grace as in gifting will end financial instability.

  11. Norman Roth
    April 2, 2020 at 8:25 pm

    Craig ???


    Norman L. Roth

  12. Ken Zimmerman
    April 10, 2020 at 11:56 am

    For most contemporary observers, the dollar is an invulnerable transformer, not a morally reformable currency. The prevailing classic interpretation of money thus absolutizes a model of market money, shaped by the following five underlying assumptions:

    1. The functions and characteristics of money are defined strictly in economic terms. Money, maintained Simmel, was the “incarnation and purest expression of the concept of economic value” (1978, 101). As a qualityless, absolutely homogeneous, infinitely divisible, liquid object, money is a matchless tool for market exchange.

    2. All monies are the same in modern society. What Simmel called money’s “qualitatively communistic character” (1978, 440) aborts any distinctions between types of money. Differences can exist in the quantity of money but not in its meaning. Thus, there is only one kind of money—market money.

    3. A sharp dichotomy is established between money and nonpecuniary values. Money in modern society is defined as essentially profane and utilitarian in contrast to non-instrumental values. Money is qualitatively neutral; personal, social, and sacred values are qualitatively distinct, unexchangeable, and indivisible.

    4. Monetary concerns are constantly enlarging, quantifying, and often corrupting all areas of life. As an abstract medium of exchange, money has not only the freedom but also the power to draw an increasing number of goods and services into the web of the market. Money is thus the vehicle for an inevitable commodification of society. As Simmel put it, money “intervenes in the totality of existential interests and imposes itself upon them. . . [It] has the power to lay down forms and directions for contents to which [it is] indifferent . . . (1978, 442).

    5. The power of money to transform nonpecuniary values is unquestioned, while the reciprocal transformation of money by values is seldom conceptualized or else is explicitly rejected. Unfettered by “objective or ethical considerations,” money, insisted Simmel, was exempt from extraeconomic “directives [or] obstacles” (1978, 441).

    In this context, to speak about the distinctive “quality” of modern money seems anachronistic. After all, how can money have special meanings if its very essence is the absolute homogenization and objectivization of qualitative distinctions?

    A link, an interdependence, is missing from the traditional approach to money. Impressed by the fungible, impersonal characteristics of money, traditional social thinkers emphasized its instrumental rationality and apparently unlimited capacity to transform products, relationships, and sometimes even emotions into an abstract and objective numerical equivalent. But money is neither culturally neutral nor morally invulnerable. It may well “corrupt” values into numbers, but values and sentiment reciprocally corrupt money by investing it with moral, social, and religious meaning. We need to examine more carefully how cultural and social structural factors influence the uses, meaning, and even quantity of money. What is the relationship of money as a medium of exchange and measure of utility to money as a symbol of social value? As the force of social power, as a means of stratification of societies, and the valuing and devaluing of humans, individually and groups. At least since the beginning of the 20th century there is an active effort to drive these concerns from consideration. Lest they threaten the current western hierarchies.

    • April 10, 2020 at 1:02 pm

      ” how can money have special meanings if its very essence is the absolute homogenization and objectivization of qualitative distinctions?”

      Mathematically, by being not ‘neutral’ but ‘null’. If the idea of it is mere fiction you can make it mean anything you want. Why give its fictions so much prominence? Wouldn’t it be more helpful to reflect on Newton’s equations of motion as interpreted by Arthur M Young in his book “The Geometry of Meaning”? And on the changes in the way money enables us to move: from safe bartering with gold to giving credit where credit is due or needed.

      • Ken Zimmerman
        April 11, 2020 at 12:58 pm

        Allow me to set the stage. Quoting the Israeli historian Harari, “What is a religion if not a big virtual reality game played by millions of people together? Religions such as Islam and Christianity invent imaginary laws, such as “don’t eat pork”, “repeat the same prayers a set number of times each day”, “don’t have sex with somebody from your own gender” and so forth. These laws exist only in the human imagination. No natural law requires the repetition of magical formulas, and no natural law forbids homosexuality or eating pork. Muslims and Christians go through life trying to gain points in their favorite virtual reality game. If you pray every day, you get points. If you forget to pray, you lose points. If by the end of your life you gain enough points, then after you die you go to the next level of the game (aka heaven).” Apart from wanting to explore with Harari his use of the term “natural law” I agree with this statement.

        Regarding work, a topic of great concern at present, Harari says, “In any case, the end of work will not necessarily mean the end of meaning, because meaning is generated by imagining rather than by working. Work is essential for meaning only according to some ideologies and lifestyles. Eighteenth-century English country squires, present-day ultra-orthodox Jews, and children in all cultures and eras have found a lot of interest and meaning in life even without working. People in 2050 will probably be able to play deeper games and to construct more complex virtual worlds than in any previous time in history. But what about truth? What about reality? Do we really want to live in a world in which billions of people are immersed in fantasies, pursuing make believe goals and obeying imaginary laws? Well, like it or not, that’s the world we have been living in for thousands of years already.”

        Fiction is how people construct their lives. The collections of those fictions is called culture. All these fictions affect our lives. Some much more than others. Depending on the questions we want to answer, Newton’s equations are sometimes useful fictions. But only sometimes. Likewise, money can be a useful fiction. What we’re discussing now is how and who created the dominant money fictions of the modern world. But as I’ve shown even these dominant money fictions conflict with other available and used money fictions. It’s just another game within a game.

      • April 11, 2020 at 3:01 pm

        What have I just said that had any connection with religion? Perhaps “Giving credit where credit is due”. This where nominal Jews like Harari and I suspect yourself forget that Judaism was about being grateful for creation and being led out of slavery in Egypt, excusing yourselves by claiming that all that was just imaginary: that there is no reason for rituals like saying “Thank you” which remind us of events in the past.

        Those of us who are Christians and Muslims in our own way celebrate the Jewish passover: the Muslims as I understand it for their own escape from usurious oppression of the arabs, we Christians for our Creator sending his living Word to re-enact not only his own dying in creation that we might live, but also by his resurrection to reassure us of his continued life in the form of Spirit – in scientific terms, of the conservation of energy and the possibility of it being lovingly directed, conveying Truth and Light as well as power to maintain Life.

        That Christians and Muslims and to some extent Christian catholics and protestants continue to some extent to squabble with each other is in my judgment not a little due to not understanding the doctrine of Three Persons in one God: not twigging how that is like water appearing in solid, liquid and gaseous forms. That is sad, not despicable.

        As for our praying, to keep up a friendship one needs to communicate if not immediate interest, not dis-interest; and with some of us actions speak louder than words. Imitation is our sincerest form of appreciation. So it is Easter. Join in the rejoicing! Be grateful for, not whinging about, our Brother – like his Father before him – dying that we might live.

    • Craig
      April 10, 2020 at 10:26 pm

      Money is most basically accounting which is very high on the list of most effective and useful tools that humanity has ever invented. The entire problem with money is its monopolistic paradigm of Debt ONLY which insures that the (illegitimate) business model of private Banking/Finance has complete control over both its creation and the ONLY form and vehicle for its distribution (again Debt ONLY).

      The solution to money’s problems is the new monetary, financial and thus economic mega paradigm change of Direct and Reciprocal Monetary Gifting and its policies which would align these systems with the supreme concept of every one of the world’s major wisdom traditions, namely grace as in love in action. And of course applied to economics, that would be monetary grace as in gifting.

      Grace, even to naturalists like myself, if they are wise enough to contemplate and self actualize it, is a universal conceptual and experiential solvent, and a system that expressed its many beneficial aspects would undoubtedly be the most powerful and beneficial change humanity has acculturated since the change from hunting and gathering to agriculture, homesteading and urbanization.

      • April 11, 2020 at 8:00 am

        On money as accounting, yes, but as I see it the entire problem with money is humans who can’t see the difference between obeying the spirit and the letter of the law, hence the hypocrisy of the slave owner/military officer class claiming the first for themselves but drilling the other into their foot-soldiers.

      • Ken Zimmerman
        April 11, 2020 at 1:02 pm

        “Money is most basically accounting which is very high on the list of most effective and useful tools that humanity has ever invented.” If we choose to define money in this way, we must then look to the kind of culture this involves. In other words, the way of life in which money defined in this way makes sense. The US has by some been defined as an accounting culture. Is that genuinely the case, as you see it?

      • Craig
        April 11, 2020 at 7:45 pm


        “The US has by some been defined as an accounting culture. Is that genuinely the case, as you see it?”

        Undoubtedly too much. Which only makes what I said the more important.

        In other words in pursuit of the greater truthfulness we should PERSONALLY integrate the knowledge of the effective tool of accounting with the supreme ethical and beneficial psychological concept of grace as it applies to oneself, the economy and the money system.

        It is my observation that such is perhaps too easy for an intelligentsia obsessed with and pursuing complexities instead policy applications aligned with the simple depth of understanding that can be garnered by wisdom and its mentally integrative process.

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