The Monetary Economy and the Economic Crisis

Duke University Center for the History of Political Economy Working Paper No. 2011-04

Duke Department of Economics Research Paper

27 Pages Posted: 12 Feb 2011

See all articles by David E. W. Laidler

David E. W. Laidler

University of Western Ontario - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 10, 2011

Abstract

The monetary economy has properties that cannot be analyzed using the tools of today's dynamic general equilibrium analysis. Keynes's economics, far from being an aberration in the otherwise orderly evolution of modern macroeconomics from Adam Smith's ideas about the "invisible hand," was a major contribution to an ongoing tradition in monetary theory in whose creation Smith himself had played a part. Retrospective consideration of this tradition suggests that the property of the monetary economy critical to the generation of economic crises and the stagnation that follows them is its capacity to permit trading at "false" prices, a phenomenon ruled out by assumption in dynamic general equilibrium models. Not only Keynes's explanation of depression but also Hayek and Robertson's analysis of the role of unsustainable forced saving in the boom can be thought of as relying on this factor.

Keywords: Crises, Money, Monetary Economy, General Equilibrium, Cycles, Sticky Prices, Flexible Prices, False Prices, Rate of Interest, Forced Saving, Keynesian Economics, Monetarism, New Keynesian Economics

JEL Classification: B12, B22, E12, E13, E32, E40.

Suggested Citation

Laidler, David E. W., The Monetary Economy and the Economic Crisis (January 10, 2011). Duke University Center for the History of Political Economy Working Paper No. 2011-04, Duke Department of Economics Research Paper , Available at SSRN: https://ssrn.com/abstract=1759503 or http://dx.doi.org/10.2139/ssrn.1759503

David E. W. Laidler (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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