Occasional X: Clueless economists / Money (CXLXVIII)

“Why do we use money? This should be the fundamental question of a monetary economics course. Although it seems like a somewhat obvious question, the use of money is anything but trivial when we look at it analytically through the prism of economic theory; particularly the ideal models described by Walrasian general equilibrium.” (Königs) Walrasian general equilibrium is known to be proto-scientific garbage. It's the worst possible starting point for Monetary Theory. The axiomatically correct macroeconomic approach is summarized in the table below AXEC237c ⇓ . Microfoundations are methodologically false; the economic system is based on three macroeconomic axioms (lines 1-3). As a result, the market-clearing price P is analytically determined by the relationship between the quantity produced/supplied/bought O=X and the nominal demand Ec. Budget-balancing means that nominal demand is equal to income, here Ec=Yw. The labor time L washes out and plays no role in the price determination. In the monetary economy, the resulting market-clearing and budget-balancing price for a one-good economy is P=:W/R, i.e., the price is equal to unit labor costs (line 5). Profit is zero (line 11). The workers get the entire product O. In the general case of non-budget-balancing, the market-clearing price is shown in line 9. In general, nominal demand depends on income and the expenditure ratio. The expression ρE*Yw implies an income-dependent demand curve. The household sector provides the labor input L and gets the wage income Yw. There is no other income in the elementary case. At this logical point, money enters the picture in line 16. It is of no interest here how money evolved historically. Here, money is not needed for facilitating the exchange of goods, but for paying the wage bill. The households, in turn, spend their wage income on buying the consumption goods output O. Thus, money returns to the business sector. Transaction money is here provided (at zero cost, i.e., no fee, no interest) by the Central Bank in the form of fiat money. By sequencing the initially given period length of one year into months, the idealized transaction pattern is displayed in line 16 in the table below. It is assumed that the monthly income Y/12 is paid out at mid-month. In the first half of the month, the daily spending of Y/360 increases the current overdrafts of the households. At mid-month, the households change to the positive side and have current deposits of Y/24 at their disposal. This amount reduces continuously towards the end of the month. This pattern is exactly repeated over the rest of the year. So, transaction money comes from the Central Bank; it is zero at the beginning and at the end of a given period. The average quantity of transaction money depends on the transaction pattern κ, total employment L, and the wage rate W. Money is created out of nothing and returns to nothing. There is no such thing as a fixed quantity of money. Money is present and absent depending on the time frame of observation. So, the Central Bank creates the needed fiat money out of nothing according to the changing demands due to the transactions between the household and the business sector. Transaction money is determined endogenously — “that is, as a result of the interactions of other economic variables…” (Wikipedia). There is no such thing as a 'supply of money'. The wage rate W and employment L are determined in the interaction of the household and the business sector. The Central Bank simply provides the wage bill, whatever it is. The graphic reduces formally to the money axiom in line 16. In the symmetric case Ec=Yw, the average quantity of money depends on the transaction pattern κ, the wage rate W, and employment L. If employment increases, the average stock of transaction money increases. Because W and P are formally related in line 9, there also appears a statistical correlation between price and average stock of transaction money. Both depend on the expenditure ratio ρE (lines 9 and 18). The point to start with is that both the market-clearing price and the average quantity of money depend on the expenditure ratio. This indirect relationship makes it appear that there is a correlation between the quantity of money and price. However, there is no causality from M to P. Money becomes a store of value if the expenditure ratio is ρE>1. In the most elementary case, the household sector dissaves, i.e., Ec>Yw, and the business sector makes a profit Qm as shown in line 11. At the end of the period, the business sector has a stock of money at the Central Bank equal to profit Qm. And this is the point. The concept of macroeconomic profit does not appear in legacy economics. The representative economist obviously does not know that the creation of money is intimately connected with the creation of profit. In other words, they do not understand how the economic system works. For details about the axiomatically correct approach, see the working paper ⇒ The Dark-Matter Theory of Fiat Money https://t.co/0QSqFFrVUX

— AXEC (@EgmontHandtke) November 1, 2026