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Mises and the moderns on the inessentiality of money in equilibrium

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Abstract

The challenge of rendering monetary exchange intelligible within a Walrasian general equilibrium framework is well known. Perhaps less well known is the difficulty of integrating monetary and exchange economies in decentralized conceptions of equilibrium, of which the evenly rotating economy of Ludwig von Mises (1949) is an early example. After reviewing the prospect for money in the evenly rotating economy, I survey the modern literature on frictions that make money useful for exchange. While exploring techniques commonly used to generate a useful role for money in this environment, I make a distinction between exchange frictions and epistemic frictions. Although theoretical efforts have largely focused on exchange frictions, recent experimental evidence suggests that epistemic frictions warrant further attention. I conclude that Mises should be seen as a pioneer in this literature, though recent advances demonstrate that the set of frictions capable of rendering money useful is much larger than he envisioned.

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Notes

  1. In what follows, I will limit my attention to money’s usefulness as a medium of exchange in a general equilibrium framework. Other functions—unit of account, store of value, etc.—are not of direct concern.

  2. Marget (1935), pp. 154–163) considers the issues, while summarizing the efforts of Walras and his critics.

  3. Early efforts to include money in a general equilibrium model (e.g., money in the utility function, cash in advance constraint) amount to inclusion by assumption. More recently, Banerjee and Maskin (1996) generate money in a Walrasian general equilibrium model.

  4. Luther (2014) discusses the evenly rotating economy and argues it is similar in most respects to modern search theoretic models. See also: Cowen and Fink (1985).

  5. Corbae et al. (2002, 2003) develop an endogenous matching model along the same lines. Hogan and Luther (2014) offer an endogenous matching model where some randomness remains.

  6. Specifically, agents of type τ = {1, 2, 3} produce good j = τ + 1 modulo 3 but only consume good τ. The authors also consider a model where agents of type τ = {1, 2, 3} producing goods j = τ + 2 modulo 3 but consuming only τ are randomly matched.

  7. Some restrict use of the term “essential” to those cases where money improves the set of equilibria.

  8. Kiyotaki and Moore (2002) draw attention to limited commitment. Similarly, in the context of Townsend’s (1980) turnpike model, Huggett and Krasa (1996) show that money is inessential unless commitment is limited.

  9. See: Selgin (2003).

  10. Yasutomi (1995, 2003) and Shinohara and Gunji (2001) use agent-based computational models to consider the emergence and collapse of money.

  11. Similarly, Kawagoe (2007) shows that, contrary to theory, agents are reluctant to employ a perishable good as money.

  12. Duffy (2010) surveys the relevant literature.

  13. On money as a recordkeeping device, see also Kocherlakota and Wallace (1998) and Wallace (2001). Along similar lines, Kahn et al. (2005) consider the privacy-providing role of money—that is, its ability to alleviate the need for recordkeeping. Luther and Olson (2015) maintain that bitcoin is a form of memory.

  14. In general, the probability of being matched with a given agent is 1/(N-1). As N → ∞, the probability of being matched with the person observing the defection (and, hence, the potency of the trigger strategy) goes to 0.

  15. See Williamson and Wright (2010, p. 33).

  16. Lagos and Wright (2007) reject the notion that centralized markets necessarily imply agents can observe the actions of others; they maintain that agents only observe prices in the standard Walrasian model, which they attempt to mimic in the centralized component of Lagos and Wright (2005). See also: Aliprantis et al. (2006), Araujo et al. (2010).

  17. The authors report the range of trades in decentralized periods involving money over the 12 sessions as 80–100%.

  18. According to Rothbard (1962, p. 322), “the final equilibrium position is always changing, and consequently no one such position is ever reached in practice. […] it is like the mechanical rabbit being chased by the dog. It is never reached in practice and it is always changing, but it explains the direction in which the dog is moving.”

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Luther, W.J. Mises and the moderns on the inessentiality of money in equilibrium. Rev Austrian Econ 29, 1–13 (2016). https://doi.org/10.1007/s11138-015-0321-0

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