aeon | The price theory assumes that there exist fixed and independent
curves that describe supply and demand, but the reality is that these
forces are coupled and in flux – and the idea that they lead to a stable
and optimal equilibrium seems more than a little wobbly.
Even
stranger, though, is that in answering these basic questions money
hardly seems to be mentioned – despite the fact that one would think
money is at the heart of the subject. (Isn’t economics about money?
Aren’t prices set by using money?) If you look at those textbooks, you
will find that, while money is used as a metric, and there is some
discussion of basic monetary plumbing, money is not considered an
important subject in itself. And both money and the role of the
financial sector are usually completely missing from economic models,
nor do they get paid lip service. One reason central banks couldn’t
predict the banking crisis was because their models didn’t include
banks.
Economists, it seems, think about money less than most
people do: as Mervyn King, the former governor of the Bank of England,
observed in 2001: ‘Most economists hold conversations in which the word
“money” hardly appears at all.’ For example, the key question of
money-creation by private banks, according
to the German economist Richard Werner, has been ‘a virtual taboo for
the thousands of researchers of the world’s central banks during the
past half century’. And then there is the mass of complex financial
derivatives, whose nominal value was estimated in 2010 at
$1.2 quadrillion, but which is nowhere to be found in conventional
models, even though it was at the root of the crisis.
To sum up,
the key tenets of mainstream or neoclassical economics – including such
things as ‘utility’ or ‘demand curves’ or ‘rational economic man’ – are
just made-up inventions, no more real than the crystalline spheres that
Medieval astronomers thought suspended the planets. But real things like
money are to a remarkable extent ignored.
In physics, the quantum
revolution was born when physicists found that at the subatomic level
energy was always exchanged in terms of discrete parcels, which they
called quanta, from the Latin for ‘how much’. Perhaps we need
to follow the quantum lead, and look at transactions between people. In
economics, the equivalent would be exchanges of money – like when you go
into a shop, point at something, and ask: How much? Or, if you’re in Italy, Quanto?, which makes the connection a little clearer.
