Money, Financial Markets, and the Coherence of a Market Economy

Abstract

market economy with the trading that takes place in a village's market square. To this day, formal economic theory makes this demonstration by investigating the characteristics of an abstract trading process. But its validity depends on showing that the coherence property demonstrated for the abstract trading process can be preserved when the model is altered to allow for the formalized concepts of production, labor, capital assets, monopoly, and money. As Arrow and Hahn noted in chapter 14, the proposition that a decentralized market yields a coherent result has not yet been shown to hold for an economy where money is represented by contracts created through banking processes, and capitalist financial practices are required to support the purchase of expensive, long-lived capital assets. This is not surprising, since a Keynesian analysis of the interactions among money creation, asset pricing, and investment in the development of the economy through time

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