Money Without Value, Accounting Without Measure : How Economic Theory Can Better Fit the Economic and Monetary System We Live In

The financial crisis of 2007 was unanimously declared a liquidity crisis, and governments and central banks worldwide reacted by injecting massive amounts of fresh money to rescue the financial system. Whilst this response succeeded in effectively restoring ordinary interbank credit, it did not address the systemic issues raised by the crisis. Empirical evidence of price levels for durable goods, commodities, real estate, or corporate shares, as well as of monetary aggregates, does not point to a lack of liquidity as the proper explanation of the crisis. On the contrary, some key elements suggest an excess of liquidity that implied disruptive speculative waves, including overwhelming inflation of financial assets and real estate.Such a liquidity problem confronts policy-makers and theorists with two distinct issues already recognized by von Hayek and Keynes respectively: the distinction between money and investment can be weakened and eventually lost by modern financial practices; consequently, secondly, the proper relationship between the monetary and the economic dimension may be muddled by the evaporation of that critical distinction.Theoretically speaking, then, our problem with liquidity refers then to the proper understanding of money and of it role in economy and society. Our problem relates to the confusion between price and value that leads us to misconceive money as a “measure of value”. This confusion appears to survive from the classical economic English tradition which dominated the nineteenth century and the birth of the political economy. This paper will show that this peculiar understanding of money is inappropriate to the current financial and economic conditions, and does not properly capture the functioning of money in either financial or non-financial organizations