The Monetary Economy and the Economic Crisis*

David Laidler
Publication Number: 

The monetary economy has properties that cannot be analyzed using the tools of today's dynamic 

general equilibrium analysis. Keynes's economics, far from being an aberration in the otherwise 

orderly evolution of modern macroeconomics from Adam Smith's ideas about the "invisible 

hand", was a major contribution to an ongoing tradition in monetary theory in whose creation 

Smith himself had played a part. Retrospective consideration of this tradition suggests that the 

property of the monetary economy critical to the generation of economic crises and the 

stagnation that follows them is its capacity to permit trading at "false" prices, a phenomenon 

ruled out by assumption in dynamic general equilibrium models. Not only Keynes's explanation 

of depression but also Hayek and Robertson's analysis of the role of unsustainable forced saving 

in the boom can be thought of as relying on this factor.