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1It is most welcome that, a decade after the Global Financial Crisis, Bruna Ingrao and Claudio Sardoni (2019) have provided an insightful historical and theoretical account of how macroeconomics and monetary economics since Wicksell and Fisher have analyzed, or in recent decades failed to analyze, the interactions of banks and financial markets with the real side of the economy. This important book sheds light on how economics came to a situation in which economists try to understand the real effects of banking and financial crises using models without banks or financial sectors, using Arrow-Debreu-McKenzie general equilibrium models with a transversality condition (all debts are eventually paid, so all budget constraints are binding) so that all private liabilities are as free of default risk as “money” [2] (hence Hahn’s problem of justifying existence of an equilibrium with positive holdings of fiat money) or explaining the holding of fiat money by using overlapping generations models that assume no other assets exist (see the comments of Tobin and Shubik in Kareken and Wallace, eds., 1980). The subtitle of the book is precise: the authors do not offer a history of modern macroeconomics, but rather a historical perspective on how the mainstream of modern macroeconomics came to neglect a rich heritage of theorizing about the macroeconomic importance of banking and finance. From Wicksell and Schumpeter through Keynes to Gurley and Shaw and to Tobin, the functioning or malfunctioning of the financial sector was central to what became known as macroeconomics in the 1930s and 1940s as monetary economics and business cycle analysis coalesced into a single domain of study. In recent decades, however, many influential macroeconomic models within the mainstream dynamic stochastic general equilibrium (DSGE) approach do not even have financial sectors. There was widespread agreement within macroeconomics when, just two years before the end of the Great Moderation and the onset of the Global Financial Crisis, Nobel laureate Robert Lucas averred that macroeconomists should focus on equilibrium modelling of long-run growth of potential output because fluctuations and crises were no longer a problem. The q-theory approach of Tobin and the “Yale school” to financial market equilibrium with many imperfectly substitutable assets and with real effects of monetary policy through asset prices (see Tobin 1980) was displaced within macroeconomics by DSGE models with continuously-clearing markets (apart from more or less arbitrary nominal frictions) and within finance by arbitrage among perfectly substitutable assets. The former concern with a malfunctioning financial sector was maintained, entirely outside the mainstream of macroeconomics and financial economics, by Hyman Minsky (1975, 1982, 1986), posthumously famous during the Global Financial Crisis. Like Tobin (1975, 1980), Minsky was strongly influenced by Keynes (1936, Chapter 19) on why money wage flexibility may be destabilizing and by Fisher’s debt-deflation theory of depression (1933).

2Part I “From the 1920s to the Early Post-War Period” in fact begins not in the 1920s but, quite appropriately, starts well before the 1920s with a chapter about Knut Wicksell and Irving Fisher on banks in the quantity theory of money beginning with Fisher’s Appreciation and Interest (1896) and Wicksell’s Interest and Prices (1898), two works which, as Bradford De Long (2000) stressed, mark the beginning of 20th century macroeconomics. Part I continues with a chapter about Joseph Schumpeter and Dennis Robertson on the role of money and banking in economic change, featuring especially Schumpeter (1911) and Robertson (1926), and a chapter on banks, debt and deflation in the Great Depression, with a central role for Fisher’s debt-deflation theory of depressions (Fisher 1933). Part I concludes with a chapter on banking in Keynes’s Treatise on Money (1930) and General Theory (1936), two great works with strikingly different views on the endogeneity or exogeneity of the money supply (endogenous in a manner bringing Wicksell to mind in the Treatise, but, perhaps as a simplifying assumption, largely taken as exogenous in The General Theory) and a chapter on the reception and criticism of Keynes’s General Theory.

3Part II runs (downhill?) “From the Neoclassical Synthesis to New Keynesian Economics.” The book provides a thorough, scholarly, theoretically-informed perspective on 20th century macroeconomics in which the interactions of the monetary and real sides of the economy are at the center of attention. Emphasis is placed on two traditions of analyzing the role of money and banks, one stemming from the extension of the quantity theory of money by Wicksell and Fisher, the other from Schumpeter and Robertson on the credit-creating role of banks in the dynamic process of change, and on the neglect in recent decades of what macroeconomics could learn from these two traditions. In Part II, a central message is that the New Classical project was not simply to provide macroeconomics with microeconomic foundations but to constrain macroeconomics to a very particular microeconomic foundation of rational agents in perfectly competitive, continuously-clearing markets. Because Part II is as much an argument in contemporary theory, polemicizing against the New Classical project, as an historical investigation, and so provides a decidedly unsympathetic reading of what the New Classical economists were trying to accomplish, readers should pair Part II with a combination polemic and history from the opposite perspective, Michel DeVroey’s History of Macroeconomics from Keynes to Lucas and Beyond (2016), which views the history of macroeconomics from Keynes to Lucas and Prescott as scientific progress establishing logically-consistent microeconomic foundations (even if doing so requires the very strong assumptions needed for existence of a single representative agent). Readers should also consult Roger Backhouse and Mauro Boinaovsky’s Transforming Modern Macroeconomics (2013) about how a Keynesian disequilibrium approach to macroeconomics, stemming from the work of Don Patinkin (1956), Robert Clower and Axel Leijohufvud and taken up by French and Belgian macroeconomists such as Jean-Pascal Benassy, Jacques Drèze and Edmond Malinvaud, lost out to equilibrium business cycle theory (first in Lucas’s monetary misperceptions version of New Classical economics, then in Kydland and Prescott’s Real Business Cycles) in competition for the attention of the mainstream of economics. Similarly, readers of those important books need to read Ingrao and Sardoni to appreciate the history of macroeconomic reasoning about a monetary economy.

4Beyond this general overview of Banks and Finance in Modern Macroeconomics as a major, and most valuable, contribution to understanding the evolution of 20th century macroeconomics, I would like to comment on a few specific topics related to my own areas of research, such as Fisher and Tobin.

5Ingrao and Sardoni (2019, p. 133–35) draw attention to Kalecki’s 1944 comment on Pigou (1943). Patinkin [(1956) 1965] held that the Pigou-Haberler real balance effect showed that unemployment equilibrium was possible only with a rigid money wage, because a sufficiently low money wage would increase the real value of money holdings by enough so that the wealth effect on consumption would increase demand to full-employment level, even in a liquidity trap. Kalecki (1944) showed that the real balance effect also applies to outside money, the small fraction of the money supply not backed by bank loans. John Maynard Keynes, in editorial correspondence about Kalecki’s comment, also stressed that, if people anticipate future tax liabilities to service government debt, the real balance effect also does not apply to government bonds, applying what would later be termed debt neutrality or Ricardian equivalence to the real balance effect rather than to the size of the multiplier for deficit-financed public spending (see Dimand 1991). As James Tobin (1975, 1980) and Hyman Minsky (1975) stressed, and long before them Keynes (1936, Chapter 19) and Fisher (1933), the contractionary effect of a falling price level could very well swamp the expansionary effect of a lower price level. The economy cannot get to lower prices and money wages without prices and money wages falling, so more rapid adjustment of prices and money wages makes instability more likely.

6On pages 127–29, Ingrao and Sardoni discuss Chester Arthur Phillips’s Bank Credit (1921) and, looking for intellectual influences on Phillips find that he cited Henry Dunning Macleod (writing half a century earlier) but did not know a book that L. Albert Hahn had published in German in 1920. It would seem more relevant to mention that Phillips (1921) was a Yale doctoral dissertation by a student of Irving Fisher, and that Phillips’s analysis of the expansion and contraction of bank deposits were extended and formalized in 1933 in the first volume of Econometrica by James Harvey Rogers, another Fisher doctoral student who had returned to Yale in 1930 as Fisher’s colleague (and presumably Fisher, founding president of the Econometric Society, encouraged his colleague and former student to join the society and contribute to the new journal). Intellectual filiation is neglected in some other cases – Joseph Schumpeter, Hyman Minsky and James Tobin all figure prominently in the book, without indication that Minsky and Tobin were Schumpeter’s doctoral students in the late 1940s (Minsky finished his thesis, after Schumpeter’s death, with Leontief, another of Tobin’s teachers). Pages 42–43 discuss Schumpeter’s unfinished treatise on money and banking (see Messori 1997) without mentioning that when Schumpeter died, Seymour Harris, editor of McGraw-Hill’s Economic Handbook series, commissioned Schumpeter’s former student Tobin to write the book, which after long delays (Tobin put the manuscript aside when he joined President Kennedy’s Council of Economic Advisers in 1961) became Tobin with Stephen Golub, Money, Credit and Capital (1998). For the connection between Tobin and Shiller on the efficiency of the financial system, see Robert Shiller’s interview of Tobin in Econometric Theory and David Colander’s interviews of Tobin and Shiller on the “Yale school” in Macroeconomic Dynamics (Shiller 1999, Colander 1999). Shiller’s critique of the efficient market hypothesis (1989, 2005) is discussed on pages 229–32 with one passing mention of an article by Tobin that also questioned efficiency of financial markets and cited Shiller. The interviews by Colander (1999) and Shiller (1999) indicate closer links between Tobin and Shiller in their views of financial markets.

7Ingrao and Sardoni (2019, Chapter 7) usefully emphasize the work of John Gurley and Edward Shaw (1955, 1960) on simultaneously considering all financial markets within a general equilibrium framework, with emphasis on conditions under which money will not be neutral, critiquing the rarefied set of assumptions for neutrality of money formulated by Don Patinkin (1956). I doubt, however, their claim that “Tobin’s richer vision of financial markets was largely inspired by the work of Gurley and Shaw.” I would place more weight on John Hicks’s “Suggestion for Simplifying the Theory of Money” (1935), often cited by Tobin (and noted by Ingrao and Sardoni 2019 as an inspiration for Tobin), and on the presence of Harry Markowitz (then finishing his Cowles Monograph on Portfolio Selection, (1959)) and Jacob Marschak as Tobin’s Cowles colleagues when he was writing “Liquidity Preference as Behavior Toward Risk” (Tobin 1958, see Marschak 1938, Markowitz 1952, Maes 1991). The discursive, informal presentation of Gurley and Shaw (1955) would not have made a deep impression on Tobin, then in the most mathematical stage of his career (the time of the Tobit estimator for limited dependent variables and his presidency of the Econometric Society), and Gurley and Shaw’s Money in a Theory of Finance (1960), with Alain Enthoven’s mathematical appendix, was published too late to shape Tobin’s vision of financial markets. The “Tobin manuscript” on money that became Tobin with Golub (1998), and from which Tobin (1958) was excerpted, was drafted in the late 1950s before Tobin joined the Council of Economic Advisers, and before Gurley and Shaw (1960). Tobin (1980, p. 34, 73, 74, 77, 80), for example, paid close attention to Hicks’s writings, but made no mention of Gurley and Shaw.

8I would strengthen one remark of Ingrao and Sardoni (2019, p. 168): not only had Tobin “read The General Theory since his university days,” but it was the first economics book he ever read, as an 18-year-old sophomore, before he had encountered even an economic principles textbook. As Tobin recalled, his tutor at Harvard “decided that for tutorial he and I, mainly I, should read ‘this new book from England. They say it may be important.’ So I plunged in, being too young and ignorant to know that I was too young and ignorant” to begin the study of economics by reading The General Theory (quoted in Dimand 2014, p. 10).

9The account on page 229 of the origins of the efficient market hypothesis should be supplemented with mention of Louis Bachelier (1900) and of Alfred Cowles and Holbrook Working in the 1930s, on all of whom see Paul Cootner, ed., The Random Character of Stock Market Prices (MIT Press, 1964).

10I must quibble with how Ingaro and Sardoni cite the writings of Irving Fisher, particularly their references to the 1922 revised second edition of Fisher’s The Purchasing Power of Money. Just as researchers use the Royal Economic Society editions of Keynes (edited by Donald Moggridge and Elizabeth Johnson) and Ricardo (edited by Piero Sraffa with Maurice Dobb), so William Barber’s 14 volume 1997 edition of The Works of Irving Fisher, combining articles, books and correspondence, is indispensable. As to the 1922 second edition of The Purchasing Power of Money, I would emphasize that there was no 1922 second edition of that book (which was a coauthored book, by Irving Fisher with Harry G. Brown, Fisher’s student and junior colleague). In 1913 Fisher added a new preface and concluding chapter to an otherwise unrevised reprint of the 1911 edition, explaining in the new preface that, were it not for the prohibitive cost of resetting the printing plates, he would have wished to make changes to respond to reviews by Minnie Throop England and J. M. Keynes. Augustus M. Kelley happened to use a 1922 reprint, with the date on the title page, for the reissue in Reprints of Economic Classics.

11These few quibbles are minor. Banks and Finance in Modern Macroeconomics is a valuable study of how macroeconomics, by losing touch with its past traditions, came to be ill-prepared for the Global Financial Crisis.


  • [1]
    Brock University.
  • [2]
    See Charles Goodhart (2005-2006), and other writings by Goodhart, on how models with the transversality condition are necessarily unable to analyze the role of money.


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Robert W. Dimand [1]
  • [1]
    Brock University.
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