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Hentschel, N. The Microfoundations of Monetary Theory. Credit and Capital Markets – Kredit und Kapital, 9(1), 70-100.
Hentschel, Norbert "The Microfoundations of Monetary Theory" Credit and Capital Markets – Kredit und Kapital 9.1, 1976, 70-100.
Hentschel, Norbert (1976): The Microfoundations of Monetary Theory, in: Credit and Capital Markets – Kredit und Kapital, vol. 9, iss. 1, 70-100, [online]


The Microfoundations of Monetary Theory

Hentschel, Norbert

Credit and Capital Markets – Kredit und Kapital, Vol. 9 (1976), Iss. 1 : pp. 70–100

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Hentschel, Norbert


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The Microfoundations of Monetary Theory

Following an initial brief mention of some fundamental problems of microeconomic monetary theory in the introduction, it is shown how rudimentary equilibrium models of the Arrow-Debreu type are from the viewpoint of transaction theory. Traditional equilibrium theory does not explain why there are objects in the real national income which perform the function of a medium of exchange. Consequently it also fails to explain why just a few goods are used as dominant media of exchange. Furthermore, it is completely unclear how the economic interaction of individuals is coped with in the transformation from the initial to the equilibrium allocation. The theory proceeds implicitly from the assumption that this process is of a decentralized nature as far as information is concerned, but only at the cost of assuming a non-specified perfect exchange organization, with the result that all information and co-ordination problems deriving from the interdependence of individual exchange activities are eliminated by definition. Traditional equilibrium theory further fails to explain why individuals can acquire a positive amount of a “useful” good with a unit of a good having no inherent value (paper money). The function of money as a general medium of exchange is not sufficiently well grounded in the model structure. Moreover, since the same equilibrium allocation ıs attainable both with and without the help of intermediate transactions, the idea suggests itself of regarding all positive intermediate transactions as functionless. Lastly, the theory gives no answer to the question why the exchange organization observed in reality came into being, because in this approach exchange is not conceived as an economic activity that requires resources, that is to say, there is no choice between different exchange organizations (transaction technologies). Starting out from these deliberations, this essay discusses approaches which set out to modify the initial model, which is unsatisfactory from the standpoint of transaction theory. By allowing for transaction costs, exchange can be conceived as an economic activity ın which the choice between various modes of exchange becomes an economically relevant decision-making problem. Transaction costs can be taken into account by the following alternative procedures: On the one hand, every individual can be assigned the dual function of consumption and exchange; on the other hand, however, the two economic activities of consumption and exchange can be isolated from each other for analysıs, drawing a distinction between a household sector comprising households only and a sector consisting solely of exchange intermediaries. However, this approach seems to afford few possibilities of advancing very far beyond the initial model in the matter of the use of media of exchange. The groundwork for this is provided by another approach in which (neglecting transaction costs) the function of money as a medium of exchange can be well founded and explained in the model by the conception of exchange as bilateral interaction.