How Neoclassical Economics Developed Without a Theory of Money

Abstract

In 2008 the global financial system suffered a catastrophic collapse. The question ‘why did it happen?’ has rightly been foremost in the minds of many writers since but this paper seeks to approach the problem from a different angle. The dominant paradigm in economics was, and amazingly still is, neoclassical economics, however it failed to see the danger in the build-up of debt in western economies that ultimately led to collapse. The major question addressed in this paper is how could such a theory, which lacked a proper model of money and debt ever get to such a position of pre-eminence?The answer to this question starts with the understandable desire of economics in the 19th century to match the success of the natural sciences, in particular physics. From there, as economics developed it encountered difficulties modeling human behaviour in a robust mathematical way. Nonetheless such a flawed theory was successful as firstly, the ‘rentier’ class, who throughout the ages wished to escape the opprobrium they suffered at the hands of the economy’s debtor class, adopted it. More importantly, this relationship develops into the symbiotic relationship between neoclassical economics and neoliberal political theory, which we observe today.