Integration of Market Exchange and Money Circulation

Gang Gong*

March, 1995

I want to thank Edward Nell, David Colander, John Eatwell and Thomas Palley for their comments and suggestions on the early draft of paper.

Integration of Market Exchange and Money Circulation

Abstract: Money as a medium of exchange is circulated along with market exchanges. The process of market exchanges can be viewed as a sequence of trades with the starting point to be an autonomous demand. Money in this process is naturally integrated with the proceeding of market exchanges. Its circulation is now closed, continuous and dynamics. This further provides some implications to post Keynesian macroeconomics.

Much study on monetary economics follows the Walras-Hicks-Patinkin tradition to treat money as a stock. Typically, the demand-supply principle is used to determine the money stock equilibrium along with the commodity equilibrium. However, money as a medium of exchange is also a flow. It is circulated among different agents. In economics literature, there is also a circulation approach that follows Wicksell's tradition to study the macroeconomic operation based on the circulation of money.[1] Wicksell's tradition does not provide much micro-insides of money circulation. Money as a medium of exchange is circulated along with the proceeding of market exchanges, and therefore the study on money circulation should be integrated with the study on the trading process. Without concerning its macroeconomic implication, attempts, with vary degree of success, have also been made to formalize the money circulation along with a trading process. Such a tradition follows the pioneer works by Ostroy (1973) and Ostroy and Starr (1974). The trading is supposed to be decentralized, sequential and executed in pairs. Recently, Diamond's "search process" (Diamond 1982, 1984) is often used to formalize this idea.[2] This paper presents my own contribution to