History of Economic Analysis

"Schumpeter doesn’t boil down and simplify; he multiplies and complexifies. Schumpeter has seemingly read everyone from the 17th century through to the 1930s (though Innes is a conspicuous exception). The History of Economic Analysis is actually a 1,100 page book on the entire history of economic thought, but I’ve put it on this list because there are about 150 pages in it on money that I think are invaluable. I think Schumpeter gives us the best history of theories of money, because he shows history’s diversity . Reading Schumpeter you can see how complicated the debates are, how many different voices there were in the debates, and you can find strands that have been lost. For me he’s also a crucial figure because he undermines the simplistic dichotomy that you sometimes get in Ingham, or in the modern money theorists, who want to say that there’s the commodity theory, and it’s wrong and then there’s our state theory and it’s right. Schumpeter was actually trying to do something that wasn’t compatible with either. Another person doing this interview might have given you a list with Georg Knapp’s book from 1905, The State Theory of Money, a crucial resource for both MMT and Ingham. Knapp articulates the basic notion that money is what the state declares it to be. The sovereign state says, ‘we declare this to be money’ and henceforth money exists and has value, on the basis of that declaration. Knapp invented the term chartalism , from the Latin charta (token), and you see his basic ideas all the time today. Whenever someone refers to the state ‘printing money’ they are implicitly invoking Knapp and the state theory. But even the idea that money has value because we ‘all agree’ that it has value, or money is a ‘collective leap of faith’—all of these ideas can be traced back to state theory. Ingham takes the state theory from Knapp and merges it with the credit theory from Innes to create a Keynesian blend. I think Schumpeter is so important because he shows us that these two strands should not, cannot be blended. Schumpeter rejects commodity theory and state theory at the same time. Schumpeter thinks money is a token or ticket, but refuses the idea that the state creates it. Schumpeter rejects the state theory and develops an incisive critique of Knapp. I think Schumpeter’s critique poses an enormous challenge to MMT, and that he offers a powerful critique to Ingham. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Schumpeter agrees that money is a token of credit created endogenously by commercial banks. But for him, that is not at all the same as the state determining money, in a top-down way by, declaring that this is what money is and what it’s worth. I find Schumpeter’s critical arguments here to be historically accurate and to offer us potential building blocks for a better theory of money (one I myself try to build). Beyond this, Schumpeter helps us to avoid overly simplistic accounts of money. There are some political accounts of money today from both from the left and the right, that take the state theory and basically say, ‘Well, the state completely controls money,’ and then in a kind of crude Marxist way add, ‘if we just take over the power of the state, we’ll have the Fed do what we want, we’ll have a central bank do what we want, and all of our problems will be solved.’ And Schumpeter gives us a more sophisticated economic analysis of how that works, which is why he’s on the list for me. There’s some real lost value in Schumpeter, some arguments there that have disappeared. And my one quibble with Ingham is that he folds Schumpeter into his own account—he puts Schumpeter on Ingham’s side when Schumpeter himself so starkly rejected state theory."