The role of money in the economy
Supplement Rosa Luxemburg Foundation
Full text at Rosa Luxemburg Foundation
Generations of economists have argued over whether money has any (long-term) impact on economic production. It may seem like an odd debate to outsiders. Do we not all know that “money makes the world go round”?
Nevertheless, although central banks nowadays mainly agree that money affects our economy (at least in the short run), most standard economic textbooks feature models without banks and money. Let us briefly revisit this controversy over money. It is a central dividing line between different economic theories. Hence, it may be helpful to better understand why, as argued in the study When Finance Meets Big Data: Financial Technology and the Scramble for Africa, credit and money is central to investment and economic production.
Why does this matter for understanding debates around financial technology (FinTech)? Because, as that study shows, most of the money we use for our daily transactions is bank money or just numbers on computers.
Banks command the bulk of the money creation power in society, and most of the things FinTech firms do is shifting bank money from A to B without “disrupting” anything but rather just building a data-driven business model upon banks.
Moreover, credit money is central to the dynamics of capital accumulation, technological progress, and high growth rates witnessed during the expansion of modern capitalism. However, as capitalism itself it can equally be a destructive force. It may feed bubbles and financial crises, trigger debt crises, or fund environmentally harmful economic activities. Hence, the crucial question for shifting economic policy is how to better target credit towards socially desired activities.
This material is intended to provide complementary theoretical background to those interested in money.