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Bruna Ingrao and Claudio Sardoni, Banks and Finance in Modern Macroeconomics, A Historical Perspective

Perry Mehrling
p. 415-417
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Bruna Ingrao and Claudio Sardoni, Banks and Finance in Modern Macroeconomics, A Historical Perspective, Cheltenham: Edward Elgar, 2019, 296 pages, ISBN 978-178643152-3

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Crédits : Edward Elgar

1Responding to the global financial crisis of 2007-2008, this book plumbs the history of economic thought for resources that can help us understand the relations between the financial and the real sectors of the economy. Such an investigation is made necessary, in the view of the authors, by the fact that mainstream macroeconomics has “almost completely ignored, or amply downplayed” these relations, a fact that itself calls for historical investigation and explanation. Why did the robust discussion of the 1930s about how best to integrate monetary theory and value theory die out, leaving macroeconomists intellectually disarmed in the face of the rise of global finance?

2According to Ingrao and Sardoni, Keynes and the Keynesians are responsible for this. Keynes got the ball rolling in the General Theory by shifting attention from banks to money demand, and from the dynamic method of his earlier Treatise on Money to the equilibrium method. Postwar Keynesians finished the job by constructing the so-called Neoclassical Synthesis. The monetarist counterrevolution was of no help, and eventually (as Frank Hahn repeatedly warned) the inherent logic of the Walrasian equilibrium frame pushed money out of the picture entirely. And that’s where we are today: DSGE triumphant.

3In my reading, the key section of the book is “The Evolving View of the Nature of Banking” (127-131) where the authors highlight the key role played by Chester A. Phillips in his book Bank Credit (1920), that urged the shift from the “old view” to the “new view” of banking, and the key role played by Paul Samuelson in endorsing and popularizing Phillips, starting with his 1948 textbook. This is the origin of the treatment of banking in the postwar neoclassical synthesis. The valiant attempt by Gurley and Shaw, in their Money in a Theory of Finance (1960), to urge for a broader view gained some traction with the work of James Tobin, but ultimately failed to reverse the tide. A similar fate met subsequent interventions by Hyman Minsky and Charles Kindleberger.

4Why does the disappearance of banks from economic theory matter?

5The “old view” of banking emphasized the degree of freedom in the system that comes from that most basic of all banking operations: a swap of IOUs (IOU standing for “I Owe You”), the bank’s IOU being an immediate means of payment and its counterpart’s IOU being a promise to deliver means of payment at some future date. In effect, this operation increases the supply of money to meet the demand for finance. The old view thus emphasized the elasticity of credit in the payments system. Banking could be a force for the better, for example by providing purchasing power to entrepreneurs with positive Net Present Value projects, thus giving them the green light today by expanding credit (as Schumpeter emphasized). But it could also be a force for the worse, giving the green light instead to mere speculations that never pan out, sowing the seeds of eventual financial crisis. The art of banking is all about using this degree of freedom with wisdom.

6By contrast, the “new view” emphasized the clearing constraint that individual banks face, particularly so when creating deposits that are likely going to be transferred to someone with an account at some other bank, hence an outflow of reserves. In effect, this view highlights the constraint that comes from portfolio equilibrium, the discipline of reserves in the funding system, and the role of asset prices as the key equilibrating factor. Ex post, after the clearing, all assets must be willingly held by wealth holders. Specifically, money demand must equal money supply. Thus, if money demand doesn’t change, then neither can money supply, and banks are conceptualized as mere intermediaries.

7Apparently, the reason for the shift from one view to the other—elasticity to discipline and payments to funding—was the rise to dominance of Walrasian general equilibrium as the frame used by economists to think about these matters. An equilibrium frame leads inevitably to a focus on funding. Indeed, once one adopts an equilibrium frame, it is hardly possible even to see payments.

8The failure of macroeconomics to deal adequately with banking, and the financial sector more generally, did not go unnoticed. Leading figures, not just Hahn but also Kenneth Arrow and Robert Lucas, repeatedly bemoaned the hiatus. Eventually, something had to be done, and this explains the proliferation of papers that, starting in the late 1980s, proposed various ways of bringing in financial factors. But essentially, all of this work still takes the non-monetary DSGE model as its central frame, and just adds some imperfection or frictions. Ingrao and Sardoni call for a more fundamental treatment.

9In the old view of banking, banks were active players, choosing when and where to expand their balance sheet, and thus directing the course of economic activity. In today’s real world, that role is arguably even more relevant than it was in the 1930s—but it is nowhere to be found in economic theory. For modern concerns, it is the older authors—Wicksell and Fisher, Schumpeter and Robertson—that are the best resources. But Ingrao and Sardoni want more than that. They call for nothing less than a revival of the tradition of classical political economy, specifically Marx, Schumpeter, and Hayek (246). These are authors from a tradition that that highlights the role of “large firms that directly affect prices and control markets”. This is in contrast with the passive role which they play in Walrasian general equilibrium theory, where they take prices as given by the auctioneer.

10As an account of what happened in the history of economic thought, this book is largely unobjectionable—with the possible caveat that Tobin does not strike me as “at the margins of the mainstream” given his enormous impact on macroeconometric models that were actually used by central banks. However, one is left without much sense of exactly why all of this happened. Can it really be the case that the modelling decisions of Keynes, in one single book, shifted all of economics on the wrong track? For me, the book was interesting mainly for its account of a familiar history from an unfamiliar point of view, viz. the point of view of classical political economy. As such, its main contribution may be to provide an introduction to banking and finance for students of classical political economy.

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Phillips, Chester A. 1920. Bank Credit: A Study of the Principles and Factors Underlying Advances Made by Banks to Borrowers. London: Macmillan.

Gurley, John G. and Edward S. Shaw. 1960. Money in a Theory of Finance. Washington: Brookings Institution.

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Perry Mehrling, « Bruna Ingrao and Claudio Sardoni, Banks and Finance in Modern Macroeconomics, A Historical Perspective », Œconomia, 9-2 | 2019, 415-417.

Référence électronique

Perry Mehrling, « Bruna Ingrao and Claudio Sardoni, Banks and Finance in Modern Macroeconomics, A Historical Perspective », Œconomia [En ligne], 9-2 | 2019, mis en ligne le 01 juin 2019, consulté le 18 novembre 2019. URL :

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Perry Mehrling

Boston University,

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