CLI213 | The money mechanism : Laws, Institutions, and Decisions

Mainstream economics has presented money as a sum of its attributes – a measure and store of value, that serves as an instrumentality of exchange. Within this narrative, the relationship between money and the value that it represents, as well as its relationship with prices, is assumed to be a function of the construct of pareto optimality. This narrow focus on money’s role in the market mechanism, obscures the role of the state. In common parlance, reference to money is not to private tokens of exchange; it is, instead, a reference to fiat money. The state holds the power to create this money and control its supply. Towards these ends, a constitutional, legal, and institutional framework is put in place – to facilitate as well as circumscribe the exercise of this power.

The manner in which the discourse around money is shaped has implications for the way in which the money mechanism is employed. A market-oriented perspective of money treats it at best as a macroeconomic tool, to be used in view of its relations with quantitative correlates such as aggregate demand and supply, and prices. On the other hand, heterodox literature on the emergence of money has emphasised money as a creation of the state for meeting public purposes.

No single convention – be it economics, law, or political theory – provides the necessary description or explanation. For this reason, a multi-disciplinary approach has been adopted in designing this course. Students who attend this course will gain a more comprehensive explanation of the money mechanism. The course will address the reasoning for both how (within the explanation of the mechanism) and why (the normative view) public money should be employed.

There are three modules in this course-

– Module 1: The fiat money mechanism

– Module 2: The legal and institutional framework governing monetary and fiscal decision-making

– Module 3: Criteria for evaluating decision-making by the monetary and fiscal authorities

A detailed description of the contents of each module is given below.