Taking Money Seriously.

This book is a collection of articles written by David Laidler. The goal of the text, as Laidler notes in the Introduction, is to remind the readers of the importance of monetary theory and to prompt "some of them to explore further the implications of those ideas for monetary theory". The first several chapters focus on the rationale for holding money and emphasize money's role as a buffer stock. Any text with such an ambitious title must also respond to the implications of New Classical economics. Laidler also reviews the contributions of the New Classical revolution and proceeds to offer a number of criticisms of New Classical macroeconomics. A theme found throughout the text is the author's view of New Classical economics which, he argues, "despite its great theoretical clarity and rigour . . . is at best unhelpful, or at worst misleading, in empirical applications . . .". The final chapters focus on policy issues ranging from the role and implementation of monetary policy to the choice of an appropriate exchange rate regime.

The goal of chapter 1 is to explain why money should be taken seriously. The chapter begins with a brief summary of the development of monetary theory. Laidler then discusses the precautionary motive for holding money. This "overview" chapter also includes discussions about the modelling of agents' expectations and money's role as a substitute for costly information. One minor suggestion this reader had about the essay is that it would have been helpful to have included references to the work by Jo Anna Gray when discussing the effects of price level behavior on contract length and on the level of indexation.

In chapter 2, Laidler describes the notion of money as a 'buffer stock' of cash balances. This buffer stock is argued to mitigate the effects of surprises in markets and to serve as a substitute for information. To highlight the differences of the buffer stock approach, Laidler compares it to both the Keynesian and New Classical descriptions of the money market. His discussion of the disequilibrium nature of the buffer stock approach on pages 29-33 is excellent. While the majority of the chapter is devoted to the description of these competing views of the money market, the author concludes with a brief discussion of empirical characteristics of money demand.

The distinction between aggregate and individual money demand relationships presented in chapter 2 is also used in chapter 3 to discuss the costs of inflation. Despite the difficulty in assessing the costs of inflation, Laidler notes that "our inability to quantify such costs does not make them any the less real, or any the less worthy of discussion." The essay discusses the implications and costs of inflation, offers suggestions about future avenues of research and proposes several policies to reduce the costs of inflation (e.g. paying an "appropriate" interest rate on money).

Chapters 4 through 6 focus on the development of macro-money issues with particular emphasis placed on the contributions of New Classical economics and on the monetarist response to these contributions. Chapter 4 includes an excellent summary of recent economic events and developments in macroeconomics. While the author clearly describes the rationale, implications and gains from New Classical economics, the majority of the chapter actually describes his criticisms of the New Classical framework. For example, the severity of the 1980-82 recession is cited as evidence of the failure of the New Classical model. Laidler then notes that the New Classical response of the lack of Fed credibility to explain the recession's severity is possibly no different from assuming price stickiness in a Keynesian model. Despite the somewhat misleading title, the topics and insights offered in this essay are excellent.

Chapter 5 includes the only mathematically technical material in the text. Laidler demonstrates how the introduction of price stickiness to a New Classical framework can yield a plausible explanation of macro events. Specifically, fluctuations in the money stock will cause persistent deviations in output. Chapter 6, one of the strongest and most accessible essays, begins with an excellent summary of the development of macroeconomics since the construction of the Hicksian IS-LM framework through the New Classical revolution. This summary allows Laidler to provide a similar discussion about the development of monetary policy. The section on money as a public good is especially interesting. It is here where the author discusses the role that banks play in providing this public good. The potential benefits (measured in terms of price level stability) of a free banking system, concerns about bank failures and the role of the central bank are also discussed.

Chapter 7 focuses on the relationship between two key issues: (1) the stability of money demand; and (2) the implementation and goals of monetary policy. Laidler first presents three sources of unexplained instability that emerged during the 1970s. The author then discusses his concerns about the use of the quantity of money in circulation as a measure of the demand for money. The final section briefly summarizes the evolution of monetary policy since the nineteenth century. This section also offers suggestions about the implementation of monetary policy in light of, for example, the effects of institutional change on money demand.

The final three chapters examine international aspects of monetary policy. The first sections of chapter 8 explain the relative effectiveness of monetary and fiscal policy under fixed and flexible exchange rate regimes. Laidler follows this with an excellent discussion of the development of the international monetary system since the 1950s; his explanation of the collapse of Bretton Woods is especially clear. He then discusses the experience with floating exchange rates and offers several interesting comments about the possibility of international monetary reform. In chapter 9, Laidler first presents the case for a currency union. The objective of the essay, however, is to offer several aspects of a currency union that are "problematic." Laidler easily achieves this by discussing both the short and long-run economic factors and political constraints which would make a currency union difficult to sustain. The final essay addresses what Laidler calls the "two striking changes" of the 1970s: (1) the end of Bretton Woods; and (2) the beginning of fiscal deficits. Laidler discusses the effects/role of deficits in both the Ricardian Equivalence and Keynesian paradigms. Laidler's explanation of the effects of fiscal deficits during the post-Bretton Woods period allows him to address a variety of problems currently facing policy makers. Laidler notes that "the problem . . . is not how to design international economic order in order to curb domestic policies. Rather it is how to curb domestic policies in order to preserve international economic order." To achieve this, he proposes that the US electorate "must be persuaded to display more foresight and public-spiritedness than any other if the US is to be expected to put its fiscal house in order." No doubt, there are few economists who would disagree with Laidler. How one can achieve this goal in the current economic and political climate, however, is a monumental task.

Taking Money Seriously is an excellent collection of essays. The author has done a superb job of explaining difficult material in a logical and accessible fashion. The only criticism this reader had is the repetition of arguments and discussion found in a number of the essays. Nevertheless, this collection of essays offers the reader an excellent opportunity to review the development of monetary economics and the issues currently facing monetary policy makers.

1. That claim will be explored in some detail by Wolff and Stephen Resnick in my anthology on Evolutionary Concepts in Contemporary Economics (University of Michigan Press, 1993).

David W. Findlay Colby College