Chapter 3 of Colin Rogers’ Money, Interest and Capital (1989) deals with neo-Walrasian general equilibrium theory and the role of money in that theory.
Such general equilibrium models do not take the value of capital as a given quantity, but as an array of quantities (Rogers 1989: 45).
Neo-Walrasian models reduce to ones of perfect barter in which perfect knowledge, tâtonnement and recontracting are assumed to coordinate all economic activity before trade commences (Rogers 1989: 46).
Money as a unit of account is added without disrupting or changing any of the perfect barter conditions (Rogers 1989: 46). That is, money is an inessential addition to a real model in which perfect barter is assumed (Rogers 1989: 46).
An economic model that treats money as an unnecessary addition does not adequately describe real world monetary capitalist economies, especially the problems of a modern economy with a credit and banking system (Rogers 1989: 47).
The most sophisticated neo-Walrasian model is that of Arrow-Debreu, which abolishes any problems that arise in the real world from uncertainty or shifting expectations; the Arrow-Debreu model also collapses the future into the present (Rogers 1989: 48).
Alternatively, neo-Walrasian temporary equilibrium models relax the Arrow-Debreu assumption of a complete set of futures markets for all time-dated commodities, but still face the problem of expectations (Rogers 1989: 48–49).
The solution that was adopted by many neoclassical models was the Rational Expectation hypothesis, which assumes that agents correctly predict on average the equilibrium prices of the future (Rogers 1989: 49).
Thus neo-Walrasian temporary equilibrium models are functionally equivalent to Arrow-Debreu models, and once again reduce to models where money is an inessential addition (Rogers 1989: 49).
Rogers considers the neo-Walrasian equilibrium model of Hahn (1982), in order to compare it with Wicksellian monetary theory. In Hahn’s model, equilibrium does not generate an equality of interest rates between the two commodities produced in the model (Rogers 1989: 53). The peculiar feature of the neo-Walrasian interest rate theory is that it does distinguish profit from interest (Rogers 1989: 58).
In short, all neo-Walrasian models must be rejected as irrelevant to real world economies because they ultimately have no real role for money (Rogers 1989: 67).
Hahn, Frank. 1982. “The Neo-Ricardians,” Cambridge Journal of Economics 6.4: 353–374.
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.