Three Essays on the Theory of Money and Financial Institutions Essay 2: The Exchange Economy, Money, and Markets

This essay is the second of three. The first is nontechnical and in part autobiographical describing the evolution of my approach to developing a micro economic theory of money and financial institutions. This essay is devoted to a mathematical sketch of a closed economic exchange system with general equilibrium GE and rational expectations RE viewed game theoretically. It squeezes the last drop out of statics and an illusory dynamics in the form of the RE extension of GE with no other externalities beyond money and markets. The third essay builds on process models adding uncertainty,innovation, an active government, nonsymmetric information and other externaties that all lead away from a static equilibrium model to an evolving entity where competition involving finance and innovation is part of a dynamic non-equilibrium process.