A Game Theoretic Approach to the Theory of Money and Financial Institutions
This is a sketch of a game theoretic and gaming approach to the development of an appropriate microeconomic theory of money and ﬁnancial institutions. The phrase “money and ﬁnancial institutions” is used to stress that a theory of money alone cannot be fruitfully constructed in an institutional vacuum. The monetary and ﬁnancial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society. This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade. The money measures provide a crude but serviceable basis for the accounting system which in turn, along with the codiﬁcation of commercial law and ﬁnancial regulation are the basis for economic evaluation and the measurement of trust and ﬁduciary responsibility among the economic agents. A central feature of a control mechanism is that it is designed to influence process. Dynamics is its natural domain. Equilibrium is not the prime concern, the ability to control the direction of motion is what counts. Bagehot (1962) noted that a ﬁnancial instrument originally designed for one purpose may take on a life of its own and serve a diﬀerent purpose. In particular most of the instruments may have been invented to facilitate trade but they provided a means for control. Money and ﬁnancial institutions provide the command and control system of a modern society. The study of the mechanism, how they are formed, how they are controlled and manipulated and how their influence is measured in terms of social, political, and economic purpose pose questions not in pure economics, not even in a narrow political economy, but in the broad compass of a political economy set in the context of society. A basic purpose of the approach adopted here is to show the minimal conditions which require that ﬁnancial institutions and instruments emerge as a necessary carriers of process. The thrust is for the development of a mathematical institutional economics.
Shubik, Martin, "A Game Theoretic Approach to the Theory of Money and Financial Institutions" (1986). Cowles Foundation Discussion Papers. 1048.