On Pasinetti’s “separation theorem” applied to money

In his 2007 book Keynes and the Cambridge Keynesians. A ‘Revolution in Economics’ to be Accomplished, Luigi Pasinetti advocates a “separation theorem” which distinguishes between the “natural” level of “pure theory” and the “institutional” level of the study of “actual economies”. He mentions money as an area of analysis where some aspects are to be dealt with at both levels. The aim of the paper is at discussing how this “separation theorem” may apply to money. It is shown that, in Pasinetti’s model of a monetary “pure labour production economy”: 1) The number of “degrees of freedom” is actually two, not three as claimed in the book – a point acknowledged by Pasinetti in private correspondence; 2) The deleted degree of freedom reflects the absence of the medium of exchange function of money; 3) This absence may be remedied by reinterpreting the two degrees of freedom in the terms offered by Ricardo’s theory of money; and 4) This interpretation preserves Pasinetti’s analysis of debt and credit relations as part of a “natural distribution of income” and gives a consistent basis to the application of the “separation theorem” to money. An additional import of the paper is that it draws on a hitherto unpublished private correspondence on this matter with Luigi Pasinetti in 2012.