Introduction: The Monetary Theory of Production

Abstract

On 10 October 1932 Keynes resumed the Michaelmas term at King’s College in Cambridge with a new title for his lectures; namely, The Monetary Theory of Production’. At around that time, Keynes used the same title for a contribution to a Festschrift for Arthur Spiethoff (Keynes, 1933). In this short paper Keynes discusses the difference between a real-exchange economy and a monetary economy, the distinction being that in the latter, but not in the former, money plays an essential role in the determination of the aggregate level of output and employment. According to Keynes, the lack of understanding of this non-neutral role of money is at the root of many problems in economics. In particular, the failure of the economic discipline to provide satisfactory explanations and solutions to real world problems, such as economic crises, is due to the lack of a theory for a monetary economy; what Keynes termed a monetary theory of production (MTP):

In my opinion the main reason why the problem of crises is unsolved, or at any rate why this theory is so unsatisfactory, is to be found in the lack of what might be termed a monetary theory of production. The distinction which is normally made between a barter economy and a monetary economy depends upon the employment of money as a convenient means of effecting exchanges — as an instrument of great convenience, but transitory and neutral in its effect. It is regarded as a mere link between cloth and wheat… It is not supposed to affect the essential nature of the transaction from being, in the minds of those making it, one between real things, or to modify the motives and decision of the parties to it. Money, that is to say, is employed, but is treated as being in some sense neutral… That, however, is not the distinction which I have in mind when I say that we lack a monetary theory of production. An economy, which uses money but uses it merely as a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions, might be called — for want of a better name — a real exchange economy. The theory which I desiderate would deal, in contradistinction to this, with an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy. (Keynes 1933, pp. 408–9; italics in original)

Giuseppe Fontana, Riccardo Realfonzo

The Tradition of the Monetary Theory of Production

Frontmatter

1. Macroeconomic Analysis and Individual Economic Rationality: Some Lessons from Wicksell, von Mises and Schumpeter

Abstract

The purpose of this contribution is to investigate the problem of the room attributed to individual economic rationality by circulation approaches. The expression ‘circulation approaches’ here refers to an analytical framework in which income distribution, production and exchange activities cannot be simultaneously implemented on interdependent markets but are organized according to a given logical and chronological order which implies the preeminence of the production of commodities and of the existence of the means of payment that permit the circulation of these commodities (Arena, 1985, p. 47; see also Deleplace and Nell, 1996). Our investigation will not privilege however the modern versions of these approaches (see Graziani 2003a, ch.1). We will instead utilise the works of some economists of the past, namely, Knut Wicksell, Josef Schumpeter and Ludwig von Mises. The reason of the choice of these three authors is that their respective contributions to economic analysis belong to what Leijonhufvud called the ‘Wicksell Connection theories’ (Leijonhufvud, 1981, p. 132). In this context, Schumpeter’s and von Mises’s theories of money and economic progress appear to be two possible extensions of Wicksell’s original work. Our view is that, by contrast with Wicksell’s economic theory, they both give an essential role to individual economic rationality.

Richard Arena, Agnès Festré

2. Monetary Economics after Wicksell: Alternative Perspectives within the Theory of the Monetary Circuit

Abstract

Augusto Graziani’s main theoretical contribution has been the development of the theory of the monetary circuit. This contemporary approach has its roots in the monetary heterodoxy of the end of the nineteenth century and the first thirty years of the twentieth century. Graziani’s theoretical enterprise has never divorced positive contributions to economic thought from an appraisal of past theories and authors. His position is highly original. Usually, two conflicting visions are held. The first move backwards from modern theories to older antecedents, on the assumption that the former are a progress relative to the latter because either they have overcome prior errors or encapsulated the partial truth sedimented by past developments. It is a continuist view. The second is a discontinuist view, stressing paradigm shifts, advancing no pretence that formal refinements mean that the older views are wrong or outdated. The door is then open to conflict among different viewpoints in contemporary theorising.

Riccardo Bellofiore

3. Lost and Found: Some History of Endogenous Money in the Twentieth Century

Abstract

This chapter started in an airport waiting room. I happened on Tim Congdon, and we talked about Keynes’s monetary theory while we waited for our flight. The conversation brought into sharp focus an idea that had been festering in the back of my mind for some little time: that I had been brought up to take the endogenous generation of money (deposits) by banks for granted; why was it necessary for the modern theory of endogenous money to re-invent the concept? But Tim had been given a very different understanding. An informal survey of other economist friends of roughly his age (currently (2003) around the age of fifty), showed a pretty uniform experience of having been taught that ‘the central bank provides money and the banks multiply it’, as Roger Backhouse (in conversation) succinctly characterised the money-base theory of the money supply. Clearly something had happened somewhere between the time of my under- and post-graduate education in the late 1950s-early 60s to theirs some 15 years later.

Victoria Chick

4. Alternative Theories of the Rate of Interest: A Reconsideration

Abstract

The view of money as a special good was so deeply burnt into economic thought after neoclassical theory had stormed the universities of the Western world for forty years that, in 1911, a trailblazer like Joseph Schumpeter was required to inform a learned public that the entrepreneur, ‘before he requires any goods whatsoever, he requires… money, and which is not based upon goods already produced’ (1911, pp. 102 and 112).

Gunnar Heinsohn, Otto Steiger

5. An Inquiry into a Dark Mystery in the History of the Monetary Theory of Production: What Went Wrong with the Early Contribution of Joan Robinson

Abstract

In their introduction to the book in honour of Augusto Graziani, Arena and Salvadori (2004) emphasise his paramount contribution to the rehabilitation of history of economic thought. For too many years since the advent of so-called ‘mainstream-orthodox economics’, studying great economists of the past (before the advent) has been jeopardised by two interwined commitments. On one hand, it is scorned by mainstreamers because it is a waste of time to be interested in pre-scientific writers. They could only be saved if it could be proven that there are some neoclassical roots helping their reinterpretation within the framework of some standard model. On the other hand, it has been progressively turned into a pure historical field of research without any impact on the building of a positive alternate scientific programme that is to be substituted for the mainstream economics. History of economic thought has become the ‘refuge’ for dissenters who disagree with orthodoxy but, for whatever reason, believe that conceiving a true general theory, free from the methodological and ideological somewhat hidden postulates of mainstreamers, is beyond the possibility of the human mind. From both those perspectives, the search for a genuine precursor of contemporary Monetary Theory of Production (MTP) would be a vain or academic exercise. Both are denied by Graziani’s (2003) specific interpretation of the history of economic thought.

Alain Parguez

6. Some Reflections on Changes in Keynes’s Analysis between the Treatise and the General Theory

Abstract

This chapter explores some of the differences in the treatment of money and interest rates by Keynes in A Treatise on Money (hereafter TM) (Keynes, 1930) and in The General Theory of Employment, Interest and Money (hereafter GT) (Keynes, 1936). The analysis of money is much more extensive in TM than in GT, and it could be argued that the treatment of money in GT is relatively brief (e.g. it does not discuss banks in any detail) because it was not necessary to repeat the lengthier treatment of TM (and Keynes assumed his readers knew TM).

Malcolm Sawyer

Stocks and Flows in the Monetary Circuit

Frontmatter

7. Single-Period Analysis: Financial Markets, Firms’ Failures and Closure of the Monetary Circuit

Abstract

The seminal contributions of Augusto Graziani (1982; 1984) to the monetary theory of production make it clear that the realisation of monetary gross profits of firms at the macroeconomic level represents the most intricate and awkward puzzle in the circuit approach. The analytical reason for this puzzle is simple: assuming a single macro period, isolated from those that precede and follow it, and a private pure credit economy, closed to foreign exchanges, the quantity of means of payment introduced into the economy at the beginning of the period coincides with the total debt of firms and with the wage bill; hence the total monetary revenues realised by the set of firms at the closure of the period will at most be equal to their initial debt and cannot account either for the existence of monetary profits or for the monetary payment of bank interest.¹

Marcello Messori, Alberto Zazzaro

8. The Existence of Monetary Profits within the Monetary Circuit

Abstract

The many writings of Augusto Graziani have had a large influence on a generation of younger economists who have taken his writings to heart. In my own case, I have been seduced by many of his ideas on the monetary circuit including his perceptive analysis of initial and final finance. In this chapter, I would like to turn to a topic that has raised considerable debate and on which Professor Graziani had much to contribute.

Louis-Philippe Rochon

9. Central Banking in a Monetary Theory of Production: The Economics of Payment Finality from a Circular-Flow Perspective

Abstract

Payment finality — that is, ‘the discharge of an obligation by a transfer of funds and a transfer of securities that have become irrevocable and unconditional’ (Committee on Payment and Settlement Systems, 2003a, p. 496) — is crucial for the orderly working of modern economic systems. As a matter of fact, monetary transactions are the backbone of production and exchange, national as well as international. Payments equivalent to a country’s annual GDP are presently made over a few working days within any national economy. The large volume and scope of payments at the time of writing imply that problems in their settlement could affect the financial sector and even the economy as a whole. Further, the implementation and transmission mechanism of a central bank’s monetary policy also depends on the smooth functioning of domestic payment systems, and hence the issue of payment finality is of both private and public concern.

Sergio Rossi

The Monetary Circuit and Unemployment

Frontmatter

10. Bank Mergers, Monopoly Power and Unemployment: A Monetary Circuit Approach

Abstract

In the present macroeconomic debate there is widespread agreement between neoclassical scholars and supporters of the standard Keynesian theory concerning the following points:

(a)

money supply is exogenous (depending on the autonomous decisions of the central banks);

(b)

money can be significant only where it is required for keeping a stock of liquid wealth;

(c)

income distribution reflects the marginal productivity of inputs.

Guglielmo Forges Davanzati, Riccardo Realfonzo

11. Circuit Theory and the Employment Issue

Abstract

The circuit is a time-honoured concept in economics. It can be traced back to the Physiocrats of eighteenth-century France, who viewed production as a circular process initiated by advances, that is, capital expenditures which are recouped when goods are produced and then sold. Ever since then, however, this conception, without being explicitly discarded, has been left on the sidelines. For instance, Schumpeter, Keynes, Kalecki and J. Robinson, to mention twentieth-century economists only, undoubtedly made allowance for the circuit but did not give it prominence.¹ In fact, the idea of making use of this conception as a research tool remained largely dormant until the late 1960s in France and Italy, when J. Le Bourva (1962), B. Schmitt (1966, 1984), A. Parguez (1975), A. Barrère (1979) and A. Graziani (1990, 2003) undertook to revive it. This undertaking has been largely inspired by Keynes’s work and, just like the Anglo-Saxon Post Keynesians, circuitists have sought to set Keynes’s heterodoxy opposite the neoclassical synthesis.

Claude Gnos

Money, Inflation and Distribution

Frontmatter

12. Non-Credit Money to Fight Poverty

Abstract

While finance plays an important role in supporting economic growth, financial institutions have a limited reach in low income countries. This is because underdeveloped financial infrastructures, inadequate collateral, weak contract enforcement, and low participation in payments systems expose banks to high liquidity and credit risks. Circuit analysis shows how banks enable a monetary production economy to function and grow by creating and allocating money through lending to support demand and production. When lending is hindered by structural impediments, economic growth is constrained.

Biagio Bossone, Abdourahmane Saw

13. Towards a Non-Conventional Circuit Approach: Credit, Microcredit and Property Rights

Abstract

In the circuit approach, as developed by Augusto Graziani (1980, 1988, 1996, 2004), credit plays a fundamental role, as firms open up the monetary circuit by buying the services of labour, in exchange for the money which they receive as credit from the banking system. Graziani’s approach assumes that the banking sector adopts conventional principles, thus ensuring that some agents have privileged access to credit, while others undergo severe ‘credit rationing’.

Lilia Costabile

14. Monetary Theory of Production and Disequilibrium Inflation

Abstract

Present-day studies of inflation concentrate largely on price-rise inflation, which is measured by comparing changes in the general level of prices from one period to another. Monetarists and Keynesians are the main protagonists in this domain.

Elie Sadigh

Monetary Circulation and Economic Policy

Frontmatter

15. What is Wrong with the Euro Area Monetary Model?

Abstract

The creation of the euro has also created a euro area of countries with a single currency and a single monetary policy, but with no other euro area level macroeconomic policies. The fiscal policies of the national governments are supposedly constrained by the Stability and Growth Pact (SGP), which places an upper limit of 3 per cent of GDP on government deficits and a balance or small surplus on the government budget over the course of the business cycle. In this chapter, we argue that the monetary policy of the euro area is firmly based on what has been termed the ‘new consensus’ in macroeconomics (NCM). This new consensus stands in contrast with the monetary theory of production (and Graziani’s many contributions, including Graziani, 1994, 2003), where ‘understanding of the workings of an economic system can only be acquired if the economy is analysed from the outset as a monetary economy’ (Graziani, 1989, p. 1). Three of the key features of the NCM-based euro-area monetary model involve the classical dichotomy, the neutrality of money and the relevance of Say’s Law: and clearly each of those features is rejected by the monetary theory of production.

Philip Arestis, Malcolm Sawyer

16. Circulation Approach and Applied Economics: Monetary Duality in Cuba

Abstract

This chapter is an exercise in applied economics, concentrating on circular flows. It is trivial to mention that the monetary theory of production is centrally concerned with the analysis of circular flows in a market economy. By contrast with the mainstream approach, which understands such an economy exclusively in terms of real supply and demand, the circulation approach focuses on the monetary flows generated by economic activity. My contention is that circular flows are not simply one of the various aspects which characterise this approach, together with, for example, endogenous money, the bank rate of interest or producers sovereignty. It is the core of the monetary theory of production, and an author may happen to be closer to this theory even if he deals only with real magnitudes, than another author who deals with monetary magnitudes, but from an allocation standpoint. To put it in a provocative way: Sraffa might be closer to Graziani than Kaldor.

Ghislain Deleplace

17. Lessons from Asset-Based Financial Systems with Zero-Reserve Requirements

Abstract

Although Augusto Graziani has devoted a large number of his works to the notion of endogenous money, there is little to be found about the behaviour of the central bank. This in itself is not surprising, since most writers of the circuit school have paid no attention to the role of central banks. Most analyses of the monetary circuit are set within a kind of pure Wicksellian economy, closed and without a government. The links between commercial banks and the central bank, as well as the interdependence between the decisions of the central bank and the non-financial sectors, are thus left aside.

Marc Lavoie

18. Interest Rates, Interest Spreads and Monetary Circulation: Theoretical Framework and Empirical Implications for Macroeconomic Performance

Abstract

Traditional neoclassical macroeconomics confers an important position to interest rates in determining macroeconomic activity but pays little attention to the possible role of interest spreads. In contrast, as Augusto Graziani (1987, p. 25; 2003, p. 123) makes it abundantly clear, the relation among subsets of the vast array of interest rates in a modern monetary economy may be of critical significance, especially since these rates pertain to different aspects of the process of monetary circulation. Indeed, as soon as one adopts a circuitist perspective where credit relations are crucial and where, inter alia, the distinction, made famous by Graziani (1987), between initial and final finance, becomes relevant, suddenly the relations among the various rates associated with the flux/reflux process take on new meaning and offer insights that were hitherto inconceivable within traditional macroeconomic analysis. The object of this chapter is to discuss how some of these interest rates are envisioned within the framework of the monetary circuit, and what theoretical and empirical implications changes in both levels and interest spreads could have on macroeconomic performance.

Mario Seccareccia

Springer Professional

The Monetary Theory of Production

Tradition and Perspectives

Über dieses Buch

Inhaltsverzeichnis

Frontmatter

Introduction: The Monetary Theory of Production

Introduction: The Monetary Theory of Production

The Tradition of the Monetary Theory of Production

Frontmatter

1. Macroeconomic Analysis and Individual Economic Rationality: Some Lessons from Wicksell, von Mises and Schumpeter

2. Monetary Economics after Wicksell: Alternative Perspectives within the Theory of the Monetary Circuit

3. Lost and Found: Some History of Endogenous Money in the Twentieth Century

4. Alternative Theories of the Rate of Interest: A Reconsideration

5. An Inquiry into a Dark Mystery in the History of the Monetary Theory of Production: What Went Wrong with the Early Contribution of Joan Robinson

6. Some Reflections on Changes in Keynes’s Analysis between the Treatise and the General Theory

Stocks and Flows in the Monetary Circuit

Frontmatter

7. Single-Period Analysis: Financial Markets, Firms’ Failures and Closure of the Monetary Circuit

8. The Existence of Monetary Profits within the Monetary Circuit

9. Central Banking in a Monetary Theory of Production: The Economics of Payment Finality from a Circular-Flow Perspective

The Monetary Circuit and Unemployment

Frontmatter

10. Bank Mergers, Monopoly Power and Unemployment: A Monetary Circuit Approach

11. Circuit Theory and the Employment Issue

Money, Inflation and Distribution

Frontmatter

12. Non-Credit Money to Fight Poverty

13. Towards a Non-Conventional Circuit Approach: Credit, Microcredit and Property Rights

14. Monetary Theory of Production and Disequilibrium Inflation

Monetary Circulation and Economic Policy

Frontmatter

15. What is Wrong with the Euro Area Monetary Model?

16. Circulation Approach and Applied Economics: Monetary Duality in Cuba

17. Lessons from Asset-Based Financial Systems with Zero-Reserve Requirements

18. Interest Rates, Interest Spreads and Monetary Circulation: Theoretical Framework and Empirical Implications for Macroeconomic Performance

Backmatter