Monetary Production Economy Research Articles

The Monetary Theory of Production and the Supermultiplier: What Determines Savings?

ABSTRACT The paper presents a closed-economy stock-flow consistent model aimed at outlining the natural synthesis between two fundamental pillars of the post-Keynesian approach: the supermultiplier (SM) model and the monetary theory of production based on the notion of endogenous money. Such integration allows the defining of the whole economic mechanism describing the financing of autonomous components and investments, as well as the determination of output and saving within a monetary economy of production. Our contribution argues that the endogenous money theory plays a non-ancillary role within the SM approach. By comparing different scenarios describing the financing of autonomous components of demand and investments (bank loans, retained profits, CB, and equity emissions), we point out that the endogenous process of money creation is the only structural mechanism through which the autonomous components can exist and be independent of current income, and Keynesian causality materializes in the long-run. In general, it is the initial finance of investments and autonomous components through endogenous money that allows them to be ex-post founded by household saving. Conversely, the initial finance through the existing stock of wealth, although it does not intact the investments-saving causality, can be considered only a temporary spin-off of the endogenous money process.

Ecological transition in a monetary economy of production: a heterodox approach

The global warming challenge is probably the major issue of our epoch, calling for a concerted response involving as many entities as possible. The economic system being the main responsible of this troubling situation, it is logical to address it first. The actual monetary economy of production has the banking system as the main driver of its functioning which justifies putting our attention on it. Central banks play a prominent role in such a system. They thus dispose of a relevant room for maneuver, which constitutes one of the main topics addressed here. Before that, this article discusses environmental concerns in a monetary production economy, advocating for an ecological economics approach as our privileged analytical foundation and highlighting the seminal role of the banking system in the monetary essence of our economic system, thus calling for an effort to enrich current monetary policy practices which must depart from the myth of ‘market neutrality’. We therefore propose four axes of intervention with regard to the greening of central banks’ action, which aim at redirecting credit away from carbon-intensive activities and towards low-carbon economic sectors. As needed as it is, adjusting monetary policy would however not suffice, the actual climate crisis being enrooted within the economic growth mantra applied through a profit-seeking scheme. A questioning of the very basis of our economic system is thus required to make the economy sustainable and finally safeguarding the conditions of life on earth.

Luigi Pasinetti and the making of classical-Keynesian political economy

The paper is made up of two sections. The first contains some preliminary remarks to elaborate a classical-Keynesian system of political economy: closing the gap between Keynes and Sraffa, and the close connections existing between Ricardo, Sraffa and Keynes. The second section starts with a presentation of the social process of production, followed by considering the relationship between this process and the problems of value and distribution. Subsequently, the determination of output and employment in a monetary production economy is dealt with. Finally, the crucial importance of the Pasinetti transformation for linking classical and Keynesian elements of analysis is put to the fore. In the concluding remarks classical-Keynesian political economy is set into a wider context.

Refutations of Say’s Law and Dynamics of a Monetary Economy of Production

In a monetary economy of production, Say’s law is invalid for several reasons. Based on some refutations, it is possible to state that revenues generated by the production process are structurally lower than the supply price of production, which means that firms create insufficient purchasing power to buy what they produce. Herein, we study the dynamics of such an economy and obtain two main results. First, the long-term debt level of that economy must increase during a growth phase to enable demand to grow at the same pace as supply. Second, because of the repayment of this debt, the gap between supply and net revenues generated by the production process widens along a growth phase. JEL Classification: E12, E2, E30, E42, G21

Facing Stagflation in the Seventies in Italy: Fausto Vicarelli's Economic Policy Proposals

This paper surveys Vicarelli's economic policy proposals. We begin by offering brief contextual sketches and later examine the flaws in the "neoclassical synthesis" approach in accounting for stagflation. By first recognizing the inadequacy of the traditional approach at the heuristic-interpretative level, we then recall the policy proposals suggested by Vicarelli in order to foster the accumulation process. As will be pointed out, these were useful tools in restoring and enhancing the state of confi- dence as well as the marginal efficiency of capital. We conclude that Vicarelli leans towards a sort of "return to Keynes" in considering institutional engineering solu- tions in the context of a monetary production economy, whose functioning is af- fected by complex interaction mechanisms and systemic uncertainty.

Financial Instability and Income Inequality: Why the Minsky–Piketty Connection Matters for Macroeconomics

ABSTRACT This article addresses the relationship between financial instability and wealth inequality in a twofold perspective. First, it is an attempt to explain why the two phenomena, despite being nowadays equally relevant as empirical concerns, do not attract equal attention from researchers and are usually studied separately or conceived as independent levers affecting cycles or growth. We suggest the adoption of implicit methodological paradigms, instead of ‘historical momentum’ as the likely reason. Secondly, we present a theoretical framework grounded on the work of Piero Ferri (Aggregate Demand, Inequality and Instability — New Directions in Modern Economics. Edward Elgar Publishing, Cheltenham, UK, 2016) with a medium-run dynamic demand-led model set for a monetary economy of production, where corporate debt is introduced into the financial account of firms. Minsky and Piketty come instrumentally to support the two perspectives: on one side they become our opposite representatives of heterodox and orthodox method; on the other side, as the model specification makes the work of Thomas Piketty (Capital in the Twenty-First Century. Cambridge University Press, Cambridge, MA, 2014, and Capital in the Twenty-First Century, Technical Appendix. Cambridge University Press, Cambridge, MA, 2014) directly comparable with the financial instability hypothesis, our exercise sheds light on the dynamic role of retention rates and capital share during the cycle phases, qualifying the conditions under which financial instability may lead to inequality. Connecting the implications of the two argumentative lines, the call emerges for a significant rethinking in macroeconomics studies.

Stock-Flow Consistent Model with Repayment of Bank Loans Used to Finance Past Investments

ABSTRACT Stock-flow consistent modelling (SFC) is currently one of the most active fields of research in post-Keynesian macroeconomics. SFC models make it possible to study the dynamics of a monetary economy of production within a consistent accounting framework. However, with some rare exceptions, SFC models do not take into account the repayment of bank loans used to finance business investments. It is assumed that these investments are financed by perpetual loans or by constant turnover. In this article, we reject this assumption and build a model based on recent studies, in which firms repay part of their past debt in each period. We then study the dynamics of this model. The results obtained indicate that the dynamics of an SFC model is significantly affected by taking these repayments into account.

Refutation of Say's Law and Dynamics of a Monetary Economy of Production

In a monetary economy of production, Say's law is invalid for several reasons. On the basis of some of these refutations (Schmitt, 1984; Renaud, 2000), it is possible to state that the revenues generated by the production process are structurally lower than the supply price of production. We study here the dynamics of such an economy and obtain two main results. First, the long-term debt level of this economy has to increase during a growth phase to enable demand to grow at the same pace as supply. Secondly, due to the repayment of this debt, the gap between supply and net revenues generated by the production process widens along a growth phase.

The past, present and future of evolutionary macroeconomics

The key features of heterodox macroeconomic analysis are outlined. The relationships in general terms between micro-, meso- and macroeconomics are considered, specifically the nation state orientation of what is termed macroeconomics, and relate them to the analysis of a monetary production economy. Ideas on fundamental uncertainty have been a key component of heterodox macroeconomics and outline the implications of that in terms of decision-making and path dependency. Remarks on how organisations and institutions are approached in heterodox macroeconomics are made. The key roles of finance and money are examined. Heterodox macroeconomics has focused on the demand side of the economy. Attention is drawn to two areas where heterodox macroeconomic analysis has historically ignored though the last decade or so has seen developments: ecological economics and gender. There are some remarks on recent modelling techniques in heterodox macroeconomics.

Liquidity Preference, Capital Accumulation and Investment Financing: Fernando Cardim de Carvalho’s Contributions to the Post-Keynesian Paradigm

ABSTRACT This paper assesses the main theoretical contributions by Fernando Cardim de Carvalho to the post-Keynesian Economics Paradigm: his elucidation of the fundamental principles that define the concept of a monetary production economy; his analysis of decision-making under non-probabilistic uncertainty; his development of a portfolio choice theory in which the decision to invest is regarded as one of possible wealth accumulation strategies; his liquidity preference theory, including its application to banks’ portfolio allocations under uncertainty; and finally his analysis of the finance-funding circuit and its implications for the functioning of monetary economies.

Financialisation and the limits of circuit theory

AbstractThe theory of the monetary circuit aims to provide a highly stylised account of the workings of a modern monetary production economy. While there may have been a time when it succeeded in this aim, that time is over. The key development in the monetary sphere of capitalism over recent decades is the advent of financialisation, a phenomenon that circuit theory cannot explain other than by omitting some of its most important characterising features while indiscriminately dismissing those features that it does address as dysfunctional outgrowths. The fact is that a theory that has the aggregate monetary circuit as its methodological framework and whose sole focus is on the financing needs of firms is simply not flexible enough to accommodate the new reality of financialisation. To make that accommodation what is needed is a framework that is sufficiently elastic as to be able to encompass a broad range of socio-economic factors, most notably those associated with demographic change, as co-drivers of financialisaton. This article argues that a framework based on Marx's commodity principle meets this requirement.

El paradigma post keynesiano: preceptos, estado del arte y visión de la economía

Al considerar la falta de pluralismo en la enseñanza de la ciencia económica y el predominio de una teoría económica con supuestos bastante alejados de la realidad y su postura excluyente, hermética e inmutable hacia cualquier contribución distinta a su perspectiva económica este artículo busca introducir al lector en las ideas Post Keynesianas, presentándole de manera concisa su postura económica y su estado actual del arte, como corriente crítica y alternativa del análisis económico. Se realiza una taxonomía de la Escuela Post Keynesiana para diferenciarla del enfoque ortodoxo dominante y se expone la postura de la economía monetaria de producción.

The relationship between inflation and unemployment: a critique of Friedman and Phelps

The ‘natural rate of unemployment’ was not an important part of Friedman's presidential address, although it is what the paper is remembered for. On the 50th anniversary of the paper, we argue that there is no ‘natural rate of unemployment’, and that the relation between inflation and unemployment is not the one assumed by Friedman or neoclassical theory. In Section 2 we present the conventional framework in which the Phillips curve is drawn by neoclassical economists. It emphasizes the exogenous nature of money, as well as the assumption that (a large part of) unemployment has to do with workers’ trade-off between paid work and leisure time (in a utility maximization perspective). Section 3 explains that the neoclassical framework is flawed, because money is endogenous and unemployment is not simply an outcome of workers’ choices with regard to the observed ‘equilibrium’ wage level. This section points out that inflation cannot be controlled with an interest-rate policy and that unemployment is the result of a lack of effective demand (hence it is involuntary). Section 4 provides two alternative macroeconomic analyses, one where inflation as well as unemployment are explained by the disorderly working of the banking system and another where conflict in the functional distribution of income within a monetary economy of production dominates. The conclusion offers some policy-oriented remarks as regards contemporary fiscal and monetary policies that a variety of countries have been adopting in their (largely ineffective) attempt to emerge from the crisis that erupted in 2008 at the global level – whose negative consequences still affect a relevant part of the world population.

An Analysis of the Classical Circuit Mechanism of North Korea’s Money: Understanding the North Korean Economy as a Monetary Economy of Production

An Analysis of the Classical Circuit Mechanism of North Korea’s Money: Understanding the North Korean Economy as a Monetary Economy of Production

Dinero endógeno, circuito monetario y estado estacionario en la economía monetaria de producción

El ensayo considera el circuito económico de una economía monetaria de producción. La exposiciónde las transacciones financieras, productivas y comerciales entre los agentes económicosen el sistema de mercados exige una contabilidad macroeconómica integrada que unifiquede manera comprehensiva las cuentas financieras de stocks y flujos de fondos y las cuentas deproducción, gasto e ingreso de las cuentas nacionales. En el plano del análisis económico, lacontabilidad macroeconómica integrada constituye un argumento de consistencia lógica interna enel proceso de construcción de modelos teóricos y empíricos. El ensayo se desarrolla para el casoabstracto de una economía cerrada con producción circular simple en estado estacionario competitivodel largo período. La exposición ab ovo del circuito monetario advierte sobre la importanciaclave de la separación funcional de la propiedad y la posesión para la constitución de economíamonetaria de producción y del principio de la demanda efectiva en la dinámica capitalista. Posibilitatambién proponer una solución de la cuestión de la “paradoja de las ganancias”.

A Simple Analytical Model of the Adverse Real Effects of Inflation

AbstractThe essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.

Book review: İlker Aslan, Macroeconomic Foundations of Financial Analysis: A Case Study of Turkey as a Monetary Production Economy (Logos Verlag Berlin, Berlin, Germany 2014) 280 pp.

"Book review: İlker Aslan, Macroeconomic Foundations of Financial Analysis: A Case Study of Turkey as a Monetary Production Economy (Logos Verlag Berlin, Berlin, Germany 2014) 280 pp." published on Apr 2016 by Edward Elgar Publishing Ltd.

Alvaro Cencini & Sergio Rossi, Economic and Financial Crises: A New Macroeconomic Analysis

Abstract. Thereviewed bookdevelops a newparadigm regarding economic and financial crisesat both the national and international level.That paradigm rests on the purely numerical and vehicular nature of money, from which Cencini and Rossi infer the fundamental laws governing a monetary economy of production. The pathologies of the economic system are then characterized in light of these laws. In order to avoid the recurrence of crises, the authors eventually put forward a reform of the domestic and the international payment systems, which rests on a distinction between money, income and fixed capital developed throughout the book. After a short introduction, this review offers a description of the book and ends up drawing some implications, especially as pertains to the nature of money and the characterization of crises. Keywords. Crisis, Money, Income, Monetary Reform. JEL. E31, E32, E42, E44, E50.

A simple analytical model of the adverse real effects of inflation

The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.

Money, income, and profit: lessons from the monetary theory of production

In this paper we analyze Augusto Graziani’s numerous contributions to the monetary theory of production, which he developed from a theoretical but also a policy-oriented perspective. We focus on the rejection of the neoclassical dichotomy, the causal relation between production and money creation, and the definition of macroeconomic saving. These three dimensions of Graziani’s work can be identified in the framework of the monetary circuit, in the tradition of classical and Marxian economic thought. The outcome of Graziani’s investigations sheds light on the working of a monetary economy of production from the issuance of bank money to the distribution of income and capital accumulation.