notes on monetary circuit theory

8/13/2019 Notes on Monetary Circuit Theory

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- Credit potential of the banking system: In case of one bank serving all no reserves are

required; in one bank serving one agent reserve ratio should be %100; in between the two

extremes, a principle holds that The higher the faction of agents banking with any bank, the

lower will be the reserve requirements of that bank, and the higher its credit potential for any

given amount of reserves. (Graziani 1989, 10)

- Banks are not passive players in the circuit. They are profit-seeking firms in the business

of spelling a productcredit. (Rochon 2005, 129 and more)

- Critique of Tobin type of banking system: See Godley & Lavoie (2007, p.334). The main

point is that in Tobin (1968, 1969) banks are no different from households that they are

guided by the same principle of portforlio choice. Whereas, the main function of MCTs

banks is to make loans to finance production and inventories. Banks make profits not by

deciding what kind of asset to invest in, but rather by setting prices that insure a profit

marginmargin; they do this by setting the loan and deposit rates of interest relative to the bill

rate and relative to each other in such a way that profits will be forthcoming (ibid., 334)

- MCTs notion of the major role of bank as creation of money along with financing

production is in contrast to Marxs approach: For Marxist monetary theory the defining

aspect of banking is the collection of societys hoarded money, its transformation into

interest-bearing capital, and its subsequent advance as monetary credit (Lapavitsas 1991,

p.506).

* CIRCUIT

- Following Parguez (1980) Rochon notes that in GT it is defined as the time necessary for

the full multiplier effect to take effect. (Rochon 1999, 18)

- Following Deleplace & Nell (1996, 13) Rochon notes that circuitists define the time spanof the circuit as merely the consequence of the duration of credit. (Rochon 1999, 18)

- Rochon discuss on Keynes shift from his Marshallian definition of time appearing in GT

where short period is conceptualized as a few months to a year to circuitists notion where

short period is defined as the average interval of time needed for banks to evaluate the

ability of firms to generate a profit from an initial spending. (Rochon 1999, 18)

- As Alain Parguez showed in this work, if we integrate money in the analysis, we mus t

reject the equilibrium analysis and use a monetary circuit. (Accoce 2005, 3)


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* CONSTANT CAPITAL (HOW TO TREAT IN THE MODEL)

- . Marx criticized both Smith and Ricardo for having overlooked or downgraded the

analysis of the circulation of constant capital. Steedman (1982) has convincingly shown that

Marxs criticisms were largely misplaced. Trigg, however, espouses Marxs posi tion (2006,

10). (Sardoni 2009, 162, fn.2)

- Both MCA and CC deal only with the circulation of revenues. One way to address the

problem without falling into the double counting trap is to take the total prices of final goods

not of all goods including intermediary goods. That is, final consumption vs. production

consumption. The result would be the same since the aggregate prices of total final goods are

equal to the aggregate prices of net output (i.e. money value added). But in this way we could

incorporate of the circulation of constant capital as well into the picture. The idea is the same

when Moseley writes the price of the means of consumption really is entirely resolved into

revenue. (176) So to speak, the concepts we are talking about price of total final goods,

which is nothing but consumption goods, total price of net output, and total revenue are all

GDP concepts.

- The immediate form in which the problem presents itself is this. How is the capital

consumed in production replaced in its value out of the annual product, and how is the

movement of this replacement intertwined with the consumption of surplus-value by thecapitalists and of wages by workers? (KII, 469) -> This question was the focus of Marxs

previous discussions of Smiths dogma and is clearly concerned with flows of money, money

which functions as capital and money which functions as revenue. (Moseley 1998, 171)

Marx . emphasized that the reproduction of the total social money capital also involves

the reproduction of the material elements of production, especially the means of production.

(172) See also Moseley (1998, 174).

- Moseley (1998)s arguments very important. His quote form Marx If production has acapitalist form, so too will reproduction (KII 711) needs to be much more elaborated and

contemplated. In the chapter on simple reproduction, Marx describes as the most important

question the extent to which the breakdown of the value of each individual capitalist

commodity product into c+v+s holds also for the value of the total annual product, even if

mediated by a different from of appearance.

=> The last point is exactly what I have in mind. Moseley understands it as a critique of

Smiths dogma. But I think it is raising a issue of double accounting.

- That The constant capital advanced in department I is recovered by means of the sale of


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means of production to other capitalists in department I (Moseley 1998, 175) is the main

point of section 6, chapter 20, KII.

- Moseley on section 8, chapter 20, KII, the confusion surrounding the reproduction of

constant capital stems from the fact that the current labor in both departments produces new

value, which is equal to the price of the means of consumption and which provides revenue in

both departments with which the means of consumption are purchased. This fact makes it

appear as if there is no labor left over to reproduce the means of production, or that the means

of production somehow reappear without any labor having been expended by society to

produce them~~~~~~~~. (177)

- As for MCTs practice of resolving investment fund into exclusively to wage funds,

Wicksell also criticizes this. He insists that investment fund resolves into wage and funds that

go to purchasing intermediate goods, i.e. fixed capital. However Wicksell suggests to treat

profits earned by capitalists producing capital goods as rent (Wicksell 1898, p.123).

- Keynes critique of not including intermediate goods in markup pricing: The results of

such an analysis have almost no practical application since the assumption on which it is

based is very seldom realized in practice. (1936, p. 272)

* Critique of mainstream neoclassical tradition

- Its basic assumption of an economic equilibrium determined by individual choices.

(Graziani 1989, 12). For instance, individual workers choice participates in determining the

level of output through labour supply while in MCA firms as a whole independentlydetermine it.

* FINANCE SECTOR

- See Graziani (2003, 157-58)

- In other words, financial markets are relevant in the traditional circuit framework only in

the closure of the monetary circuit: it plays the role to recuperate the liquidity not collected


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through the sale of goods. Hence, the financial market could not even operate if money has

not been previously created by the credit market, the only one which is able to provide

money ex-nihilo (Fumagalli & Lucarelli 2010, 16)

* FIXED/CIRCULATION CAPITAL

- Marx emphasizes that the distinction is soley within production capital, immediate

production process. (Marx 1978, 268)

- Rochon (1999) uses circulating capital as referring to labour. Do circuitists generally not

following Marxs CK/FK distinction?

* INTEREST RATE

- Our argument is that banks can ensure that all their operations are profitable,

notwithstanding the passivity in their responses which we have assumed, by appropriate

adjustments in at least one of the rates of interest over which they have control. We shall

assume that banks raise the rate they charge on loans, relative to the bill rate, whenever theirprofitability falls below a certain threshold, here called botpm. Similarly, when profitability

exceeds some upper threshold called toppm they reduce their lending rates, for fear of

government legislation or consumer outrage (GL 2007, p.340).

- Post-Keynesian notion of exogenous interest rate vs. Keynes liquidity preference theory of

interest rate? Graziani criticizes some PKs not seeing exogenous nature of interest rate

determination by banking sectors but subjecting to liquidity preference theory (Graziani 2003,

p.68).

* INVESTMENT

* MODEL (STOCK-FLOW CONSISTENT)

- Why it starts with bank loans? We find the French-Italian PK circuit approach particularly

useful for driving home the point that the finance for spending must come from somewhere.

(Graziani 1990) Most recognize that to finance a purchase one needs to use income, to sell an


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- For circuitists in general, the theory of the monetary circuit is a short-period, equilibrium

theory. (Rochon 1999)

- The existence of money alters the structure and inner workings of economic system,

modifies the behavioral functions of the agents, and gives new content to the equilibrium

positions as for activity levels as well as for income distribution. (Graziani 1989, 1)

- This dynamic flux and reflux process is the essence of the monetary circuit. (Parguez &

Seccareccia 2000, 104)

- In the monetary circuit approach, the separation between banking and enterprise sector

represents a fundamental characteristic of capitalism. (Fumagalli & Lucarelli 2010, 15)

- Production plans chosen by entrepreneurs can be affected by two main economic factors:

1.the availability of liquid assets in order to fund new investments;

2.the expectations concerning the placement of products on the market aimed at the

valorisation of production.

Thus it would seem that the only actual constraint for production activity is given by

monetary conditions established by the banking sector. The risk of not selling all goods that

have been produced represents a constraint that can be easily removed: enterprises have the

opportunity to issue stocks and bonds and thus regain liquidity to pay off thei r bank debt.

(Fumagalli & Lucarelli 2010, 16)- Limits of MCT

- The appropriateness of the concept of a single, unitary period of circulation, applicable

to the whole economy. Whether there could be a clear-cut starting or precise ending point

especially in terms of borrowing and repayment of bank loans. This issue is briefly

mentioned in Deleplace & Nell (1996, 30)

- Lacks a pricing theory

- Unrealistic assumptions and model settings: We have already pointed out that ourpicture does not correspond to reality. It has to be remembered that actual processes of

exchange and payment do not take place at these annual intervals but follow on one another

in rapid succession, so that one transaction is constantly "infecting" another, to use Marx's

phrase (Wicksell 1898, p.148).

- Absence of consideration of speculations; Wicksell warns it (Wicksell 1898, p.148).

- The SFC approach is usually developed along three steps: (1) do the (SFC) accounting; (2)

establish the relevant behavioral relationships; and (3) perform comparative dynamics

exercises (generally with the help of computer simulations) (Dos Santos 2005). The third of


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these stepsthe so called solution of the modelallows for the understanding of how the

economy behaves in time, if it tends toward equilibrium or if it presents an explosive

behavior (more on this below). However, as we stated above, a model can be considered

completed even before it has fulfilled this last step. As we said, SFC modeling is based on a

comprehensive accounting framework, which, in the methodology developed by Godley, is

based on a set a three matrices: (1) a stock matrix, representing the initial stocks of the

economy; (2) a flow matrix, showing all the flows implied by initial stocks and by the

decisions of the agents; and (3) a stocks revaluation matrix, making explicit how the flows of

the period determine different stocks at the end of it. The consistency of the accounting is

ensured by precise rules (Caverzasi & Godin 2013, p.13-14).

Keynes mention of Marxian circuit of M-C-M in Collected Works Vol. 29, p. 81

- Explanations how successive periods are related is not much developed.

* MONEY; DEFINITION

- PK: credit, CA: means of circulation. So PK tends to see money as one type of asset, a

particular one though while CA see it as completely different from other asset since it alonehas a general purchasing power. So means of exchange and store of value are complementary

functions of money for PK but competitive for CA. (Deleplace & Nell 1996, 23-24)

- The above difference makes PK to see bank similar to other firms, financial firms dealing

with money as a financial asset whereas CA sees bank assigned with a peculiar task of money

creation.

- For PK, resources for bank funds (money creation) are necessary and are attained through

endogenous finance. For CA, no resources are required since money itself is endogenous.

Therefore, the endogeneity of money means that industrial firms will always be able to


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obtain money from the banking system, independently of what happens on the financial

market. (Deleplace &Nell 1996, 32)

=> Remind that in PK financial innovation is a means by which the financial system

(including banks), in creating money, circumscribes and nullifies the central banks power to

control money creation. Then the question is how financial innovation is explained in MCA.

=> In demonstrating MCAs position on money whose creation is ultimately initiated by firms

money is created because of firms decision to enter into debt (Rochon 1999, 14)

Rochon says While velocity and financial innovations may play a role, these would have to

be considered in the ex post and are not causal in the determination of credit availability.

They become secondary issue. (Rochon 1999, 15) And he cites Lavoie (1996, 533) as saying

accommodation or the lack of it, liability or the lack of it, and financial innovations or the

lack of it are second-order phenomena to the crucial causal story that goes from debt to the

supply of means of payment. (Rochon 1999, 15)

- Rather than seeing money based on the demand for money balances, circuitists place the

emphasis on the creation and the ultimate destruction of money and more (Rochon

1999, 14)

- While the creation of bank credit and deposits (money) is simultaneous, credit and money

are nonetheless seen as different entities, each playing a different, yet specific, role in thecircuit. There is hence no need to extend the definition of money to include other

instruments.. The emphasis is placed on flow approach to credit, and not on portfolio

decisions. In this respect, credit and money become endogenous not because of any single

decision of households or of the central bank, but rather because of the needs of production.

(Rochon 1999, 15)

- Many circulationists share Kaldors and Moores horizontalist argument. (Rochon 1999,

16) But he points out that they basically tend not to speak of money supply since for themsupply is demand. (Rochon 1999, 16) (The notion of a supplyof money somehow conjures

up the notion of afunction, thereby suggesting a relationship between the supply of credit and

the rate of interest. (Rochon 1999, 17; emphasis in the original))

- Circuitists therefore reject the very notion of a money market, where a price and a

quantity is determined. Rather, the rate of interest is determined exogenously, by the central

bank, outside of the confines of a money market. (Rochon 1999, 17)

- Money is a result of debt and production, not a result of uncertainty [as many PK

conceive]. Production can never be financed by changes in the portfolio decisions of


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household [as mainstream view states]. Money is created ex nihilo as soon as credit is

awarded to firms. (Rochon 1999, 30)

- Considering endogeneity of money, the demand for money is an expost notion, that is ex

post to credit demand and production decisions. The demand for money therefore carries no

real significance: it does not determine the firms investment decisions, although it impacts

on their realized profits. (Rochon 1999, 33)

- In CA, money becomes a theory of distribution and accumulation. Flow and hierarchical

analyses play a central role. (Rochon 1999, 37)

- In MCA, First, money is, and has always been, a debt created ex nihilo by bank credit

advances that are granted either to permit the generation of real wealth or to acquire existing

physical assets. Second, there is no alternative between debt financing on the one hand, and

the tapping of existing liquid resources (or accumulated savings) to finance expenditures, on

the other. At the macroeconomic level, spending in a monetary economy is always and

everywhere in the nature of debt financing. (Parguez & Seccareccia 2000, 102) Money

cannot be defined, as is traditionally done by economists, in terms of its presumed functions

of unit of account or store of value. (105) Money exists and has a value only as long as it is

spend by non-bank agents for the purpose of creating future wealth. The hoarding of money

in the form of bank deposits merely obstructs the process of wealth creation upon which thevalue of money depends. Indeed, it is this inconsistency which explains why the traditional

demand for money as a component of wealth has a potentially destabilizing role within the

monetary circuit. (105) Rules of creditworthiness must ensure that banks issue debts on

themselves to finance loans that ultimately lead to a creation of new real wealth. If banks

were to issue liabilities to finance loans that could never support the generation of future real

wealth, these debts would be deprived of value and no one would accept them. (107)

Similarly, demand for money as liquidity can pose a problem to firms. (Rochon 2005, 130)- Parguez & Seccareccia is very detail in describing the process of money creation. See the

following: In the initial phase when banks grantcredit, they issue new debts upon themselves

which they lend to non-bank agents. (2000, 104; emphasis added.) Conceiving bank money

as debt banks issued upon themselves (they use the term implicit debts),it is natural that the

authors claim that bank money holders cannot be called bank creditors which is quite a

conventional practice in the literature and especially Moore (1988) uses a term convenience

lending. This is because money is merely debt that the banks have issued on themselves ex

nihilo.


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- Conceptualizing money as credit, Parguez & Seccareccia (2000, 104-5) write Money

cannot be, and never has been, a commodity whose value stems from its scarcity. And

continue to say The value ofmoney (or its purchasing power) cannot be inferred on the basis

of some neoclassical scarcity principle, since the quantity of new debts issued by banks is

constrained only by the expressed demand for money of non-bank agents. Here it seems that

MCAs credit money theory is not directed mainly against commodity money theory of

Marxian tradition, but against neoclassical demand-supply principle.

-> Extrinsic value in the following sense: Regardless of the material support of these

conventional debts in the form of gold, silver, copper coins or paper notes such as bank

money, these coins or paper notes have an essentially extrinsic value because each holder is

certain to possess a legal claim on real resources, and because it can serve ultimately as a

means of settling ones debts. The very notion of a commodity money is an illusion which

confuses the material support of money with money itself. (106)

- Parguez & Seccareccias definition of money: Money is at all times the liabilities issued

by banking institutions which have been endorsed by the state primarily for the purpose of

financing the formation of future real wealth. This money has a real extrinsic value because

every holder of these liabilities has acquired a claim on the future physical wealth that results

from the initial bank credit advances. (107)- . the ex nihilo creation of money is the result of the complexity of the relationship

between three specific causal relationships: banks and firms (initial finance), workers and

firms (final finance), banks and households (the demand for money). (Rochon 2005, 126)

- money exists to be ultimately destroyed, although households may decide at the end of

the circuit to hold on to some money balances (which poses problems for the closure of the

circuit.) (Rochon 2005, 126)

- Money is the natural result of debt: it is credit-led and demand-determined. In this sense,money is endogenous and not excess supply of money exists. It is the result of double-entry

accounting: debt being the asset of banks while money is its liability. As a result of debt,

money is created only to be ultimately destroyed.(Rochon 2005, 128)

- Money becomes the book-keeping record of this debt. (Rochon 2009, 59)[Endogenous

creation of money] does not rely on central bank operations or some stage of development of

the banking system, or again on liability management, as has been suggested by some

structuralists.(Rochon 2009, 59; see also 60)

- a hierarchy of debt arises. (Rochon 2009, 59)


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- Money is not neutral at all and it has direct consequences on the level of investments made

by the enterprise sector and therefore on the final level of production. Money doesn't just

affect the level of effective demand (as in Keynes' General Theory) but being the only means

of funding it also heavily influences the productive activity of the enterprise sector, which is

the effective supply. (Fumagalli & Lucarelli 2010, 15)

- Money, not being a commodity, is in the nature of credit. However, it is nota direct credit

between the two contracting agents, but an indirect relationship set up by means of a

triangular transaction in which a third agent acts as an intermediary. (Graziani 2003, p.61)

When a payment is made, money is created and two debt relationships emerge: the agent

making a payment becomes a debtor while whoever receives the payment becomes a creditor

of the banking system (Ibid., p.65)

- Rossi (2001)s critique of neoclassical excess demand approach to money which, he says,

does not fit well with another core neoclassical thesis that characterizes money solely as

means of circulation.

- Rossi points out that the traditional conception of money as the generally accepted

medium of exchange appears ill-founded, and the confusion between means (that is, the

instrument, or process, used in performing an action) and end (the object for which the action

is performed_ is not of a pure semantic order within this context (Rossi 2001, p.93). Here thepoint is that while money is purported to be characterized as means of circulation, contrarily

it is dealt as some sort of goods or assets i.e. stock which are demanded. As is well

known, neoclassical analysis portrays the sale (that is, consumption) of national output as a

relative exchange between two dichotomous stocks, money and real goods, which move in

opposite directions between economic agents (Rossi 2001, p.94).

- money is like the hot potato of a childrens game: one individual may pass it to

another, but the group as a whole cannot get rid of it (Tobin 1987, p.273).- recalling Smiths intuition that the great wheel of circulation can logically be

neither sold nor purchased; in other words, it is never the object of either supply or demand of

its own. In fact, the means of payment must be conceptually distinguished from the things

exchange (Rossi 2001, p.97).

+ CHARTALISM:

- The substitution of fiat, paper money, for metallic coin as the main component of

currency in the last 200 years provides strong support for the Chartalist view that the

monetary essence of currency can rest upon the power of the issuer and not upon the intrinsic


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value of the object so used (Goodhart 1989, p.34)

- The problem with excess demand approach is that including money among the set of

commodities would raise the problem of measuring goods by means of goods, a problem that

Ricardo had been trying to solve without success until his death (Rossi 2001, p.98).

- In particular, were fiat money the dichotomic counterpart of goods and services, no

objective measure of the value of current national output would ever exist (Rossi 2001,

p.102).

- Critique: It is a normative and prescriptive approach, not a positive and descriptive one.

See this: http://heteconomist.com/welcome-to-heteconomist-mmt-and-the-crisis/ . In

particular in relation to Marxs theory of money, the latter is about logical, conceptual

analysis of capitalist money, while MMT and chartalism are concerned with the historical

pre-capitalistorigin of money.

- According to Rossi (2001, p.106) all the views that conceive money as a mere unit of

account conform to the Smithian intuition that money is essentially a means of payment, or

the wheel of output circulation, which, in point of principle, does not add to the amount of

riches of a given economy (Hegeland 1951, p.1)

- any payment within the national economy is tautologically a monetary transaction

carried out through the bookkeeping records of the domestic banking system. However, ifmoney and non-money goods were to be exchanged as claimed by adherents to the

neoclassical cosmology, the banking system would be nothing but a go-between apt to

smooth so-called market frictions (Rossi 2001, p.107).

- Money creation and production of commodities are one and the same action (Schmitt

1984, p.450; re-quoted from Rossi 2001, p.147) In fact, the measure of output as a whole

(which is given by the total wage bill of the relevant period, let us emphasise it) is established

by the substitution of the real flow of goods and services with the monetary flow of nominalwages, at the precise instant when the wage bill is paid. So, instead of producing real goods

directly in their physical form, the economy produces real goods in the monetary form

(Schmitt 1984, p.458-9) (Rossi 2001, p.147).

-> How can we incorporate this view to money within Marxian framework?

- the link between money and output established by the remuneration of production

factors is definitively severed by income expenditure on the product market (Rossi 2001,

p.148).

- Money is created by bank lending in MCT. But what about Michael Roberts report:
http://heteconomist.com/welcome-to-heteconomist-mmt-and-the-crisis/http://heteconomist.com/welcome-to-heteconomist-mmt-and-the-crisis/http://heteconomist.com/welcome-to-heteconomist-mmt-and-the-crisis/


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Indeed, while UK banks pile up deposits, they are reducing lending to industry at a near 6%

annual rate. The BBA puts it like this: Companies are reluctant to borrow or invest new

funds while domestic and international trading activities remain subdued or uncertain. With

larger firms also using alternative funding from corporate bonds, bank borrowing levels arecontracting. http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-

economy/

Would the answer be that other forms of lending should be considered???

- Banknote

- ..weassume that the central bank provides all the cash that is demanded by consumers.

The central bank never refuses to provide commercial banks with the banknotes that their

clients need for transacting. As in the real world, banknotes can always be obtained through

automatic teller machines. Hence in reality, banknotes issued by the central bank are supplied

to households who demand them through the services of private banks, in exchange for bank

deposits (Godley & Lavoie 2007, p.335).

M-L is generally regarded as characteristic of the capitalist mode of production. But this is

in no way for the reason just given, .. i.e. because surplus labour is produced . It is rather

on account of its form, because in the form of wages labour is bought with money, and this is

taken as the characteristic feature of a money economy. (KII: 113)

According to the core axiom of the theory of the monetary circuit, an economy is a genuine

monetary one if and only if value is always generated by an expenditure of money and

therefore is always materialized in a money form." (Parguez 2004: 260)

Production of consumption goods requires the prior provision of funds just as much as does

the production of capital goods. (Keynes recited from Graziani 1996: 146)

Graziani understands Keynes as assigning to financial market the role that it in fact has,
http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/


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which is not that of financing investment but of bringing back to firms the money savings of

households, and thereby preventing them from remaining into idlebalances. (Graziani 1996:

146)

* The principle of essentiality of money: Parguez 1996: 157-58)

* QUANTITY OF MONEY (STOCK/FLOW)

- Parguez & Seccareccia (2000)s critique of Nells solution: 109,

- . initial increase in the money stock is only temporary; the final, observed increase in the

stock of money is dependent on household behavior (the demand for money). (Rochon 2005,

129)

- At the end of the circuit, the final (observed) increase in the money stock is given by the

quantity of saving that is hoarded by households. The final amplitude of these changes will

depend on the saving behavior of households. As such, changes in the stock of money as

well as hoarded savings are a residual of the system; that is, a result of the pattern of

circulation of money. (Rochon 2005, 130) In this sense, Lavoie writes There is no

difference between the outstanding amount of loans and the stock of money. (1992, 156) =>

No difference????

* REALIZATION OF PROFITS (THEORIES OF SURPLUS VALUE)

- This is a central question of the theory of the monetary circuit, and the failure to find a

consensus reveals the degree of confusion on this matter. Indeed, it remains probably the only

issue on which there is considerable disagreement, at least on the surface. (Rochon 2009, 61)The problem of reflux is a central issue of the monetary circuit. (Rochon 2009, 61)

- Nell 1996: 259

- . a surplus generated in one sector . necessarily represents a bank-financed deficit in

some other sectors, whether it be the household or government sectors. (Seccareccia 2004,

181)

=> Does this contradicts to Marx?

- the level of profits is strictly related to the formation of the price level. As Schmitt

would say, profits are born in the commodities market; (Graziani1989, 15)


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- A common problem with all these explanations is that they rely on external conditions to

generate profits. In other words, the simple model of the single circuit with no government in

a closed economy seems to be unable to generate profits. Profits must be explained from

within the circuit and from a realist account of markets. Only then can they be deemed truly

endogenous to the monetary circuit. (Rochon 2005, 134) Since the realization of monetary

profits, within an overall endogenous-money framework, is explained by the production

process, then the production process alone should logically be able to explain the existence of

profits. (Rochon 2009, 62)

=> Rochons thesis on the realization of profits within single, self-contained, closed circuit

makes sense; if any external factors, for example, government deficits, are used in explaining

the existence realization of profits, it leads to a unexpected, unintended conclusion that

that very factor is a necessary condition, thus source of, profits.

- Whether either of these theories [i.e. Marxs theory of surplus value or theory of factor

productivity] is adequate is not the issue; they nevertheless provide an account explaining

how it is possible for C become C must exchange for a larger sum of money. How does M

become M? There is not theory to explain that particularly if M is a sum of silver or gold.

This is problem the theory of the circuit must solve. (Nell 1996, 251)

- According to Rochon (2009, 58), the problem of monetization of profits arises due to thefact that the money supply is endogenous. In an exogenous-money world, either the money

supply can always increase, such that M can become whatever amount the central bank

chooses, or the question becomes irrelevant.

- Four solutions (in Rochon 2009, 62-64):

i) Opening-up the circuit:

ii) Borrowing the profits that firms will be making in advance of the production process and

injecting them into circulation: Renaud (2000), Rossi (2001)iii) The existence of a number of overlapping monetary circuits: Smithin (1997), Gnos (2003),

iv) The linearization of production: Lavoie (1987), Renaud (2000), Febrero (2008),

v) Only wages in the investment-goods sector need to be financed by bank credit: Nell (2002)

- Additional solutions (See Messori and Zazzaro 2005, especially p.121, fn.1,2)

vi) ProfitRealization in kind (Graziani 1984)

- HW: Contradicts Marxs value-form theory

- Messori and Zazzaro (2005, p.112-15) show that this solution cannot be viable implying

the firms would not be able to meet a debt commitment to pay monetary interest and finally


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would be in default formally.

vii) Giving up macroeconomic aggregation (De Vroey 1988)

viii) Including bank loans for investment demand (Parguez 1980; Seccareccia 2003): HW:

Having this type of bank loans in the model cannot be a special case but that is how the real

economy practically works.

ix) Hypothesizing higher and endogenous velocity of circulation of credit-money (Schmitt

1984)

x) Hypothesis that firms and banks anticipate the formation of their profits and sped them

intin advance (De Vroey 1988; Renaud 2000).

xi) Legal tender through public-sector expenditure (Graziani 1985).

- Following Graziani (1997)s reasoning, Bellofiore et al. (2000, 406) well demonstrate that

in MCA the source of profit lies in the capital-labour relation as in Marx. But a significant

difference is that for MCA the power of firms to extract profit from wage relation lies in their

exclusive access to bank finance See their footnote 4.

- What quantity of money will be created is an important question in MCA while PK does not

ask it. (Moore is an exception for whom the quantity of money created is equal to the wage

fund. Deleplace & Nell (1996, 32))

- Single swap approach adopted by Seccareccia (1996) is defective in that it could not capturea sequential process of transactions which is one of the main features of capitalist economy.

now the sequence has to be considered, which means that total output cannot swap at one

time for the total money supply. (Nell 1996: 252)

- Interdependence implies sequencing in exchange, and competitive pressures will lead to

economizing on the use of money. (Nell 1996: 255)

- In MC model, liquidity existing at any single moment is therefore limited to money

balances held by households. Such balances are measured by the difference between theamounts of money created and destroyed from the origin of time up to the present time. An

analysis of money creation and money destruction is therefore necessary in order to

determine the supply of money. Any analysis limited to the intermediate phase of the

economic circuit, namely the phase between creation and destruction of money, cannot say

anything concerning the supply of money. That is why current monetary theory, being centred

on the intermediate phase of the economic process, is forcefully limited to the analysis of the

demand side of the money market, and is bound to assume the supply of money to be an

exogenous variable. (Graziani 1984, 11)


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- profits are an income that wage-earners, or, more generally, income holders transfer to

firms on the product market (via the mark-up price mechanism) (Rossi 2001, p.148; p.162) -

> This contradicts Marxs theory of profit.

- Single period solution: Supported by Rochon (2005), Messori and Zazzaro (2005)

- Some solutions: Reference in Zazzaro (2003, p.20~, p.37, fn.49) and his critical comments

on them.

* TIMING

- Most general time feature of MCA represented by Grazianis model is that the time has a

starting point; here we cannot think of time-before. This is not the case with Nells model

where time has both before and after.

* VALUE OF LABOUR

- In such an essential money economy, the value of labour must also be expressed in money

terms. In each state, the value is bestowed on labour through the payment to labour of an

aggregate money-wage bill that is to be spent in the acquisition of the supply of consumption

goods to bestow on firms the required profits. (Parguez 1996: 158) -> This is exactly the

same with Foleys way of conceptualizing the value of labour.

* Value of money

- Effects of fluctuation in value of money: Nell 1996: 249-50

- Noting two ways of money value determination cost of production approach & QTM

Nell suggests a theory that reconciles them, i.e. as the former for the long run and the latter

for the short run. (Nell 1996, 268)


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* Velocity of money

- MCA generally assumes a constancy of velocity: Graziani (1989, 14)

- In terms of the quantity theory of money, we may say that the velocity of circulation of

money does not remain constant. You can lead a horse to water, but you cant make him

drink. You can force money on the system in exchange for government bonds, its close

money substitute; but you cant make the money circulate against new goods and new jobs.[4]

Samuelson.

* Commodity money regime

- Adjustment of the quantity of money to the needs of trade is not automatic. Rules are

required such as: the mint price, the conditions of convertibility at the banks, laws governing

melting coin, clipping and other practices, and the rates at which different coins areacceptable in settlement of debts and for payment of taxes. (Nell 1996, 292)

* Price theory

- Accepts PK mark-up pricing, but with some difference; in PK, mark-up is generallydetermined by their desire to raise as much internal finance required to finance investment

(Rochon 1999, 21) However, Rochon argues that for MCA the main source of investment

finance comes from bank loans. (Rochon 1999, 21)

- So one of the primary purposes of generating revenue (including profits) for MCA is to

repay loans back to banks; markup is determined accordingly.

- Parguez (1997) distinguishes the two as Kaleckian markup (for PK) and monetary markup

(for MCA).
http://en.wikipedia.org/wiki/Velocity_of_money#cite_note-sam_vel-3http://en.wikipedia.org/wiki/Velocity_of_money#cite_note-sam_vel-3http://en.wikipedia.org/wiki/Velocity_of_money#cite_note-sam_vel-3http://en.wikipedia.org/wiki/Velocity_of_money#cite_note-sam_vel-3


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* Reflux principle

- The idea is that firms have to rely on bank credit every period even in a stationary state, i.e.

the flows of income and production are constant, since with the revenue obtained at the end

of the period they have to repay the bank.

- Sources of reflux: consumption, households buying new securities of the firms (Keynes

called it financial saving),

* EFFLUX PRINCIPLE

- Firms outlays (disbursement of incomeswages and dividend).

- Bank credit must be put into productive use in order for firms to generate income. It is the

creation of incomes which allows money to circulate. (Rochon 1999, 31)

* INITIAL/FINAL FINANCE- Investment is financed the moment in which newly produced capital goods find a buyer on

the market (Graziani 2003, p.71) See Grazianis discussion of financing investment in

Graziani (2003, p.71) -> final finance for investment is always supplied by savings.. (73).

Insisting that bank credit cannot used for financing investment, Bank credit can only solve a

different problem, namely that of making it possible for agents to hold the desired amount of

liquid balances (Ibid., p.73)

- Very good explanation on the concept: Accoce 2005, 4

- PK on what bank loans cover: For Moore (1988) bank loans cover only wages; For


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Davidson (1972) it also covers capital investment.

- financement: the amount of liquidity created in a given instant or over a given period

(Graziani 1984, 9)

- Graziani (1984, 9-10; 1994, 277)

- Which would be included in initial finance, i.e. finance by bank loans, constitutes the

greatest disagreement among circuitists. (Rochon 1999, 24)

- Keynes position: See Rochon 1999, 28-> Post-GT Keynes final conclusion: Bank credit

is used for production, and saving may be used as a way of reimbursing the initial debt by

firms selling new securities what can be labeled financial saving. (Rochon 1999, 28) In

this respect Rochon writes: ..in circulationist theory, never can portfolio decisions be used to

finance investment. (Rochon 1999, 35)If we consider long-term investment as well, then the

above statement is wrong since it is internally financed either by retained earnings or issuing

new securities, which is also admitted by Rochon himself.

- Argument supporting Grazianian type of finance:

- According to Bailly (1992) conceiving otherwise is identical to assuming that saving is

used to finance investment. (Rochon 1999, 24)

- Gnos 2003, He says, not following Grazianis approach would represent a

reinstatement of the natural rate hypothesis (although this is not correct if we assume, as doPKs and many circuitists, an exogenous rate of interest.) (Requoted from Rochon 2005, 128)

- Against Graziani:

- An idea pervading in the MCA literature that bank credit only covers working capital is

rooted in the real bills doctrine. Smiths version of it dictates that a restriction to real bills

leads banks to finance only short-term loans for working capital. Mints critique of such RB

view: there is no point in the insistence that the banks furnish only circulating capital,

whether temporarily or not. He insists to the effect that Any distinction between fixed andcirculating capital in this connection is irrelevant and therefore likely to be misleading.

(Mints 1945, 35)

- Rochon 1999;

- According to Seccareccia (1996), in Grazianis model i) firms producing capital goods

make no profit, and ii) there is an asymmetry between firms producing capital goods and

firms for consumption goods. Finally, Seccareccia also counter-argues against Bailly insisting

that i) the rate of interest is considered exogenous, thus unrelated to the forces of supply and

demand, or money or saving, ii) as long as circuitists accept the reversed causality between


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deposits and loans . there are no grounds to Baillys argumens. . even though bank credit

is used to finance investment, these credits do not come from prior saving. (summarized in

Rochon 1999, 25) The same critique of Bailly is found in Parguez & Seccareccia (2000, 108)

- such an extensive conception of the role of credit advances is the necessary

requirement for the validity of money. (Parguez & Seccareccia 2000, 108)

- Seccareccia (1997) provides Canadian data showing A notable proportion of corporate

investment is done via debt creation rather than through the build-up of corporate equity. (10)

- Lavoie (1987) also views that investment finance is covered by all three sources bank

loans, retained earnings, and the new issue market although bank loans (both medium and

long-term financing) is the main part.

- Febrero (2008, 119): [i]n our view, and contrary to the revolving fund argument,

long-term bank finance for the purchase of fixed capacity is empirically relevant.

- By including investment finance in the analysis, there is sufficient money to account

for the realization of profits. Indeed, all along, post-Keynesian and circuitists were asking the

wrong question: it is never about how M becomes M, but rather the other way around: firms

borrow M but only reimburse M within a single period of production. (Rochon 2009, 68)

- Seccareccias position implies that there exists in the circuit a struggle between short-run

financing (wages and raw materials) and long-run financing (capital goods). That is, firmshave to negotiate with banks about the timing of the investment loan repayment which

generally stretches over several periods. (Rochon 1999, 26)

- Following questions (Rochon 1999, 26): if credit is used, who supplies this credit? Does it

matter whether credit arises out of bank loans or from other financial intermediaries? ->

Answer: Rochon 1999, 27-30. Second, is credit used for the production of investment-goods

alone, or can it cover the production of consumption-good as well? -> Answer: Rochon 1999,

30-31- PK generally assume that bank credit is needed only for the production of investment-

goods. For instance, Davidson (1985, 105). (Rochon 1999, 39)

- Seccareccia compares the notion of initial/final finance to the old-line nineteenth-century

real bills doctrine of financing activities. According to this traditional banking principle,

prudent bank behavior would dictate that credit-money ought to go only toward the financing

of short-term production requirements. Long-term financing of fixed capital formation would

be expected to bypass altogether the banking system and to result either from the build-up of

equity via internal finance and/or through the selling of securities to households. The


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adoption by many circuit writers of what seems to be a peculiar version of the real bills

financing rules ensues exclusively from the internal macroeconomic logic of their analysis.

(Seccareccia 2003, 175) The logic is that they treat the firms as one consolidated entity in

which internal transactions would not necessitate financing via bank credit. And he further

notes that even if the firms take out bank credit to finance their investment in fixed capital the

proceeds generated by such transaction to the capital goods producing firms will eventually

be used in financing wage bills. (176)

=> This logic is questionable since these circuitist writers seem to treat money as stock not as

flow contrary to their proclaimed commitment to the latter. So to speak, treating money as

flow implies that one considers not the final destiny of the circuit money but each stage of the

latter. For example, consider the circuit where bank credit of $100 mediates three consecutive

transactions of one between firm A and firm B, then another between firm B and workers, and

still another between workers and firm A. Then total quantity of money in this circuit would

be $300, not $100 as the circuit writers would have it. If this argument is correct, then the

MCAs treatment of firms as one consolidated entity where internal transactions require no

financing by bank credit would be undermined; and we may conclude that in MC model the

total quantity of money tend to be underestimated.

- Seccareccia points out MCAs claim that fixed capital investment is financed by internal

funds could be justified when it incorporates a theory which explains firms pricing decisions

guaranteeing internal cash flows enough to invest on fixed capital. (And he comes up with

empirical data supporting it.) Yet for him, the build-up of corporate equity through pricing

does not fully finance fixed capital formation within an oligopolistic environment. Credit

creation also needs to fill the financing gap between desired investment and net cash flow .

A notable proportion of corporate investment in North America is done via debt creation

rather than through the build-up of corporate equity. (Seccareccia 2004, 179)- In MCA literature, especially when the issue of production finance is discussed,

intermediary goods such as raw materials, etc. i.e. circulating constant K in Marxs

terminology seem to slip into an ambiguous position. In those who adhere to Grazianis

approach to initial/final finance, two distinctions coexist uneasily. i) Distinction between

working capitalcirculating capital in Marxs terminology and fixed capital; the former is

externally financed by bank credit and the latter is internally financed by either retained

earnings or issuing new securities in the financial markets. ii) Distinction between labourers

and means of production; the former needs to be purchased through monetary transaction


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while this is not so in case of the latter. The latter distinction is based on a presupposition that

individual firms are aggregated into a firm sector as one entity, hence no transaction within

the sector involves money. Since circulating constant capital is included in working capital, it

should be financed by bank credit according to the first distinction. However, this cannot be

the case according to the second; i.e. since circulating constant capital would be transacted

among firms, it would involve no monetary transaction according the second distinction.

Graziani and his followers model that firms take bank loans covering wages only. Yet, this

does not match with the first distinction. Their model also involves unreasonably asymmetric

treatment between circulating constant capital and fixed capital; i.e. the former does not have

to be financed (since it is merely transferred among individual firms without money involved

while the latter needs to be (internally) financed. Readers could sense that the only way to

eradicate these contradictions is to ignore intermediary goods, raw materials, fuels, etc. And

this is exactly what they tend to do! Even if not explicitly, in Graziani and his followers

exposition raw materials, etc. tend to disappear from the picture. Interestingly, this is also true

for circuitists who oppose Graziani and insist that bank credit covers fixed capital as well. A

striking example is found in Rochons suggestion to make a distinction between two types of

bank credit; short-term credit, granted to firms in order for them to cover the payment of

wages, and reimbursed entirely within the period of production, and long-term finance, forthe purchase of capital goods, which is reimbursed over several periods of production.(2009,

67) Implicit, if not explicit, tendency to ignore circulating constant capital is found in both

groups of circuitists. Actually such tendency is inherently set within the theory of monetary

circuit; i.e. it explains the latters confusion between constant/variable capital disti nction on

one hand and circulating/fixed capital distinction on the other. Marxs critique of Smith and

Ricardo on this matter in Capital Vol.2 exactly applies here.

-> It is obvious that in a coherent macro-monetary framework all exchanges within the firmsector may be ignored because they are internal transactions. (Bellofiore et al. 2000, 406)

the macro reading of the cycle of money capital does not entail in the NI, as it does on

the circuit approach, the initial abstraction from monetary transactions among firms.

- ~~~~ from a macroeconomic point of view the firms investment of profit on the financial

market is not an investment at all~~~~~~ (Rossi 2001, p.149)

- Initial finance by retained profit from previous years: Rossi 2001, p.149; Cencini 1995 p.73-

4

- PK debate on short-term vs. long-term finance: Davidson 1972, 1986, Chick 1983, p.262-3,


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1984, Dalziel 2001, ch.6.

- In his post-GT articles concerning the revolving fund, Keynes assumed that all of the long-

term funding was obtained by issuing equities, but Davidson (1972) Chapters 10-12)

recognized that some of the funding might be provided instead by the banking system in the

form of long-term advances (Dalziel 2001, p.73).

- Keyness distinction between finance and fund: Dalziel 2001, p.73-4. Especially figure 6.2;

and During the current period, this short-term finance must be turned into long-term funding

77).

* PRICING THEORY

- . a further related problem [to finance issue] is the pricing issue, which has not been

fully articulated satisfactorily by circuit writers. (Seccareccia 2004, 177)

- Grazianis model provides no theory about how prices are set to satisfy a specific target

rate of return of the type for instance, illustrated by Parguez (1996) (Seccareccia 2004,179)

- Seccareccia 2004, 179

* LOAN/DEPOSIT RELATION

- Literature on loan creating deposit: Withers (1920) The Meaning of Money, Keynes (1936,

ch.7), Chick (1986) The Evolution of the Banking System and the Theory of Saving,

Investment and Interest, Hayek (1933)Monetary Theory and the Trade Cycle

- Loan determines deposits as opposed to New Keynesians and some PK (Rochon 1999, 28).- in every state of the economy, the amount of liquid resources initiated by credit

contracts is thus identical to the amount of newly created money. (Parguez 1996, 158)

- households demand for money (i.e. hoarded saving) = the debt of firms = the final increase

in the supply of money (Rochon 1999, 36)

- Bellofiore et al. 2000, fn.5

- Keynes agrees, far from actively created deposits being the offspring of the

passively created deposits it is the other way round (1971 Treatise:22).


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* CENTRAL BANK

- its role is to guarantee the stability of the financial market. The relationship goes from

the exogenous rate of interest, to the demand for credit, to its supply by commercial banks,

back to the central bank and the supply of reserves in order to keep the system functioning

well. But reserves are not emphasized in circuit theory since they are seen as a notion left

over from non-credit economies. In this sense, the role of the central bank is not limited to

supplying reserves to prevent a crisis, but is an integral and permanent component of the

circuit. (Rochon 1999, 17)

- Rochon & Rossi 2004;

- Ignoring the central bank is typical in this tradition (Accoce 2005, 6)

* FINANCIAL MARKET

- Role: not to channel saving toward investment, but rather to reimburse firms for their

production costs (Rochon 2009, 61)

* LAW OF REFLUX-

* THE STATE

- Parguez 1997; Parguez & Seccareccia 2000, 110-12;


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* PROBLEMS OF ORIGINAL CIRCUIT

- How can we start the circuit with firms buying inputs when no machines have been

produced at this initial period?

* INTEREST RATE

- Increase in interest rate on bank loan -> decrease in demand for credit for individual firms

but increase for the non-financial business sector as a whole

=> Even though he mentioned, Seccareccia does not take into his model 9.1.C the fact that

change in investment financed by bank credit could have a negative relation with interest rate.

(Seccareccia 2004, 181-82)

- In Graziainis model, real profits do not depend on the rate of interest paid on bonds. As a

consequence, any attempt to control private investment by controlling the rate of interest is

bound to be without effect, since it does not alter the level of real profits . This result .

Cannot be extended to interest paid to the banking system.. (Graziani 1989, 15)

* STOCK/FLOW

- In Post-GT Economic Journal articles, Keynes is describing the process of the monetary

circuit with the causality as: investment decision (expected income) -> finance (demand for,

supply of, credit) -> investment spending -> effective income & saving (both hoarded and

financial) (Rochon 1999, 31)- Rochon, however, problematizes Keynes discussion of revolving fund: Keynes appears to

be talking about astock of finance financing aflowof investment. This would, however, go

against the meaning of the monetary circuit. But as Graziani (1996, 147) notes, The fact of

its amount being constant does not deprive the revolving fund of its being by nature a flow of

liquidity supplied by the banks. (Rochon 1999, 31; emphases in the original.)


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* MARXIST MONETARY CIRCUIT APPROACH (MARXS REPRODUCTION

SCHEMES)

- The reason why classical capitalism was demand-constrained was discussed with great

clarity by none other than Marx himself, who could be considered the pioneer of the Keynes-

Kalecki revolution, though he did not carry his ideas in this sphere to their natural, logical

conclusion.~~~ (Patnaik 2009, 5)

=> Patnaik here notes Marxs original contribution to the theory of aggregate demand, which

was submerged until the birth of Keynesianism.

- As for the distinction between firms and workers, MCA emphasizes on the fact that the

former has an exclusive access to money. The point could supplement Marxs focus on an

exclusive possession of means of production. But before that, are they easily compatible? Or

what are the differences? => Bellofiores answer: Of course, in Marx, the class divide exists

before and independently of the rules governing the access to money, insofar as it depends on

the ownership of the means of production. According to Marx, it is because they are

capitalists that they have access to bank . nance. However, if one does not want to explain the

access to credit with the ownership of commodities before explaining how commodities are

produced, it is right to assume that the class divide depends on access to bank credit.According to this view, it is because they have access to bank . nance that they are capitalists.

(Bellofiore et al. 2000, 406, fn.4)

- This theme of the reflux of money was also emphasized by Marx in his lat er writings on

reproduction and again clearly indicates that the quantities in Marxs reproduction tables are

quantities of money capital, and that Marxs analysis of reproduction has to do with the way

the quantities of money capital invested are recovered by the different groups of capitalists,

so that this money capital can be reinvested and capitalist production can continueuninterrupted. (Moseley 1998, 166)

- The following important question which Marx tried to deal with is missing in MCA: how

is the constant capital consumed in production recovered, so that the consumed means of

production can be repurchased? (Moseley 1998, 167) the recovery of the constant capital

and the distinction between capital and revenue (171) The narrowness of Smiths

conception lies in his failure to see what Quesnay had already seen, namely the reappearance

of the value of the constant capital in a renewed form. (KII, 438)

- Marxs reproduction tables are in terms of flows of money capital. (Moseley 1998, 170)


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- Quantity of money in reproduction: KII, 551(quoted in Moseley 1998, 178)

- Discontinuity of investment in fixed capital as the main source of disruption (Moseley

1998, 179-80)

- Marxs reproduction tables consist of quantities of money which circulate as capital and as

revenue, and have to do primarily with the reproduction of the various components of the

money capital invested in the two departments. Marxs refutation of Smiths dogma has to

do with the distinction between money which functions as capital and money which functions

as revenue. Since capital is defined in terms of money, the components of capital (constant

capital, variable capital) and surplus value are also defined in terms of money. (Moseley

1998, 182)

* STOCK-FLOW CONSISTENT

- It is inventories on one hand, and money stocks on the other, which provide essential

flexible elements the buffers which enable the whole system to function in a world of

uncertainty (Godley & Lavoie 2007, p.292).It is assumed that all plans with regard to the

disposition of expected net wealth between cash, time deposit money, bills and bonds aregenerally realized (equations 10.41, 10.42, and 10.43) as shown in Box 10.7. Hence all

mistaken expectations about income and wealth determine the deviations, from what was

originally planned, in checking account money deposits (equation 10.43).We have here, in

fluctuations in checking account deposits, an exact analogue to the fluctuations in inventory

accumulation consequent upon firms never knowing exactly what their sales are going to be.

As is the case of firms expectations about sales, the way expectations by households about

their real disposable income are actually formed is no big deal; if actual income is lower thanexpected, this will show up instantaneously as lowerthan-expected wealth in the form of

checking account money and result (by the consumption equation 10.29) in corrective action

in subsequent periods (GL 330)

- For reasons of convenience (to economize on equations and functions) it is assumed,

finally, that firms never hold any money or securities; it is not strictly necessary for them to

do so given our assumptions that loans match inventories one-for-one instantaneously and

that all profits are immediately distributed. (GL 321)

- Interest rate in portfolio choice, real vs. nominal? Our answer is that, as long as the


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portfolio set-up is consistent and the various adding-up constraints are respected, we may

indifferently use real or nominal rates of return. Either sort of rates of return will yield the

same results with the same set of parameters. From a purely realistic point of view,

households will be comparing nominal rates; and hence from that point of view it may seem

better to use nominal rates, as in equations (10.42) to (10.45). From a formal point of view,

some economists may prefer to use real rates of return, as shown in Box 10.6, or in the

following matrix, because this presentation carries explicitly the rate of return on checking

deposits and its associated coefficients. (GL 327)

* IDEAS

- Graziani (1989) determines price level from the monetary circuit. However, without a set of

preexisting prices the specific quantity of bank loans at the outset cannot be determined. In an

hypothetical example where barter economy suddenly changes into monetary economy,

Mints comments No prices will exist when lending begins, and therefore the amount

originally loaned either will be a matter of chance or will be determined in some arbitrary

manner. (31)

* TRANSACTION AMONG FIRMS

- Commonly accepted assumption: If transactions between firms are ignored, i.e.if purchasing of capital services is considered an internal transaction ofthe firms sector, labour services are the only inputs to buy (Fontana 2004).

Reference

Bellofiore, Riccardo, Guglielmo Forges Davanzati, Riccardo Realfonzo 2000, Marx Inside

the Circuit: discipline device, wage bargaining and unemployment in a sequential monetary

economy,Review of Political Economy12(4).

Gnos, C. 2003, Circuit Theory as an Explanation of the Complex Real World in L. P.

Rochon and S. Rossi (eds) Modern Theories of Money: The Nature and Role of Money in

Capitalist Economies.


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Graziani, Augusto 1994, Monetary Circuits, The Elgar Companion to Radical Political

Economy.

Lavoie, M. 1996, Loanable Funds, Endogenous Money, and Minskys Financial Fragility

Hypothesis, in A. Cohen, H. Hagemann and J. Smithin (eds), Money, Financial Institutions

and Macroeconomics, Boston: Kluwer Academic.

Moselye, Fred 1998, Marxs Reproduction Schemes and Smiths Dogma in The Circulation

of Capital,

Parguez, Alain 1997, Government Deficits within the Monetary Production Economy or the

Tragedy of the Race to Balance Budgets.

Rochon 1999, Credit, Money and Production,

Rochon, L.P. 2005, Monetary Profits within the Monetary Circuit, in G. Fontana and R.

Realfonzo (eds), The Monetary Theory of Production: Tradition and Perspectives, Palgrave

Macmillan.

Rochon, L. P. 2009, The Existence of Profits within the Monetary Circuit: Some

Unanswered Questions Revisited, inPolitical Economy of Monetary Circuits

Rochon, L.P. and Rossi, S. 2004, Banking in the Monetary Circuit, in M. Lavoie and M.

Seccareccia (eds), Central Banking the Modern World: Alternative Perspectives(Cheltenham:

Edward Elgar).Parguez, Alain 1996, , inMoney in Motion,

Seccareccia, Mario 2004, Pricing, Investment and the Financing of Production, Modern

Theories of Money,

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