Transcript Monetary Economics after Wicksell: Alternative Perspectives within

The Monetary Divide
• Individualistic, non-monetary, static,
equilibrium paradigms
– Money as means of payment
– Dichotomy, Neutrality
The Monetary Divide2
• Macrosocial, monetary, dynamic, disequilibrium
paradigms
– Money as finance
• affects real structure of the economy and income distribution
• Instability
Wicksell 1898, Schumpeter 1911/1939, Keynes 1930/1937-9
– But also, Money as store of value
• Crisis, involuntary unemployment equilibrium
Keynes 1936
What about Marx and Sraffa?
The process of capitalist
development
• Capitalist development is defined by
Schumpeter as a discontinous and
qualitative change induced by innovation
• The innovation breaking the existing
general equilibrium is a the expression of a
change in people’s behaviour
Stationary circular flow
• Interests and profits are absent
• Since the economic process is syncronized,
there are no stores of money
• Credit may be neglected
• Money plays a non essential role
Credit creation and ensuing Inflation
• Credit creation and the ensuing inflation cause a
transfer of productive resources.
• This transfer happens owing to a squeeze of the
purchaising power held by the old producers.
• Essential role of credit in capitalist development
• Credit => Innovation
• Innovations, yielding profits, enable entrepreneurs
to pay interests to the banks wich granted credit
Interest
• Interest is an entirely monetar phenomenon
• The premium of present over future means of
payment wich the owner brings on balances he has
lent
• A share of net product
Schumpeter’s pure model of two
phase cycle
• The first entrepreneur make it easier for others to introduce
new production funcitons in the same or in other sectors.
• Innovations appear in bunches
• Great increase in monetary expenditure whereas the supply
of goods is not growing yet.
• Prices of means of production and incomes are the first to
increase, followed by consumer goods’prices
• When supply is raised as an outcome of innovations, the
new firms enjoy net profits whereas the old firms must
undergo restructuring or get out of the market
• General disequilibrium => stop of entrepreneurial action
(recession phase)
Schumpeter Class Analysis
• One does not have to belong to boorgeousie to become an
entrepreneur
• Recession establishes a necessary condition for new phase
of prosperity, but the actual renewal of entrepreneurial
action is caused by motivation of entering the capitalist
class
Money and capitalist development
• Money is the driving power of economic
evolution.
• In the circular flow money is at the same
time receipt voucher and claim ticket
(money as a veil)
• Un capitalist developmet money is only
claim ticket
(banks can create credit ex novo)
Money and capitalist development
In capitalist development there is a sequential order
of the concatenated acts in which development runs:
1) entrepreneur’s demand on his bank (financing of
innovation)
2) Inflationary process (caused by the non simultaneity of
the emergence of new purchaising power and of the new
commodities)
3) Carrying out of innovation
4) Flow of new supply
5) Taking of profits by the enrepreneur (that will allow to
pay back capital +monetary interest to bank)
Summary
• Without credit no innovation and o cycle is
possible.
• Banks perform a funcional role for
accumulation
• But they also have a contradictory role:
interest is a ‘tax on profits’ and a brake on
development!
Wicksell monetary theory
• Wicksell is the first author who sees in bank
financing of investments by credit creation
the defining character of capitalism as a
monetary and unstable economy.
• Investments are financed by the banking
system and credit does not depend upon the
amount of savings (i.e. created ex novo)
Wicksell monetary theory
• There is an equilibrium (S=I) only if
entrepreneurs’real rate of return on
investments and the money rate of interest
established by the banks have the same
value.
• But the equality between money and natural
rate of interest is a chance!
The Unstable Equality
(Pure credit system)
• Banks set discretionally the level of the money
rate of interest, and the real return of investment
(i.e. natural rate of interest) is higly unstable.
• If natural rate > money rate
=>entrepreneurs’(extra)profits (at the expense of
savers)
• =>demand for finance and credit supply increase
• =>greater liquidity =>cumulative inflation
(extraprofits are preserved)
In other cases
• Equilibrium will be broken again, beacuse of the
stediness of the discretional level of the money
rate fixed by naks against the higly unstable real
rate.
• The process is worsened –not compensated- by a
reduction in propensity to save.
• A positive difference between the two rates acts
positevely on the capitalization of the returns
expected from new capital goods, favouring their
production at expense f consumption goods =>
forced savings!
Schumpeter vs Wicksell
• In Wicksell credit supply satisfies each entrepreneurial demand,
whereas in Schumpeter banks ration credit and have a positively
sloped supply curve.
• According to Schumpeter the structural instability of capitalism
is due to an endogenous qualitative change, (financing of
innovation). According to Wicksell variations in the natural rate
are exogeneous (credit creation only in equilibrium) => inflation
is independent from changes in production functions.
• The conflict over distribution in Wicksell is between merchant
capitalists (savers) and industrial capitalists.The conflict in
Schumpeter is between entrepreneurs and managers of old
firms, with bankers earning interests and selecting
entrepreneurial demand.
Schumpeter vs Wicksell
(the common ground)
• They sees the economic process as a
monetary circuit where money is endogenous
because of the ex novo creationof purchaising
power by banks in favour of the industrial
capitalists.
• Capitalists can escape the budget constraint,
but workers cannot.
• Decisions on the level and composition of
output are autompusly taken by industrial
capitalists, with workers in a passive position.
Monetary Circuit (Graziani)
• Step 1
• Initial finance (only firms are admitted
to bank credit)
• The demand for bank credit coming
from producers depends only on the
wage rate and on the number of workers
that firms intend to hire
Monetary Circuit (Graziani)
• Step 2
• Decision concerning production and
expenditure.
• Wage earners can only take decisions on how
to distribute their money incomes between
consumption expenditure, addition to cash
balances or purchase of securities.
Monetary Circuit (Graziani)
• Step 3
• Commodities produced are put to sale
• Money that wage earners spend in
commodities market, as well as money
spent in financial market on the
purchase of securities, flows back to the
firms, who can use it to repay bank debt.
Monetary Circuit (Graziani)
• Step 4
• Bank debt is repaid. Monetary circuit is
closed.
• New money will be created when the
banks grant new credit for a new
production cycle.
Monetary Circuit (Graziani)
• The above descripiton has homitted the
problem of the payment of interest to the
banks.
• Since the only money existing in the market
is the money that banks have lent to the
firms, even in the most favourable case, the
firms can only repay in money the principal
of their debt and are unable to pay interest!