Production commitments and the financial foundations of specialized economies

Abstract

Production commitments are the financial underpinnings of the productive system. All productive systems that involve specialization require the formulation, tacit or explicit, of production commitments. This paper explains how production commitments are related to the financial and productive sides of the economy. The article has two main objectives: First, to introduce the notion of production commitment as a credit/debit relation that exists (and must exist) between specialized producers. Second, use this notion to bridge the gap between the inter-industry and intersectoral analyses. This connection can also be used to complement Keynes’ General Theory and other Post Keynesian approaches. The connection between the inter-sectoral and inter-industry sides of the productive system allows for the inclusion of multiple types of financial assets. Correspondence can be established between the existing production commitments and the required outstanding financial assets. In addition to the interaction between currency and bonds traditionally analyzed in the Post Keynesian literature, the present analysis offers a path for the inclusion of other types of financial assets like stocks and derivatives.

Keywords:

• Economywide Production
• money
• financial sector
• production commitments

JEL Classification:

• E110
• E120
• E4

Acknowledgments

I express my gratitude to Professors Jan Kregel, John F. Henry and the late Professor Frederic S. Lee for their invaluable guidance and comments. The author is fully responsible for any mistakes that the reader may find.

Notes

1 Smith (2007 [1776], 3–19).

2 As will be explain below, these credit/debit relationships do not need to involve the commitment of monetary payments. They are, more fundamentally, a commitment to deliver a physical good or a service.

3 According to Keynes: “A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction.” Keynes (1936, vii).

4 Generally considered, a producer is an entity whose individuality or collectivity depends on the units chosen and the level of aggregation. For instance, a firm cataloged as an individual producer is also a collective entity: a group of other cataloged individuals (the firm’s departments or the people who are part of them). This general consideration acknowledges the collective dimension of seemingly individual entities. More importantly, as will be explained below, the role of producers is socially constructed. Division of labor must be contextualized within a given level of aggregation.

5 Such importance can be defined by the character of producers as going concerns.

6 I use the concept of going economy as defined in Lee (2011) although the theoretical framework is different from the one proposed by the author. Lee defines the notion of a going economy as follows:

“As a theoretical concept and a methodological approach, the economy as a going concern is abstracted from its historical origins and situated historically. That is, it represents a ‘currently’ functioning working capitalist economy complete with structures, agency, social fabric, and social activities. Hence, the structures that give the economy its form, the organizations and institutions that structurally organize and coordinate economic activity, and the agency or acting person that initiates and directs economic activity operate interdependently, contemporarily, although not necessarily synchronically. So while the structures, organizations, and institutions provide the framework for the economy to be a going concern, to continuously generate economic activities, it is the acting person that makes it happen or not—the economy does nothing on its own accord.” (Lee 2011, 1283).

7 The term normal is here used to imply that similar products generally exhibit similar characteristics in their production processes.

8 The characterization of financial assets as “money today in exchange for money in the future” is attributed to Professor Jan Kregel who mentions it in multiple unpublished handouts.

9 In Keynes’ definition of a monetary economy (Keynes 1936, vii), the quantity of employment belongs in the inter-sectoral realm, whereas the direction of employment is part of the inter-industry dimension of the economy.

10 This is another way of stating Keynes’ equilibrium in presence of unemployment. Full employment is not a unique state towards which the economy tends, but one of many other states all of them equally possible from the theoretical stand point.

11 Kaldor (1956) and Pasinetti (1962) et al.

12 For instance, Wray (2012).

13 Godley and Lavoie (2012) inter alia.

14 For example, Minsky (1982).

Additional information

Notes on contributors

Andres F. Cantillo

Andres F. Cantillo is an assistant professor at Kansas City Kansas Community College, Kansas City, KS 66112, USA.