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.

KEYWORDS:

• Post-Keynesian theory
• Keynes
• monetary economics

JEL CLASSIFICATION:

• B59
• E12
• E44

Acknowledgements

We wish to acknowledge the generous comments of two anonymous referees.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 One of the few favourable references to Marx in his writings is made in that connection. When Keynes endeavours to clarify the nature and role of firms in a business economy, he mentions the famous Marxist concept of commodity circulation (Keynes 1973 Vol. XXIX, p. 81), that is, the M-C-M’ arrangement, where M is the amount of money applied in purchasing labour and means of production at the start of the production cycle, C represents the commodities produced during the cycle and M’ is the amount of money obtained at the close of the process (M’ > M). Money is thus the beginning and end of all production activity.

2 See section 2 of this paper for a description of the Paradigm.

3 Fernando Cardim de Carvalho passed away in May 16, 2018.

4 This paper differs from the brief survey done by Ferrari-Filho (2018) that focused mostly in Carvalho (1992). Although we analyse other Carvalho’s works, we do not intend to exhaust his contributions, but rather to focus in some his most important theoretical contributions.

5 Open systems are those where it may not be possible (in a complex system), to be sure that all relevant variables are identified; there may be interrelationships between agents and/or these may change (for example agents may learn); there is imperfect knowledge of the relations between variables, their relationships may change; connections between structures may be imperfectly known and/or may change, so that structure and agency are typically interdependent (Chick 2004, 6).

6 Davidson (1984) offered a different codification that included the principle of the non-neutrality of money, the non-ergodicity principle and the money contract principle.

7 On the relationship between the essential properties of money and its liquidity, Keynes (1936, 241) states that: ‘The attribute of liquidity is by no means independent of these two characteristics [the negligible elasticities of production and substitution]. For it is unlikely that an asset, of which the supply can be easily increased or the desire for which can be easily diverted by a change in relative prices, will possess the attribute of liquidity in the mind of owners of wealth. Money itself losses the attribute of liquidity if its future supply is expected to undergo sharp changes.’

8 A stochastic process is said to be ergodic when, if performed in infinite repetitions, its temporal and spatial means converge (Davidson 1988, p. 331). In that context, the probability distributions of relevant variables obtained from any past repetition of the stochastic process will converge to the probability distribution governing present and future values of those variables.

9 Because it cannot be traded on secondary markets, capital is an illiquid asset and accordingly has no corresponding cash or spot price. Thus, the expected quasi-rent of capital is given by the ratio between a capital asset’s expected monetary return (Q) and demand price (), i.e., the maximum price that entrepreneurs are willing to pay for one additional unit of the asset.

10 For an analysis of the theory of the endogenous money in an ‘accommodationist’ view, see Lavoie (2006), and in a ‘structuralist’ view, see Dow (2006).

11 Rochon (2001), however, has argued that neither Moore or Kaldor actually endorsed such a passive role of the CB in providing bank reserves

12 The main contribution was made in Carvalho (1999). See also Carvalho (2015, Chapters 4 and 5).

13 According to Carvalho (2016, 294, italics in the original), ‘when money is spent (… .) that amount of means of payment becomes available to be held by somebody else in advance of some other purchase. It works like a revolving fund, where money spent can now be used by somebody else to make a purchase as long as the value of the latter is the same as the value of the former’.

14 Note that Carvalho made other important contributions to theory, with regard, for instance, to inflation, bank regulation and economic policy. See, for instance, Carvalho (1993b).