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Abstract
Stock-flow-consistent models (SFC) and modern monetary theory (MMT) are growing in popularity. Both are part of post-Keynesian theory and provide it with a modeling tool for the former and political proposals for the latter. However, these new modern post-Keynesian approaches share features with monetary circuit theory: their accounting framework, the hierarchy of agents and economic flows, and the importance of the Keynes’s finance motive. This article examined the fundamental elements of these new approaches to establish their links with monetary circuit theory.
Notes
1 See Barrère (Citation1990); Parguez (Citation1980, Citation1984, Citation1986); Parguez and Seccareccia (Citation2000); Poulon (Citation1980, Citation1982, Citation1985, Citation1998, Citation2018).
2 Although in the following we will talk about money circuit theory, we must recognize that there are in fact three approaches of MCT: that of Schmitt, that of Barrère, Graziani and Parguez, and finally that of Poulon. For example, Schmitt separates two forms of money, contrary to Parguez and Poulon. Credit and the financing of production is not enough to endogenously create money, because money only really becomes money when it takes on purchasing power through the payment of wages and therefore of labor. The Marxist inspiration is clear. In the same way this currency deflates from this purchasing power by the consumption of the workers before being ultimately destroyed. According to Schmitt, the monetary circuit cannot be confused with the action of banks.
3 Schmitt having a special place within MCT, he would not fully agree with point 5 (see also note 2 on the link between money and labor).
4 According to Vallageas (Citation2022), the “circuitists” can be classified based on the position they take on the amount of credit that banks need to extend to firms in order for the economy to function. Consequently, he defines three groups of circuitist economists: (i) credit finances wages (Graziani and Schmitt); (ii) credit finances all distributed income (in the form of wages or profits) (Poulon and Vallageas); (iii) credit finances production costs (wages and investment) (Parguez and Seccareccia).
5 Barrère (Citation1990, pp. 20) reminds us of Henri Guitton’s question. In his book entitled Imperfection in Economics (1979), he wondered whether the concept of the circuit was intended to take the place of the concept of the market.
6 If Marc Lavoie can be considered a “Circuitist” and one of the founders of SFC models, most of the authors in SFC modeling (Wynne Godley, Francis Cripps, Lance Taylor, Claudio Dos Santos, Jacques Mazier) are not familiar with MCT. The exceptions are Gennaro Zezza who knew and admired Augusto Graziani and Edwin le Héron who took part in the debate on MCT in France during the 1980s.
7 The TEE, named after the Tableau économique by the Physiocrat François Quesnay, was introduced in 1955. It is the main tool of the French national accounts, and therefore of the System of National Accounts.
8 According to Le Héron (Citation2020), MCT develops money as a flow (referring to Keynes’s finance motive) and does not attach much importance to the liquidity preference, i.e., money as a stock. SFC models develop the two dimensions of money: flow (endogenous money through production) and stock (according to a portfolio arbitrage between money and securities where the liquidity preference has a role to play).
9 Admitting he has adhered to MCT since the 1970s, Lavoie (Citation2021) shows that there is strong compatibility between Godley’s and Graziani’s analyzes, the latter being considered as the leader of the Italian MCT.
10 This relationship, in the form (1) or (1′), is the basis of MMT analysis (Kelton, Citation2020, chapter 4). Stephanie Kelton acknowledges the influence Godley has had on her own thinking (Kelton, Citation2020, pp. 128–129).
11 While neoclassical theory seeks the microeconomic foundations of macroeconomics, post-Keynesians provide a macroeconomic basis for microeconomic behavioral relationships.
12 See, for example, Godley (Citation2004).
13 Firms demands for credit depends on their expectations of the demand for goods and services that they think they must satisfy, and in particular, on the effective demand that determines the level of employment, and therefore the income to be paid to households.
14 This comes from interpretations of the Keynes’s finance motive—the 1980s debate in post-Keynesian theory. For MCT, all the money borrowed by firms (for the purchase of commodities, capital or labor) ends up as household income. To illustrate this, imagine that any firm allocates half of its resources to the payment of income to households and the other half to the purchase of means of production from other firms, which will do the same. Thus, step by step, all the money borrowed will be paid to household income.
15 According to Cottin-Euziol and Le Heron (Citation2021), SFC models are not interested in the monetary financing of expenditures within the period considered. Monetary financing only appears for what exceeds this short-term period, i.e., the financing of net investment. This is consistent for example with the analysis of Paul Davidson, according to whom initial finance only finance investment but not all costs of production as for MCT.
16 “[A]t the aggregate level the causation goes from spending to income, from injections to leakages” (Wray Citation2019, pp. 15).
17 The horizontalist/structuralist controversy died out of its own accord in the early 2000s (Fontana Citation2003).
18 For example, the Circuit of “Dijon” uses double-entry accounting to show the immediacy of certain transactions. The identity of savings and investment and the time of the circuit are clarified (Bradley et al. Citation1993).
19 The Circuit of Dijon has often been criticized for focusing on the unit of account function. Indeed, for MCT in general, the question is to establish that money corresponds to household income. The school of Dijon goes further: it distinguishes a money, a pure number (which has changed its name over time), from a “real” money, which is the equivalent of household income. For them, the latter is the only money with a liberating power, that is to say, purchasing power.
20 “First, there is the story for the sophisticated reader or the scholarly researcher, what Fullwiler et al. (Citation2012)—three key contributors to MMT—call the specific case. This is the story which is exactly right and with which I am in full agreement. Different countries have different institutions with different specificities, and small differences or small changes may lead to substantial consequences with regards to the monetary and fiscal nexus. Then there is a second story, which MMT writers call the “general” case, which is designated for a more popular consumption, for instance blog readers” (Lavoie Citation2019, pp. 98).
21 The emphasis in the source.
22 “[F]irst, the chartalist assertion whereby this thing is necessarily state money, and synonymous with the debt of the state. Chartalist writers ground this assertion simply in the fact that every modern banking system is endowed with a central bank or ‘high-powered money.’ Hence, they write, central bank money is de facto the creature of the state. Second, we wish to challenge the assumption that the central bank and the treasury are treated as if they were the same institution” (Gnos and Rochon Citation2004, pp. 43).
Additional information
Notes on contributors
Éric Berr
Éric Berr is at Bordeaux School of Economics – CNRS – Université de Bordeaux, France.
Virginie Monvoisin
Virginie Monvoisin is at Alternative Forms of Markets and Organizations, Grenoble École de Management, France.