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Eichner's Monetary Economics

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Eichner's Monetary Economics Eichner’s monetary economics: ahead of its time Marc Lavoie August 2006 For the book: MONEY AND MACROECONOMIC ISSUES ALFRED EICHNER AND POST-KEYNESIAN ECONOMICS Edited by M. Lavoie, L.-P. Rochon, M. Seccareccia 7243 words 1 Eichner’s monetary economics: ahead of its time 1. Introduction While Geoff Harcourt once thought that Alfred Eichner “was not an absolutely top-line economist”, adding that “he did a lot of harm to Post Keynesianism” (Harcourt in King 1995, p. 85), I tend to think instead that Alfred Eichner’s contribution to post-Keynesian economics in general, and to post- Keynesian monetary theory in particular, was ahead of its time and of great relevance today. Now, this runs somewhat against the standard assessment of Eichner’s contribution to monetary theory, which is usually perceived as being very minor, perhaps even non-existent, Eichner being viewed somehow as the man of one idea, that of markup pricing being dependent on the amount of internal funds necessary to finance capital accumulation. The following quote partly illustrates this standard assessment. ... Money didn’t have a crucial role to play, in the way that I think Minsky and others would see money and the financial system as having important implications for the way that the economy operated .... I think this is one of the unresolved issues in Post Keynesian economics. The paper that Paul Davidson wrote in the Festschrift for Alfred Eichner, for example, points out that Alfred had not incorporated any essential role for money in his analysis. Most, or maybe all, of Eichner’s analysis doesn’t really come to grips with the nature of money and the financial system. It essentially assumes that investment can be financed, and doesn’t analyse the financial system at all. So I think there is a continuing debate inside Post Keynesian economics on this, and a degree of tension among different Post Keynesian economists over the role of money. Much work within Post Keynesian theory, ranging from Amitava Dutt and Joseph Steindl to Kalecki and Eichner, whilst making some mention of money, does not really incorporate money in any essential way. (Sawyer in King, 1995, p. 145) 2 Malcolm Sawyer’s judgment would rely, at least partly, on Davidson’s (1992) reading of Eichner’s unfinished 1987 textbook, a paper which did appear in the Eichner Festschrift edited by William Milberg (1992). But Davidson’s own opinion seems to be based on an overly quick read of the book. All but one of the references made to the book are taken from the first 12 pages of the 58-page chapter 12, entitled “Money and Credit”. In addition, while praising Eichner for his use of the flow- of-funds approach in that chapter, Davidson (1992, p. 187-189) seems to be unaware that financial flows are presented in great detail as early as chapter 2, from pages 79 to 108, claiming that “monetary aspects of his book do not appear until chapter 12 – 800 pages into the volume”. The purpose of this chapter is to show that, by contrast, Eichner was very much concerned with monetary economics and the financial system, and that in the course of his work, besides claiming, as many heterodox authors before him contended unproductively, that he intended to explain “the monetarized production system” (Eichner 1987, 8), he did put forward four key concepts which are now at the forefront of post-Keynesian monetary economics.1 Indeed, it is rather ironic to note that Sawyer (2001) himself later showed that, despite being terse, Kalecki’s contribution to monetary economics was quite relevant; and it also turns out that Dutt (1995) constructed a little model, inspired from Steindl’s work, showing the importance and impact of corporate debt for economic growth. Thus, with respect to Eichner’s contribution to monetary economics, there is some similarity with the widely-held belief that Joan Robinson only dealt with growth and capital theoretic issues, or to methodology, with no concern about monetary and financial issues, a belief that was shown to be without foundations by Rochon (2005), who demonstrated instead that Robinson had a much better comprehension of monetary theory than most of her contemporaries. History of thought is full of these paradoxical assessments! The four key monetary theory concepts that were highlighted by Eichner are the following: the starting point of monetary theory is the demand for credit, not the demand for money; central banks pursue essentially defensive operations when intervening on the open market; the liquidity pressure ratio of banks plays an important role throughout the economy; an understanding of the economy can only be acquired by going beyond the standard national income and product accounts, 1 Instead of a monetarized production economy, most authors today would speak of a monetized production economy. 3 that is by making use of the flow of funds accounts. Each of these four points will now be taken in turn, by relating them to present-day post-Keynesian monetary economics. 2. The starting point: the demand for credit In his most famous book, The Megacorp and Oligopoly, Eichner (1976, 12) says that “the premise underlying this volume ... is that the function of the monetary system is primarily to provide lubricating fluid for the real economy ”. It is this statement which may have led some to believe that Eichner had very little to say on money and finance. A similar statement opens up chapter 12 on “Money and Credit” in his 1987 book: This lack of attention to money per se is no accident. It reflects the belief among post- Keynesians that while monetary factors are clearly important – and indeed under certain circumstances, may be critical – they are typically less important than the real factors which have been emphasized up to this point. It is not, as some critics of this and other Keynesian-inspired theories have charged, that ‘money does not matter’. It is rather that other factors matter more .... (Eichner 1987, 805). It is precisely this passage that drew most fire from Paul Davidson (1992), and some would say rightly so, in the paper mentioned by Sawyer in the introductory quote. It led Davidson (1992, 185) to write that “in the area of monetary theory and macrodynamics [Eichner] barely scratched the surface”. This passage may also reflect the fact that, as pointed out by Andrea Terzi (1992, 157), “the question of whether monetary factors should play an essential role or should rather be regarded as mere reflections of more fundamental phenomena ... was probably still unresolved in Eichner’s own mind”, although the indented quote above is confirmed earlier in the book, when Eichner (1987, 139) says that up until chapter 12, “we shall simply adhere to the logic of the basic Keynesian model by assuming a fully accommodating policy on the part of the central bank”. However, as early as 1979, in his brief presentation of the broad post-Keynesian econometric model that he intends to construct, Eichner, citing Minsky, claims quite explicitly that it would be 4 a mistake to set aside or ignore monetary factors and only focus on real features. Post-Keynesian short-period models emphasize the importance of credit availability – as determined by the central bank – in enabling business firms and other spending units to bridge any gap between their desired level of discretionary spending and the current rate of cash inflow. Credit availability is important in determining not only discretionary spending but also liquidity crises and the number of bankruptcies.... Thus it is credit availability – or the degree of “liquidity” pressure throughout the economy – that becomes the critical monetary factor in a post-Keynesian short-period model, not the stock of money. The latter, as distinct from the monetary base, is regarded as partly the result of endogenous economic processes rather than the determinant of those processes (Eichner 1979, 40-1). While this statement is clearly reminiscent of Minsky’s views on the possibility of financial fragility, there is still some ambiguity in Eichner’s statement. Eichner seems to imply that the supply of money is mostly endogenous, as most post-Keynesians would claim, but that the supply of the monetary base is not. This ambiguity will be lifted a few years later. But the point that I wish to make is that Eichner clearly puts the focus of the analysis on the ability of agents, non-corporate firms in particular, to obtain bank credit. The critical monetary factor is the availability of credit, and not the availability of money, a point also underlined with great force at that time by Albert Wojnilower (1980, 324) when he wrote that “I can testify that to all except perhaps the most indigent of the economic actors, the money stock – in contrast to oil or credit – is a meaningless abstraction”. This point will be reiterated forcefully by Eichner a few years later: “It is the demand for credit rather than the demand for money that is the necessary starting point for analyzing the role played by monetary factors in determining the level of real economic activity” (Eichner 1985, 99). This is confirmed by Arestis and Driver (1984, 53), when they analyze the key features of the Eichnerian econometric model: “In terms of its monetary aspects the emphasis is on credit rather than money in enabling spending units to bridge any gap between their desired level of discretionary spending and the current rate of cash inflow”. 5 This led Eichner to completely remove the money stock from his econometric model, as early as 1981 or 1982, a move that was to be imitated, without acknowledgment, ten or fifteen years later, by the proponents of the New consensus in monetary policy and by central bankers.
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