The Monetary Theory of Production The essays in this book are dedicated to and in honour of Augusto Graziani The Monetary Theory of Production Tradition and Perspectives Edited by Giuseppe Fontana and Riccardo Realfonzo Selection and editorial matter © Giuseppe Fontana and Riccardo Realfonzo 2005 Individual chapters © contributors 2005 Softcover reprint of the hardcover 1st edition 2005 978-1-4039-3259-4 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. * No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin's Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-51619-3 ISBN 978-0-230-52307-4 (eBook) DOI 10.1057/9780230523074 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The monetary theory of production :tradition and perspectives I edited by Giuseppe Fontana and Riccardo Realfonzo. p. em. Includes bibliographical references and index. 1. Money. 2. Monetary policy. 3. Economic policy. 4. Production (Economic theory) I. Fontana, Giuseppe, 1968- II. Realfonzo, Riccardo, 1964- HG220.A2M576 2005 332.4'01-dc22 2004057664 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 09 08 07 06 OS Transferred to digital printing 2005 Contents List ofFigures xii List of Tables xiii Acknowledgements xiv Notes on the Contributors xvi Introduction: The Monetary Theory of Production 1 Giuseppe Fontana and Riccardo Realfonzo Keynes's legacy 1 Traditions of the monetary theory of production in Keynes's time 3 The contemporary debate on the monetary theory of production 6 Overview of the book's contributions 10 Note 16 References 16 PART I THE TRADITION OF THE MONETARY THEORY OF PRODUCTION 1 Macroeconomic Analysis and Individual Economic Rationality: Some Lessons from Wicksell, von Mises and Schumpeter 23 Richard Arena and Agnes Festre Introduction 23 Individual economic rationality and macroeconomic analysis: Wicksell after the modern circulation approach 24 Economic rationality, circular flow and economic development in Schumpeter 27 Economic rationality, the 'evenly rotating economy' (ERE) and the 'progressing economy' (PE) in von Mises 31 Conclusion 35 References 36 v vi Contents 2 Monetary Economics after Wicksell: Alternative Perspectives within the Theory of the Monetary Circuit 39 Riccardo Bellofiore Introduction 39 Wicksell's Interest and Prices 40 Keynes's Treatise on Money 42 Schumpeter on finance, innovation and capitalist evolution 45 Out-of-equilibrium monetary economics before The General Theory: an assessment 47 Preliminary conclusions 50 Notes 50 References 51 3 Lost and Found: Some History of Endogenous Money in the Twentieth Century 53 Victoria Chick Introduction 53 Do banks 'create credit'? 54 The deposit multiplier 57 The role of reserves 60 Conclusion 63 References 63 4 Alternative Theories of the Rate of Interest: A Reconsideration 67 Gunnar Heinsohn and Otto Steiger Schumpeter's and Keynes's criticism of the neoclassical theory of the rate of interest: money precedes goods 67 Where does the money come from in Schumpeter's and Keynes's theories? 68 The 1937 debate on 'Alternative Theories of the Rate of Interest' 71 Own capital and collateral: the missing links in the theory of the rate of interest 73 The property paradigm as an alternative theory of the rate of interest 75 Notes 79 References 79 Contents vii 5 An Inquiry into a Dark Mystery in the History of the Monetary Theory of Production: What Went Wrong with the Early Contribution of Joan Robinson 83 Alain Parguez The Robinsonian mystery 83 Solving the mystery: one must venture beyond the veil of joan Robinson's crucial concern with the classical restoration 87 At last the mystery is solved 92 Notes 93 References 93 6 Some Reflections on Changes in Keynes's Analysis between the Treatise and the General Theory 95 Malcolm Sawyer Introduction 95 Money in A Treatise on Money 95 Money in The General Theory 98 A Treatise versus The General Theory 102 Conclusion lOS Notes 106 References 106 PART II STOCKS AND FLOWS IN THE MONETARY CIRCUIT 7 Single-Period Analysis: Financial Markets, Firms' Failures and Closure of the Monetary Circuit 111 Marcello Messori and Alberto Zazzaro Introduction 111 Profit realisation in kind 112 The financing of investment demand 115 Monetary profits and firms' failures 118 Conclusion 120 Notes 121 References 122 8 The Existence of Monetary Profits within the Monetary Circuit 125 Louis-Philippe Rochon Introduction 125 The theory of the monetary circuit 126 The determination of profits 131 viii Contents Conclusion 136 Notes 136 References 136 9 Central Banking in a Monetary Theory of Production: The Economics of Payment Finality from a Circular-Flow Perspective 139 Sergio Rossi Introduction 139 The coexistence of central and commercial bank monies 140 The circular flow of central bank money and credit 144 Payment finality for cross-border transactions 148 Conclusion 150 Notes 150 References 151 PART III THE MONETARY CIRCUIT AND UNEMPLOYMENT 10 Bank Mergers, Monopoly Power and Unemployment: A Monetary Circuit Approach 155 Guglielmo Forges Davanzati and Riccardo Realfonzo Introduction 155 The monetary circuit 156 Increase in competition, bank mergers and firms' monopoly power 157 Monopoly power, interest rate and employment 160 Policy implications 166 Interest rate, savings and employment 167 Conclusion 169 Notes 169 References 170 11 Circuit Theory and the Employment Issue 173 Claude Gnos How circuit theory accounts for the originality of Keynes's theory of employment 174 Circuit theory at centre stage in explaining unemployment 177 Conclusion 180 Notes 181 References 181 Contents ix PART IV MONEY, INFLATION AND DISTRIBUTION 12 Non-Credit Money to Fight Poverty 187 Biagio Bossone and Abdourahmane Sarr Introduction 187 Finance for growth: what works and what does not 188 Finance to fight poverty: a proposal 191 Economic effects of the NCMS 196 Appendix I 199 References 201 13 Towards a Non-Conventional Circuit Approach: Credit, Microcredit and Property Rights 203 Lilia Costabile Sufia's story 204 Conventionalism, libertarianism, welfarism, and the capability approach 205 Microcredit and its reasons 210 Microcredit and the circuit approach 213 Notes 215 References 215 14 Monetary Theory of Production and Disequilibrium Inflation 217 Elie Sadigh Introduction 217 Inflation defined only as an increase in the general level of prices 217 Monetary disequilibrium inflation 220 Consequences of disequilibrium inflation 222 Conclusion 226 Note 226 References 226 PART V MONETARY CIRCULATION AND ECONOMIC POLICY 15 What is Wrong with the Euro Area Monetary Model? 231 Philip Arestis and Malcolm Sawyer Introduction 231 Theoretical underpinnings of the EMU model 231 Institutional framework 233 x Contents The monetary theory of production view 234 Effectiveness of interest rate changes 236 Conclusions 241 Notes 242 References 242 16 Circulation Approach and Applied Economics: Monetary Duality in Cuba 243 Ghislain Deleplace The issue of monetary duality 244 The specificity of the Cuban monetary regime 24 7 Viability and stability of monetary duality in Cuba 249 Conclusion 254 Notes 255 References 255 17 Lessons from Asset-Based Financial Systems with Zero-Reserve Requirements 257 Marc Lavoie Zero-reserve requirements at the Bank of Canada 259 The operations of the settlements system 260 The determination of the overnight interest rate 261 The case of the American financial system 264 Conclusion 266 References 267 18 Interest Rates, Interest Spreads and Monetary Circulation: Theoretical Framework and Empirical Implications for Macroeconomic Performance 269 Mario Seccareccia Introduction 269 Brief historical digression: Wicksell's model of monetary circulation and some original insights from Robinson to Nell 270 Financial implications of the interest spread: Graziani's analytics 271 Real interest rates, debt and macroeconomic performance: some further Grazianian insights 273 Some empirical insights on the effects of changes in interest spreads and real interest rates 275 Contents xi Conclusion 283 References 283 Appendix: Augusto Graziani's Selected Publications 285 Index 288 List of Figures 9.1 The circular flow of central bank money in the interbank market 144 9.2 The two circuits of central bank money 145 9.3 Bilateral and multilateral credit operations between banks 146 9.4 The real flows of a central bank's monetary circuit