Monetary Theories of Production

The link between the Marxian analysis of the ‘inner laws of movement’ of capitalism and the Keynesian ‘methodology of aggregates’ was not developed by Keynes himself. Rather, it was the subsequent generations of heterodox economists who explicitly engaged with the task of developing a critical theory of capitalist economies. In this regard, two main groups of economists should be mentioned: first, the members of the broadly defined Cambridge school of economics; and, second, the proponents of what may be termed the ‘modern endogenous theories of money.’ The first group is rather heterogeneous but its members share two common features. First, they reject the neoclassical theory and second, they focus mainly on economic growth and income distribution. This group includes both the strictly defined Post Keynesians, meaning the direct pupils of Keynes and Michał Kalecki, ¹ and the proponents of the surplus approach pioneered by Piero Sraffa. ² The second group appears as heterogeneous as the first one. However, its proponents share a well-defined theoretical feature. They usually focus on the role played by money and finance, that is, on the endogenous process of creation, circulation, and destruction of monetary means within a capitalist economy. This group includes the ‘American’ Post Keynesians, ³ the modern money theory (or neochartalist approach), ⁴ and the Franco-Italian theory of monetary circuit. ⁵ This chapter focuses primarily on the second line of research. Its chief purpose is to outline the main features of modern monetary theories of production, particularly the original circuit approach and the current literature about stock-flow consistent models. Weaknesses, strengths, and recent developments are covered as well. The chapter is organized as follows. The second section provides a thorough description of the monetary circuit view. It is shown that circuit economists, along with other heterodox monetary economists, committed to set up a systematic analysis of the inner working of a monetary economy of production. The third section compares the circuit view with both the dominant approach in macroeconomics and with other heterodox lines of research, including the ‘old’ Cambridge school of economics. The fourth section addresses current developments in the monetary theories of production. The fifth section discusses both the limitations of the original circuit approach and the new possibilities offered by stock-flow consistent models. The final section offers some concluding remarks and suggests that stock-flow consistent models are renewing and strengthening the tradition of the monetary theories of production