The Creation and Circulation of Endogenous Money: A Circuit Dynamique Approach

Article excerpt

Endogenous money has traditionally been recognized as the quasi-exclusive domain of Post Keynesian political economy, and many authors consider it the "coping stone" of Post Keynesian macroeconomics [Chick 1995; Palley 1992].

But as the paradigm developed, disagreements over how money becomes endogenous lead to crucial debates about the nature and mechanics of endogeneity. In this journal, L. Randall Wray [1992] has summarized the various approaches to money both in orthodox and heterodox traditions. This led to a subsequent debate, again in this journal, between Wray [1995] and Basil Moore [1995]. This has raised questions as to whether Post Keynesians are united in their views on money [Trautwein 1995]. Robert Pollin [1991] had previously identified two distinct approaches within Post Keynesian thought: the structuralists and the accommodationists - or horizontalists, following Moore. And while some [Pollin 1996] see the differences as irreconcilable, others [see Moore 1996; Lavoie 1996a] insist the differences are largely a matter of emphasis rather than substance. Since then, it has appeared that these differences have widened rather than narrowed.

These debates, however, have masked crucial arguments with respect to Post Keynesian monetary theory. In particular, most Post Keynesians have failed to notice that, in some respect, Post Keynesian monetary theory shares many insights with orthodox theory. Emphasis is placed on the supply and demand of money as an asset and where the existence of money itself is linked to uncertainty (yet again, money as an asset). The treatment of money resulting from a credit-flow and discussion of its creation, circulation, and destruction have become secondary issues.

These shortcomings have generated an alternative Post Keynesian approach, one that is critical of orthodox monetary thought, but also of "mainstream" Post Keynesian economics, or what I have elsewhere called "neo-Post Keynesianism" [Rochon 1999a]. According to these heterodox economists, alternatively labeled circulationists or circuitists, Post Keynesian monetary theory does not constitute a clear enough alternative to orthodox monetary thought.

While there is significant common ground between these two Post Keynesian groups, there are also some important differences. In fact, Stephen Rousseas [1996, 677] claims that both approaches are "related." For Marcello Messori [1985, 210] they are "complementary," while for Richard Arena [1996, 431] they are "more complementary than analogous." While they are definitely complementary, the theory of the monetary circuit must be seen as a more "general" approach and a better foundation for developing a monetary theory of production in the heterodox tradition, while neo-Post Keynesian theory can be inserted within this more global approach.

An interesting way of seeing each approach is to argue that both are rooted in Keynes, although a very different Keynes. Post Keynesians take the General Theory as the starting point and then try to reconcile Keynes's later writings in the Economic Journal with it. These articles are then seen as an attempt by Keynes to clarify or to defend the General Theory. The other approach [see Rochon 1997] sees the post-General Theory articles as wholly different, an attempt by Keynes to distance himself from some aspects of the General Theory. In this sense, it is the General Theory that ought to be interpreted in light of the views developed within the Economic Journal articles. Circuitists have developed a different aspect of Keynes, seeing him as more radical than Post Keynesians would care to admit (see also Keynes's Treatise on Money).

The purpose of this article, however, is not to explore the intricate differences between the two approaches; I will leave this to the reader upon which to carefully reflect. Rather, I propose to outline the broad themes of this Post Keynesian alternative approach to credit and money endogeneity. …