Toward a New Economics: Essays in Post-Keynesian and Institutionalist Theory

By Alfred S. Eichner | Go to book overview

tem), will lead to an increase in the ratio of bank loans to bank deposits (while slowing the growth of the money stock as conventionally defined). The resulting rise in the liquidity pressure variable, L, will not only force banks to ration credit, but it will also, together with the parallel rise in the ratio of free to total reserves, lead to higher short- and long-term interest rates.

One can come closer to bringing out what it is that the focus on the money stock, as conventionally defined, is meant to illuminate--namely, the availability of the means of payment--by formulating the macroeconomic model within a flow of funds framework as we have done (see Eichner, 1979a). In this way it becomes clear that the availability of what serves as the means of payment by each type of nonfinancial institution--business firms, households, nonprofit organizations, governmental units, and the rest-of-the-world--depends first and foremost on its net cash inflow, that is, on its total revenue or income during the period less any cash outlays; and then secondarily on its access to credit, whether a loan has actually been obtained or whether the funds are simply available if needed through a line of bank credit. Within this framework, the focus is on the flow of funds throughout the economy as a whole without any effort to identify any particular stock of monetary assets as the effective constraint on the amount of those funds. The growth in the flow of funds depends solely on the rate at which the commercial banking system is willing to provide credit, or additional funds, supported by the willingness of the central bank to provide the necessary increase in bank reserves. The actual amount of bank deposits at any given point in time (along with the amount of currency, or Federal reserve notes, the public wishes to hold) is of little consequence. Thus the money stock, as conventionally defined, can for all practical purposes be ignored, greatly simplifying the task of constructing an empirically valid macroeconomic model.

It is not just that no reference need be made to the money stock or any of the other monetary aggregates in explaining the level of real economic activity. Omitting the money stock from the analysis avoids confusing a change in bank deposits alone (or bank deposits plus currency in circulation) with a change in bank deposits relative to bank loans as the variable through which the Fed's open market operations affect both the rest of the monetary-financial sector and the level of real economic activity. It is the latter variable, interpreted as measuring the degree of liquidity pressure, and not one of the monetary aggregates (incorporating bank deposits) that serves as the causal link.

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Toward a New Economics: Essays in Post-Keynesian and Institutionalist Theory
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface viii
  • 1 - Introduction 3
  • 2 - The Megacorp as a Social Innovation 10
  • Afterword 27
  • 3 - Micro Foundations of the Corporate Economy 28
  • Afterword 73
  • 4 - An Anthropogenic Approach to Labor Economics 75
  • Afterword 96
  • 5 - The Demand Curve for Money Further Considered (Written With, and Based on the Econometric Work of, Leonard Forman and Miles Groves) 98
  • Afterword 109
  • 6 - Stagflation: Explaining the Inexplicable 113
  • Addendum 145
  • Afterword 148
  • Notes to the Addendum 149
  • 7 - The New Paradigm and Macrodynamic Modeling 151
  • Introduction 151
  • Conclusions 173
  • 8 - Post-Keynesian Theory and Empirical Research 176
  • Afterword 199
  • 9 - Reflections on Social Democracy 200
  • Afterword 218
  • References 219
  • Index 231
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