Download Money in the Economy: A Post-Keynesian Perspective Victoria Chick

Money in the Economy: A PostKeynesian Perspective
Victoria Chick
Note: ‘A Perspective’ not ‘The
Perspective’. Big field with several
approaches. Cannot cover
everything.
‘Post-Keynesian’
• Joan Robinson, AEA meetings 1971 (where she
gave the Ely Lecture, ‘The second Crisis in
Economic Theory’ ) came to meeting called by
Paul Davidson –scholars who took Keynes
seriously
• ‘Keynesians’ still influential, though
monetarists on th rise
• She suggested ‘post-Keynesian’
Mill and Hayek on money
'There cannot ... be intrinsically a more insignificant thing, in
the economy of society, than money' J S Mill
'...the task of monetary theory is a much wider one than is
commonly assumed; that its task is nothing less than to
cover a second time the whole field which is treated by
pure theory under the assumption of barter... The first step
... is to release monetary theory from the bonds which a
too narrow conception of its task has created.' F A Hayek,
Prices and Production p 110, quoted by Keynes in his
review, CW XIII, p. 254.
Keynes on monetary theory
• In the standard theory of Keynes's time (and ours)
money is 'a convenient means of effecting exchanges [it is] an instrument of great convenience, but
transitory and neutral in its effect. ... [in what] might
be called ... a real-exchange economy. The theory
which I desiderate would deal, in contradistinction to
this, with an economy in which money plays a part of
its own and affects motives and decision and is, in
short, one of the operative factors in the situation, ...
[I]t is this which we ought to mean when we speak of a
monetary economy. Keynes, 'A Monetary Theory of
Production', CW XIII, pp 408-9.
A money production economy in
contrast to a real exchange economy
Money in Keynes’s General Theory : pervasive
influence:
Labour bargains for money wages
Saving = putting money into financial assets
The rate of interest is a rate of return in the form of
money on an asset denominated in money
Firms seek profit ( = sales minus money-costs)
Marx: Barter economy: C – M – C
Money economy: M – C – M’
Production, time, uncertainty and
money
Production takes time. Goods are produced for a
‘market’ that will exist some time in the future.
The future is irreducibly uncertain. Producers
cannot ‘know’ their market. Neither can workers
know the real value of their wages.
Money allows us to keep our options open. It
‘lulls our disquietude’ (Keynes). It also creates
uncertainty. Intentions hidden.
Liquidity preference
A theory of the rate of interest (r/i) based on the
desire to hold liquid assets versus the return
from going less liquid.
A liquid asset is ‘more certainly realisable at
short notice without loss’ (Keynes, Treatise on
Money). Three dimensions: probability, time,
price variation.
Can see r/i as a liquidity premium or reward for
parting with liquidity
Incentives to liquidity
Transactions, precaution, speculation
Transactions: obvious : money, by convention or
govt sanction (acceptance in payment of taxes,
protection of contracts in law) serves as means
of final settlement.
Precaution – keeping one’s options open
Speculation: the liquid assets help avoid losses
on less liquid assets.
Can be generalised to a theory of asset prices,
including real assets (GT Ch 17). c, q, l, a
Essential properties of money
Low elasticity of production ‘so far as the power
of private enterprise in concerned’ (GT p. 230),
and a low elasticity of substitution. (GT p. 231)
Translated: There’s nothing quite like money and
‘the public’ cannot make it when they want
more of it. Only the banks and the monetary
authorities can do that.
The rate of interest, investment ,
employment and economic prosperity.
Why is the r/i important? Important in
determining investment, which is the engine of
growth.
I = I(r/i, expectations of future profit). Influence
of r/i can be swamped by volatile expectations.
New investment is (in Keynes’s theory) financed
by bank credit. New money in the system.
In other words
‘The rate of interest on money plays a
peculiar part in setting a limit to the
level of employment, since it sets a
standard to which the marginal
efficiency of a capital asset must attain
if it is to be newly produced.’ (GT p.
222)
Money is not neutral
S/he who has money or can borrow it can do
what s/he wishes. Money determines the shape
of the economy.
Look at today’s British economy, with its
preponderance of financial activity, much of
which supports asset prices (esp house prices)
instead of investment and production.
The monetary authorities and the
banks I
How do banks create money?
A bank balance sheet:
Assets
liabilities
liquid assets
deposits
‘investments’
equity capital
loans
The monetary authorities and the
banks II
Can the central bank control money?
accommodationists and structuralists
Banks, credit and economic growth.
should the banks determine the shape of
the economy?
Banks and financial stability
Modern Monetary Theory
Quite wrong and nothing new? (Palley)
Govt spends and then claws back money in tax.
Acceptability in payment of tax determines what
is money.
Govt should act as Employer of Last Resort
Interest rates should be kept at zero
Full employment can be achieved w/o inflation
Circuit theory
Bank credit provides working capital to pay
wages. Wages used to but goods, Revenue
from sales of goods used to pay back bank
loans.
Circuit starts from nothing. How is it that banks
and firms exist? Another circuit: yesterday’s
sales pay today’s wages.
Evaluation
• Few followed the GT. Textbook macro limits role
of money to determining prices. Neutral. No
uncertainty. Fantasy world.
• Some details of treatment in GT out of date.
Banks no longer lend for investment. First
consumer loans, then mortgages, financial
speculation. Whoever can borrow from banks
pre-empts resources.
• LP still a valuable idea. GFC and liquidity illusion.
Money morphs. Watch shadow banking..