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Advanced Political Economy

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Title: Advanced Political Economy


1
Advanced Political Economy
  • The Circuitist School

2
It aint just neoclassical economics thats bad
  • Political economists in general united in
    opposition to Neoclassical economics
  • But
  • Divided over nature of alternative and
  • Why neoclassical is bad and
  • What alternatives there are
  • Often problem is not neoclassicism per se, but
    economics in general
  • Lacks experimental method as means to reject
    unsound theories
  • Self-referentialisolated from real sciences (
    even other social sciences)

3
It aint just neoclassical economics thats bad
  • As a result
  • Theories experiment would show to be wrong
    persist
  • Methods in economics in general often primitive
  • Rebels against neoclassicism often slip into
    same mistakes as neoclassicals
  • Obsession with equilibrium as the actual state of
    economy
  • Inappropriate static methodology
  • Ignorance of modern analytic techniquesincluding
    computer simulation, visualisation etc.

4
It aint just neoclassical economics thats bad
  • An instance Circuitist School analysis of money
  • Brilliant underlying insight but
  • Use of inappropriate equilibrium methodology to
    try to develop it
  • Stalemate went backwards on crucial issues
  • (Relatively!) easy solution to dilemma with more
    appropiate methodology
  • Monetary Post Keynesian (MPK) thought mainly
    developed in US/UK
  • Companion theory has developed in Europe the
    Circuitist school
  • Key focus developing a true monetary theory of
    production

5
A French/Italian connection
  • Basic focus is the circuit by which debt-based
    money is created when loan made, and eventually
    destroyed when it is repaid.
  • Like MPK approach, Circuitist school emphasises
    that monetary economy is fundamentally different
    to barter economy
  • Cant treat monetary economy by just tacking
    money onto commodity model
  • Many schools of thought (Classical, Neoclassical,
    Marxian) treat money as commodity
  • Keynes argued monetary economy fundamentally
    different to barter economy, but insights poorly
    expressed modelled

6
What is money?
  • Circuitists attempt codification of money from
    1st principles
  • Argue a commodity cannot be money
  • The starting point of the theory of the circuit,
    is that a true monetary economy is inconsistent
    with the presence of a commodity money. A
    commodity money is by definition a kind of money
    that any producer can produce for himself. But an
    economy using as money a commodity coming out of
    a regular process of production, cannot be
    distinguished from a barter economy. A true
    monetary economy must therefore be using a token
    money, which is nowadays a paper currency.
    Graziani (1989 3)

7
Circuitist creation of money
  • Ignore creation of fiat (outside) money by
    government and focus on creation of debt-based
    money by banking system
  • the money stock is increased or decreased by
    means of debt and credit operations taking place
    between the Central Bank and commercial banks.
    The ideal model of the theory of the circuit
    therefore resembles the so-called Wicksellian
    model of a pure credit economy, with the addition
    of a Central Bank. (3)
  • But money seen as essentially different to
    credit
  • If in a credit economy at the end of the period
    some agents still owe money a final payment is
    needed, which means that no money has been used.
    (3)

8
Conditions for money
  • Must be a token (otherwise a barter model if a
    commodity)
  • Must be means of final settlement (3)
  • Must not grant rights of seignorage (agents
    cant create it indefinitely at negligible cost
    as formally Governments can with fiat money)
  • The only way to satisfy those three conditions
    is to have payments made by means of promises of
    a third agent (3)
  • Essential point in Circuitist case (and
    endogenous money in general) transactions are
    all 3 sidedbuyer, seller, banker. Banks are an
    essential aspect of capitalism.

9
Conditions for money
  • When an agent makes a payment by means of a
    cheque, he satisfies his partner by the promise
    of the bank to pay the amount due. Once the
    payment is made, no debt and credit relationships
    are left between the two agents. But one of them
    is now a creditor of the bank, while the second
    is a debtor of the same bank. This insures that,
    in spite of making final payments by means of
    paper money, agents are not granted any kind of
    privilege. For this to be true, any monetary
    payment must therefore be a triangular
    transaction, involving at least three agents, the
    payer, the payee, and the bank. Real money is
    therefore credit money. (3)
  • Second essential point of this school the
    minimum number of agents in a capitalist economy
    is three

10
Commodity money just n1 barter economy
  • Barter economy 2 sided, 2 commodity exchanges
  • person A gives person B d units of commodity X
  • in return for ? units of commodity Y
  • Calling one the money commodity simply semantics
  • 1st essential insight
  • Money a non-commodity
  • A true monetary economy must therefore be using
    a token money, which is nowadays a paper
    currency. (3)

X
A
B
Y
11
Three agents minimum for money economy
  • Monetary economy 3 sided, single commodity,
    financial exchanges
  • person A gives person B d units of commodity X
  • in return for person B having bank Z transfer ?
    currency units from B's account A's account
  • Every transaction has 3 partners
  • Two for exchange
  • One for double-entry book-keeping

Capitalism's eternal triangle
d X
B
A
B -?
A ?
Z
12
Three-cornered exchange the rule
goods
Seller A
Buyer B
  • Seller A accepts Bank Cs implicit promise to pay
    as full discharge of buyer Bs obligation to pay
    A for commodity.

13
Conditions for money
  • Banks and firms must be considered as two
    distinct kinds of agents. Firms are present in
    the market as sellers or buyers of commodities
    and make recourse to banks in order to perform
    their payments banks on the other hand produce
    means of payment, and act as clearing houses
    among firms. In any model of a monetary economy,
    banks and firms cannot be aggregated into one
    single sector. (4)
  • Circuitists develop a strict time-based model of
    sequence of transactions leading to creation and
    destruction(?) of money

14
The money process (Model 1 only one bank)
  • Workers either spend wages or buy corporate bonds
  • Either activity extinguishes firms debt to banks
  • Graziani asserts this destroys money created at
    start of cycle
  • As soon as firms repay their debt to the banks,
    the money initially created is destroyed.
    (Graziani 1989 5)
  • But rate of purchase by workers a time-dependent
    thing money not spent immediately
  • This money (not spent or invested) stays in
    economy in workers bank accounts
  • Residue of money means corresponding debt of
    firms to banks (with interest accruing over time)
  • Circuit has thus created net money/debt
  • New circuit begins

15
The money process
  • Model aggregates
  • Firms into commercial sector
  • Labour into household sector
  • Banks into banking sector
  • Model sequence
  • Banks grant firms right to finance
  • Firms hire labour at wage rate determined by
    negotiation (amount of labour hired omitted from
    modelimplicit that hiring reflects firms
    expectations of profit)
  • Workers deposit wages in bank accounts
  • Workers now creditors of banks, firms debtors to
    banks

16
The money process (Model 2 multiple banks)
  • With more than one bank, possibility than money
    paid by one agent (with debt to bank A) may be
    deposited by recipient in bank B
  • Thus Bank A has a debt to Bank B
  • Each bank needs reserves equivalent to own share
    of credit market
  • How does Bank A repay Bank B?
  • Third party again needed, otherwise Bank A would
    repay with promise to repay the Central Bank
  • Just as single agents use bank deposits, namely
    promises to pay issued by banks, single banks use
    promises to pay issued by the Central Bank. The
    role of the Central Bank is in fact that of
    acting as third party between single banks so far
    as their reciprocal payments are concerned. (9)

17
The money process (Model 3 Central Bank)
  • Without a government sector in the model,
  • reserves can only be created if the Central Bank
    opens credit positions with single commercial
    banks. The total amount of reserves is therefore
    a debt of commercial banks towards the Central
    Bank, just as the total amount of deposits is a
    debt of firms towards commercial banks. (10)
  • With a government sector
  • The possibility exists for the Central Bank to
    create money in order to finance the Government
    deficit. Central Bank money thus created is no
    longer a debt of commercial banks, but a debt of
    the Government towards the Central Bank. (10)

18
Putting a foot wrong
  • Up to this stage, Circuitists have
  • Structured model of money/credit creation process
  • Where model depends on rate of change of worker
    spending for creation of money
  • Next stage should have been to create dynamic
    model of money creation process
  • Move from double-entry book-keeping approach to
    rate of change approach
  • Instead, Graziani works out income distribution
    and price relations using simultaneous equations
  • But these equations represent steady state or
    equilibrium outcomenot ones involving dynamics
  • Kaleckian identities thus to some extent
    incompatible with underlying Circuitist schema.
  • Nonetheless

19
Income distribution equations
  • Definitions
  • w Money wage rate
  • N Total employment
  • c,s worker consumption and savings propensities
  • p Labour productivity
  • B Total bonds issues by firms
  • i rate of interest on bonds
  • p market price of output
  • X total supply of commodities ( pNp)
  • b Fraction of total output bought by firms
  • Equating monetary supply and demand yields

Worker demand from wages Bond income
Firms demand for intermediate goods
p (price) on both sides of equation
20
Static income distribution equations
  • Deriving the price level in equilibrium

21
Static income distribution equations
  • Deriving the rate of profit in equilibrium

Substitute
Cancel
22
Static income distribution equations
  • Deriving the rate of profit

23
Guidance from static equations
  • Money prices independent of quantity of money
  • Profits are related to the price level
  • Real profits are independent of the interest rate
    on bonds
  • Profits equal investment if workers consume
    everything.
  • Just one problem with all these conclusions
  • Based on equilibrium conditions, yet
  • Model of money formation required
    disequilibrium otherwise level of money in
    economy falls to zero
  • An assumption is therefore required for the
    existence of a money stock, namely that
    wage-earners spend their money incomes gradually
    over time It is a necessary assumption if we do
    not want money to disappear altogether from the
    system. (6)

24
The problem
  • Circuitist logic leads inevitably to a need for
    one component of their system (workers
    expenditure) to have a rate of change with
    respect to time rather than an equilibrium value
  • But in equilibrium all rates of change are zero
  • Equilibrium analysis thus inappropriate for
    circuitist case
  • E.g., of course money plays no role in setting
    money prices in equilibriumbecause in
    equilibrium (in their model) there is no money!
  • Instead, have to use dynamic methods
  • But thats not what happened

25
Inability to model
  • Two parts to Grazianis attempt to model circuit
  • Verbal trace cycle of path of single dollar
  • Initial loan by bank to capitalist
  • Payment of wage by capitalist to worker
  • Purchase of goods/securities by worker
  • Extinguishment(?) of original debt
  • Simultaneous equation/equilibrium analysis
  • But verbal logic implied need for dynamic model
  • An assumption is therefore required for the
    existence of a money stock, namely that
    wage-earners spend their money incomes gradually
    over time (6)

26
The equilibrium cringe
  • Despite criticism of equilibrium fetish of
    neoclassical economics, Circuitists/Post-Keynesian
    s still havent definitively broken with statics
  • Consider these excerpts from Graziani
  • the preceding equality is an equilibrium
    condition in a perfectly competitive market
  • if s b, profits are zero, as in a perfectly
    competitive equilibrium
  • Equilibrium prevails if firms get back the
    whole of the money they have initially spent and
    that they now owe to the banks.
  • Circuit theory defines the money stock as a
    debt of firms towards the banks as soon as money
    balances exceed their equilibrium level, firms
    will reduce their debt, therefore destroying
    money by the same amount.

27
One step forward, two steps back?
  • Circuitists provide first sound foundation for a
    monetary theory of production
  • A monetary system cannot have a commodity as
    money
  • Then develop logic of 3-sided exchange model with
    double-entry book-keeping of transactions
  • But then face dilemmas
  • If all transactions are balanced, how can any one
    agent make a profit?
  • How can capitalists repay debts with interest and
    not lose money?
  • These dilemmas didnt exist with Marxs
    non-monetary theory (which many Circuitists
    subscribe to)
  • Capitalists make a profit out of the surplus
    generated in production

28
Marx the source of profit
  • Wrongly attributed surplus entirely to labour,
    but basic point correct shared by other PE
    schools
  • The conversion of money into capital has to be
    explained on the basis of the laws that regulate
    the exchange of commodities, in such a way that
    the starting point is the exchange of
    equivalents. Our friend, Moneybags, who as yet is
    only an embryo capitalist, must buy his
    commodities at their value, must sell them at
    their value, and yet at the end of the process
    must withdraw more value from circulation than he
    threw into it at starting. His development into a
    full-grown capitalist must take place, both
    within the sphere of circulation and without it.
    These are the conditions of the problem. (Marx
    1867, pp. 163)

29
Marx the source of profit
  • The change of value that occurs in the case of
    money intended to be converted into capital ...
    must ... take place in the commodity bought by
    the first act, MC, but not in its value, for
    equivalents are exchanged, and the commodity is
    paid for at its full value. We are, therefore,
    forced to the conclusion that the change
    originates in the use-value, as such, of the
    commodity, i.e. its consumption. In order to be
    able to extract value from the consumption of a
    commodity, our friend, Moneybags, must be so
    lucky as to find, within the sphere of
    circulation, in the market, a commodity, whose
    use-value possesses the peculiar property of
    being a source of value. (Marx 1867, pp. 164.
    Emphases added.)

30
Marx the source of profit
  • The past labor that is embodied in the labor
    power, and the living labor that it can call into
    action the daily cost of maintaining it, and its
    daily expenditure in work, are two totally
    different things. The former determines the
    exchange-value of the labor power, the latter is
    its use-value. The fact that half a working
    day's labor is necessary to keep the laborer
    alive during 24 hours, does not in any way
    prevent him from working a whole day. Therefore,
    the value of labor power, and the value which
    that labor power creates in the labor process,
    are two entirely different magnitudes and this
    difference of the two values was what the
    capitalist had in view, when he was purchasing
    the labor power... What really influenced him was
    the specific use-value which this commodity
    possesses of being a source not only of value,
    but of more value than it has itself. This is the
    special service that the capitalist expects from
    labor power, and in this transaction he acts in
    accordance with the 'eternal laws' of the
    exchange of commodities. The seller of labor
    power, like the seller of any other commodity,
    realizes its exchange-value, and parts with its
    use-value. (Marx 1867, p. 188.)

31
Incomplete attempts at dynamics
  • Marxs insight lost in initial difficulties of
    dealing with double-entry bookkeeping monetary
    vision of Graziani
  • Subsequent Circuitist writers compounded problem
  • Simplifying assumptions that remove essential
    aspects of the model
  • Bellofiore et al. 2000 (footnote 8) For the
    sake of simplicity, we exclude the payment of
    interest to the banks
  • Inability to work out whether system allows for
    profit
  • Bellofiore et al. 2000 (footnote 9) are firms
    able to obtain money profits? in the basic
    circuit approach, it is impossible for all
    firms to obtain money profits
  • Bellofiore et al. stymied by question can
    capitalists borrow money pay it back at a
    profit?
  • Effectively answer no

32
Bellofiore et al. Marx Inside the Circuit
  • The circuit of the capitalist economy
  • (a) banks create money and firms acquire
    labour power
  • (b) the production process takes place
  • (c) workers spend their income on wage goods
  • and firms repay the initial debt contracted to
    the banks.
  • Assuming a propensity to consume equal to one,
    firms would always get back the money wage bill
    and repay the banks (interest apart). (407-08)
  • Huh? We have to assume MPC1 for firms to get
    back what they have paid out in wages? And this
    wouldnt repay accumulated interest?

33
Bellofiore et al. Marx Inside the Circuit
  • Attempt to turn Grazianis verbal vision into
    mathematical model stymied by lack of dynamic
    analysis
  • Rather than confronting dynamic process, shied
    away from complex essential aspects
  • Cant borrow money without paying interest
  • Cant borrow money without repaying it
  • Yet capitalists do make profits
  • But Circuitists argue that in the basic circuit
    approach, firms in the aggregate can only obtain
    the wage bill they advanced to workers (wN) and,
    as a result, it is impossible for all firms to
    obtain money profits. (410)
  • Other Circuitists confront same dilemma the
    paradox of monetary profit how can capitalists
    borrow money, repay it with interest, and still
    make a profit?

34
The source of profit
  • Rochon put is well
  • The existence of monetary profits at the
    macroeconomic level has always been a conundrum
    for theoreticians of the monetary circuit not
    only are firms unable to create profits, they
    also cannot raise sufficient funds to cover the
    payment of interest. In other words, how can M
    become M? (125).
  • Problem arises from failure to distinguish
    between transactions and income once working in
    monetary framework
  • Double-entry system records all transactions
  • Income is sum of transactions net of costs
  • Capitalists make profit if production produces a
    surplus over costs, just as Marx explained in
    non-monetary model

35
A monetary advance but
  • Marx answers source of profit, but expresses it
    only in value terms
  • No explanation of how value converted into
    money
  • Circuitists, inspired by Marx, develop true
    monetary model of capitalism, but lose the source
    of profit!
  • What went wrong here? One step forward, two steps
    back?
  • Problem caused by
  • Inability to follow logical argument through in
    verbal terms
  • Equilibrium fetishtrying to analyse dynamic
    process as if it occurs in equilibriumand
  • Use of static simultaneous equations to analyse a
    dynamic process
  • Paradox easily solved with appropriate
    mathematics Ordinary Differential Equations
    (ODEs)
  • Normally not taught to economics students, but
    fundamental part of training of engineers,
    physicists, etc.
  • Simple illustration from Grazianis point that
    wage-earners spend their money incomes gradually
    over time

36
Modelling workers expenditure, money
  • Basic and realistic assumption/fact that
    wage-earners spend their money incomes gradually
    over time
  • E.g., Workers spend a of their wages per unit
    of time
  • rate of change of their money account wage per
    week is a
  • Rate of change of money wage account is a per
    week
  • Mathematically
  • This can be solved for M using integration
  • C0 is initial stock of money
  • Lets try C0100, a1

37
Modelling workers expenditure, money
  • Balance in accounts (and thus money) from initial
    deposit of 100 is
  • Inverse dynamic needed for accumulating
    additional debt of firm (interest on 100 at r
    per time period, compounded)

38
A modelling dilemma
  • Circuitist initial case well thought out, but
  • complexities of cycle overwhelm verbal reasoning
  • in mathematical modelling, they fall back on
    familiar methods of simultaneous equations
  • Simultaneous equations incompatible with their
    basic insights
  • Common problem, even in non-neoclassical
    economics economists use wrong tools for the job
    because they dont know the right tools
  • Right tool for this sort of analysis is ordinary
    differential equations (ODE)
  • Some insights from previous ODE

39
ODE Insights
  • Process modelled involves single bank-firm loan
    and its aftermath
  • Clearly these are occurring all the time
  • In a growing economy, these would be positive
  • There is a rate of change function for new debt
    issues
  • Firms must aim to make a profit out of this
  • Level of borrowing probably a function of
    expected profits
  • Whole model must tie back into itself current
    model is incomplete
  • Two more related insights from other economists

40
Additional insights for Circuitist approach
  • Minsky debt must always be growing in growing
    economy
  • If income is to grow, the financial markets,
    where the various plans to save and invest are
    reconciled, must generate an aggregate demand
    that, aside from brief intervals, is ever rising.
    For real aggregate demand to be increasing, ...
    it is necessary that current spending plans,
    summed over all sectors, be greater than current
    received income and that some market technique
    exist by which aggregate spending in excess of
    aggregate anticipated income can be financed. It
    follows that over a period during which economic
    growth takes place, at least some sectors finance
    a part of their spending by emitting debt or
    selling assets. (Minsky 1963 1982)

41
Additional insights for Circuitist approach
  • Marx sum of excess demands of producers/consumers
    negative in a capitalist economy
  • The capitalist throws less value in the form of
    money into the circulation than he draws out of
    it... Since he functions ... as an industrial
    capitalist, his supply of commodity-value is
    always greater than his demand for it. If his
    supply and demand in this respect covered each
    other it would mean that his capital had not
    produced any surplus-value... His aim is not to
    equalise his supply and demand, but to make the
    inequality between them ... as great as
    possible. (Marx 1885)
  • Bank debt needed to balance (as per Minsky)
  • Expanding debt a basic feature of growing
    capitalist economy

42
Weaknesses in circuitist approach
  • No proper consideration of production
  • Clearly workers produce output after hired
  • Output must be priced and sold
  • Physical surplus must be monetized
  • For profitable economy, sale price must exceed
    cost of production
  • Circuitist model as laid out by Graziani (and
    also much as developed to date) therefore only
    one step in overall dynamic process
  • Basic flowchart of full process

43
Full flowchart of circuitist model
  • Spagetti notion?

Workers
Factory
Firm
Other Firms
Bank A
Output
Bank B
  • But in fact this complex web can be modelled
    mathematically using ODEs ordinary differential
    equations
  • Basic mathematical method for analysing dynamic
    processes
  • Expresses system in terms of rates of change as
    function of current states

Central Bank
44
Dynamic analysis
  • Basic equation of money balances earlier

Current state of money balance
Rate of change of money balance
  • More elaborate systems built up from this simple
    building block
  • Can develop entire dynamic Circuitist model and
    solve dilemma of monetary profits

45
A dynamic Circuitist model
  • Start from the basics
  • Bank lends money to capitalist
  • Loan paid into credit account for capitalist KC
  • Debt recorded in debit account KD
  • How to model discussed soon
  • Loan must be repaid
  • Interest must be paid by capitalist
  • This component simple if debt not repaid, debt
    grows at the debit interest rate times the
    current level of debt
  • Capitalist earns (lower) credit rate of interest
    on balance in credit account

46
A dynamic Circuitist model
  • How to model repayment of debt?
  • Simplest way same as interest payment itself
    only different sign
  • Capitalists repay outstanding debt KD at rate R
  • Amount R.KD has to come from credit account

Amount R.KD taken from credit account
paid into debit account
What about the Bank?
47
A dynamic Circuitist model
  • Payment of RKD really goes to bankentry in KD
    account simply keeps record of how much
    capitalist still owes
  • So need account for bank to receive interest
    principal repayments
  • Payments out (initial loan interest on KC
    balance)
  • Initial loan an initial condition, not rate of
    change (a constant of integration)
  • Payments in (RKD)
  • Absolutely simplest system is thus

48
A dynamic Circuitist model
  • How does it operate?
  • Lets simulate it!
  • Many tools for dynamic simulation these days
  • I use Mathcadsimulate actual equations
    Vissimconvert into flowchart
  • Firstly, in Mathcad
  • Lets check that out slowly

49
A dynamic Circuitist model
  • Components of Mathcad Simulation

Declares constants
Initialconditions
Model
  • Might look complicated on first exposure, but
    easily simplest and fastest means to simulate
    dynamic model
  • Now the flowchart approach

Solves model
Variablesto graph
Values after one year
50
A dynamic Circuitist model
  • Flowchart software developed by systems
    engineers
  • Represent dynamic system as flowchart
  • Enable numeric simulation of relationships
  • Initially used to model Club of Rome scenarios
    about potential depletion of earths resources
  • Now commonest tool used by engineers to design
    dynamic systems
  • Advantage over equation approaches
  • Shows flow of system variables
  • Simulated in real time
  • Example basic debt dynamics

51
A dynamic Circuitist model
  • Debt dynamics

Current level of debt
Integrated
Times interest rate
Gives current level of debt
(Added to initial debt)
Simulated live in Vissim
Returning to Mathcad
52
A dynamic Circuitist model
  • Base model indicates dilemma Circuitists felt
  • Capitalists end up owing money after 1 year
  • 37.36 left in KC account
  • 38.67 still owing to Banker (KD account balance)
  • Banker well ahead
  • 62.64 in banker account
  • Also points out error in Grazianis verbal logic
  • Money not destroyed when debt repaid (as Graziani
    believed), but accumulates in hands of banker as
    unencumbered asset!
  • Sum of KC and B is 100 identical to original
    creation of money To be examined
  • Money not identical to debt
  • Money not destroyed when debt repaid

53
A dynamic Circuitist model
  • Model somewhat sloppy at this point
  • Debt repayment factor R unrelated to initial debt
  • In reality, debt repayment terms always related
    to initial debt
  • Seignorage being able to print money and then
    spend it
  • Bank should be able to spend income from spread
    between lending and deposit payments, but not
    principal
  • As specified, bank could spend principal
  • Have to split B account in BP for principal and
    BY for income
  • Repayment stream R goes into BP
  • Deposit and interest streams into out of BY

54
A dynamic Circuitist model
  • First step relate principal repayment factor R
    to initial debt
  • Standard debt contract annuity payment
  • Continuous stream of equal payments for defined
    period
  • At end, payments stop
  • Complicated to model in ODE terms
  • Also suits single transaction
  • Circuitist model aggregate one notionally
    includes many capitalists, banks, workers
  • Better to use aggregate view of debt
  • Capitalists intend to pay debt down to target
    fraction of initial debt by a defined time
  • Modelling this as an ODE

55
A dynamic Circuitist model
  • By time T, outstanding debt KD(T) will be a
    fraction Xlt1 of debt at time t0
  • As an equation
  • Objective achieved by adding term RKD to debt
    equation, where part reflects payment of interest
    and part repayment of principal
  • Solve by rearranging into log equation
  • Rearrange dKD and dt
  • Integrate both sides
  • Result is logarithm
  • Take exponentials

56
A dynamic Circuitist model
  • Debt equation is
  • At time t0, CKD(0)
  • Now use this equation to solve for R

given that
so then X is
Take logs
Solve for R
57
A dynamic Circuitist model
  • So final debt equation is

Call this RP (repayment principal) Positive
because Xlt1
Call this Ri (repayment interest)
  • Ri goes to Bankers income account BY
  • RP goes to Bankers principal account BP
  • Basic properly specified model now is

58
A dynamic Circuitist model
  • Circuitist model without production

These two cancel
Lets simulate this
59
A dynamic Circuitist model
  • Result of system
  • Can now see that capitalist debt bank principal
    equals amount of initial money created
  • Money not destroyed by repaying debt, but changes
    from debt of firms to banks to pure bank asset.

60
A dynamic Circuitist model
  • Still no production how to model?
  • Simplest approach do it implicitly
  • Production undertaken to generate profit
  • Production requires workers
  • Sum of output sum of income
  • All output resolves into flow of income to
    workers and capitalists
  • Production takes time
  • New concept a time lag
  • Remember workers spending formula from earlier
    in lecture?
  • Parameter a related to a time lag
  • How long it would take worker to exhaust account
    if absolute rate of spending maintained

61
A dynamic Circuitist model
  • If we express workers account formula as
  • Then t is a measure of how much time it would
    take before M returned to zero linearly
  • Actual ODE gives exponential decay
  • t is value of tangent to M at t0
  • With t2, tangent crosses time axis at 2 (weeks)
  • Use same concept for production time lag tKC
    represents flow out of capitalist accounts to
    finance production

62
A dynamic Circuitist model
  • Use Marxian relation here (problems with labour
    theory of value dont arise in single commodity
    model)
  • Income from factory resolves into either profits
    or wages
  • Ratio is s(1-s)
  • Same as s/v in Marxian analysis
  • So we
  • Add outflow from KC account of -1/tKC that
    finances production
  • Time lag represents time involved in production
    sale
  • s/tKC returns to capitalist account as income
  • (1-s)/tKC goes to workers as wages

63
A dynamic Circuitist model
  • One new account workers WY
  • Consumption flows now occur from workers
    bankers
  • Transactions by workers and bankers to buy output
    of factories
  • Time lag tB for bankers consumption tW for
    workers

Expenditureonproduction
Profits
WorkersConsumption
BankersConsumption
Wages
WorkersConsumption
BankersConsumption
64
A dynamic Circuitist model
  • Incomes are the flows
  • Into workers accounts from capitalists (wages)
  • Back into capitalist accounts from production
    (profits)
  • Of interest to and from bankers income (bank
    income)
  • The integrals of these show the sum of income
    generated by the original loan and the production
    it financed
  • Lets put some numbers to all this

65
A dynamic Circuitist model
  • Initial loan 1 million rd 5 rc 3 T
    (repayment horizon) 1 year X (repayment target)
    1 tW workers consumption time lag 2 weeks
    (1/26 years) tB bankers lag 1 year tKC
    production lag 3 months (1/4 years) ProfitWages
    ratio s(1-s)0.30.7

66
A dynamic Circuitist model
  • With those figures
  • Initial debt1 million
  • Debt after 1 year10,000
  • Aggregate Profit578,649
  • Aggregate Wages1,350,180
  • Aggregate Bank Income4,370
  • How come sum of income exceeds initial loan?
  • Circulation from bankers workers (
    capitalists!) back to capitalists renews
    financing of production turnover of credit
    finances more than initial loan over 1 year

67
A dynamic Circuitist model
  • Dynamics also more complex now interaction of
    1st order systems generates some 2nd order
    effects
  • Final extension (before explicit production)
    relending of bank principal with time lag tBP

68
A dynamic Circuitist model
  • Outflow from relending of bankers principal into
    Capitalists credit account
  • Matching debt recorded in capitalists debt
    account

DebtRecord
Creditpayment
Relending
69
A dynamic Circuitist model
  • With relending, model settles down to stable
    flows (dynamic equilibrium)
  • Wages 1,109,038 p.a.
  • Profits 475,302 p.a.
  • Bank income 3,678 p.a.
  • Different figures would apply with different time
    lags, etc.
  • But basic point applies can have sustained level
    of economic activity with profit repay
    (relatively minor!) debt obligations on 1
    million loan

70
A dynamic Circuitist model
  • Many insights from Circuitists dynamic model
  • Endogenous credit money analysis makes sense
  • Money not destroyed when debt repaid
  • Money is capitalists debt to banks (KD) plus
    balance in bankers principal accounts (BP)
  • Money endogenously created simply by bank
    advancing loanno necessity for reserve or
    gold backing of loan
  • Instituted in practice for security of system
  • Circuitist confusion on source of profit due to
    confusing transactions with income
  • Mathematical modelling can assist verbal logic in
    non-neoclassical economics if it is dynamic

71
References
  • Bellofiore, Riccardo, Davanzati, G. F. and
    Realfonzo, R, (2000), Marx inside the Circuit
    Discipline Device, Wage Bargaining and
    Unemployment in a Sequential Monetary Economy,
    Review of Political Economy, 12, pp. 403-17.
  • Fontana, Guiseppe, Realfonzo, R., (eds.),
    (2005), The Monetary Theory of Production,
    Palgrave, New York.
  • Marx, Karl, (1954 1867), Capital Vol. I,
    Progress Publishers, Moscow.
  • Rochon, Louis-Philippe, (2005), The existence of
    monetary profits within the monetary circuit, in
    Fontana Realfonzo (2005), pp. 125-138.
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