Cir­cuit The­ory and the state of Post Key­ne­sian Eco­nom­ics

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I gave the fol­low­ing pre­sen­ta­tion at the 4th Dijon Money con­fer­ence (Decem­ber 10–12 2009):

Steve Keen’s Debt­watch Pod­cast 

| Open Player in New Win­dow

Briefly, my paper explained how var­i­ous conun­drums that have stymied the devel­op­ment of Cir­cuit The­ory for 20 years were in fact the result of con­fus­ing a stock (an ini­tial loan) with a flow (the eco­nomic trans­ac­tions that loan could ini­ti­ate over a year). With a proper dynamic approach, using the “tab­u­lar” method that I out­lined here in “The Rov­ing Cav­a­liers of Credit”, the conun­drums are eas­ily solved–watch the pre­sen­ta­tion to see how (click here for my Pow­er­point pre­sen­ta­tion, and the two Vis­sim files that I ran are linked here and here (you will need to “right click” to down­load them, oth­er­wise you’ll just get a text file). If you don’t have the free Vis­sim Viewer,  it is down­load­able from here. This is one of the Math­cad files that I showed (use a right-click for this one too; it’s poorly structured–written for my use rather than pub­lic consumption–but if you have Math­cadyou’ll be able to fol­low your way around it).

I pre­sented in a par­al­lel ses­sion, the morn­ing after the con­fer­ence din­ner, and had a pre­dictably small audi­ence. How­ever that dis­ad­van­tage had a for­tu­nate side, because that tiny audi­ence included the two con­fer­ence organ­is­ers Louis-Philippe Rochonand Claude Gnos, as well as Basil Moore and Allin Cot­trell. Basil is the ven­er­a­ble father of the propo­si­tion that the money sup­ply is endoge­nously deter­mined, rather than set exoge­nously by the Cen­tral Bank, as is still taught (in wild con­flict with both the empir­i­cal data and actual Cen­tral Bank knowl­edge and prac­tice) in almost all macro­eco­nom­ics courses; Louis-Philippe and Claude are well-known and respected Post Key­ne­sian mon­e­tary econ­o­mists; Allin is a very capa­ble expo­nent of Marx­ian eco­nom­ics, who unlike most Marx­ists uses com­puter mod­el­ling exten­sively in his analy­sis (I just wish he’d update his web­page, which doesn’t appear to have changed since 1997!).

The dis­cus­sion was there­fore pos­si­bly bet­ter than it would have been, had I pre­sented in a ple­nary:

Steve Keen’s Debt­watch Pod­cast 

| Open Player in New Win­dow

How­ever though I was pleased with the way my paper was received by those present, I was very dis­ap­pointed with most of the pre­sen­ta­tions at the con­fer­ence. Though there were some notable exceptions–one of which I’ll com­ment on below–the papers were either non-ana­lytic (“What Keynes said was…”, “Econ­o­mists must take uncer­tainty seri­ously…”), bom­bas­tic (“The fatal flaw in the cap­i­tal­ist sys­tem is …”), or used graph­i­cal ana­lytic meth­ods that could not eas­ily be dis­tin­guished from the con­tent of an ordi­nary macro­eco­nomic text­book. There were one or two block dia­gram expo­si­tions, but they too were graph­i­cal only–mere draw­ings, not influ­ence dia­grams, and cer­tainly not sys­tems dynam­ics mod­els.

There are many lead­ing Post Key­ne­sians who weren’t at this conference–including quite a few who attended the Aus­tralian Soci­ety of Het­ero­dox Econ­o­mists con­fer­ence that Peter Kriesler organ­ises at much the same time every year–so I’m not claim­ing that the papers here are utterly rep­re­sen­ta­tive of the gen­eral state of Post Key­ne­sian eco­nom­ics today. Nev­er­the­less, if they were even mildly rep­re­sen­ta­tive of the work that Post Key­ne­sian econ­o­mists are doing in the midst of the biggest cri­sis that cap­i­tal­ism has faced in sev­enty years–and one which is caus­ing a cri­sis in neo­clas­si­cal eco­nom­ics as well–then they will fail to shift eco­nomic the­ory at all. After ten or fif­teen years of eco­nomic pain, the neo­clas­si­cal ortho­doxy will be reassembled–since it will be true that “there is no alternative”–and Post Key­ne­sians will remain a noisy and largely ignored minor­ity.

Papers like these, though they are intended to crit­i­cise the unre­al­ity of neo­clas­si­cal eco­nom­ics, or to point out issues (uncer­tainty, bounded ratio­nal­ity, open sys­tems, non-ergod­ic­ity, what­ever) that should be taken seri­ously in eco­nom­ics, actu­ally strengthen the resolve of neo­clas­si­cal econ­o­mists to do noth­ing of the sort, since they lack any coher­ent alter­na­tive ana­lytic approach.

Neo­clas­si­cals who attend such presentations–which almost always include dis­parag­ing remarks about the absurd assump­tions neo­clas­si­cal econ­o­mists make–walk away quite jus­ti­fi­ably think­ing that “if that’s the best you can do with real­ism, then I’ll stick to my ‘absurd assump­tions’!”

We can and must do bet­ter than that. But to do so, non-ortho­dox econ­o­mists have to find tools that can express their vision of the econ­omy ana­lyt­i­cally, either as math­e­mat­i­cal or com­puter mod­els. If we don’t, then what­ever might be said by “Crit­i­cal Real­ists” about the inap­pro­pri­ate­ness of math­e­mat­i­cal analy­sis in eco­nom­ics, or how one can’t model open sys­tems math­e­mat­i­cally, the crit­ics will be side­lined in a not too dis­tant future by those who do use such models–and who care a good deal less about real­ism than the crit­ics do. Yet again, the crit­ics may win the philo­soph­i­cal bat­tle, only to lose the method­olog­i­cal war.

That’s why I’ve put in the effort to learn the meth­ods of dynam­i­cal analy­sis in math­e­mat­ics (sys­tems of dif­fer­en­tial equa­tions), engi­neer­ing (sys­tems dynam­ics), and com­put­ing (multi-agent mod­els), and it’s why I’m try­ing to develop alter­na­tives to those which make sense in the con­text of eco­nomic modelling–notably my tab­u­lar method to develop sys­tems mod­els.

These dynamic mod­els enable us to put our thought processes into a sys­tem­atic frame­work, and to explore rela­tions that are sim­ply too com­plex to fol­low ver­bally. This is a major ben­e­fit to math­e­mat­i­cal analy­sis that is lost in the cri­tiques non-ortho­dox econ­o­mists tend to make of how neo­clas­si­cals abuse math­e­mat­ics: when we out­line a causal mech­a­nism ver­bally, we are in fact stat­ing a dif­fer­en­tial equa­tion ver­bally. If we say that “Fac­tor X causes changes in vari­able Y”, we are actu­ally say­ing “the rate of change of Y is a func­tion of (amongst other things) Fac­tor X”. In math­e­mat­i­cal nota­tion, this is d/dt (Y) = F(X).

The advan­tage of express­ing these con­cepts math­e­mat­i­cally, as well as ver­bally, is that the math­e­mat­i­cal ren­di­tion keeps track of all the feed­backs and com­plex inter­ac­tions that sim­ply over­whelm our capac­ity to fol­low a com­plex causal process ver­bally, and they give us a means to pro­vide a rough quan­tifi­ca­tion of how strong those feed­back effects are.

The fail­ure to do this within Cir­cuit The­ory is why a sim­ple con­fu­sion of stocks with flows–mistaking the stock of money for the flows that are ini­ti­ated by a given stock of money over a year–has stymied for twenty years the devel­op­ment of Graziani’s bril­liant insights into a work­able the­ory. As I show in the talk above, the sim­ple expres­sion of the flows ini­ti­ated by a loan are suf­fi­cient to solve all the “conun­drums” of Cir­cuit The­ory. The conun­drums were sim­ply the prod­uct of apply­ing the wrong type of analysis–simultaneous equa­tions, “period analy­sis” with its implicit dif­fer­ence equa­tion form, or worse still mere words–to the issue. A sim­ple appli­ca­tion of flow analy­sis in con­tin­u­ous time shows up all those conun­drums for what they really are: con­fu­sions result­ing from bad analy­sis and inap­pro­pri­ate ana­lytic meth­ods.

Now I also have to exhort my fel­low Post Key­ne­sians to learn at least some of the appro­pri­ate meth­ods. Get out of the com­fort zone of ver­bal expo­si­tion, his­to­ri­og­ra­phy, simul­ta­ne­ous equa­tions and graph­i­cal analysis–and even the much more sophis­ti­cated stock-flow con­sis­tent frame­work of God­ley and Lavoie (While this method is cer­tainly a major step in the right direc­tion, using it to try to explain where profit comes from was rather like try­ing to under­stand how a horse runs, using pho­tographs of a run­ning horse taken at one hour intervals)–and learn dif­fer­en­tial equa­tions, or sys­tems dynam­ics, or com­puter pro­gram­ming. It’s hard, but the effort is worth it. And if you don’t do it, then pre­pare to once again be dom­i­nated by neo­clas­si­cal econ­o­mists once the Global Finan­cial Cri­sis has passed.

I’ll end on one very pos­i­tive note: there was one excep­tional piece of work done by a PhD stu­dent (who is also a full-time school teacher) Pas­cal Seppecher. He has devel­oped a multi-agent model in Java that also sim­u­lates the mon­e­tary cir­cuit, and reaches much the same result as I do from a dif­fer­en­tial equa­tions per­spec­tive. His model is called Jamel: Java Agent-based Macro­Eco­nomic Lab­o­ra­tory. It’s a bril­liant piece of work and I do rec­om­mend explor­ing it.

If a full-time school-teacher with a fam­ily can nonethe­less acquire the skills and find the time needed to do qual­ity work like this, then it’s high time aca­d­e­mic Post Key­ne­sians did the same. Stick­ing with what you are used to, when what you are used to merely lets you point out what “should be” done rather than actu­ally doing it, is no longer good enough.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Ramanan/superpoincare


    Thanks for your reply. 

    I know dimen­sional analy­sis, dif­fer­en­tial equa­tions very well 😉 

    I will come back to you once you are rel­a­tively free. Gives me time to “Tex­ify” what I have to say as well. For now I have to say a few things:

    1. Even with­out time­lags your equa­tions should be hav­ing wF_D AND gam­maF_D. Though you can “absorb” it as one, you may not be able to absorb them every­where into a rede­f­i­n­i­tion.

    2. I have some issues with time-lags. And for time lags I would have expected terms like f(t-tau). Reference:Gandolfo
    Quan­ti­ties such as 1/tau just intro­duce a time-scale in the prob­lem not a time-lag. 

    3. Stock flow con­sis­tency requires you be dou­ble-entry book keep­ing con­sis­tent. This is an absolute must. Flows such as inter­est income do not become an asset for a bank but a means of extin­guish­ing its lia­bil­ity. Inter­est pay­ments increases lia­bil­i­ties and deposits are bank lia­bil­i­ties too for the bank! 

    Will ping you next month. 


  • Good Ramanan,

    In that case I can address your points more fully.

    1. If I remem­ber you argued for the sec­ond term because I should have spend­ing out of wealth as well as out of wages. The W_D account is the recip­i­ent of wages, so I have that already: the inputs to W_D are wages and inter­est income, the out­put is con­sump­tion.

    At a later stage, I would want to have pur­chases of finan­cial assets by work­ers and spend­ing based both on their level and income from them, but the model isn’t yet com­plex enough for that.

    2. f(t-tau) is what sys­tems engi­neers call a time delay, not a time lag. For a more com­plete model they would be nec­es­sary (to pro­prely model gov­ern­ment pol­icy for exam­ple, which will always occur using dated data); again as a first pass I haven’t used them because they dra­mat­i­cally com­pli­cate the model. And my sys­tems engi­neers describe equa­tions using terms like those I have used as “first order time lags”; for gen­eral read­ers they are sim­i­lar to the func­tions used to describe radioac­tive decay.

    3. I am stock-flow consistent–that’s one of the beau­ties of the sys­tem I’ve devised for devel­op­ing cou­pled ODE mod­els of the finan­cial sys­tem. I do not have inter­est pay­ments becom­ing an asset for the bank–they turn up on the lia­bil­i­ties side of the ledger. I do treat them as lia­bil­i­ties for a bank­ing sys­tem, but ones that in an inter­sec­toral sense sum to zero with an aggre­gated bank­ing sec­tor, and gen­er­ate no inter­est pay­ment oblig­a­tions, but are in the aggre­gate a source of income to the bank­ing sec­tor. In a more com­plete multi-bank sys­tem, they would have intra-sec­toral inter­est pay­ment oblig­a­tions, but this would still sum to zero at the aggre­gate level.

  • vk

    > And my sys­tems engi­neers describe equa­tions using terms like
    > those I have used as “first order time lags”; for gen­eral
    > read­ers they are sim­i­lar to the func­tions used to
    > describe radioac­tive decay.


    I believe the cor­rect term is “time con­stant”:

    and yes, it is related to the radioac­tive half life.

    Please do not use time lag or time delay to describe a time con­stant. These terms do have a valid lit­eral use as the time dif­fer­ence between 2 events’ time­stamps — for exam­ple the lag between the moment a worker receives his wage and the moment he spends it.

    My mem­ory is a bit rusty on that but if I recall cor­rectly time delays always add insta­bil­ity to a sys­tem, i.e. a sta­ble sys­tem can be made unsta­ble by intro­duc­ing delays here and there. In other words a sys­tem with in-build delays always needs to be “extra-sta­ble” in order to remain sta­ble after the delays are intro­duced.

  • Thanks vk,

    My sys­tems engi­neer­ing col­league uses “time lag”, but I take the point from the Wiki entry that “time con­stant” is prob­a­bly a bet­ter way to describe it. I’ll mod­ify a cur­rent paper to suit.

  • Ramanan/superpoincare


    Time lag or time con­stant — that is not really impor­tant. The fact is that every dif­fer­en­tial equa­tion auto­mat­i­cally has para­me­ters which become the “Scale” in the prob­lem. It is no dif­fer­ent in dif­fer­ence equa­tions — appear­ance are decep­tive! Appen­dix 3.3 in God­ley-Lavoie is called the mean-lag the­o­rem. The para­me­ter alpha_3 is like a scale in the prob­lem.

  • frashe


    I’ve been work­ing through your alge­bra and I can’t see how you can make one of your state­ments — that firms can repay their debt.

    In your descrip­tion, the debt can be repaid from the pro­por­tion of sur­plus that is retained by the firm. But this is a flow of the phys­i­cal com­mod­ity. It can be given a dol­lar equiv­a­lent value by using the price, but is not avail­able to the firm as a dol­lar amount. The dol­lar amounts come to the firm from con­sump­tion by both the house­hold and the banker — the pro­ducer sur­plus is con­sumed in your model.

    If you play around with your equa­tions, what you find is that as the pro­por­tion of sur­plus retained by the firm increases, the price of the com­mod­ity increases and the num­ber of units pur­chased by the house­hold and bank decrease. More units of pro­duc­tion are kept off the mar­ket by the pro­ducer and con­sumed (or stored or thrown away). The higher price ensures that the firm has enough money to pay the worker and the net inter­est bill.

    I’m not sure that you’d want to call that profit in the usual sense of the word. Though it does fit into the Marx­ist analy­sis — raise prices to send the worker to the sur­vival level and expro­pri­ate the ben­e­fit of labour to your­self.

  • Re #106 Cir­cuit the­ory,

    Wel­come aboard Frank.

    The price sys­tem con­verts the entire amount sold into a mon­e­tary sum, part of which is eas­ily capa­ble of repay­ing the debt. I’m not sure which equa­tions you’re look­ing at here, but if you down­load this paper and check pages 13–16 on which I model the stan­dard propo­si­tion in Post Key­ne­sian eco­nom­ics (with which I dis­agree) that debt repay­ment destroys money, the debt is nonethe­less repaid. When I model the sit­u­a­tion that I think is more realistic–that debt is paid down and money there­fore taken out of cir­cu­la­tion and cred­ited to the bank’s cap­i­tal (or equity) and later relent, debt is never elim­i­nated com­pletely. But that’s because if it were, money in cir­cu­la­tion would drop to zero (since lend­ing to firms is the only lend­ing in that sim­ple “toy” model), not because it isn’t fea­si­ble for debt to be repaid.

  • Ramanan/superpoincare


    This com­ment caught my atten­tion. Would put it dif­fer­ently. A pay­ment of prin­ci­pal does not go into the bank’s cap­i­tal. Con­sider a sim­ple bank which lends and takes deposits. When­ever a loan is repaid, the deposits go down. I think you will agree with that. The (loan) inter­est pay­ment part goes into the cap­i­tal. Div­i­dend pay­ments and pay­ment of inter­est on deposits by a bank reduce cap­i­tal — so it is sim­pler to think of retained earn­ings (undis­trib­uted prof­its) adding to a bank’s cap­i­tal. This is because accord­ing to Basel 2, rules banks can lend upto Capital/(Adequacy Ratio) and a “rule of thumb” is that they can lend 12 times — though the details are more com­pli­cated because of risk weights.

    If a bank lends L, it nei­ther adds to the cap­i­tal nor destroys it. Retained earn­ings add to cap­i­tal and non­per­form­ing loans reduce cap­i­tal, in case you want to include the lat­ter. When banks raise more equity (say, in a pub­lic offer­ing), that adds to cap­i­tal as well. 

    You may include “Cap­i­tal” in the def­i­n­i­tion of money sup­ply, if you wish to define it that way. At any rate I would imag­ine, you will end up either sup­port­ing hor­i­zon­tal­ism or tak­ing a “struc­tural­ist” posi­tion and not dif­fer­ing from PKists.

  • Ramanan/superpoincare

    No “this is because” in my first para in #108

  • Re #108 Ramanan,

    I don’t have time to con­sider this issue in detail now, though I do want to do so before embark­ing on fur­ther mod­el­ling. How­ever the rea­son I treat inter­est pay­ments dif­fer­ently to loan repay­ments is to pre­vent the “seignor­age” effect of a bank then being able to base its own spend­ing directly on the money it cre­ates. At some stage I should pro­duce a sim­u­la­tion to show the out­come of this; I think that might make the case clearer than ver­bal dis­cus­sion.

  • frashe


    I’d repro­duced all the equa­tions for your model from the descrip­tion in your slides. Your paper, apart from the sec­tion in p13-16 doesn’t add much i.e. the slides were a good sum­mary.

    My point is, who buys the extra goods that I’ve pro­duced so that I have the cash to repay some of the debt? In your sim­ple model all goods are bought to be con­sumed and you’ve included the con­sump­tion of the bankers and house­holds. There is no other cash flow­ing around the sys­tem. If the bank requires dol­lars as a repay­ment of a loan and this is com­ing out of the profit, then who sup­plies the dol­lars?

    If you look at the flow of com­modi­ties in your model you’ll find that the sur­plus of the firm is in the form of the com­mod­ity pro­duced, to which we can nom­i­nally cal­cu­late a value using the price. But this cal­cu­la­tion is only a nom­i­nal one, it is not a con­ver­sion of the com­mod­ity to a dol­lar amount. Dol­lars in this model can only be cre­ated by the bank. All the bank cash­flows are stated by your model and none of them give dol­lars to the firm with which it can repay the loan.

    I have a sim­ple spread­sheet which shows all this.

  • ak


    I totally agree with you. Debt money exists only as long as the debt is not repaid, there­fore if we don’t want to see a col­lapse in the sim­ple model:

    1. firms can­not repay its debt or
    2. another class of agents needs to be indebted to cre­ate credit money else­where in the sys­tem (e.g. house­holds) or
    3. fiat money has to be intro­duced

    In real­ity we can observe what hap­pens when M3 col­lapses and debt is repaid. This is con­sis­tent with this very sim­ple model.

  • Re #111 Frashe,

    Adam is spot on. This model imple­ments the Cir­cuitist endoge­nous money per­spec­tive that “loans cre­ate deposits” in a sim­ple “pure credit economy”–ie one in which there is no cen­tral bank or gov­ern­ment (that itself causes some frac­tion with Char­tal­ists, but let’s ignore that for once -:) ).

    If loans are repaid, then–whether I then imple­ment my per­spec­tive that loan repay­ment does not destroy money but does take it out of cir­cu­la­tion (con­sis­tent with Keynes’s “revolv­ing fund of credit” vision in his 1937 paper “The rate of inter­est”) or the stan­dard Cir­cuitist per­spec­tive that the money is actu­ally destroyed when debt is repaid–the money in cir­cu­la­tion drops and over time eco­nomic activ­ity will cease because there is no money in the econ­omy.

    One way to answer your ques­tion is that the bank sup­plies the dol­lars with which its debt is repaid: repay­ment is sim­ply return­ing to the bank the money it cre­ated endoge­nously in the first place when it issued the loan. While the debt con­tin­ues to exist, it finances a turnover of eco­nomic activ­ity equiv­a­lent to F_D/tau_S — the money in the firm’s deposit account divided by the turnover period (the time between M and M+ in Marx’s terminology)–which can be sev­eral times the size of the loan per year. If the debt falls to zero, then so does the money in F_D and all the other bank accounts, and eco­nomic activ­ity ceases.

    By the way, would you mind shar­ing your spread­sheet with the blog? There are sev­eral peo­ple here work­ing on dif­fer­ent com­put­ing tech­nolo­gies to imple­ment the model (War­ren Raft­shol, who’s done some bril­liant work to extend the model in Scilab, began with a spread­sheet ver­sion from mem­ory, while AK is work­ing on a Scilab front-end to my tab­u­lar sys­tem, and my off-list col­lab­o­ra­tor Cyril Wilkin­son is devel­op­ing a stand­alone inter­face in the Lua lan­guage), and every bit of cross-fer­til­i­sa­tion helps.

  • frashe


    I’m not so much wor­ried about pay­ing back the loan, as your com­ment that it can be done with the profit. The “profit” in your model doesn’t seem to be mon­e­tary, it is phys­i­cal. I’ve attached the spread­sheet, which I hope is self-explana­tory. The two right­most columns show the pro­duc­tion con­sumed by the house­hold and the banker. There is a sur­plus of pro­duc­tion kept by the cap­i­tal­ist but unless some­one buys it off him (and we’re assum­ing this doesn’t hap­pen beca­sue we haven’t spec­i­fied that cash flow) then there is no cash with which to repay the loan. Or almost no cash — there is some in the firm’s work­ing (vari­able) cap­i­tal and we can use this cash to reduce the debt.

    To keep the bank’s assets and lia­bil­i­ties in bal­ance the repay­ment from reduc­ing the work­ing cap­i­tal (FD in your work) of course exactly matches the reduc­tion in the loan (FL).

    The slide bars allow the user to eas­ily change any of the vari­ables and see what hap­pens to the out­put in real time. (Warn­ing, may not work on Mac.) I find this a use­ful tool to get a feel for these things, and an invalu­able teach­ing tool.


  • frashe

    What’s the best way of shar­ing the spread­sheet. The lit­tle “Browse” box only seems to allow a jpg to be added.


  • The cap­i­tal­ist spend­ing is implicit in this sec­toral model Frank, since I can’t show pur­chases of goods by cap­i­tal­ists from other cap­i­tal­ists in an inter-sec­toral account–it sums to appar­ently zero. This is why I delib­er­ately split all sec­tors in two in the larger multi-sec­toral model so that I could explic­itly show intra-sec­toral pur­chases as requir­ing cash.

    How­ever in the sin­gle sec­toral model, this intra-sec­toral expen­di­ture by cap­i­tal­ists on the out­put of other cap­i­tal­ists appears as a zero, but it is still there in the actual dynam­ics of the model.

    Total spend­ing is F_D/tau_S per annum: this reflects work­ers spend­ing of (1-s)*F_D/tau_S (from their wages) and implic­itly s*F_D/tau_S expen­di­ture by cap­i­tal­ists (bank expen­di­ture from its net income is a zero-sum trans­fer and there­fore doesn’t con­tribute to aggre­gate spend­ing).

    When I first wrote the model I used a “sup­ply and demand” price-set­ting equa­tion where sup­ply was the out­put and demand was the mon­e­tary sum of worker plus cap­i­tal­ist expen­di­ture, which is F_D/tau_S. This returned exactly the same val­ues in equi­lib­rium as using the price set­ting equa­tion I use in the paper.

    I know it looks strange at first, but it is an arte­fact of the inter­sec­toral nature of the model.

    I’m busy writ­ing a paper with a 5pm today dead­line, so I’ll have to leave a more detailed expo­si­tion to later. I’ll see if I can post an ear­lier ver­sion of the paper that will make this point clearer.

  • frashe


    Thanks for respond­ing so quickly.

    I’ve taken all the points you make into account in my think­ing. For instance, if the cap­i­tal­ists are buy­ing from each other then where is their cash held when we take a snap­shot? It’s either held in an account X that is not cur­rently included in the model, or, with­out loss of gen­er­al­ity, we can assume it’s the deposit at the bank FD

    In equi­lib­rium we would have X con­stant. From a mod­el­ling point of view this is equiv­a­lent to FD con­stant.

    If loans are repaid from X then this will decrease the value of X until it dis­ap­pears.

    X can’t be an asset or lia­bil­ity of the bank, oth­er­wise we’d have to put it into the bank’s bal­ance sheet. In a Cir­cuitist approach it can be the credit of the cap­i­tal­ists cir­cu­lat­ing between them­selves. If so, then how does the bank allow it to reduce a bank debt? The bank needs to mon­e­tise the debt by lend­ing against the cap­i­tal­ist credit or by con­sum­ing addi­tional com­modi­ties. This would require a reduc­tion in their sav­ings (effec­tively the bank’s cap­i­tal).

    If X is in the form of a stock of bank notes then there should be a lia­bil­ity of the bank reflect­ing this.

    What this gets down to is essen­tially what you have in your model on p14 — FD and FL are reduced in equal amounts.

    BTW, I can’t under­stand the model on p14. When a bank reduces the loans and deposits in equal amount then there is no change in the level of reserves. The cash­flow to the bank is pos­i­tive from the reduc­tion in the loan, and neg­a­tive in the reduc­tion of the deposit. As these amounts are iden­ti­cal in size they can­cel each other out, leav­ing no excess amount to flow into reserves. By adding this “reserve” term into the model you have upset all your care­fully bal­anced stocks and flows.

    Frank Ashe

  • Its pos­si­ble to “cut and paste” a link state­ment from a html page into the win­dow Frank, if you can post the file to a web­site (I’d like to pro­vide more than that, but the last time I installed a plu­gin that gave addi­tional facil­i­ties to post­ing, it caused chaos with the blog–this was just 2 weeks ago).

    Alter­nately, send the file to me via email (debunk­ing at gmail dot com) and I’ll post it to my FTP site and thence to here.

  • frashe

    Steve, I’ve sent the spread­sheet. Frank

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