Keynes

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Keyness revolving fund the Circuit

• Steve Keen

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One step forward, two steps back?

• Circuitist non-commodity money, 3-cornered
  exchange fundamental advance on Keynes
• But School beset by dilemmas
• Losses in Circuit
• Destruction of Money
• Dilemma of profit how can M become M? (Rochon
  2004 125)
• Keynes 1937 saw no such dilemmas
• If investment is proceeding at a steady rate,
  the finance required can be supplied from a
  revolving fund of a more or less constant amount
• How to reconcile Keynes the Circuitists?
• And the Accommodationists Structuralists

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Model Circuit Dynamically

• Circuit fundamentally a dynamic process
• Attempts to model to date have been either
• Single period accommodationist Simple, but
• Change occurs between periods, out of time
• Comparative statics links periods
• Multi-period structuralist Too complex to
  model?
• practical need to often rely on comparative
  statics exercises rather than full-blown dynamic
  experiments (Fontana 2004 381).
• Comparative statics is the problemnot the
  Circuit!
• Need truly dynamic approach to analysis
• Systems dynamics Differential equations
• Not difference equations
• Distorted time delays
• Analytic stock/flow confusion still possible

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Model Circuit Dynamically

• Starting point Grazianis key insights
• Money a tokenpure credit system
• Three agents minimum
• Seignorage cannot be possible
• Minimum of 5 accounts needed
• Two for capitalist
• One to record debt KD, other to store money KC
• One for worker
• Receive spend wages WY
• Two for Bank
• One for principal production/repayment BP
• One for rentier income spending interest margin
  BY

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Modelling endogenous money dynamically

• Capitalist Credit (KC)
• Credit Money paid in here
• Interest on balance
• Repayments out of here to Banker
• Capitalist Debt (KD)
• Debt obligation recorded here
• Interest on balance
• Banker Principal Account (BP)
• Accepts repayment of debt by capitalist
• Banker Income Account (BY)
• Records incoming and outgoing interest payments
• Worker Account (WY) introduced later
• Start at simplest level compound interest
• Capitalist borrows never repays or uses money

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Modelling endogenous money dynamically

• Both KC KD start with KD(0)
• KD grows at rate of debt interest rd
• Compound interest, the simplest possible
  differential equation

• KC grows at rate of credit interest rc

• BY pockets the difference

• As Circuitists feared, this is the road to ruin
  for capitalists
• With Loan L100 (million billion), rd5,
  rc3, after one year
• Capitalists 2 in red

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Modelling endogenous money dynamically
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Modelling endogenous money dynamically

• Whod be a capitalist?
• But model isnt complete yet no repayment

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Modelling endogenous money dynamically

• Repayment intention to make debt decay
  exponentially

• Achieved by adding
• Repayment of interest
• Repayment of capital

• Both amounts come out of capitalist credit
  account KC (capitalists only store of funds)

• Repayment of principal to banker principal
  account BP

• Interest to banker income account BY already shown

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Modelling endogenous money dynamically

• So (still incomplete) system is

• How does this behave?
• Simulate and find out
• Try RP1

• Picture looks a lot better for capitalists than
  without repayment

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Modelling endogenous money dynamically

• But being a capitalist still a losing
  proposition
• Because production isnt yet modelled
• Capitalists borrow to produce, sell, make a
  profit

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Modelling endogenous money dynamically

• Whole purpose of production to make profit
• Not physical profit (Bellofiore et al. 2000)
• Must spend to make outflow from KC needed
• Production requires workers
• Must be paid wages (into new account WY)
• Products sold to capitalists, workers, bankers
• Transactions from sale flow to capitalist credit
  account (out of BY, WY)
• Net revenue generated resolves into either
  profits or wages
• in proportions of flow of income from production,
  wage share profit share 1
• Profit proportion flows back into KC account

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Modelling endogenous money dynamically

• Call proportion of outflow that finances
  production P

• Fraction (1-p) of this flows to workers as wages

• Fraction p flows back to capitalists as profits

• Workers earn interest too

• Paid by bankers from BY

• Workers bankers consume

• pay to KC account

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Modelling endogenous money dynamically

• First complete (but still simple!) system is

• Simulated as flowchart in systems engineering
  software

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Modelling endogenous money dynamically

• After ten years
• Capitalist net debt position negligible
• Almost all net money in BP account

• What about incomes?
• KD, KC, WY, etc. record bank balances
• Entries wWY, bBY, etc. record transactions
  between accounts
• Incomes are subset of transactions

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Modelling endogenous money dynamically

• Workers wages interest

• Bankers net interest

• Capitalists profit net interest

• These are flows
• Aggregate income generated by initial loan L100
  is stock
• Integral of these over time

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Modelling endogenous money dynamically

• So initial loan of 100 can generate
• 89 income to capitalists
• 2 to bankers and
• 215 to workers
• (with example parameters)
• Without relending
• All money eventually accumulates in BP activity
  ceases
• Next extension re-lending
• credit as a revolving fund which can be used
  over and over again. (Keynes)
• Bankers re-lend proportion B of existing BP
• Amount paid into KC recorded in KD

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Modelling endogenous money dynamically

• System with re-lending is

• Initial loan L can now fund one investment after
  another, as Keynes argued

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Modelling endogenous money dynamically

• All accounts stabilize at constant level

• Flow of revolving fund through accounts
  generates sustained stream of income for all 3
  classes from single initial loan

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Modelling endogenous money dynamically

• With parameter values used, 100 initial loan can
  finance
• 61 of profit
• 143 of wages and
• 1 of bank income per year

X
X

• Income nets to profitswages the monetized
  surplus from production

X
X
X
X
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Modelling endogenous money dynamically

• How can capitalists borrow money make a
  profit? dilemma easily solved
• So long as income from production exceeds
  interest payments on borrowed money!

Interest on debt
Income from production

• Circuitist how can M become M? dilemma a case
  of confusing stocks (initial loan) and flows
  (incomes, including profits)

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Additional insights from model

• Endogenous money works
• Dont need deposits to make loans (exogenous
  money perspective)
• instead loans create deposits
• Loans(t) KD(t)
• Deposits(t) KC(t)WY(t)BY(t)
• Amounts identically equal over time
• Bank creates money ab initio
• No need for it to have any assets
• Just need acceptance of its IOUs as money by
  third parties

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Additional insights from model

• Deposits destroyed as Loans repaid, not
  Moneywhich is conserved
• Money a bank asset
• Money(t) KD(t) BP(t)
• Technically, Loans destroyed by returning
  Deposits to Banks

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Additional insights from model

• Form of money is either
• Debt by other parties to banks (loansdeposits)
  or
• Banks unencumbered asset in BP account
  (reserves)
• Reserves created by repayments of loans
• Reverse of exogenous money perspective (loans
  made possible by reserves)

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Next extension creation of new money

• Model so far has single injection of money KD(0)
• In actual economy, new money created endogenously
  all the time
• How to model here?
• Simplest step banks create new money at rate nm
  p.a.
• New money generated in Bank Principal account

• New money then loaned to firms
• Recorded as positive entry in credit (money) and
  debt account
• Subtracted from Bankers Principal account once
  paid to capitalists

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Creation of new money

• Final model is

• Model now has growing levels of income over time

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Creation of new money

• All account balances grow over time

• As do incomes, etc.

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Reconciling Accommodationists Structuralists

• Final model

Basil
Sheila
Basil
Sheila

• Includes Moores Lines of credit Horizontalism

Basil
Sheila

• And Dows (et al.) structuralist active role
  for banks

• Foundation for proper transactions modeling of
  Minsky
• Behavioral relations replace constant parameters
• Investment expectations generate new money

• Bank rationing controls money reflux

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Conclusion

• Circuitists Keynes correct
• Loan in pure credit system initiates sustained
  economic activity
• Money in economy endogenously determined
• Debt an essential aspect of capitalist economy
• Apparent dilemmas in Circuitist logic
• how can M become M? (Rochon 2004 125)
• As soon as firms repay their debt to the banks,
  the money initially created is destroyed
  (Graziani 1989 5)
• Result from
• Forgetting generation of surplus in production
• Not thinking dynamically when fundamentally

The Circuit is dynamic!