Breaching Walras's Law with Endogenous Money

1
Breaching Walras's Law with Endogenous Money

• Steve KeenUniversity of Western Sydney

2
The Dogma

• Walrass Law cornerstone of neoclassical
  economics
• Balance in n-1 markets guarantees balance in nth
• Core component of equilibrium analysis
• If commodity money markets are in equilibrium,
  so must be the labour market
• Keyness Unemployment equilibrium an oxymoron
• Proof of Sum of excess demands equals zero
  starts from conservation law
• (1) Conservation of goods Final quantity equals
  initial
• 2 person (AB), two commodity (12) example

Initial allocation of good 1
Final distribution of good 1
As initial wealth
As final position
3
The Dogma

• (2) Conservation of wealth Final value equals
  initial

As initial wealth
As final wealth
Initial value good 1
Final value good 1

• (3) Define excess demand

As excessdemand for Good 1
Sum of excessdemand equals zero
4
The Heretics

• Several non-neoclassicals express misgivings
• Money plays essential role in all of them
• Marx
• Two circuits in capitalism
• CMC Says/Walrass Law applies
• MCM Says/Walrass Law violated
• The capitalist throws less value in the form of
  money into the circulation than he draws out of
  it
• His aim is not to equalise his supply and demand,
  but to make the inequality between them as
  great as possible. (Marx 1885 120-121)

5
The Heretics

• Schumpeter
• in so far as credit cannot be given out of the
  results of past enterprise it can only consist
  of credit means of payment created ad hoc, which
  can be backed neither by money in the strict
  sense nor by products already in existence...
  (Schumpeter 1934 106)
• Minsky
• If income is to grow, the financial markets
  must generate an aggregate demand that 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
• 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 6)

6
The Alternative

• Circuit School
• Non-commodity vision of money
• 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 (Graziani 1989 3)
• Necessitates bank (issuer of currency)
• 3-sided, 1 commodity exchanges, not 2x2 barter

7
The Alternative

• Seller A with commodity X
• Buyer B with money ?
• Bank records transfer of ? from Bs account to
  As

Capitalism's eternal triangle

• Money and debt essential aspects of capitalism
• Basis for alternative monetary model of
  capitalism
• Which breaches Walrass Law when economy growing

d X
B
A

• Technical innovation Approach to systems
  dynamics so simple, even economists can
  understand it!

B -?
A ?
Z
8
A simple approach to dynamic systems

• Each column represents a stock (system state)
• Each row entry represents a flow between stocks
• Specify relations between system states across
  rows

Relations
Equations

• To generate the model, add up each column
• Sum of column is differential equation for stock

9
An application Endogenous Money

• Deliberately simplified model
• Entirely linear
• Does not reflect current monetary institutions
• Basic model can be easily extended to
• match current institutional arrangements
• Include non-monetary flows (commodity production
  sale, etc.)
• Does answer fundamental questions
• How is money created?
• Is Walrass Law bollocks?
• Basic system
• Three classes capitalists, bankers, workers
• One record of debt (capitalist)
• Capitalist borrows money to initiate production

10
Initial conditions

• Starting position is

• Stage one bank extends loan of L to capitalist

11
Model without growth

• Whole model is

• Equations of motion read down the columns e.g.,
  FD

12
Model without growth

• Model has rank 2
• Dominant eigenvalue negative for all realistic
  parameter values

• State space rendition is

13
Model with growth

• Lines of credit
• Firm deposit account grows with matching increase
  in firm debt

Sums to more than zero
14
Model with growth

• Model has rank 3
• Dominant eigenvalue positive for all realistic
  parameter values

• State space rendition is

15
Model with growth

• Model breaches Walrass Law
• Sum of excess demands gt zero
• Not expenditure equals income but
• Expenditure equals income plus increase in debt
  minus servicing costs

Positive in growing economy

• It aint nonlinear or complex yet, BUT

16
Further development

• Prelude to developing full monetary model of
  capitalism that can explain this dynamic

Yes, Walras's Law is bollocks...
www.debtdeflation.com/blogs