1. Money in the Economy: A Post- Keynesian Perspective Victoria Chick Note: ‘A Perspective’ not ‘The Perspective’. Big field with several approaches. Cannot cover everything.

2. ‘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’

3. 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.

4. 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.

5. 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’

6. 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.

7. 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

8. 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

9. 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.

10. 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.

11. 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 )

12. 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.

13. The monetary authorities and the banks I How do banks create money? A bank balance sheet: Assetsliabilities liquid assetsdeposits ‘investments’equity capital loans

14. 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

15. 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

16. 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.

17. 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..