1. The Monetary Divide Individualistic, non-monetary, static, equilibrium paradigms –Money as means of payment –Dichotomy, Neutrality

2. The Monetary Divide2 Macrosocial, monetary, dynamic, disequilibrium paradigms –Money as finance affects real structure of the economy and income distribution Instability Wicksell 1898, Schumpeter 1911/1939, Keynes 1930/1937-9 –But also, Money as store of value Crisis, involuntary unemployment equilibrium Keynes 1936 What about Marx and Sraffa?

3. The process of capitalist development Capitalist development is defined by Schumpeter as a discontinous and qualitative change induced by innovation The innovation breaking the existing general equilibrium is a the expression of a change in people’s behaviour

4. Stationary circular flow Interests and profits are absent Since the economic process is syncronized, there are no stores of money Credit may be neglected Money plays a non essential role

5. Credit creation and ensuing Inflation Credit creation and the ensuing inflation cause a transfer of productive resources. This transfer happens owing to a squeeze of the purchaising power held by the old producers. Essential role of credit in capitalist development Credit => Innovation Innovations, yielding profits, enable entrepreneurs to pay interests to the banks wich granted credit

6. Interest Interest is an entirely monetar phenomenon The premium of present over future means of payment wich the owner brings on balances he has lent A share of net product

7. Schumpeter’s pure model of two phase cycle The first entrepreneur make it easier for others to introduce new production funcitons in the same or in other sectors. Innovations appear in bunches Great increase in monetary expenditure whereas the supply of goods is not growing yet. Prices of means of production and incomes are the first to increase, followed by consumer goods’prices When supply is raised as an outcome of innovations, the new firms enjoy net profits whereas the old firms must undergo restructuring or get out of the market General disequilibrium => stop of entrepreneurial action (recession phase)

8. Schumpeter Class Analysis One does not have to belong to boorgeousie to become an entrepreneur Recession establishes a necessary condition for new phase of prosperity, but the actual renewal of entrepreneurial action is caused by motivation of entering the capitalist class

9. Money and capitalist development Money is the driving power of economic evolution. In the circular flow money is at the same time receipt voucher and claim ticket (money as a veil) Un capitalist developmet money is only claim ticket (banks can create credit ex novo)

10. Money and capitalist development In capitalist development there is a sequential order of the concatenated acts in which development runs: 1)entrepreneur’s demand on his bank (financing of innovation) 2)Inflationary process (caused by the non simultaneity of the emergence of new purchaising power and of the new commodities) 3)Carrying out of innovation 4)Flow of new supply 5)Taking of profits by the enrepreneur (that will allow to pay back capital +monetary interest to bank)

11. Summary Without credit no innovation and o cycle is possible. Banks perform a funcional role for accumulation But they also have a contradictory role: interest is a ‘tax on profits’ and a brake on development!

12. Wicksell monetary theory Wicksell is the first author who sees in bank financing of investments by credit creation the defining character of capitalism as a monetary and unstable economy. Investments are financed by the banking system and credit does not depend upon the amount of savings (i.e. created ex novo)

13. Wicksell monetary theory There is an equilibrium (S=I) only if entrepreneurs’real rate of return on investments and the money rate of interest established by the banks have the same value. But the equality between money and natural rate of interest is a chance!

14. The Unstable Equality (Pure credit system) Banks set discretionally the level of the money rate of interest, and the real return of investment (i.e. natural rate of interest) is higly unstable. If natural rate > money rate =>entrepreneurs’(extra)profits (at the expense of savers) =>demand for finance and credit supply increase =>greater liquidity =>cumulative inflation (extraprofits are preserved)

15. In other cases Equilibrium will be broken again, beacuse of the stediness of the discretional level of the money rate fixed by naks against the higly unstable real rate. The process is worsened –not compensated- by a reduction in propensity to save. A positive difference between the two rates acts positevely on the capitalization of the returns expected from new capital goods, favouring their production at expense f consumption goods => forced savings!

16. Schumpeter vs Wicksell In Wicksell credit supply satisfies each entrepreneurial demand, whereas in Schumpeter banks ration credit and have a positively sloped supply curve. According to Schumpeter the structural instability of capitalism is due to an endogenous qualitative change, (financing of innovation). According to Wicksell variations in the natural rate are exogeneous (credit creation only in equilibrium) => inflation is independent from changes in production functions. The conflict over distribution in Wicksell is between merchant capitalists (savers) and industrial capitalists.The conflict in Schumpeter is between entrepreneurs and managers of old firms, with bankers earning interests and selecting entrepreneurial demand.

17. Schumpeter vs Wicksell (the common ground) They sees the economic process as a monetary circuit where money is endogenous because of the ex novo creationof purchaising power by banks in favour of the industrial capitalists. Capitalists can escape the budget constraint, but workers cannot. Decisions on the level and composition of output are autompusly taken by industrial capitalists, with workers in a passive position.

18. Monetary Circuit (Graziani) Step 1 Initial finance (only firms are admitted to bank credit) The demand for bank credit coming from producers depends only on the wage rate and on the number of workers that firms intend to hire

19. Monetary Circuit (Graziani) Step 2 Decision concerning production and expenditure. Wage earners can only take decisions on how to distribute their money incomes between consumption expenditure, addition to cash balances or purchase of securities.

20. Monetary Circuit (Graziani) Step 3 Commodities produced are put to sale Money that wage earners spend in commodities market, as well as money spent in financial market on the purchase of securities, flows back to the firms, who can use it to repay bank debt.

21. Monetary Circuit (Graziani) Step 4 Bank debt is repaid. Monetary circuit is closed. New money will be created when the banks grant new credit for a new production cycle.

22. Monetary Circuit (Graziani) The above descripiton has homitted the problem of the payment of interest to the banks. Since the only money existing in the market is the money that banks have lent to the firms, even in the most favourable case, the firms can only repay in money the principal of their debt and are unable to pay interest!