I found time this weekend to read Toporowski, Jan. “The monetary theory of Kalecki and Minsky.” SOAS Department of Economics Working Paper Series 172 (2012), which can be downloaded via Google Scholar for anyone interested. It’s commendably short. Here’s the abstract:
The monetary theory of Kalecki and Minsky is usually placed within the Post-Keynesian tradition, deriving from the monetary analysis of John Maynard Keynes. The paper argues that Kalecki and Minsky shared a common inheritance in Swedish and German monetary theory, rather than the Marshallian tradition. Thus the monetary analysis of Kalecki and Minsky emphasises the endogeneity of money through capitalist reproduction, rather than through the mechanisms connecting central bank money to credit creation in the banking system. This provides the link between the monetary theory of Kalecki and Minsky and modern circuit theory.
If I correctly understand, what the author means by “endogeneity of money through capitalist reproduction” is the idea that firms finance investment out of retained profits and that such investment shows up as profits for other firms which then use those to finance further investment, and so on and so forth. This is contrasted with the idea that money is endogenously created as banks satisfy the demand for loans (to finance investment), the central bank then, in its turn, satisfying the banks’ demand for any liquidity (central bank reserves and/or coins and notes), as required (p. 3).
The “Swedish” bit in the abstract is Knut Wiksell and his 1898 book Interest and Prices. According to the author (p. 4), one unusual place where Wiksell got his ideas is Volume II of Marx’s Capital.
The “German” bit is mostly not German at all, in the literal sense of the world: the only German mentioned by the author is Hans Neisser, a Marxist. According to the author: “In his 1928 book Der Tauschwert des Geldes (The Exchange Value of Money) Neisser had divided up cash balances into “balance reserves‟, held against contingencies by producers and consumers, and the “operating funds‟ to meet regular shortfalls of income against expenditure. To these Neisser attributed different velocities of circulation”.
The other “Germans” mentioned are Austrians: Hayek, Mises and Schumpeter. Rudolf Hilferding, whose book Das Finanzkapital (Finance Capital) is mentioned by the author as “[t]he earliest influence on Kalecki’s monetary theory” (p. 5) was also an Austrian (and had studied economics in Austria; although a Marxist, he is sometimes reckoned with the Austrian school), but later was politically active in Germany, where he made it to Finance Minister. He was murdered by the Nazis in 1941.
What is, perhaps, remarkable is that the author does not mention another important strand of German (in the literal sense) monetary theory, the one starting with F.G. Knapp’s State Theory of Money. Clearly this tradition must have had no influence on Kalecki and Minsky (so far as I can tell from this paper) and, perhaps it had become completely discredited, because of the war and post-war inflation in Germany and Austria. However, I’m curious to know what, if anything, Ellis, H.S. (1934) German Monetary Theory 1905-1933 Cambridge Mass.: Harvard University Press or Bellofiore, R. (2011) German Monetary Theory Revisited London: Palgrave Macmillan, both cited by the author, have to say about Knapp’s theory.
Here’s a bit of the author’s conclusion:
Both Kalecki and Minsky derived their monetary economics from the German discussions during the first third of the last century. This led them to the conclusion that the expenditure of capitalists determines the circulation of money in the economy, and credit or monetary policy only affects the balance sheet of the banking system. This is a fundamentally different view from that of Keynes and the Post-Keynesians, who argued and continue to argue that credit or monetary policy determines the circulation of money in the economy (except in the unlikely case of a “liquidity trap‟) through its impact on the expenditure of capitalist firms. In the case of Keynes and the Post-Keynesians, such expenditure draws down the liquidity of bank balance sheets, but does not expand those balance sheets.
Generally speaking, although I understand the author’s point, I’m not really sure if there’s as much difference as he makes out between the view he attributes to Kalecki and Minsky and the view of Post-Keynesians (let’s leave Keynes aside for the moment, since entire books have probably been written on what his view really was). It seems to me that the difference in these two views reflects the oft-cited weaknesses of monetary policy, best summarised in the two adages according to which it is “like pushing on a piece of string” or that “you can lead a horse to water but you can’t make it drink”. Meaning that, of course, endogenous money creation by banks cannot, on its own, cause the money thus created to circulate in the economy, unless it is lent out to capitalists who will use it for investment. So, clearly, the expenditure of capitalists is a necessary link in the creation and circulation of money in a capitalist economy. However, since capitalist’s work for profit, this logically means that the money supply must keep expanding to provide those profits and this, at the latest, is the stage where the banks (or some sort of banking system) come in. I think that especially Minsky (who explicitly mentioned the possibility of firms financing investment, at least in part, from retained earnings) clearly stressed that the expansion stage of his stability-breeds-instability cycle can’t go on unless banks provide credit to units, as those pass from the “hedge” to the “speculative” and, finally, “Ponzi” stage. I also don’t understand the author’s statement that, in the view of Post-Keynesians the expenditure of capitalist firms (financed by loans) “does not expand [the bank’s] balance sheets”. Surely, those loans must show up in the banks’ balance sheets and thus expand them.
In other words, it might well be that the author greatly exaggerates the differences in the view of –at least- Minsky (with whose work I’m more familiar), supposedly inherited from the “Germans” (Austrians) and the view of Post-Keynesians.