By Jack Wendland*
Neoclassical economics has largely relegated money to the role of neutral medium of exchange. A closer, more historical look at money reveals that, from the beginning, money has always been credit offset by debt, not a medium of exchange. Although the acceptability of money follows a clear-cut hierarchy, the process by which money is created remains the same for all parties. Running contrary to the mainstream narrative, this vision of money as credit has important implications for the fiscal policy of any state that issues its own currency.
By Matthew Berg*
This paper argues that a monetary production credit economy must necessarily have a hierarchy of money (Foley 1983; Bell 2001) in which some IOUs are more liquid and more acceptable than others, and in which default on IOUs is possible. The imposition of a tax liability by the government is a sufficient condition not only to ensure that the government’s IOU is acceptable (Wray 2012), but also to ensure that at least some non-government IOUs will be acceptable to the degree that they can be converted into government IOUs – that is, to the degree that they are liquid.
Banks are institutions which exchange their own IOUs for the IOUs of borrowers who stand lower in the hierarchy of money than banks. Borrowers take out loans from banks for the purpose of buying goods, services, or financial asset from a third party. Banks (and central banks) act as the “ephors” of capitalism – and as the ephors of the hierarchy of money – by deciding which IOUs shall be “validated” and effectively converted into government IOUs, and by deciding when and for how long those IOUs shall be validated.
By Ryan M. Pope*
Hyman P. Minsky said he thought there were as many forms of capitalism as Heinz had pickles. The same can be said about the different types of banking within the financial system. The system has undergone a dramatic transformation over the development of the capitalist economy, and Minsky spent a large amount of time studying this transformation. Many economists feel the same way as Minsky did, that the results achieved by a capitalist economy can be viewed from two fundamentally different perspectives: the Smithian way and the Keynes way. The Smithian way assumes the presence of an “invisible hand”, and therefore “intervention or regulation can only do mischief.” (Minsky 1991, 5) In contrast, the Keynes way assumes that the economy is naturally unstable, and “… regulation and intervention can be beneficial.” (Minsky 1991, 5) When designing economic policies, government leaders must choose between these two perspectives. This is exactly what policy makers have done over the evolution of the capitalist economy, and their decisions have transformed the banking system in many ways.
By Vincent Huang*
The discrepancy between the orthodox (primarily neoclassical) and the heterodox (Post Keynesian, Chartalism, MMT, etc.) schools of thought rests fundamentally in their different perception in the way the capitalist economy functions. Such discrepancy can be described in the contrast between C – M – C’ and M – C – M’. The orthodox school holds the former view that depicts a barter economy in which the end purpose of production is consumption. Individuals innately engage in production because of the urge to truck and barter. Money merely facilitates the exchange of goods and services and cannot affect production decisions. The heterodox school, however, asserts the latter view that depicts a monetary production economy in which production is always financed through money and would not take place unless more money expects to be realized through sale of goods and services. Hence, the orthodox school asserts money neutrality (at least in the long run) since money is simply the medium of exchange. The heterodox school rejects money neutrality since money not only finances production but also serves as its end goal. The distinction between the barter and the monetary economy, as discussed above, thus necessarily implies a very different understanding of the nature, origin, and role of money between the orthodox and the heterodox school of thought. The purpose of this paper is, through examining the nature and origin of money in a historically grounded context, to demonstrate that the orthodox school of thought has completely mistaken the nature of money and consequently misinterpreted the nature of the capitalist economy. Such theoretical misunderstanding is devastating because it manifests wrong policies that continually fail to address economic and social problems threatening a capitalist society. Based on the heterodox theory of money, the paper also intends to shed light on alternative guiding principles behind monetary and fiscal policies.