Initial and Final Finance in the Monetary Circuit and the Theory of Effective Demand

Abstract

One remarkable aspect of modern heterodox theory is the detachment between demand‐led growth models and endogenous money theories. This paper suggests a possible integration of the Keynesian theory of the multiplier (and supermultiplier) with endogenous money and Keynes's finance theories. Focussing upon Graziani's version of the Monetary Circuit Theory (MCT), the paper is a contribution towards reconciling the preoccupation of MCT with initial production financing, and the concern of demand‐side oriented heterodox growth theories with final financing of autonomous demand. Following Davidson, Dalziel and others, the paper shows that endogenous money finances production decisions based, inter alia, on expected consumption and investment orders. In turn, the income (super)multiplier generates actual consumption and saving. The latter funds the actual purchase of investment goods. The (super)multiplier is the nexus between initial and final finance. Various complications of this basic idea not yet considered by the literature are examined.

The relation between Keynesian monetary theory and demand-led growth: a Sraffian exploration

“…Unfortunately, the coordination of financing of production versus financing of aggregate demand components is still rather neglected by the Post-Keynesian literature. Besides Davidson (1986), the exception is Cesaratto (2017); see also Toporowski (2020).…”

“…While we defer to other contributions for a more detailed analysis of the financial aspects of autonomous spending (Pariboni 2016;Cesaratto 2016bCesaratto , 2017Cesaratto and Di Bucchianico 2020;Vieira Mandarino et al 2020), we underline here the integration in the supermultiplier approach of some of the original inspiring principles of the monetary circuit: that everything starts with money creation and ends with money destruction, and the related concepts of initial and final finance. As previously hinted at, we in fact believe that the supermultiplier provides a framework that allows a smooth and proper incorporation of Keynes's finance into the domain of Post-Keynesian growth theory.…”

Garegnani, Ackley and the years of high theory at Svimez

“…We are therefore left with autonomous consumption, government spending, and exports as components of final demand. These components are ultimately all financed by credit/money creation by banks (Cesaratto, 2016(Cesaratto, , 2017a.…”

Firms’ Finance in an Experimentally Microfounded Agent‐Based Macroeconomic Model

“…This difference mainly arises from the different angle of vision chosen by the authors to investigate the same core ideas. While Minsky focuses principally on the natural evolution of the economic system from financial robustness to financial fragility (Minsky, ), Graziani is mainly interested to elucidate the evolution of the capitalistic process from its initial to its final financial condition (Graziani, ; Cesaratto, ).…”