The role of money and financial institutions in Kalecki and Keynes

AbstractNumerous discussions on money and financial institutions have been advanced both between and within economic theories. Heterodox schools of thought consider money to be non-neutral, with causality running from money demand to money supply and the interest rate as a monetary and distributive variable. In this paper we discuss the views of Michał Kalecki and John Maynard Keynes on money and the operation of financial institutions. Kalecki and Keynes formulated the theory of effective demand, specifically in terms of its effects on economic growth and financial instability. Nonetheless, in line with the work of Tracy Mott, we argue that Kalecki’s analyses of the financial system are more profound because they better capture the complexity of the oligopolistic financial system, providing the foundations for Keynes’ liquidity preference theory. As a result, it may be concluded that the main problem of economic growth and investment spending is the structure of corporate finance.Keywords: KaleckiKeynesmoneyfinancial institutionsJEL Codes: E11E12E41E44 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 In a letter to Ralph George Hawtrey, Keynes stated his understanding of the classical school to mean “not merely Ricardo and Mill, but also Marshall, Pigou and Henderson and myself until quite recently and, in fact every teacher of the subject in this country.” He did not include Hawtrey and Friedrich Hayek whom he considered “neo-classical'” (letter to Hawtrey, 15 April 1936, CW XIV, p. 24). Despite their awareness of the prominence afforded to monetary aspects of economics, Keynes contended that these scholars tended to endorse classical conclusions on matters of monetary policy (though taking a more eclectic approach on other policy issues), Tily Citation2007, footnote 2, p, 10.2 Keynes argued that “the ordinary Budget should be balanced at all times. It is the capital budget which should fluctuate with the demand for employment” (CW, XXVII p. 225), adding that ”the very reason that capital expenditure is capable of paying for itself makes it much better budgetwise and does not involve the progressive increase of budgetary difficulties” (CW, XXVII p 320), concluding that “if, for one reason or another, the volume of planned investment fails to produce equilibrium, the lack of balance would be met by unbalancing one way or the other the current Budget” (CW, XXVII p. 352).3 Keynes’ view of monetary policy and its effects on interest rate and finance changed radically as a result of his visit to the United States. This argument is summarized in the Chicago papers, for further references see Minsky Citation1989.4 According to Chick (Citation1983) the revolving fund is completely different from the theory of loanable funds. In the former there is a process of ongoing liquidity issuance and payment involving different borrowers, while in the latter credit issued to one borrower needs to be repaid by the same agent for new credits to be created, producing a very close link between investment, credit, and the interest rate.5 Keynes Citation1930, Book 1, p. 125 has a similar approach summarized by the “widow’s cruise,” analogy, which Keynes, unlike Kalecki, solely related to consumption spending. Keynes argues that “If entrepreneurs choose to spend a portion of their profits in consumption … the effect is to increase the profit on the sale of liquid consumption goods by an amount exactly equal to the amount of profits which have been thus expended…. Thus profits, as a source of capital increment for entrepreneurs, are a widow's cruse [sic] which remains undepleted however much of them may be devoted to riotous living.”Additional informationFundingThis paper is part of the research project IN-303823, sponsored by PAPIIT-UNAM.Notes on contributorsNoemi Levy-OrlikNoemi Levy-Orlik is a full time professor, Economic Faculty at UNAM, Mexico City, México.