Monetary Policy from a Circuitist Perspective

As Arestis says, circuit theory is ‘a strong component of the endogenous money thesis’ (1996: 113). This notably means that circuitists endorse the original Post Keynesian dismissal of the orthodox Monetarist approach to monetary policy by which the quantity of money in the economy should be regulated so as to stifle inflationary pressures. From the endogenous view, money creation is, in Moore’s words (1988), ‘credit-driven’, meaning that money is demanded by the general public and firms to finance spending which is dependent upon prices and money wages. Hence it is prices and money wages that are factors determining the amount of money created and not the contrary. This led Post Keynesian writers to relate inflation to distributional conflicts which should be addressed by means of institutional measures designed to regulate income distribution. Paraphrasing a famous formula by Friedman, Davidson (1991: 100) concluded that ‘inflation is always and everywhere a distribution phenomenon’. Weintraub (1979) proposed a tax-based income policy that would charge those firms which let wages rise more than productivity. Circuitists too have pointed out the distributional aspects of inflation (Parguez 1991: 61–89, and Bradley, Friboulet and Gnos 1996: 107–34). Another well-known divergence between orthodox and heterodox approaches concerns the interest rate, which is considered as an endogenous variable in the monetarist tradition while Post Keynesians and circuitists argue for its exogeneity. However, none of the approaches mentioned stopped there.