Money in the Circular Flow

Abstract

Money plays an important role in both the Post Keynesian and circuit theory approaches. In the circuit approach, macroeconomic identities and the logic of circular flows are emphasized. In this method, all values are in nominal terms; thus, money is analyzed according to the role it plays in these nominally valued circular flows. In contrast, most Post Keynesians have emphasized money as a stock and have paid particular attention to the impact rising liquidity preference has on circular flows. Some Post Keynesians, however, have also recognized that as all spending must be financed, the money supply must expand endogenously to finance a growing circular flow. In addition, Post Keynesians have tended to pay more attention to individual decision-making than have those who adopt the circuit approach. The most important difference between the two approaches, however, is probably the treatment of uncertainty. Because Post Keynesians are particularly concerned with ex ante decision-making, uncertainty plays a major role in their view. On the other hand, circuitistes tend to focus on ex post aggregate identities, where uncertainty plays no role. Thus, the different treatments of money in the two approaches can be attributed at least in part to a difference in emphasis over where analysis should begin.