Graziani’s monetary analyses and the critique of neoclassical school

1 Augusto Graziani made very important contributions to various aspects of academic life. He committed himself to the Departments with vigor and impartiality. He defended the need of young people to have adequate research training. He organized countless meetings in which he decisively defended his ideas. A young researcher with arguments other than those he proposed had the opportunity to face a formative experience, perhaps difficult, but certainly constructive.

Among the issues within his competence, those concerning the role of money were among the most debated. The analyses on the “monetary circuit” attracted the attention of international literature and are still at the center of discussions that describe Graziani as an innovator and a school leader, a recognition that highlights the originality and complex articulation of his thought and personality.

The starting point of these analyses is the observation that entrepreneurial activity is carried out by anticipating means of payment that the banking system makes available. The loans granted by banks do not necessarily depend on the deposits they have already collected. Banks can lend new by reducing monetary base reserves, thus fostering an autonomous increase in effective demand that changes production and employment levels and income distribution.


2 The role of money and credit in economic activity has always been a controversial topic in literature. Henry Thornton, the British economist who had the greatest impression on the drafting of the Bullion Report of 1810, believed that monetary issuance could permanently change the level of production (today we would say “it could modify the potential product”). Ricardo and James Mill denied this claim by adopting Say’s Law and arguing that monetary factors are irrelevant when examining underlying trends in economic behavior. The controversy between these positions, known as the debate on the “neutrality of money”, has spanned the entire history of economic thought. Lucas’ Nobel Lecture shows that the problems connected with this debate guided this author’s research and the birth of New Neoclassical Macroeconomics in the 1970s. In the following years, other economists, agreeing with Lucas’ positions on the neutrality of money, spawned the New Keynesian Macroeconomics and the New Consensus in Macroeconomics.

The point at issue in all this literature is not the neutrality of money in the analysis of the cyclical fluctuations of the economy. Ricardo, James Mill and the economists who, after them, examined monetary problems – including Lucas and the economists of the New Macroeconomics – agree that changes in money and credit affect the levels of economic variables during the cycle. The point under discussion concerns the neutrality of money in the analysis of underlying trends. The literature refers to this theme with the expression “long-period neutrality of money”, which indicates the inability of monetary issuance to modify the “potential product” and the “natural rate of interest”.

These discussions touch on a key point of the discipline. How is money to be integrated into the theoretical foundations of economic science, i.e. the theories of value, distribution and the level of production?

After the crisis of 1929, Keynes’s work, supported by the young colleagues of the Cambridge Circus, focused on this theme. The “monetary theory of production”, which he begun to construct in the second half of 1932 in opposition to the dominant viewpoint that he himself had proposed in the 1930 Treatise on Money, denied the “long-period neutrality of money” and Say’s Law. In the General Theory of Employment, Interest and Money, Keynes argued that monetary factors play a crucial role in the permanent changes of production, employment, and distributive variables, including the rate of interest.

Keynes was aware that his research project concerned the integration of money into the theoretical foundations of the discipline and thought that his book represented a “revolution” that had to induce the profession to interpret economic events in a new way (see the letter of January 1, 1935, to George Bernard Shaw and the broadcast “Poverty in Plenty” published in The Listener of November 21, 1934). The contents of this “revolution”, however, left room for discordant interpretations and, even among those who shared Keynes’s positions, different proposals were made on how to evaluate them.

Sraffa, Harrod and Kaldor saw in Keynes’s work a break with the dominant theories. Analyzing the structure of interest rates, Kaldor (1939, pp. 39-41), instead of referring to an abstract and not directly observable concept such as the natural rate of interest, argued that the decisions of the monetary authorities depend on their interpretations of what are the real and monetary factors that affect the behavior of financial markets and the economy in a certain historical period. He also added – as Keynes had already done – that such decisions are most effective when they succeed in shaping the expectations of operators. Kaldor (1939, p. 37) concluded that, although changes in the course of events may hinder the activity of monetary authorities by increasing the degree of uncertainty prevailing in markets, historical experience showed that they had been successful in stabilizing markets on a lasting basis.

Joan Robinson saw in Keynes’s work a break with the dominant methodology. For Robinson (1936, p. 74; 1951, pp. 257-258), Keynes noted that adjustment processes are slow and fail to produce the effects that the literature indicates because frequent changes during events modify trends, thus keeping uncertainty alive about future market outcomes. Identifying his positions with those of Shackle and Kalecki, Joan Robinson (1974, p. 3) stated that, until the publication of the General Theory, he had difficulty inducing Keynes to see that this was the central point of his “revolution”. She concluded by arguing that, when he published a summary of the General Theory after its publication, Keynes fortunately pointed out that the rupture consisted in moving from the method of rational choices to that of decisions based on guess-work and conventions.

In agreement with Joan Robinson, Shackle (1967, p. 207) pointed out that economic studies must develop with “short-period” analyses, as the two economists called them, without worrying about underlying trends. In addition, both stated that, focusing on disequilibrium, the Treatise on Money proposes a more convincing description of the role of uncertainty than the General Theory. (See Shackle, 1967, pp. 208-215 and 240; J.V. Robinson, 1951, pp.  254-255).


3 These considerations about the history of thought can help to clarify some aspects of Graziani’s work and to highlight the themes that should be further deepened by examining his writings.

In the analysis of the “monetary circuit”, the banks’ choices to lend to firms by reducing the reserves of monetary base violate the condition of equilibrium between saving and investment decisions. To describe the mechanisms that these choices set in motion, Graziani examined disequilibrium processes and sequencies that, unlike neoclassical ones, do not lead the economy towards full employment. Moreover, his interest in the writings of Schumpeter and of those who prefer the study of disequilibrium processes suggests that his analyses – like those of Joan Robinson and Shackle – assume that the economy does not tend towards equilibrium positions, whether they are characterized by the presence of full employment or unemployment.

A second element that brings Graziani’s elaborations closer to those of Joan Robinson and Shackle is the greater interest in the analytical contents of the Treatise on Money than in those of the General Theory. The attention to the Treatise, a text that belongs to the neoclassical tradition and that – as Keynes himself clarified – accepts the long-period neutrality of money, the dichotomy between the real and monetary analytical departments of economic theory, Say’s Law and the leading role of the natural rate of interest in the conduct of monetary policy, signals an inclination to study the works of the past to find inspiration on the problems that current events face. The approach, which allows to propose different “readings” of the previous literature, not necessarily accurate from the point of view of historical reconstruction, can favor the development of knowledge if used by experienced and competent authors such as Graziani. However, there remains the need to clarify the limits on the interpretative content of the proposed “readings”. In this regard, the statement of Marglin (2021, p. 3), one of the most important critics of the neoclassical school, that accurate reconstructions of the history of thought are a work for its own sake as useless as the “search for the Holy Grail”, is not convincing.


4 Reflections on the history of thought can also help to evaluate how Graziani considered the work of Sraffa, another leader of critical economics.

The lack of interest in the study of underlining trends and in the equilibrium method suggests a first reason for the distance that Graziani showed for Sraffa’s critical analyses. One can, however, become more aware of this point by examining how the two authors conceived of the relationship between theory, history and politics. Recent developments in the literature on Sraffa’s writings call for a similar examination of those of Graziani.

Sraffa’s critical analyses assumed that the realism of hypotheses, not that of conclusions, is the test of theories. They sought to identify the hypotheses that make a coherent theory to assess whether, from the point of view of realism, they are more acceptable than those required by alternative theories. Recent literature on this issue has examined how Sraffa’s work was linked to that of Keynes, proposing some novelties.

An interpretation proposed in the second half of the XX century stated that these authors were so distant as to give rise to what Skidelsky (1986) called “a case of non-communication”. Pasinetti (1979, p. 738) had already criticized the widespread but erring opinion that considers Sraffa’s contribution as ‘merely abstract exercise in pure theory’, distant from reality and elaborated without having interest in the historical and political-normative aspects. In the 1980s the analysis of the monetary and political writings published by Sraffa in his youth confirmed Pasinetti’s assessments. Then, in the mid-1990s, the opening of the Sraffa Papers, the archive deposited in the Wren Library of Trinity College, Cambridge, made it possible to further examine the works of this author.

Documents have emerged which, from the second half of the first decade of the new millennium, have led to the recognition that Sraffa’s research project had as objective the construction of an economic theory in accordance with hypotheses concerning the behavior of observable, tangible, and measurable magnitudes (see Kurz and Salvadori, 2005). He wanted to reduce the likelihood that assumptions, which escape “objective” verification, could introduce ideological elements into the discipline, making it dominated by dogmas rather than scientific knowledge. The new interpretation has also showed that Sraffa and Keynes had a common sensitivity on these issues and has made it clear that the two economists developed a close collaboration, ranging from examining the methodological and theoretical foundations of the discipline to specific aspects of monetary analysis (see Panico, 2021). Despite character differences, they shared research goals and the elaboration of analytical topics in a climate of respect and friendship. Their relation was not “a case of non-communication”.

The study of the Sraffa Papers has also made it possible to establish that Keynes and Sraffa shared the contents of the scientific tradition that Marshall had imposed on Cambridge. He had opposed Cunningham in a debate similar to the “Methodenstreit” that was taking place simultaneously in continental Europe. Marshall (1985) considered that the economic discipline needs general principles, conceived in terms of “abstract” theories – which consider only some of the elements operating in reality – the application of which has to take account of the prevailing historical circumstances. For Cunningham, instead, the political and historical dimensions have to dominate in the construction of theories. Following Marshall, Keynes and Sraffa recognized that, owing to their abstract nature, theories must be judged on the basis of their logical coherence and that the mismatch between their results and the prevailing historical events is not sufficient to induce the profession to abandon the dominant theoretical foundations. The realism of hypotheses, not that of conclusions, represents for them the test of theories.

The novelties that emerged on Sraffa’s work and on the relationship with that of Keynes call for a new reading of Graziani’s writings to examine how he conceived the relationship between theory, history and politics. The eminent role that he has played in the elaboration of critical theories makes this analysis desirable.


Kaldor N., 1939, Speculation and economic stability, The Review of Economic Studies, 7 (1), October, 1–27. Reprinted in Kaldor N., Essays on Economic Stability and Growth, Collected Economic Essays, vol. II, London: Duckworth, 1960, 17-58.

Keynes J.M., 1930, A Treatise on Money, in Moggridge D.E., ed., The Collected Writings of J.M. Keynes, Volumes V and VI, London: Macmillan, 1971.

Keynes J.M., 1934, Poverty in plenty: is the economic system self-adjusting?, The Listener, 21 November. Reprinted in Moggridge D.E., ed., The Collected Writings of J.M. Keynes, The General Theory and After. Part I: Preparation, vol. XIII, London: Macmillan and Cambridge University Press for the Royal Economic Society, 1973, 485-92.

Keynes J.M., 1935, letter to George Bernand Shaw, 1 January. Reprinted in Moggridge D.E., ed., The Collected Writings of J.M. Keynes, The General Theory and After. Part I: Preparation, vol. XIII, London: Macmillan and Cambridge University Press for the Royal EconomicSociety, 1973, 492-93.

Keynes J.M., 1936, The General Theory of Employment, Interest and Money, in Moggridge D.E., ed., The Collected Writings of J.M. Keynes, Vol. VII, London: Macmillan, 1971.

Kurz H.D., Salvadori N., 2005, Representing the production and circulation of commodities: on Sraffa’s objectivism, Review of Political Economy, 17 (3), 414-41

Marglin S.A., 2021, Raising Keynes: a Twenty-First-Century General Theory, Cambridge, Mass.: Harvard University Press.

Marshall A., 1885, Thand Present Position of Economics: An Inaugural Lecture at Cambridge University, February. A large part of this article is reprinted in Hodgson G.M., 2005, The present position of Economics by Alfred Marshall, Journal of Institutional Economics, 1 (1), 121-37.

Panico C., 2021, Sraffa’s monetary writings, objectivism and the Cambridge Tradition, in Sinha A., ed., A Reflection on Sraffa’s Revolution in Economic Theory, Palgrave Macmillan, Palgrave Studies in the History of Economic Thought, 419-49.

Pasinetti L.L., 1979, Sraffa Piero, International Encyclopedia of Social Science, Biographical Supplement, vol. 18, New York: Macmillan, The Free Press.

Robinson J.V., 1936, The long-period theory of employment, Zeitschrift für Nationalökonomie, 7, 74-93.

Robinson J.V., 1951, The rate of interest, Econometrica, 19 (2), April, 92-111. Reprinted in Robinson J.V., Collected Economic Papers, Volume II, Oxford: Basil Blackwell, 1960, 246-65.

Robinson J.V., 1974, What has become of the Keynesian Revolution?, Challenge, 16 (6),  January- February,  6-11.

Shackle G.L.S., 1967, The Years of High Theory, Cambridge: Cambridge University Press.

Skidelsky R., 1986, Keynes and Sraffa: a case of non-communication, in Bellofiore R., a cura di, Piero Sraffa: tra Teoria Economica e Grande Cultura Europea, Milano: Angeli, 73-84.

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Carlo Panico

Carlo Panico

Full professor of Political Economy at the University of Naples Federico II

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