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Introduction

It is truly an honour for me to have been invited to write and share these words about a man whose ideas influenced my own in countless ways, and, it must be said, was truly one of the nicest and most generous persons I have ever met. With Alain Parguez, Graziani’s work deeply influenced my knowledge of the monetary circuit, through various conversations through the years, either in person or by email.

I first became very aware of Augusto Graziani’s writings when I was a doctoral student at the New School for Social Research, starting in 1993. When I arrived in New York, within I think the first week, I asked Edward Nell, who would become my supervisor, if he had a project on which I could work.  He pointed to what can be best described as a bunch of papers on a table, and asked me to put them in order.  Those papers were articles presented by various participants – twenty-eight to be exact – at a Levy Institute conference, held in early November, 1990.  It was a thankless job, but I succeeded. That pile of papers became the authoritative book, Money in Motion: The Post Keynesian and Circulation Approaches.

I remember very well reading Graziani’s contribution for that book for the first time, “Money as Purchasing Power and Money as a Stock of Wealth in Keynesian Economic Thought,” which was chapter five.  It was eye-awakening.  Of course, I was aware of his work, but I did not know it that well until then.  After all, I was educated on the ideas of post-Keynesians and circuit theory, notably by Marc Lavoie, Mario Seccareccia and Alain Parguez, whose works I know intimately. And of course, Graziani’s work is mentioned in Lavoie’s book, the original 1992 edition, and as such, I was aware of Graziani’s work, but it was not until my days at the New School that I took a very deep interest in it. Up until then, I had been satisfied in reading Alain’s version of the theory of the monetary circuit. But reading Graziani’s version, which is very close to Alain’s in many key aspects, nevertheless brought an added dimension to my approach to the monetary circuit.

This said, I first came into contact with Graziani, while writing my doctoral dissertation, at the New School, sometime in 1997. The first chapter of my dissertation was on the monetary circuit, and Marc Lavoie and Alain Parguez had given me extensive comments. I reached out to Graziani via email, and sent him a copy of the first chapter, and kindly asked him if he could provide some comments.  I had never met him or spoken to him before.  As a result, I was not expecting much from him, to be honest.  But he kindly replied saying that he was very busy and did not have much time, but that he would reply sometime, perhaps, eventually.

However, the next day, I awoke to find an email from him in my Inbox, along with a few pages of detailed comments, as he urged me to send him more chapters.  This started a fruitful exchange of ideas over the years.

I met Graziani a few more times, and had been invited to his home in Naples, where I was very lucky to see his beautiful library, which included a first edition of Copernicus.

Those familiar with my work will see through my various publications, the influence of a great economist and a great man. Here, I want to discuss 4 articles of mine that were directly influenced by the writings of Augusto Graziani.

Graziani’s influence

The basic model or the monetary circuit involves capital-producing firms and good-producing firms, banks and workers. Following Keynes in the rejection of Say’s Law, firms need access to bank credit in order to pay workers, and to buy other inputs of production.  While there is a debate about whether all firms needed to access credit, I have certainly taken the position (Rochon, 1999) that firms in both sectors needed to secure funding from banks in order to pay workers and begin the production process.  This is what has been termed the initial finance, and from which money is created ex nihilo, to use an expression I heard a million times from Alain. Circuit theory involved a few of my first publications.

Indeed, the first paper where you can see Graziani’s influence is in fact my very first paper, published in 1997, on Keynes’s finance motive in the Review of Political Economy – a journal where I am now Editor-in-Chief (talk about coming full circle).  In fact, I thank Graziani for comments he gave on previous drafts.

That paper was so clearly influenced by Graziani’s own paper on the finance motive, which he originally published in 1984. In fact, my whole interest on the finance motive was a result of reading his early paper – an updated version of which was published a few years later, in 1987, in Monnaie et Production, which was edited by Alain Parguez. In fact, this paper I found so important, that Mario Seccareccia and I reprinted it in a forthcoming book on what we consider the best articles from Monnaie et Production (see Rochon and Seccareccia, 2024).

My work on the finance motive was perhaps, strangely enough, the beginning of a more critical analysis of Keynes, which until then, I considered beyond reproach.  But Graziani’s criticism of the General Theory and how it related to the finance motive was a first step toward seeing Keynes in a different light – or at least which Keynes in what light. Because of Graziani’s work, I took a keen interest in Keynes’s post-General Theory articles in the Economic Journal.

The second paper very much influenced by Graziani’s views was one I wrote with my old camarade-in-arms, Sergio Rossi, a paper that tried to explain the differences between the two views of money endogeneity within the circuit and the post-Keynesian literature – views which we labelled evolutionary and revolutionary, for reasons that should be clear to readers.  I very much like that paper, but it is a paper for which I received much praise from some, and much grief from others who warned me about criticizing Vicky Chick, who was always very critical of the views of circuitists because, I can only assume, she followed Keynes of the General Theory too closely. In a similar vein, in his comments published on this blog, Mario Seccareccia recounts the disaccord between Graziani and Chick on this very topic.

In many ways, this paper was a continuation of the first paper discussed above. The idea of linking money creation to initial finance or bank credit would resonate very clearly with me, as it always stood in direct contrast to what many post-Keynesians would argue, at the time and since. Whether it was Paul Davidson’s views of money as a time machine, linked to uncertainty, or indeed Vicky Chick’s views of the evolution of the banking system, there was always something refreshing about seeing money linked to debt, and it’s endogeneity linked to its nature, as we say. 

I always found post-Keynesians rather confused on this idea.  As I explained in my 1999 book, there is a long history in post-Keynesian economics that saw money either becoming endogenous, either through time or through institutions, or seeing money as being both endogenous and exogenous.  This was always very puzzling.  After all, how can the “money supply” be both endogenous and exogenous at the same time? What does the degree of endogeneity even mean?  Much clarity came to me when I read Marc Lavoie’s comment, in 1996 (p. 533), where he states that “accommodation or the lack of it, liability or the lack of it, and financial innovations or the lack of it are second-order phenomena to the crucial causal story that goes from debt to the supply of means of payment”. Yes, this was very much in the circuit tradition.

The third paper influenced by Graziani was concerned with my views or rediscovery of Joan Robinson’s writing on endogenous money. Ah, there is much to say here.  When I was writing my dissertation, I came upon Graziani’s 1989 chapter, in an edited book by Feiwel, honouring Joan Robinson.  I was always a fan of Robinson, and always found her, in many ways, to be superior to Keynes. But in this contribution, Graziani wrote about how Robinson had endogenous money in the Accumulation of Capital.  It in this same book, in fact, that Frank Hahn also recognized Robinson’s contribution to monetary theory.  Asked by Feiwel (1989, p. 909) what he considered Robinson’s “real contribution” to economic theory to be, Hahn replied that “it is in monetary economics. Her work on interest rates and money was excellent —outstanding in many ways.”

Both of these contributions led me on a career-long obsession with Robinson and money, and I subsequently have argued that she was the first post-Keynes economist to develop endogenous money.  Her views on this topic in fact predates the Accumulation of Capital, and can also be found here and there, going back as early as 1949, at a talk she gave to the Workers’ Educational Association, and the Workers’ Trade Union Committee (see Robinson, 1949). I also think of the Accumulation of Capital of being the first post-Keynesian book – but that is a topic for another day.

Finally, a fourth paper, and there are perhaps a few more I could discuss, is the paper I presented in Benevento, Italy, in December, 2003, at a conference in honour of Graziani, organized by Giuseppe Fontana and Riccardo Realfonzo. This had to do with the realization of profits.  I eventually wrote three papers on this topic (Rochon 2005, 2009; and Cottin-Euziol and Rochon, 2013). I always wondered how M became M’, to use a popular Marxian analogy, and circuitists had many explanations for it, reasons I thought just did not fit well.  Indeed, in the basic model, if firms borrow M from the banks to pay wages, and assuming workers do not save, the best firms could hope for was to recuperate M at the end of the circuit.  Yet, they still had to reimburse the banks M plus interest.  Where does the money for the interest come from? I have called this the profit conundrum.

On the face of it, I always thought the basic model of the circuit should explain on its own the existence of profits.  This is why I rejected the inclusion, for instance, of a foreign sector, or of the State, or indeed of overlapping circuits, to explain profits.  For me, the solution laid in the idea that some loans are taken out initially, but only paid back over several years or periods, say over the life of the capital good. That way, firms borrowed M but did not have to pay back M by the end of the initial period.

Where do we go from here

The theory of the monetary circuit remains, in my opinion, one of the greatest stories of how economies work. It is a story of sequential analysis, of how money is created, circulated and destroyed. In that sense, I find it superior in many ways to what traditional post-Keynesians have offered.

This said, it is in a way, a little bit outdated.  Careful, I did not say irrelevant, but outdated, in the sense that much has changed since Graziani wrote about the circuit, notably the rise of shadow banks and the complexity of financial instruments today.  In this sense, as we all strive to explain the real world, we must somehow update the theory of the monetary circuit.

Here, I will simply discuss briefly two paths. First, we need a better microeconomic understanding of banks and bank lending.  Indeed, some post-Keynesians have accused circuitists and horizontalists of having ‘passive’ banks – a reference I heard again very recently.  Of course, this is not true, but still, we need to strengthen the theory – or explain – how banks decide on who gets access to initial finance.

I tried to do this in a paper in honour of another great economist, Basil Moore, published in 2006.  Once we reject the notion of banks as financial intermediaries, this leaves a rather big black box concerning the decision of banks and how exactly we determine the ‘fringe of unsatisfied customers.’  I relied on Keynes’s description of bursts of optimism and pessimism, as applied to banks, incorporating uncertainty about the expectations of aggregate demand.

Another area we must work on is how best to describe the complicated panoply of new financial instruments. The first chapter of my 1999 book, now looking back, was rather a rudimentary sketch of the circuit, or what has now been called the ‘basic model’. At the time, I think, most writers on the circuit wrote about this basic circuit, and as such, it was certainly in line with what was written elsewhere.  Everything was there, for certain, the emphasis on credit, money endogeneity, social classes – or macro groups, as Graziani called them – distribution, etc. And from that basic circuit, we could draw a number of important, and valid, conclusions.

But that was 1999. 

However, as it was developed, the circuit approach was always very weak in this very important aspect: while it contained a rich theory of endogenous money and production (the production circuit), it lacked a description of the role of finance and financial instruments (the financial circuit). Understandably, circuit theory was developed at a time when financialization was nascent, and the simple production circuit was sufficient to explain the real world and the possibility of crises through the closure of the circuit. As it turns out, I tried to do this, back in 2001, when Alain Parguez and I started working on this, although the paper was never published. The paper was entitled “A tentative integration of the circuit of speculation into the monetary circuit of production.”

However, finance and financial instruments and motives have grown considerably in the last four decades, and in this sense, it is imperative that we incorporate these new financial instruments within an explanation of the circuit. In other words, new models of the circuit must reflect the dual circuit of production and finance, as the later can explain far better financial crises. While the circuit of production can explain income business cycles and recessions, we need a carefully developed financial circuit to explain accumulated wealth in the analysis of financial crises, which have become and will continue to become only more prevalent moving forward. As Passarella (2014, p. 131) writes, “financialization has led to a remarkable change in the structure of the monetary circuit.” Seccareccia (2012-2013, p. 282) reaches a similar conclusion: “growing profits and retained earnings associated with a relatively weak business investment have slowly transformed (or rentierized) the nonfinancial business sector itself into a net lender that seeks profitable outlets that provide high financial returns for its internal funds.”

So, let us be clear: the so-called basic circuit, as developed by Graziani but also by Alain Parguez, still provides us with invaluable insights into the workings of the capitalist system. In this sense, we disagree with Lysandrou (2000, p. 2) who argues “circuit theory does have difficulty in accommodating the new reality of financialization” – or what Guttmann (2009, p. 46) calls, a “new accumulation regime”, and strongly disagree when the author argues that “the growth in the scale of securities markets cannot be reconciled with firms’ production motive, which in the theory is that which sets in motion the whole monetary circuit process because of firms’ need to finance investments and pay wages through bank borrowing.”  In a previous version of the paper, the author argued “circuit theory will do more to hinder than to promote an understanding of these new norms for which reason it must be summarily discarded”.

In my opinion, this betrays a naïve understanding of circuit theory. Rather, we believe the problem of financialization can be “reconciled” with the basic model of the circuit, by amending the underlying model, and by incorporating a financial circuit, or what Sawyer (2016, p. 314) calls “supplementary circuits”.

In a joint paper with Domenica Tropeano, we attempt to extend the basic model, and add for starters the State, but also the roleplayed by pension funds, shadow banking, the complex derivatives market, and more. Indeed, we propose a full incorporation of these financial issues. As Rochon and Seccareccia (2013, p. 6) wrote: “The new challenge ahead is how to adapt these fundamental ideas of the circulationist perspective to a better understanding of the financialization of the productive apparatus of contemporary capitalist economies.” Similarly, Fontana (2000, p. 33, fn. 2) argues that “complex and increasingly important phenomena like consumer credit and speculative borrowing are not adequately investigated within the Circuitist framework. Consumer credit should be considered as banks’ loans to households in advance of their incomes, whereas speculative borrowing calls for a deep understanding of the relationship between the financial and the real sector.”

In conclusion, it is clear that after all these years, Augusto Graziani’s work continues to inspire me to think not only about money, but also about capitalism, conflict and distribution. The many insights provided even by the basic model are still valid, and the subsequent development of this model may prove more realistic in an increasingly complex and financialized world.