Circuit Theory Supplementing Keynes’s Genuine Analysis of the Monetary Economy of Production

Abstract

When elaborating the General Theory, particularly in his 1933 writings, Keynes (1933/1979) showed his intention of working out a ‘theory of the monetary economy of production’ that would sharply depart from the neoclassical (or ‘classical’ in his words) theory of a ‘real exchange economy’. He then essentially laid focus on the role of the entrepreneur and the functions of money in the actual economy, which is, he argued, an ‘entrepreneur’ or ‘wage-economy’. On the neoclassical view, as is well known, the entrepreneur is a mere intermediary between the market for productive services and the market for manufactured goods, and money is a neutral medium of exchange, so much so that, in a state of equilibrium, the entrepreneur and money may be disregarded.¹ The volume of output and its distribution are determined by the interplay of supply and demand in markets, in a way that, under free competition, allegedly achieves an optimal allocation of resources. This is not so on Keynes’s view:

[a]n entrepreneur is interested, not in the amount of product, but in the amount of money which will fall to his share. He will increase his output if by doing so he expects to increase his money profit, even though this profit represents a smaller quantity of product than before. (Keynes, 1933/1979, p. 82)

[t]he firm is dealing throughout in terms of sums of money. It has no object in the world except to end up with more money than it started with. That is the essential characteristic of an entrepreneur economy. (Keynes, 1933/1979, p. 89)