MMT’s claims on monetary policy: is ‘raising interest rates ‘actually deflationary’, lowering rates ‘actually inflationary’?

MMT founders Warren Mosler and Randall Wray like to claim that ‘monetary policy has it backwards’, see these 1,5 min video quotes:

To offer some explanation of why I do not subscribe to W. Mosler‘s claim, I‘ll sketch another, imho more coherent view of how interest rate policy ‚transmits‘ to the price level of consumer goods that‘s pretty ‚Keynesian‘ to me (and not Moslerian at all), but also goes beyond Keynes in one important aspect by identifying a core implicit general assumption Keynes made, and specifying the situations where this assumption actually applies – and those situations where it does NOT apply.

This overall view is based on my reading/interpretation of Wolfgang Stützel‘s work mainly from the 1950s-1980s, which like MMT is also based on an ex post sectoral accounting framework (i.e. an accounting/balance sheet based circuit model of a closed economy). It imports Keynes‘ core GT ideas on employment, interest and money into the sectoral accounting framework, but specifies them and clarifies them by added conceptual precision, and provides a realistic systematic microfoundation in business practice (see, for example, his micro-absorption approach of explaining current account balances of small countries, linked at the end of this text).

Unfortunately, no english translation of this particular – core – part of Stützel‘s work exists yet. We did very shortly present it at our 2017 seminar at BI Norwegian Business School, which had focused more on our overall legal institutionalist framework and its connection to macro accounting. The seminar talks & presentations are linked at the end of this text.

Here, I‘ll try to be as brief as possible, hoping it will still be accessible.

Stützel was a very influential post war german economist. He was part of the german economic council council in the 1960s and produced a number of theoretical innovations. Nevertheless, his foundational texts, his 1952 Dissertation (‘Price, Value and Power – Analytical Theory of the Economy’s relation to the State’) and a major 1953 followup text importing the power theory of value developed there into a sectoral accounting framework (‘Paradoxes within Monetary Economies’) never got read or discussed much as they were published in book form only more than 20 years later, in 1972 and 1979.

Reading texts by MMTers, specifically Wray, had helped to prepare me for studying Stützels often difficult work, but as I did, I found that in a number of significant points, Stützel had achieved what I consider significant additional clarifications beyond MMT (and other post keynesian monetary circuit models) as early as the 1950s (the postwar ‘Keynesian’ era MMT also draws upon).

I will presuppose the standard MMT ex post sectoral accounting framework where all financial assets (if accounted for at face value!) always net to zero with their corresponding financial liabilities, and where there is a clear awareness of how different transactions lead to different types of quadruple entry balance sheet changes.

So: a raise in central bank interest rates would raise yields/period on financial assets and costs on financial liabilities. But this would also immediately reduce the current price of those financial assets the central bank offers to buy & monetize, leading to direct reductions in net worth of the holders of those assets. If financial institutions‘ net worth in relation to their financial assets is very low, a drastic raise in interest rates can directly lead to insolvencies of financial firms, even to the point of chain insolvencies of banks and bank runs like we saw in 1931. Thus, an important post 2008 reform effort was to raise capital requirements (net worth to total assets ratio) for financial institutions. I‘d recommend Perry Mehrling‘s money & banking course on that topic.

But in this short blog entry, I don‘t want to focus on what interest rate policy means for the financial sector, which Perry Mehrling exclusively focuses on, but what it means for the nonfinancial sector (nonfinancial firms, i.e. firms producing nonfinancial products/assets & services) from one particular perspective, focussing on one particular ‚transmission‘ from the financial to the ‚real‘ sphere and the pricing decisions of nonfinancial firms and thus, the ‚price level‘ for the nonfinancial assets & services they produce. Perry Mehrling does explicitly NOT cover that – imho because with his conceptual apparatus, he fails to conceptualize clearly enough how financial and nonfinancial spheres interact.

Let‘s presuppose firms want to maximize their yields and minimize their costs/period – they want to maximize their profit.

If on average, expected net (nominal) yields on financial assets are > expected net yields on real assets (durable investment goods), nonfinancial firms will plan to increase their stock of net financial assets (financial assets held promise yields, financial debt held incurs costs), i.e. restructure their portfolio by shifting from real to net financial assets (net worth = real assets + net financial assets, therefore ΔNW = ΔRA + ΔNFA).

Net financial assets (sometimes more aptly called ‚net financial position‘ since it is a balancing item that can take on both positive and negative values) is the crucial link between financial and ‚real‘ spheres. An increase in net financial assets can be accomplished only by achieving a current account surplus, which is roughly equal to a trade surplus. To be able to achieve that, subjects need to plan to sell more real assets (in terms of monetary value) than they buy. Sales imply revenues, i.e. increases of net financial assets, purchases imply expenditures or ‚spending‘, i.e. decreases of net financial assets. So to achieve a trade surplus, subjects need to plan to achieve expenditures > revenues, or an increase in net financial assets.

In german standard business accounting (which Stützel used), the terms ‚revenues‘ and ‚expenditures‘ are defined as ‚increases of net financial assets‘ and ‚decreases of net financial assets‘:

(Standard german business accounting classification of ‘moneyflows’, developed by Eugen Schmalenbach. Different transactions lead to different combinations of stock changes)

Ex post, aggregate sales (revenues) and aggregate purchases (expenditures) will of course be equal by accounting identity. On the ex ante level of expectation based future plans, however, there is no such accounting identity. Rather, aggregate planned sales (revenues) and aggregate planned purchases (expenditures) can deviate from each other (and thus, be incongruent) for the simple reason that in a market economy, independent ‚free‘ legal subjects plan independently from one another and do not know everyone else‘s plan. Plan coordination happens ex post on the market when subjects try to realize their plans; and incongruent plans will lead to market tensions.

Aggregate ex ante planned sales of real assets is synonymous with aggregate revenues and aggregate ‚supply‘ of real assets; aggregate ex ante planned purchases of real assets is synonymous with aggregate planned expenditures (‚spending‘) and aggregate ‚demand‘ for real assets.

As far as my MMT understanding goes, in MMT, the concepts of supply and demand for real assets are not yet coherently related back to the sectoral accounting framework in this way. Sometimes one gets the impression that MMTers see ‚spending‘ as such as synomous with ‚demand‘ for real assets, not explicitly distinguishing ex post actual spending from ex ante planned spending. The former can be traced back to balance sheet entries as they relate to transactions that have already happened. The latter cannot be traced to balance sheet entries, as it relates to transactions that have not have happened yet.

This distinction is crucial, however. Aggregate demand cannot be equal to ex post aggregate spending: in that case, aggregate supply would have to be equal to aggregate revenues, and we know that aggregate ex post expenditures are always equal to aggregate ex post revenues by accounting identity. So if agg. ex post expenditures would be equal aggr. aggr. demand could never deviate from aggr. supply – they would always be equal by definition.

So if the CB raises the interest rate above the average rate of expected yields on nonfinancial assets, this will induce firms to plan trade surpluses for the following period. If agg. planned trade surpluses > planned aggregate trade deficits, this amounts to aggregate supply for real assets being > aggregate demand.

The same plan constellation of agg. planned revenues (supply) being greater than agg. planned expenditures (demand) can also be expressed as aggregate planned change in net financial position being > 0, or as the familiar Keynesian

S(desired) > I(desired)

This simply results from S = ΔNet Worth (NW) and I=ΔReal Assets (RA):

We know that

NW = RA + FA – FL

Net Worth equals Real Assets plus Financial Assets minus Financial Liabilities, and


Financial Assets minus Financial Liabilities equals Net Financial Assets so that


Regarding flows,


The change in Net Worth (profit/loss; yields/period minus costs/period) equals the change in Real Assets plus the change in Net Financial Assets.

Therefore, S (ΔNW) can deviate from I (ΔRA) only if ΔNFA deviates from zero.

For any closed aggregate economy as a whole, therefore, ex post S will always equal I by accounting identity:

Saggex post = I aggex post

Ex ante, however (in terms of ‘desired’ or ‘planned’ S and I), S and I can and typically will deviate from one another, as in private law based market economies, planning is decentralized so that subjects plan independently from one another, only anticipating everyone else’s plans. Plans get coordinated only in the phase of their realization by way of supply/demand incongruencies and the price mechanism.

For any open economy (individual firm or sector), S and I can also deviate from each other ex post. Sex post will deviate from Iex post by ex post net exports (X-M)ex post, as S = I + (X-M). Exports X are sales of real assets to rest of world, imports M are purchases of real assets from rest of world. The ex post accounting identities are Xsector = Mrest of world (any sector’s exports/sakes equal rest of world’s imports/purchases) and vice versa, so that ex post,

(X-M)sector = -(X-M)rest of world

(X-M)sector + (X-M)rest of world = 0


(S-I)sector = -(S-I)rest of world

(S-I)sector + (S-I)rest of world = 0

Which in turn are just 2 more ways to express the standard ex post accounting identity regarding net financial assets (NFA):

ΔNFAsector = -ΔNFArest of world

ΔNFAsector + ΔNFArest of world = 0

Of course, we can subdivide into any other number of sectors; I’m sticking with 2 sectors for simplicity, here. The basis of this simple use of standard ex post accounting terms is well established in MMT, albeit not always as explicitly integrated with income accounting categories as described above, and not always clearly distinguishing ex post from ex ante variables (which is crucial, see below). Compare for example the section on ‘macroeconomic accounting’ in Tymoigne/Wray’s 2013 ‘The Rise of Money Manager Capitalism’, p. 20-21.

But ex ante, in the planning stage, the above aggregate balances will equal zero only in a very unlikely special case. Usually, they will deviate from zero.

Xplanned are planned sales to /revenues from, Mplanned are planned purchases from/expenditures to rest of world.

So if on the aggregate level,

Xpl > Mpl

aggregate planned sales revenues are > agg. planned expenditures on purchases, then

agg. supply > agg. demand

This implies that

(X-M)pl > o

the closed economy (world as a whole) plans a a trade surplus (which it by definition cannot achieve as for a closed economy, there is no external trading partner by definition, so its balance of trade can only be zero at all times), and

Spl > Ipl

the world s a whole plans to save more than to invest (the classic Keynesian version of the paradox of thrift), which is also impossible since ex post, S will be equal to I by accounting identity; and

ΔNFApl > 0

the world as a whole plans to increase its net financial assets, which is also impossible since ex post, the aggregate economy’s change in NFA will be zero by definition.

What does that mean for the outcomes of such incongruent, not fully achievable plans?

If aggregate plans to increase net financial assets are > 0, this will mean ex post some plans must fail as ex post, the change in net financial assets of any closed economy always equals zero, by definition (by accounting identity). If aggregate planned sales are > aggregate planned purchases, either some planned sales will not have been realized ex post, or aggregate planned purchases will ex post be greater than was planned ex ante.

That crucial (and fairly trivial) relevance of the ex post macro accounting identities of the sectoral accounting framework is – as far as I‘m aware, and correct me if I m wrong – not yet explicitly described and used this way in MMT discourse. It was, however, a standard insight in any german national accounting textbook of the 1960s, such as Alfred Stobbe‘s ‚Volkswirtschaftliches Rechnungswesen‘ (1966, p. 130ff).

To explore some consequences, let‘s first use the standard implicit Keynesian presupposition of ubiquitous buyer‘s market tensions (where buyers – the ‚demand side‘ – have power over sellers – the ‚supply side‘), as that will be an uncontroversial assumption for people considering themselves Keynesians. New for Keynesians will only be Stützel’s insight that this is an unexplained general assumption generalized mostly from the great depression period, and, although in fact a (very frequent) special case, not a ‚natural fact‘ and ‚general‘ case, and therefore requires an explanation based on a careful collection of historical counterexamples (which I will only cover shortly in this short sketch).

In that particular situation, demand (plans to buy nonfin. assets & services) will win over supply (plans to sell nonfin. assets & services): planned purchases (planned spending) determines ex post realized sales (planned revenues), so that the result will be that some planned sales will ex post not have happened as was planned. There will be unplanned/unexpected failures to sell products.

Total planned sales are equal to total quantity of real assets to be sold, multiplied by price. So either, not all real assets that were planned to be sold ex post could be sold: some firms, at the end of the period, still have some products left in their stock which they originally had planned to sell. Or, the other possibility: all real assets were actually sold as planned – but some of them could only be sold at a price lower than the price that was planned ex ante.

In that latter case, the price level will have dropped as a result of the raised interest rate, not risen.

Now if in the next period, the CB will keep interest rates – expected yields on fin. assets – above the average expected net yields on real assets, and firms continue to maximize their profit, plans will remain at the same constellation. But those who failed to achieve their plans will probably try to achieve their plans next period by reducing their expenditures, as the expenditures/demand side wins on buyer‘s markets. This will lead to a drop in total (ex post) expenditures, with again the same result of some failed plans as above etc. – the deflationary spiral that should be familiar to any Keynesian from the 1930s evidence that led to Keynes‘ 1936 General Theory in the first place, I‘d say, as a result of a raise in interest rates.

If in that situation, governments plan additional expenditures / purchases of nonfin. assets (of bombs or whatever – as we know, in the later 1930s, in increasingly became bombs, tanks etc.), it can change aggregate plans so they will either be congruent (‚equilibrium‘) or even aggregate demand > aggr. supply. In that case, the above process reverses, and as long as firms still expect & experience buyer‘s market tensions, total expenditure/production will rise, not necessarily the price level.

But the plan constellation could also be changed if CB‘s lower interest rates significantly below the average expected net yields on real assets. But if average expected net yields on real assets are very low already, there is little room to manouver with interest rate policy, and fiscal demand stimulus policy – planning additional gov‘t expenditures – must help out (which is what Central Bankers had been calling for since 2019, at least).

Now, imho this is all pretty much compatible not only with standard Keynesian theory, but congruent with how Central Banks actually have learned to conduct monetary policy in practice and are doing monetary policy todayand I don‘t see how to square that with Mosler‘s imho confused claim + added ad hoc ‚theorizing‘ that

Monetary policy has it backwards – raising interest rates is actually expansionary, lowering them is actually contractionary‘.

Based on the view sketched above (and further below), it seems to me that quite the contrary could be the case: it seems to be Mosler who ‚has it backwards‘ even by Keynesian standards (let alone by standards of actual central banking practice).

I find this a little surprising for someone claiming to be an expert on ‘money’ and monetary policy, and someone claiming his views to be compatible with Keynes’ thinking.

To see that more clearly, let’s take Stützel’s view one step further: once buyer‘s market tensions are dismanteled and seller’s market tensions develop, which will inevitably happen if average expected net yields on real assets consistently remains above expected average yields on net financial assets and therefore, nonfin. firms consistently plan to achieve their profits by trade deficits (by decreasing net financial assets): then, power will move over to the seller‘s side (seller‘s markets) and the choice to raise prices will be preferred by sellers, which eventually will lead to stagflation.

Buyer‘s markets also put pressure on producers regarding product quality, customer service, efficient organization of work and efficient use of resources. Sellers have to try to persuade and ‚bribe‘ buyers into buying their stuff (we all know the kinds of presents sellers sometimes offer in that regard). Seller‘s markets remove that pressure from sellers put it on buyers – customers. They now have to run after sellers, bribe them to get the products they want, and stand in line in the shops (a well known phenomenon in the 1970s & 80s in real socialism, analyzed by Janosz Kornai in his 1980 ‘Economics of Shortage’, and even re-emergent today in some countries, notably in Venezuela in an extreme form). Product quality declines, delivery times get longer. In the 70s, mild forms of that could be witnessed during the stagflation era in capitalist economies as well (I very well remember the relatively low level of customer service at the time, as compared to today’s level).

As Stützel noticed in 1953, this is not clearly conceptualized by Keynesians yet because to them, buyer‘s market tensions are something ‚natural‘ and ‚ubiquitous‘, whereas seller‘s market tensions exist as little for them as for their Walrasian foes. Unfortunately, the latest article on Stützel’s theory of business cycles by Johannes Schmidt in the Journal for the History of Economic Thought knowingly simply denies Stützels sellers’ market cases, thereby willfully misrepresenting Stützel’s work and distorting economic history, ironically by omitting Stützel’s innovation beyond Keynes.

So, in the following 4-way matrix, the two Keynesian ‚buyer‘s market tension‘ cases can be found in the top row, the two ‚anti-keynesian‘ ‚seller‘s market tension‘ ones in the bottom row. The historical illustrations were not given by Stützel. I have added them in an attempt to integrate & clarify Stephan Schulmeister’s Keynesian model of ‘long business cycles’ (summarized here) by viewing it through the lens of Stützel’s scheme.

As Stützel put it,

‘Pure General Equilibrium Theory cannot give a solution for any of these 4 cases of plan divergences. Keynesian Theory only knows the two buyer’s market cases’. (W. Stützel 1953: Paradoxa der Geld- und Konkurrenzwirtschaft, Aalen 1979, p. 188)


If economic subjects in a closed economy are planning to decrease aggregate net financial assets, this does not self-evidently – and as claimed by most theories of business cycles – lead to an increase in ex post total expenditures/revenues. This only happens under the special conditions of prevailing buyer’s market tensions. If seller’s market tensions prevail in the closed economy, the same plan divergence (planned expenditures/sales/purchases or agg. demand > planned revenues/purchases or aggr. supply which implies planned increases of aggregate net financial assets) leads to the opposite result: ex post, the flow of total expenditures/revenues will decrease. ‘ (R.D. Grass/W. Stützel 1988: Volkswirtschaftslehre – eine Einführung, München: Vahlen, p. 341).

To my knowledge, Stützel provided a few historical examples for seller’s markets (the german post WWII situation before the 1948 currency reform, with a hyperinflating Reichsmark and administered prices was well within his biographical experience), but did not explicitly specify conditions which would lead to seller’s markets. But imagine an economy where expected yields on financial assets are kept below expected yields on real assets by constant application of fiscal stimulus and low interest monetary policy. This would keep aggregate planned investment > planned saving, and after providing a stimulus as long as buyer’s market tensions exist, dismantle existing buyer’s market tensions, and start to develop seller’s market tensions. [From my point of view, a coherent take on why like in Schulmeister’s ‘long cycles’ model, the keynesian ‘real-capitalist’ constellation will undermine itself in the longer run just as much as its counterpart, the ‘finance-capitalist’ constellation.]

One actually fairly trivial, but nevertheless clarifying takeaway insight from this is, in my view: Keynesian policy can only work after buyer‘s market tensions were created, first; and this can happen only by aggregate supply (planned revenues) being > aggregate demand (planned expenditures), which will be a result of expected yields on financial assets > expected net yields on real assets. Constant application of demand stimulus policy, of trying to keep aggregate demand > aggregate supply by way of fiscal or monetary policy, will remove the preconditions for that very policy to lead to the desired results, and eventually produce the opposite result: instead of growing output and employment, declining output and employment stagflation, with rising prices.

Which leads to the quite trivial insight that what’s needed is anti-cyclical monetary and fiscal policy that aims at regulating market tensions, i.e. the level of pressure/challenge or ‘discipline’ sellers are faced with in the economy. Which monetary policy already practices, with fiscal policy currently experiencing a full swing return to the (pre-Stützel) Keynesian perspectives of the 1950s/60s.

Also note that buyer‘s market tensions are good for buyers, bad for sellers. But firms and individuals always are a seller as well as a buyer, if only a seller of labour.

I‘d say that this provides a more balanced, integrative perspective beyond the typical quarrel between Keynesians and Anti-Keynesians. That was Stützel‘s explicit goal – much like Keynes, he didn‘t go for a ‚heterodox alternative‘ but for a ‚General Theory‘, and he pursued that goal methodically and had methodical tools he used for that (today‘s ‚heterodox‘ and ‚orthodox‘ economists seem to lack those tools and stuck in their unproductive fighting an in-grouping).

The (trivial) ex post accounting foundations of this view are the same as those of MMT, but Stützel makes some additional explicit precise distinctions MMT does not (yet?) make: distinctions between

  1. ‘spot’ prices relating to a point in time, like sales prices, and ‘holding’ prices relating to a period of time, like expected net yields on financial and real assets
  2. ex post accounting identities and ex ante planning deviations from those identities, resulting in the development of
  3. buyer’s market tensions and seller’s market tensions

This not only coherently relates the concepts of aggregate demand & supply back to the balance sheet bsed sectoral accounting framework, which MMT does not yet do as far as I can tell. It also integrates Keynes’ thoughts on the role of the interest rate in relation to expected net yields on real assets (investment goods), while Mosler’s claim seems to contradict Keynes here. The model is only very abstract and would need to be specified by including the private household sector, assumptions about their typical portfolio choices, a closer look at the components of net yields on nonfin. investment goods (including wages, for ex.) etc., but the basic patterns of this view have hopefully become clear in this short description.

Stützel also uses a model building strategy of specifying areas of applicability of generalizations, which can demonstrate seemingly incompatible generalizations are actually compatible if their area of applicability is specified; in addition, Stützel looks for implicitly assumed generalizations (like the Keynesian implicit generalization of ubiquitous permanent buyer’s market tensions, thus ‘demand dominance’) to then demonstrate to which special cases they apply and to which special cases they do not apply.

So for example, while Keynesians criticize Say‘s Theorem (‚any supply will always find demand‘) and simply replace it with a reverse Say‘s theorem (‚any demand will always find supply‘), generalizing from the historically specific experience of the great depression mainly, this model specifies the situations where each of the theorems applies (Keynes: buyer’s markets, Say: seller’s markets).

The debate over‚ which of them is true and which is false‘ becomes unneccessary and can be recognized as blocking integrative progress/learning, (like many other ‘true vs. false‘ debates over economists hasty overgeneralizations), because it avoids asking the question, which statement applies to which specific set of situations‘). Within the framework shortly sketched above, both are true AND false – true for the situations where they apply, false for those where they do not apply. By specifying their respective areas of applicability, we see more clearly; by fighting for binary true/false beliefs, we block and avoid seeing more clearly.

I‘ll close here, not very confident in that anyone of the few who may actually have read this up to this point will make any sense of this. I‘ve tried this many times and the reactions were mostly, people at best used what fit their preconceived beliefs and ignored the rest. Only in one case, someone asked, ‘I’d really like to know how these seller’s market cases work’ but then didn’t pursue the question further, but instead of inquiring how these can be produced went back to presupposing they ‘usually don’t exist’ – where Venezuela would have been a current example with an inflation rate way above the interest rate, where people of course plan to purchase more nonfinancial assets than they plan to sell, and everyone plans to reduce their net fin. assets, producing seller’s markets (empty shelves in supermarkets etc.).

I’m not a professional economist, so I don’t have the time and resources to engage in constant debate with professionals, or translate Stützel’s entire work. I would have no chance whatsoever anyway against their skilled rhetorical manouvers. However, I do take the freedom as a citizen to express doubt to economists’ claims if I see good reasons for that, whether they come from orthodox or heterodox economist. I also take the freedom to read economists whom I feel made significant contributions to some progress in understanding.

It seems to me that Stützel‘s work was most often used selectively by Keynesians and Anti-Keynesians, who just picked out what fit their theories anyway but ignored the rest, and chose to perpetuate that quarrel between Keynesians and Antikeynesians, and between Orthodoxy and Heterodoxy Stützel wanted to solve rationally by integrative model building a la Keynes’ ‘General Theory’. He was very frustrated with how economics developed during the 70s and 80s.

I the end, I think, power claims will probably always trump attempts at integrative understanding overall, at best, only few people will want to sidestep those power games the way Stützel did, even though we should expect that of any academic economist. I don’t see any of Keynes’ or Stützel’s caliber on the horizon right now who could foster integrative progress in economics, so the divide between orthodoxy and heterodoxy both Keynes and Stützel wanted to bridge will probably continue to exist, and citizens and politicians will continue to tend to distrust most economists and their diverse promises, while themselves relying on uninformed models often containing fallacies of composition, but incoherently muddle through somehow in practice, changing ideologies ad hoc as needed.

Keynes famously wrote in Chap. 24 of his General Theory:

“… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” (full text here)

I used to believe that too. But these days, after observing both political discourse and post 2008 academic discourse, I tend to conclude that Keynes may have overestimated economist’s influence. Much more than their ideas, power relations influence what happens, and pragmatic elite reactions and changes of ad hoc opinions, legitimated by pretty much randomly chosen ideology, in reaction to crises. Sure, Keynes’ belief may have boosted his self-image as well as that of his colleagues (‘it’s us who make history with our ideas’). I tend to think these days that’s probably a little to self-congratulatory and elitist. Maybe economists and their delusions and ideologies don’t matter that much in the long run, and whatever they say, we shouldn’t take their claims all too seriously, but maybe dare and try to think for ourselves as well. Or not, it doesn’t make that much of a difference. Which reminds me of another Stützel quote. On the first pages of his last book, an introduction to economics he completed about 4 years before his death in an attempt to pass on the gist of his work to his beginning students, he summarized what he had learned about ‘economics’ in the then almost 60 years of his life:

“The only thing I think I really know for sure is this: the job of an economist, the job of improving the world, i.e. the job to prepare suggestions how the human economic life can be organized in a more humane way, is a difficult job. Whoever wants to really take on that job has to keep in mind many different aspects. Otherwise, all too easily the best intentions result in disastrous unintended results.” (W. Stützel/R.D. Grass: Volkswirtschaftslehre – eine Einführung. 2. Aufl. München: Vahlen 1988, p. VI).

Indeed, sometimes I think that the zeal with which someone promotes his (however half-baked) economic ideas are often inversely reciprocal to their empirical and pragmatic quality. And I fear that Mosler’s ‘monetary policy has it backwards’ could be a case of that. I could say a lot more but I probably said much too much already for anyone to listen (those who I might think would ‘should’ listen will not listen anyway, so I shouldn’t be talking). It’s definitely time for me to shut up and do something constructive instead of trying to ‘improve the world’ – at closer look, possibly a rather presumptous, vain and maybe even ridiculous goal.

To sum up and for those who actually feel they can’t stay away from thinking more about this, despite all the warnings, and if it will be anyone at all it will probably be few, I’ll link our video presentations of Stützel’s model described above, including a further elaboration of the monetary aspects of that model, and the only english paper written by Stützel that I am aware of, which may help to get a feel for his thinking.

ANEP Seminar at BI Norwegian Business School, including a summary of the above and a second talk by Johannes Schmidt on further aspects of Stützel’s business cycle theory that I did not cover above

W. Stützel 1974: How to Forecast and Explain the Balance on Current Account of Small Countries. This paper also demonstrates Stützels systematic microfoundation of the macro sectoral accounting model and the micro level portfolio choice approach that is also the basis for what I sketched above.

New Paper: Stützel’s Theory of Business Cycles (Part II: Monetary Aspects)

The paper Prof. Johannes Schmidt (Karlsruhe) first presented at our Seminar “Introduction to New European Political Economics” at BI Norwegian Business School (see overview , video recordings of all presentations, and background reading) in November 2017 has now been published in the European Journal for the History of Economic Thought, Volume 26, 2019 – Issue 6:

Its title is “Balance Mechanics and Business Cycles“: read it by clicking here. Watch the video of Johannes Schmidt’s Oslo presentation of this paper by clicking here.

Schmidt lays out how Wolfgang Stützel offers an overall shared framework (based on law and a specified sectoral accounting model of a closed economy) within which both orthodox “real” and orthodox and heterodox “monetary” theories of business cycles can be meaningfully related to one another. By relating both views back to the general framework, the special areas of applicability of the cases described by orthodox and heterodox models, as well as orthodox and heterodox overgeneralizations, can be clearly identified, so that their seeming incommensurability is replaced by an integrated view. This view precisely identifies where each theory has its rightful place and where it overgeneralizes, therefore needs to be corrected. Rather than vague “tolerant” pluralism or a confrontative view of “incommensurability” of orthodox and heterodox models, this straightforward approach aims at (and, in our view, offers) integrative progress in both the Keynes’ (GT Chap. 1) and Thomas S. Kuhn’s sense. This was Stützels general methodological strategy. He also used it to formulate a general theory of valueing and pricing, including the previous theories as special cases.

In presenting the monetary aspects of Stützel’s theory of business cycles, Schmidt demonstrates this for theories that deal with “money” in different ways: (1) Walrasian tradition “real business cycle” theories, (2) theories based on some form of the quantity theory of money (such as monetarism or today’s “100% money” proposals, (3) Post Keynesian (including Minskyan) “monetary production” models and (4) New Keynesian models.

To put Schmidt’s paper in context, it may be helpful to watch the previous presentations of the seminar, especially Nicolas Hofer’s presentation of the “bipartite division of monetary theory” into stocks/flows of means of payment vs. stocks/flows of net financial assets (see here) and Thomas Weiss’ presentation of Part I of Stützel’s theory of business cycles, covering aggregate demand/supply constellations and how their effects differ when they hit upon existing market tensions: buyer’s vs. seller’s markets (see here).

The accounting relationships presupposed there will be familiar to MMTers, but get crucially more specific, precisely distinguishing three types of flows of monetary wealth, thereby introducing the bipartite division of the theory of money into stocks/flows of (1) means of payment and (2) net financial assets (aka financial net worth), the latter representing the crucial “missing link” between “monetary” the “monetary” sphere of financial assets/debt and “real” sphere of nonfinancial assets. Stützel adopted this distinction of three types of flows of monetary wealth from standard german business accounting; it was originally developed as a financial accounting concept for business accounting by Eugen Schmalenbach and is known as the ‘Schmalenbach-Staircase’ (for the shape of its geometrical depiction):

It is also described in more detail in Johannes Schmidt’s 2015 paper, “Reforming the Undergraduate Macroeconomics Curriculum: The Case for a Thorough Treatment of Accounting Relationships” (pdf here) and Fabian Lindner’s 2012 paper “Saving does not finance Investment – Accounting as an Indispensable Guide to Economic Theory” (pdf here).

Stützel adds one additional concept, “lockstep”. If my inflow of means of payment (receipts) is equal to my cash outflow (payments) for a period, my stock of means of payment does not change; if this applies to all economic subjects, inflows and outflows move of means of payment move in lockstep for the whole economy. If my net lending (increase of net financial assets) equals my net borrowing (decrease of net financial assets) for a period, my stock of net financial assets does not change (i.e. my balance on current account, mostly made up of the balance of trade, is zero). If this applies to all economic subjects, net lending and net borrowing are moving in lockstep for the whole economy. If there is lockstep both on the level of means of payment and the level of net financial assets, money of any form becomes a neutral numeraire as in the Walrasian tradition.

Keynes had written in 1933:

“The divergence between the real-exchange economics and my desired monetary economics is, however, most marked and perhaps most important when we come to the discussion of the rate of interest and to the relation between the volume of output and the amount of expenditure.

Everyone would, of course, agree that it is in a monetary economy in my sense of the term that we actually live. Professor Pigou knows as well as anyone that wages are in fact sticky in terms of money. Marshall was perfectly aware that the existence of debts gives a high degree of practical importance to changes in the value of money. Nevertheless it is my belief that the far-reaching and in some respects fundamental differences between the conclusions of a monetary economy and those of the more simplified real-exchange economy have been greatly underestimated by the exponents of the traditional economics; with the result that the machinery of thought with which real-exchange economics has equipped the minds of practitioners in the world of affairs, and also of economists themselves, has led in practice to many erroneous conclusions and policies. The idea that it is comparatively easy to adapt the hypothetical conclusions of a real wage economics to the real world of monetary economics is a mistake. It is extraordinarily difficult to make the adaptation, and perhaps impossible without the aid of a developed theory of monetary economics.

One of the chief causes of confusion lies in the fact that the assumptions of the real-exchange economy have been tacit, and you will search treatises on real-exchange economics in vain for any express statement of the simplifications introduced or for the relationship of its hypothetical conclusions to the facts of the real world. We are not told what conditions have to be fulfilled if money is to be neutral. Nor is it easy to supply the gap.” (J.M. Keynes 1933: A Monetary Theory of Production. First published in ‘Der Stand und die nächste Zukunft der Konjunkturforschung: Festschrift für Arthur Spiethoff‘. Munich: Duncker & Humboldt, pp.123-25, full text here)

Stützel clearly identifies the implicit ‘assumption of the real exchange economy’ that renders ‘money’ ‘neutral’ in the ‘classical model’ – an assumption originally made by Walras. It is the lockstep assumption.

Some more information on Wolfgang Stützel’s work, one of the major foundations for the seminar and papers above, can be found in the 2019 article by Sauer & Sell: “Lost in Translation – a Revival of Wolfgang Stützel’s Mechanics of Balances” (see here). It has been among the Top 10 Most Read Articles of 2018 in the European Journal for the History of Economic Thought.

Some biographical background on Stützel: Stützel came from an entrepreneurial family. After his 1952 Ph.D. dissertation on “Price, Value and Power – Analytical Theory of the Relation between the Market and the State” and writing his foundational “Paradoxa der Geld- und Konkurrenzwirtschaft” in 1953 (which was to be published only in 1979), he worked at Berliner Bank from 1953-1956, and at Deutsche Bundesbank in 1957/58, before becoming a Professor at University of Saarland, heading the department for banking and monetary macroeconomics. He developed the foundations of his macroeconomic model during the 1950s already in his 1952 Dissertation, his 1953 “Paradoxa …” (see above) and his 1958 “Volkswirtschaftliche Saldenmechanik” (which became a classic of german macroeconomics literature), consistently refining and specifying them on through the 1980s. From 1966-1966, he was part of the german Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (German Council of Economic Experts).

So again, to read Johannes Schmidt’s paper, click here. To watch the video of Johannes Schmidt’s Oslo presentation of this paper, click here.

Current Account Imbalances: YSI Webinar with Heiner Flassbeck

Some news: on October 31, 2018 Nicolas, Thomas and I (Wolfgang) participated in a INET YSI Finance, Law & Economics working group webinar on current account imbalances (within the Eurozone) with Heiner Flassbeck. We had a chance to ask Flassbeck some questions from our perspective – on the type of institution needed to coordinate national macroeconomic policies within the eurozone, for example.

You can watch or listen to the event here (scroll down to 2018 webinars).

From our point of view, Thomas Wieser’s view of of existing european institutions’ current capacity to effectively coordinate the Eurozone member state’s macroeconomic policies is much more realistic than Flassbeck’s view.

Instabilities in the Web of Contracts: Deflation, Inflation and Anacyclosis

Hi everyone, today we’d like to recommend a great 30 min talk Axel Leijonhufvud gave at INET’s 2012 “Paradigm Lost” Conference in Berlin (thanks to Charlotte Bruun for reminding us of his work!).

The way he describes the 2 forms of instability the web of contracts at the heart of western civilization (which is based upon the private/public law – dialectic): deflation and inflation, and the dilemmas politicians face when trying to intervene, connects to Katharina Pistor’s Law-Finance-Paradox and comes close to a rudimentary theory of some of the economic roots of anacyclosis.  The international monetary system, being based on non-enforceable “soft law” treaties in international public law, is even more fragile and subject to both instabilities Leijonhufvud describes.  The gold standard cracked during the deflationary instability of the 1930s.  The Bretton Woods system cracked during the inflationary instability of the late 1960s and 1970s.

From the perspective of long cycles, we like to visualize and conceptualize the alternating pattern of deflation and inflation like this:

What is anacylosis?

It is a pattern of history well known in the history of republican thinkers (from Plato and Aristotle to Polybios, Cicero and Machiavelli): the cycle of more centralized, authoritarian and more decentralized, democratic forms of government in western civilization, of which we are witnessing another round right before our eyes during the democratic recession which started in 2005 and is in full swing world wide now (2018). From our perspective, it is directly rooted in one of the fundamental conflicts of western civilization: the conflict between the principles of private and public law (free contract/consent vs. authoritative legislation/command), and the inherent instability of an unregulated private law (property and contract) based, monetary “free market” economy.

Katharina Pistor has voiced similar intuitions more from the perspective of a lawyer in her short (9 p.) 2013 paper, “The State, the Market and the Rule of Law” (and in her “Legal Theory of Finance” paper).  Neither Axel nor Katharina, however, draw a connection to the historical pattern and the theory of anacyclosis, because they take a systematic perspective only, not doing large scale and long term historically comparative analysis.

From our perspective, the legal, economic and comparative historical perspectives must be integrated to achieve a realistic understanding of western civilization, its historical patterns and its present state & situation in Europe – that is the core of the research program we are developing:

Thinkers like Axel Leijonhufvud, Katharina Pistor, and Polybios are all important contributors to this integrative and clarifying work, culminating in Level 5 of our analysis (see above): Long Cycles – discovering larger scale historical patterns of western civilization that repeat with variations.

If you like what we do and it makes sense to you, you probably will enjoy their contributions to better understanding the anacyclosis pattern and the democratic recession we are experiencing now in the aftermath of the 2008 crisis:

Axel Leijonhufvud: Debt, Inflation and Austerity (video, 30min talk)

Katharina Pistor: The State, the Market and the Rule of Law (9 p.)

The Institute for Anacyclosis: The Crisis (2 p.)

ANEP Economics:  Overview of New European Political Economics – our own approach to Integrate Law, Business and Macroeconomics by way of making explicit the Law-Accounting-Connection and comparing this to the stateless “Non-Law”: of traditional stateless hunter-gatherer and segmentary communities and the international community of states (international “law” which, to use E.A. Hoebel’s bonmot, is “primitive law on the global level”).

6th Presentation of our Oslo Seminar is online: Charlotte Bruun on Logical Structures and Algorithmic Behavior in a Credit Economy

Charlotte was probably the first author who published on Stützel’s work in english, before Johannes Schmidt, Fabian Lindner and Severin Reissl added further introductions in the 2010’s (which we all link for you below).  Working on her dissertation in the early 1990s, and having access only to a Xerox copy of Stützel’s 1958 classic, “Volkswirtschaftliche Saldenmechanik”, she recognized the potential of his mechanics of balances framework, including the lockstep concept, for coherently integrating (1) the real and monetary sphere and (2) the micro- and macroeconomic perspective – two long standing problems in the history of monetary economics.  She used Stützels straightforward solutions of these problems as a basis for her treatment of the logical structure of a monetary economy in Chapter 3 of her excellent dissertation, “Logical Structures and Algorithmic Behavior in a Credit Economy”.

In her short presentation, she gives an overview of how her highly innovative dissertation project developed.  Watch it here:

Related Downloads:

Seminar at BI Norwegian Business School 2017: Video 5 “Conceptualizing Capitalism: Legal Institutionalism” (Prof. Geoffrey M. Hodgson) now online

The fifth presentation at our seminar at BI Norwegian Business School (Oslo) is online: Prof. Geoffrey M. Hodgson, founder of Legal Institutionalism, the World Interdisciplinary Network for Institutional Research WINIR and author of the book “Conceptualizing Capitalism”, gives an introduction to the legal institutionalist perspective.

After clarifying the nature of law (vs. custom) and arguing that law cannot be pushed into the “superstructure” as an epiphenomenon, he provides two powerful examples demonstrating the constitutive role of law for capitalism:  property rights, and the theory of the firm.  By conflating property rights with mere possession, the field of “economics of property rights” entirely abstracts from the legal institutions necessary to guarantee and enforce property rights: a state guaranteeing and enforcing private (property and contract) law, including a system of civil courts.  Viewing the firm the way lawyers routinely do – as a fictitious legal person – solves a number of problems in the theory of the firm literature in a straightforward way and demonstrates the integrating power of a legal institutionalist perspective.

Click here to view (opens in new tab):


Seminar at BI Norwegian Business School 2017: Video 4, “Stützels General Theory of Business Cycles Part II” by Prof. Johannes Schmidt now online

The fourth presentation at our seminar at BI Norwegian Business School is online:  Johannes Schmidt presents, for the first time in english, Part II of Stützel’s theory of business cycles.

Stützel’s simple general approach solves a number of recurring controversies in monetary economics – especially that of a coherent integration of the “real” and “monetary” or “nominal” spheres – and provides a general theory within which existing business cycle theories – both “monetary” and “nonmonetary” – can be integrated as special cases.

It is based on nothing more than standard business and national double entry accounting categories – plus one original concept (“Lockstep” of inflows/outflows of net financial assets and/or means of payment), which is the core concept of Schmidt’s talk.

With the lockstep concept, Stützel demonstrates in a simple way why in models that implicitly presuppose lockstep – such as the Walrasian general equilibrium model or today’s “real business cycle” models – money naturally cannot “matter” (Hahn’s Problem), whereas in Keynesian and post keynesian monetary production models, this is partially remedied as explicitly intended by Keynes, but still lacks the necessary precision and clarity.  This precision, however, can be taken simply from empirical (business and national) accounting practice:  the distinction between means of payment and net financial assets.   Stützel imported this precision into ex ante macro theory as the “bipartite division of the theory of money”, added the lockstep concept and showed (already in 1953) that existing theories can be seen as describing special cases within that general framework.  Johannes Schmidt applies this to today’s macroeconomic theories of business cycles.

View Schmidt’s Presentation here (the 3 previous presentations introduce the standard legal & accounting concepts and the first part of Stützel’s Theory needed to understand Schmidt’s talk):

Seminar at BI Norwegian Business School 2017, Video 3 now Online: Stützel’s General Theory of Business Cycles

Stützel’s goal was to render superflous the controversy between Keynesians and Anti-Keynesians by demonstrating precisely for which special cases each group is correct and for which special cases each group overgeneralizes.  Thomas Weiss’ presentation shows the first part of how he accomplished that.

To view the video, click on the image.  Read a short summary below.

Summary: Ex post, within a closed economy the sum of all increases of net financial assets (positive balances on current account) and the sum of all decreases of net financial assets (negative balances on current account) are always equal by accounting identity, since net financial assets of the world as a whole always equal zero. PLANNED aggregate expenditures (planned decreases of net financial assets) and PLANNED aggregate revenues (planned increases of net financial assets), however, are not necessarily equal since legal persons plan independently from one another on the basis of subjective, uncertain future expectations.

If in the aggregate,  plans to to increase net financial assets (to achieve positive balances on current account) prevail, aggregate supply (for goods and services) is greater than aggregate demand.  This will reduce existing seller’s markets and eventually lead to buyer’s markets, or increase already existing buyer’s market tensions. If in the aggregate, plans to decrease net financial assets (to achieve deficits on current account) prevail, aggregate demand (for goods and services) is greater than aggregate supply. This will reduce existing buyer’s market tensions and eventually lead to seller’s markets, or increase already existing seller’s market tensions.

On buyer’s markets, aggregate planned expenditures (“aggregate demand”) will determine which revenues can be realized – in this special situation, Keynesian demand economics holds true.  Thus, on existing buyer’s markets, if aggregate plans change from planned increases of net financial assets to planned decreases of net financial assets because the state announces plans to decrease its net financial assets (deficit spending), output and employment will increase.  On seller’s markets, however, planned revenues (“aggregate supply”) will determine which expenditures can be realized.  This is where Keynesian demand stimulus policy breaks down, and government austerity (as well as a central bank interest rate above the market rate) is needed to boost output & employment. Stagflation during the 1970s may be a historical example for such a special situation, as well as other highly inflationary historical situations (such as today’s Venezuela).

The fourth presentation by Prof. Johannes Schmidt, Karlsruhe (coming soon) will present the second part of Stützel’s Theory of business cycles, introducing the concept of lockstep of revenues and expenditures (increases and decreases of net financial assets) and receipts and payments (increases or decreases of the stock of means of payment).   Lockstep means inflows and outflows equal each other for a period so there is no change in stocks of net financial assets or means of payment (or both). While this is always true for a closed economy as a whole, for partial groups inflows and outflows will often deviate from each other, lockstep being the exception. Lockstep or deviation effects can happen independently of each other on the level of net financial assets and means of payment, yielding 4 possible combinations. Schmidt shows that current macroeconomic theories each describe one of those 4 special cases.  Thus, they are not really theoretical alternatives, but can be integrated as special cases into Stützel’s General Theory.

This General Theory is based on standard, precise empirical business and national accounting categories, one original concept (lockstep of inflows and outflows of means of payment and net financial assets), and a few realistic behavioral assumptions taken from everyday business practice.

Seminar at BI Norwegian Business School 2017: Second Video now Online

Watch it by clicking on the image:

Nicolas clarifies the historically specific legal nature of assets & liabilities, using legal anthropology to distinguish reciprocity based mutual obligations of exchanging favours and gifts within a “Gemeinschaft” (as described in Marcel Mauss’ 1925 classic “The Gift” or in Marshall Sahlins 1972 classic essay “On the Sociology of Primitive Exchange” – for a short intro see here) from money-denominated, state enforceable legal obligations (“financial assets”) within a roman law-based civil society (“Bürgerliche Gesellschaft”).

He then introduces a foundational concepts of double entry bookkeeping:  the balancing items net worth (equity) – this is what Luca Pacioli originally termed “il cavedale”, i.e., capital  and probably the origin of the term “capital” – and net financial assets.   The concept of net financial assets (a balancing item which, for a nation as a whole, is usually called international investment position) forms the core concept of Stützel’s mechanics of balances based ex ante theory of business cycles.  It is the core concept allowing for a coherent integration of the real and monetary spheres in macro models.

Nicolas then develops this up to sectoral accounting for a closed economy (which is standard in National Accounting and also used in Modern Monetary Theory and Stock Flow Consistent Modelling), clarifying that capitalism is a zero sum game on the level of net financial assets – but not on the level of net worth (profits&losses).   For example, it is impossible that all nations achieve positive (or negative) balances of trade/on current account within the same period – one nations surplus on current account will equal the rest of the world’s current account deficit by accounting identity.  But it IS possible that all nations increase (or decrease) their net worth within the same period.

The next two videos – Presentations by Thomas Weiss and Prof. Johannes Schmidt – will present an introduction to Stützel’s theory of business cycles.  Stay tuned, these will be published soon.

For a summary of contents of video and the complete seminar, click here.