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, aggregate increases of net financial assets (positive balances of trade) and aggregate decreases of net financial assets (negative balances of trade) are always equal by accounting identity. PLANNED aggregate expenditures (decreases of net financial assets) and PLANNED aggregate revenues (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.  Aggregate plans to increase net financial assets (to achieve positive balances of trade) will eventually lead to buyer’s markets; aggregate plans to decrease net financial assets will eventually lead to seller’s markets.

On buyer’s markets, planned expenditures 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, output and employment will increase.  On seller’s markets, however, planned revenues will determine which expenditures can be realized.  This is where Keynesian demand stimulus policy breaks down, and government austerity is needed to boost output & employment. Stagflation during the 1970s may be a historical example for such a special situation.

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 the 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” from money-denominated, state enforceable legal obligations within a 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 – 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, 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).   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.

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

On Nov. 01-03, 2017, we held a Seminar at BI Norwegian Business School, Oslo (details here).

Our main goals were (1) to present an overview of the current state of our work and get some feedback from the perspective of BI staff and students from different disciplines (Business, Law, Economics, Political Science), and (2) to personally and institutionally connect Legal Institutionalism to Wolfgang Stützel’s work.   To that end, we had invited Geoff Hodgson (University of Hertfordshire), founder of Legal Institutionalism and editor of the Journal of Institutional Economics, Johannes Schmidt (Hochschule für Technik und Wirtschaft Karlsruhe), one of the few experts on Wolfgang Stützel’s work, and Charlotte Bruun (Aalborg University), who was the first to publish on Stützel in english with her excellent 1995 dissertation, “Logical Structures and Algorithmic Behavior in a Credit Economy“, to attend and contribute presentations.

The first presentation: “Legal and Accounting Foundations of Western Civilization” (Wolfgang Theil) is now online. To view it on youtube, click on the image (opens in new tab):

We will publish the other presentations given at the seminar within the next few weeks.  Here’s an overview:

Wolfgang Theil’s presentation “Legal and Accounting Foundations of Western Civilization” (above) explicitly lays out the basic, historically specific legal institutional foundations of double entry bookkeeping in roman law, making explicit the two basic inherent dialectic conflicts of western civilization:  that between the state (public law) and the market (private law), and that between state-mediated, impersonal legal relations (state legislation and private contracts) and traditional personal, kinship-based relations of informal reciprocity.

The first conflict historically led to anacyclosis, a swing back and forth between more centralized and more decentralized forms of government which was well known to republican thinkers from Aristoteles over Polybios and Cicero to Machiavelli, Vico and Kant.  Just like in the 1930s, after a phase of liberalism and democracy followed by a major crisis we are now witnessing a renaissance of more centralized forms of governing, often termed the “democratic recession”. From a long term historical perspective, this does not come as a surprise but fits in with a bigger pattern within western civilization that has been recurring ever since classical greco-roman antiquity.

The second conflict, that between state-mediated and and kinship based relations, creates the whole phenomenon of “corruption” (including nepotism, now to be found in the White House as well).

Both conflicts are historical constants, as Francis Fukuyama has brilliantly shown in his two recent books on the comparative history of the state, “Origins of Political Order” (2011) and “Political Order and Political Decay” (2014 – see his own overview here).  They represent challenges for development and transition economics, but remain present in so-called “developed” economies as well.

Nicolas Hofer’s presentation “Accounting, Money & Banking in terms of Law” picks up on that and presents some crucial distinctions in business accounting in terms of law – actual business practice serves as the microfoundation of our macro model.

After clearly distinguishing 1st order objects of law (things) from 2nd order objects of law (rights vis a vis other legal persons who hold corresponding obligations), he distinguishes flows of monetary wealth affecting (1) the stock of means of payment, (2) net financial assets, and (3) net worth (equity), making clear that on the level of net financial assets, capitalism is a zero sum game – but not on the level of net worth (profit & loss statement), where “everyone wins” (achieves a profit within a period) is possible just as much as “everyone loses” (suffers a loss within a period).

Special emphasis is given to the category of net financial assets and flows of monetary wealth on that level, which forms the key of Stützel’s theory of business cycles that we adopt.  It allows for a precise distinction between “real” and “purely financial” transactions and to conceptualize balances of trade and on current account.   Morris Copeland’s flow of funds accounts do not include that balance – or any balances, for that matter – therefore it is no wonder sources and uses do not add up to the same number as they should (Perry Mehrling vaguely notices some symptoms of this, but does not fix it – click on the link and watch 4:45 to 10:00).

Nicolas takes this more precise accounting system up to our legally grounded version of the sectoral balances approach (routinely used in national accounting), which connects micro to macro accounting and then serves as a foundation for an ex ante macro model of business cycles within a circular flow model of a closed economy.

Thomas’ Weiss builds on that and takes this further into macroeconomics, presenting an overview over Wolfgang Stützel’s Theory of Business Cycles.  Stützel used the sectoral balances approach to build a coherent theory of business cycles that renders superfluous the controversy between Keynesians and Anti-Keynesians, which was epitomized in 2015/16 by the clash between Yanis Varoufakis and Wolfgang Schäuble.  It is still present today between an apparent new quasi-Keynesian consensus forming internationally, vs. the old german austerity & export surplus strategy, now put into practice by new finance minister Olaf Scholz (SPD) who retained most of Schäuble’s personnel in the ministry of finance.

Key to Stützel’s integration is the precise, theoretically coherent demonstration of what has been guessed in practice all along:  that the holy grail of Keynesianism – demand-led output and employment – does apply, but not generally, not to every situation:  it applies only to the special case of buyer’s market situations.  In extreme buyer’s market situations, the paradox of thrift holds true, and anti-cyclical government surplus expenditures are necessary.  But constant demand stimulus policies gradually dismantle buyer’s markets and then, if continued, transform them into stagflatory seller’s market situations.  And in that situation, the mirror phenomenon of the paradox of thrift – what we call the paradox of surplus expenditure – applies.  On seller’s markets, employment and output stimulus can only be brought about by government austerity, which gradually will dismantle seller’s markets and build buyer’s markets again, completing the cycle.

Thus, Stützel’s theory is genuinely one of business cycles.  It coherently demonstrates why neither permanent demand stimulus nor permanent austerity is needed, but rather more generally: anti-cyclical policy.  In the words of Keynes: “The most important Agenda of the State relates not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.” (J.M. Keynes. 1926. The End of Laissez-Faire. In: Keynes, J.M. 1931. Essays in Persuasion. London: Macmillan 1931). 

For present Germany, whose private household sector and corporate sector have consistently been net savers in terms of net financial assets over the past years, that would mean to end pro-cyclical government budget consolidation, and instead to increase government expenditure for useful investment into infrastructure and education, thereby easing the pressure on the foreign sector to take all the additional net debt corresponding to the continous german domestic surpluses.   From our perspective, Germany within Europe should not press so much for austerity as it should press for building comparably reliable, relatively incorrupt state & legal institutions across the Eurozone and EU. 

Johannes Schmidt’s presentation  “Stützel’s Theory of Business Cycles and Current Macroeconomics” builds on that and shows how Stützel’s theory of business cycles can function as a General Theory, capable of integrating current theories of business cycles and financial crises as describing special cases:  New Classical Macroeconomics and Real Business Cycle, Post Keynesian (including Minskyan) and New Keynesian Models are covered, and “Full Money” proposals are also included.

He accomplishes this by introducing a concept unique to Stützel’s approach to accounting based macroeconomics, the concept of lockstep behavior of partial groups. It can apply on the levels of (1) net financial assets and/or (2) means of payment.  Lockstep behavior means that for all individual legal persons within a closed economy, inflows and outflows of (1) net financial assets (nfa) or (2) means of payment (mop) equal one another so that stocks of nfa and mop remain unchanged.  For example, lockstep behavior of all nations with regard to net financial assets would mean that all nations maintain balanced trade vis a vis the rest of the world, i.e. their total sales of goods and services to the foreign sector would equal their total purchases of goods and services from the foreign sector (in terms of monetary value), leaving each nation’s net financial position – its net international investment position – unchanged (Keynes’ 1940’s Clearing Union idea was actually designed to work towards that goal). On the contrary, if inflows of nfa and/or mop deviate from respective outflows, there will be a change in the stock of nfa and/or mop.

On that basis, Schmidt shows that “money does not matter” in new classical models because they implicitly assume lockstep behavior on both the levels of flows of net financial assets and flows of means of payment (lockstep mop: yes, nfa: yes): a special case that is indeed possible but very unlikely to be the normal case. But because of this implicit assumption, situations based on the other three cases: lockstep (mop: yes, nfa: no); (mop: no, nfa: yes); (mop: no, nfa: no) cannot be modeled.

Naive quantity theory can be shown to presuppose lockstep on the level of net financial assets, but not on the level of means of payment (lockstep mop: no, nfa: yes) – another special case that has some historical applications but today is an unlikely case. While the monetarist version of the quantity theory has mostly been abandoned, naive quantity theory has reappeared after 2008 as a renaissance of “full money” proposals (inspired by Irving Fisher’s 100% money) which in some ways could be called “supermonetarist” (Heiner Flassbeck).

Stay tuned to find out how New Keynesian Macroeconomics and Post Keynesian/Minskyan Models fit in this integrative schema – Schmidt’s presentation will be online soon.

This underlines that Stützel’s work, other than heterodox approaches viewing themselves as an alternative to the neoclassical model, is capable of functioning as a General Theory (like Keynes had intended), integrating both neoclassical and heterodox models as special cases within a coherent general framework.  In fact, it was one of Stützel’s explicit goals to render superfluous the controversy between Keynesians and Anti-Keynesians by demonstrating the specific conditions under which each position applies, thus correcting their overgeneralizations.

Geoff Hodgson’s presentation “Legal Institutionalism: Capitalism and the Constitutive Role of Law” presents an overview of Legal Institutionalism, delineating how it crucially differs from New Institutional Economics which still underconceptualizes law and the constitutive role of the state for legal relations.  He clearly demonstrates this using the examples of property rights & contract and the firm (corporation) as a juridical person – a fictitious legal entity defined by the legal capability to enter contracts, to sue and being sued, and obliged to pay taxes, and makes a strong case for a legal institutionalist definition of capitalism.

Stay tuned, we will publish all these over the next few weeks – and we are looking forward to your comments, criticisms, questions and suggestions – you can post them below.  Thanks!

 

ANEP Seminar at BI Norwegian Business School, Nov. 01-03, 2017: Papers for Download

Information on the seminar, including the programme, can be found here.  Some short introductory presentations of our approach can be found on our youtube channel.  Anyone interested in taking a more detailed look at our approach of constructing a realistic, non-universalist paradigm for analyzing capitalism by reconnecting accounting to the historically specific foundations in roman law it is empirically based upon, and then contrasting this with informal, traditional social relations in stateless contexts, can download some further material below.  Our own papers are marked by showing the author in bold print, but are augmented by papers detailing the most fundamental building blocks of our conceptual framework: Law, Legal Institutionalism, Mechanics of Balances, and Legal/Economic Anthropology. All links will open in a new tab.

 

  • Business Cycles
    • Stützel 1952, Preis, Wert und Macht. Analytische Theorie des Verhältnisses der Wirtschaft zum Staat
    • Stützel 1953, Paradoxa der Geld- und Konkurrenzwirtschaft
    • Grass/Stützel 1983, Volkswirtschaftslehre
    • Weiss 2017, Conceptualizing Credit & Money: Law, Balance Sheets and and the Inherent Instability within the Core Institutions of Open Societies

 

New Blog on Stützel’s Mechanics of Balances

On top of Legal Institutionalism, Micro-Macro Accounting and Stützel’s Mechanics of Balances are the second fundamental building block of our approach, as outlined in Thomas Weiss’ presentations at the 2016 YSI Plenary in Budapest (view here) and 2017 WINIR  Conference, “Institutions and Open Societies” (view here).

Fabian Lindner is now hosting a new blog in english on Stützel’s Mechanics of Balances.  You are invited to explore it here.  More detailed overviews in english on the basic concepts of this fundamental building block of our approach can be found here and here.

ANEP Economics Seminar at BI Norwegian Business School, Nov. 01-03, 2017

We will be giving a 3-day seminar “Introduction to New European Political Economics and Legal Institutionalism” at BI Norwegian Business School in Oslo, Norway.

It will take place from November 1-3, 2017 and feature guest speakers Geoff Hodgson (University of Hertfortshire) and Johannes Schmidt.  Geoff Hodgson is the co-developer of Legal Institutionalism, author of the book “Conceptualizing Capitalism” and co-founder of WINIR, the World Interdisciplinary Network for Institutional Research.  Johannes Schmidt is a Professor at the Hochschule Karlsruhe Technik und Wirtschaft and, together with Fabian Lindner, a pioneer in communicating Wolfgang Stützel’s work on mechanics of balances to the English speaking community.

A full description and programme can be found at BI Norwegian Business School’s website by clicking here.  Papers for download can be accessed here (links open in new tabs).

We welcome and invite anyone interested in getting an introductory overview of the current state of our work and discussing with us personally!

 

 

ANEP team at WINIR 2017 “Institutions and Open Societies”

At this week’s WINIR conference on Institutions and Open Societies at Utrecht University, Nicolas Hofer, Wolfgang Theil and Thomas Weiss will present some more material we developed over the past year.

Nicolas will summarize some difficulties in building open societies that are are rooted in the contradictory basic legal structure of open societies:  the private/public law dialectic.  Public law is based upon centralizing power and sovereignty, private law on its opposite, fundamentally decentralizing power, decisionmaking and sovereignty.  Yet, private law presupposes public law and cannot exist without it.  Republican constitutions mediate this conflict but in times of crisis have often been replaced by authoritharian forms of government: forms of government have been changing back and forth between more centralized and more decentralized forms.  Such cycles were well known to many republican thinkers of classical antiquity, among them Aristoteles, Cicero, Machiavelli, Vico and Kant, as Anacyclosis.

State building itself has to deal with an even more fundamental conflict, as Francis Fukuyama points out in his recent 2 volume global comparative history of state formation: the conflict between kinship-based “informal” relations and the impersonal legal order of a modern state, which are in no less of a tension than public and private law.

Wolfgangs presentation will develop a legal institutionalist concept of money and show how from that perspective, two controversies in monetary theory can be solved in a fairly uncontroversial way:  that between metallists and nominalists, and that between Randall Wray’s Modern Monetary Theory and Perry Mehrling’s Money View whether the state’s liabilities are often at the top of the hierarchy of means of payment because the state is a quasi-absolutist entity (Wray), or rather because the state “does business” with all its citizens (Mehrling).

Thomas’ Presentation will sketch basic elements of Stützel’s balance mechanics-based theory of business cycles, thereby moving from Levels 1 and 2 of our framework to laying out some basic concepts for levels 3 (intentional actors and their plans & expectations) and 5 (long cycles) of our model building project:

Presentations & Papers will be available soon. For now, you can check Wolfgang’s academia page for papers, and our youtube channel for previous presentations.