Stützels General Theory of Business Cycles Part II: Johannes Schmidt’s Presentation 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.