The Nature of Money, Credit Creation, and the Realization of Profits: A Heterodox Critique

The podcast segment delves into the fundamental theories of money, contrasting the mainstream commodity theory with the heterodox credit or claim theory, which posits money as merely an entry in a ledger. It critiques the traditional textbook functions of money—unit of account, medium of exchange, and store of value—arguing that the neoclassical interpretation of these functions implicitly relies on a commodity theory, which is no longer applicable, if it ever was. The discussion emphasizes that the unit of account is often treated as a mere numeraire, the medium of exchange is linked to barter, and the store of value function is problematic, especially in modern capitalism. Drawing on scholars like John Hicks and Jeff Ingham, the segment redefines money primarily as a "unit of account" (an abstract standard of value) and a "means of payment" (the canceling of a debt), explicitly distinguishing the latter from a medium of exchange. This framework highlights the endogenous nature of money, where bank money, created through credit extension, is the characteristic form in capitalism. It explains the hierarchy of money, from base money to commercial bank deposits, based on the differing quality of debts. The segment also challenges the conventional money multiplier concept, asserting that the monetary base and money supply are both endogenous, and central banks influence lending rates through policy rates rather than direct control over the money supply. The analysis then uses two historical "puzzles" to illustrate the shortcomings of mainstream economic theories. Robert Dennis Robertson's 1922 Derby Day story, intended to demonstrate the velocity of circulation, is reinterpreted as exposing the "utter emptiness" of this concept and the inadequacy of neoclassical utility maximization, which fails to account for the realization of monetary profits. Similarly, Marx's monetary circuit (M-C-C'-M') is examined, revealing a critical unanswered question: how can aggregate profits (M' > M) be realized if the money supply is fixed? Neither classical, Marxian, nor neoclassical economics adequately address this. The core insight derived from these critiques, and central to heterodox theories like Modern Money Theory and Post-Keynesianism, is that the realization of money profits, and thus the incentive for production, fundamentally depends on credit creation by the banking system. Without an expansion of the money supply through debt, aggregate profits cannot be realized, leading to a system where there is no incentive to produce. While acknowledging the risk of credit creation fueling financial speculation rather than real value added, the segment firmly concludes that credit creation is an indispensable mechanism for the functioning of a capitalist economy and the realization of profits.

historically throughout all time there have been two basic theories of money a commodity theory of money where money is literally a commodity obviously a precious metals such as gold or silver secondly the credit or the claim theory of money

money is what is paid for a discharge of debt when that debt itself has been paid in terms of money

all money is debt insofar as the issuer's of that debt promise to accept their own money for any debt payment by any bearer of the money

the means of payment is definitively the canceling of a debt and notice that timing is completely flexible

the store of value function per se disappears it seems that the most two important ones are in Hicks's terms unit of account and in means of payment

the idea of the money multiplier simply doesn't work the way that banks keeping the step and I've used Keynes's phrase there is not by restricting them to loaning out other people's money

it's the ability of the state to levy taxes and its obligation to accept payment in its own money which is the key

the story demonstrates the utter emptiness the complete emptiness of the velocity of circulation content

the reason it's not an accurate theory of capitalism is that there is no mechanism within it for the realization of profits in monetary terms

if the money supply is fixed how can it be possible for M prime to be greater than M and that's a crucial question neither marks nor the classical economists nor neoclassical economists ever seem to ask

the answer has to be credit creation money creation by the banking system

unless there is credit creation there can be no production