What is a monetary theory of production?


The striking argument made frequently by representatives of the supply-side school is the supposed superior efficiency of market allocation. Government expenditure is associated with high allocation restraints and negative effects on growth. Debt-financed government spending is considered damaging optimal allocation and growth by crowding out private investments in the neoclassical capital market according to this theory.

As stated in the monetary theory of production by John Maynard Keynes that is completely wrong and almost grotesque. However, the arguments made by Keynes were never really put up and turned against the theses of supply-side policies. The Theory of Monetary Economy of Keynes was withheld and it is still our duty and obligation to change that.

To address the most important misunderstanding: neither was the monetary theory of production set up to discuss the role of money in the economy in greater detail in terms such as cash, bank account money, bills and Lombard, nor to explain the function of banks in the pre-financing of production and the role of central banks policies. Those topics are all covered by thick books describing it to the layman. Overall this would have nothing to do with the monetary theory of production of Keynes. Furthermore what is taught as Monetary Economics at universities today prevents the necessary findings.

The monetary theory of production sees production and income of an economy determined by monetary mechanisms – and not for example by the use of the production factors like capital and labor.

Orthodox economics addresses itself to the production function, aiming to increase the use of the production factors capital and labor. This has far-reaching implications for the theory of economists as for the political advice based upon this theory – after which it needs more savings to promote business investment. Therefore profit would encourage growth and consumption would only waste the additionally needed investment funds.

According to the monetary theory of production the orthodox teaching is not only completely wrong but devastative in its economic impact. Without any limitation the orthodox doctrine has to be held responsible for the serious damage to people and economies which was caused by economic crises such as the global economic crisis of 1929-33 or the mass unemployment by the neo-liberal policies since the 1980s until today.

Finally, the monetary theory of production will prove that the potential wealth of a society in which economic policy is shaped by orthodoxy is monetarily limited. This makes the orthodox doctrine of the free market one of the largest obstacles of allocation in the economy.

The secret of this monetary limit of wealth reveals itself to the viewer with the realization that saving in an economy is not possible to an unlimited extent and the resulting consequences by that.

An economy as a whole cannot save money. The balance of receivables and liabilities is always zero. Thus, the entire savings of all of us are limited to the net investment of the economy. Investments are risky and compete with the lending of money and even with cash. Monetary stability is a severe obstacle for the net investment, thereby reducing our savings, because an economy cannot save in its stable money state. Only the individual can save money and only to the extent to which others (people, government, foreign countries) are going into debt.

The monetary theory of production of Keynes leads to the conclusion that the economy’s possible savings cause a limitation of the income. We all can restrict our consumption as individuals to save more. But we cannot all save more than the net investment in the economy, which is particularly in crises zero.

If we restrict all our consumption to save our income, but overall these savings cannot exceed zero, than the effect of the monetary mechanism of the economy will be that we save us poor: Our income has to fall that low and the economy has to become that impoverished that we can save no more anything. Saving is the cause of economic crises.

An example: if the state is indebted an average household should be able to save 500 euros a month. Without that indebtedness the income of the average household would have to decrease that far that households in general could save nothing on balance. Instead of the neoclassical production function this mechanism determines the wealth and real income of each economy.

This is our topic of the monetary theory of production according to Keynes, which is detailed in the following articles:

Keynes in einem Satz

Keynes hat die Produktionsfunktion umgedreht

Die Zerstörung von Kapital in der Krise

Wie Keynes die orthodoxe Ökonomie widerlegt hat

Die monetäre Konjunkturtheorie von Keynes

Etwas Saldenmechanik

Die neoklassische Arbeitsmarkttheorie

Welche Schuld hat die VWL an unserer Krise?

Gesamtwirtschaftliches Denken

Die monetäre Limitierung des Wohlstands