Monetary Circuit Theory

Monetary Circuit Theory has two roots – France and Italy.



The concept of the circuit was first used in economics by the Physiocrats of 18th century France. They viewed production as a cycle beginning with advances, that is, capital expenditure, and ending when the goods that had been produced were sold. To that extent, the late 20th century revival of the circuit concept by Bernard Schmitt (1960, 1966, 1984), Jacques Le Bourva (1962), Alain Barrère (1979, 1990) and Alain Parguez (1975), was a salute to a French tradition. This is not the whole story, though. Circuitist thinking, although usually unsung, has in fact underpinned many approaches to economics from Marx to Keynes by way of Wicksell,1 Schumpeter, Kalecki and J. Robinson.2 Indeed, today’s French circuit school owes much to Keynes, to whom Schmitt, Barrère and Parguez all referred extensively. And it is Keynes’s heterodoxy, as opposed to the conventional neo-classical view of Keynes’s economics, that was their source of inspiration. Hence the affinities of French circuitists with post-Keynesians (for a detailed review of common ground and differences, see Deleplace and Nell, 1996, Arena, 1996, Rochon, 1999a).

Circuit theory also counts an Italian branch which emerged in the 1980s on Graziani’s (1989, 2003) initiative and which explicitly focuses on Keynes’s monetary theory of production (cf. Fontana and Realfonzo, 2005). French and Italian circuitist approaches have also inspired post-Keynesians outside Europe, especially in Canada (Lavoie, 1984; Rochon, 1999; and Seccareccia, 1996). This affinity between circuit theory and Keynes’s heterodoxy and now post-Keynesian theory will be a recurrent theme in this paper. It should help readers familiar with post-Keynesian literature to grasp the significance of the circuit approach and help also to confirm its veracity. 


Circuitists see the economy, meaning the present-day monetary economies of production, as being based on an asymmetrical (hierarchical) relationship between firms (or entrepreneurs) and workers. Firms employ workers and pay them money wages. In spending their money wages, workers gain access to a fraction of the output, the size of that fraction varying according to the price they pay for goods in markets. Symmetrically, firms earn profits formed by the surplus of the price received for the goods sold over the wage-bill the firms paid out, allowing them and their backers to appropriate the complementary part of the output.

First, it shall be seen that the features outlined here set circuit theory apart from the neoclassical view inherited from Smith (1776) and extended by Walras (1926), by which the economy is composed of individual agents who simultaneously supply their productive services on a first set of markets and create demand on a second set for the goods produced. To be clear, circuitists do not of course deny the existence of markets and the correlated role of supply and demand in determining wages and prices. What they refute, by reference to Keynes’s notion of the entrepreneur economy, is the idea that market transactions may ultimately be seen as mere exchanges of productive services and goods for one another, with the terms of trade supposedly being determined through adjustments taking place in interdependent markets in conformity with the agents’ preferences. Secondly, it will be confirmed that the circuitist approach, as its proponents argue, implicitly underpins Keynes’s principle of effective demand to which circuitists therefore subscribe. 


Key Sources of Research:


Circuit and Coherent Stock-Flow Accounting

Marc Lavoie

October 2001

Click to access graziani_lavoie.pdf



Claude Gnos

Click to access v_2005_10_28_gnos.pdf


Some Simple, Consistent Models of the Monetary Circuit

Gennaro Zezza,

April 2004

Click to access wp405.pdf


Finance and Crisis: Marxian, Institutionalist and Circuitist approaches

Georgios Argitis
Trevor Evans
Jo Michell
Jan Toporowski

Click to access Finance-and-crisis-Marxian-Insitutionalist-and-Circuitist-Approaches-WP-39-1.pdf


Financialisation and the Limits of Circuit Theory

Photis Lysandrou

Click to access PL300514.pdf


October 28-29, 2005,

Jean-Vincent ACCOCE



Click to access v_2005_10_28_accoce_mouakil.pdf





Click to access MVP%20ROPE%202014.pdf



The Dynamics of the Monetary Circuit

Steve Keen


Click to access 9780230_203372_10_cha09.pdf



The theory of the monetary circuit and economic policy in Augusto Graziani. An assessment from an early Italian circuitist perspective, and a first comparison with Alain Parguez


Riccardo Bellofiore


Click to access Bellofiore.pdf

Do Shadow Banks Create Money?
Financialisation and Monetary Circuit
Jo Mitchell



Modern Monetary Circuit Theory, Stability of Interconnected Banking Network, and Balance Sheet Optimization for Individual Banks

Alexander Lipton

October 27, 2015



Financial-real side interactions in the Monetary Circuit: Loving or Dangerous Hugs?

Alberto Botta, Eugenio Caverzasi, Daniele Tori




Duccio Cavalieri



Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on

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