A New Paradigm for Economic Policy
New Directions in Modern Economics series
Edited by Claude Gnos and Sergio Rossi
The analysis of the economic system in terms of a circular flow of incomes has always had the appeal of integrating money directly into the productive system. However, the extension from an elementary circuit wherein monetary incomes are earned by wage earners and then spent on buying consumption goods to a complex dysfunctional economy has always been problematic. For example, to deal with inflation the traditional circular flow approach considers that the two symmetrical operations, namely the initial creation and the final destruction of monetary incomes, are separated by a period of time during which the amount of money available in the system may be increased. The problem with this interpretation is that, if monetary ‘events’ do indeed happen in between the ‘extremes’ of the circuit, then money is given back its autonomy compared to goods, and this restores a form of dichotomy between monetary and real magnitudes. The traditional conception of the circuit of monetary incomes appears therefore to be caught between a coherent but useless description of a simplistic world and a simple reworking of a well-known approach.
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