Handbook of Critical Issues in Finance

Handbook of Critical Issues in Finance

Elgar original reference

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.

Chapter 18: The flow of funds

Jo Michell

Subjects: economics and finance, financial economics and regulation, post-keynesian economics


The flow of funds refers both to a set of national accounts and to a methodological and theoretical apparatus derived from those accounts. Whilst the set of accounts that make up the flow of funds are straightforward in their depiction of the complete set of real and financial transactions that have taken place over a given time period, the question of the correct theory that should be deployed to tie these transactions together into a cohesive whole is open to a wide range of interpretations. As Alan Greenspan observed in 1958: [T]he basic problem in handling flow of funds accounts is the primitiveness of our financial theory. These accounts are extremely elaborate and extraordinarily well constructed. But unless we know what we want to use them for, they are of as much practical value as a table of random numbers. (Greenspan et al., 1958, p. 171). Since then a number of attempts have been made to find a systematic way in which to organize the flow of funds accounts theoretically. However, none have come to hold a position equivalent to that taken by the ‘Keynesian’ system of equations as the ‘default’ theory used for organizing real-sector consumption, expenditure and investment identities.

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