The Difference Between Italian and French Monetary Circuit Theory
Introduction Monetary Circuit Theory (MCT) explains that money is created through bank lending, circulated between firms and workers, and destroyed through the repayment of loans. The term “circuit” refers to this flow of money. The creation of bank money for firms is termed "initial finance," while the firms' retrieval of money for repayment through sales or the issuance of securities is termed "final finance." Methodologically, MCT draws on the approaches of Keynes (non-neutrality of money in “Treatise on Money”) and Marx, particularly the M–C–M' form. MCT criticizes the neoclassical theory in which money supply is exogenous and the price and interest rate are determined by the relation between the demand and supply. In contrast, MCT claims that money is supplied in response to firms' demand to pay wages for production. As a type of macroeconomic theory, MCT aggregates different economic agents into three sectors: firms, workers, and banks. Th...
