I was going to write a retrospective on Ben Bernanke this week, since his tenure as Federal Reserve chairman ends soon, and it’s time to look back on his period in office – as he himself did on his predecessors during the Great Depression. But a far more important departure occurred last week: the Italian economist Professor Augusto Graziani died at the age of 80.
Augusto who, you may ask? Graziani’s name is not widely known even among economists, let alone the general public, because he was outside the neoclassical mainstream – and also outside continental America, which has a pseudo-monopoly on fame in economics these days. His Wikipedia entry emphasises his current obscurity: it is a mere stub.
But within the post-Keynesian community, and especially within its European branch, Graziani was a giant. He deserves to be much better known, and I hope that history is far more fulsome in its praise of him than the contemporary world has been, where the chatter of neoclassical economists like Bernanke drowns out the wisdom of true sages like Graziani.
Graziani’s most important contribution was to derive from first principles an accurate statement of the fundamentally monetary nature of a capitalist economy. This began with a simple question: can a monetary economy be one in which a commodity functions as money – something like gold, silver, or in a more modern sense, the pseudo-commodity bitcoin, which is “produced” via energy-intensive computation? His answer was no, because such an economy is merely a barter economy with a minor twist. From this he derived the first principle that a monetary economy is one that uses an essentially valueless token in exchange:
His second principle was that this token can’t be an ordinary IOU, like a trade credit issued in exchange for goods, because this still leaves a financial relationship between the buyer and the seller after the goods have been transferred. A painter who buys paint from a retailer using a trade credit gets the paint, but he also walks away with a debt towards the shop. But if he buys the paint with money, then after the money changes hands, the paint belongs to the painter and he owes the shop nothing. Money is therefore a token which is accepted as a means of final payment by all sellers:
Graziani then developed three conditions needed to define a monetary economy:
In order for money to exist, three basic conditions must be met:
a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);
b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);
c) money must not grant privileges of seignorage to any agent making a payment.
From this Graziani derived a simple but profound insight that overturned two centuries of economics perceiving capitalism as fundamentally a modified version of barter. In this conventional barter vision, all exchanges involve two parties and two goods: the ideal situation is where Agent A has good X (for example, deer) and wants good Y (for example, beaver), while Agent B has beaver and wants deer. They meet, work out an exchange ratio, swap the respective bundles of commodities, and toddle off to consume their purchases.
Money was treated as a simple kludge between this ideal barter and the more common situation where A had deer and wanted beaver, while B had good Q (say, wheat) and wanted deer. B would first sell wheat in return for some of the designated “money commodity” Z (say, gold). A would then willingly give B the deer in return for gold, because he knew he could then give someone else gold in return for what he really wanted, which was some beaver.
Graziani’s insight was that rather than the 2-person, 2-commodity vision of barter, a monetary economy was one in which every exchange involved 3 people (or institutions), one commodity, and money. A monetary economy is one in which buyer A directs bank Z to transfer money from A’s account to B’s. In return, B gives A the beaver he craves (hmmm… don’t blame me, it’s Adam Smith’s example). In Graziani’s words:
Some people remember where they were when John F Kennedy was shot, or when Princess Diana was killed (or when Miley Cyrus twerked on MTV). I remember where I was when I read documents that profoundly altered how I thought about the world. Reading this paper from Graziani – a single page in a single paper, no less – was one of those occasions.
I was working as a senior lecturer at my ex-employer UWS, and I’d been asked to take over teaching the financial economics course, because the staunchly neoclassical economist who had been lecturing in it was such a bad teacher that there had been a student revolt. There was no way that I was going to serve up the guff that neoclassical textbooks delivered on this topic, so I delved into the strictly monetary literature in economics to construct my own course.
I knew that Augusto Graziani was one of the authors I had to read, because by chance I had heard him speak at a 1998 conference at the University of Bergamo in northern Italy. Not only was his paper insightful, his spontaneous answers to questions from the floor were delivered in perfectly formed English paragraphs. “Augusto” is a grand name for anyone to have to bear – let alone a man who stood barely five feet high – but with his elegant posture and flawless erudition, Augusto carried his name with aplomb.
When I read Graziani’s paper in 2002, a puzzle that had stymied me for years was suddenly solved. How do I move from the implicitly monetary model of financial instability I had developed in 1992, to a strictly monetary one – in which deflation could exacerbate a debt crisis, as it clearly had during the Great Depression? The answer was simple: banks had to become an essential part of my modeling, and every transaction had to follow that triangular structure that Graziani outlined. Triangles and banks, and not two lines between buyer and seller and barter, ruled in monetary economics.
That insight led over time to the development of my Minsky modeling program, which is now an indispensable part of my approach to economics. In building it I truly stood on the shoulders of the giant who was Augusto Graziani. Hopefully a future economics will accord him the status he rightly deserves.
I’ll conclude with a quote from Riccardo Bellofiore’s paean to Graziani in the Review of Keynesian Economics:
Vale Augusto. And a nudge to Wikipedia authors: feel free to mine this content and the links below to give this elegant, diminutive man the true status he deserves as a giant of economics.
For more detail on Graziani: