Modeling the Economy as a Whole: An Integrative Approach

Modeling the Economy as a Whole: AnIntegrative Approachajes_804 1282..1314

By FREDERIC S. LEE*,†

ABSTRACT. This article integrates the social surplus approach withinput-output, stock-flow consistent, social accounting, and socialfabric modeling with a structure-agency methodology to develop ahistorically grounded model of the economy. The first two sectionsdevelop a model of the monetary structure of the social provisioningprocess. The third section introduces agency into the model in theform of the acting organization. The fourth section uses the socialfabric approach and historical context drawn from social structures ofaccumulation to develop a socially embedded, historically contextu-alized, structured-agency model of the economy as a whole. The finalsection discusses the importance of the model.

People have social, caring lives; they have households, parents, chil-dren, friends, colleagues, and a history; and they need to be fed,housed, clothed, married, schooled, and socially engaged. And theneeded and desired goods and services are produced to sustaintheir socially constructed, caring lifestyle. Thus the social provision-ing process is a continuous, non-accidental series of production-based, production-derived economic activities through historicaltime that provide “needy” individuals and households the privateand state goods and services (that is, the social surplus) necessaryto carry out their sequential, reoccurring, and changing social activi-ties through time. As such then, a continuous provisioning processimplies that it is something like a going concern whose core pro-cesses provide the material bases for social provisioning and aresimilar to a going plant and going business. This means, in part, that

*Department of Economics, 211 Haag Hall, University of Missouri–Kansas City, 5100

Rockhill Road, Kansas City, Missouri 64110, United States, E-mail: [email protected]

†I would like to thank Tae-Hee Jo, Terry McDonough, and Erik Olsen for comments

on earlier versions of the article.

American Journal of Economics and Sociology, Vol. 70, No. 5 (November, 2011).© 2011 American Journal of Economics and Sociology, Inc.

the social provisioning process is embedded in the social surplusapproach. It also suggests that social provisioning is affected byhistorically situated social norms and cultural values, by the socialactivities to be supported, and by the decisions of acting persons.Hence, modeling the social provisioning process or the economy asa whole involves, first, stock-flow, social accounting consistent mod-eling of its productive and monetary structures and the embeddingof the acting person within them. This economic model of theprovisioning process is in turn linked at one end to culturalvalues, norms, and societal institutions and at the other end byhousehold social activities and government services. In addition, theconcatenated model is “linked” to a historical context or stage ofcapitalist development. Consequently, the concatenated model ofthe provisioning process of the economy as a whole, which ispredicated on the concept of a going economy, is an integration ofthe social surplus approach, of input-output, stock-flow, socialfabric, and social accounting consistent modeling, of historical con-textualization, and of structure-agency methodology (Jo 2011; Mon-giovi 2011; McDonough 2011; Hayden 2011; Olsen 2011; Lee and Jo2011).

As a theoretical concept and methodological approach, theeconomy as a going concern is abstracted from its historical originsand situated historically. That is, it represents a “currently” function-ing working capitalist economy complete with structures, agency,social fabric, and social activities. Hence, the structures that give theeconomy its form, the organizations and institutions that structurallyorganize and coordinate economic activity, and the agency oracting person that initiates and directs economic activity operateinterdependently, contemporarily, although not necessarily synchro-nically. So while the structures, organizations, and institutionsprovide the framework for the economy to be a going concern, tocontinuously generate economic activities, it is the acting personthat makes it happen or not—the economy does nothing on its ownaccord.

Therefore, to construct qua delineate the model of the economyas a whole, the first step is to descriptively model the productivestructure and the surplus, which involves articulating the nature of

Modeling the Economy as a Whole: An Integrative Approach 1283

circular production, fixed investment goods, and scarcity, decom-posing the surplus into government, consumption, and fixed invest-ment goods and services, and linking the surplus to the provisioningof households, state, and the business enterprise. The next stepinvolves “social accounting” modeling of these linkages in terms ofmoney incomes vis-à-vis workers, capitalists, and the state. Thisrequires the introduction of government expenditures, a chartalisttheory of money, a banking sector, financial assets and liabilities,and finally the financial structure of the provisioning process. Withthis in place, the social accounting of the relationship betweenprofits, incomes, and the surplus is delineated and then integratedwith the models of the productive and financial structures toproduce a descriptively consistent model of the monetary structureof the social provisioning process. This model of the provisioningprocess is comprised entirely of structures and hence lacks agency,lacks acting persons. Therefore, the third step is to introduce coreorganizations and institutions—the household, state, business enter-prise, trade union, and market governance organizations—relevantto the social provisioning process and the acting persons whoseagency or decisions, which take place through the organizations andinstitutions, direct, control, and sustain the social provisioningprocess. Combining these three steps creates the economic model ofthe provisioning process. In the penultimate section, the economicmodel is historically contextualized and linked to and situated in thesocial fabric of the society, hence creating a historically grounded,descriptively consistent model of the economy as a whole. Theimportance of the model for heterodox economics is discussed inthe concluding section.

Modeling the Productive Structure of the Economyand the Surplus

The social provisioning process is founded on the social and inter-dependent production of goods and services; thus the structuralframework of economic activity of a capitalist economy consists ofits schema of production and the income flows relative to goodsand services for social provisioning. The schema of production of

1284 The American Journal of Economics and Sociology

the economy is represented in classical-Sraffian-Leontief terms as acircular production input-output matrix of material goods combinedwith different types of labor power skills to produce an array ofgoods and services as outputs (Lowe 1976; Gehrke and Kurz 2006;Kurz 2006; Kurz and Salvadori 2000, 2005, 2006). Many of theoutputs replace the goods and services used up in production, andthe rest constitutes the social surplus to be used for householdconsumption, private fixed investment, and government services.1

More specifically, the production schema of the economy is empiri-cally represented in terms of a product-by-product input-outputtable (or matrix). The table shows that m goods and services areproduced, and that n goods and services and z labor power skillsare used in their production, where the former constitute the inter-mediate inputs where m > n and the latter constitute the laborpower skills inputs where z > m. Thus, letting gij represent theamount of the jth product (good or service) and Liz represent theamount of the zth labor power skill to produce Qi amount of the ithproduct, the production schema of the ith good or service can berepresented by

g . . . , g L . . . , L Q or Qi in i1 iz i i i i1, , , ,[ ] → [ ] →G L (1)

where Gi = (gi1, . . . , gin) is a row vector of n intermediate inputs; andLi = (Li1, . . . , Liz) is a row vector of z labor power skills inputs.

Hence, the productive structure of the economy takes the followingform:

G L

G L1,

,1 1

m m m

Q

Q

[ ] →[ ] →

(2)

Representing the array of (G1, . . . , Gm) as G a product-by-productinput-output table, the array of (L1, . . . , Lm) as L a labor powerskills-by-product table, and the total quantity produced of eachproduct as Q, the production structure of the economy of Equation (2)is be depicted as

G L⊕ → Q (3a)


or

G

G

L

L

Q

Q11

21

11 1⎡⎣⎢

⎤⎦⎥

⊕ ⎡⎣⎢

⎤⎦⎥

→ ⎡⎣⎢

⎤⎦⎥21 2 (3b)

where G is a m ¥ n flow matrix of intermediate inputs consisting ofproduced goods and services;L is a m ¥ z flow matrix of labor power skills;Q is a strictly positive m ¥ 1 column vector of output or thetotal social product;G11 is a square n ¥ n matrix of intermediate inputs used in theproduction of Q1 a strictly positive n ¥ 1 column vector ofintermediate goods and services;G21 is a m - n ¥ n matrix of intermediate inputs used in theproduction of Q2 a strictly positive m - n ¥ 1 column vector offinal goods and services for consumption, investment, andgovernment use;L11 is a n ¥ z matrix of labor power skills used in the pro-duction of Q1;L21 is a m - n ¥ z matrix of labor power skills used in theproduction of Q2; and� means both intermediate and labor power inputs areneeded to produce the output.

One feature of the structure of production is that G11 → Q1,meaning that all of Q1 are produced means of production. Thisimplies that both inputs and outputs are tied to technically specifieddifferentiated uses, production is a circular flow, all intermediateinputs are produced inputs, and the linear production schemas(Equation (1)) for each output are all linked together on the inputside. Consequently, the production of intermediate inputs is a dif-ferentiated, indecomposable hence emergent system of productionthat cannot be segmented, aggregated, disaggregated, reduced, orincreased. A second feature of the structure of production is that theproduction of any Qi must directly involve at least one gij where i� j, which means that all of G11 is at least indirectly engaged inits production, making all intermediate inputs, Q1, Sraffian basicgoods.


Circular Production, Labor Power, and Scarcity

Although labor power is not an intermediate produced good andservice per se, neither is it a non-produced input with naturallygiven indestructible productive capabilities and talents that existprior to production and externally to the structure of production asoriginal factor input. Being producible within the structure of pro-duction, goods and services used as intermediate produced meansof production are not original factors; and a similar argument can beused for labor power as well. Labor power is a socially producedinput in that it is created or becomes. That is, humans are actingpersons that have capabilities to learn particular skills. A particularstate of technical knowledge will produce and reproduce thoseskills or specific forms of labor power while changes in it willrender some skills obsolete and create new skills. In addition, anyparticular labor power skill or even the overall amount of laborpower can vary as a result of changes in technical knowledge.Therefore, labor power is socially constructed hence similar to, butnot the same as a good or service used as an intermediate input.Hence, while labor power is not produced within the system ofproduction like a ton of steel, it is socially created in conjunctionwith technical knowledge and then enters the system of productionas an “input.”

With labor power, goods, and services being used as intermediateinputs co-created and co-existing internally within the structure ofproduction, there do not exist original factors of production withnaturally given indestructible capabilities and given unalterableendowments. Consequently, none of the inputs in G or L can bescarce factor inputs, as defined in mainstream economics, whichimplies that none of the outputs (Q) can be characterized as relativelyscarce products. Therefore, production is not an activity to overcomescarcity, exchange does not arise from scarcity, and prices are notscarcity indexes. In short, under circular production, scarcity has notheoretical meaning and hence is not an organizing principle ofeconomic inquiry in heterodox economics.2 Finally, the absence oforiginal factors of production and scarcity means that with circularproduction, the restraints on the social provisioning process are not a


result of given quantities of scarce factor inputs located in production,but are located in the decisions and social values that affect theproduction of the surplus (Q2) and its distribution (McCormick 2002;De Gregori 1985, 1987; Zimmermann 1951; Levine 1977, 1978; Veblen1908).

Fixed Investment Goods and the Surplus

Behind the usage of intermediate inputs and the employment ofdifferentiated labor power skills for each product stands an array ofdifferentiated fixed investment goods:

KSi i1 ikk . . . , k= [ ], (4)

where KSi is a row vector of the stock of kk fixed investment goodsused in the production of Qi.

The fixed investment goods are used in production, but they are notused up like intermediate inputs. Rather, they are separate from theintermediate and labor power inputs (hence the colon in Equation (5))because they are repeatedly used in the repeated production of theoutput. Thus, the combined array of fixed investment goods (KSi),intermediate inputs (Gi), and differentiated labor power (Li) used forthe production of Qi represents the complete stock-flow technology ofthe schema of production:

K G LSi i i iQ: .⊕[ ] → (5)

The technology of the schema embodies a specific set of sociallycreated knowledge that is an emergent whole. In particular, the fixedinvestment goods, intermediate inputs, and the differentiated laborpower inputs are the physical manifestations of the uniquely specificsocial knowledge or technology used in the production of Qi. Beinglinked in an emergent technological arrangement for the production ofQi, the schema of production cannot be separated into parts with eachidentified with a certain portion of the output; its fixed investmentgoods cannot be viewed as separate “dated output” to be hypotheti-cally sold in the form of joint products; and the schema itself cannotbe treated as joint outputs along with Qi. Finally, from Equation (5),the entire structure of production can be represented as


K G

K G

L

LS1 11

S2 21

11 1:

:⎡⎣⎢

⎤⎦⎥

⊕ ⎡⎣⎢

⎤⎦⎥

→ ⎡⎣⎢

⎤⎦⎥21 2

Q

Q(6)

where KS1 is a n ¥ k matrix of the basic sector stock of fixedinvestment goods used in the production of Q1; andKS2 is a m - n ¥ k matrix of the surplus sector stock of fixedinvestment goods used in the production of Q2.

The social surplus of the economy consists of the excess of totalgoods produced over what is used up in production:

e e Q G SQ G* * *dT T( ) − ( ) = − = (7)

where e is a unit vector;Qd is m ¥ m diagonal matrix of the total social product;(eQd)T = Q the total social product and its composition;G* is an augmented G matrix with the n + 1 to m columnsconsisting of zeros;(eG*)T = G* is a semi-positive m ¥ 1 column vector of inter-mediate inputs; andS* is a semi-positive m ¥ 1 column vector of the goods andservices that constitute the social surplus.

The social surplus includes “extra” intermediate inputs and final goodsand services that go into inventory. However, since the inventory ofgoods and services constitutes less than plus or minus 1 percent oftotal economic activity, they will, for this article, be ignored byassuming that all of Q1 is used up in production or

e eQ Gd1T T( ) − ( ) = 0. (8)

This means that the surplus of the economy is essentially technicallydefined and consists of Sraffian non-basic goods and services:

S Q= 2. (9)

Being a surplus, the goods and services of Q2 have no technologicallinks but rather social links. Thus, they are differentiated by their socialdestination or social accounts into which they flow—governmentgoods (Q2G) for the state, consumption goods (Q2C) for the household,fixed investment goods (Q2I) for the business enterprise:


S Q Q Q Q= = + +2 2 2 2G C I (10)

where Q2C, Q2I, and Q2G are semi-positive m - n ¥ 1 column vectorsof surplus goods and services.

Since the different destinations are engaged with broadly differenteconomic and social activities, the array and composition of thethree vectors differ. In particular, Q2I not only differs in its arrayof goods from Q2G and Q2C, it is also a differentiated array ofgoods and services due to the different technologies used toproduce Q2G and Q2C, which themselves are an array of differenti-ated goods and services. Moreover, Q2I is connected as a flow ofbasic sector fixed investment goods KF1 to the stock of basic sectorfixed investment goods KS1 and as a flow of surplus sector fixedinvestment goods KF2 to the stock of surplus sector fixed investmentgoods KS1:

Q2IT

FI 2 S1 2K K→ →− − (11a)

Thus, the economy is productively linked together by the circularflow of the production of intermediate inputs and by a secondcircular flow via the surplus from the production of fixed investmentgoods to their final social destination as stocks and their subsequentuse directly and/or indirectly in their own production as well asin the production of all intermediate inputs and final goods andservices, which makes them “quasi-basic goods” in the Sraffiansense.

The array of differentiated goods in Q2G indicates the range ofsocial activities supported by the state and its composition indicatestheir relative social importance. Therefore, the state’s contribution tosocial provisioning is affected by the cultural values, beliefs, andnorms and by agency qua decisions that compel the production ofQ2G. But to provide the desired government services (GS), the state’sstock-flow “schema of production” draws upon government fixedinvestment goods and employs differently skilled workers, manag-ers, and politicians, and combines them with Q2G and governmentpayments (GP):

K Q L K KS GT

41 F4 S4: GP GS4 2 ⊕ ⊕ → →, (11b)


where KS4 is a row vector of the stock of k government fixedinvestment goods used in providing of government services(obtained through past government purchases);QT

2G is a (1 ¥ m - n) row vector of surplus goods and servicesused in providing government services;L41 is a m + 2 row vector of z labor power skills used inproviding government services;GP is the amount of dollars of government payments, such asunemployment or social welfare benefits, to dependent indi-viduals and households that do not have current employmenthence wage income or other forms of income, and interestpayments to bank and non-bank enterprises and householdsthat hold government bonds; andKF4 is a row vector of the flow of k government fixedinvestment goods into KS4.3

Finally, the array of differentiated goods and services in Q2C indi-cates the range of social activities undertaken by households, while itscomposition indicates their relative social importance:

Q2CT HSA→ (11c)

where QT2C is a (1 ¥ m - n) row vector of surplus goods and services

that contribute to household social activities (HSA).There are two further implications arising from Q2 being produced

as Sraffian non-basic goods. The first is since consumption andinvestment are based on current production, the former is not con-strained by the latter and the latter is not based on “savings.” Secondly,as Q2 is produced for the purpose of maintaining an ongoing range ofparticular government services and household social activities, theoverall array and composition of the social surplus is the physicalcomponent of the structure of the social provisioning process. But italso represents social relationships and decisions that produced it.This clearly makes the surplus socially (not naturally) constructedhence a social surplus; and the social determination of the volume andcomposition of the surplus also means the social determination of allmeans of production—goods, services, and labor power. Thus, all theactual economic activities that constitute the social provisioning


process are manifestations of societal relations and decisions (Kurzand Salvadori 1995; Veblen 1908; Ranson 1987; Lower 1987; Lager2006).

Social Provisioning as a Going Plant

What emerges from above is that the structure of the social provision-ing process in terms of goods, services, and labor power consists, inpart, of the structure of production required for the production of thesocial surplus (Equation (6)) and of the allocation qua contribution ofthe surplus to social provisioning through enabling government ser-vices and household social activities to occur and maintaining gov-ernment and private sector productive capabilities (Equations (11a)–(11c)). This can be qualitatively represented in terms of a stock-flow,social accounting descriptively consistent model of the productivestructure of the social provisioning process “producing” social activi-ties (GS, HSA):

Stock-Flow, Social Accounting (SFSA) Model of the Productive Structure ofthe Social Provisioning Process

Basic Goods Sector K G L Surplus Goods Sector K

S1 11 11 1

S

: ⊕ → Q22 21 21 2G 2C 2I

S4 2GT

41 F4

G L

State GP GS

:

: ,

⊕ → = + +

⊕ ⊕ →

Q Q Q Q

K Q L K

2

→→→→ →− −

KQQ

S4

2CT

2IT

F1 2 S1 2

Household HSAEnterprise K K

(12)

As a whole, the social provisioning process acquires the structureof a going plant with unused capacity and fixed investment goodsand the capability of producing additional capacity through produc-ing fixed investment goods. So, as long as household socialactivities are ongoing and supported by government services, thestructure of production ensures the continuous reproduction of theintermediate inputs and fixed investment goods. More specifically,the level of economic activity for the economy as a whole is deter-mined by the decisions to produce consumption, investment, andgovernment goods and services, that is, by effective demand. With


the “input” requirements produced and reproducible simultaneouslywith the goods and services necessary for the household socialactivities and government services to take place, the social provi-sioning process is potentially sustainable, and thus has an expectedfuture; and this is what makes the provisioning process a goingplant.

Modeling the Relationship Between the Social Surplus and Income

The social provisioning process takes place through linkages betweentwo broad social accounts: (1) the money incomes of workers, capi-talists, politicians, and other members of society, profits of enterprises,and government spending and (2) the social surplus, that is, con-sumption, investment, and government goods and services (Miller andBlair 2009; Olsen 2011). They exist because the social surplus needsto be accessed qua distributed in a manner that maintains theeconomy as a going concern and particularly a capitalist goingconcern. Consequently, class and agency-linked incomes are associ-ated with agent-created goods and services. Managers and owners ofenterprises use their business income, that is, profits, to purchase fixedinvestment goods produced by other enterprises, while workers usetheir wage incomes to purchase consumption goods and the state usesits state money to purchase government goods, both of which are alsoproduced by capitalists.

The particular forms that the linkages take involve exchange,markets, and state money, but they are based on a set of socialrelationships specific to capitalism. That is, under capitalism thereexists a set of property rights that vest the ownership of the pro-duced means of production and output in a group of actingpersons, either business people or the corporate enterprise; and anassociated set of legal rights that validate and “empower” a hierar-chical organizational structure that enables the board of directorsand senior management of business enterprises to unilaterally directtheir activities. These two groups of acting persons—businesspeople/corporate enterprise and members of boards of directors/senior management—constitute the capitalist class. In addition, thestate, as opposed to the political elite, owns its activities and “prop-


erty” while the elite, which also consist of acting persons, have thelegal authority to direct its activities. Thus the combination of thecapitalist class and the political elite constitutes the ruling classthat owns the means of production, and output and directs theeconomic and political activities of enterprises and the state. Incontrast, there is a second class of acting persons who engage inthe production of the output but do not own it or the means ofproduction by which it is produced and who engage in activitiesthat provide government services; and neither can in any substan-tive sense direct, determine, or control the “working” activities inwhich they are engaged. These private and public sector employeesconstitute the working class. Finally there is a third class of actingpersons who are not engaged in social provisioning activities,such as children, retirees, and others that constitutes the dependentclass.

As noted above, it takes the entire going plant of the economy toprovide for social provisioning and thus ensure the survival andcontinuation of households, business enterprises, and the state. Thiscombined with the dominance of the ruling class means that thesocial provisioning process involves market exchange, which hasfour implications. First, all goods and services, Q, are produced forexchange, but once they are brought for their usefulness, they ceasefor the most part to be commodities, that is, to be offered for furtherexchange. Secondly, exchange is carried out in markets andinvolves prices hence the only analytical-theoretical starting point isa system of systematic, coordinated, and unending multipleexchanges involving state money. The third implication is that pricesare state money prices denominated in the state monetary unit andhence are abstract indexes of credit qua debt obligations that arenot grounded intrinsically in the commodities themselves. Finally,the last implication is that exchange, whether money for goods,services, or labor power or vice versa, arises from the need ofhouseholds to gain access to a state-money monetized social pro-visioning process. The social relationship between the ruling classand the working and dependent classes combined with the former’scontrol and use of state money produces a particular symbioticrelationship that defines capitalism. That is, the social relationship


between the ruling class and the working and dependent classes isthat the former owns the productive and administrative capabilitiesunderpinning social provisioning, has the social power to direct it,and controls the access to state money that is necessary for accessto social provisioning, while the latter have none of the above. Thistripartite social relationship defines what is meant as capitalism as asocial, political, and economic system embedding the provisioningprocess; and in doing so, it determines the particular structural formof the linkages between the money incomes of workers, managers,and other members of society, profits of enterprises, and state“money income” and expenditures on the social surplus (Wray 1998,2003; Bell 2001).

Government Expenditures, State Money, and the Banking Sector

Since all outputs are commodities that are exchanged in markets, theyhave prices in terms of state money. Hence, letting p = (p1, . . . , pm) bea column vector of state money prices of all m goods and servicesproduced in the economy, p1 = (p1, . . . , pn) be a column vector ofprices of intermediate inputs, and p2 = (pn+1, . . . , pm) be a columnvector of all surplus goods and services, then the total value of thetotal social product is QTp, QT

1p1 is the total value of the intermediateinputs, QT

2Ip2 is the total value of investment goods, QT2Gp2 is the total

value of goods and services purchased by government, QT2Cp2 is the

total value of consumption goods and services, and the total value ofthe social surplus is

Q p Q p Q p Q p2 2 2 22T

2GT

2CT

2IT .= + + (13)

Consequently, to gain access to social provisioning, it is necessary thatall household incomes, enterprise revenues, and government expen-ditures be denominated in state money.

In terms of state money, government expenditures are equal to itspurchases of final goods and services, to the wages and salaries ofgovernment employees and politicians, to government paymentsthat are politically qua administratively determined incomepayments to the dependent class (GPd), and to government interest


payments to business enterprises (GPib), banks (GPiB), and house-holds (GPih) for holding state financial assets, that is, governmentbonds:

GOV GP GP GP GP

GP

E 2GT

41 d ib iB ih

2GT

41 4

= + + + + += + +

Q p L w

Q p L w

2

2(14)

where GOVE is total government expenditures;QT

2Gp2 is government expenditures on goods and services;w = (w1, . . . , wz) is a column vector of state money wagerates;L41w is the government’s wage bill; and

GP GP GP GP GP .4 d ib iB ih= + + +

Because government expenditures are credited to bank accounts in thebanking system, enterprises, individuals, and households must use statemoney for provisioning and reproduction purposes and all enterprisesmust accept it and utilize the banking system for making payments andreceiving revenues. In addition, since the government does not actuallyproduce Q2G or the consumption goods and services purchased bygovernment employees, politicians, and the dependent class, govern-ment expenditures are directly and indirectly spent on outputs ownedby business enterprises and show up as a component of their profits andhence in the total profits for the economy—so the more the statespends, the more profits (given tax rates) the capitalist class receives.Because profits are also generated by expenditures on fixed investmentgoods, total profits are equal to investment and government expendi-tures after taxes. This means government-generated profits are con-verted into financial assets through the purchase of government bondsby non-bank and bank corporate enterprises, and by households via thedistribution of dividends out of profits.4

The symbiotic relationship of the state and its governing acti-vities and the capitalist class regarding state money creates bankingactivities distinct from the productive activities in the basic andsurplus goods sectors that are managed by capitalists, which entails


the existence of a separate banking sector. So the bankingsector’s stock-flow “schema of production” draws upon a stockof fixed investment goods (KS3), financial assets—governmentbonds (FASGB3) and bank loans (FASBL3), and financial liabilities—deposit accounts of business enterprises and households (LBS3),utilizes intermediate inputs and labor power, income from the gov-ernment bonds and loans minus the costs of demand deposits toproduce qua create bank loans that are purchased by enterprisesand households at the current bank interest rate:5

K G LS3, ,FA LB : QS3 S3 31 31 3L⊕ → (15)

where KS3 is a row vector of kk fixed investment goods and used inthe production of bank loans;FAS3 = FASGB3 + FASBL3 is the total stock of financial assets of thebanking sector and is a scalar;6

G31 is a m + 1 row vector of n intermediate inputs used in theproduction of bank loans;L31 is a m + 1 row vector of z labor power skills used in theproduction of bank loans; andQ3L is a scalar and the amount of bank loans made toenterprises and households.

Since enterprises require bank loans for working capital on acontinuous basis and for, at times, long term investment projects, theyhave a stock of financial liabilities. Similarly, households take out bankloans to purchase various goods and services needed for householdsocial activities and so have a stock of financial activities. Finally, thestate carries out government expenditures that are not completelycompensated by taxes and so has a stock of financial liabilities calledthe national debt that is represented by the outstanding governmentbonds owned by non-bank and bank enterprises and by households.Combining this with Equations (14) and (15), the model of theproductive structure of the social provisioning process (Equation (12))is broadened to include a qualitative-descriptive model of the financialstructure of the economy with stock-flow, social accounting consistentrelationships of financial assets, and liabilities that produces socialactivities:


SFSA Model of the Productive and Financial Structure of the SocialProvisioning Process

Basic Goods Sector K FA LB : G LSurplus Goods Sector

S1 S1 S1 11 11 1, , ⊕ → QKK FA LB : G L

Banking Sector FAS2 S2 S2 21 21 2 2G 2C 2I

S3

, ,,

⊕ → = + +Q Q Q QKS3 ,, LB : Q FA

LBState , LB : GP

S3 31 31 3L S3

1,2,5

S4 S4 2GT

41 4

G L

K Q L

⊕ → →→

⊕ ⊕ → GGS ,Household FA LB : HSAEnterprise K

F4 S4

S5 S5 2CT

2IT

F1

,,

K KQQ

→→→ −33 S1 3

S4 SG

K

Financial Structural Balances National Debt: LB FA

→

=

−

BB1 3,5

SBL3

S3

Bank Loans: FA LBBank Demand Deposits: LB

−

==

1 2 5, ,

FFASDD1,2,5

(16)

where FAS1 and LBS1 are n ¥ 1 vectors of the stock of financialassets–government bonds (FASGB1) and demand deposits(FASDD1)—and liabilities—bank loans (LBS1)—associated withthe production of intermediate inputs or basic goods;FAS2 and LBS2 are m - n ¥ 1 vectors of the stock of financialassets—government bonds (FASGB2) and demand deposits(FASDD2)—and liabilities—bank loans (LBS2)—associated withthe production of the social surplus;FAS3 and LBS3 are scalars and the stock of financial assets—government bonds (FASGB3) and bank loans (FASBL3)—andliabilities—demand deposits (LBS3)—associated with the pro-duction of bank loans;LBS4 is a scalar and is the stock of financial liabilities (nationaldebt) associated with providing government services; andFAS5 and LBS5 are scalars and are the stock of financialassets—government bonds (FASGB5) and demand deposits(FASDD5)—and liabilities—bank loans (LBS5)—associatedhousehold activities.

The model shows that the national debt consists of the governmentbonds are that held by bank and non-bank enterprises and byhousehold; thus an increase in the national debt arising from govern-ment expenditures exceeding taxes increases private sector and


household holdings of government bonds and hence their incomesand profits. Enterprises and households also take out bank loans(liabilities), which simultaneously create financial assets for thebanking sector; but since bank loans are deposited in banks (thuscreating financial assets), they also create banking sector liabilities.Therefore, an increase in bank loans increases at the same timebanking sector financial assets and liabilities. In short, governmentdecisions to spend (given tax rates) and enterprise and householddecisions to take out bank loans create, drive, and change the econo-my’s financial structure.

Profits, Incomes, and the Social Surplus

To simplify the analysis, gross profits are defined as the differencebetween intermediate and labor input costs and revenues; thus, itincludes depreciation (which is an “income” stream to the enterprise)and interest income for the banking and non-banking enterprises. So,drawing on Equations (12)–(16), gross profits in a state moneyeconomy are:

ΠGET

3 D S3 31 1 31G L TR i LB= ( ) − +[ ] + − − +[ ]Q p e p w G p L w1 (17a)

Π Π ΠGE GNB GB= + (17b)

where PGE is a scalar and the total gross profits of the economy;QTp is the total value of the total social product;Gp1 is the value of the intermediate inputs by product usedin the production of the social product;Lw is the wage bill by product incurred in the production ofthe social product;TR3 is the total interest income of the banking sector and isequal to interest income from government bonds (iGFASGB3)plus interest income from bank loans (iBpFASBL3);iG is the rate of interest on government bonds;iBp is the rate of interest on past bank loans;iDLBS3 is the interest costs of demand deposits to the bankingsector;


iD is the rate of interest on demand deposits set by the banks;G31p1 is the value of the intermediate inputs by product usedin the production of the bank loans;L31w is the wage bill by product incurred in the production ofthe bank loans;PGNB is the total gross profits of the non-banking sector; andPGB is the total gross profits of the banking sector.

Because demand deposits and interest payments on bank loans area cost and income to the banking and non-banking sectors, grossprofits of the economy reduces to net profits (PNE), depreciation(DE), interest on government bonds (that is, government interestpayments to banks and non-banks enterprises—Equation (14)), andhousehold interest income (HII), which is the difference betweenthe interest income made on loans to the household sector(iBpFAHSBL3) minus the interest payments made on householddemand deposits (iDLBHS3):

Π Π ΠGE NE G SGB1 3 E NE E Ei FA D HII GP D HII= + + + = + + +− (18)

where GPE = GPiB + GPib is government interest payments to enter-prises; and

HII i FAH i LBHBp SBL3 D S3= − .

Profit and income taxes (as well as other payments to the state) arenecessary to maintain the demand for state money; thus with regardto profits, there is a profit tax, tp. In addition, the capitalist classallocates a percentage of its profits to dividends, and the rest isretained to purchase fixed investment goods, reduce liabilities, andacquire new government bonds. So net profits after taxes are distrib-uted between dividends and retained earnings:

Π Π ΠGE p GRE p GD p1 t 1 t 1 t−( ) = −( ) + −( ) (19a)

Π Π ΠGEat GREat Gdat= + (19b)

where PGE(1 - tp) = PGEat is net profits after taxes;


PGRE(1 - tp) = PGREat is retained earnings after taxes used topurchase fixed investment goods and government bonds, andto make payments to retire their bank loans; andPGD(1 - tp) = PGDat is dividends to be distributed to rulingclass households.

From the above, the link between retained profits after taxes and fixedinvestment goods, assets, and liabilities is

ΠGREat 2IT

BE BEFA LB= + +Q p2 (20)

where FABE is the amount of government bonds purchased by bankand non-bank enterprises; andLBBE is the amount of liabilities (LBS1,2) paid off by non-bankenterprises.

In addition, dividends are distributed to ruling class households,which use them to purchase government bonds (FA5RC):

ΠGDat 5RCFA= . (21)

Thus, total profits after taxes resolves into the purchase of investmentgoods and supporting production (QT

2Ip2 + LBBE) and the purchase ofgovernment bonds (FABE + FA5RC), which implies that decisions toproduce investment goods, make government expenditures, and pushworkers into debt are the primary factors that determine profits (Erdosand Molnar 1990).

Finally, turning to households and their incomes, working classand dependent class households have bank loans and demanddeposits, but do not own government bonds. Thus they spend theirentire post-tax income (which consists of wages, government pay-ments, and interest payments on demand deposits) on consumptiongoods and services and paying off bank loans (LBHWDC) while main-taining their demand deposits. On the other hand, the ruling classspends only its post-tax salary and interest income on consumptiongoods and services, paying off bank loans (LBHRC) and maintainingits demand deposits and utilizes its post-tax dividend income topurchase government bonds. Thus, drawing from Equations (14),


(15), and (21), the link between total income and consumptiongoods and services is

e wL* 1 t GP 1 t i FA 1 t GP 1 t

+ 1 t

i d i D SDD5 i ih i

GD p

( ) −( ) + −( ) + −( ) + −( )−(Π )) −( ) = + +

= +( ) + +

1 t FA LB

FA LB

i 2CT

5RC 5

2CT

5RC 5

Q p

Q p

2

2α β(22)

where e(L*w) is the total wage bill of the economy;ti is an income tax;iDFASDD5 is interest income from demand deposits;FA5RC is the amount of government bonds purchased by rulingclass households;LB5 is the amount of banking sector liabilities paid off by thehouseholds (LBHRC + LBHWDC);anda (b) is the percentage of consumption goods purchased bythe working and dependent (ruling) classes where a + b = 1.

The social accounting linkages between income-profit-governmentspending and the surplus delineated in Equations (13), (14), and(20)–(22) implies that incomes and profits before taxes equals thevalue of the social surplus; that the current government deficit isequal to the value of government bonds purchased by enterprisesand the ruling elite; and that taxes represent the government’sprocurement of “free” labor power and goods and services forthe benefit of society as a whole as interpreted by the rulingclass.

Social Provisioning as a Going Business

Combining the models of the productive and financial structure ofthe social provisioning process (Equations (13) and (16)) and theabove income-surplus linkages (Equations (18)–(22)), the stock-flow,social accounting descriptively consistent model of the monetarystructure of the social provisioning process that produces social activi-ties is the following:


SFSA Model of the Monetary Structure of the Social Provisioning Process

Basic Goods Sector K FA LB : G L Q

Surplus Go

S1 S1 S1 11 1 11 d1 1, , p w p1+ + =Poods Sector K FA LB : G L QS2 S2 S2 21 1 21 d2 2 2G

T2 2C

T2, , p w p Q p Q p2+ + = → + +P QQ p

K G p L w

2IT

2

S3 S3 S3 31 1 31 GB 3 3LBanking Sector FA LB : TR Q, , + + = → +Π 1 ii FA

LB

State LB : GP GP GP

B S3

S1 3,5

S4 S4 2GT

2 41 d ih

( ) →→

+ + + +−

K Q p L w, EE F4 S4

S5 S5 i d i D

GS

Household FA LB : L* 1 t GD 1 t i F

→ →( ) −( ) + −( ) +

,

,

K K

e w AA ( t ) + GP 1 t

1 t 1 t FA

SDD5 i ih i

GD p i 2CT

5R

1 − −( ) +−( ) −( ) = +( ) +Π α β Q p2 CC 5 S5

S5

GRE p 2IT

BE BE

LB HSA FA

LB

Enterprise 1 t FA LB

+ →

−( ) = + + →

, ,

Π Q p2 KK FA LB

Financial Structural Balances National D

S1 3 S1 3 S1 3− − −→, ,

eebt LB FA

Bank Loans: FA LB

Bank Demand

S4 SGB1 3,5

SBL3 1,2,5

==

−

DDeposits LB FA

Current Financial Balances Government

S3 SDD1,2,5=

DDeficit: GOV Taxes FA FA

Total Profits After Taxes:

E BE 5RC

GE

− = +

Π aat 2IT

BE BE 5RCLB FA FA= + + +Q p2

(23)

where P1 is a n ¥ 1 vector of profits for each intermediate input;P2 is a m - n ¥ 1 vector of profits for each surplus product; andP3 is a scalar of profits for financial assets.

The model clearly distinguishes between stocks and flows andaccounts for the social destinations of the various flows. Forexample, it shows the flows of intermediate inputs into the surplusgoods sector, and the flows of the various surplus goods and ser-vices into their social accounts of households, enterprises, and thestate. At the same time, the model mirrors this flow of goods andservices with the flow of wage, profit, and state incomes requiredby households, the state, and enterprises to purchase them. In thismanner, the monetized social provisioning process is stock-flow,social accounting consistent and hence acquires the structure of agoing business. With the provisioning process as a going plant, theflow of state money ties together market transactions and non-market activities that ensure the continuation of household activitiesand government services through time. The model also implicitlyidentifies the central decisions that drive the provisioning process:the decisions that determine the social surplus, employment, prices,


profits, household incomes, and interest rates. Because the rulingclass (as opposed to the capitalist class by itself) through its actingpersons has the productive and administrative capabilities and thelegal rights to these decisions, it can direct the provisioning processin its own current and changing future interests. Therefore, thesocial provisioning process is a socially sustainable process in whicheach state money transaction is a manifestation and reproduction ofthe capitalist relationships and hence both sustains and promises afuture for the ruling elite and their dependents (Bortis 1997, 2003;Lee 1998; Levine 1978; Kregel 1975).

Agency, Organizations, and Social Provisioning

As it is, the monetary structure model lacks agency that is actingpersons. Consequently, the key variables that “drive” the provision-ing process, from the social surplus and prices to interest rates andgovernment payments, lack determination. Agency is vested in theacting person (O’Boyle 2010, 2011), which in turn is embedded invarious social relationships that give meaning, direction to his/herdecisions and acts. That is, the acting person has an ongoing,repeated pattern of culturally particular, ethically informed socialrelationships. Moreover, in a transmutable world where certain endsare not known, trust, fairness, and inter-personal comparisons alongwith social relationships affect every decision made by an actingperson. Finally, the acting person makes decisions and takes actionsto achieve something that is relationally social. Taken together, alldecisions regarding prices, social surplus, interest rates, and otherkey variables are social, non-optimal acts taken to achieve outcomesthat affect the social provisioning process and have an impact ongovernment services and household social activities. Thus, the actingperson is not a neutered individual, isolated agent, or a represen-tative agent for the entire economy; and neither is the acting personpassive, simply reactive, and unwilling to make decisions and inten-tionally act to change the structures of the provisioning process andthe acting person itself. Rather, the acting person has the remarkableproperty of making the social provisioning process non-self-regulating.


For acting persons to act they need to be located in organizationsand institutions, thus analytically transforming the latter into actingpersons as well that make decisions and carry out intentional activi-ties. Under capitalism, the social provisioning process has two central“acting” organizations, the state and the business enterprise, and onecentral “acting” institution, the household. There are additional actingorganizations that, through their actions on specific variables, assist ingoverning economic activity and access to social provisioning, such asmarket governance organizations (for example, cartels, price leaders,and government regulatory commissions) and class-based organiza-tions (for example, trade unions).7 Specifically, the key decisionsemanating from business enterprises set prices and private sectorinterest rates, demand investment goods and bank loans, determinethe production of consumption goods, employment, profit mark ups,and dividends and retained earnings, affect if not determine wagerates and salaries, and influence taxes on profits; decisions emanatingfrom the state set state interest rates on government bonds and taxrates on incomes and profits, demand government goods and services,determine government payments, employment, and wages and sala-ries, and influence private sector interest rates; decisions emanatingfrom households allocate their income to purchase the various con-sumption goods and services produced by enterprises, demand bankloans, and influence wages and salaries; decisions emanating frommarket governance organizations affect if not determine prices, privatesector interest rates, wages and salaries, and profit mark ups; anddecisions emanating from trade unions influence if not determineworking conditions hence employment and wages and salaries—seeTable 1.

Modeling the Economy as a Whole

Combining the monetary structure of the social provisioning process(Equation (23)) with acting organizations and institutions (Table 1)creates the economic model of the social provisioning process thatproduces social activities:


Tab

le1

Age

ncy

and

Key

Dec

isio

ns

Key

Dec

isio

nVar

iable

s

Org

aniz

atio

ns

and

Inst

itutio

ns

with

Age

ncy

Busi

nes

sEnte

rprise

Stat

eH

ouse

hold

Mar

ket

Gove

rnan

ceO

rgan

izat

ions

Cla

ss-B

ased

Org

aniz

atio

n—

Tra

de

Unio

n

Soci

alSu

rplu

sD

eman

d—

Q2I

Det

erm

ine—

Q2C

Dem

and—

Q2G

Choose

among—

Q2C

Ban

kLo

ans

Dem

and—

LB1,

2

Det

erm

ine—

Q3L

Dem

and—

LB5

Em

plo

ymen

tD

eter

min

e—L 1

1,

L 21,

L 31

Det

erm

ine—

L 41

Det

erm

ine/

Influen

ce—

L 11,

L 21,

L 31,

L 41

Price

sSe

t—p

Set/

Affec

t—p

Wag

es/S

alar

ies

Det

erm

ine/

Affec

t—w

Det

erm

ine—

wIn

fluen

ce—

wAffec

t—w

Det

erm

ine/

Influen

ce—

w

Pro

fit

Mar

k-U

ps

(pm

u)

Det

erm

ine—

pm

uD

eter

min

e/

Affec

t—pm

u

Div

iden

ds/

Ret

ained

Ear

nin

gs

Det

erm

ine—

PG

RE,

PG

D

Inte

rest

Rat

esSe

t—i B

,i D

Set—

i GIn

fluen

ce—

i B

Set/

Influen

ce—

i B,

i D

Gove

rnm

ent

Pay

men

tsD

eter

min

e—G

P4

Influen

ce—

GP

d

Tax

esIn

fluen

ce—

t pD

eter

min

e—t i,

t p


Economic Model of the Social Provisioning Process

Structures

p w p1Basic Goods Sector K FA LB : G L QS1 S1 S1 11 1 11 d1, , + + =P 11

S2 S2 S2 21 1 21 d2 2 2GTSurplus Goods Sector K FA LB : G L Q, , p w p Q2+ + = →P pp Q p Q p

K G p L w

2 2CT

2 2IT

2

S3 S3 S3 31 1 31 GBBanking Sector FA LB :

+ ++ +, , Π == → +( ) →

→+ +

−

TR Q i FA

LB

State LB : G

3 3L B S3

S1 3,5

S4 S4 2GT

2 41

1

K Q p L w, PP GP GP GS

Household FA LB : L* 1 t GD

d ih E F4 S4

S5 S5 i d

+ + → →( ) −( ) +

,

,

K K

e w 11 t i FA t GP 1 t

1 t 1 t

i D SDD5 i ih i

GD p i 2C

−( ) + −( ) + −( ) +−( ) −( ) = +( )

1

Π α β QTT5RC 5 S5

S5

FA LB HSA FA

LB

p2 + + → , ,

(24)

Enterprise 1 t FA LB K FA LBGRE p 2IT

BE BE S1 3 S1 3 S1 3Π −( ) = + + → →− − −Q p2 , ,

FFinancial Structural Balances National Debt LB FAS4 SGB1 3,5= −

BBank Loans: FA LB

Bank Demand Deposits LB FA

SBL3 1,2,5

S3 SDD1,

== 22,5

ECurrent Financial Balances Government Deficit: GOV Taxes F− = AA FA

Total Profits after Taxes: LB FA

BE 5RC

GEat 2IT

BE BE

+

= + + +Π Q p2 FA .

Acting Organizations Key Decision Variables

Bu

5RC

Agency

ssiness Enterprise LB L , L , , pmu,2I 2C 3L 11 21 31 GQ Q Q L p w, , , , , ,,1 2 Π RRE GD B D p

2G 41 G B 4 i p

2C

i i , t

State , , , i , i , GP t , t

Household

, , ,

,

ΠQ L w

Q ,, LB ,

Market Governance , , pmu, i , i

Trade Union L , L ,

5

B D

11 21 3

w

p w

L 11 41 d, , , GPL w

The model descriptively links agency with key decisions qua eco-nomic variables embedded in the economic structures, thus linkingagency with structures. Decisions about any economic variable, givenstructures, pushes the provisioning process in a particular directionand doing so generates transfactual outcomes. But those same deci-sions may also transform the structures (and the economic variablesand acting organizations as well)—slowly most of the time but ratherquickly at other times. This suggests that both structures and actingorganizations are historically contingent, that is, vary as capitalismchanges. Moreover, given the social nature of the acting person, theacting organization is not separable from society. As a result, the


economy and its economic activities are interlinked with variouscultural values (such as individualism and egalitarianism) that areevaluative criteria for establishing which social activities are worth-while and desirable; with norms and beliefs (such as property rightsand the work ethic) that explain or justify particular social activities;with societal institutions (such as the legal system and specificallycompetition and labor laws, state money, and markets); and withtechnology (such as technical and social knowledge necessary forproducing goods and services). These components of the social fabricaffect the acting organizations and hence the pattern and organizationof economic activities delivering the goods and services that makegovernment services and household social activities possible: theygive this delivery mechanism or the social provisioning process itsmeaning, its value (Hayden 1982, 1986, 2006, 2011).

The penultimate step to descriptively model the economy as awhole is to connect the social fabric to acting organizations—seeFigure 1. The social fabric, as noted above, consists of cultural values,norms and beliefs, societal institutions, and technology; and theyinfluence the actions of the acting organizations and institutions. Inturn, the acting organizations and institutions act on the social provi-sioning process and social activities, and the latter has an impact onthe provisioning process. Thus, in Figure 1 the model of the economyas a whole consists of the economic model of the social provisioningprocess (acting organizations and the provisioning mechanism) beingbracketed at one end by the social fabric and at the other end bygovernment services and household social activities. Hence, not onlyis the model of the economy socially encased, so is, quite clearly, theeconomic model of the social provisioning process. Therefore, allsocial provisioning qua economic activity and decisions are sociallyembedded, impregnated.

Since agency and structures change, capitalism and its social pro-visioning process change as well. In particular, the structures andagency that constitute capitalism can be relatively stable for a periodof time, followed by a much shorter period of time in which theychange more quickly, therefore giving rise to an ongoing stage-crisis-stage-crisis conceptual history of capitalism. Hence, the last step todescriptively model the economy as a whole is to historically contex-


Figu

re1

His

torica

llyG

rounded

Model

of

the

Eco

nom

yas

aW

hole

His

tori

cal

Stag

e of

C

apit

alis

t D

evel

opm

ent

Ideo

logy

C

apit

al-C

apit

al H

arm

ony,

Cap

ital

-Lab

or D

iffe

renc

es, S

tate

’s R

ole

Ideo

logy

Eco

nom

y as

a

Who

le

Soc

ial F

abri

c A

ctin

g O

rgan

izat

ions

and

Ins

titu

tion

s P

rovi

sion

ing

Mec

hani

smS

ocia

l Act

ivit

ies

Col

umn

Del

iver

ing,

Row

s R

ecei

ving

Cul

tura

l Val

ues,

N

orm

s, I

nsti

tuti

ons,

T

echn

olog

y

Bus

ines

s E

nter

pris

e S

tate

H

ouse

hold

M

arke

t G

over

nanc

e T

rade

U

nion

S

ocia

l P

rovi

sion

ing

Pro

cess

Gov

ernm

ent

Ser

vice

s H

ouse

hold

S

ocia

l A

ctiv

itie

s C

ultu

ral V

alue

s,

Nor

ms,

In

stit

utio

ns,

Tec

hnol

ogy

Bus

ines

s E

nter

pris

e In

flue

nce

Sta

te

Infl

uenc

e

H

ouse

hold

In

flue

nce

Mar

ket

Gov

erna

nce

Infl

uenc

e

ec ne ul f nIno i n

Uedar

T Soc

ial

Pro

visi

onin

g P

roce

ss

A

genc

y A

genc

y A

genc

y A

genc

y A

genc

y

Str

uctu

ral

Impa

ct

Str

uctu

ral

Impa

ct

Gov

ernm

ent

Ser

vice

s

Dem

and/

In

flue

nce

Dem

and/

In

flue

nce

Dem

and/

In

flue

nce

Dem

and/

In

flue

nce

Dem

and/

In

flue

nce

Infl

uenc

e/

Impa

ct

Hou

seho

ld

Soc

ial

Act

ivit

ies

In

flue

nce

Infl

uenc

e D

eman

d/

Infl

uenc

e

In

flue

nce/

Im

pact


tualize it (McDonough 2010, 2011). Each historical stage of capitalismis distinguished by its ideology, by capital-capital harmony or com-petitive relationships between business enterprises, by its class-basedcapital-labor differences or nature of workplace control, and by thestate’s role in the economy.8 These features establish the concretehistorical form of the model of the economy as a whole and hence ofthe social provisioning process. In particular, for a given stage ofcapitalism, ideology informs both the social fabric and social activities;while the capital-capital harmony specifically informs market gover-nance, the capital-labor differences specifically informs trade unions,the state’s role specifically informs the state, and all three generallyinform all acting organizations and institutions and the provisioningmechanism as well. With this last step, the historically grounded,descriptively consistent model of the economy as a whole can berepresented (see Figure 1) as a series of linked components: historylinked to the model of the economy, social fabric linked to theeconomic model of the social provisioning process, agency linked tostructures, and social provisioning linked to social activities.

Conclusion

The implications of the model for heterodox economics are visible ona number of different levels. First, it is clear from the way the modelof the economy was constructed that it draws upon different modelingapproaches and melds them into a coherent whole. In particular, itshows that it is possible to integrate the Sraffian social surplusapproach, with the post-Keynesian emphasis on state money, finance,and uncertainty, with the Marxist concern with classes, with theinstitutionalist social fabric matrix approach, with the acting person ofsocial (and feminist) economics, and with the critical realist method-ology of structures, agency, and transmutable reality and still producea coherent model. Thus, there is little substance to the often voicedview that heterodox economics consists of a disparate group oftheories and approaches that cannot be brought together and inte-grated into a single theoretical approach. Secondly, the model isempirically grounded and draws upon modeling and data found inflow of funds data (http://www.federalreserve.gov/apps/fof/


Default.aspx) and in input-output analysis and GNP data that isgenerated by governments around the world—for example, see Millerand Blair (2009) and the U.S. Department of Commerce, Bureau ofEconomic Analysis: http://www.bea.gov/index.htm. Moreover, thesocial fabric approach has been used for empirical research (Natara-jan, Elsner, and Fullwiler 2009). These two points together lead to theconclusion that this model of the economy is well-grounded andalmost theoretically unremarkable, which suggests that it should bewidely used by heterodox economists.

While the various components of the model are familiar to hetero-dox economists and empirically well-grounded, the way it is theoreti-cally constructed makes it quite different. For example, the modelmakes it quite clear, with, for example, its prices as credit-debtindexes, circular production and the absence of scarcity, and theacting person, that heterodox economics is theoretically distinct frommainstream economic theory. Moreover, with agency and the provi-sioning process bracketed by the social fabric and social activities, thegoing economy as a whole cannot be reduced to simply a circuit ofcapital where the only interest of business enterprises and the capi-talist class is to make more money. Finally, the model rejects themicroeconomics-macroeconomics divide; rather, there is the economyas a whole, which has emergent interconnected components that canbe studied. Because this model of the economy is empirically well-grounded, theoretically coherent, includes components well-known toheterodox economists, and rejects mainstream economic theory, itshould be, in spite of its theoretical novelties, the model of choice forheterodox economists. In fact, it should be the only model of theeconomy as a whole that heterodox economist use.

Notes

1. To simplify the analysis, resources are omitted. However, this is not areal shortcoming since following institutional analysis, resources are a pro-duced means of production just like other intermediate inputs. Non-producedrelatively scarce inputs or factors of production simply do not exist (DeGregori 1985, 1987; Zimmermann 1951).

2. While scarcity is an organizing principle in mainstream economics, it isalso a theoretically incoherent concept—see Levine (1977: 180–186). The


problem with scarcity is that it is an asocial or pre-social concept being usedto organize explanations of what are inescapably social activities.

3. The banking sector and G31 and L31 will be introduced below.4. Beginning with Kalecki (1954: 242–243), this point is frequently argued

in post-Keynesian literature: see, for example, Erdos and Molnar (1980, 1983,1990), Molnar (1981).

5. In a chartalist monetary system where the state has a national debt andruns a current account deficit, banking system reserve requirements have noanalytical relevance.

6. It is assumed that the government backs all demand deposits at par, thusmaking demand deposits equivalent to state money.

7. There are also institutions within the business enterprise and the state,such as working rules, that help facilitate the articulating and defining ofobjectives and goals and the making of decisions to attain them.

8. In addition, there is an international dimension to capitalism, butbecause of space constraints, it will not be dealt with.

References

Bell, S. (2001). “The Role of the State and the Hierarchy of Money.” CambridgeJournal of Economics 25(2): 149–163.

Bortis, H. (1997). Institutions, Behaviour and Economics Theory: A Contribu-tion to Classical-Keynesian Political Economy. Cambridge: CambridgeUniversity Press.

——. (2003). “Keynes and the Classics: Notes on the Monetary Theory ofProduction.” In Modern Theories of Money: The Nature and Role of Moneyin Capitalist Economies. Eds. L.-P. Rochon and S. Rossi. pp. 411–474.Cheltenham: Edward Elgar.

DeGregori, T. R. (1985). A Theory of Technology: Continuity and Changes inHuman Development. Ames: Iowa State University Press.

——. (1987). “Resources Are Not: They Become: An Institutional Theory.”Journal of Economic Issues 21(3): 1241–1263.

Erdos, P., and F. Molnar. (1980). “Profit and Paper Profit: Some KaleckianEvolution.” Journal of Post Keynesian Economics 3(1): 3–18.

——. (1983). “An Answer to Asimakopulos’s Comment.” Journal of PostKeynesian Economics 6(1): 133–139.

——. (1990). Inflation and Recessions in the U.S. Economy in the 1970s: Price,Profit, and Business Cycles in Theory and Practice. Budapest: Akademiai.

Gehrke, C., and H. D. Kurz. (2006). “Sraffa on von Borkiewicz: Reconstructingthe Classical Theory of Value and Distribution.” History of PoliticalEconomy 38(1): 91–149.

Hayden, F. G. (1982). “Social Fabric Matrix: From Perspective to AnalyticalTool.” Journal of Economic Issues 16(3): 637–662.


——. (1986). “Values, Beliefs, and Attitudes in a Sociotechnical Setting.”Journal of Economic Issues 22(2): 415–426.

——. (2006). Policymaking for a Good Society: The Social Fabric MatrixApproach to Policy Analysis and Program Evaluation. New York:Springer.

——. (2011). “Assessment of the Possibility of Integrating the Social Structureof Accumulation and Social Accounting Matrix with the Social FabricMatrix Approach.” American Journal of Economics and Sociology 70(5):1208–1233.

Jo, T.-H. (2011). “Social Provisioning Process and Socio-Economic Modeling.”American Journal of Economics and Sociology 70(5): 1094–1116.

Kalecki, M. (1954/1990). Theory of Economic Dynamics. In Collected Works ofMichal Kalecki, vol. II, Capitalism: Economic Dynamics. Ed. J. Osiatynski.pp. 205–348. Oxford: Clarendon Press.

Kregel, J. A. (1975). The Reconstruction of Political Economy: An Introduc-tion to Post-Keynesian Economics. 2nd ed. London: Macmillan Press.

Kurz, H. D. (2006). “The Agents of Production are the Commodities Them-selves: On the Classical Theory of Production, Distribution and Value.”Structural Change and Economic Dynamics 17: 1–26.

Kurz, H. D., and N. Salvadori. (1995). Theory of Production: A Long-PeriodAnalysis. Cambridge: Cambridge University Press.

——. (2000). “Classical Roots of Input-Output Analysis: A Short Account of itsLong Prehistory.” Economic Systems Research 12(2): 153–179.

——. (2005). “Representing the Production and Circulation of Commodities inMaterial Terms: On Sraffa’s Objectivism.” Review of Political Economy17(3): 413–441.

——. (2006). “Input-Output Analysis from a Wider Perspective: A Comparisonof the Early Works of Leontief and Sraffa.” Economic Systems Research,18(4): 373–390.

Lager, C. (2006). “The Treatment of Fixed Capital in the Long Period.”Economic Systems Research 18(4): 411–426.

Lee, F. S. (1998). Post Keynesian Price Theory. Cambridge: CambridgeUniversity Press.

Lee, F. S., and T.-H. Jo. (2011). “Social Surplus Approach and HeterodoxEconomics.” Journal of Economic Issues 45(4): forthcoming.

Levine, D. P. (1977). Economic Studies: Contributions to the Critique of Eco-nomic Theory. London: Routledge and Kegan Paul.

——. (1978). Economic Theory: The Elementary Relations of Economic Life.London: Routledge and Kegan Paul.

Lowe, A. (1976). The Path of Economic Growth. Cambridge: CambridgeUniversity Press.

Lower, M. D. (1987). “The Concept of Technology Within the InstitutionalistPerspective.” Journal of Economic Issues 21(3): 1147–1176.


McCormick, K. (2002). “Veblen and the New Growth Theory: Community asthe Source of Capital’s Productivity.” Review of Social Economy 60(2):263–277.

McDonough, T. (2010). “The State of the Art of the Social Structure ofAccumulation Theory.” In Contemporary Capitalism and its Crisis. Eds. T.McDonough, M. Reich, and D. M. Kotz. pp. 23–44. Cambridge: Cam-bridge University Press.

——. (2011). “Social Structures of Accumulation: A ‘Punctuated’ View ofEmbeddedness.” American Journal of Economics and Sociology 70(5):1234–1247.

Molnar, F. (1981). “Consumers’ Investment Versus Capital Investment: AContribution to Contemporary Business Fluctuations.” Acta Oeconomica26(1–2): 133–155.

Mongiovi, G. (2011). “Demand, Structural Interdependence, and EconomicProvisioning.” American Journal of Economics and Sociology 70(5):1147–1174.

Miller, R. E., and P. D. Blair. (2009). Input-Output Analysis: Foundations andExtensions. 2nd ed. Cambridge: Cambridge University Press.

Natarajan, T., W. Elsner, and S. Fullwiler. (2009). Institutional Analysis andPraxis: The Social Fabric Matrix Approach. New York: Springer.

O’Boyle, E. J. (2010). “From Individual to Person: An Evolutionary ProcessGrounded in Human Communication.” In Looking Beyond the Individu-alism and Homo Economicus of Neoclassical Economics. Ed. E. J.O’Boyle. pp. 91–118. Milwaukee: Marquette University Press.

——. (2011). “The Acting Person: Social Capital and Sustainable Develop-ment.” Forum for Social Economics 40(1): 79–98.

Olsen, E. K. (2011). “Modeling the Economic Surplus in a SAM Framework.”American Journal of Economics and Sociology 70(5): 1175–1207.

Ranson, B. (1987). “The Institutionalist Theory of Capital Formation.” Journalof Economic Issues 21(3): 1265–1278.

Veblen, T. (1908). “On the Nature of Capital.” Quarterly Journal of Economics22(4): 517–542.

Wray, L. R. (1998). Understanding Modern Money: The Key to Full Employmentand Price Stability. Cheltenham: Edward Elgar.

——. (2003). “Seigniorage or Sovereignty?” In Modern Theories of Money: TheNature and Role of Money in Capitalist Economies. Eds. L.-P. Rochon andS. Rossi. pp. 84–102. Cheltenham: Edward Elgar.

Zimmermann, E. W. (1951). World Resources and Industries: A FunctionalAppraisal of the Availability of Agricultural and Industrial Materials.Revised ed. New York: Harper and Brothers, Publishers.


Documents

Modeling the Economy as a Whole: An Integrative Approach