Basics of the Wolfgang Stützel’s Balance Mechanics

Introduction, Purpose. The article considers the aspects of the Balance Mechanics developed in the middle of the XXth century by the German economist Wolfgang Stützel. Balance Mechanics aggregates all the interactions between the financial and real economic sectors. Since general orthodox neoclassical equilibrium DSGE models failed to predict the global financial crisis of 2007-2008, and due to their fundamental failure to simulate crisis situations in the economy, the post-Keynesian stock-flow consistent approach appears to be the main alternative in building macroeconomic models. Methods. A key feature of the SFC models is that they aggregate the full integration of real and financial sectors of the economy. These models use the system based on double-entry and four-entry accounting principles. Results. On the basis of the analysis of Stützel’s Balance Mechanics, it is possible to define some important concepts and terms, i. e. expenditure and revenue which influence the net value of financial assets of the economic agent; payments and revenue receipts which influence the volume of payment assets of the economic agent. It has been established that the total amount of all expenses shall be necessarily equal to the total income. Therefore, the total amount of financial savings (changes in the net financial value of assets) of all the economic agents in a closed economy (or world economy) always equals zero. The only way to provide the economy with savings is to increase the amount of non-financial assets, i. e. physical capital. Discussion. In accordance with Stüzel’s approach, the analysis of the macroeconomic paradoxes performed on the basis of neoclassical approach involves the “fallacious composition”, when the facts and assumptions which are true to an economic agent or a group of economic agents are fallaciously and unreasonably transferred to the whole aggregate of the economic agents.

Stock Flow Consistent Models, Stützel’s Balance Mechanics, macroeconomic models, Stock Flow Consistent models, loanable funds theory, paradox of parsimony, financial and non-financial assets

1. Bezemer D. Finance and Growth: When Credit Helps, and When It Hinders Axica Conference Center & Federal Foreign Office, Berlin. April 2012, pp. 12-15

2. Bezemer D. ‘Understanding Financial Crisis Through Accounting Models’. Accounting, Organizations and Society, 2010, vol. 26, pp. 676-688

3. Mankiw G. N. Macroeconomics, Third Edition, New York: Worth Publishers, 1997. P. 608

4. Bernanke B., Gertler M., Gilchrist S. The Financial Accelerator and the Flight to Quality,” The Review of Economics and Statistics, 1996, no. 78 (1), pp. 1-15

5. Godley W., Lavoie M. Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth, Palgrave MacMillan, New York, 2007, p. 576

6. Godley W., Cripps Francis T. Macroeconomics. Oxford University Press: London, 1983, p. 320

7. Godley W. Seven unsustainable processes. Levy Institute of Economics, Strategic Analysis, January 1999, p. 28

8. Караев А. К., Мельничук М. В. Использование SFC-моделирования для целей долгосрочного прогнозирования // Бизнес в законе. Экономико-юридический журнал. 2014. № 5. C. 320-325

9. Karaev A. K., Melnichuk M. V. Using SFC-modeling for long-term forecasting. Biznes v zakone. Jekonomiko-juridicheskij zhurnal = Business in law. Economic and legal journal, 2014, no. 5, pp. 320-325. (In Russ.)

10. Stützel W. Volkswirtschaftliche Saldenmechanik, Tübingen, J.C.B. Mohr (Paul Siebeck), 1978, p. 290

11. Stützel W. Paradoxa der Geld- und Kreditwirtschaft. Aalen, ScientiaVerlag, 1979, p. 210

12. Lavoie M. Post-Keynesian Economics: New Foundations, Edward Elgar Publishing, 2014, p. 688

13. Lindner F. “Saving does not finance Investment: Accounting as an indispensable guide to economic theory”. IMK working paper, no. 100. Düsseldorf: Macroeconomic Policy Institute (IMK), 2012. URL: http://www.boeckler.de/pdf/p_imk_wp_100_2012.pdf (аccessed 5 Feb 2018)

14. Lindner F. Does Saving Increase the Supply of Credit? A Critique of Loanable Fund Theory. World Economic Review, 2015, vol. 4, pp. 1-26

15. Lindner F. Did Scarce Global Savings Finance the US Real Estate Bubble? The “Global Saving Glut” thesis from a Stock-Flow Consistent Perspective. IMK Working Paper 155-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute, 2015, pp. 1-36

16. Lindner F., Reissl S. Balance Mechanics and Macroeconomic Paradoxes, Manuscript, this article will be published by the Macroeconomic Policy Institute (IMK) upon completion, 2014, p. 31

17. Reissl S. A critique of Keen on effective demand and changes in debt. Real-World Economics Review, 72, 2015, pp. 96-117

18. Schmidt J. “Sparen - Fluch oder Segen? Anmerkungen zu einem alten Problem aus Sicht der Saldenmechanik,” in Martin Held, Gisela Kubon-Gilke, and Richard Sturn, eds., Normative und institutionelle Grundfragen der Ökonomik, Marburg: Metropolis, 2012, pp. 61-85

19. Schmidt J. “Reforming the Undergraduate Macroeconomics Curriculum: The Case for a Thorough Treatment of Accounting Relationships“. International Journal of Pluralism and Economics Education, vol. 8, no. 1, 2017, pp. 42-67

20. Schmidt J. Balance mechanics and business cycles, Paper prepared for the 21st FMM conference, Berlin, 9-11, Nov. 2017. URL: https://www.boeckler.de/pdf/v_2017_11_11_schmidt.pdf

21. Tarne R. Proposals for Monetary Reform - A Critical Assessment Focusing on Endogenous Money and Balance Mechanics, Paper for the FMM Conference 2016: Towards Pluralism in Macroeconomics? 20 Years-Anniversary Conference of the FMM Research Network, 2016, p. 34