What is 'Circuitism'

Circuitism helps explain how banks create money for production activities, how firms direct production, how workers contribute to production and consumption and how money from those activities then returns to banks. It is a macroeconomic theory.

BREAKING DOWN 'Circuitism'

Circuitism, which is also known as monetary circuit theory or the circulation approach, is a post-Keynesian theory of monetary economics based on Karl Marx's ideas about the M-C-M, or money-commodities-money, capital cycle.

Circuitism was developed after the Second World War and was primarily advocated by French and Italian economists such as Bernard Schmitt and Augusto Graziani.

Circuitism holds that money is created endogenously, or through economic variables, as opposed to through a central bank.The theory holds that money supply is based on money demand. Money is demanded to finance production, to trade goods and services, to save and to invest.  

In contrast to neoclassical economic theory, which emphasizes the role of the individual in the economy, circuitism emphasizes the roles of banks and firms. Further, according to this theory, employment and income levels are also determined by conditions determined by banks and firms.

Money Supply and Monetary Policy

Circuitism is one of many different macroeconomic monetary theories, which are theories about the creation and role of money supply in the economy. A country’s money supply is the entire stock of its currency and liquid instruments which are circulating at any given moment in time.

Unlike circuitism, many other economic theories hold that money is created through central banks, which can then control the size and growth of money supply as an economic tool to influence interest rates and, in turn, employment rates and economic growth. In the United States, the Federal Reserve is in charge of the country’s monetary policy.  

Generally, central banks use two different types of monetary policy. The first is expansionary monetary policy, in which case the bank increases the money supply to lower employment, boost private-sector borrowing and stimulate growth in the economy. The other is contractionary monetary policy, where the government slows down the growth of money supply to control inflation. This, however, can also increase unemployment and slow growth.

In fact, there is a school of economic thought, called monetarism, that hold that the total supply of money in an economy is the primary determinant of economic growth. This economic theory is associated with economist Milton Friedman who argued that the government should keep the money supply steady and expand it a little every year to allow for natural economic growth.

RELATED TERMS
  1. Expectations Theory

    The expectations theory uses long-term interest rates to forecast ...
  2. Accelerator Theory

    The accelerator theory is an economic theory whereby as demand ...
  3. Theory Of Price

    The theory of price is an economic theory whereby the price for ...
  4. Neutrality of Money

    The neutrality of money is an economic theory that states that ...
  5. Integrated Circuit Card

    An integrated circuit card is a type of payment or identification ...
  6. Rational Expectations Theory

    The rational expectations theory posits that individuals make ...
Related Articles
  1. Insights

    A Look at Fiscal and Monetary Policy

    Learn more about which policy is better for the economy, monetary policy or fiscal policy. Find out which side of the fence you're on.
  2. Insights

    Fiscal Policy vs. Monetary Policy: Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two courses of action: monetary policy or fiscal policy.
  3. Insights

    Monetarism: Printing Money To Curb Inflation

    Learn how Milton Friedman's monetarist views shaped economic policy after World War II.
  4. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  5. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  6. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  7. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  8. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
RELATED FAQS
  1. Who determines interest rates?

    Learn who determines interest rates. In countries using a centralized banking model, interest rates are determined by the ... Read Answer >>
  2. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ... Read Answer >>
  3. What methods can the government use to control inflation?

    There are many methods used by the government to control inflation; one popular method is through a contractionary monetary ... Read Answer >>
  4. How Do Fiscal and Monetary Policies Affect Aggregate Demand?

    Learn about the impact fiscal and monetary policy have on aggregate demand, and discover how the government influences economic ... Read Answer >>
  5. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices, as when one outweighs the other, prices can rise or fall in response. Read Answer >>
  6. What is the difference between macroeconomics and finance?

    Dive into the world of economics by learning the key differences between macroeconomics and finance. These ideas help investors ... Read Answer >>
Trading Center