The Balances Mechanics (; from balances of bookkeeping respectively the credit system and mechanics to characterize the strict universal identities) is a work and mean of economics, comparable with Stock-Flow Consistent Modelling. Statements of Balances Mechanics are not based on assumptions and preconditions of a model but are of trivial arithmetic nature, usually shaped as equation and universal without restrictions. Balances Mechanics were developed by Wolfgang Stützel and published in his books Paradoxa der Geld- und Konkurrenzwirtschaft (Paradoxes of Competition-Based Monetary Economies) and Volkswirtschaftliche Saldenmechanik (Balances Mechanics of Economics).Both texts have not been translated into English yet (03/2015). A summary in English is available in Charlotte Bruun's 1995 Dissertation: "Logical Structures and Algorithmic Behavior in A Credit Economy" (online ), Chapter 3: "The Logical Structure of a Monetary Economy", pp. 78-98 (online )
Overview Balances Mechanics deals with interrelations, the validity of which – contrary to most economics postulates – does not depend on assumptions about human behaviour.Adolf Wagner: Strukturwandel, Arbeitslosigkeit und Veprteilung. Marburg 2003, p. 491. Balances Mechanics allows to put these frequently necessary assumptions of economic theories and postulates onto a logic fundament of overall economics thinking (Size Mechanics). Previously false conclusions in pricing theory, theory of money, and trade cycle theory, resulting from single economy thinking (partial sentence) are overcome by a correct micro foundation and introduction of the real existing credit economy to the modeling (global sentence, size mechanics/relational sentence).Adalbert Winkler: Finanzsystementwicklung, Konsumentenkredite und Wirtschaftswachstum. In: Wolfgang Stützel. Moderne Konzepte für Finanzmärkte, Beschäftigung und Wirtschaftsverfassung. (Hrsg. Schmidt, Ketzel, Prigge) Tübingen 2001, (online auf Google.Books) p. 492-493.
For example, from the view of the single economy experience it seems to be absolutely logical that rising expenses of a national economy go along with a rising need for medium of exchange in terms of quantity theory. From the view of Balances Mechanics one recognizes, with regard to the counter entry, that growing expenses in overall economy mean growing revenues as well and that, for instance, at payment lock step there is no correlation at all between overall sales volume and need for medium of exchange.Wolfgang Stützel: Volkswirtschaftliche Saldenmechanik. Tübingen 2011. p. 232-233.
Beside the mechanics of the real identities, in particular of buy surplus and sales surplus, it is just the insight from Balances Mechanics thinking that shows many issues, which commonly and with levity are viewed as connected, are not connected mechanically at all. Stützel uses the term "problem plaitings" () when e.g. the equilibrium of the plans for changes of money assets are identified as invalid with the lock step of those changes and the steady state of the overall expenses or the capital stock. Similarly applies to Balances Mechanics of – strictly viewed as separated – operations of money assets and operations of medium of exchange, which can only enable a self-consistent clarification of the interrelations between money system and real economy by using a clear distinction.Johannes Schmidt: Die Bedeutung der Saldenmechanik für die makroökonomische Theoriebildung. (PDF; 150 kB) p. 6 and following pages
Balances Mechanics thus uses the interrelations of real identities and reveals serious fallacies of model making from wrongly assumed identities (ex ante equilibrium conditions/ex post identity equations).Michael Frenkel, Klaus Dieter John: Volkswirtschaftliche Gesamtrechnung. München 2011, (online auf Google.Books) p. 30.Fritz Voigt (Hrsg.), Wolf-Albright Prautzsch: Die Struktur der Nachfrage von Wirtschaftsunternehmen und privaten Haushalten nach finanziellem Vermögen in der Bundesrepublik Deutschland. Berlin 1971, (online auf Google.Books) p. 33.
Basic concepts
Bank money creation and Credit Mechanics Balances Mechanics considers the mechanics of private credit creation and recognizes the credit mechanics, which comes from Otto Pfleiderer and Wilhelm Lautenbach.Frank Decker, Charles A.E. Goodhart: Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate, Taylor & Francis, 2021, DOI=10.1080/09672567.2021.1963796. (Wolfgang Stützel often spoke of the "Lautenbachsche Kreditmechanik").
From the mechanics of giving a loan it becomes obvious: Once a debtor uses its credit entry,Deutsche Bundesbank, 2012: Geld- und Geldpolitik. p. 72: "Geschäftsbanken schaffen Geld durch Kreditvergabe." which corresponds to a liability, as payment for a purchase at the market, by Balances Mechanics this creates a surplus of the debtors expenses over its revenues. With that the remainder of the economy has a surplus of revenues over expenses.
This business relationship (temporarily) created new fiat money (if the seller does not use the received money to pay back own bank liabilities).Wilhelm Lautenbach: Zins, Kredit und Produktion. (Hrsg. Wolfgang Stützel) Tübingen 1952. (PDF ) p. 48: "Leistet ein Kreditor an einen Debitor, so schrumpft die Kreditsumme, leistet ein Debitor oder einer, der durch die Zahlung Debitor wird, an einen, der nicht Debitor ist, so erhöht sich die Kreditsumme. Sie bleibt aber gleich, wenn ein Debitor an einen anderen Debitor oder ein Kreditor an einen anderen Kreditor leistet." () and in tendency leads to national economy value addedDeutsche Bundesbank, 2012: Geld- und Geldpolitik. p. 78:"Kreditvergabe und die damit verbundene Geldschöpfung führen deshalb in der Tendenz zu Investitionen und vorgezogenem Konsum und auf diese Weise zu erhöhter Produktion und volkswirtschaftlicher Wertschöpfung." () (in a phase of growing economy only).
This relativises common statements by classic theories which claim that so called capital collector locations would loan deposits from savers to debtors. Because the surplus of expenses of a debtor enables additional property to the economy (lowering liabilities, increasing monetary property) it is valid to say , in no case the opposite.Wilhelm Lautenbach: Zins, Kredit und Produktion. (PDF ) p. 34: "Um den Gegensatz zur traditionellen Theorie besonders hervortreten zu lassen, kann man den Tatbestand pointiert so ausdrücken: es wird nicht die Investition durch die Ersparnisse, sondern umgekehrt die Ersparnis durch die Investition bestimmt: Die Ersparnis ist ein reiner Verteilungsbegriff. Das Sparen entscheidet nicht über die Gesamtgröße der Investitionen sondern nur über den Anteil der Wirtschaftssubjekte an dem Vermögenszuwachs den die Volkswirtschaft durch die Investition erfährt." ()
Economic entities, groups and the overall economy Stützel distinguishes the totality of all economic entities (overall economy) and groups of economic entities. A group is defined as the totality of all economic entities minus at least one economic entity.
Group of economic entities < Sum of all economic entities (overall economy)
Thereby a group also can be a single economic entity. Each group has a complementary group, so that the sum of group plus complementary group gives the overall economy.
Group + Complementary Group = Overall Economy
Examples for groups are all private households of a national economy or all companies of a national economy. The group of private economic entities (private sector) is the sum of all companies and all private households. A national economy is a group as well. It is the sum of all economic entities of a nation (following the inland concept, these are all economic entities inside a state territorium; following the inhabitant concept, these are all economic entities of same nationality). The complementary group to the sector of private households are all not-households (state, companies, foreign countries). The complementary group of a national economy are all other national economies, the foreign country sector.
So groups can be defined as needed and for a certain purpose.
Sentence categories Three sentences about the relationship of groups and overall economy can be set:
Partial sentences: These are sentences, which are valid for groups and individual economic entities. Global sentences: These are sentences, which are valid for the totality of all economic entities. Size Mechanics: Tells under what conditions (the behaviour of the complementary group) statements for groups and single entities are valid (partial sentences).
When a partial sentence is applied to the totality of economic entities then that is a fallacy of composition.
Example: Partial sentence: A company rises its sales volume when it lowers its prices. Global sentence: If all companies lower their prices, sales do not change but the price level lowers. Size mechanics: A company can only rise its sales volume if the complementary group (all other companies) keeps its prices.
This example is an application of the paradox of competition (Konkurrenzparadoxon).
Single economy and overall economy buildup of money assets For a single economic entity and groups of economic entities the partial sentence is valid, that the entities can rise their net-money assets by surplus of revenues (partial sentence):
Revenues – Expenses = ΔNet money assets
Furthermore, it is valid that the expense of an economic entity A is the revenue of an economic entity B:
Expense A = Revenue B
A purchase of a good by a customer leads to a revenue to the seller, the wage payment of an employer leads to the revenue of a worker and so on. Because every expense faces a revenue (and every revenue faces an expense) the sum of all expenses must be the sum of all revenues:
Sum revenues = Sum expenses
From that the global sentence derives that the aggregate expense-revenue-balance of a closed aggregate economy equals zero (current account/performance record). This is valid for the global economy and closed national economies. Open national economies are groups because they can have a current account balance value. For them the partial sentence is valid that their net money assets can differ from zero. In addition, it is valid that every debt claim of an economic entity corresponds to a liability of an other economic entity, so that the sum of all claims necessarily corresponds to the sum of all liabilities:
Sum claims = Sum liabilities
From that comes the global sentence that the aggregate net financial assets of a closed economy (all claims minus all liabilities) necessarily is Zero. The same is valid for changes of claims and liabilities:
Sum Δclaims = Sum Δliabilities
Here the Global Sentence is: The totality of economic entities cannot rise or lower their overall net money assets.
After all the Size Mechanics shows the conditions which make the partial sentence valid that individuals and groups can change their net money assets by expense-revenue-balances:
A group can only rise its net money assets (by surplus of revenue) if its complementary group (the remaining of all economy subjects, literally spoken the rest of the world) lowers its net money assets with the same amount (by an expenses surplus).
Balance of a single economic entity Every economic entity (individuals, private households, companies, states, national economies etc.) has a balance sheet which consists of assets (activa) and liabilities (passiva). On the assets side there is the tangible assets (examples: machines, buildings, etc.) and the accounts receivable (examples: money, shares, bonds, etc.). On the liabilities side there are the liabilities and the net worth (also called equity).
So it is valid for each economic entity:
net worth = tangible assets + claims – liabilities
Claims minus liabilities equals net money assets:
net money assets = claims – liabilities