Credit, Money and Crises in Post-Keynesian Economics 9781786439550, 1786439557

Table of contents :
Front Matter
Copyright
Contents
List of figures
List of tables
List of contributors
Acknowledgements
Introduction: the importance of credit and money in understanding crises
Part 1: Money, income distribution and post-Keynesian economics
1 Celebrating pioneers
2 Understanding credit-money: Lavoie and Seccareccia’s contribution to monetary theory
3 Money, state and growth of welfare: fighting the dangerous transformation of capitalism
4 Two easy pieces
5 The role of stabilisation policies in the New Consensus Macroeconomics (NCM): modern lessons from John Kenneth Galbraith
6 The macroeconomic dimension of money
7 The theory of money, interest and unemployment
8 International money: where do we stand?
9 Endogenous money, liquidity preference and confidence: for a qualitative theory of money
10 High finance, political money and the US Congress: a quantitative assessment of the campaign to roll back Dodd–Frank
11 International rentiers, finance and income distribution: a Latin American and post-Keynesian perspective
Part 2: Crises and post-Keynesian economics
12 Is macro in crisis?
13 Stagnation and crisis: understanding credit flows in Latin America from a circuitist perspective
14 Secular stagnation and the curse of contemporary Eldorados: whatever happened to broad-impact products?
15 Seccareccia and Lavoie on financial crises. Linking the real and financial sectors of the economy: the major contribution of post-Keynesians
16 On the changing nature and geography of crises: lessons for a sustainable internationalization
17 Banking and financial crises
Full bibliography of Marc Lavoie and Mario Seccareccia
Index

Citation preview

Credit, Money and Crises in Post-Keynesian Economics

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NEW DIRECTIONS IN POST-KEYNESIAN ECONOMICS Series Editors: Louis-Philippe Rochon, Laurentian University, Sudbury, Canada and Sergio Rossi, University of Fribourg, Switzerland Post-Keynesian economics is a school of thought inspired by the work of John Maynard Keynes, but also by Michal Kalecki, Joan Robinson, Nicholas Kaldor and other Cambridge economists, for whom money and effective demand are essential to explain economic activity. The aim of this series is to present original research work (single or co-authored volumes as well as edited books) that advances Post-Keynesian economics at both theoretical and policy-oriented levels.   Areas of research include, but are not limited to, monetary and financial economics, macro and microeconomics, international economics, development economics, economic policy, political economy, analyses of income distribution and financial crises, and the history of economic thought.   Titles in the series include: Post Keynesian Theory and Policy A Realistic Analysis of the Market Oriented Capitalist Economy Paul Davidson Inequality, Growth and ‘Hot’ Money Pablo G. Bortz The Financialization Response to Economic Disequilibria European and Latin American Experiences Edited by Noemi Levy and Etelberto Ortiz Crisis and the Failure of Economic Theory The Responsibility of Economists for the Great Recession Giancarlo Bertocco A Modern Guide to Rethinking Economics Edited by Louis-Philippe Rochon and Sergio Rossi Monetary Policy and Crude Oil Prices, Production and Consumption Basil Oberholzer Finance, Growth and Inequality Post-Keynesian Perspectives Edited by Louis-Philippe Rochon and Virginie Monvoisin Aggregate Demand and Employment International Perspectives Edited by Brian K. MacLean, Hassan Bougrine and Louis-Philippe Rochon Credit, Money and Crises in Post-Keynesian Economics Edited by Louis-Philippe Rochon and Hassan Bougrine Economic Growth and Macroeconomic Stabilization Policies in Post-Keynesian Economics Edited by Hassan Bougrine and Louis-Philippe Rochon

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Credit, Money and Crises in PostKeynesian Economics Edited by

Louis-Philippe Rochon Full Professor, Laurentian University, Canada Editor, Review of Political Economy Founding Editor Emeritus, Review of Keynesian Economics

Hassan Bougrine Full Professor, Laurentian University, Canada

NEW DIRECTIONS IN POST-KEYNESIAN ECONOMICS

Cheltenham, UK • Northampton, MA, USA

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© Louis-Philippe Rochon and Hassan Bougrine 2020 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020933655 This book is available electronically in the Economics subject collection DOI 10.4337/9781786439550

ISBN 978 1 78643 954 3 (cased) ISBN 978 1 78643 955 0 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

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Contents List of figuresvii List of tablesviii List of contributorsix Acknowledgementsxvii Introduction: the importance of credit and money in understanding crises1 Louis-Philippe Rochon and Hassan Bougrine PART 1 MONEY, INCOME DISTRIBUTION AND ­POST-KEYNESIAN ECONOMICS   1 Celebrating pioneers Louis-Philippe Rochon and Hassan Bougrine

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  2 Understanding credit-money: Lavoie and Seccareccia’s contribution to monetary theory Robert Guttmann

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  3 Money, state and growth of welfare: fighting the dangerous transformation of capitalism Alain Parguez and Slim Thabet

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  4 Two easy pieces Riccardo Bellofiore 

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  5 The role of stabilisation policies in the New Consensus Macroeconomics (NCM): modern lessons from John Kenneth Galbraith69 Giuseppe Fontana   6 The macroeconomic dimension of money Virginie Monvoisin and Jean-Francois Ponsot

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  7 The theory of money, interest and unemployment Hassan Bougrine

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  8 International money: where do we stand? Claude Gnos and Sergio Rossi   9 Endogenous money, liquidity preference and confidence: for a ­qualitative theory of money Edwin Le Heron

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10 High finance, political money and the US Congress: a quantitative assessment of the campaign to roll back Dodd–Frank152 Thomas Ferguson, Paul D. Jorgensen and Jie Chen 11 International rentiers, finance and income distribution: a Latin American and post-Keynesian perspective Esteban Pérez Caldentey and Matías Vernengo

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PART 2  CRISES AND POST-KEYNESIAN ECONOMICS 12 Is macro in crisis? Sheila Dow

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13 Stagnation and crisis: understanding credit flows in Latin America from a circuitist perspective Eugenia Correa and Wesley C. Marshall

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14 Secular stagnation and the curse of contemporary Eldorados: whatever happened to broad-impact products? Laurent Cordonnier

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15 Seccareccia and Lavoie on financial crises. Linking the real and financial sectors of the economy: the major contribution of post-Keynesians Joëlle Leclaire 16 On the changing nature and geography of crises: lessons for a ­sustainable internationalization Pascal Petit 17 Banking and financial crises Jan Toporowski

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Full bibliography of Marc Lavoie and Mario Seccareccia327 Index359

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Figures   8.1 Absolute exchanges in the international monetary order 124 10.1 The spectrum of political money 162 10.2 Campaign expenditures and vote shares are strongly associated168 10.3 Campaign expenditures and vote shares. House elections, ­1980–2014 169 10.4 Campaign expenditures and vote shares. Senate elections, ­1980–2014 170 11.1 Evolution of the ratio of the value global financial assets to world GDP (1980–2016) 213 11.2 All deposit insured institutions. Profitability, asset growth and total asset share of banks with assets . US$250 billion, 1984–2018214 11.3 Commodity prices and US real exchange rate 220 11.4 Relative importance of the determinants of commodity prices (1993–2007; 2008–2018) 221 16.1 Monetary aggregate M2, representing money and quasi money as a percentage of world GDP 306 16.2 Capital formation as a percentage of world GDP 306 16.3 CO2 emissions estimated for the world economy in millions of kilotonnes of carbon per year 310

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Tables             8.1 The result of an emission of international money in an absolute exchange 126       9.1 Top-down and bottom-up processes 134      A10.1 Counts and percentage Democrats representatives breaking party for the five roll calls 198    A10.2 Counts and percentages of members leaving Congress and serving on House Financial Services Committee for Democrats199    A10.3 Comparison of percentages of breaking party 199    A10.4 Descriptive statistics of means and standard deviations of the interval level variables 200    A10.5 Estimated coefficients and odds ratios for ‘breaking party’ based on a mixed logistic model 201    A10.6 Counts and percentages for voting for the five roll calls 202    A10.7 Counts and percentages of members leaving Congress and party at 2012, Democrats and Republicans 202    A10.8 Comparison of percentages for voting against the banks (Anti-Bank)203   A10.9 Descriptive statistics of means (SD) for the interval level variables204 A10.10 Estimated coefficients and odds ratios for voting ‘Anti-Bank’ based on a spatial temporal logistic model 205       11.1 Rate of growth of commodity prices in agriculture, energy, metals and minerals (1960–2015, in percentages) and correlation coefficients 216    11.2 Major trading commodity firms: headquarters, revenues and commodity trades (selected years) 218     11.3 Differential between income and GDP as a percentage of GDP (selected economies of Latin America), 1990–2015 223           11.4 Profit share for selected Latin American countries (2002, 2006, 2010 and 2014) 224

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Contributors Riccardo Bellofiore is a Professor of Political Economy at the University of Bergamo, Italy. He teaches advanced macroeconomics, history of economic thought, and international monetary economics. His research interests include capitalist contemporary economy, endogenous monetary approaches, Marxian theory and the philosophy of economics. Among his recent publications are: ‘Crisis Theory and the Great Recession: A Personal Journey, from Marx to Minsky’ (Research in Political Economy, 2011); and with Francesco Garibaldo and Mariana Mortagua, ‘A Credit-Money and Structural Perspective on the European Crisis: Why Exiting the Euro is the Answer to the Wrong Question’ (Review of Keynesian Economics, 2015); The Great Recession and the Contradictions of Contemporary Capitalism (co-edited with Giovanna Vertova, Edward Elgar Publishing, 2014); Towards a New Understanding of Piero Sraffa. Insights from Archival Research (with Scott Carter, Palgrave Macmillan, 2014); and two volumes co-edited with Ewa Karwowska and Jan Toporowski in honour of Tadeusz Kowalik: The Legacy of Rosa Luxemburg, Oskar Lange and Michal Kalecki and Economic Crisis and Political Economy (Palgrave Macmillan, 2013). Hassan Bougrine holds a PhD in Economics from the University of Ottawa and has been teaching at Laurentian University (Canada) since 1988. He has been a Visiting Professor to many universities in Latin America, Europe and Africa. Bougrine also acted as consultant to the Canadian International Development Agency and the International Development Research Centre, Canada, in the 1990s. He has published widely on issues of money, finance, public policy and the economics of development. In addition to several edited books, his peer-reviewed articles have been published in journals such as the International Journal of Political Economy, Review of Keynesian Economics, Journal of Post Keynesian Economics, International Review of Applied Economics, Journal of Economic Development, Canadian Journal of Regional Science, Journal of European Integration, and Critique Économique. His most recent book, The Creation of Wealth and Poverty: Means and Ways (Routledge, 2017), has been translated into Arabic and Persian.

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Esteban Pérez Caldentey is Senior Economic Affairs Officer and Chief of Financing for the Development Unit at the Economic Commission for Latin America and the Caribbean (ECLAC) within the Economic Development Unit. He holds a master’s and PhD in economics from the New School for Social Research. He is a member of the editorial board of the International Journal of Political Economy, co-editor of the Review of Keynesian Economics, and co-editor of the World Economic Review. He is also co-editor-in-chief of the New Palgrave Dictionary of Economics. He is the author of the first intellectual biography of Roy Harrod (Palgrave Macmillan, 2019). He has published extensively on Latin America. Jie Chen is Senior Statistician at the University of Massachusetts, Boston and a co-director of the Research Design and Analysis Core for the UMass Boston/Dana-Farber/Harvard Cancer Center Partnership Program, funded by the National Institute of Health. She has published extensively on  scan statistics, applied probability, and Bayesian spatial models. She received a BS from Peking University and a PhD in statistics from the University of Connecticut. Laurent Cordonnier is Professor at the University of Lille (France) and researcher at Clersé (UMR 8019 – CNRS). His work focuses on growth, distribution and employment in the context of financialized capitalism. He seeks to highlight the conditions that allow companies to generate significant profitability, even though the accumulation of capital has been very depressed for 35 years due to the increased demands of shareholders. He published Pas de pitié pour les gueux (Paris: Raison d’action, 2000); L’économie des Toambapiks, une fable qui n’a rien d’une fiction (Paris: Raison d’agir, 2010); and Le surcoût du capital: la rente contre l’activité (Lille: Presses Universitaires du Septentrion, 2015, with T. Dallery, V. Duwicquet, J. Melmiès and F. Van de Velde). Eugenia Correa is a Professor of Economics, Finance and Development at the Universidad Nacional Autónoma de México. She received her PhD from the same university and is a member of the Mexican Academy of Science and of the National System of Researchers. She is a recipient of the Research in Economics Award from the Universidad Nacional Autónoma de México. Her research interests are in areas of macroeconomic financial policies, financial systems and feminist economics. She is the associate editor of Forum for Social Economics, and is on the editorial board of the International Journal of Political Economy, the Review of Political Economy, Panoeconomicus, and Trimestre Económico, and has been on the editorial board of Economía Informa and the Review of Keynesian Economics. She is a co-founder of the journal Ola Financiera. She is the

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author and editor of more than 35 books and also more than 140 journal and book chapters. Sheila Dow is Emeritus Professor of Economics at the University of Stirling, Scotland, and Adjunct Professor of Economics at the University of Victoria, Canada. Her main academic focus is on raising methodological awareness in the fields of macroeconomics, money and banking, and the history of economic thought (especially Hume, Smith and Keynes). While her career has primarily been in academia, she has held positions with the Bank of England and the Government of Manitoba, and as special advisor on monetary policy to the UK Treasury Select Committee. She has held positions such as Chair of INEM, and is currently a member of the Academic Council of INET and of the Academic Advisory Board of the ISRF. Recent books include Economic Methodology: An Inquiry, A History of Scottish Economic Thought, and Foundations for New Economic Thinking. Thomas Ferguson is Professor Emeritus at the University of Massachusetts, Boston and Director of Research at the Institute for New Economic Thinking. He is also a Senior Fellow at Better Markets. He received his PhD from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or co-author of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a member of the editorial board of the International Journal of Political Economy and a long-time Contributing Editor at The Nation. Giuseppe Fontana is Professor of Monetary Economics at the University of Leeds (UK), Associate Professor at the University of Sannio (Italy), and Research Associate at the Cambridge Centre for Economic and Public Policy (UK). He has written extensively on endogenous money theory and the new consensus macroeconomics theory, and of monetary and fiscal policies. He has authored and co-authored over 30 book chapters, and over 60 international journal papers. He has also co-edited several books, including Macroeconomic Theory and Macroeconomic Pedagogy (Palgrave Macmillan, 2010) with Mark Setterfield, and The Global Economic Crisis (Routledge, 2011) with Emiliano Brancaccio. He has also published the monograph Money, Time, and Uncertainty (Routledge, 2010). He was a member of the coordinating team/executive board and work-package leader of the €8 million EU FP7 research project FESSUD (http:// fessud.eu/). He was an elected member of the board of directors, Eastern

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Economic Association, USA (2011–2014), and at the 2015 ASSA meetings in Boston was elected President of the Association for Social Economics. Claude Gnos was Associate Professor of Economics at the University of Burgundy and Director of the Center for Monetary and Financial Studies in Dijon, France. He is the author of L’Euro (Management et Société, 1998) and Les grands auteurs en économie (Management et Société, 2000), and co-editor of Post-Keynesian Principles of Economic Policy (Edward Elgar, 2006, with Louis-Philippe Rochon) and The Keynesian Multiplier (Routledge, forthcoming, with Louis-Philippe Rochon). He has also published a number of articles on monetary economics, circuit theory, and the history of economic thought, which have appeared in books and refereed journals (Journal of Post Keynesian Economics, Review of Political Economy, International Journal of Political Economy, Economie Appliquée, Revue d’Economie Politique, Economies et Sociétés). Robert Guttmann is the Augustus B Weller Professor of Economics at Hofstra University, and Professeur Émérite at the CEPN research lab, Université Paris XIII. He studied in Vienna (Austria) and at the University of Wisconsin before obtaining his PhD at the University of Greenwich, in London, in 1979. He won ‘Distinguished Teacher of the Year’ awards at Hofstra in 1989, 2004 and 2012. He teaches International Economics, Monetary Economics, Economic Integration in the European Union, and Public Finance. Widely published in monetary theory as well as money and banking, his latest books are Finance-Led Capitalism: Shadow Banking, Re-Regulation and the Future of Global Markets (Palgrave, 2016) and EcoCapitalism: Carbon Money, Climate Finance and Sustainable Development (Palgrave, 2018). He is currently working on another book, provisionally entitled Multi-Polar Capitalism: The End of the Dollar Standard, scheduled for publication in late 2020. ​ aul D. Jorgensen is Associate Professor of Political Science at the P University of Texas Rio Grande Valley in Edinburg, Texas. He obtained his PhD from the University of Oklahoma, and was formerly Research Fellow at the Edmond J. Safra Center for Ethics at Harvard University (2011–2013). He has published widely in the International Journal of Political Economy, Journal of Law, Medicine & Ethics, Policy Studies Journal, Political Research Quarterly, Social Science Quarterly, and other journals. Joëlle Leclaire is Associate Professor of Economics and Finance at SUNY College at Buffalo, where she teaches Macroeconomics, Economic Statistics, and Money and Banking. Her research looks at the connection between the real and financial sectors of the economy, and the role of

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private and public debt on financial and economic macrostability. She has presented her work at numerous conferences and graduate summer schools around the world, has served on international expert bodies such as the INET Private Debt Initiative, and has organized international conferences. She has published articles in the Journal of Post Keynesian Economics, International Journal of Political Economy, and the online Post Keynesian Forum. She has authored one book, The Great Deficit Debacle (2008) and published one edited volume Heterodox Analysis and Financial Crisis and Reform (2011). Edwin Le Heron is Full Professor in Economics at the Bordeaux Institute of Political Studies, France, and researcher at the CED (Emile Durkheim Center, UMR CNRS 5116). He is also President of the ADEK (French Association for Development of the Keynesian Studies). His research interests include monetary policy, central banking, post-Keynesian monetary theory, SFC modelling and the history of economic thought. Wesley C. Marshall has an undergraduate degree in political science from the College of William and Mary. He received his doctorate in Latin American Studies from the National Autonomous University of Mexico (UNAM) and did a postdoctorate at the Faculty of Economics at the same university. Since 2009 he has been a professor-researcher at the Universidad Autónoma Metropolitana – Iztpalapa (UAM), where he is currently responsible for the Center for Financial and Economic Studies of North America, and is Head of the Political Economy Area. He is a member of the National System of Researchers and also the Mexican Academy of Political Economy. He is a member of the Editorial Board of Ola Financiera and the Review of Political Economy, and is associate editor of the International Journal of Political Economy. He has dozens of published journal and book articles, and is the author of the book México desbancado: causas y consecuencias de la pérdida de la banca nacional. Virginie Monvoisin is an Associate Professor at the Grenoble École de Management in the Department of People, Organizations and Society. She also teaches at the Grenoble Alpes University or Sciences Po Grenoble. She obtained her PhD at the University of Burgundy with top honours. Her PhD dissertation was one of the first French theses on endogenous money. Before moving to Grenoble, she taught at Laurentian University (Canada) as an Assistant Professor. More broadly, her research interests are in the areas of monetary economics, macroeconomics and economic systems. She is currently working on banking systems and their alternative and ethic dimensions. She has published in French and in international academic journals and books in her main field of research. Recently,

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she co-edited L’économie post-keynésienne: Histoire, théories et politiques (Editions du Seuil). Alain Parguez is Emeritus Professor of Economics at the University of Franche-Comté Besançon, France. He has worked extensively on developing a genuine general theory of capitalism, that is, a monetary production economy, which he labelled the theory of the monetary circuit. He has written extensively on monetary policy, crisis theory and economic policy, including many articles on the impact of austerity measures, which he believes are the cause of world crises. He was the editor of Monnaie et Production, and has written numerous articles and books. Pascal Petit is Director of Research Emeritus at the CEPN (Centre d’économie de Paris Nord). He works on issues of growth and wealth of nations in an institutionalist perspective. His research takes into account the historical, social, legal and political conditions in which the movements of developed and developing economies operate. Jean-Francois Ponsot is Full Professor of Economics at UGA (Grenoble Alpes University) and a Researcher at PACTE. Prior to this, he was a Researcher at the Central Bank of Ecuador, before being hired as Assistant Professor at Laurentian University, Canada. His research interests concern the political economy of money, innovative financing for development and post-Keynesian economics. He has also worked as an academic consultant for the French government on the new forms of money, as well as for the United Nations Department of Economic and Social Affairs on the new financial regional architecture in South America. He has recently published La monnaie, entre dettes et souveraineté (2016, Odile Jacob) with Michel Aglietta and Pepita Ould-Ahmed. He also edited a number of special issues of academic journals and books, including The Political Economy of Monetary Circuits (2009, Routledge, with Sergio Rossi), and L’économie post-keynésienne (2018, Le Seuil, with Eric Berr and Virginie Monvoisin). Louis-Philippe Rochon is Full Professor of Economics at Laurentian University, Canada, where he has been teaching since 1994. Before that, he taught at Kalamazoo College, in Michigan. He obtained his doctorate from the New School for Social Research, in 1998, earning him an award for outstanding dissertation. He is currently co-editor of the Review of Political Economy. He is the founder and past editor (now emeritus) of the Review of Keynesian Economics. He is the author of over 140 articles in peer-reviewed journals and books, and has written or edited 26 books. He has been guest-editor for the Journal of Post Keynesian Economics, the International Journal of Pluralism and Economics Education, the European

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Journal of Economic and Social Systems, and the International Journal of Political Economy. He has published on monetary theory and policy, postKeynesian economics, and fiscal policy. He is on the editorial board of Ola Financiera, International Journal of Political Economy, the European Journal of Economics and Economic Policies: Intervention, Problemas del Desarrollo, Cuestiones Económicas (Central Bank of Ecuador), and Credit and Money (Central Bank of Poland). He has been a visiting scholar or professor in Australia, Brazil, France, Italy, Mexico, Poland, South Africa, and the United States, and has further lectured in China, Colombia, Ecuador, Italy, Japan, Kyrgyzstan, and Peru. He has received grants from the Social Sciences and Humanities Research Council Canada (SSHRC), the Ford Foundation, the Mott Foundation, among other places. He has lectured in a number of central banks. His forthcoming books include A Short History of Economic Thought (Edward Elgar, 2020, co-edited with Hassan Bougrine), Employment in the Age of Austerity (Edward Elgar, 2020, co-edited with Brian MacLean and Hassan Bougrine). He is the lead editor of the Elgar Series on Central Banking and Monetary Policy. Sergio Rossi is Full Professor of Economics at the University of Fribourg, Switzerland, where he has held the Chair of Macroeconomics and Monetary Economics since 2005. He has a PhD in Economics from the University of Fribourg (1996) and a PhD in Economics from University College London (2000). His research interests are in macroeconomic analysis, particularly as regards to national as well as international monetary and financial issues. He has authored or edited about 20 books, including an encyclopaedia of central banking, has widely published in academic journals, and is frequently invited to TV talk-shows discussing contemporary macroeconomic issues both at the national and international level. He is a member of the editorial board of Cogent Economics and Finance, International Journal of Monetary Economics and Finance, Review of Keynesian Economics, and Review of Political Economy. Since 2015, he has been on the list of the most prominent economists in Switzerland, as published annually by the Neue Zürcher Zeitung. Slim Thabet is lecturer and researcher at the Department of Economics and Management of the University of Picardie Jules Verne, in Amiens, France. He has worked extensively on the links between John Maynard Keynes and the old institutionalism, especially with John Rogers Commons. He has written on the fields of history of economic thought, macroeconomics and theory of institutions. Jan Toporowski is Professor of Economics and Finance at the School of Oriental and African Studies, University of London, and holds visiting

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appointments at the University of Bergamo and International University College, Turin. He is a member of the Japan Economy Network, and is on the Editorial Boards of the Journal of Post-Keynesian Economics, the Review of Political Economy, and the Review of Keynesian Economics. Jan Toporowski has published two volumes of the biography of Michał Kalecki and nearly 300 books, articles and papers on monetary theory and policy, and finance. Before working as an academic he worked in fund management, international banking, and central banking. He has been a consultant for the United Nations Development Programme, the United Nations Conference on Trade and Development, the UN Economic Commission for Africa and the Economist Intelligence Unit. He studied economics at Birkbeck College, University of London, and the University of Birmingham, UK. Matías Vernengo is Full Professor at Bucknell University. He was formerly Senior Research Manager at the Central Bank of Argentina (BCRA), Associate Professor at the University of Utah, and Assistant Professor at Kalamazoo College and the Federal University of Rio de Janeiro (UFRJ). He has been an external consultant to several United Nations organizations such as the Economic Commission for Latin America and the Caribbean (ECLAC), the International Labor Organization (ILO), the United Nations Conference on Trade and Development (UNCTAD) and the United Nations Development Program (UNDP), and has six edited books, one book and more than 50 articles published in peer-reviewed journals. He specializes in macroeconomic issues for developing countries, in particular Latin America, international political economy and the history of economic ideas. He is also the co-editor of the Review of Keynesian Economics (ROKE) and co-editor in chief of the New Palgrave Dictionary of Economics.

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Acknowledgements The editors would like to thank all the contributors to this volume for accepting to participate. We also acknowledge the continued and ­wonderful support of the staff at Edward Elgar.

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Introduction: the importance of credit and money in understanding crises Louis-Philippe Rochon and Hassan Bougrine Over a century ago, in an aptly-titled article, Innes (1913) asked what we believe is one of the most important questions in monetary theory: ‘What is money?’ – a question Smithin (1999) would later revisit. While on the surface this question may appear to be simple enough, the answer, however, is far from simple. Indeed, many answers have been provided, from a number of perspectives and disciplines. Money can mean something very different to different scholars, and the answers provided often reflect the focus of one’s research, thereby leading to different aspects of the same issue or question being explored in various degrees of detailed analysis. Indeed, money has many dimensions. The study of money has certainly perplexed economists for decades, if not centuries, with no consensus in sight. However, two general approaches can be identified, which, following Schumpeter (1954/1994, p. 277), can be labelled real and monetary analyses respectively (see also Rogers, 1989, Ch. 1) – although other labels can also be used: orthodox versus heterodox, exogenous versus endogenous. Rochon and Rossi (2013) have further identified two distinct approaches to endogenous money within postKeynesian theory, referring to what they call the ‘evolutionary’ (Chick, 1986) and ‘revolutionary’ (Lavoie, 1992, 2014; Rochon, 1999) approaches to endogenous money. Moreover, in the last few decades, many economists in the mainstream have come to accept some version of the endogeneity of money, as reflected for instance in the use of Taylor Rules, as in the New Consensus, or the Woodford (2003) model, although whether this can be considered endogenous has been questioned (see Monvoisin and Rochon, 2006). In this sense, some have argued that the lines between post-Keynesians and the mainstream appear somewhat blurred, and the endogeneity/exogeneity of money is no longer a distinguishable characteristic between the two approaches. For instance, according to Lavoie (2020), ‘propounding a theory based on the endogeneity of money is insufficient to break away

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from mainstream economics: one also has to reject the existence of a natural rate of interest in a monetized economy’. This, of course, comes down to how we define endogeneity. Lavoie is certainly correct to argue that we further need to reject the natural rate of interest – an issue at the core of Smithin’s life-long research agenda – ­otherwise what we end up having is some sort of endogeneity in the shortrun, with the central bank rate of interest gravitating to the natural rate in some long-run equilibrium. But we need to go beyond this. Rochon (1999) suggested five arguments embedded in a true or revolutionary theory of endogenous money. Indeed, if we follow the logic of money’s endogeneity, and the link between money and production, then a true definition of endogenous money must imply the following conditions: (1) reverse causality between money and income; (2) reverse causality between savings and investment; (3) reverse causality between reserves, deposits and loans; (4) the rate of interest is a pure exogenous variable or an administered price; (5) the money supply is credit-led and demand-determined. To which we should add the rejection of a natural rate of interest. Seen in this light, it becomes clear that New Consensus models are still far from any sort of money endogeneity. Indeed, Fiebeger and Lavoie (2018) have recently argued that monetarism was simply folded into New Consensus models. This is consistent with Lavoie (2004, p. 16), who called New Consensus models ‘old wine in a new bottle’. What we are left with is a potpourri of ideas that make up mainstream theory and policy. On the one hand, while mainstream proponents have certainly recognized the ability of the central bank to set the rate of interest, they still believe that the overall objective of monetary policy is to gravitate towards the natural rate of interest. In addition, inflation is still seen, if not as a monetary phenomenon, certainly as a monetary policy phenomenon. One therefore wonders, despite advances in the last two decades, whether or rather how far the mainstream has gotten from the ideas of Milton Friedman. For instance, quantitative easing is still based on the old money multiplier model, where banks would lend out the excess reserves being created. Old wine indeed. Regardless, the orthodox approach remains the dominant view in the profession. Textbooks still explain money largely as a commodity among many others, whose supply is determined by the central bank, independently of economic activity. There are still plenty of textbooks that still depict the money supply curve as vertical. In other words, money

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Introduction ­3

is simply a veil behind which real economic activity still operates: this is Schumpeter’s real analysis. Post-Keynesians (at least most of them) reject this approach, and in fact dig deeper: they not only reject the mainstream view of money, they also reject the mainstream explanation regarding the origins of money, and the links between money and inflation. First, they reject the idea that money somehow evolved out of bartering. After all, anthropological evidence indicates the link between money and barter is at best tenuous. As Wray (1990, p. 4) claims, ‘In fact, an examination of anthropological evidence reveals that early societies were not barter economies, that markets did not spring forth from barter, and that money was not invented to facilitate exchange’. Barter may therefore not have existed on a wide scale, or at least it was not such a cumbersome activity that required a solution. Barter was not a central element of economic life (Wray, 1990).1 First, primitive societies tended to be rather self-sufficient. Second, anthropologists question the nature of the ceremonies that many economists have come to accept as barter. In fact, according to some, these acts were highly ceremonial and religious in nature, often aimed at fostering new relationships between clans or reinforcing existing ones, often through marriage, in order to forge strategic alliances in times of war. Indeed, according to Malinowsky (1922, p. 66), the purpose for exchanging goods was ‘to exchange articles which are of no practical use’. In fact, Polanyi (1971, p. 74) argues that occasionally the identically same object is exchanged back and forth between the partners, thus depriving the transaction of any conceivable economic purpose or meaning. . . . The sole purpose of the exchange is to draw relationships closer by strengthening the ties of reciprocity.

The barter fable, therefore, appears to be just that: a fable (Servet, 1994). According to Heinsohn and Steiger (1989, p. 180), ‘The concept of a pure barter economy from which the monetary economy devolves is not more than a historical speculation and does not correspond to the true course of history’. If money did not evolve from barter, then how can we explain the existence of money? How is it introduced into active circulation? If not by a central authority, how? After all, if money exists, where does it come from and how is it created? We cannot possibly do justice to this question here, but suffice it to say that many historians, including Mitchell Innis, and even Keynes, argue that money in ancient societies has always taken the form of credit. Coins have value because of the promise of debt they represent and not because of the

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Credit, money and crises in post-Keynesian economics

metal of which they are made. Other items such as pottery, wood sticks, paper, and so on have been used to record the debt/credit relationship between the parties to an exchange. Second, regarding the link between money and inflation, post-­ Keynesians and heterodox economists in general would argue that inflation is the result of conflict over the appropriate distribution of income. In this sense, it is not in general related to excess demand considerations (see Rochon and Setterfield, 2012). For post-Keynesian economists, including the proponents of the monetary circuit in France and Italy, the answer lies in the macroeconomic link between bank credit, production and money. Post-Keynesians believe that real analysis has no application in a world that is essentially monetary in nature. In other words, there is a direct connection between the existence of money and economic activity: money and production are strictly related to one another, through the need of the private sector to finance production through the emission of bank loans (Rochon, 1999). In a way, the theory of production is rooted in the theory of debt, and therefore the rejection of Say’s Law. Far from being a veil, one cannot disassociate money from the overall economic activity. This is the very nature of money, and the meaning of Keynes’s idea of a ‘monetary economy of production’. Money is not neutral. The emphasis is therefore on credit demand, not money demand. The primary emphasis is the relationship between loans, debt and the resulting creation of money; discussions over the various functions of money, whether as a store of value or a unit of account are secondary, or at least separate from the discussion over the creation of money. What money does once it is created is certainly important, but not as important as how it is created and how it enters circulation (Rochon, 1999). As Keynes (1971, p. 197) writes: Credit is the pavement along which production travels and the bankers if they knew their duty, would provide the transport facilities to just the extent it is required in order that the productive powers of the community can be employed at full employment.

Banks may or may not want to validate this demand, but they are always prepared to do so as long as borrowers are considered creditworthy, i.e. deemed able to reimburse the loan with interest. All this, of course, is well known, and the work of Marc Lavoie and Mario Seccareccia over the last 35 years has certainly contributed to the large heterodox and post-Keynesian literature on this topic. Both authors have contributed significantly to the theory of endogenous money,

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Introduction ­5

monetary policy and central banking in general. In doing so, interesting questions regarding the possibility of crises emerge. Indeed, one possible source of crises undoubtedly is the behaviour of banks. As Keynes tells us, banks are ‘special’, and ‘if they knew their duty’, banks can have obvious benefits for output and growth. But what if they don’t perform their duty? If investment and production are financed, at least partly by bank credit, what if banks do not lend because of their overall pessimistic outlook on expected aggregate demand in the (near) future (see Rochon, 2006)? The Great Financial Crisis that started in 2007/8 showed us how bad lending contributed to breaking the back of the proverbial economic camel. In both cases, either in refusing to lend or in making too many bad loans, banks are indeed ‘special’ and their behaviour must not only be monitored, but perhaps severely regulated (Kregel and Tonveronachi, 2014). Some have even called for a greater role of public banks (Bougrine and Seccareccia, 2013; Marshall and Rochon, 2019). Finally, the issue of income inequality and distribution must be included into the discussion of crises, as it relates directly to aggregate demand. Here, the pioneering work of both Lavoie and Seccareccia, on linking monetary policy to income distribution is of paramount importance. The focus here is on the rate of interest as a distributive variable, where conflict between the distribution of income between rentiers and workers take centre stage. Changes in the rate of interest are transmitted to the real economy not only through the cost of borrowing and lending, but also through income. The horrible consequences of these inequalities have been exposed by the most recent Coronavirus pandemic. Indeed, the pandemic has exposed the inner contradictions of the capitalist system itself; and showed that availability of – and universal access to – health care cannot be subject to profit calculations. If we count only the human death toll, it appears that workers and the poor are among the hardest hit: some statistics indicate that in the USA, 70 percent of the deceased are black. Also, when the health crisis forced businesses to close down, governments around the world came to the rescue of corporations through unprecedented fiscal stimuli – thus proving the class nature of the State.

STRUCTURE OF THE BOOK The 17-chapter book is divided into two sections. Part 1, entitled ‘Money, Income Distribution and Post-Keynesian Economics’, contains 11 contributions. The opening chapter, by Louis-Philippe Rochon and Hassan

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Bougrine, discusses the pioneering work of Marc Lavoie and Mario Seccareccia, and celebrates this long-lasting friendship and cooperation. Chapter 2, by Robert Guttmann, discusses the outstanding contributions of Marc Lavoie and Mario Seccareccia. Guttmann argues that they have each advanced heterodox monetary theory, especially its post-Keynesian variant, in clarifying the modus operandi of endogenous money creation, the link between money and credit in a cyclical dynamic engendering financial instability from within the system, the strategic importance of liquidity and its paradox, interest rates and their shifting structure, as well as the at-times contradictory intervention logic of central banks. In Chapter 3, Alain Parguez and Slim Thabet emphasize the role of the State, which was all too often forgotten by early versions of the Theory of Monetary Circuit and some post-Keynesians. They show that in a true monetary economy not doomed to permanent crises, the State must enjoy the full sovereignty of its currency by being free to create at will the money needed for achieving its goals: full employment, abolition of scarcity, building of the most enlightening future despite fundamental uncertainty. In Chapter 4, Riccardo Bellofiore  sketches Augusto Graziani’s vision of the theory of the monetary circuit as a macro-class monetary theory of capitalist production, and compares it with Alain Parguez’s circuitism. Bellofiore discusses the alleged differences between the two authors, before considering how Graziani dealt with the controversial problem of the ‘monetization’ of profit and interest. Marc Lavoie’s perspective on the problem is considered, as is the criticism of Graziani’s perspective put forward by Mario Seccareccia. In Chapter 5, Giuseppe Fontana argues that John Kenneth Galbraith was first and foremost an institutionalist economist, who was in favour of the market economy, but did not hesitate to condemn its inherent problems. He believed that macroeconomic policies offered the solution to many problems and social imbalances of the modern market economies. For this reason, Fontana argues that Galbraith discussed the role of monetary and fiscal policies in a variety of theoretical and practical circumstances. Fontana critically assesses the still-dominant New Consensus Macroeconomics (NCM) theory, and its policy implications, in light of the work of John Kenneth Galbraith. Virginie Monvoisin and Jean-Francois Ponsot, in Chapter 6, propose two specific objectives: first, what are the means by which money is not neutral? They answer this question by highlighting three dimensions of money: (i) the macroeconomic dimension of money as related to the endogeneity of money; (ii) the institutionalist dimension of money as a social relation – an institution stronger than the market; (iii) the politicaleconomy dimension of money as a source of power, asymmetries and

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Introduction ­7

conflicts. Second, they aim at showing that the macroeconomic dimension of money is the most essential prerequisite to understanding money from an economic perspective. Unfortunately, most recent widespread monetary developments (MMT, 100 per cent Money, Sovereign money, etc.) tend to focus only on holdings of money and forget that money and production are closely linked. A rehabilitation of the endogeneity of money hypothesis is then necessary.  In Chapter 7, Hassan Bougrine argues along Kaleckian lines, that the political obstacles to full employment draw their effectiveness from the strength of the oligarchic alliance between the industrialists and the financiers. The chapter builds a model to show that such strength rests on the degree of control over the process of money creation and the concomitant setting of interest rates. In this context, it is shown that the oligarchy asserts its dominance over the distribution of wealth by using both private and public means to ensure that money remains scarce – thus limiting public and private investment and job creation opportunities. To solve the long-standing problem of unemployment and break the constraint of money scarcity, the chapter proposes an economic model of generalized worker-owned enterprises and public financing entities, which would eliminate private banking and hasten the euthanasia of the rentiers. In Chapter 8, Claude Gnos and Sergio Rossi focus on a number of essential questions about the nature of international money that have not been definitively answered by the economics profession yet. Can a national currency (such as the British pound, the US dollar, or the euro) play the role of international money essentially? What are the basics for the creation of a truly international money? Which institution should issue it? What are the links between money and credit at the international level? Is it possible to design an international monetary system conducive to financial stability as well as real economic growth? Edwin Le Heron, in Chapter 9, starts with the argument that money is an institution, which can only function when it perfectly manages the relationship between sovereignty and confidence. The foundation of this monetary relationship can focus on either of two directions: either a topdown process based on sovereignty so as to justify public confidence in the money; or a bottom-up process starting from building confidence through coordination and learning among individuals to explain the organization of a sovereign monetary authority. Le Heron confronts two ambiguities in the monetary analysis of Keynes’s General Theory. The first is the traditional opposition noted by post-Keynesians between liquidity preference and endogenous money. The second addresses the issue that when Keynes talks about interest rate, which rate is he talking about? Chapter 10, by Thomas Ferguson, Paul D. Jorgensen and Jie Chen,

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looks at other aspects of money and finance. They argue that social scientists have traditionally struggled to identify clear links between electoral campaign finance and legislative voting. More than a few have concluded that the task is impossible. The authors address this classic question head on, starting by assembling a new data set that captures much larger swaths of politically relevant spending than any previous study – one that demonstrates how those studies have considerably underestimated flows of political money into Congress. They then analyse US House of Representatives’ voting on measures to weaken the Dodd–Frank financial reform bill in the years following its passage. To control as many factors as possible that could influence floor voting by individual legislators, the analysis focus on representatives who originally cast votes in favour of the bill but then subsequently voted to dismantle key provisions of it. This design rules out from the start most factors normally advanced by sceptics to explain vote shifts, since these are the same representatives, belonging to the same political party, representing substantially the same districts. A panel analysis, which also controls for spatial influences, highlights the importance of time-varying factors, especially political money, in moving representatives to shift their positions on amendments such as the ‘swaps push out’ provision, which Senator Elizabeth Warren dramatically attempted, but failed, to head off. The analysis demonstrates that links between campaign contributions from the financial sector and switches to a pro-bank vote were direct and substantial: for every $100,000 that Democratic representatives received from finance, the odds they would break with their party’s majority support for the Dodd–Frank legislation increased by 13.9 per cent. Democratic representatives who voted in favour of finance often received $200,000–300,000 from that sector, which raised the odds of switching by 25–40 per cent. Chapter 11, by Esteban Pérez Caldentey and Matías Vernengo, wraps up the first part of the book. They argue that Lavoie and Seccareccia’s work emphasized the role of rentiers, in particular their emphasis on monetary policy, building on the work of Keynes and other post-Keynesian authors, in creating conditions for higher levels of inequality, and, in turn, lower levels of economic growth. The analysis the authors propose builds on this post-Keynesian perspective, to analyse the role of financialization and international rentier interests on income distribution in Latin America. They suggest that the financialization of commodity markets, by increasing returns to what are increasingly financial assets, might have led to an increase in the profit share of several countries in the region. In this view, financialization of commodities, which went hand in hand with the neoliberal turn, plays an insidious role. While higher commodity prices, which, in part, can be ascribed to speculation in these markets, were instrumental in

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Introduction ­9

lifting the external constraint, they created the conditions, with the fluctuation and instability that characterizes financial markets, for an increased vulnerability of the region to financial crises. Part 2, on Crises and Post-Keynesian Economics, contains six chapters. Chapter 12, by Sheila Dow, addresses the failure of mainstream economics to address an economic crisis, proving that economics itself is in crisis. She argues that, throughout their careers, Marc Lavoie and Mario Seccareccia have contributed, not only to the critique of mainstream economics, but also to building up alternative theories and theoretical frameworks better suited to addressing real macroeconomic problems. Dow focuses on the issue of how far it is feasible to establish agreement (among experts, far less the wider community) on the facts and causal mechanisms that provide the basis for macroeconomic policy. Is it a binary choice between fake news and truth? Building on several key insights from the work of both Marc Lavoie and Mario Seccareccia to analyse the macroeconomic restrictions placed on Latin America from a circuitist perspective, Eugenia Correa and Wesley C. Marshall, in chapter 13, argue that over the last few decades, interest rate and exchange rate policies have placed the region in a straightjacket, the purpose of which was never aimed at targeting low levels of inflation, but rather low levels of growth. At the same time, the policies of deregulation and financial opening have left the region open to severe financial crises. The methodology of Lavoie and Seccareccia is adopted to critically examine the mainstream positions, and propose alternative hypotheses in the heterodox tradition. Framed in this way, it is shown how, independent of political change in the region, Latin American economies are managed following US financialized interests, which have scant interest in the region’s development, much less employment and production. Chapter 14, by Laurent Cordonnier, aims to offer an explanation – not entirely new according to the author, but revitalized and enriched – that might lend credibility to the secular stagnation viewpoint. In addition to the reasons advanced by Larry Summers and in addition to those he fails to mention (basically those long advanced by post-Keynesians), Cordonnier suggests that the persistent (structural) imbalance between the propensity to save and the inducement to invest, assuming this secular stagnation, may be the result of the malformation (or the relative weakness) of contemporary Eldorados, i.e. the disappointing nature of the new frontiers offered to the inducement to invest. He attributes this lack of Eldorados in turn to a kind of curse that clings to contemporary goods. These seem, for the time being, to be unable to combine the necessary features that would dynamically structure and coordinate supply and demand patterns so as to create, on the macroeconomic level, a virtuous loop.

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Credit, money and crises in post-Keynesian economics

In Chapter 15, Joëlle Leclaire argues that Seccareccia and Lavoie, each in their own ways, have developed a useful discussion of the interaction between the financial and real sides of the economy, from which we have benefited in our attempt to understand how this relationship is symbiotic in nature. She considers this nexus between financial and real analysis, from the perspective of the work of Lavoie and Seccareccia. In doing so, she highlights their significant contribution to our understanding of financial crises. Specifically, she looks at Wicksell, circuit theory, the decoupling of banking and real sectors, the SFC model, endogenous money, the state, and the central bank. Chapter 16, by Pascal Petit, claims that crises, be they financial or otherwise, tend to affect differently trade partners according to the specificities of the pattern of internationalization they are in. With an increasing still multidimensional internationalization, this spatial issue becomes an important issue if only for designing a sound governance of international exchanges, limiting the crises and their detrimental effects. Petit tries to investigate this plasticity, taking into account two characteristics for each market, namely their security and safety and applying these on both the consumer and the supplier sides. Although highly preliminary, such an approach hints at a gross assessment of the risks of crises and of their geographical diffusion. Finally, in Chapter 17, Jan Toporowski argues that real theories of crisis, from Diamond and Dybvig, to Kiyotaki and Moore, and today’s ‘financialization’ theorists, take a pre-finance, banking view of crisis, ultimately derived from Tugan-Baranovsky’s account of banking crises in classic capitalism in Britain. Debt is viewed as a claim on real assets, and interest on the income derived from real assets. But with long-term financing, financing is secured on financial assets, and therefore prone to illiquidity in capital markets. This makes for different kind of monetary endogeneity and financial circulation, and a different kind of financial crisis.

NOTE 1. The quotes from Malinowsky, Polanyi, and Heinsohn and Steiger are taken from Wray (1990).

REFERENCES Bougrine, H. and M. Seccareccia (2013), ‘Re-thinking banking institutions in contemporary economies: are there alternatives to the status quo?’. In Rochon,

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L.-P. and M. Seccareccia, (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State. Cheltenham: Edward Elgar, pp. 134–159. Chick, V. (1986), ‘The evolution of the banking system and the theory of saving, investment and interest’. Économies et Sociétés, Monnaie et Production, 3, 95–110. Fiebeger, B. and M. Lavoie (2018), ‘Helicopter ben, monetarism, the New Keynesian credit view and loanable funds’, Mimeo. Heinsohn, G. and O. Steiger (1989), ‘The veil of barter: the solution to “The Task of Obtaining Representations of an Economy in which Money is Essential”’. In Kregel, J. (ed.), Inflation and Income Distribution in Capitalist Crisis. London: Palgrave Macmillan. Keynes, J.M. (1971), The Collected Writings of John Maynard Keynes. Volume VI: A Treatise on Money. The Applied Theory of Money, Moggridge, D. (ed.). London: Macmillan and Cambridge University Press. Kregel, J.A. and M. Tonveronachi (2014), ‘Fundamental principles of financial regulation and supervision,’ Working papers wpaper29, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project. Innes, A. (1913), ‘What is money?’. Banking Law Journal, May, 377–408. Lavoie, M. (1992), Foundations of Post-Economic Analysis. Cheltenham: Edward Elgar. Lavoie, M. (2004), ‘The New Consensus on monetary policy seen from a postKeynesian perspective’. In Lavoie, M. and M. Seccareccia (eds), Central Banking in the Modern World: Alternative Perspectives. Cheltenham: Edward Elgar, pp. 15–34. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar. Lavoie, M. (2020), ‘Introduction’. Post-Keynesian Monetary Theory: Selected Essays. Cheltenham: Edward Elgar. Malinowsky, B. (1922), Argonauts of the Western Pacific: An Account of Native Enterprise and Adventure in the Archipelagoes of Melanesian New Guinea. London: Routledge. Marshall, W. and L.-P. Rochon (2019), ‘Public banking and Post-Keynesian theory’. International Journal of Political Economy, 48(1), 60–75. Monvoisin, V. and L.-P. Rochon (2006), ‘The Post-Keynesian consensus, the new consensus and endogenous money’. In Gnos, C. and L.-P. Rochon (eds), Post-Keynesian Principles of Economic Policies. Cheltenham: Edward Elgar, pp. 57–77. Polanyi, K. (1971), ‘Aristotle discovers the economy’. In Polanyi, K., C. Arensberg, and H. Pearson (eds), Trade and Market in the Early Empires. Chicago: Regnery Company. Rochon, L.-P. (1999), Credit, Money and Production: An Alternative Post-Keynesian Approach. Cheltenham: Edward Elgar. Rochon, L.-P. (2006), ‘Endogenous money, central banks and the banking system: Basil Moore and the supply of money’. In M. Setterfield (ed.), Complexity, Endogenous Money and Macroeconomic Theory: Essays in Honour of Basil J. Moore. Cheltenham: Edward Elgar, pp. 220–243. Rochon, L.-P. and S. Rossi (2013), ‘Endogenous money: the evolutionary and revolutionary views’. Review of Keynesian Economics, 1(2), 210–229. Rochon, L.-P and M. Setterfield (2012), ‘A Kaleckian model of growth and

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­ istribution with conflict-inflation and Post-Keynesian nominal interest rate d rules’. Journal of Post Keynesian Economics, 34(3), Spring, 497–520. Rogers, C. (1989), Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge: Cambridge University Press. Schumpeter, J. (1954/1994), History of Economic Analysis. London: Routledge. Servet, J.M. (1994), ‘La fable du troc’. Dix-Huitième Siècle, 26, 103–115. Smithin, J. (1999), What is Money? London: Routledge. Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton: Princeton University Press. Wray, R. (1990), Money and Credit in Capitalist Economies: The Endogenous Money Approach. Aldershot, UK: Edward Elgar.

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PART 1

Money, income distribution and ­post-­Keynesian economics

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1.  Celebrating pioneers* 1

Louis-Philippe Rochon and Hassan Bougrine INTRODUCTION The names of Marc Lavoie and Mario Seccareccia have been associated with one another for well over four decades, during which time they made important contributions to post-Keynesian economics in general, but have also been associated with an array of more specific topics, including the theory of the monetary circuit, economic growth, fiscal policy, monetary policy/theory and endogenous money, growth theory, and microeconomics, among others. Individually or together, they contributed a vast arsenal of both critical and constructive papers and books: close to 300 journal and book articles, as well as a number of books, authored and edited, including the Canadian version of the American micro–macro textbook by Baumol and Blinder (see Baumol et al., 2009a; 2009b). Throughout their long and distinguished careers, their contributions have pushed post-Keynesian and heterodox economics in many interesting and fruitful directions, and they have influenced a number of scholars as well as students around the world. Steadfast in their criticism of ­neoclassical – or orthodox or mainstream – economic theory, as well as their rejection of mainstream policies, in particular fiscal austerity and fine-tuning monetary policy, Lavoie and Seccareccia have shared a vision of a more real-world view of economics, where institutions mattered. But their meeting almost did not happen, as it was more coincidental than anything else. They first met in Ottawa, in the spring of 1979. Seccareccia had arrived at the University of Ottawa the previous fall, in 1978, on a limited-term appointment, while completing his doctoral degree in economics at McGill University, under Professor Jack Weldon, which he received in 1983. Seccareccia’s thesis was on ‘Prices Changes and Movements in the

* This chapter also appears in the companion volume to this book, Economic Growth and Macroeconomic Stabilization Policies in Post-Keynesian Economics, edited by Hassan Bougrine and Louis-Philippe Rochon, and published by Edward Elgar.

14

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Celebrating pioneers ­15

Composition of Output and Employment in Canada’, which ended up being a two-volume, 717-page dissertation. Lavoie arrived at the University of Ottawa the following year, in the fall of 1979, after having completed a doctorate at the Université de ParisSorbonne, where he studied with Bernard Ducros, and was exposed to the ideas of the French monetary circuit. It was during this time that he first met Alain Parguez, who was then giving some of Ducros’s lectures. Parguez would later make regular trips to Ottawa and would be associated with them in one way or another through the next four decades. In fact, Lavoie was instrumental early on in bridging the circuit and postKeynesian schools, in a series of articles from 1982 to 1990 (see Lavoie, 1982; 1984; 1985; 1986a; 1986b; 1987; 1990). Prior to Paris, Lavoie had done an undergraduate degree in economics at Carleton University in Ottawa, from 1972 to 1976, where he was exposed to post-Keynesian economics in a seminar taught by Thomas Rymes, who would later edit a book on lecture notes taken by some of Keynes’s students (see Rymes, 1990). Like Seccareccia, Lavoie had also been hired on a two-year position at the University of Ottawa. But in 1981, four assistant professor positions opened up at the University of Ottawa, all tenure-track, at which time they both applied and were both offered positions.

IMPORTANT THEMES For a meeting that was the result of pure historical luck, their relationship provided a number of important contributions. And while each has a distinct line of research, many of their contributions overlap, and in fact one can say there are a number of themes that have followed them through the last 40 years. For instance, both defend the ‘big tent’ approach to post-Keynesian economics, preferring to see similarities rather than differences between the various strands of heterodox or post-Keynesian economics, and where differences exist, they argue these are often the result of emphasis rather than substance. In this sense, they both resisted the narrower definition of post-Keynesian economics provided, for instance, by Paul Davidson, who regarded a big tent as an ‘incoherent analytical structure’ (Davidson, 2003–2004, p. 247). In this sense, Lavoie and Seccareccia always sought to emphasize the unifying traits between post-Keynesians, Sraffians, Kaleckians and other heterodox approaches. Unsurprisingly, both have condemned in-fighting among the various strands of post-Keynesian/ heterodox economics.

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In the field of monetary economics, Lavoie and Seccareccia were among the first to have popularized the idea that money is created ex nihilo, out of nothing, or by a stroke of the banker’s pen. Indeed, along with Alain Parguez (1984) and Augusto Graziani (1990), they are pioneers of the circuitist school (Parguez and Seccareccia, 2000). In fact it was largely because of their contributions that we know of circuit theory, as they have sought to bridge the European circuit approach and the Western postKeynesian approaches to money. Moreover, they have contributed to our understanding of endogenous money, and have been clear that money is endogenous on two levels: (i)  with respect to the relationship between banks and borrowers; and (ii) when it comes to the relationship between banks and the central bank. With respect to the first relationship, they have always emphasized money as credit/debt, as a social relation that comes into existence once credit is issued and lends itself to destruction once debt is paid off. This understanding led to the development of the theory of endogenous money, which means that money is created within the system as private, creditworthy, economic agents present their financing needs to commercial banks. Here, the act of lending is a validation of the private sector’s production plans. This has marked a clear break with the dominant view, according to which money was exogenously determined and vertically introduced into the system (see Moore, 1988). The idea of endogenous money is also extended to the central bank, and its relationship with both banks and the government: in the monetary circuit theory, the central bank is viewed not only as the bank for all banks, but also as the government’s bank. The central bank is the ultimate provider of liquidity to the banking system, but it does so by responding to the banking system’s needs of liquidity: hence, central-bank money is also endogenous and responds to the needs of the banking system, as pioneered early on by Alfred Eichner (1979), whose own contributions were celebrated in Lavoie, Rochon and Seccareccia (2010). The central bank can also finance all of the government’s expenditures simply by advancing funds to the government, in return for government securities (Lavoie, 1992; Bougrine and Seccareccia, 2002). This finding is important because it dispels two prevailing myths: (i) the scarcity of public funds; and (ii) the negative effects of government debt and deficits (crowding out, etc.). Such understanding liberates the government from being subject to an artificial budget constraint and, therefore, allows it actively to intervene and fill the gap of underutilized capacity of society as a whole – that is, strive to achieve full employment. A final element in Lavoie and Seccareccia’s contribution to our understanding of endogenous money is the necessity to reject the existence of a

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natural rate of interest. As stated in the introduction, ‘one also has to reject the existence of a natural rate of interest in a monetized economy’ (Lavoie, 2020). Indeed, to consider the central bank rate as truly exogenous, we must also insist that it is not a short run policy the aim of which is to ultimately end up at its natural value. Full employment can occur at any level of the rate of interest. Indeed, the issue of full employment in particular has been a major preoccupation in Lavoie’s and Seccareccia’s scholarly activity throughout their careers (Lavoie, 1986b; Seccareccia, 1991; 2004). Together or individually, they have contributed great ideas, ranging from understanding the causes of unemployment to proposals of policy actions to achieve full employment. Indeed, both Lavoie and Seccareccia strongly reject the claims that unemployment is a supply-side problem and argue instead that the growing unemployment in modern economies has essentially resulted from a deliberate policy choice to avoid stimulating demand sufficiently via fiscal measures (Lavoie, 1986b; Seccareccia, 2013). This is why more recently they have resorted to putting pressure on policymakers to immediately start implementing activist fiscal and monetary policies with the aim of securing and maintaining full employment (Seccareccia and Lavoie, 2018). Lavoie and Seccareccia have also had specific views on the rate of interest. First, they argued persistently that the rate of interest was not a market-determined price, by nebulous forces of supply and demand for money, but rather set and administered by the central bank, at whatever rate the central bank deemed appropriate given its economic goals. This was their commitment to the horizontalist cause. But there was more. They both shied away from the use of counter-cyclical monetary policies or the use of interest rates to fine-tune economic activity, claiming it was an inefficient policy tool, called by Rochon and Setterfield (2008) the ‘parking it view’ and renamed by Lavoie (2014), appropriately, as the income distributive rule. Second, they viewed interest rates as an income distributive variable, affecting the distribution of income between workers and rentiers. In that sense, they provided a very useful way of measuring this relationship, which they called the Pasinetti Index (Lavoie and Seccareccia, 1999; Seccareccia and Lavoie, 2016; see also Lavoie, 1996).

OUR OWN JOURNEYS WITH MARC AND MARIO We were both students of Lavoie and Seccareccia. Over the years, we both enjoyed countless meetings and long conversations with them on a number of topics. They have both had a deep and profound influence on our views, and on how we see the world around us.

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We decided to put together these two companion volumes, Credit, Money and Crisis in Post-Keynesian Economics and Economic Growth and Macroeconomic Stabilization Policies in Post-Keynesian Economics, for very personal reasons, but also in recognition of their outstanding work and their contribution to the greater post-Keynesian community, both as individuals and as two scholars linked together over almost four decades. Rochon arrived at the University of Ottawa in 1982, where he first registered as a political science student, but switched to economics after taking a course with Anna Koutsoyiannis in the second year. Koutsoyiannis, who at the time taught micro and econometrics, was a ball of fire, and Rochon was convinced that an economics degree was better than a political science one. Even her microeconomics was in many ways heterodox or at least very critical. But Rochon always felt uncomfortable in economics overall, or, rather, with its neoclassical teachings. Things like ‘prices are determined by supply and demand’ always felt hollow, but Rochon never had the tools to critically analyse the conventional teachings. However, things changed dramatically when, in 1986, because of a lack of electives, Rochon ended up taking an obscure class, given by an obscure professor: PostKeynesian Theory: Money and Effective Demand, taught by Marc Lavoie. As a side note, this course was the basis for Marc’s 1992 Foundations of Post-Keynesian Economic Analysis, as well as his 2006 book, Introduction to Post-Keynesian Economics (which Rochon translated into English). The course provided Rochon with the answers he was seeking, and the course just ‘made sense’. The following year, he took Seccareccia’s fourth year macro class, and it was at this time that he also met Alain Parguez. Needless to say, these two courses had a profound influence on Rochon, as was his meeting with Parguez, with whom he developed a life-long friendship. Rochon then ended up going to McGill University to work with Athanasios Asimakopoulos, a close colleague of Jack Weldon, and found his way eventually to the New School. Bougrine arrived at the University of Ottawa in the fall of 1983 as a doctoral student. Since the list of required courses for the PhD program did not include any of the courses taught by either Lavoie or Seccareccia, Bougrine got to know them through the various economics seminars, which included Alain Parguez, Anwar Shaik and Michel Chossudovsky, among others. The discussions during these debates were insightful and illuminating. In 1988, Bougrine accepted a full-time position and moved to Sudbury, Ontario, but continued to visit the University of Ottawa on a regular basis. It was during these discussions that Seccareccia became the supervisor of Bougrine’s PhD thesis; and that also marked the beginning of a long-time professional collaboration. The chapters included in these two books, Credit, Money and Crisis

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in Post-Keynesian Economics and Economic Growth and Macroeconomic Stabilization Policies in Post-Keynesian Economics, are original contributions written by 34 distinguished economists who came to know Marc and Mario, either as students or as colleagues, and who appreciate their firm commitment to the development of a realistic theory of the economy and society as well as the institution of policies to improve the well-being of humans worldwide. Each book contains 17 chapters, including this one. We are confident that each chapter represents a serious addition to this realistic view and we hope that the reader will find it beneficial.

ACKNOWLEDGEMENTS This chapter benefited greatly from a series of email exchanges between Rochon, Lavoie and Seccareccia, as well as being inspired by Lavoie (2013) and Seccareccia (2019).

REFERENCES Baumol, W., A. Blinder, M. Lavoie and M. Seccareccia (2009a), Microeconomics: Principles and Policy, 1st Canadian edn, Toronto: Nelson Education. Baumol, W., A. Blinder, M. Lavoie and M. Seccareccia (2009b), Macroeconomics: Principles and Policy, 1st Canadian edn, Toronto: Nelson Education. Bougrine, H. and M. Seccareccia (2002), ‘Money, Taxes, Public Spending and the State within a Circuitist Perspective’, International Journal of Political Economy, 32 (3), 58–79. Davidson, P. (2003–2004), ‘Setting the Record Straight on A History of Post Keynesian Economics’, Journal of Post Keynesian Economics, 26 (2), 245–272. Eichner, A.S. (1979), A Guide to Post-Keynesian Economics, London: Macmillan. Graziani, A. (1990), ‘The Theory of the Monetary Circuit’, Economies et Sociétés, 24 (6), 7–36. Lavoie, M. (1982), ‘Les post-keynésiens et la monnaie endogène’, Actualité Économique, 58 (1), 191–221. Lavoie, M. (1984), ‘Un modèle post-keynésien d’économie monétaire fondé sur la théorie du circuit’, Économies et Sociétés, 18 (2), 233–258. Lavoie, M. (1985), ‘Credit and Money: The Dynamic Circuit, Overdraft Economies, and Post-Keynesian Economics’, in M. Jarsulic (ed.), Money and Macro Policy, Hingham, MA: Kluwer Academic Publishers, pp. 63–85. Lavoie, M. (1986a), ‘L’endogeneité de la monnaie chez Keynes’, Recherches économiques de Louvain, 52 (1), 67–84. Lavoie, M. (1986b), ‘Chômage keynésien et chômage classique: un prétexte aux politiques d’austérité’, Economie appliquée, 39 (2), 203–238. Lavoie, M. (1987), ‘Monnaie et production: une synthèse de la théorie du circuit’, Économies et Sociétés, 9, 65–101.

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Lavoie, M. (1990), ‘Le circuit dans la pensée post-keynésienne américaine’, Économie, 6, 105–118. Lavoie, M. (1992), Foundations of Post-Keynesian Economic Analysis, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing. Lavoie, M. (1996), ‘Monetary Policy in an Economy with Endogenous Credit Money’, in G. Deleplace and E. Nell (eds), Money in Motion, London: Macmillan, pp. 532–545. Lavoie, M. (2006), Introduction to Post-Keynesian Economics, London: Palgrave Macmillan. Lavoie, M. (2013), ‘Teaching Post-Keynesian Economics in a Mainstream Department’, in J. Jespersen and M.O. Madsen (eds), Teaching Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 12–33. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. Lavoie, M. (2020), ‘Introduction’, in Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. Lavoie, M. and M. Seccareccia (1999), ‘Interest Rate: Fair’, in P. O’Hara (ed.), Encyclopedia of Political Economy, vol. 1, London: Routledge, pp. 543–545. Lavoie, M., L.-P. Rochon and M. Seccareccia (2010), Money and Macroeconomic Issues: Essays in the Eichnerian Tradition, London: Routledge. Moore, B. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge, UK: Cambridge University Press. Parguez, A. (1984), ‘La dynamique de la monnaie’, Economies et Sociétés, Monnaie et Production, 1 (4), 83–118. Parguez, A. and M. Seccareccia (2000), ‘The Credit Theory of Money: The Monetary Circuit Approach’, in J. Smithin (ed.), What is Money?, London and New York: Routledge, pp. 101–123. Rochon, L.-P. and M. Setterfield (2008), ‘The Political Economy of Interest Rate Setting, Inflation, and Income Distribution’, International Journal of Political Economy, 37 (2), 2–25. Rymes, T.K. (1990), Keynes’s Lectures 1932–1935: Notes of a Representative Student, Ann Arbour, MI: University of Michigan Press. Seccareccia, M. (1991), ‘An Alternative to Labour-Market Orthodoxy: The PostKeynesian/Institutionalist Policy View’, Review of Political Economy, 3, 43–61. Seccareccia, M. (2004), ‘What Type of Full Employment? A Critical Evaluation of Government as the Employer of Last Resort Policy Proposal’, Investigación Económica, 63 (247), 15–43. Seccareccia, M. (2013), ‘Budgetary Deficits and Overhanging Public Debt: Obstacles or Instruments to Full Employment? A Kaleckian/Institutionalist Perspective’, Journal of Economic Issues, 47 (2), 437–443. Seccareccia, M. (2019), ‘My Contact with Marc Lavoie Since [sic] Forty Years’, remarks given at the AFEP conference, Lille, July. Seccareccia, M. and M. Lavoie (2016), ‘Income Distribution, Rentiers, and Their Role in a Capitalist Economy: A Keynes–Pasinetti Perspective’, International Journal of Political Economy, 45 (3), 200–223. Seccareccia, M., M. Lavoie, et al. (2018), ‘Letter Addressed to the Honourable Bill Morneau, Federal Minister of Finance of the Government of Canada’, available at: http://www.progressive-economics.ca/2018/06/04/the-bank-of-canada-sho​uld​ -target-full-employment-and-inflation/.

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2.  Understanding credit-money: Lavoie and Seccareccia’s contribution to monetary theory Robert Guttmann INTRODUCTION Marc Lavoie and Mario Seccareccia, who spent pretty much their entire academic careers together at the University of Ottawa, have made the most of this twist of fate. Their fruitful collaboration over four decades has yielded a rich body of work whose strategic significance for the progress of Post-Keynesian economic theory deserves much commentary and debate. This is especially true, it seems, when it comes to their work on matters of money. How economists view this crucial institution and relate it to the rest of the economy inevitably shapes very much how they specifically come to understand the modus operandi of our capitalist market system.

THE STANDARD VIEW OF ‘NEUTRAL’ MONEY Standard neoclassical economics has a very peculiar view of money as an exogenous stock variable separated from the so-called ‘real’ sphere of exchange and production with regard to which the quantity of money in circulation is supposed to be neutral. While there may be instances where variations of the money supply or its velocity may affect the nation’s output and employment levels as those move towards their long-term equilibrium position following instances of temporary deviation, such impact is at best short-lived, if it exists at all. In the long run, money is but a ‘veil’ devoid of any lasting effect on those real-economy variables. The Austrian economist Friedrich Hayek (1931) has referred to this characterization as the neutrality of money. All that money may hence influence in the long run are ‘nominal’ (i.e. money-determined) variables such as prices, wages, or the exchange rate. If we want these variables to be reasonably stable, we have to have a central bank committed to follow the classical ‘Quantity 21

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Rule’ of slow and steady money-supply growth. Derived from Irving Fisher’s (1911) Equation of Exchange M.V 5 P.Q, the rule states that the central bank should let the money supply M grow at the rate at which the gross national product Q expands naturally (based on increases in labor supply and productivity) to provide for a stable price level P. We assume here a constant (or at least predictably stable) velocity of money V, justified by arguing that its reciprocal, the money ‘demand’ as the percentage of income the public wants to hold in the form of cash to pay for daily transactions, reflects a routinized spending pattern. This separation of the economy into monetary (i.e. nominal) and real spheres, reconnecting both by means of the aforementioned Quantity Theory of Money dating back to David Hume’s (1752) discussion of the specie-flow adjustment mechanism, evacuates money from the organization of economic activity so as to argue in favor of the system having an automatic tendency towards equilibrium. The problem is that, the moment you bring money fully into the picture at the heart of what is in effect a cash-flow economy, any notion of equilibrium gets reduced to a purely coincidental moment of balance bound to disappear in short order. Money and equilibrium do not go together, as already recognized by the neoclassical economist Frank Hahn (1965). Equilibrium conditions are all defined in non-monetary terms, as in depicting exchange as barter, physical production functions of factor inputs yielding output of goods and services, partial equilibrium of a single market’s quantity demanded equaling its quantity supplied, general (multi-market) equilibrium, or the ex-ante equalization of saving and investment at the macro level. This makes for a logically beautiful and consistent construct, one that also happens to be ideologically reassuring, at the expense of having not that much to say about how capitalist economies really work.

WICKSELL AND KEYNES The idea of the money supply as an exogenous stock variable made perhaps some sense in the 19th century when we were still operating under a gold standard and money was thus a commodity. But even then the prevailing regime of commodity-money became increasingly supplanted by the emergence of credit-money with which it had to learn how to coexist through new rules of convertibility – first integrating fiat money (‘currency’) issued by the state with the emergence of a London-centered gold-exchange standard on a global scale after 1879, then incorporating private bank money in the form of checking accounts (‘demand deposits’) which started to take off as the century came to a close. This two-step flexibilization of

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the money supply, allowing the banking system to respond to the funding needs of the government and private actors with money creation in acts of credit extension (hence the notion of ‘credit-money’), also affected how economists came to analyze the monetary process going forward. Seccareccia (1994), always interested in grounding key concepts and arguments in the history of economic thought, had already traced how this confluence of two different money forms began to impact the thinking of the great economic thinkers at the time, even while they remained wedded to the principal arguments of mainstream orthodoxy. Ever since the debate between David Ricardo and Thomas Malthus two centuries ago concerning the validity of Say’s Law versus the system’s propensity towards general gluts, classical economists had built their model of an automatically self-balancing economy around the presumed (ex-ante) equality between saving and investment as maintained at the full-employment level by appropriate adjustments in the interest rate. The Swedish economist Knut Wicksell (1936 [1898]) integrated the appearance of credit-money into this argument when he proposed the loanable-funds doctrine according to which the interaction between the borrowers’ external financing needs (the ‘demand for loanable funds’) and the supply of loanable funds comprising loans, bonds, and other forms of credit determines a market interest rate which he termed the ‘money’ rate, replacing thereby the traditional saving-and-investment schedules of classical political economy. At the same time, Wicksell also introduced the notion of a ‘natural’ (real, short-term) rate of interest at which the economy operates at a full-employment level consistent with price stability. Wicksell afforded the relationship between the two interest rates great strategic importance through what he termed the ‘cumulative process,’ with an excessively low money rate engendering debt-fueled boom conditions and inflation-prone acceleration of money creation within the banking system while a money rate set too high above the natural rate triggers recessionary adjustments and deflationary pressures. Since the up- and down-cycles cancel each other out over time, Say’s Law and the Quantity Rule can still be preserved as valid in the long run as was indeed implied in Wicksell’s work. His extension provided nonetheless an early insight into money’s endogeneity when functioning as elastic credit-money from which derived a discretionary role for the central bank to keep the money rate closely aligned with the (invisible) natural rate lest the economy be allowed to move away from its balanced-growth path. Wicksell’s theory of the interest rate exerted great influence on the Austrian School (Hayek, von Mises, Menger) for whom the bane was always excessively lax monetary policy by an irresponsible central bank. His cumulative process served as the principal business-cycle theory until

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John Maynard Keynes’ (1936) General Theory anchored a revolution in economic thinking by reformulating how capitalist economies operated in intrinsically cyclical fashion. One way to characterize Keynes’ work is to see it as a life-long attempt to clarify what it means to have a market economy based on credit-money and correspondingly well-developed financial markets or institutions. Keynes’ (1923) beautifully written Tract, while still largely adhering to the classical Quantity Theory tradition, takes lucid account of the intense monetary instability associated with World War I and its turbulent aftermath to put forward a series of prescriptive arguments in favor of a stable currency managed responsibly by the state rather than going back to a gold standard. Keynes’ (1930) two-volume Treatise returns to the Wicksellian business-cycle dynamic by separating saving from investment and focusing on discrepancies between them to explain the cyclical sequencing of booms and busts. This masterful book also an extensive discussion of money creation and circulation in the banking system, a system that offers its clients debits (overdrafts) and credits (deposits) which the central banks manage in such a fashion as to keep the system stable. In that context Keynes offers a vision of money, apart from currency or bank reserves, as social convention endowed with the public-good quality of liquidity, a concept he introduced here for the first time. By the time Keynes gets to the General Theory (1936), we are in the middle of the Great Depression, prompting him to focus on the level of employment. Both Lavoie (1992, 2016) and, albeit in more indirect fashion, also Seccareccia (2004) have commented separately on the differences in monetary analysis between Treatise and General Theory and their significance in the history of economic thought. In the General Theory, the analysis of money got compressed into a much tighter conceptual framework than was the case in the Treatise to highlight the liquidity preference underpinning various money-demand motives as a possible barrier to adequate levels of aggregate demand. Keynes’ principal objective in this magnum opus of his is to demonstrate how aggregate saving and investment can be brought into equilibrium at levels below full employment. Excessively high saving, depressing overall consumption spending as the largest source of aggregate demand, get matched with unsold inventories boosting investment beyond planned levels on the other side of the equation. This argument does away with the classical notion of full-employment equilibrium, a breakthrough in economic analysis made necessary by the reality of a decade-long depression from which the advanced capitalist economies could not emerge on their own.

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THE ENDOGENEITY OF MONEY I am introducing this two-step movement away from the standard view of money as veil, not least because Lavoie and Seccareccia have continued along this Wicksellian-Keynesian tradition, to help anchor the next chapter in this evolution of heterodox thought – Post-Keynesian theory. In this endeavor the two have consistently followed Keynes’ (1973 [1933]) prescription to focus on what he termed ‘a monetary theory of production’ in which money is not neutral, in sharp and direct contradistinction to what he characterized as the standard ‘real-exchange economy’ view as espoused by Alfred Marshall or Arthur Pigou. When money is presumed to be not neutral, it is so to the extent that it enters ‘the motives and decisions’ of economic actors so that we have to know how money ‘behaves’ as it drives our economy forward in continuously self-adjusting motion.1 It makes sense to start analysis of the monetary process at the beginning, with the creation of money. Heterodox economists of all traditions insist here on the endogeneity of money by which is meant, among other features, its creation in response to manifest funding needs of private or public economic actors within the banking system in acts of lending. Such money needs to be understood as credit-money whose interconnection between the acts of money creation and credit extension shapes the economy in profound ways, as I have analyzed in considerable detail elsewhere (see Guttmann, 1994). In a regime of credit-money, currency responds in elastic fashion to the funding needs of the economy, governments can run budget deficits continuously and have the public debt monetized by the central bank, enterprise has the means to finance mass production, and consumers can spend beyond current income on expensive items such as homes or private education. All these are features of contemporary capitalism that did not exist as such a century ago, not even at the time of Keynes’ writing. Lavoie (1984) in particular distinguished himself early on in laying out the Post-Keynesian logic of endogenous credit-money and its manifold implications in crystal clear fashion. Issued when banks make loans to finance production, such credit-money turns the orthodox argument on its head: investment creates saving rather than the other way around as claimed in standard theory; and by the same taken loans beget deposits which is the exactly opposite causality of the one claimed by the Monetarists. More generally speaking, the entire sequencing of the Monetarists and neoclassical Keynesians from high-powered money (‘monetary base’ MB) via money multiplier m to the money supply M, which in turn is connected via velocity V to nominal GDP, is stood on its head in the Post-Keynesian argument where the causation runs from income spent to money and from

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money to bank reserves. The same can be said for the standard portfolio effect implying a choice between money and other, less liquid assets which in reality is reversed inasmuch as portfolio shifts are induced by changes in interest rates and not vice versa. Given the relatively pronounced interestinelasticity of money demand, slowdowns require fairly large interest-rate hikes and hence rather drastic shifts in the policy stance of central banks. Most of the time, therefore, central bank policy is accommodationist, allowing the banks to satisfy the public’s borrowing needs, which yields a basically horizontal money–supply curve according to which ­borrowers will get all their funding done at whatever interest rate is set. When framed in this context, monetary policy then plays out around setting the a­ ppropriate interest rate rather than targeting the money supply. This gets us to a key debate in Post-Keynesian monetary theory between the Horizontalists, implying an infinitely elastic money-creation process at a set base interest rate fully accommodated by the central bank, and the Structuralists who focus on additional factors likely to play a determinant role in the money creation process such as endogenous determinants of the interest rate, reserve-reducing innovations by banks, and moneydemand elements shaping the response functions of banks and the public, in particular those relating to liquidity preference.2 The horizontalist position emerged in the 1970s and 1980s as a pedagogically captivating contradistinction to mainstream Monetarism to crystallize money’s endogeneity at the heart of an alternative Post-Keynesian paradigm which at that point was broadening its focus beyond an initial emphasis on growth and distribution, with key contributions pushing in this direction by Kaldor (1982) and Moore (1988). Whereas Lavoie is generally included in the Horizontalist camp, his own contribution to this crucial question in Post-Keynesian theory is a lot more nuanced than would be implied by the simplifying characterizations of the original Horizontalists by their adversaries. This is clearly evident when looking at the rather balanced treatment of that debate in his two great tomes on Post-Keynesian theory (see Lavoie, 1992, 2014). But this becomes perhaps even more convincingly clear when we see his efforts in Lavoie (1996a) at showing how the Horizontalist argument of central bank accommodation does not preclude the presence of credit constraints and other limitations on the bank-lending pipeline pushing up interest rates as recovery turns into a boom as the rapidly expanding economy moves towards a situation of credit overextension. In that regard he has played a crucial role in providing a possible synthesis between these two Post-Keynesian variants, which considers the structural conditions under which the money supply curve slopes upward. This obviously has, among other factors, much to do with behavior of banks seeking to balance their (or their clients’) liquidity preference and their profit motive shaping

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their credit-extension and money-creation activities. It thus behooves us to model bank behavior in greater detail, as evoked by Deriet and Seccareccia (1996), Bougrine and Seccareccia (2013), Seccareccia (2014), or Lavoie and Seccareccia (2016).3 A pedagogically very effective presentation of the endogenous moneycreation process involving modern private bank money was offered by Lavoie (2003). Using T-accounts to illustrate cash-flow transactions between the parties involved, Lavoie constructs layer after layer of how the banking system as a whole manages to create money as part of its bread and butter business of financial intermediation. He starts with a single bank in a pure credit economy, whose money-creation activity becomes part of how it earns a profit. In a multi-bank system there may typically arise a sort of division of labor between money-center banks specializing in lending to business and smaller regional or community banks collecting deposits. The insertion of a central bank and then also government with its public expenditures and collection of tax revenues, issuing deficit-covering bonds which the central bank may partially monetize, complete the system which in the end can even be opened up to discuss the implications of cross-border money flows on the domestic banking system. Apart from demonstrating convincingly the Post-Keynesian (endogenous creditmoney) causality from loans to deposits and from deposits to reserves, which is exactly the opposite from that usually argued by the Monetarist (exogenous money-stock) orthodoxy, Lavoie (2003) uses his multi-layered model of the banking system to distinguish overdraft facilities from an asset-based system, to highlight liquidity and solvency issues banks may face in the run-up to crisis, and to analyze recent developments in banking such as securitization, electronic money, or repurchasing agreements.

THREE GENERATIONS OF MONETARY CIRCUITS Insisting on modern money’s innate endogeneity, as Post-Keynesians are prone to do, makes total sense when considering that we live after all in a cash-flow economy in which all economic activities are organized as ­intertwined monetary circuits – notably exchange M – C – M, production M – C . . . C′ – M′, and credit M – M′ (where M′ . M thanks to the income creation process of value added). Analyzing economic activity in terms of such monetary circuits, intertwined to the extent that all production activity starts and ends with exchange transactions (purchase of inputs, sale of output) while credit depends on the successful conclusion of the ­(production and consumption) activities it helps to fund, has been the great achievement of Karl Marx (1992 [1867]).4 To the extent that the monetary

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production circuit involves spending money now (M – C) in order to make more money later (C′ – M′), this vital activity involves buying preceding selling. Yet all market participants are subject to a monetary constraint inasmuch as they have to sell first (earn income) before being able to buy (spend it). Credit covers these inherent cash-flow gaps between buying and selling by allowing borrowers access to spendable income before they have earned it – and, by extension, in order to earn it. Given this credit-dependent dynamic of our monetary production economy in need of bridging innate cash-flow gaps, it will only be a question of time before the extension of credit will no longer just rely on transferring existing income (from lender to borrower) but get tied to automatic money creation injected into those circuits as new income (to be shared between lender and borrower). The emergence of credit-money in the wake of Roosevelt’s monetary reforms following the collapse of the gold standard in 1931 was thus a historic imperative.5 Even though Marx was very interested in the behavior of banks and made recurrent allusions to credit-money issued by private (i.e. profitmotivated) commercial banks, his major writings occurred during a period of the gold standard’s reinforcement, starting with the Peel Bank Charter Act of 1844 and reaching its climax with the global adoption of the London-centered gold-exchange standard by 1879. So Marx never put banks at the center of his monetary circuit theory as happened later with a Post-Keynesian variant known as the circuitists (see Graziani, 1989) who depicted all economic transactions with banks intermediating between buyer and seller and so placed credit-money strategically as the driver of modern monetary production economies without any need for fiat money issued by the state or central bank injections of reserves. The circuitists aggregated economic actors from the micro-level to the macro-level on the basis of their respective positioning in this triangular configuration of monetary circuits, thus grouping together businesses, workers, and banks respectively. Both Lavoie and Seccareccia can be considered protagonists of this approach, with the latter in particular doing much work to help its propagation (see Seccareccia, 1996; 2003; Belliofore and Seccareccia, 1999; Parguez and Seccareccia, 2000; Lavoie, 2013a). An alternative monetary circuit approach with the Post-Keynesian tradition emerged in the 2000s with the so-called post-Chartalist Modern Money Theory (MMT) whose emphasis is on state-issued fiat money and its insertion into the economy via the government’s interaction with the central bank in the wake of monetizing its deficit-spending. In this approach only fiat money matters as fuel for the economy’s expansion by giving rise to what MMT protagonists, such as Wray (1998) or Mitchell (2009), have referred to as reserves-enhancing and wealth-creating ‘vertical

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transactions,’ in contradistinction to ‘horizontal transactions’ within the private sector in which assets are offset by liabilities and hence no new net wealth is created. This distinction is framed so as to highlight the government’s positive contribution to economic activity, downplay fears of budget deficits, and to call for full employment policies centered on statesponsored job creation programs. The MMT has many critics, even within the Post-Keynesian camp, and Lavoie (2013b) has offered an interesting critique of its overly simplistic integration of government and central bank by taking a closer look at how exactly payments systems transfer funds and settle payments obligations to underpin endogenous money creation within the banking system. Lavoie has managed to resolve the differences and tensions between these two alternative macro-approaches to money within the PostKeynesian tradition by offering a powerful synthesis that incorporates the substantial features of both and thereby integrates them into a multisector structure covering the entire economy, the path-breaking stock-flow consistent (SFC) model sketching a fully monetized capitalist economy in forward motion. This is a complex model he developed with the legendary Post-Keynesian economist Wynne Godley, rooted in the latter’s sectoralbalances approach which the MMT also used to frame its argument on a macro-economic level (see Godley and Lavoie, 2007). With credit-money issued as simultaneous asset and liability for either side, all transactions can thus be traced as reciprocal balance-sheet entries between the parties involved. Possibly more than any other economist I know of, Lavoie has consistently used balance-sheet entries between interacting parties to trace the cash flows in monetary circuits. In the SFC model these entries are aggregated to sectoral balance sheets (of government, firms, households, banks, the central bank, etc.) on top of which is added a transaction matrix of income flows between those various sectors whose precise constellation depends on underlying behavioral assumptions shaping the actions and decisions of the different actors involved (e.g. saving behavior of households, leverage ratios, price formation of firms). By updating the sectoral balance sheets every period in terms of noting how the stocks of assets and liabilities have been changed by the transaction flow of funds and by capital gains or capital losses, the latter being associated with the stock revaluation matrix, we can track how the whole system moves through time and identify unsustainable imbalances building up in the system as it moves forward. The model integrates real and financial sectors better than any other, and its internal consistency derives from the endogenous circulation logic of credit-money according to which someone’s asset is always someone else’s liability at the same time and an inflow is simultaneously also an outflow. You can structure SFC models with as many sectors as you

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want, giving their model-builders lots of flexibility and allowing for many different problems to be investigated. No wonder they have enjoyed rapidly growing popularity among heterodox economists over the last decade.6

FALLACIES OF COMPOSITION Another way in which Lavoie has contributed mightily to our understanding of how the micro and macro levels of economic theorizing relate to each other is by pointing out the many fallacies of composition that may arise when we project from the behavior of individual actors to the level of the economy as a whole. This already started famously with John Maynard Keynes in his General Theory where he illustrated that what made sense for individual firms, namely to cut back production and employment during periods of declining sales, would prove disastrous for the economy as a whole, being thus thrown into self-feeding recession. Much like Keynes had done before him when showing that individual attempts to save more may well lead collectively to lower personal saving for the entire household sector, the so-called ‘paradox of thrift,’ Lavoie (2014) framed several of these compositional fallacies in terms of paradoxes. A number of those relate to finance. For instance, individual efforts to deleverage typically necessitate spending cutbacks to reduce borrowing needs or forced asset sales which, when undertaken by the entire group of firms or financial institutions at the same time, may so reduce earned income levels or asset values that the ­leverage ratios actually rise as the denominator drops faster than the numerator – the paradox of debt, a phenomenon we have seen spread globally in the wake of the systemic crisis of 2007/2008 and playing a key role in what Richard Koo (2011) has termed ‘balance-sheet’ recessions in a replay of Irving Fisher’s (1933) debt-deflation spiral. That crisis also demonstrated another fallacy of composition, the paradox of liquidity. Individual efforts to increase liquidity by selling off assets may depress the prices of the latter substantially if occurring on a sufficiently widespread scale. The end result may be that markets for those assets actually freeze as happened on several occasions during the 2007/2008 crisis with mortgage-backed securities, asset-backed commercial paper, repos, and money market funds. There is another dimension to the paradox of liquidity already highlighted by the great Post-Keynesian financial-crisis theorist, Minsky (1982, 1986). For him much financial innovation activity occurs to enhance liquidity for individual users by providing new alternatives to holding cash, as for instance happened with the introduction of money market funds in 1975 or integrated cash-management

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‘sweep’ accounts in 1982. But these very innovations also encourage users to increase their leverage as they make it easier to live with higher levels of debt. As debtors drive financial expansion by taking on more debt and using a greater variety of cash substitutes in the (ultimately illusory) belief that they can always have easy access to cash when needed, the ensuing increasingly complex layering of financing arrangements leaves the entire system with fewer fail-safe cash or quasi-money assets (e.g. Treasury bills) relative to the potential demand for those during instances of financial instability. In this way overall liquidity actually erodes! This liquidity-paradox phenomenon is ultimately closely related to the paradox of tranquility which Minsky (1982, p. 26) defined simply as ‘stability is destabilizing’.7 When we have lived for a while without crisis, especially as we become increasingly euphoric and gripped by a get-rich-quick mentality, we end up forgetting about our last painful experience with crisis. Instead we downplay risk, take on more debt, and so become, over time, more financially fragile as our debt servicing charges and exposure to capital losses both rise. Against this background of eroding margins of safety even relatively minor slowdowns in income generation, which often coincide with rising interest rates near the cyclical peak, can trigger major bouts of financial instability. Those turn easily into full-blown crises as lenders cut off overextended borrowers. Finally, there is the paradox of risk, which also ended up playing a major role in the global financial crisis a decade ago. Just as the increased layering of the financial system made it more illiquid, so did risk-reducing efforts and innovations end up making the entire system actually riskier. Several innovations, in particular financial derivatives and most notably creditdefault swaps, came into widespread use over the last quarter of a century as risk-transfer instruments, whereby market risks or credit risks could be transferred to others. The same holds true for securitization, whereby loans get re-bundled into securities that can be sold off. In reality, however, all these risk-transfer instruments ended up spreading the risks among a wider group of investors tied to each other in ever-larger interlocked funding and contractual-commitment chains which, when rupturing in a crisis, leave all parties so engaged with losses. Since the use of such risk-transfer instruments encourages its users to believe that they are actually reducing their individual risk exposure, they are incentivized to take on more risk over time, which causes the eventual collapse of the credit-fueled boom to unfold in more dramatic and painful fashion. These four paradoxes presume a proper role for finance at the center of the monetary production economy in feeding its cyclical growth dynamic, something that the neoclassical orthodoxy’s artificial separation of money and credit prevents us from doing. Standard macro-economic models, such

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as the dynamic stochastic general equilibrium (DSGE) model, leave barely any space for finance. By contrast, the Post-Keynesians afford it a crucial role, notably Minsky’s (1977, 1992) financial-instability hypothesis whereby the business cycle is tied to a parallel credit cycle, feeding its amplitude as credit overextension yields growing and spreading conditions of financial fragility when many heavily indebted borrowers can only service existing debt by taking on more new debt – a vulnerable and ultimately unsustainable position which Minsky characterized as ‘Ponzi finance’. Ironically, Lavoie and Seccareccia (2001) applied their fallacy-of-composition argumentation also to Minsky’s financial-instability hypothesis inasmuch as the micro-level deterioration of individual debtors’ financing positions at the core of his argument does not have an automatic macro-economic equivalent where economic expansion is inevitably associated with acrossthe-board increases in leverage ratios.8

MONETARY POLICY CONCERNS Having vested a lot of their research focus on matters of money, it is not surprising to see both of these authors also having concerned themselves quite extensively with questions of monetary policy. Seccareccia (1990, 1992, 1998) demonstrated an early interest in what he called Wicksellianism, with its emphasis on how much the market rate deviates from a macro-level equilibrating ‘natural’ rate provides a normative context for appropriate interest-rate levels to target by central banks. During the 1980s, central banks gradually began to shift away from trying to control monetary aggregates, not least because these had become more difficult to define and more volatile in the wake of substantial deregulation of money and banking (starting with America’s Depository Institutions Deregulation and Monetary Control Act of 1980s). Instead, they opted for targeting short-term interest rates. But to the extent that such a policy focus on interest rates combined with targeting of inflation at low levels (typically # 2 percent), a practice taking root all over the world after 1991, it did not presage a switch to Keynesianism. Instead, as pointed out by Lavoie (2004) in their jointly co-edited reader, central banks continued monetary policy within the classical Monetarist tradition albeit using different tools to pursue the same goal of price stability. This critical stance had been initially phrased even more forcefully in Seccareccia and Lavoie (1996), where the two long-standing foes of austerity take issue with the hawkish policy stance of the Canadian central bank. While the Taylor Rule (see Taylor, 1993) has become the standard reaction function of central banks, a rather Wicksellian policy framework if we

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substitute the (otherwise invisible) natural rate for a ‘real’ rate of 2 percent as a ballpark approximation, its validity can be questioned on Keynesian grounds in terms of how short-term interest rates being targeted affect long-term rates and how sensitively business investment, or aggregate demand more generally, reacts to fluctuations of said long-term rates. This is precisely what Seccareccia and Lavoie (2004) have posed as empirical questions pertaining to the monetary policy effectiveness of central banks pursuing the Taylor-Rule formula. Pushing for an alternative theoretical framework within which to frame central bank management of money and credit, Lavoie (1996b) has painstakingly demonstrated that how we conceive the endogeneity of money, and there are obviously different ways to look at this essential characteristic of an elastic money supply, will have a significant impact on what central banks can do and how they do it. This article is one of the more complete statements concerning the differences and overlaps between different heterodox approaches with regard to monetary policy. The global financial crisis of 2007/2008 obliged central banks of the advanced capitalist economies to alter in quite dramatic and unprecedented fashion how they conducted monetary policy. Apart from financial stability emerging as a primary policy objective amidst massive, costly, and politically unpopular bank bailouts, the deflationary pressures unleashed by this massive disruption and subsequent deleveraging pushed the Fed, the Bank of Canada, the Bank of England, the European Central Bank, and above all the Bank of Japan rapidly towards the zero lower bound, at which point monetary policy risked losing much of its effectiveness. This time, however, the central banks found new ways to get around this problem by flooding the banking system with huge amounts of liquidity through massive securities purchases and imposing negative nominal interest rates wherever they could (e.g. negative rates on reserve deposits). Eventually, even bond yields turned negative across a significant range of the maturity spectrum. Lavoie and Seccareccia (2012) analyze the extraordinary central bank interventions in the interbank market and related money markets on several occasions when panic conditions froze those strategic nerve centers of global finance. In a similar vein, Lavoie (2010) explores the radical central bank interventions, ranging from targeted liquidity injections to unclog blocked money-market channels and replacing toxic assets with safe bonds on banks’ damaged balance sheet to compressing the usual interest-rate collar under central bank control to a floor of zero interest, deployed to combat a uniquely deep and wide systemic banking crisis. Given the rather profound operational changes in the modus operandi of different central banks induced by the crisis, Lavoie and Seccareccia (2013) illustrate the reciprocal influence between America’s Federal Reserve and

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the Bank of Canada which, despite facing vastly different domestic banking structures, have learned from each other, especially in the aftermath of the crisis when the latter accelerated its innovative thrust under the leadership of Mark Carney (2008–2013). Finally, Seccareccia (2017) approaches crisis-induced changes in central bank operations from an entirely different angle, regarding them as a shift in priorities from rentier income protection to supporting asset values as vested interests of the banking sector changed in the face of a systemic crisis hitting their balance sheets harder than their income statements.

INTERNATIONAL MONETARY RELATIONS Any economist seeking to discuss money and banking issues will sooner or later have to address questions related to international monetary relations. Our two friends are no exception in this regard. But their respective treatment of the international monetary system is less complete and extensive than other aspects of monetary theory mentioned above, as they appear mostly to have arisen as extensions of arguments made in the domestic context. This, for instance, is well illustrated in their ancillary framing of exchange-rate regimes, whether flexible or fixed, in open-economy stockflow consistent models as in Lavoie and Daigle (2011). Lavoie (1992, pp. 189–192), of course, has made a widely recognized, important contribution known as the ‘compensation’ approach which investigates how central banks can maintain control over targeted interest rates in an open economy with fixed exchange rates via compensatory balance-sheet adjustments balancing out changes in assets and liabilities within the banking system. China’s long-standing peg serves as effective illustrative example here.9 This approach replaces the standard MundellFleming model, extending the IS-LM framework to an open economy and so allows us to consider a more flexible range of options how to balance exchange-rate regimes, monetary policy autonomy targeting interest rates, and controls over cross-border capital flows than the rather rigid trilemma argued by Mundell-Fleming (according to which you cannot have fixed exchange rates, monetary policy autonomy, and free capital movements at the same time). The same emphasis on balance-sheet interactions has also informed Lavoie’s (2015) view of the euro-zone crisis, whose Target2 payments system counterbalancing intra-zone surpluses and deficits reminds him more of Keynes’ proposal for an international clearing union 70 years ago and necessitates a deeper understanding of the 2009–12 crisis than just a balance-of-payment crisis. Seccareccia and Correa (2017) used

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another historical antecedent to discuss the euro-zone crisis, namely the fateful interaction so well described in Karl Polanyi between deregulated supra-national haute finance and an increasingly rigid and deflationary gold standard culminating eventually in war and depression between 1914 and 1945. Economic and monetary union in Europe also allowed both authors to discuss possibly similar single-currency arrangements in North America, if Americans and Canadians were ever so inclined to push beyond the current free-trade area. This interest stems from earlier work on dollarization (see Rochon and Seccareccia, 2003), which Canadian economists living next to the elephant would naturally be inclined to think about. In this context it is worth noting that Post-Keynesian economists, such as most other heterodox approaches, are generally opposed to any such supra-national arrangements robbing countries of their economic-policy autonomy while imposing austerity constraints and asymmetric adjustment burdens borne mostly by deficit countries. Unless, of course, such an arrangement follows the more symmetric and reflationary logic of Keynes’ (1980 [1943]) original Bancor Plan and provides the institutional structures for such a pro-growth money construct. In sum, Lavoie and Seccareccia have made a major contribution to our understanding of money, banking, and monetary policy. They have done so by combining a solid grounding in the history of economic thought with an open mind about different heterodox approaches and a great curiosity regarding current developments to which they also bring a political commitment beyond sectarian divisions. This is a wonderful combination for any economist to bring to bear; it becomes that much more powerful when carried by a partnership of close cooperation stretching over four decades. We are indeed lucky to have had those two towering figures in Post-Keynesian economics be so actively engaged in forming networks, launching debates, bridging differences, and branching out into new avenues of research.

NOTES 1. A reprint of this otherwise somewhat obscure little article by Keynes, containing perhaps one of the most meaningful juxtapositions between the orthodox and heterodox approaches to money, can be found at http://www.hetwebsite.net/het/texts/keynes/keynes​ 1933mtp.htm. 2. This debate has also been discussed extensively by Fontana (2004), Wray (2007), and Palley (2013). 3. Lavoie and Seccareccia are aware that much depends here on national differences in banking regulations and structure of the financial system, as for instance exemplified by the ‘overdraft’ system prevailing in the United Kingdom or much of continental

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4.

5.

6. 7. 8. 9.

Credit, money and crises in post-Keynesian economics Europe while absent in the United States (see Lavoie, 1985; or Bougrine and Seccareccia, 2013). It should be noted, as Sardoni (1997, p. 10) did in his fascinating juxtaposition of these two giants in the history of economic thought, that Keynes, while generally very critical and often even dismissive of Marx’s work, did approve of the latter’s depiction and analysis of economic activities as monetary circuits. Roosevelt’s reforms of money and banking centered on the Glass–Steagall Act of 1933 to restructure the banking system while putting it on a sounder footing as well as the Bank Act of 1935, which reorganized the Federal Reserve to turn it into a full-fledged central bank capable of conducting discretionary monetary policy. Other pieces of legislation, such as the Emergency Banking Act of 1933, the Gold Reserves Act of 1934, the Securities Act of 1933, and the Securities Exchange Act of 1934 complemented these reforms before internationalizing that new regime of nationally administered creditmoney with the Bretton Woods Agreement of 1944. Recently, as well presented in Godin (2015), SFC models have been complemented by so-called agent-based models (ABM) depicting micro-level behavior of heterogeneous agents to which they can be connected for better micro-macro integration. It was actually Lavoie himself who in a recent conversation pointed out to me that Minsky (1995, p. 94) attributed this by now well-known phrase usually associated with him to Abba Lerner instead. Lavoie (1986; 1997) questions Minsky’s emphasis on rising interest rates coinciding with upward-shifting leverage ratios at the core of his financial-fragility hypothesis. The Chinese case was studied in detail in Lavoie and Wang (2011). The ‘compensation’ approach was also incorporated in open-economy SFC models (see Godley and Lavoie, 2007, pp. 196–201).

REFERENCES Bellofiore, R. and M. Seccareccia (1999), ‘Monetary circuit’. In O’Hara, P. (ed.), Encyclopedia of Political Economy, Volume 2. London and New York: Routledge, pp. 753–756. Bougrine, H. and M. Seccareccia (2013), ‘Rethinking banking institutions in contemporary economies: Are there alternatives to the status quo?’. In Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State. Cheltenham: Edward Elgar, pp. 134–159. Deriet, M. and M. Seccareccia (1996), ‘Bank markups, horizontalism and the significance of banks’ liquidity preference: An empirical assessment’. Économies et Sociétes, 30(2/3), pp. 137–161. Fisher, I. (1911), The Purchasing Power of Money. New York, Macmillan. Fisher, I. (1933), ‘The debt-deflation theory of great depressions’. Econometrica, 1(4), pp. 337–357. Fontana, G. (2004), ‘Rethinking endogenous money: A constructive interpretation of the debate between Horizontalists and Structuralists’. Metroeconomica, 55(4), pp. 367–385. Godin, A. (2015), ‘Special issue: Post-Keynesian stock-flow consistent modeling: Editorial to the special issue’. European Journal of Economics and Economic Policies: Intervention, 12(1), pp. 29–31. Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. London: Palgrave.

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Graziani, A. (1989), ‘The theory of the monetary circuit’. Thames Papers in Political Economy. Guttmann, R. (1994), How Credit-Money Shapes the Economy: The United States in a Global System. Armonk, NY: M. E. Sharpe. Hahn, F. (1965), ‘On some problems of proving the existence of an equilibrium in a monetary economy’. In Hahn, F. and F. Brechling (eds), The Theory of Interest Rates. London: Macmillan. Hayek, F. (1931), Prices and Production. London: Augustus Kelley. Hume, D. (1752), ‘Of money’. In Hume, D. (ed.), Political Discourses. Edinburgh, UK: Kincaid and Donaldson (http://www.davidhume.org/texts/pd.html). Kaldor, N. (1982), The Scourge of Monetarism. Oxford: Oxford University Press. Keynes, J.M. (1923), Tract on Monetary Reform. London: Macmillan. Keynes, J.M. (1930), Treatise on Money. New York: Harcourt, Brace and Company. Keynes, J.M. (1973 [1933]), ‘A monetary theory of production’. In D. Moggridge (ed.), Collected Writings of John Maynard Keynes, vol. XIII – The General Theory and After, Part I – Presentation. London: Macmillan, pp. 408–411. Keynes, J.M. (1936), The General Theory of Employment, Interest, and Money. London: Macmillan. Keynes, J.M. (1980 [1943]),  ’Proposal for an International Currency Union’. In Moggridge, D. (ed.), Collected Writings, vol. XXV: Activities, 1940–44: Shaping the Post-war World: The Clearing Union. London: Macmillan, pp. 168–195. Koo, R. (2011), ‘The world in balance sheet recession: Causes, cure, and politics’. Real-World Economics Review, 58 (http://www.paecon.net/PAEReview/issue58/ Koo58.pdf). Lavoie, M. (1984), ‘The endogenous flow of credit and the Post-Keynesian theory of money’. Journal of Economic Issues, 18(3), pp. 771–797. Lavoie, M. (1985), ‘Credit and money: The dynamic circuit, overdraft economics, and post-Keynesian economics’. In Jarsulic, M. (ed.), Money and Macro Policy. Dordrecht, the Netherlands: Springer, pp. 63–84. Lavoie, M. (1986), ‘Minsky’s law or the theorem of systemic financial fragility’. Studi Economici, 29, pp. 3–28. Lavoie, M. (1992), Foundations of Post-Keynesian Economic Analysis. Cheltenham: Edward Elgar. Lavoie, M. (1996a), ‘Horizontalism, structuralism, liquidity preference, and the principle of increasing risk’. Scottish Journal of Political Economy, 43(3), pp. 275–300. Lavoie, M. (1996b), ‘Monetary policy in an economy with endogenous credit money’. In Deleplace, G. and E. Nell (eds), Money in Motion: The Circulation and Post-Keynesian Approaches. London: Macmillan, pp. 532–545. Lavoie, M. (1997), ‘Loanable funds, endogenous money and Minsky’s financial fragility hypothesis’. In Cohen, A.J., H. Hagemann, and J. Smithin (eds), Money, Financial Institutions and Macroeconomics. Dordrecht, the Netherlands: Springer, pp. 67–82. Lavoie, M. (2003), ‘A primer on endogenous credit-money’. In Rochon, L.-P. and S. Rossi (eds), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies. Cheltenham: Edward Elgar, pp. 506–543. Lavoie, M. (2004), ‘The new consensus on monetary policy seen from a PostKeynesian perspective’. In Lavoie, M. and M. Seccareccia (eds), Central Banking in the Modern World: Alternative Perspectives. Cheltenham: Edward Elgar, pp. 15–34.

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Lavoie, M. (2010), ‘Changes in central bank procedures during the subprime crisis and their repercussions on monetary theory’. International Journal of Political Economy, 39(3), pp. 3–23. Lavoie, M. (2013a), ‘The state, the central bank and the monetary circuit’. In Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State. Cheltenham: Edward Elgar, pp. 11– 21. Lavoie, M. (2013b), ‘The monetary and fiscal nexus of neo-Chartalism: A friendly critique’. Journal of Economic Issues, 47(1), pp. 1–32. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar. Lavoie, M. (2015), ‘The Eurozone: Similarities to and differences from Keynes’s plan’. International Journal of Political Economy, 44(1), pp. 3–17. Lavoie, M. (2016), ‘Rethinking monetary theory in light of Keynes and the crisis’. Brazilian Keynesian Review, 2(2), pp. 174–188. Lavoie, M. and G. Daigle (2011), ‘A behavioural finance model of exchange rate expectations within a stock-flow consistent framework’. Metroeconomica, 62(3), pp. 434–458. Lavoie, M. and M. Seccareccia (2001), ‘Minsky’s financial fragility hypothesis: A  missing macroeconomic link?’. In Bellofiore, R. and P. Ferri (eds), The Economic Legacy of Hyman Minsky; Volume 2: Financial Fragility and Investment in the Capitalist Economy. Cheltenham: Edward Elgar, pp. 76–97. Lavoie, M. and M. Seccareccia (2004), Central Banking in the Modern World: Alternative Perspectives. Cheltenham: Edward Elgar. Lavoie, M. and M. Seccareccia (2012), ‘Monetary policy in a period of financial chaos: The political economy of the Bank of Canada in extraordinary Times’. In Rochon, L.-P. and S. Y. Olawoye (eds), Monetary Policy and Central Banking: New Directions in Post-Keynesian Theory. Cheltenham: Edward Elgar, pp. 166–189. Lavoie, M. and M. Seccareccia (2013), ‘Reciprocal influences’. International Journal of Political Economy, 42(3), pp. 63–83. Lavoie, M. and M. Seccareccia (2016), ‘Money and banking’. In Rochon, L.-P. and S. Rossi (eds), Introduction to Heterodox Macroeconomics. Cheltenham: Edward Elgar, pp. 97–116. Lavoie, M. and P. Wang (2011), ‘The “Compensation” thesis, as exemplified by the case of the Chinese Central Bank’. International Review of Applied Economics, 26(3), pp. 287–301. Marx, K. (1992 [1867]), Capital, Volume One: A Critical Analysis of Capitalist Production. London: Penguin Classics. Minsky, H. (1977), ‘The financial instability hypothesis: An interpretation of Keynes and an alternative to “standard” theory’. Challenge, March-April, pp. 20–27. Minsky, H. (1982), Can ‘It’ Happen Again? Armonk, NY: M.E. Sharpe. Minsky, H. (1986), Stabilizing an Unstable Economy. New Haven, CT: Yale University Press. Minsky, H. (1992), ‘The financial instability hypothesis’. Working Paper, No. 74, Levy Institute: Bard College (http://www.levy.org/pubs/wp74.pdf). Minsky, H. (1995), ‘Longer waves in financial relations: Financial factors in the more severe depressions II’. Journal of Economic Issues, 29(1), pp. 83–96. Mitchell, B. (2009), ‘Money multiplier and other myths’. billy blog, posted April 21 (http://bilbo.economicoutlook.net/blog/?p=1623).

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Moore, B. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge: Cambridge University Press. Palley, T.I. (2013), ‘Horizontalists, verticalists, and structuralists: The theory of endogenous money reassessed’. IMK Working Paper, No. 121. Parguez, A. and M. Seccareccia (2000), ‘A credit theory of money: The monetary circuit approach’. In Smithin, J. (ed.), What Is Money? London and New York: Routledge, pp. 101–123. Polanyi, K. (1944), The Great Transformation. New York: Farrar & Rinehart. Rochon, L.-P. and M. Seccareccia (eds) (2003), Dollarization: Lessons from Europe and the Americas. New York: Routledge. Sardoni, C. (1997), ‘Keynes and Marx’. In Harcourt, G.C. and P. Riach (eds), A ‘Second Edition’ of the General Theory. London and New York: Routledge, pp. 2–19. Seccareccia, M. (1990), ‘The two faces of neo-Wicksellianism in the 1930s: The Austrians and the Swedes’. In Moggridge, D. (ed.), Perspectives in the History of Economic Thought, Volume 4. Aldershot: Edward Elgar, pp. 137–154. Seccareccia, M. (1992), ‘Wicksellianism, Myrdal and the monetary explanation of cyclical crises’. In Dostaler, G., D. Ethier and L. Lepage (eds), Gunnar Myrdal and His Works. Montreal: Harvest House, pp. 144–162. Seccareccia, M. (1994), ‘Credit money and cyclical crises: The views of Hayek and Fisher compared’. In Colonna, M. and H. and Hagemann (eds), Money and Business Cycles: The economics of F. A. Hayek, Volume 1. Aldershot: Edward Elgar, pp. 53–73. Seccareccia, M. (1996), ‘Post-Keynesian fundism and monetary circulation’. In Deleplace, G. and E. Nell (eds), Money in Motion: The circulation and PostKeynesian Approaches. London: Macmillan, pp. 400–416. Seccareccia, M. (1998), ‘Wicksellian norm, central bank real interest rate targeting and macroeconomic performance’. In Arestis, P. and M.C. Sawyer (eds), The Political Economy of Central Banking. Cheltenham: Edward Elgar, pp. 180–198. Seccareccia, M. (2003), ‘Pricing, investment and the financing of production within the framework of the monetary circuit: Some preliminary evidence’. In Rochon, L.-P. and S. Rossi (eds), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies. Cheltenham: Edward Elgar, pp. 173–197. Seccareccia, M. (2004), ‘Aspects of a new conceptual integration of Keynes’s Treatise on Money and the General Theory: Logical time units and macroeconomic price formation’. In Arena, R. and N. Salvadori (eds), Money, Credit, and the Role of the State. Aldershot: Edward Elgar, pp. 285–310. Seccareccia, M. (2014), ‘Banking sector viability and fiscal austerity: From rhetoric to the reality of bank behavior’. Journal of Economic Issues, 48(2), pp. 567–574. Seccareccia, M. (2017), ‘Which vested interests do central banks really serve? Understanding central bank policy since the global financial crisis’. Journal of Economic Issues, 51(2), pp. 341–350. Seccareccia, M. and E. Correa (2017), ‘Supra-national money and the euro crisis: Lessons from Karl Polanyi’. Forum for Social Economics, 46(3), pp. 252–274. Seccareccia, M.  and M. Lavoie (1996), ‘Central Bank austerity policy, zeroinflation targets, and productivity growth in Canada’.  Journal of Economic Issues, 30(2), pp. 533–544. Seccareccia, M. and M. Lavoie (2004), ‘Long-term interest rates, liquidity preference, and the limits of central banking’. In Lavoie, M. and M. Seccareccia (eds),

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Central Banking in the Modern World: Alternative Perspectives. Cheltenham: Edward Elgar, pp. 164–182. Taylor, J. (1993), ‘Discretion versus policy rules in practice’. Carnegie-Rochester Conference Series on Public Policy, 39, pp. 195–214 (https://web.stanford.edu/~​ johntayl/Papers.Discretion.PDF). Wicksell, K. (1936 [1898]), Interest and Prices. London: Macmillan. Wray, R. (1998), Understanding Modern Money: The Key to Full Employment and Price Stability. Cheltenham: Edward Elgar. Wray, R. (2007), ‘Endogenous money: Structuralist and horizontalist’. Working Paper, No. 512, Annadale, NY: Levy Economics Institute (http://dx.doi.org/10.2​ 139/ssrn.1010462).

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3.  Money, state and growth of welfare: fighting the dangerous transformation of capitalism Alain Parguez and Slim Thabet INTRODUCTION Going always further than the Master (Keynes indeed!), herein is the ultimate lesson taught by the life-long work of Marc Lavoie and Mario Seccareccia. Contrary to the Master, they were absolutely free from the language of the neoclassical economics. They strove always to find the way to a long-run stable growth, starting ab initio contrary to the NeoRicardians, from the essentiality of money. They founded what must be deemed the supreme Post-Keynesian synthesis by proving that money, being the existence condition of the monetary capitalist economy, was always perfectly endogenous as a pure credit, denying the scarcity principle. Contrary to many Post-Keynesians of the new generation, they never ignored that the ultimate truth of Post-Keynesianism was to emphasize the principles of economic policy leading to full employment. Such a policy, for them, was mainly fiscal policy relying on State deficits of which the sole limit was true full employment without rationing. In this chapter, to honor their work, we intend to go still further to derive the existence conditions of a regime of very long-run growth, targeting true full and permanent employment with wages and pensions high enough to prevent rationing and what must be deemed permanent growth of welfare. By welfare, we address the permanent increase of access to the most efficient health care, education, culture in the widest sense, and feeling of freedom to have access everywhere in the real world. Welfare includes not only research for science but mainly how to be the master and not its slave. The growth we have in mind operates in a global system, capitalism, which is a totality determining the behavior and decisions of agents. Thereby, like Lavoie and Seccareccia, we reject ab initio any spurious effort to discover ‘micro-foundations’ of any sort, and any modelization restoring those mystical foundations. Reasoning in capitalism as a total 41

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system embracing all aspects of society leads to five fundamental propositions we intend to analyze in full: 1. Capitalism is a pure monetary economy. Its existence relies on unceasing creation of money to undertake actions required by the goals or targets of leading agents. 2. Capitalism is an evolving system which is always transforming itself out of the decisions of the ruling group or class of decision-makers. Let us define this group as the ruling capitalist-class whose sole purpose is to attain higher profits with the minimum possibility of losses. Metamorphoses of capitalism are led by decisions of the ruling class having to affront absolute unknowability of the future. 3. Transformational capitalism is obviously ignoring long-run stable growth as defined above. Two great crises reveal a full metamorphosis of the system. Today, the world economy is in a state of absolute metamorphosis, the so-called high-tech one, of which financialization is just one aspect. 4. Only a permanent effort and commitment of the State can neutralize the destructive impact of metamorphosis through a very long-run wager on the future to protect the socially required growth. 5. It is tantamount to bestow on the State the power to spend at will out of the unchecked direct creation of money. It means that transformational capitalism, especially in this ongoing metamorphosis, requires that the State becomes the leading agent of the intertemporal ­monetary circuit. Banks’ money creation plays a subordinate role. Those propositions explain the logic of our analysis. In a first part, we explain in full the monetary power of the State while in a second part we must address that its perfect efficiency requires a specific nature of the State, what must be deemed enlightened democracy. Finally, one must carefully analyze the role of the private banking system when the State is the leader in the creation of money. In conclusion, one must address the impact on distribution of this role. In doing so, one must go much further than Kalecki and the Neo-Kaleckian models. Kalecki never explained its required share of profits while Neo-Kaleckian models too often ignore the State, if not money itself.

THE STATE IS THE LEADER IN THE CREATION OF MONEY Since the ongoing metamorphosis of capitalism enshrines its ‘high-tech’ spirit, an effort to get rid of labor is justified by the hijacking of culture.

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It fully falsified Marx’s vision of technology as the road to freedom. What are the stakes in this brave new world extoled by the orthodox profession – the long run drop in employment and standard of living, the debasement of culture when humankind becomes enslaved to new technologies. More than ever, only the State can save society and the system itself by its commitment to very long-run growth of employment and welfare. Herein is the law explaining the role of the State. The more the unchecked private capitalist sector is metamorphosing, the more the State must accept the inverse metamorphosis to warrant true full employment and welfare and restore the social control of technology.1 Henceforth, one must fully transform what could be deemed the General Theory of the Monetary Circuit, abolishing any link with its early versions still close to General Equilibrium Theory and ignoring the State. Since the State must act to protect society, it must enjoy full sovereignty of its currency, which requires an emphasis on the paramount role of the State in the monetary circuit. The State role is played in two acts: 1. In act I, the State spends out of the direct creation of money. Herein one must, once and for all, set the role of the Central Bank straight. It is nothing but the banking branch of the State, while the Treasury is its spending branch. In Act I, the Treasury orders the Central Bank to create money to finance the required expenditure. Applying conventional accounting, the Central Bank acquires a claim on the Treasury balanced by a debt of the Treasury to the Bank. Obviously, it is pure fiction: to say that the State is indebted to itself is tantamount to the hard truth that there is no debt at all. 2. There is indeed an Act II: the State as sovereign imposes a tax liability on private society to be paid ex-post. Taxes never finance expenditures, taxes only destroy a share of the money initially created by the State. Herein are two axioms economic orthodoxy cannot accept because they destroy its very existence. However, we must add that there is also an Act III; the ‘deficit’ crucial role. To undertake its mission, the State is obliged to spend initially more money than the money it destroys ex-post. Herein is the ‘deficit’. When the State has to fight the destroying metamorphosis of capitalism, the famous deficit is embodying the crucial characteristics: 1. It is tantamount to the State net investment into the future of society, including the most audacious wagers on the future in both, as previously shown by Eisner (1995), in both tangible and non-tangible

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capital encompassing mainly health, education, research, culture, environment, may be the most important part. State investment must provide true dynamism and the required security to individuals. 2. The ‘good deficits’ must be increasing over time, according to the fundamental law previously emphasized. There cannot be any exogenous limit to State investment as long as the State is a true State. 3. Finally, the State deficit does not require any true debt of the State. Herein lies the major reason why the direct creation of money by the State is essential. Just to dally with the ‘financing of the deficit’ is mere absurdity since it is part of initial expenditures. Those three acts raise a problem: does the leading or guardian role of direct money creation free of debts by the State lead to some ‘Hayekian serfdom’? The answer is a strong no! It is completely foreign to soviet-like authoritarian planning or absolute powered Nazi policy. First, it aims at fully abolishing scarcity and allows society to escape the ‘Malthusian trap’ restored by the private sector. Next, it aims at the true welfare of society, which was certainly not the case of Nazi pseudoplanning, animated by a world war to come as its supreme goal.2 Finally, it must be undertaken in the most decentralized way by all kinds of public agencies: autonomous public firms, hospitals, schools, universities, research institutions, etc. What is essential is that public creation of capital must be only the outcome of public sector agencies. To rely on commands to the private sector is doomed ab ovo, taking care of the metamorphosis of the private sector. Thereby, the State investment is free of any profit constraint. It means that it cannot be constrained by the usual calculus of profitability. Access to health care and education at any level must be free of costs paid by users. The principle is of paramount importance for universities. In this age of high tech and debasement of culture, universities are dealt with like firms having to exact a profit and provide the private sector with the required formatted labor-force. It is the absolute negation of the role of universities. Access must be free, the curriculum must encompass all fields of culture, and teachers must not play the role of some ‘intellectual aristocracy’ of capitalism (replacing the former workers’ aristocracy of old capitalism). Indeed one could raise two objections: 1. First, who is to pay? The State of course, out of its net investment without any arbitrary control. 2. What about the quality of students and teaching process? Could there be a collapse of the quality of students and professors as well? Again, from the most scientific perspective, one must answer no! The collapse

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is already there with anguished students indebted for life (especially in the USA). Teachers wishing to endow their masters with obedient servants, are themselves part of the capitalist ruling class. On this point, Marx, Polanyi, Dewey and Sartre were right. The so-called counter-revolution in ‘ideas’, especially in economics, to explain the success of neoclassical of whatever church, ignores that ‘ideas’ are the by-product of the metamorphosis of capitalism.3 To close the debate, the very long-run public investment in human capital will raise the average level of the young generation at all levels, providing universities with bright and curious students, generating a radical change in teaching rooted in a permanent dealing between true professors and students. Indeed, it would have to get rid of the monopoly of textbooks which, especially in economics, are a plague providing enormous profits, quasi-rents to publishers and mainly to the orthodox profession. To draw a provisional conclusion from this part, one must answer the ultimate question: when the dominant creation of money free of debt is the State, what becomes of the so-called ‘closure of the circuit’? The public sector, being free of debt, cannot be closed by reimbursement, the sole source of cancellation of the State money is the payment of taxes by the private sector. Tax liabilities must, or rather can, increase over time as, as will be shown, there is accelerating growth of gross private income. There remains the fact that the equally accelerating growth of State net investment imposed by the law of transformation must reflect an increase in the stock of State money available to the private sector. Such an increase just reflects the creation of public capital which is its counterpart. There is no closure as in the early versions of the Monetary Circuit Theory. The famous duality between final and initial finance becomes irrelevant. What is the political infrastructure of this true growth of State investment in the future? As already mentioned, herein is the true answer to Hayek, Friedman and neoclassicals of all sorts. According to the rather ubiquitous conventional wisdom, the death of Keynesianism is explained by the fact that Keynesians in pure economic departments of prestigious universities lost the war of ideas. Herein should be the explanation of all variations of sound fashionable economics. Nobody dares to ask the questions: why such a power of pure ideas, why did ‘ideas’ embodied in pure abstract models determine an absolute counter-revolution in economics and ­policies? Answering this puzzle required emphasizing that economic policies are undertaken by politicians enslaved to technocrats who are themselves meeting the requirements of the ongoing metamorphosis of capitalism. One must never forget that prestigious modelizers are themselves directly or indirectly servants of the ruling class. In ‘The

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German Ideology’, Marx and Engels never stopped to criticize those for whom pure ideas born in the Hegelian sky determine reality. The truth is that ‘pure ideas or models’ are born in earth not in the sky to comply with what is an existing condition of the system. Their critique of ideology has been forgotten by plenty of heterodox economists, including many PostKeynesians of recent vintage. The ongoing metamorphosis of capitalism fits only with the absolute faith in a State fully enslaved to the ruling class, preaching unchecked markets, budget balance or at least enslavement of the State to ‘financial markets’. Herein is the core of the many aspects of the so-called academic triumph in the sphere of ideas. There is a fundamental existence condition of the State: direct creation of money through the growth of its net investment. A political structure granting the absolute independence of policymakers from a ruling class having lost any rationality. Such a liberation of the State implies throwing away the advice and preaching of the ruling academic elite. It happened at the time of Franklin D. Roosevelt, it could happen again out of restoration of what we have deemed ‘enlightened democracy’ because policymakers truly want the best future for the majority of the people, a future of hope and not fear. True democracy requires a political structure able to express the true will of the people. It is crystal clear that the demise of the State as guardian and protector of genuine long-run growth has been the result of some planned version of the demise of democracy (Parguez, 2016a). On the other hand, people must be educated enough to understand the necessity of unchecked money creation out of growing ‘good deficits’. The role of policymakers is to provide this education, abolishing faith in lies preached by technocrats and academic stars paid by the ruling class. It means that State policy­ makers must themselves meet three conditions: 1. They must truly want the last for all, rejecting any false ideas relative to money. 2. They must enlighten the people without any constraints and fear of not following what is the existing conventional wisdom, which is spread by media of all kinds, social networks, false information, etc. 3. Henceforth, one must strive to build a radical political new process of choosing leaders. Today, the ongoing disastrous metamorphosis is both generating the absolute necessity of such a reform and its extreme difficulty of being successful. To conclude this part, we do believe that the supremacy of State money, while being the mark of State money sovereignty, is the essence of

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genuine democracy. It is why it is under attack and is increasingly denied or ­abolished – the most perfect example being the euro monetary order (Parguez, 2016b). In such a system of money creation free of debt, what is the role of the private banking system? We must first analyze the impact of the creation of State money on the private sector, which highlights the dual role of private banks as recycling intermediaries and the true source of new money out of private debt.

THE IMPACT OF THE GROWTH OF STATE MONEY The whole net stock of State money, whatever the expenditures, labor or investment, is automatically transferred to the private sector as a net increase in stock of deposits in the private balance-sheet of banks; thereby, private banks’ balance-sheets must be drawn as follows: assets contain conventional claims of the Central Bank, or reserves: liabilities contain a stock of State money. Private agents, household, firms recycle instantaneously their own assets in State money by their own expenditures and savings by acquisition of financial assets. Private expenditures encompass private consumption of commodities not produced by the public sector and investment by producing firms answering the demand for consumption. What is essential is that those expenditures are themselves free of debt. It means that they are not the outcome of banks credits or debts to banks. All banks’ available stock of money to be recycled is being provided by the State, policymakers are not constrained by the rate of interest charged by banks for their services. Herein is the true natural rate of interest that must only cover banks’ costs in terms of wages, without granting profits to banks playing a purely passive role. Banks in their automatic recycling role are not fearing losses from their expenditures. They do not take wagers on the future thanks to the State’s own wagers determining its long-run action. One must distinguish three aspects of the recycling function: I. The financing of private expenditures: answering its normal role of ‘employer of first resort’,4 the State has not to absorb all the available labor-force. A share of labor remains available for pure consumption and thereby for investment, allowing building the required capital, providing consumption commodities. We have emphasized already that the State has to confront the metamorphosis that is targeting consumption, allowing for the unchecked reduction of the need for

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labor. Here is the age of the so-called ‘high-tech’ commodities of all sorts including conventional commodities quasi-free of labor, but also ‘cultural gadgets’, which are the core of the new culture – supersmartphones, pure video-games, etc. In any case, recycled State money must first finance ‘investment’ and not the acquisition of the new commodities. In this ongoing metamorphosis of capitalism, investment is fully determined by a choice which is itself the outcome of previous initial investment in the new culture. Herein lies what must be deemed the ‘social accelerator’ ruling the private sector use of State money. The public sector and the new private sector do not compete for labor. There cannot be a crowding out of the private sector need of labor by the public sector’s very long commitment to true full employment. It is the ultimate meaning of the fundamental law of compensation we emphasized. It excludes the very possibility of wage inflation out of an excess of demand for labor. The law, per essential, denies the existence of any kind of labor markets! II. The financing of private savings: true savings, non-spent income of households, retained profits of new capitalist firms (we will deal with the formation of profits in the following parts), must be invested in assets excluding the possibility of a financial crisis. Now, we must deal with the existence of the emission by the State of the long-run debt liabilities having nothing to do with the financing of the deficit. What are the most secure assets providing absolute certainty but debt titles issued by the State at fixed interest rates in both nominal and real terms (since there cannot be inflation). The State is absolutely free to determine the amount of bonds sold to the private sector. There remains a problem raised by the Modern Monetary Theory (MMT): private banks could be tempted to transform their assets into bonds providing more earnings, which could lead to acquisition of already existing bonds generating instability in the financial structure. Therefore, to provide full stability and prevent financialization, another aspect of the metamorphosis of capitalism, the State proceeds as follows. 1. In a first phase, private banks strive to transform their excess reserves into new State bonds. 2. Next, they have to sell their new bonds to private savers, which simultaneously decreases by an equal amount their stock of deposits and their assets.

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Ultimately two fundamental consequences stem from this process. 1. As such, monetary policy is irrelevant. Interest rates are entirely ruled by fiscal policy out of the State net investment. They can never be an obstacle to full employment. 2. Absorbing saving out of the sale of bonds in the context of a full employment policy explains why savings are no more an obstacle to full employment. To the contrary, while they prevent unchecked financialization, they limit destabilizing private expenditures in the context on the ongoing metamorphosis of capitalism jettisoning labor, and, indeed, they prevent ab initio the emergence of a desire for the new consumption goods.

THE FINANCING OF THE TRADE DEFICIT We have already emphasized that the Monetary Circuit operates in a perfectly open economy excluding any effort of ultra-protectionism. Let us assume a trade deficit with China or any other country. One of the worst mistakes shared by too many orthodox schools is to believe that the deficit is to be financed, that it is financed by China, that it is caused by the domestic State deficit, which is thereby ultimately financed by China savings, at least by arbitrary ratios contradicting the performance of the economy. All those propositions are in gross denial of logic and reality and could lead to absurd if not sinister reactions. 1. The budget deficit being already financed by direct money creation, it has not to be financed by China ‘savings’. 2. What are those mysterious ‘savings’ but profits of Chinese firms out of net exports? They embody some pure gift of the domestic economy to China. 3. What is the impact of domestic debt? China has acquired a share of the money initially created free of debt. Usually, it would desirable to recycle this share of State money into bonds bearing the predetermined rate of interest. 4. This operation does not lead to an increase of the domestic debt, just a transfer of public debt to titles held by private firms to China. 5. What is the cause of this deficit, especially in the ongoing metamorphosis of capitalism? It is the metamorphosis itself! China and other similar countries provide commodities that the domestic capitalist sector does not want to produce anymore while providing a large share of the components of the new cultural ‘gadgets’.

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Here are the major propositions: trade deficits are not caused by State policies any more than by false exchange rates. Any wish of protectionism is sheer absurdity, as well as fixed exchange rates. In the very long run, the State net investment must stabilize if not transform the deficit into a surplus, as long as it neutralizes the destabilizing metamorphosis of capitalism. Indeed, since the State is to be free from any constraint, a perfectly flexible exchange rate is required.

THE DUAL ROLE OF BANKS IS TO BE THE SOURCE OF NEW MONEY WITHOUT GENERATING INSTABILITY Let us assume that, suddenly, there is a burst of bold searchers and inventors being learned enough to understand the impending disaster of the metamorphosis. In some way, the founding fathers of ‘high tech’ were in the same situation. So far in advance of their time are their prospects, that they cannot rely on pure recycling, they were obliged to ask for longrun loans from private banks to be repaid in the far future, if they are successful. Let us assume that banks agree with their bold wagers and grant them loans which are instantaneously put into expenditures. Now, banks have created money out of credits both to hire labor and build the required capital foundation of new projects. What is the impact of banks’ creation of money on the system? 1. It is perfectly consistent with the leading-role of State money creation. By generating confidence in a bright future, neutralizing the destructive transformations of capitalism, and providing high education and culture, the State is the source of those bold and true wealth-creating innovations. Instead of destroying entrepreneurial animal spirits, the State summons them again. 2. Credit-financed expenditures are not to cause an excess demand for labor. On the contrary, they must attract a part of the wasted labor and equipment in the metamorphosis-led twilight productive structure. They must tap into the new highly educated labor force jettisoned by the ruling private activities. 3. What about the answer of private banks? Could there be some rationing of this demand for loans of new entrepreneurs? The straight­ forward answer must be a strong no as long as some conditions are met:

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Money, state and growth of welfare ­51 ●● ●● ●●

The rate of interest is still fixed by the State and it is constant. Thanks to State net investment, banks may escape the yoke of absolute uncertainty. In any case, private banks’ assets are mainly State money (reserves) or State bonds. The value of both is absolutely certain. Herein is the final answer to the everlasting debate on endogeneity.

First, since money is the existence condition of the system, it is per se perfectly endogenous. Endogeneity also rules for banks’ money creation. It has nothing to do with Central Bank policy in terms of interest rates, required reserves, etc., in other words, some money multiplier. It is just the outcome of the ultimate leading and guiding role of the State and thereby of the dominant State money creation.

THE FORMATION OF PROFITS AND THE IMPACT ON DISTRIBUTION: FIGHTING THE EMERGENCE OF A NEW NEO-KEYNESIAN RENTIER ECONOMY. THE DETERMINATION OF PROFITS IN THE ONGOING METAMORPHOSIS As already proven, profits are only exacted in the private sector, in which the goal is the minimization of labor cost. Whatever the metamorphosis, profits in any period are equal to aggregate gross receipts minus labor costs or wages. Gross receipts are equal to consumption and investment expenditures, both being determined by prior expectations. Receipts are thereby the sum of recycled net State investment and spending out of banks new loans minus household savings. Thereby if π is aggregate profits, Igt2λ and Ipt2λ recycled State and private investment decisions in t–λ, λ being the average delay of production, Sht2λ, aggregate household savings decided in t–λ, and expected by new capitalist firms in period t, Wt being aggregate production cost in terms of labor at time t, we get the new form of gross profits equation in t:

π 5 [   Igt2λ 1 Ipt2λ 2 Sht2λ   ] 2 Wt

(3.1)

with Wt always dropping because of the metamorphosis of capitalism. Four consequences can be derived. 1. πt is always rising because of the effort to squeeze the labor requirement. 2. The major source of gross profits is State net investment. 3. Profits are to be recycled and generate income-financing ultra-luxury

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consumption out of dividends of all sorts, the income of managers and their required servants (technocrats, leading economists and politicians). 4. This rise in profits can only be checked by the rise in savings of households and fixed freeze of retained profits. Herein taxation has a ­stabilizing role. Super-taxes should be levied on gross profits to allow the full play of law of compensation. Taxes on profits earned by debasement of labor are thereby part of the longrun action of the State to generate a sustainable democracy-led economy. Equation (3.1) allows us to derive the equation of distribution in the private sector. As usual, let h* be the required gross share of profits by capitalists and r* the required rate of profit. As already shown: h* 5 r*/1 1 r*(3.2) which includes banks’ profits out of their leading activity. Thereby, the required wage-bill in any period Wt* is:

Wt* 5 πtE/r*(3.3)

with: Wt* 5 w 3 Lt*

(3.4)

with πt, w and Lt* being, respectively, the expected or targeted long-run flow of profits always rising thanks to the metamorphosis of Wt*, w the unit labor cost, and Lt*, the labor requirement. The metamorphosis ensures an always rising h* or r* granting a superinsurance policy against uncertainty whatever the rise in πtE. One can go further: the core of the metamorphosis is that πtE is itself entirely determined by the unchecked rise in the targeted rate of profit. It explains, were the State absent, that there must in any case be an accelerated drop in the required wage-bill, explaining the collapse of Lt*, and thereby the constraint on the wage-rate. Left to itself, the capitalist private sector enshrines a collapse of the share of labor, unemployment and inflation because of the average price equation: p* 5 (1 1 r*)w/a(3.5) with a being the average productivity. The accelerated rise in r*, the falling productivity, is not compensated by the pressure on the level of wages.

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Equation (3.5) is the perfect proof that by fully planning its role of employer of first resort, the State must warrant full employment and price stability. In the long-run, the State’s leading role as an architect of the future leads to a collapse of h* and r* until they attain a fixed level of h0 and r0. While it allows the strong rise in productivity out of investment in education, research and culture, attaining full employment must also stabilize the average wage-rate.

THE EMERGENCE OF A NON-KEYNESIAN RENTIER ECONOMY The metamorphosis allowed the creation of a new pure rentier capitalism, especially out of the total control of culture. Its most perfect aspect is the so-called ‘social networks’, the role of ‘video games’ generating the ­substitution of virtuality for the real world of increasing poverty, astounding inequality, and resurgence of the most dangerous dark ideas. Owners of this network, abolishing common sense, are accumulating quasi-unlimited profits. Labor costs are insignificant, fees paid by a quasiworldwide audience are the source of those profits, which are pure rents. Those rents are not explained by the scarcity of real capital, it is why they are non-Keynesians, but rather by the absence of productive capital. Rents of owners of virtuality are perfectly consistent with the collapse of labor income and unemployment since the pool of users is so large that fees may be very low. Here lies the explanation of gigantic monetary capital which generates the investment funds taking over public utilities, natural resources, and universities, while allowing such a rise in ultra-luxury consumption that, in this new world, predator barons of the gilded age appear as very poor and thrifty-led capitalists. Only the never-ending fight of the State through its net investment in education, culture, and faith in the future may abolish the doomsday of the triumph of virtuality. Here is again a new reason for ultra-taxation of this rentier accumulation.

CONCLUSION We have proved that genuine long-term growth of true welfare is ­ultimately the outcome of the battle of policymakers against the m ­ etamorphosis of capitalism.

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A true system crisis caused by unchecked transformations of capitalism reflects the everlasting effort of the ruling class to get rid of labor and exact amazing profits without having to confront the absolute unknowability of the future. Such a metamorphosis has only two issues: either the ruling class, starting to feel that it cannot escape the threat of uncertainty, chooses the darkest option, some post-Nazi society; or the policymakers, through their net investment, take the leading role. Either the full dominant role of State money created debt-free or a catastrophe. Here is the choice. It is not a fight of ideas, but a fight to save the world. Returning to Marx and Engels’ critique of ideology, instead of being enslaved to an imposed ‘high tech’, what is at stake is to adjust the so-called ‘high tech’ to the survival of humankind in a bright future.

ACKNOWLEDGEMENTS We thank especially for their rewarding inspirations: Ricardo Bellofiore, Massimo Cingolani, Joseph Halevi, Daniel Pichoud and Louis-Philippe Rochon. Indeed, as usual, we take full responsibilities for our analysis.

NOTES 1. Marx and Engels (1962) had an encompassing interpretation of ‘technology’ – which today is the so-called ‘high tech’. For them, technology was the sole way of humankind to become the master of its fate. To the contrary, the modern ‘high tech’ is the way to escape the real world and fly to virtuality and children’s game worlds. 2. As shown by the best specialist of Nazi economy, Adam Tooze (2006), Hitler was only interested in infrastructure useful for his ultimate goal of total war. Civilian infrastructures has been quasi-finished by the Weimar Republic. 3. Including pseudo-pagan reactionary religious ideas extoling the adoration of the lords of ‘high tech’ in their worthy commitments, for instance the creation of ‘artificial intelligence’. They are indeed very useful to justify the demise of labor and culture. 4. The crucial role of the State as ‘employer of first resort’ out of the creation of State currency is wonderfully explained by Bougrine (2016).

REFERENCES Bougrine, Hassan (2016), The Creation of Wealth and Poverty: Means and Ways. New York: Routledge. Eisner, Robert (1995), The Misunderstood Economy: What Counts and How to Count It. Boston: Harvard Business School Press. Marx, Karl and Engels, Friedrich (1962), The German Ideology (Including a Thesis

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on Feuerbach and Introduction to the Critique of Political Economy). Amherst NY: Prometheus Books. Parguez, Alain (2016a), ‘How the planned perversion of democracy generated accelerating inequalities’. Journal of Contemporary Economic and Business Issues, 3(2), 49–59. Parguez, Alain (2016b), ‘Economic theories of social order and the origins of the euro’. International Journal of Political Economy, 45(1), 2–16. Tooze, Adam (2006), The Wages of Destruction: The Making and Breaking of the Nazi Economy. London: Allen Lane.

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4.  Two easy pieces Riccardo Bellofiore INTRODUCTION My path into heretical thinking in monetary macroeconomics has been deeply influenced by Marc Lavoie and Mario Seccareccia. The intellectual link was, of course, Augusto Graziani, whose evolution I began to follow closely since my first years of study and research. In my experience, since 1977 (if not even before) to read Graziani was to be introduced to his version of the theory of the monetary circuit. I was part of the ‘heroic’ early years of the Italian approach to the monetary circuit, mostly represented by the Seminar in Naples about Monetary Theory (1981–1985). This meant a confrontation and dialogue with the other French versions, the one held by Alain Parguez and the quite different one by Bernard Schmitt. In 1982 there was also a confrontation in Nice, with a group around Richard Arena (and to which Jan Kregel participated). It is against this background that my encounter with Marc and Mario returns in my recollections. I think I met Marc for the first time in Louvain-la-Neuve, in 1985, thanks to some initiative (I was there as a visiting professor) promoted by Michel de Vroey who, at the time, was involved in a difficult intellectual trajectory trying to find a bridge from Marx to monetary heterodoxies, involving also Aglietta, and Benetti and Cartelier. I confess I remained stuck there, at the meeting between Marx and Keynes, and Schumpeter too: I am definitely a slow learner, while Michel is nowadays very far away from that. I asked Lavoie for a survey of the theory of the monetary circuit, which was likely the first of its kind in print, in a special section on money edited by me, for an Italian theoretical journal, Metamorfosi (Lavoie, 1987a). The original French version appeared the same year in Monnaie et Production, the special series that Alain edited for Economies et Societies for many happy years (Lavoie, 1987b). There were (and there still are), of course, differences between us, and some distance. Some of these differences came out in the refereeing procedure by Mario of a short entry on ‘Monetary Circuit’ I was writing for an Encyclopaedia in Political Economy in the late 1990s. A 56

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written discussion ensued, and my rewriting of some parts of the entry to recognise the alternative points of view on some aspects of the monetary circuit. The dialogue was so useful, and Mario’s contribution was so nice and substantial, that I asked him to add his name to the entry (Bellofiore and Seccareccia, 1999: a nice way to deviate possible criticisms from other circuitists, isn’t it?). I then insisted on having both Marc and Mario at the Minsky conference I organised in Bergamo in 1999, although they were critical (and rightly so, in my view) of some aspects of the financial instability hypothesis (Lavoie and Seccareccia, 2001). It is something that I doubt was (and is) appreciated by the local Minskyians, and by some US friends too. What is for sure, however, is that I don’t think I would like to have Mario as the writer of my obituary. After his criticism of Minsky in Bergamo 1999, Mario presented a paper (actually, some slides, but a lot of slides: filled with arguments) at a Paris event in Paris XIII honouring Graziani in January 2015. There he maintained that Graziani’s theory of the monetary circuit was tainted by too many Austrian, non-Keynesian and non-Kaleckian influences. Needless to say, here I strongly disagree with Mario. I can only imagine what he would say about me! Among the most contested topics in the theory of monetary circuit, and the topics to which Marc and Mario contributed (as well as one of the editors of this volume, see Rochon, 2005, 2009), there are the two important issues that many scholars take as problematic: (i) the monetary payment of interest by firms to banks; and (ii) the monetary realisation of profits by firms. I’ll focus on these two questions, from the point of view of Graziani’s framework. I’ll propose a kind of radical simplification of his attempt to solve the first issue, and I’ll maintain that his view of gross profits as earned ‘in kind’ by the firm sector has its reasons and can be defended. This will be done, admittedly, in a curious shape. Below, I shall present two distinct, very short, articles I would have liked to send to some journals, and I never did. I am sure that no serious journals would have published them, not even Post-Keynesian journals (which actually is quite comforting for me: usually, my best papers have always been rejected by journals or book editors, but when published somewhere they were the most appreciated). So, I present here these ‘two easy pieces’ as a homage to Marc and Mario. The implicit reference in the title of this chapter is of course to Five Easy Pieces, the 1970 movie by Bob Rafelson with Jack Nicholson. I can only add that I hope I can obtain a lenient treatment from the Court.

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IS THE PROBLEM OF THE PAYMENT OF INTEREST TO THE BANKS ALREADY SOLVED? Is the problem of the payment of interest to the banks already solved? Yes. Since 1956. What is the Problem, and How Graziani Dissolved it? The problem was stated by Graziani in all his circuitist writings. Since 1984 Graziani’s argument is straightforward. I take his 1989 Thames Papers in Political Economy, ‘The Theory of the Monetary Circuit’ as representative (Graziani, 1989a, pp. 17–18). At the end of each period firms must give back to banks not only the initial finance they borrowed but also the interest, which has been agreed on the money market. However, what firms as a whole can recover from the circuit is just what they obtain from the consumption market or from selling securities, and at best it can be equal to the finance initially injected. If they have to pay money interests to banks, firms need to get money from some other source of money than initial finance. What firms owe to banks is the amount of money charged on the money loans as interest. What would be the use by banks of interests disbursed by firms? To pay wages and salaries to employees, to grant interest on deposits to household, to buy commodities from firms. If the two sums are equal the problem is ‘solved’ in the substance, says Graziani. We see that the problem is in fact non-existent for the Italian economist, the only tricky point is to find a ‘technical’ stratagem to make it work. Graziani imagines that firms get a second round of financing from banks at the end of the circuit, and immediately give it back to banks so that interest is paid to the bank. At the same instant, the interest is directly or indirectly spent: the share of interest going to wages and salaries and spent by their employees, or the share of interest spent by banks in buying commodities. So firms have once again the disposal of the amount of money needed to reimburse the second round of financing, and they extend a final payment to banks. This ‘roundtrip’ voyage of money between firms and banks being instantaneous, there is no further interest charge on it. This solution indeed amounts to nothing but a payment ‘in kind’ from firms to banks, with the two fractions of the capitalist class sharing the net product: ‘In substance, what have taken place is a barter, firms having paid interest in kind (Lavoie 1987, Graziani 1984)’ (Graziani, 1989a, p. 18). Income is now divided into real wages to the working class, industrial profits accruing to industrial capital, and financial profits accruing to financial capital. Exactly the same argument is found in Graziani’s Monetary Theory of Production (Graziani, 2003): ‘In order to get the money needed to satisfy

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their interest payments, the only thing they can do is to sell part of their product to the banks, which is tantamount to saying that interest can only be paid in kind’ (Graziani, 2003, p. 31). In the book, Graziani considers the similar solution according to which banks buy equities issued by firms. If interest is not paid in kind, the firms’ debt is not finally paid in a definitive fashion, and banks accumulate a mere financial wealth. This was in fact Paolo Sylos Labini’s solution in 1948 (Sylos Labini, 1948): an accumulation of money as wealth as such. A similar path was followed also by Wray (1996, p. 452), and is judged by Graziani as ‘less reasonable’ than the ‘in kind’ solution: ‘It is indisputable that the banks, like any other entrepreneur, may want to earn profits in money form. But this is only a transient form, while the final destination of money is to be spent in order to make a profitable investment’ (Graziani, 2003, p. 31). Toporowski’s criticism of Graziani (Toporowski, 2018), which he considers a sort of Kaleckian alternative, seems to be based on the dubious idea that in a theoretical problem like the one we are dealing with, the theoretician is allowed to assume that firms possess some unexplained monetary capital in their balance sheets whose origin is mysterious: we just assume that it has been accumulated in the past. A criticism of Kalecki’s monetary theory can in fact be presented because he does not distinguish enough investment financing from production financing (see Messori, 1991): Kalecki overlooks the fact that the capitalist class demand whole production financing, and assume that working capital does not need to be financed. As Schumpeter taught, the monetary analysis of the capitalist process must be pursued ab ovo. Graziani’s (non-existent!) problem of the payment of interest to banks has naturally nothing to do with the existence or not of money savings by the workers. Toporowski says that in Graziani’s theory a key part is played by workers saving, and that this results in the problem of interest monetisation. It is not true: in Graziani the problem emerges also with a zero propensity to save. It is not saving as such, but rather ‘hoarding’ within saving, i.e. an increase in liquid holdings by households, which may create difficulties in getting the finance firms need to pay interest if banks do not accept an increase in firms’ debt towards banks. But this has nothing to do with the issue we are discussing. Toporowski is simply arguing in a different theoretical setting, without recognising the conceptual structure of the approach he is criticising. The 1956 Solution by Joan Robinson However, as I argued, the problem of the payment of interest by firms to banks was already solved, in 1956. The date refers to Joan Robinson’s Accumulation of Capital (Robinson, 1956). Before considering in which

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sense we find a ‘solution’ to the problem we are discussing, let me remind the reader that Graziani published a chapter on ‘Money and Finance in Joan Robinson’s Works’ (Graziani, 1989b). The chapter is interesting also because it presents a very simple formalisation of Graziani’s scheme of the circuit in which the economy is structured in two sectors, producing respectively consumption goods and investment goods. In that article, Graziani once more intervenes on the payment of interests by firms to banks. In the model he assumed that banks pay an interest to households’ deposits as well as charging an interest to firms’ loans. The problem, thus, emerges only if the latter is higher than the former. In this case, he wrote, even if wage-earners spend the whole of their income on consumption goods, firms will never be able to pay back their debt. The solutions presented this time are slightly different. Graziani imagines two ways of resolving the conundrum. The first is that banks directly pay wages to their employees, which are then spent on the goods market or on the financial markets, and go into the receipts of the firm sector. The second is that banks spend the excess of the interest rate paid by firms on loans over the rate reckoned by banks on savers’ deposits. In fact, in the second case Graziani has in mind something very similar to what we saw before, because he qualifies this payment as similar to the payment in kind (but the cumbersome roundabout circulation of money of the other writing is here hidden from view). The first case is more problematic, and I have reasons to think the written version of this chapter must be much earlier than 1989. The difficulty is that, if the interest is monetarily reimbursed by firms thanks to the direct bank payment of wages and salaries to workers, this amount to banks breaking the rules of a monetary economy as defined by Graziani: banks pay workers through an IOU. In the other writing, banks, first, obtain the payment of interest, and then pay workers; here, banks pay workers ‘printing money’, and only thanks to that do they obtain the payment of the interest. It is a kind of seigneurage. That is where Robinson (1956) is helpful. Graziani reminds that in her book, as well as in her article on ‘Own Rates of Interest’ (Robinson, 1961), there are clear references to an argument in terms of a monetary sequence. Of course, Robinson translates all this in a Keynesian terminology, which leads to a total rejection of the loanable funds approach. Bank-capital and industrial-capital are considered to be two water-tight compartments. The stock of money is a debt of banks to firms. Graziani quotes Robinson in support of the idea that interest on the existing money stock may be paid from firms to banks when banks pay their own employees or buy finished books: ‘[t]he whole of the gross proceeds of the banking business (that is the interest paid by the entrepreneurs) returns to industry as quasi-rents arising from the expenditure of their employees’ (Robinson, 1956, p. 228).

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I think, instead, that a more convincing ‘solution’ was already hidden a few pages before: or, if you prefer, I think that one can understand better Robinson’s solution, as endorsed by Graziani, putting it into its larger, more complete context. Let us see how. Book IV of The Accumulation of Capital is made up of two chapters: 23, Money and Finance; and 24, The Rate of Interest. At the beginning of Chapter 23 Robinson affirms that notes now circulating are the result of past loans to entrepreneurs. Entrepreneurs pay interest to banks since their IOU would not be acceptable as a means of payment, while the notes of respected banks are. So, firms obtain money as circulating medium against a discount (Robinson, 1956, p. 226). This means that, in fact, interest has been already paid in advance by entrepreneurs to banks, and ‘interest payments represented by discounts are a deduction from [industrial] profits’ (Robinson, 1956, p. 228). The problem, which so entertains circuitists in their heated debates, is therefore absent from the start. Banks have already earned their interests as receipts, gross proceeds, so yes, they actually can pay their employees with that or buy commodities from firms without breaking any rule in a monetary economy: the profits will be their income from the interest payments less their expenses. They don’t run their business ‘printing money for themselves’. First Conclusion Is the problem of the payment of interest to the banks already solved? Yes. Since 1956. The solution was embedded in Joan Robinson’s The Accumulation of Capital. Interest payments are paid through the discounts which we may think are part of, and deduction from, the initial finance to production granted by banks against firms’ IOUs. The reader may wonder if a similar fate – actually, more a dissolution than a solution – awaits the other (in)famous problem within monetary circuitism: the monetary realisation of profits. If we stick to the methodological construction of Graziani’s scheme of the monetary circuit, and understand its logic, the answer cannot but be, again, a resounding yes. But this is the theme of another article.

IS THE PROBLEM OF THE MONETARY REALISATION OF PROFITS A FALSE PROBLEM? Is the problem of monetary realisation of profits a false problem? Yes, you bet.

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What is the Problem? And How Graziani Dissolved it The problem of the monetary realisation of profits is obviously related, though not identical, to the one about the payment of interest by banks to firms. The best reference here is likely the second section of Chapter 5 in his The Theory of Monetary Production (Graziani, 2003, pp. 98–100). If we assume as a starting point, as Graziani always does, a closed economy without the State, then in the market for resources firms as a whole need only to hire labour power according to their plans to begin production. In the market for finished products, firms enter into mutual exchanges of the goods they do not make available to workers: in this way they obtain the fraction of total product required for further production. Graziani is clear that this outcome may be reached either following Keynes’s Treatise on Money or Kalecki’s degree of monopoly perspective. Graziani insists that the more rigorous logical reasoning here is to stick to the initial postulation that firms belong to a single integrated and consolidated sector: it follows necessarily that in this most abstract, but fundamental, layer of abstraction, the presence of firms in the market for finished products must be ruled out: ‘this would imply that one and the same agent is selling and buying the product that he himself has produced . . . it seems more logical to imagine that firms do not put on sale the fraction of total product that they plan to use in their own production’ (Graziani, 2003, p. 99). This solution, he goes on, is fully consistent with the structure of the model. Since, at best, wage earners can spend their money income and not more, what has been said amounts to arguing that the capitalist surplus is not realised in money, but in kind. The shortcoming of this way of putting things is that the issue of how the purchases by firms on the commodity market disappear from view. A way to overcome this apparent ‘non-realism’ of the model is to relax the rigorous abstract starting point, and introduce some more concrete determinations. Let us maintain the hypothesis that only a single good is produced, which can be used as a consumption good and as an investment good. The financing of the demand of the many capitalist firms on the commodity market can only come, at first, from a second round of bank credit at the end of the period. Firms can get whatever amount of bank finance they need to fulfil their plans, since there is no risk of the money spent in the closed circle of their purchases within the sector (as Rosa Luxemburg wrote, it is a ‘family business’: the debt of some firms is the revenue of others), and so the banking sector is sure to get back instantaneously the second round of finance. The only difficulty may come from ‘hoarding’. A different position is presented by Parguez and Seccareccia (2000, pp. 422–423), who write:

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Two easy pieces ­63 Firms have also to spend in order to maintain or increase their stock of capital goods by acquiring the newly-available equipment goods produced by the capital goods sector. Abstracting from any specific assumptions regarding the degree of integration of business enterprise [which is of course the key moment in Graziani’s argument!], we see no logical reason why investment, the acquisition of the newly-produced capital goods, should not be financed by bank loans.

In his 1987 survey on the monetary circuit approach, Lavoie admits that we may consider the part of profit of the investment sector (the share which is not sold outside the sector) as ‘in kind’ (‘e profit est alors purement comptable’: Lavoie, 1987b, p. 78). But he also advances another possibility of monetary realisation of profits without a second round of finance, or without assuming that the finance of profit realisation is anticipated in initial finance. In a disaggregated fashion, each firm uses part of the money receipts net of costs to buy some part of the means of production output (Lavoie, 1987b, pp. 79–80). It is clear that Graziani’s view is such that the problem of the monetary realisation of profits is not a problem at all. The concessions to a ‘less rigorous’ reasoning does not detract from the fact that for him circuit theory must begin with the realisation of profits ‘as if’ in kind. A solution like the one which assumes that part of the firm sector gains money profits, while the other is in deficit, is not a solution, it is just the dissolution of Graziani’s fully consistent and most rigorous scheme. A Marxian Dissolution of the Problem of the Monetary Realisation of Profits In another paper (Bellofiore, 2017) I have argued that an attentive look at the formation of Augusto Graziani’s circuitist perspective confirms how relevant was the influence of Marx – though it was hidden from view most of the time. Two 1983 interventions by Graziani are particularly pertinent to understand the way he argues about the realisation of money profits. In ‘Riabilitiamo la teoria del valore’ – published in a special supplement of L’Unità in 1983, and translated in English in a monographic issue of International Journal of Political Economy edited by me, as ‘Let’s Rehabilitate the Theory of Value’ (Graziani, 1997a) – Graziani sees Marx’s as a class macroscopic analysis. It is a description of the capitalist economic process as a monetary circuit, where initial finance purchases labour power: money, before being the universal equivalent (the social relation connecting individual capitalist firms on the market), is what put the capitalist in a s­ pecific ‘social relation’ with workers. The fact of being a supplier of labour(-power) does not give to workers any command over goods or wealth. ‘Valorisation’ means an enlargement of abstract

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wealth – Graziani uses the term ‘wealth in general’ (ricchezza in generale, or ricchezza astratta) – for the capitalist class: in a macro perspective, no exchange internal to the firm sector can contribute to valorisation: ‘only to the extent that c­ apitalists use labour and take for themselves a part of the product obtained they can realise a surplus and convert it into a profit . . . [that is,] the difference between the total sum of labour employed and the sum of labour that returns to the worker in the form of the real wage’ (Graziani, 1997a, p. 24). In ‘La teoria marxiana della moneta’ – an intervention to a 1983 conference published in 1986 in the proceedings, and also translated in English as ‘The Marxist Theory of Money’ in the same monographic issue of International Journal of Political Economy edited by me (Graziani, 1997b)  – Graziani is more precise. He stresses that in Marx we have to distinguish ‘money’ (Geld in Marx’s original German: denaro in Italian, argent in French) and ‘currency’ (Münze in Marx’s original German: moneta in Italian, monnaie in French). Geld is what exhibits abstract wealth, ‘wealth in general’; Münze is the universally accepted intermediary of exchange, and is one among many representatives of wealth in general. The consequence is that, if one adopts this distinction, the valorisation process is defined money–commodity–more money, M-C-M, while the monetary circuit is defined as currency–commodity–currency, C-M-C: ‘[i]f therefore the specific end of the capitalist is to acquire money in the sense of wealth in general, it still does not follow that the purpose of the capitalist is to accumulate currency’ (Graziani, 1997b, p. 28; the translation has been amended). Unfortunately, in the hurry to publish the issue, the journal did not intervene into the mistake of the translator who rendered with ‘money’ both denaro and moneta, though at the time I clearly pointed out the problem, which is in fact clearly spelt out in footnote 2, pp. 48–49, of the translation. That is why the quote above has been amended. This error makes the English translation incomprehensible: just on this point, but it is a crucial one. Mario Seccareccia meritoriously included that article in a virtual special double issue that has been freely accessible to readers until the end of August 2017: Mario, oh Mario, why didn’t you alert me about your intention to republish the article? Anyhow, I submit that it would now be important to republish a revised version of the article, with the (actually very few, but crucial) changes needed. I have seen too many times the best minds be lost on the simplest issues. What Graziani is actually saying here is that the theory of the monetary circuit fully respects Marx when it represents the capitalist sequence in such a way that the ‘currency’ (moneta, Münze) recovered at the closure of the circuit is (at best) equal to the ‘currency’ injected at the opening: but

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this is therefore perfectly compatible with the sequence money (denaro, Geld) – commodity – more money. Graziani adds a quote by Marx confirming that ‘when Marx discusses the nature of profit, he makes it clear that profit is acquired by the capitalists taken collectively solely in the form of commodities’ (Graziani, 1997b, p. 28). Valorisation does not require an increase of currency to bring about an increase in money. Graziani is in fact presenting the macro-foundation of Capital, Volume I, adding a division of the capitalist class between ‘financial capital’ (i.e. the banking sector) and ‘industrial capital’ (i.e. the firm sector). In this setting, and with the working class being paid a total real wage given by what capitalists made available to wage-earners, surplus value is realised in real terms, and the class distribution is accurately defined in terms of labour-values (or better, as they are now called in the Marxian literature, simple or direct prices). Graziani observes that Marx is right in stressing that ‘currency’ as ­intermediator of exchange in final circulation may well be a commodity (as it is argued by Marx in the first chapters of Capital). On the other hand, ‘currency’ representing ‘money’ as a form of capital – namely, ‘money’ producing ‘more money’, in different shapes – must be a form of credit, and more specifically bank credit ex nihilo (as I have argued elsewhere, this amounts to seeing in bank finance to production a monetary ‘antevalidation’ of valorisation). The reason why the fact that currency is bank credit ex nihilo is not explicit in Capital is due to the fact that when Marx writes of ‘money’ and ‘currency’, especially in Volume III, he does not present a ‘pure’ theory but only an inquiry about what we nowadays call the practice of the money markets. Moreover, he assumes an open economy and the presence of the State: Graziani’s Marx upholds a form of State theory of money. Marx–Keynes Through the Eyes of Kalecki or Vice Versa In his 1976 textbook, Teoria economica. Prezzi e distribuzione, before the theory of the monetary circuit was fully spelt out by Graziani, our author already proposes a Keynes–Kalecki synthesis. This is a long but noteworthy quote about the meaning of Kalecki’s view: The meaning of this price theory is the following. The distribution of national income between wages and profit depends from the respective levels of money wages w and prices p; the money wages are fixed by the bargaining with the trade unions, the prices are unilaterally fixed by the firm sector according to a desired profit margin q; once the money wages and the margin q are fixed, the distribution of income between wages and profit is settled. At this point this theory has a point which is not still determined: the profit margin, q. We need to define the

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Credit, money and crises in post-Keynesian economics criteria with which firms set this margin, that is an essential element to arrive at the fixation of price. [. . .] We can argue in this way. In a capitalist economy, the totality of the means of production is owned by capitalist-entrepreneurs. Thus, the entrepreneurs must be able to buy all the new means of production which have been produced, and therefore the totality of the investments carried out in each period. The profit margin must be set at a level such that the mass of profit is equal to realised investments. If, according to their own strategies of expansion, entrepreneurs decide to invest a given share of national income, they have to fix the q margin so that the share of profits in income is at the same level. (Graziani, 1976, pp. 621–622, my translation)

The ‘classist’ theory of the distribution of income he adopted brings with it two results: (i) that every investment decision must be automatically financed by a corresponding formation of real saving; (ii) that every investment decision is likewise financed by a corresponding formation of profit. The former is the ‘financing of investment’ for the economy as a whole; the latter is the ‘self-financing’ of firms, corresponding to what Graziani sometimes called forced saving in excess of voluntary saving – namely, the non-distributed profits by the firm-sector. Firms’ self-financing is physiological in the circuitist model: Graziani’s distinction between finance to production and finance to investment cannot but lead to Kalecki’s selffinancing as retained profits. Second Conclusion Is the problem of monetary realisation of profits a false problem? Yes, of course. To understand why, however, one has to discover the hidden Marxian construction of Graziani’s theoretical scheme of the monetary circuit. Graziani’s theory of the monetary circuit is a macrosocial and monetary theory of capitalist production akin to Marx’s two-class perspective in Volume I of Capital. The only difference is that, in fact, Graziani inserts from the start the banking/financial capital in the macro-monetary setting of the monetary process, while borrowing from Marx the distinction between ‘money’ (Geld) and ‘currency’ (Münze). Hence, the capitalist process is in its essence a production of (more) money by means of money: it is not, however, an accumulation of (more) currency. The article has shown how Graziani’s conclusions are quite similar to Kalecki, as he interpreted the Polish author: we may in fact submit that, paradoxically as it may sound, a kind of Kalecki’s vision (the Kalecki of the 1930s, most likely) informs Graziani’s way of reclaiming the labour theory of value as a theory of exploitation and, at the same time, his own macro-monetary theory of capitalist production, where

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profit is acquired by the capitalists taken collectively solely in the form of commodities.

REFERENCES Bellofiore, R. (2017), ‘Keynes within the 20th century political economy’s “hidden Marxian Stream”. The Italian circuitism of Augusto Graziani in the 1970s and early 1980s’. Mimeo. Bellofiore, R. and M. Seccareccia (1999), ‘Monetary circuit’. In O’Hara, P. (ed.), Encyclopedia of Political Economy, Volume 2. London/New York: Routledge, pp. 753–756. Graziani, A. (1976), Teoria economica. Prezzi e distribuzione, 2nd edn. Naples: Edizioni Scientifiche Italiane. Graziani, A. (1989a), The Theory of the Monetary Circuit. London: Thames Papers in Political Economy. Graziani, A. (1989b), ‘Money and finance in Joan Robinson’s works’. In Feiwel, G.R. (ed.), The Economics of Imperfect Competition and Employment. London: Macmillan, pp. 613–630. Graziani, A. (1997a), ‘Let’s rehabilitate the theory of value’. International Journal of Political Economy, 27 (2), pp. 21–25. (Italian original: Riabilitiamo la teoria del valore, L’Unità, supplemento speciale per il centenario della morte di Marx, 48, 27 febbraio 1983, p. 4.) Graziani, A. (1997b), ‘The Marxist theory of money’. International Journal of Political Economy, 27(2), pp. 26–50. (Italian original: La teoria marxiana della moneta, in C. Mancina (a cura di), Marx e il mondo contemporaneo, vol. I, Editori Riuniti, Roma 1986, pp. 207–229.) Graziani, A. (2003), The Monetary Theory of Production. Cambridge: Cambridge University Press. Lavoie, M. (1987a), ‘La teoria del circuito monetario’. Metamorfosi, 5, pp. 7–36. Lavoie, M. (1987b), ‘Monnaie et production: une synthèse de la théorie du circuit’. Economies et Sociétés, 20(9), pp. 65–101. Lavoie, M. and M. Seccareccia (2001), ‘Minsky’s financial fragility hypothesis: a missing macroeconomic link’. In Bellofiore, R. and P. Ferri (eds), Financial Fragility and Investment in the Capitalist Economy. The Economic Legacy of Hyman Minsky, Volume II. Cheltenham: Edward Elgar, pp. 76–98. Messori, M. (1991), ‘Financing in Kalecki’s theory’. Cambridge Journal of Economics, 15(3), September, pp. 301–313. Parguez, A. and M. Seccareccia (2000), ‘A credit theory of money: the monetary circuit approach’. In Smithin, J. (ed.), What is Money? London/New York: Routledge, pp. 101–123. Robinson, J. (1956), The Accumulation of Capital. London: Palgrave. Robinson, J. (1961), ‘Own rates if interest’. Economic Journal, 71(283), September, pp. 596–600. Rochon, L.-P. (2005), ‘The existence of monetary profits within the monetary circuit: an essay in honour of Augusto Graziani’. In Fontana, G. and R. Realfonzo (eds), The Monetary Theory of Production: Tradition and Perspectives. London: Macmillan, pp. 125–138. Rochon, L.-P. (2009), ‘The existence of monetary profits in the monetary circuit:

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some unanswered questions revisited’. In Ponsot, J.-F, and S. Rossi (eds), The Political Economy of Monetary Circuits: Tradition and Change. Basingstoke: Palgrave Macmillan, pp. 56–76. Sylos Labini, P. (1948), ‘Saggio dell’interesse e reddito sociale’. Rome: Accademia Nazionale dei Lincei, Rendiconti, Series VIII, 3, (11–12), pp. 426–453. Toporowski, J. (2018), ‘The theory of the monetary circuit and monetary circulation’. Mimeo. Wray, R. (1996), ‘Money in the circular flow’. In Deleplace, G. and E. Nell (eds), Money in Motion. The Post-Keynesian and Circulation Approaches. London: Palgrave Macmillan, pp. 440–464.

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5.  The role of stabilisation policies in the New Consensus Macroeconomics (NCM): modern lessons from John Kenneth Galbraith Giuseppe Fontana INTRODUCTION The last few decades have witnessed a degree of consensus in macroeconomics unprecedented since the Neoclassical Synthesis of the 1950s–1970s. As argued by several commentators, the focus in macroeconomics has now moved from a polemical ‘schools of thought’ debate to a new synthesis, which explicitly draws on a rich variety of previous contributions. This New Consensus Macroeconomics (NCM) view has several features: monetary policy replaces fiscal policy as the main stabilisation policy; price stability, which for all practical purposes means a constant inflation rate around 2 per cent, is the primary objective of monetary policy; this implicit or explicit inflation target can be controlled through interest rate-management policies by the monetary authority of the country; and finally there is no long-run trade-off between inflation and unemployment (e.g. Clarida et al., 1999; see, for a critical assessment of the NCM, Arestis, 2009; Lavoie, 2009; Kriesler and Lavoie, 2007). The purpose of this chapter is to critically assess the New Consensus Macroeconomics (NCM) theory and its policy implications in light of the work of John Kenneth Galbraith. The chapter is organised as follows. The next section presents the New Consensus Macroeconomics view together with its monetary policy implications. The subsequent two sections then discuss the views of John Kenneth Galbraith on macroeconomics theory and policies, and social imbalances in modern economies, respectively. The final section concludes.

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THE NEW CONSENSUS VIEW OF MACROECONOMICS AND ITS MONETARY POLICY IMPLICATIONS The simple three-equation New Consensus Macroeconomics (NCM) model is usually made of an expectations-augmented Phillips curve, an IS-type curve, and a monetary policy rule. The IS-type curve and the monetary policy rule provide a reduced form description of the short-run aggregate demand side of the model, whereas the expectations-augmented Phillips curve represents the short-run aggregate supply side of the model. The expectations-augmented Phillips curve, the IS curve, and the monetary policy rule are all derived from explicit optimising behaviour of individual agents in the presence of market failures, including imperfect competition, incomplete markets, and asymmetric information. These market failures generate price and wage stickiness in the short run, which in turn gives support to the view that the central bank is able, via changes in the short-run nominal interest rate (i), to affect the short-run real interest rate (r). This means that in order to hit the inflation target the central bank can fine-tune components of the IS­-type curve, which respond directly (e.g. consumption (C)) or indirectly (e.g. investments (I)) to changes in the real interest rate (r). In other words, in the short run the central bank can manage aggregate demand (AD) in order to achieve the desired level of current output (Y) and unemployment (U). Finally, the Phillips curve provides the crucial link between movements of current output and changes in the inflation rate (π). The equation below shows the transmission mechanism of the NCM model in a three–stage process.

Stage 1

Stage 2

b

i

Δi 1 Δr 1 ΔC, ΔI 1 ΔAD 1 ΔY & ΔU  1 (Y2Y*) 1 Δπ (5.1) b



Stage 3

The first stage highlights the role of the central bank in controlling the short-run real interest rate: by changing the short-run nominal interest rate (i), and given short-run price and wage rigidities, the central bank is able to affect the real interest rate (r). In stage two, this rate (r) affects interestsensitive components of the aggregate demand (AD) function, namely consumption (C) and investment (I), and hence the current level of output (Y) and unemployment (UN). Finally, stage three highlights the link between changes in the output gap (Y–Y*) and changes in the inflation rate (π). The above equation also brings to light the key features of the NCM view described above. First, monetary policy, in the form of interest-rate management strategies, is the main policy tool to stabilise output and employment around their long-run trend values. Fiscal policy plays no or

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only a marginal role in the standard NCM view. Furthermore, whereas the policy tool of the central bank is the interest rate, the policy objective is the inflation target. Secondly, monetary policy is able to affect components of the aggregate demand function, but only in the short run. In the long run, prices and wages are by definition fully flexible, and hence the central bank is unable to affect the real interest rate. Finally, the aggregate demand function affects the current component (Y) of the output gap, but never the potential level of output (Y*). As argued by Solow (1997), in the NCM view there is thus a strict separation between the two components of the output gap. The potential level of output (Y*) is the supply-determined output path of the economy, and as such it is exogenously determined by the rate of technical progress and the growth rate of the labour force. By contrast, the current level of output (Y) is the demand-determined level of output. It describes the fluctuations around the trend of potential output, and is assumed to be inversely related to the real interest rate, and hence under the influence of the central bank via interest-rate management policies. This means that monetary policy has real effects in the short run, but it is neutral in the long run (Lavoie, 2006). The transmission mechanism described above also explains the role played by the policy objective (π) in the NCM view. As in the theory of (dual) interest rate and prices of Wicksell (Seccareccia, 1998; Fontana, 2007), the inflation rate (π) is a summary statistic indicating the state of economic imbalance of the economy. Since the potential level of output is assumed to be independent of the level and time path of aggregate demand, current output should grow in line with potential output. Whenever current output exceeds its potential level the inflation rate accelerates. The change in the inflation rate is therefore signalling the unwarranted growth of aggregate demand in excess of the growth of aggregate supply. The central bank has therefore the policy mandate of bringing current output into line with potential output by appropriately modifying the real interest rate in the economy.

JOHN KENNETH GALBRAITH ON MACROECONOMICS AND MONETARY POLICY During his long life Galbraith has always been one of the most critical opponents of mainstream macroeconomics theory and policy, and more generally of all widely accepted but scarcely examined beliefs of fellow economists and social scientists, what he appositely labelled conventional wisdom. ‘It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that

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emphasizes this predictability’ (Galbraith, 1999 [1958], Ch. 2). One of the main reasons for his criticism was the failure by his colleagues to give proper attention to the notion of power and the dual economic structure in modern economies. Galbraith had already explored in early work the rise and influence of large corporations in modern economies (e.g. Galbraith, 1936), but it is with American Capitalism: The Concept of Countervailing Power (Galbraith, 1952) that he formulates the idea that modern large firms have altered the structure of modern economies. The economy is now divided in two sectors. The planning sector is made of large firms with significant market power. Modern technology requires considerable investments in capital and labour over long periods of time. In response to these longrun investments, large firms seek to protect their future by mitigating the uncertainties of the market with appropriate planning. The other sector in the economy, the market sector, comprises small competitive firms, which have little or no market power. Free competition and market rules govern their production processes and commercial strategies. This dual structure of the economy is particularly important in explaining the effects of monetary policy. Monetary policy works as it encourages or discourages the spending and respending of borrowed money . . . The effect of this action is very different as between small firms and large. House builders, other construction firms, smaller retailers, other small traders and, in appreciable measure, farmers depend for their operations on borrowed money, and they cannot, in the normal case pass along the higher interest charges. Their prices are still determined, in greater or less measure, by competition in the market.   The position of the large, strong corporation is almost exactly reverse. . . . Having substantial control over its prices, it can pass the higher interest charges along to its customers. Or, as I then argued, it will have ‘unliquidated monopoly profits’ by which the higher interest can be absorbed. So when monetary policy is invoked against inflation, the primary effect is on the small man, not the large corporation. The approval of the policy by the rich and powerful is thus an accurate reflection of their own self-interest. (Galbraith, 1981, p. 348)

The description of the workings of the transmission mechanism of monetary policy offered by Galbraith is prima facie consistent with the NCM view described in the previous section. Monetary policy is often invoked as the major tool to tame the inflation rate in the country: when the current inflation rate is above the target inflation rate, the central bank raises the short-run interest rate, and negatively affects interest-sensitive components of the aggregate demand. However, Galbraith argues that this restrictive monetary policy stance has different effects on the planning sector, and on the market sector. The former is sheltered from the higher borrowing costs

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by retained profits and discretion over price setting, at least temporarily. It is therefore the market sector that is mostly hit by the restrictive antiinflationary policy. Furthermore, the large firms of the planning sector can use their market power to pass the rising borrowing costs on to their customers. This is not the case of the small firms of the market sector, which do not have any price-making power. The working of monetary policy in a dual structure economy is strictly related to another important aspect of Galbraith’s work, namely the theory of social imbalances. Workers employed in the market sector are at a disadvantage compared with workers in the planning sector. They usually get lower wages and inferior working conditions. They are also more likely to have poorer education and less political representation, which undermine the chance of state interventions to improve their welfare and social mobility. This self-perpetuating cycle of cumulative causation is at the origin of ‘insular poverty’, i.e. the existence of poverty amidst plenty (Dunn and Pressman, 2005, pp. 176–183). If a restrictive monetary policy mainly works through its effects on the market system, it means that it amplifies inequalities in the economy between the planning system of large corporations and the market system of small firms. A corollary of this increase in inequality is that a restrictive monetary policy strengthens rather than weakens social imbalances. A further interesting aspect of Galbraith’s work regards the nature and origin of inflation. According to the NCM view, inflation is a summary statistic signalling the unwarranted growth of aggregate demand in excess of the growth of aggregate supply (Lavoie, 2009). The old monetarist school of Milton Friedman also maintained the same view. Galbraith was always very suspicious of this view, and he did not spare his criticisms. [M]odern inflation is caused not only by excess of aggregate demand; it is caused, as I’ve noted, by the direct pressure of wages on prices and, in turn, the upward pull of prices on wages. This microeconomic process, as we have learned, is not arrested by any slight or modest reduction in demand; it is arrested only by severe cut-backs in plant operations and employment. It also operates with special impact on the mass-employing industries. Trade union power is curtailed only by severe unemployment and only as employed power and the ability to pay higher wages is sharply weakened. (Galbraith, 1988, p. 126)

Here Galbraith takes a broad perspective on the different nature of inflation. He separates demand–pull inflation from cost–push inflation. The former type of inflation arises when the growth of the aggregate demand outpaces the growth of the aggregate supply. This is the standard case in both old monetarism and of the modern NCM view. The latter type of inflation may have different cost origins, although it is often used to

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indicate a substantial increase in the cost of imported goods and services (e.g. oil), which in turn produces a price-wage spiral with persistent effects. Lacking any strong evidence that during his time aggregate demand had outpaced aggregate supply, Galbraith explores the alternative source of inflation, and the likely solutions to it. Galbraith is aware that cost–push inflation assumes a dramatic force in a dual structure economy, where the considerable market power of large corporations and trade unions could destabilise the economy with a selffulfilling price-wage spiral. However, he is sceptical of using interest rate management policies to curb high inflation rates in these circumstances. Slight or modest reductions of the aggregate demand will not produce the desired results. Only a severe downturn will be effective in reducing inflation, and he is not ready to follow this solution, even in the case of high or near-capacity production. This policy will create mass unemployment and exacerbate social imbalances. In times of high or near-capacity production, the context in which the danger of inflation is thought to become acute, profits and profits prospects are certain to be favourable. . . . For all of these reasons, most investment will be extremely unresponsive to moderate increases in the interest rate. . . . If the policy is applied severely, some firms will, indeed, be squeezed by the higher rates. And in practice, since interest rates are comparatively sticky, some rationing of credit will occur. Some firms which would like to borrow will be unable to do so. If the policy is pressed far enough, investment spending will be curtailed. In the end, the slack required for price stability would appear. So would the conflict with our attitudes on the importance of production. There would be an equally urgent conflict between this policy and the employment and associated economic security which is the counterpart of high production. (Galbraith, 1999, p. 173)

Galbraith is thus critical of interest-rate management policies because they increase the disparity between the planning system of large corporations and the market system of small firms. In addition, he is aware that these interest-rate management policies would be extremely recessionary in the case of cost–push type of inflation. In both circumstances social imbalances in the economy will rise. This explains his profound condemnation of interest-rate management policies, and the search for alternative solutions to the problem of inflation. Before discussing these alternative solutions to the problem of inflation, it is worth reconsidering the policy implications of the NCM view in the light of Galbraith’s condemnation of interest-rate management policies. According to the NCM view, as long as the inflation rate is above its longrun target, the central bank must trigger a disinflationary process in order

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to open a gap between the current (or demand-driven) level of output (Y) and the potential (or supply-driven) level of output (Y). In other words, no matter whether inflation or expected inflation is 5 per cent or 10 per cent, as long as it is above its desired level, which for all practical purposes is now around 2 per cent, the central bank must raise the short-run interest rate in order to curb, via the transmission mechanism described in equation (5.1), aggregate demand and current output. This policy prescription applies whatever the source of the inflation shock, i.e. either in a demand–pull inflation environment or a cost–push inflation environment. Galbraith’s condemnation of interest-rate management policies applies well to modern monetary policy. The NCM model has an unemployment bias built-in, namely a tendency to create slack in the labour market and goods markets whenever inflation is above its target level. In other words, the NCM model, which, it should not be forgotten, inspires many macro econometric models used by central banks and treasuries around the world (Lavoie and Seccareccia, 2006; Seccareccia and Lavoie, 2010), trades low inflation rates with rising social imbalances. Furthermore, recent social and economic transformations have magnified many-fold the social imbalances caused by modern monetary policies. The growing phenomena of outsourcing manufacturing jobs and services together with a large supply of idle and unemployed workers in populous countries like China and India has meant that unskilled and semi-skilled workers have not benefited from growing output, and their real wages have mostly stayed stagnant. The problem of the increasing social imbalance in modern economies is compounded by the fact that the NCM view bypasses any issue related to the different nature and origins of the inflation shocks. Restrictive interestrate management policies are hardly the most effective theoretical tool to tackle cost–push inflation. In a cost–push inflation environment these restrictive interest-rate management policies amount to nothing less than an incomes policy based on fear of job losses and of lower sales revenues. For instance, Galbraith explains that high oil prices are a net transfer of resources from users who directly or indirectly consume this commodity to oil-producing countries and oil firms controlling its extraction and distribution. The question is then who is paying for this net transfer of resources? By purposely curtailing the aggregate demand, central banks answer this question. They depress workers and small firms’ claims to their fair share of currently produced output, freeing up income that can be used to accommodate this net transfer of resources to oil-producing countries and oil firms. These issues are rarely discussed in macroeconomics then as they are now within the NCM literature, and when they are, it is argued that it is in the natural process of things that workers have to bear the costs of higher prices for oil and food.

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Credit, money and crises in post-Keynesian economics Ultimately, workers have to accept that they will have to pay their higher energy and grocery bills themselves. Pretending that they can pass the costs on to their employers via offsetting wage increases or their governments via offsetting petrol tax cuts will only boomerang back on to them with a vengeance as companies lay off workers and governments are forced to raise taxes or cut spending in response. (Schmieding, 2008, p. 11)

This policy solution strikes at the heart of the social imbalance of modern economies. The NCM literature argues that modern central banks are concerned that high oil and food prices do not have second-round effects, starting off a 1970s type of wage and price spiral, leading ultimately to a period of stagflation. For this reason, central banks are encouraged to use restrictive interest-rate management policies in order to create slack in the labour market and the goods market, in this way keeping in check any nominal wage or price demand by workers or small firms. However, the reality is that many things have changed from the 1970s. Wages are poorly linked to price changes, and trade unions have lost most of their bargaining power. A wage-price spiral is unlikely in modern economies. In the current environment of cost–push inflation and restrictive monetary policies, the losers are the most vulnerable individuals in the society. In particular, unskilled and semi-skilled lower-wages workers will be particularly hit by higher food and fuel prices, which absorb a disproportionate amount of their incomes. With marginal political representation and no economic bargaining power, they are also less likely to be able to claim any state intervention or compensatory increase in their wages. On these crucial issues the NCM view has little to say: as a result, the most celebrated macroeconomic theory of our time, which inspires worldwide academics and policymakers alike, has no answer to the increasing inequalities and social imbalance of modern economies.

GALBRAITH ON SOCIAL IMBALANCES IN MODERN ECONOMIES Galbraith had his own solution to inflation and social imbalances in the economy. He proposed using wage and price controls to keep inflation under control and exploit fiscal policy to improve the social balance. The young Galbraith had acquired considerable knowledge and experience concerning effective price controls during his wartime position as deputy administrator in the Office of Price Administration and Civilian Supply. The Office was able to control the prices of most US goods without obstructing resource mobilisation for the war effort. This successful experience convinced Galbraith of the effectiveness of price and wage controls.

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Although at times he came to doubt the political feasibility of these controls, he suggested that a similar success could be extended to the postworld war era. Whenever asked about possible solutions to rising inflation rates, he argued that ‘the only answer is a system of agreed restraints between employers and unions’ (Galbraith, 1988, p. 139). For Galbraith, wage and price controls went hand in hand with fiscal measures to address inequalities and social imbalances of modern economies. In his view, fiscal measures were considerably more reliable and certain than monetary policy in their effects, especially if these measures were explicitly designed to address increasing inequalities in the economy. Economists, or some, have always been unduly fascinated by monetary policy, partly because it has great pedagogical value. . . . The one thing we have never really reckoned with is its unpredictability. One can tell about the direction, but one cannot tell about the amount. We have been using this policy this past year without any exact knowledge of the point at which we might put such a squeeze on housing investment, or inventories, or on smaller businessmen, or on consumers that it would bring a much larger curtailment of spending than we want. In contrast, fiscal policy is far more certain. We know within much narrower limits what the effect of a given tax increase or a given expenditure increase will be. And it makes great sense to use the instruments of policy that are certain. What I would do is perfectly clear; and it will eventually be the policy. That is to put interest rates at a moderate level, reflecting some general equity as between the creditor and the debtor community. Then fiscal policy in combination with the guidelines will be employed as the major instruments of control. (Galbraith, 1967, p. 21)

In this long quote, Galbraith discusses the use of countercyclical monetary and fiscal policies, especially in terms of the predictability of their effects. This is an interesting point, because it is often echoed in the modern literature assessing the NCM view (e.g. Lavoie, 2006, 2009, 2014; Kriesler and Lavoie, 2007). The central bank is supposed to change the short-run interest rate with the purpose of moving the output gap in such a way to achieve its inflation target. This means that by changing the short-run nominal interest rate the central bank has to affect real financial conditions in the markets, which in turn should affect interest-responsive components of aggregate demand, and hence current output. The first problem is that this is a rather variable and long process. It is not certain, and it may take a long time for changes in the short-run interest rate to work through the monetary transmission mechanism described above. It is thus difficult to fine-tune perfectly the economy via interest-rate management strategies. This makes monetary policy more an art than a science. Furthermore, one of the most controversial aspects of the NCM view is the assumption that potential output is invariant to changes in the level and path of

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aggregate demand. But if the potential level of output (Y*) does respond to at least some interest-rate induced changes in components of the aggregate demand (see, for instance, Cornwall, 1970; Lavoie, 2006, 2009; and Fontana and Palacio-Vera, 2007 on path-dependency/hysteresis policy effects), then a restrictive monetary policy may have perverse effects: the more the central bank tries to open up a gap between current and potential output now, the more has do it in future, because of the negative effects on both current and potential levels of output. The squeeze on the economy induced by the central bank may thus bring about a much larger curtailment of spending than is sought, with very dramatic effects on the level of unemployment and the growth rate of the economy. There is even a more fundamental objection to the use of countercyclical monetary policy. The interest rate set by the central bank is also, or possibly primarily, a distributive variable: profits are the reward for entrepreneurial activities, wages are the reward for labour services, and the interest rate is nothing more than the remuneration of the rentiers or financial institutions for accumulated financial capital. When the interest rate is an important determinant of the distribution of income between various social groups, the predictability of the effects of interest management policies is even more questionable than in the cases discussed above: the effects of changes in interest rates are uncertain in size and direction. For instance, an increase in the interest rate will boost the income and expenditure of rentiers, while at the same time negatively affecting investment and consumption expenditures. It is impossible to know if the former effects prevail over the latter, or the other way around. In other words, the net outcome of this monetary policy move is not predictable a priori. Furthermore, in these circumstances the distributional effects of monetary policy are likely to be questioned. For this reason, some critics of the NCM view argue that the interest rate should not be used for countercyclical purposes, but rather be set to some sort of ‘fair’ level in order to minimise conflict over income shares (Lavoie, 1996; Lavoie and Seccareccia, 1999; Rochon and Setterfield, 2007; and Smithin, 2006). A strong case is thus proposed that the real interest rate should be set close to zero. The real value of existing sums of money, representing past effort in the form of work and enterprise, would be preserved, but there would be no increase in their value arising from the mere possession of money. Further accumulation would only be possible by contributing further work or enterprise, or assuming further risk. (Smithin, 2006, p. 286)

By setting a nominal interest rate that leads to a real interest rate close to zero, the central bank will prevent financial institutions from getting a

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share in the rewards of the new productive activities of a country in which they did not take part. Only workers and firms will be rewarded, and in proportion to their contribution to the production of new income. By contrast, financial institutions, which hold accumulated financial capital, namely past profits and unspent wages, will not benefit from an increasing level of output. Over time their share in the total output of the country will decline. From this perspective, following Galbraith’s analysis, the setting of the interest rate by the central bank is not a choice between achieving or not the desired inflation target, but rather a conflict between two courses of action: on one side, a disguised ‘incomes policy by fear’ for workers and small firms, and on the other side, an overt incomes policy for financial institutions. The former is the NCM view of interest rate management policy for countercyclical purposes, the latter is an innovative view of monetary policy that would preserve the purchasing power of accumulated financial capital, but not enhance it at the expenses of low-wage ­workers and small firms. Put in this way, it is clear why Galbraith favoured the principle of a constant and moderate interest rate over the use of a countercyclical and hence continuously shifting interest rate policy. This also explains the reason for envisaging a dull future for the Federal Reserve Bank. Ultimately, the Federal Reserve will be a minor instrumentality of the state concerned with accounting and administrative matters, standing in importance somewhere between the Bureau of Printing and Engraving and the Interstate Commerce Commission. The sooner this day comes, the better it will be for all of us. (Galbraith, 1967, p. 21)

Galbraith had much more faith in the working of fiscal measures. This is a crucial and multi-faced aspect of his view about the working of modern economies. First of all, the quantitative effects of fiscal measures are more predictable than those of monetary policy. This can be immediately seen in equation (5.1). Fiscal measures such as government expenditures and taxes are a direct component of the aggregate demand function. Therefore, they have an immediate impact in stage (2) of the policy transmission mechanism in the NCM view. They dispense with all controversial linkages between the nominal short-run interest rate, real financial conditions, and components of the aggregate demand function that characterise the working of monetary policy. In fact, some contributors to a Symposium on fiscal policy in the Oxford Review of Economic Policy (2005) have argued that there is nothing inherently monetary about the nature of stabilisation policy in the NCM view: any variable affecting the aggregate demand function can play the role of a policy instrument to target the desired

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inflation target. For this reason, when the linkages that characterise the working of the monetary transmission mechanism are called into question, it is argued that fiscal policy should complement, if not replace, monetary policy (Bernanke, 2008). Furthermore, Galbraith considered the working of fiscal policy in a dual structure economy, rather than a hypothetical competitive market. He rejected the use of restrictive monetary policies because they increase inequalities and amplify social imbalances. The same criterion applies to fiscal policy, and his conclusion is that government expenditure is superior to tax changes because it can explicitly address economic inequalities and social imbalances of a country. A restrictive fiscal policy should operate through tax increases, especially if taxation is progressive and comprehensive, rather than reductions in government expenditure. By the same token, an expansionary fiscal policy should favour an increase in government expenditure rather than a reduction in taxes. In the name of the same criterion, a further distinction can be made between, on one side, government expenditure, such as military expenditure, which favours the economic interest of large corporations, and on the other side government spending, such as health care and education expenditure, that addresses more the social needs of the market sector. In all these cases, what is crucial is not simply the effect of a fiscal measure on the level of aggregate demand, but rather the effect of this measure on the structure of aggregate demand. From this perspective, an increase in government expenditure on health care and education, such as an increase in military expenditure or a reduction in the short-run interest rate, do have the same real effects: ceteris paribus they raise output and employment. But, different from the latter two measures, an increase in government expenditure on health care and education also reduces inequalities and social imbalances in the country. These considerations can be extended to modern macroeconomics. In the NCM view, price stability has become the overriding policy objective. The NCM literature offers several explanations supporting this policy goal. Price stability improves the transparency of the price mechanism. If prices are stable, agents do not confuse changes in relative prices with overall changes in the price level. Agents will therefore make informed investment and consumption decisions, and, more generally, resources in the economy will be allocated efficiently. In addition, stable prices lower the inflation risk premium in interest rates, and via the transmission mechanism described in the above equation, this should be an incentive for higher levels of investment. Finally, stable prices reduce the distortionary effects of the tax system. In short, a policy goal of price stability contributes to achieve high levels of economic activity and employment. The embedded vision behind all these advantages of price stability is that the market mechanism, despite

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all its short-run rigidities and malfunctioning, is a powerful device to boost, in the long run, economic growth and social balance. Galbraith did not share this full commitment to the market mechanism. If the planning sector of large corporations has significant market power, it follows that the market is neither a neutral mechanism for the allocation of resources, nor the ideal device for addressing inequality and social imbalance. Only appropriate government expenditures can contain inequality and address the social imbalance.

CONCLUSIONS There are some important lessons for modern macroeconomists and policymakers to be learned from John Kenneth Galbraith. Galbraith was, first and foremost, an institutionalist economist. He was in favour of the market economy, but he did not hesitate to condemn its malfunctioning. He believed that macroeconomic policies offered the solution to many problems of the modern market economies, and went on to discuss the role of monetary and fiscal policies in a variety of theoretical and practical circumstances. According to Galbraith, the market economy is divided into two sectors, the planning sector of large corporations and the market sector of small firms. The former is the most dynamic force of modern capitalism, but it also demands large investments in capital and labour, over very long periods of time. These large investments thus need to be protected from the vagaries of the market. For this reason, large corporations have developed all sorts of practices to win the elusive consumer and the unpredictable competitor. But, Galbraith maintains, this has been done at the expense of social imbalances. He referred with unique prose to increasing inequalities as the existence of poverty amidst plenty. Galbraith maintained that without some countervailing power, small firms and low-wage workers are at considerable disadvantage in the market economy. Galbraith believed that government policies could be the solution to the power of large corporations and the consequent social imbalances of modern economies. The message was as relevant then as it is today.

REFERENCES Arestis, P. (2009), ‘NCM in macroeconomics: a critical appraisal’. In Fontana, G. and M. Setterfield (eds), Macroeconomic Theory and Macroeconomic Pedagogy. Basingstoke: Palgrave Macmillan. pp. 100–117.

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Bernanke, B.S. (2008), ‘The economic outlook’. Fed Chairman  Testimony, Committee on the Budget, US House of Representatives, 17 January. Available online at: http://www.federalreserve.gov/newsevents/testimony/bernanke200801​ 17a.htm. Clarida, R., J. Galí, and M. Gertler (1999), ‘The science of monetary policy’. Journal of Economic Literature, 37(4), pp. 1661–1707. Cornwall, J. (1970), ‘The role of demand and investment in long-term growth’. Quarterly Journal of Economics, 84(1), pp. 48–69. Dunn, S.P. and S. Pressman (2005), ‘The economic contributions of John Kenneth Galbraith’. Review of Political Economy, 17(2), pp. 161–209. Fontana, G. (2007), ‘Why money matters: Wicksell, Keynes, and the NCM view on monetary policy’. Journal of Post Keynesian Economics, 30(1), pp. 43–60. Fontana, G. and A. Palacio-Vera (2007), ‘Is long-run price stability and short-run output stabilization all that monetary policy can aim for?’. Metroeconomica, 58(2), pp. 269–298. Galbraith, J.K. (1936), ‘Monopoly power and price rigidities’. Quarterly Journal of Economics, 50(3), pp. 456–475. Galbraith, J.K. (1952), American Capitalism: The Concept of Countervailing Power. Boston: Houghton Mifflin. Galbraith, J.K. (1967), ‘The public sector is still starved’. Challenge, 15(3), pp. 18–21. Reprinted in Stanfield, J.R. and J.B. Stanfield (eds), Interviews with John Kenneth Galbraith. Jackson, MS: University of Mississippi. Galbraith, J.K. (1981), A Life in Our Times: Memoirs. Boston: Houghton Mifflin. Galbraith, J.K. (1988), ‘Interview: the political asymmetry of economic policy’. Eastern Economic Journal, 14(2), pp. 125–128. Reprinted in Stanfield, J.R. and J.B. Stanfield (eds), Interviews with John Kenneth Galbraith, Jackson, MS: University of Mississippi. Galbraith, J.K. (1999 [1958]), The Affluent Society. London: Penguin Books. Kriesler, P. and M. Lavoie (2007), ‘The new view on monetary policy: the NCM and its post-Keynesian critique’. Review of Political Economy, 19(3), pp. 387–404. Lavoie, M. (1996), ‘Monetary policy in an economy with endogenous credit money’. In Deleplace, G. and E.J. Nell (eds), Money in Motion. Basingstoke: Macmillan, pp. 532–545. Lavoie, M. (2006), ‘A post-Keynesian amendment to the NCM on monetary policy’. Metroeconomica, 57(2), pp. 165–192. Lavoie, M. (2009), ‘Taming the NCM: hysteresis and some other post-Keynesian amendments’. In Fontana, G. and M. Setterfield (eds), Macroeconomic Theory and Macroeconomic Pedagogy. Basingstoke: Palgrave Macmillan, pp. 191–212. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar. Lavoie, M. and M. Seccareccia (1999), ‘Interest rate: fair’. In O’Hara, P. (ed.), Encyclopedia of Political Economy, Volume 1. London: Routledge, pp. 543–545. Lavoie, M. and M. Seccareccia (2006), ‘The Bank of Canada and the modern view of central banking’. International Journal of Political Economy, 35(1), pp. 58–82. Oxford Review of Economic Policy (2005), ‘Symposium on Fiscal Policy’, 21(4). Rochon, L.P. and M. Setterfield (2007), ‘Interest rates, income distribution, and monetary policy dominance: post-Keynesians and the “fair rate” of interest’. Journal of Post Keynesian Economics, 30(1), pp. 13–39. Schmieding, H. (2008), ‘How to restore European resilience’. Financial Times,

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Comment, 23 July, p. 11. Available online at: http://www.ft.com/cms/s/0/025c10​ d4-5821-11dd-b02f-000077b07658.html. Seccareccia, M. (1998), ‘Wicksellian norm, central bank real interest rate targeting and macroeconomic performance’. In Arestis, P. and M. Sawyer (eds), The Political Economy of Central Banking. Cheltenham: Edward Elgar, pp. 180–198. Seccareccia, M. and M. Lavoie (2010), ‘Inflation targeting in Canada: myth versus reality’. In Fontana, G., J. McCombie and M. Sawyer (eds), Macroeconomics, Finance and Money: Essays in Honour of Philip Arestis. Basingstoke: Palgrave Macmillan, pp. 35–53. Smithin, J. (2006), ‘The theory of interest rates’. In Arestis, P. and M. Sawyer (eds), A Handbook of Alternative Monetary Economics. Cheltenham: Edward Elgar, pp. 273–290. Solow, R.M. (1997), ‘Is there a core of usable macroeconomics we should all believe in?’. American Economic Review, Papers and Proceedings, 87(2), pp. 230–232.

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6.  The macroeconomic dimension of money Virginie Monvoisin and Jean-Francois Ponsot INTRODUCTION Money remains a complex object of study for economists; few notions have generated so much controversy and debate in economics. While our economies are obviously monetary, authors have always had difficulty in understanding monetary issues and in defining the nature of money. On this point, the post-Keynesian school is fundamentally different from all other schools, not only by making money a central variable of its theory but also by approaching it for the bias of its offer. The theory of endogenous money has, in fact, been built on this school of thought (Davidson and Wintraub, 1973; Kaldor, 1970; Davidson, 1965) by raising fundamental questions about the nature of money and its link with macroeconomics. In this regard, the work of Marc Lavoie and Mario Seccareccia perfectly illustrates the scope of the problems relating to money, the most complex and fundamental being the definition of its macroeconomic dimension. Furthermore, they make it possible to understand precisely that money covers multiple dimensions. This chapter has two aims. First, it shows that money is not neutral. Second, it highlights that there are three dimensions of money: the institutionalist dimension, which implies that money, as a social link, is an institution stronger than the market; the political economy dimension of money, which sees money as a source of power, asymmetries and conflicts; and the macroeconomic dimension that is based on the endogeneity of money hypothesis. The following sections further demonstrate that the macroeconomic dimension of money – particularly developed by postKeynesians – is the most essential prerequisite to understanding money from an economic perspective. Unfortunately, most recent widespread monetary developments (100 per cent Money, Sovereign Money, etc.) tend to focus only on money holdings and forget that money and production are closely linked. A rehabilitation of the endogeneity of money hypothesis is therefore necessary. 84

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THE THREE DIMENSIONS OF MONEY Money remains a riddle for economists. The usual definition in economics textbooks does not bring a lot of satisfaction when it comes to understanding the deep nature of money (Ingham, 2004; Smithin, 2018; Amato, 2015). According to this mainstream approach, money would have been invented with the development of trade, to overcome the constraints of barter and facilitate the development of markets. However, historical works teach us that the origin of money is much further away; money precedes and determines the social order of trade (Dodd, 2014). The standard approach to money advocates a purely economistic vision by reducing it to three economic functions – unit of account, store of value, medium of exchange – and claims that money can be considered neutral in the long run. Yet, money is more than a mere economic instrument and has effects on society as a whole – so it is not neutral. Therefore, the study of money deserves to be thorough and to be enriched by an enlarged framework. With the aim of understanding the monetary and financial phenomena in all their complexity, the post-Keynesians have multiplied dialogues, cooperation and research programmes with other heterodox currents (Lavoie and Ponsot, 2018), or with other disciplines of the humanities (Smithin, 2000), in particular with the Institutionalists1 and the Regulationists,2 for whom money is an essential research theme. According to Chester and Paton (2011), post-Keynesians would do better to collaborate more with Polanyi scholars and Regulationists, because the theoretical bridges are more obvious to them. Even today, T. Veblen remains the Institutionalist most cited by post-Keynesians. However, Dillard (1980) considers that connections go beyond Veblen: they also concern other Institutionalists, such as John Commons and, of course, John Kenneth and James Galbraith. According to Lavoie and Seccareccia, these fruitful exchanges fuel an alternative to orthodoxy and contribute to a new common paradigm: ‘Broadly speaking, it could be argued that Institutionalism provides the microeconomics of this unified paradigm, while post-Keynesian economics offers the macroeconomic framework’ (Lavoie and Seccareccia, 2013, p. 9). Institutional work has fuelled post-Keynesian thoughts on price theory, financialization, the nature of money and the organization of monetary and financial systems. A finer understanding of monetary institutions, in particular the organization, structure and instruments of the central bank and commercial banks, has been helpful in providing a more accurate monetary theory among post-Keynesians (Niggle, 1991, 2006). Aglietta, Ould Ahmed and Ponsot (2016, p. 91) share this perspective of openness and dialogue in order to better understand money:

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Credit, money and crises in post-Keynesian economics Money is more than a purely economic instrument. Its study deserves to be fed by the work of other disciplines in the human and social sciences [and] an Institutionalist approach to money [inviting us] to go beyond the economist’s approach. (Authors’ translation)

André Orléan (1998) adopts a similar approach, largely influenced by Keynes on monetary and financial issues. Through these multiple collaborations, three dimensions of money are highlighted, enabling a broad and coherent vision of the completeness of money if these dimensions are clearly and rigorously articulated (Ponsot, 2017). The Institutionalist Perspective The Institutionalist point of view identifies how and why money establishes a sense of belonging to a community. Here, the works of the French Monetary Institutionalist School are particularly useful for revealing the issues of confidence and trust in money, which ultimately is nothing but a social link. Money as a common good in the service of collectivity is a central institution of any society, in particular in capitalist societies (Ponsot, 2017). The ordinary concept of money forgets this institutional dimension. Too often it remains a prisoner of its commercial representations and its association with the emergence of capitalism. According to this approach, money was invented to overcome the constraints of barter, with the development of trade and the advent of capitalism. However, the works of historians and economists involved in a dialogue with other disciplines show that this vision is wrong. Money is not the result of a spontaneous innovation of the market designed to solve the problem of double coincidence of wants posed by the barter economy, as the neoclassical economist C. Menger believed in the late nineteenth century; instead, money is a stronger institution than the market and its origin is much further away. It precedes and determines the social order of trade. Unfortunately, textbooks and encyclopaedias perpetuating this ‘bartering fable’ to explain the emergence of money are still published today. Economists have a heavy responsibility for spreading this economistic and instrumental view of money. To understand money in all its complexity, it is necessary to go beyond a definition that reduces it to its three economic functions (unit of account, medium of exchange and store of value). Following in the footsteps of Michel Aglietta, André Orléan (2011), Jean-Michel Servet (2015), Bruno Théret (2008) and Jérôme Blanc (2017), French Institutionalists share this perspective. They show that money is essentially a social and political fact and they insist on monetary plurality

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(Blanc et al., 2018) The circulation of several currencies at the same time and space is not a pathology. Multiple currency circuits may work together and transform socio-economic systems. Monetary plurality can improve resilience, access to livelihoods and economic sustainability. At the same time, it introduces new risks in terms of economic governance. The Political Economy of Money Money is the cornerstone of human societies, both past and present. It is first a social relationship before being an economic instrument. At the national or community level, it is an institution that permanently connects the individual to the whole of society. Money governs not only the relations of individuals among themselves, but also those of citizens with the state or an authority of that community. The history of money is therefore that of the dissolution and constitution of this social bond, in a context of power games more or less marked by time and society, and so money is an instrument at the core of political economy. The monetary order is the result of a social and political compromise at a given period; it represents a concept of the common good and of being together. But at the same time, it is the representation of asymmetries and power relations between economic agents. In this regard, it becomes a power issue and is subject to challenges when it does not fulfil its role as mediator and becomes vulnerable to appropriation by some social groups. No monetary order is irremovable, as monetary history teaches us. If, by chance, members of society no longer recognize themselves in this compromise, society as a whole enters into crisis (Théret, 2008). Further, monetary crises are always associated with a political crisis. This is particularly true during hyperinflationary crises, revealing a redistributive conflict that has become incoherent or unsustainable (Charles and Marie, 2017). This principle also applies internationally. International monetary relations are not limited to the exercise of the intermediary function in international trade or of the reserve currency function accumulated in central banks’ accounts (Strange, 1996; Andrews, 2006). Rather, they reveal that money is a strong power instrument, as evidenced by the present currency war and the ambitions of China to internationalize the yuan in order to rival the US dollar (Helleiner and Kirshner, 2014; Fields, 2015; Cohen, 2015; Faudot and Ponsot, 2016). The Macroeconomic Point of View Although anterior to modern capitalist societies, money remains a fundamental institution of capitalism. Understanding societies’ rules ­

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of mintage – that is to say, the distribution methods of payment – can reveal a key dimension of money in capitalist economies, namely, its macroeconomic dimension. Here, money is in essence endogenous to the economic system. This means that its quantity in circulation is determined by the needs of the economic system and of economic activity, through the process of money creation by banks. As Aglietta et al. (2016, p. 94, authors’ translation) explain, ‘[i]n modern economies, money appears in credit operations granted by banks to finance production’. This mechanism, specific to the banking function, is particular: Banks have the power to create money ex nihilo, that is to say, without any need for pre-existing resources or reserves. This money creation power, however, is not unlimited. It is submitted, first, to the need to obtain repayment from the borrower (hence the importance of assessing the borrower’s risk) and, second, to prudential regulation that governs banking practices. (Aglietta et al., 2016, p. 94, authors’ translation)

Beyond commodity exchange and capital accumulation, the dynamics of capitalism rely therefore on the close relationship between money and production, which is forged through bank credit. An increase in the quantity of money is necessary to boost investment and production, which generates additional revenues. This was Keynes’s message when he encouraged his colleagues to reason within what he called a ‘monetary economy of production’ (Keynes, 1933, 1936) rather than in a real-exchange economy in which money is completely neutral. Today it is Keynes’s followers – postKeynesians – who best explain this endogeneity of money (Lavoie, 2014; Monvoisin, 2013; Rochon and Rossi, 2013).

WHY MONEY MATTERS IN MACROECONOMICS The macroeconomic dimension of money involves many assumptions and has emerged amongst economists only recently in light of economic history. There is no doubt that the theory of demand for money resting on the preference for liquidity was a part of the Keynesian revolution. But, considering the macroeconomic approach to money as Keynes did turns out to be much richer from an analytical point of view. Indeed, this point crystallizes many debates and is quite simply the result of a theoretical construction based on strong principles. In this, the work of Lavoie and Seccareccia is particularly enlightening. On the one hand, it is possible to define the link between money and production, but on the other hand the link between money and the institutions governing it also needs to be defined.

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Money: A Fundamental Notion for Keynesian Macroeconomics Post-Keynesians have developed a theory of endogenous money, which is at the core of their analysis. Their approach describes above all a monetary economy and not a real economy. To recap on the principles: Through credit, firms use money created by banks to finance production and pay employees. Commercial banks offer these credits which they have partially or completely created. Money is endogenous since it results from a demand specific to the economic system and not from the action of an external institution. As a result, these authors question the origin of money, because it allows production. Despite a general consensus around this sequence, not all post-­Keynesian authors place as much emphasis on these different mechanisms, hence the emergence of debates and discussions within the school of thought. Lavoie (1985, pp. 171–172) pertinently notes that there are two components in the theory of endogeneity, which will structure the approaches to endogenous money: the behaviour of the banking system and the link between money and production. Indeed, he considers that: The theory of endogenous money is interpreted at two levels: that of commercial banks and that of central banks. At each of these two levels we can say that the supply adapts to the demand, at the fixed price.

It implies that the endogeneity of money is analysed both in the relationship between the central bank (supply) and commercial banks (demand) (i.e. in the behaviour of the banking system), and in the relationship between commercial banks (supply) and firms (demand) (i.e. the link between money and production) (Monvoisin, 2006, p. 169). American post-Keynesians have privileged, and still privilege today, the study of the first relationship by focusing on the functioning of the banking system in the broad sense (the central bank and commercial banks). Other post-Keynesians, following the Kaleckian or more Circuitist tradition of M. Seccareccia, would rather study the behaviour of non-financial agents towards money. These authors privilege the relationship between money and production, and try to draw all the consequences of this relationship on monetary theory (Bougrine, 2017; Rochon and Seccareccia, 2013; Gnos, 2003; Rossi, 2008). However, Lavoie (1992; Lavoie and Baslé, 1996) has often emphasized this last point, alluding to J. Le Bourva’s analysis. As early as in the 1960s, Le Bourva’s criticism focused more specifically on the financial model of the credit multiplier and he proposed ‘an inverse analysis of money creation’, which is an inverse causality in the credit granting mechanism;

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deposits do not make the credits, but on the contrary the credits make the deposits. In 1962, Le Bourva stated that: At the beginning the bank lends, to the extent that creditworthy debts are brought to it. Then, the bank finds its deposits necessarily; any money created by it, since, by hypothesis, only this kind of money exists. Literally, ‘loans make deposits’. In these conditions, the bank is not an intermediary between depositors and borrowers, it is purely an institution specialized in the creation and the resorption of money. (Le Bourva, 1962, p. 37). [The] circuit from loans to deposits is closed automatically for each bank and for the whole [. . .] In short, it is thus permissible to say that ordinary banks lend, and normally find in their deposits what they lent. (Le Bourva, 1962, pp. 45–56)

The endogeneity and integration of money can be explained by the demand for credit from firms, which results in an equivalent flow of money. In fact, as noted by A. Barrère (1990, p. 28), money intervenes in the productive process: Money is integrated from the beginning of the economic process of production, thus before the transactions, to formulate the anticipations and to make the advances necessary to the production. It is the demand expected by entrepreneurs that organizes and regulates the implementation of production.

Money therefore has a macroeconomic role because it accompanies the production process. More broadly, this is part of a monetary economy of production which Keynes (1930, 1936) describes using several principles: 1. 2. 3. 4.

an explicit macroeconomic theory; an abandonment of the theory of value and dichotomy; the use of money as a unit of account; the purchase of goods by money and not the purchase of money by goods; 5. an economy of arbitrage in which the currency plays a role identical to other real variables; 6. a radical uncertainty against which the agents try to protect themselves.3 Here, the macroeconomic dimension of money rests both on the role it plays in the productive process and on its importance at all times in ­economic analysis.

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Endogenous Money: The Framework of Banking Institutions and of Behaviours The second aspect of endogenous money is relative to the hierarchical banking system. It assumes that commercial banks play a special role because they create money by granting credit to firms. Further, the definition of endogenous money evolves through the study of the banking system, the commercial banks and their behaviours. On these points, post-Keynesians have devoted much work to describing and understanding the banking system (Moore, 1988; Palley, 1998; Wray, 2015). According to this system, the central bank does not control the money supply mechanism; commercial banks assume the role of creating money. Thus, the monetary authorities do not have to influence the amount of money – the request determines the offer, which is achieved unconditionally. As Moore (1988, p. 70) explains: It is primarily the demand for bank credit, over which central banks have little or no control, that is the chief determinant of money supply growth in all credit monetary economies in both the short and the long run.

Monetary authorities try to follow the evolution in the volume of credit money in order to achieve specific objectives, such as avoiding financial crises and changes in interest rates. Traditional instruments of intervention remain partially or totally ineffective. The open market is a more defensive than offensive policy; required reserves are ineffective; and interest rate action is useless since the demand for money remains indifferent in terms of interest rates. In reality, the monetary base is inherently endogenous because the authorities adapt to the growth of the volume of bank money (through the open market) more easily than to a decline in its volume. The evolution of the monetary base is linked to that of the banking currency; with credit money being strictly determined by demand, one deduces that the amount of the monetary base is fixed by means of the demand (for credit) and therefore is endogenous to the economic system. Conversely, if notions and principles are clearly set, the functioning of the banking system and the decisions of the central banks can impact monetary creation. Bougrine and Seccareccia (2013, pp. 134–135) recall that: . . . the recognition that credit-money creation is demand-determined, this does not mean that fluctuations in the supply of credit are determined merely by simple changes in the volume of production [. . .] They are also affected by changes in a whole variety of creditworthiness considerations, which can have major consequences [. . .] on the entire macro-economy.

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However, commercial banks have experienced profound changes in recent years. Banks privilege their market activities to the detriment of traditional activities. Indeed, Turner (2009) was struck by the importance placed on these activities by British banks; less than 15 per cent of banking income is devoted to bank loans. The evolution of this sector is part of the wider financialization process. Indeed, banks are less and less inclined to provide ongoing support to firms throughout their production project: ‘Commercial banks are now found at the center of one large profit-making transactions machine that largely denies their original role in the productive sphere’ (Seccareccia, 2012, p. 277). Once the mechanism and the macroeconomic role of endogenous money have been clarified, conclusions as to the evolution of the banking system are self-evident. In fact, given the macroeconomic externalities that can be generated by current banking activities4 (Seccareccia, 2012, p. 297), banks must be as consistent as possible with the macroeconomic nature of money. Here, macroeconomic theory unites with the approach taken by institutions and by the political economy. Money is a point that requires a fit between the three dimensions.

CONCLUSION Money is a complex object of study, if any. It embraces three dimensions, all three of which are linked: an institutional dimension, a political economic dimension and a macroeconomic dimension. Institutionalists allow us to better understand the first dimension because money, as a common good, is at the service of the community and has always structured human and social relationships. But even more, money has a dimension of political economy because it also structures the relationships between citizens and the State; as always, today it remains a political object. Finally, it is of course an economic, macroeconomic object. This last point raises many questions and debates. But the theory of endogenous money presents an analysis that explains the monetary creation and, again, the relations between the different economic agents. Money is credit-driven and created with the aim to finance production; it links on one side firms and banks, and on the other side banks and central banks. Even at this macroeconomic level, it is possible to enlighten social relationships through money. In our times when money is only thought of through individual behaviour, a careful analysis shows that it is above all macroeconomic and social: a collective fact.

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NOTES 1. Examples include the publication of numerous post-Keynesian articles in the Journal of Economic Issues, and the publication of the special issue ‘Post-Keynesian and Institutional Political Economy’ of the European Journal of Economics and Economic Policies, in 2013. Other Institutionalist journals, such as Review of Political Economy, or Economie et Institutions in France, regularly publish post-Keynesian papers on money and macroeconomics. 2. The proximity between post-Keynesians and Regulationists was discussed by Lavoie (2014) and Boyer (2011). It is no coincidence that the first issue of the Revue de la régulation, published in 2007, includes a long interview with Marc Lavoie: ‘As far as the Regulationist school is concerned, I always thought that was a more radical branch of post-Keynesianism, or to be more diplomatic, that post-Keynesianism was a less radical branch of the Regulationist school! [. . .] The other particular feature of the school of regulation, in addition to its Marxist antecedents, is the importance given to institutions. But post-Keynesians have close links with the (old) American Institutionalists. [. . .] The influence of Minsky has long been evident in the work of Michel Aglietta. The integration of the financial and real aspects, which everyone wanted but which few really dealt with, is now at the heart of the research programs of the Regulationists and postKeynesians’ (Lavoie, 2007, p. 2). Two other special issues of the Revue de la régulation pursue these common reflections: one in 2011, entitled ‘Post-Keynesianism and theory of regulation: shared perspectives’; another in 2014 devoted to new avenues of postKeynesian macroeconomic modelling (Clévenot and Le Héron, 2014). 3. ‘For the importance of money essentially flows from its being a link between the present and the future’ (Keynes, 1936, p. 268). 4. ‘[T]heir activities could inflict on society as a whole because of its macroeconomic externalities, securitization should either be severely regulated [. . .] or outrightly prohibited as a legitimate banking activity with a return to a narrow system of originate and hold banking . . .’.

REFERENCES Aglietta, M., P. Ould Ahmed and J.-F. Ponsot (2016), La Monnaie: Entre dettes et souveraineté. Paris: Odile Jacob. Amato, M. (2015), L’Énigme de la Monnaie. Paris: Les Editions du Cerf. Andrews, D. (2006), International Monetary Power. New York: Cornell University Press. Barrère, A. (1990), Macroéconomie Keynésienne. Le projet de John Maynard Keynes. Paris: Dunod. Blanc, J. (2017), ‘Unpacking monetary complementarity and competition: A ­conceptual framework’. Cambridge Journal of Economics, 41(1), pp. 239–257. Blanc, J., L. Desmedt, L. Le Maux, J. Marques-Pereira, P. Ould Ahmed and B. Théret (2018), ‘Monetary plurality in economic theory’. In Gomez, R. (ed), Monetary Plurality in Local, Regional and Global Economies. London: Routledge. Bougrine, H. (2017), The Creation of Wealth and Poverty: Means and Ways. New York: Routledge. Bougrine, H. and M. Seccareccia (2013), ‘Rethinking banking institutions in contemporary economies: Are there alternatives to the status quo?’. In Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production. Cheltenham: Edward Elgar, pp. 134–159.

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Boyer, R. (2011), ‘Post-Keynésiens et régulationnistes: Une alternative à la crise de l’économie standard?’. Revue de la régulation, 10, available at http://regulation. revues.org/9377 (accessed 3 February 2018). Charles, S. and J. Marie (2017), ‘Bulgaria’s hyperinflation in 1997: Transition, banking fragility and foreign exchange’. Post-Communist Economies, 29(3), pp. 313–335. Chester, L. and J. Paton (2011), ‘The economic–environment relation: Can postKeynesians, Regulationists and Polanyians offer insights?’. European Journal of Economics and Economic Policies: Intervention, 10(1), pp. 106–121. Clévenot, M. and E. Le Héron (2014), ‘Renouveler la macroéconomie Postkeynésienne? Les modèles stock-flux cohérent et multi-agents’. Revue de la régulation, 16, available at http://regulation.revues.org/11043 (accessed 3 February 2018). Cohen, B.J. (2015), Currency Power, Understanding Monetary Rivalry. Princeton: Princeton University Press. Davidson, P. (1965), ‘Keynes’s finance motive’. Oxford Economic Papers, 17(1), pp. 47–65. Davidson, P. and S. Weintraub (1973), ‘Money as cause and effect’. Economic Journal, 83(332), pp. 1117–1132. Dillard, D. (1980), ‘A monetary theory of production: Keynes and the Institutionalists’. Journal of Economic Issues, 14(2), pp. 225–273. Dodd, N. (2014), The Social Life of Money. Princeton: Princeton University Press. Faudot, A. and J.-F. Ponsot (2016), ‘The dollar dominance: Recent episode of trade invoicing and debt issuance’. Journal of Economic Integration, 31(1), pp. 41–64. Fields, D. (2015), ‘Dollar hegemony’. In L.-P. Rochon and S. Rossi (eds), The Encyclopedia of Central Banking. Cheltenham: Edward Elgar, pp. 145–148. Gnos, C. (2003), ‘Circuit theory as an explanation of the complex real world’. In Rochon, L.-P. and S. Rossi (eds), Modern Theories of Money. Cheltenham: Edward Elgar, pp. 322–338. Helleiner, E. and J. Kirshner (eds) (2014), The Great Wall of Money: Politics and Power in China’s International Monetary Relations. Ithaca: Cornell University Press. Ingham, G. (2004), ‘The nature of money’. Economic Sociology: European Electronic Newsletter, 5(2), pp. 1–7. Kaldor, N. (1970), ‘The new monetarism’. Lloyds Bank Review, 97, pp. 1–17. Keynes, J.M. (1930 [1973]), ‘A treatise on money’. Reprinted in The Collected Writings of John Maynard Keynes, Vol. V and VI, A Treatise on Money. London and Basingstoke: Macmillan. Keynes, J.M. (1933 [1973]), ‘A monetary theory of production’. Reprinted in The Collected Writings of John Maynard Keynes, Vol. XIII The General Theory and After. Part I: Preparation. London and Basingstoke: Macmillan, pp. 408–411. Keynes, J.M. (1936 [1973]), The General Theory of Employment, Interest and Money. Reprinted in The Collected Writings of John Maynard Keynes, Vol. VII. London and Basingstoke: Macmillan. Lavoie, M. (1985), ‘La thèse de la monnaie endogène face à la non-validation des crédits’. Économies et Sociétés, 19, pp. 169–195. Lavoie, M. (1992), ‘Jacques Le Bourva’s theory of endogenous credit-money’. Review of Political Economy, 4(4), pp. 436–446. Lavoie, M. (2007), ‘La théorie post-Keynésienne et la théorie de la régulation.

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Entretien avec Marc Lavoie’. Revue de la régulation, 1, available at http://regula​ tion.revues.org/1305 (accessed 3 February 2018). Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar. Lavoie, M. and M. Baslé (1996), ‘La pensée monétaire de Jacques le Bourva: Analyse et historique’. Revue d’économie politique, 106(2), March–April, pp. 269–291. Lavoie, M. and J.-F. Ponsot (2018), ‘Les courants et fondements théoriques de l’analyse post-Keynésienne’. In E. Berr, V. Monvoisin and J.-F. Ponsot (eds), L’Analyse Post-Keynésienne. Paris: Le Seuil, pp. xxx. Lavoie, M. and M. Seccareccia (2013), ‘Post-Keynesian and institutional political economy’. European Journal of Economics and Economic Policies: Intervention, 10(1), pp. 8–11. Le Bourva, J. (1962), ‘Création de la monnaie et multiplicateur de crédit’. Revue Économique, 13(1), pp. 29–56. Monvoisin, V. (2006), ‘Les définitions post-Keynésiennes de la monnaie endogène: Des divergences à la complémentarité’. Economie Appliquée, 59(4), pp. 167–191. Monvoisin, V. (2013), ‘What’s the use of banks, especially after the crisis?’. Review of Keynesian Economics, 1(2), pp.195–209. Moore, B. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge: Cambridge University Press. Niggle, C.J. (1991), ‘The endogenous money supply theory: An institutionalist appraisal’. Journal of Economic Issues, XXIV, pp. 443–450. Niggle, C.J. (2006), ‘Evolutionary Keynesianism: A synthesis of institutionalist and post Keynesian macroeconomics’. Journal of Economic Issues, 40(2), pp. 443–450. Orléan, A. (1998), Le Pouvoir de la Finance. Paris: Odile Jacob. Orléan, A. (2011), L’Empire de la Valeur, Paris: Seuil. Palley, T.I. (1998), ‘Accommodationism, structuralism, and superstructuralism’. Journal of Post Keynesian Economics, 21(1), pp. 171–173. Ponsot, J.-F. (2017), ‘Rethinking money’. In Rochon, L.-P. and S. Rossi (eds), A Modern Guide to Rethinking Economics. Cheltenham: Edward Elgar, pp. 114–128. Rochon, L.P. and S. Rossi (2013), ‘Endogenous money: The evolutionary versus the revolutionary’. Review of Keynesian Economics, 1(2), pp. 210–229. Rochon, L.-P. and M. Seccareccia (eds) (2013), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State. Cheltenham: Edward Elgar. Rossi, S. (2008), Macroéconomie Monétaire: Théories et Politiques. Geneva, Paris and Bruxelles: Schulthess, LGDJ and Bruylant. Seccareccia, M. (2012), ‘Financialization and the transformation of commercial banking: Understanding the recent Canadian experience before and during the international financial crisis’. Journal of Post Keynesian Economics, 35(2), pp. 277–300. Servet, J.-M. (2015), ‘La Finance et la Monnaie Comme un “Commun”’. Institut Veblen pour les réformes économiques, May. Smithin, J. (ed.) (2000), What Is Money? London: Routledge. Smithin, J. (2018), Rethinking the Theory of Money, Credit, and Macroeconomics: A New Statement for the Twenty-First Century. Lanham: Lexington Books Rowman and Littlefield.

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Strange, S. (1996), The Retreat of the State: The Diffusion of Power in the World Economy. Cambridge: Cambridge University Press. Théret, B. (ed.) (2008), La Monnaie Dévoilée par ses Crises. Paris: Editions de l’EHESS. Turner, A. (2009), The Future of Finance: The LSE Report. London School of Economics and Political Science, available online at https://harr123et.files.word​ press.com/2010/07/futureoffinance-chapter11.pdf. Wray, L.R. (2015), Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Basingstoke: Palgrave Macmillan.

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7.  The theory of money, interest and unemployment Hassan Bougrine INTRODUCTION Throughout their long and distinguished careers, Marc Lavoie and Mario Seccareccia have written about almost every important issue in economics, from public policy to money and banking, inflation and unemployment to sports. However, their central and common contribution has been focused on three interrelated topics, which they considered crucial for understanding the economy and acting on it. These topics are: money, interest and unemployment. Indeed, as young scholars in the early 1980s, their first published works dealt specifically with these topics (Lavoie, 1982, 1984, 1985; Seccareccia, 1983, 1984; Lavoie and Seccareccia, 1988). Over the years, their views on money, interest and unemployment have evolved and recently have come to form a unified policy package: how to solve the unemployment problem using money and interest as policy tools. Full employment has, therefore, become a major preoccupation in their scholarly activity. Recently, Seccareccia and Lavoie et al. (2018) have even engaged in some sort of political lobbying in an attempt to influence policymakers to adopt full employment as a clearly stated policy objective. In this chapter, I want to argue that despite their obvious commitment to full employment, and despite being fully aware of the ‘political obstacles’ to full employment, Lavoie and Seccareccia continue to rely on the use of fiscal and monetary policies and remain somewhat vague about the necessity of implementing some other important changes, namely institutional, that could hasten the transformation of the system and bring about the much-desired objective. For instance, in their study of income distribution between rentiers and non-rentiers, Seccareccia and Lavoie (2016) acknowledge that rentier capitalism ‘has brought some of the [advanced industrial] economies, especially in the Eurozone, to the verge of social collapse’ and agree that there is need for some ‘significant institutional transformation’, but full employment is not discussed in the context of a change in the institutional setting of property rights to productive resources under 97

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capitalism. Similarly, even though Seccareccia (2017, 2019a) clearly shows that key institutions under capitalism such as Central Banks are captured by the vested interests of the rentier class, he does not call for any radical change in institutions. Changes to the distribution of wealth and private property of resources are not envisaged as possible means to building the egalitarian society, which would guarantee full employment. This is somewhat surprising given that both authors would consider themselves as close followers of Michal Kalecki (1943) who had called for the scrapping of capitalism for being ‘an outmoded system’ that could not deliver full employment. Most post-Keynesians, perhaps following Keynes’s footsteps, have a liberal attitude but tend to be quite conservative on the most important policy issues – and, therefore, seek no ‘break in the general traditions of society’, as Keynes (1936, p. 336) had suggested. Post-Keynesians’ conservatism is particularly worrying when we consider their stand regarding issues such as mass poverty, mass unemployment, and grotesque inequality in the distribution of wealth worldwide. After more than seventy years, there has not been a single proposal seeking to build a society that bans unemployment and poverty by eliminating inequality in the distribution of wealth and income. Eliminating inequalities among social classes is not on their agenda. Most post-Keynesians strongly defend the capitalist system and scorn the idea of a socialist alternative. They are willing to tinker with the system but not to change it. This is recognized, for instance, by Lavoie (2014, p. 34) who wrote that ‘post-Keynesians in general do not wish to eliminate capitalism; they wish to tame it, recognizing that it has important dynamic properties’. As a result, the most radical policy proposals post-Keynesians have put forward thus far seek only to ‘assure a civilized capitalist economic system’, and therefore are only ‘guidelines on how to cure the flaws that remain in this market oriented entrepreneurial system without destroying the good things that are delivered by our economic system’ (Davidson, 2015, pp. 136–137). Therefore, when it comes to the choice of economic system, both postKeynesians and neo/liberals agree that capitalism is superior to any known alternative. The fundamental difference between Keynesianism and the laissez-faire ideology of the neo/liberals is really only about the degree and scope of government intervention in the economy. Neoliberals tolerate government intervention as long as it helps primarily the interests of the dominant class. Post-Keynesians are willing to go a bit farther by implementing fiscal and monetary policies that would benefit wider segments of the population. In this context, Paul Samuelson (1976, p. 267) seems to have already declared the consensus on this issue by accepting the mixture of ‘the invisible hand of the market and the visible fist of the government’

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and agreed that ‘fiscal and monetary policies can moderate [the] frequency, intensity, and duration’ of ‘recessions and periods of relative stagnation’. Indeed, experience shows that the Welfare State is the most advanced type of intervention post-Keynesians can accept. However, the manipulation of interest rates, taxes, transfers and government payments of all sorts can only attenuate, and somewhat correct, the outcome of unfettered markets but do not eliminate the source of inequality. Seeking to improve the system by making it more charitable only perpetuates inequality by making it more bearable. It is worth noting here that even the social reformers of the late 18th and early 19th centuries had rejected these propositions.1 Post-Keynesians of the 21st century are equipped with more knowledge and much experience to know better. This chapter presents a more radical version of the views on money, interest and on how to achieve full employment. It argues that a sovereign government is fully capable of designing and implementing a public policy seeking to achieve full employment during a relatively short term. The proposed strategy rests on three pillars, which include (1) setting up public corporations in all sectors of the economy, through which the government would act as an employer of first resort (EFR). This is consistent with the role played by many governments during the ‘glorious years’ of capitalism and with Keynes’s (1936, p. 378) argument for full employment via the socialization of investment. Keynes was indeed convinced ‘that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment’ (Keynes, 1936, p. 378, emphasis added). This pillar should be complemented by (2) institutional changes supporting the creation of workers’ owned and managed enterprises, which would be financed by (3) a network of public banks. It is certain that a solution of this type requires a completely different social and economic organization – but that is what is needed. Neoclassical economists have always been opposed to this type of solution. Menger (1871, p. 174), for instance, decried what he called ‘The agitation of those who would like to see society allot a larger share of the available consumption goods to laborers [. . .] providing them with a more comfortable standard of living, and achieving a more equal distribution of consumption goods and of the burdens of life’. Menger (1871, p. 174) did not hide the reason for his opposition to this type of solution. He openly stated his concern that ‘A solution of the problem on this basis [. . .] would undoubtedly require a complete transformation of our social order’, which he vehemently opposed. Post-Keynesians who oppose the above-proposed solution would oddly find themselves in the same camp as Menger and his neoliberal followers.

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WHY IS THERE UNEMPLOYMENT? Let us be clear about the meaning of unemployment. Semantically, the word was coined to describe a situation in which some workers do not have employment. In a capitalist economy, employment has come to mean paid work; that is, work for a monetary compensation. In such a salaried relationship, workers’ compensation is actually their only means for survival. For this reason, one would expect that every worker would desperately seek paid work to ensure their survival, their wellbeing and that of their dependants. Now, why would there be some unemployed workers, knowing that without these incomes they fall into poverty and may even lose their dignity? There are two main answers, and each one reveals the ideological bias of the author. The first one focuses on the worker’s actions and reactions, that is, on the behaviour of the worker or the supply side of labour. The other focuses on the state of the economy in which the worker lives. The supply-side explanation to unemployment essentially puts the blame on the worker, and in its crude version, assumes that people are by nature lazy and would instinctively avoid, or at least try to minimize, effort and exertion (see for instance, Bentham, 1797; Zipf, 1949). Some authors are blatantly racists and consider that behaviour to be rather a characteristic of blacks and other no-white people. For instance, William S. Jevons (1871, pp. 182–183), one of the founding fathers of the neoclassical school, wrote: It is evident that questions of this kind [i.e. how much work effort is deployed] depend greatly upon the character of the race. Persons of an energetic disposition feel labour less painfully than their fellow-men, and, if they happen to be endowed with various and acute sensibilities, their desire of further acquisition never ceases. A man of lower race, a negro for instance, enjoys possession less, and loathes labour more; his exertions, therefore, soon stop. A poor savage would be content to gather the almost gratuitous fruits of nature, if they were sufficient to give sustenance; it is only physical want which drives him to exertion.

These are not forgotten ideas of some defunct economists. They are used today to explain, for instance, why unemployment is high among blacks in the USA. They are also used to explain why the whole continent of Africa is underdeveloped. Milder versions of these ideas, while still emphasizing the natural tendency of some humans to ‘loath labour’, find justification in the existence of so-called incentives, such as welfare payments and unemployment benefits. In all cases, this approach explains unemployment by the behaviour and characteristics of the workers. Consequently, the solutions proposed range from eliminating those benefits to forcing the

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poor and unemployed to perform work for pay – thus changing welfare to workfare. Note that the latter solution is only a modified version of Jeremy Bentham’s principle of ‘earn-first’. Indeed, Jeremy Bentham (1797) had proposed to lock the poor and the unemployed in workhouses where they would be forced to perform profitable work for which they would receive food – a programme he referred to as ‘Pauper Management Improved’. The inmates were to be classified according to several criteria but most importantly by ‘hands’, that is, according to their varying degrees of ability to perform work. The workhouses or factories were inspired by and modelled on his eerie jailhouse, which he proudly named the Panopticon. The workers, or the working hands, were subjected to what he called the Earn-first principle, according to which: When ability adequate to the task is certain, and laziness apprehended, no meal given, till the task by which it is earned has been first performed. Without this, or some severer and less unexceptionable spur, the lazy among them would do nothing. (Bentham, 1797, p. 383)

Therefore, according to this view, unemployment, if it exists, is voluntary and can only be explained by the workers’ laziness and depravity. A more serious and more plausible but diametrically opposed view has been given by such influential writers as Karl Marx, John M. Keynes and Michal Kalecki, who all referred to unemployment as a necessary outcome of the dynamics and functioning of the capitalist system. In volume I of his masterpiece, Das Kapital, Marx (1867) argued that capitalism needed unemployment as a reserve industrial army in order to prevent wages from rising and to discipline labour unions. Unemployment plays an important function in the system: it is a means by which to ensure a docile and ‘cheap’ labour force. The solution he envisaged was a revolution by the working class that would overthrow the bourgeoisie and replace capitalism by socialism, where the means of production (capital) are owned collectively. Along the same lines, Kalecki (1943) showed that, by its nature, capitalism cannot eliminate unemployment – mainly for political reasons. Kalecki (1943, p. 326) maintained that: ‘discipline’ in the factories and ‘political stability’ are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment must be an integral part of the ‘normal’ capitalist system.

After noting that Fascism in Germany had succeeded in securing full employment while capitalist democracy failed to do so, Kalecki (1943, p. 331, emphasis in original) suggested that for capitalism to adjust to full

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employment, it will have to incorporate a fundamental reform. Otherwise, it will prove to be an ‘outmoded system which must be scrapped’. Keynes (1936), on the other hand, argued that unemployment exists because capitalists hire workers only to a point where their production of goods and services meets the demand – that is, employment is dictated by the effective sales of the output produced. The clear and direct implication is that some workers will be left waiting in the line-up and that unemployment is, therefore, involuntary. Employment level is therefore constrained by the level of effective demand in the economy. As a solution, Keynes proposed the use of government policies that would increase aggregate demand in order to create opportunities for capitalists to make more profits, which would encourage them to make new investments and hire more workers. In other words, the level of employment in our capitalist economies depends in a crucial way on the will of the capitalists – that is, on the state of their confidence and their expectations of profitable investments, or what Keynes called ‘animal spirits’. That is why all economic policies seeking to achieve higher levels of employment are in essence nothing more than an attempt to cajole the capitalists and entice them into making those investments decisions – such as through tax cuts, lower interest rates and so forth.

FULL EMPLOYMENT AS A POLICY OBJECTIVE As mentioned in the introduction, because post-Keynesians – and Keynes before them – are not willing to scrap capitalism, even their most progressive economic policies never aim to eliminate unemployment. The famous stabilization policies seek only to dampen the business cycle. The justification and defence of this position rest on arguments that are often farfetched. Indeed, one of the arguments put forward for maintaining some unemployment is that lowering unemployment below a certain threshold will lead to inflation. Several Keynesian economists subscribe to this view (Palley, 2015a, 2015b) and few are prepared to defend a programme that seeks to achieve ‘true’ full employment, because, as pointed out by de Brunhoff (2005, p. 216), they ‘fear that low unemployment might undermine wage moderation’. After reviewing the successful experience of Sweden with high employment in a capitalist economy, Pollin suggested that the Swedish model could be made to work elsewhere but warned that the labour movement ‘should take it upon itself to design a workable full employment program today, recognizing in that program the importance of inflation control as full employment is approached’ (Pollin, 2012, p. 33, emphasis added).

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The link between inflation and high employment or full employment has been a prominent argument among neoclassical economists and the logic has been that the scarcity of labour would lead to an increase in wages, costs of production, and prices. This logic permeated the thinking of policymakers who moved to raise interest rates whenever they felt that an economic boom was about to create ‘too many jobs, overheat the economy, and lead to inflation’ (Krugman, 1996). This has been the prevailing wisdom throughout the 1970s and 1980s. It is worrying to see this kind of arguments being popularized at a time when all available data indicate that real wages have actually stagnated over the last three decades even though productivity continued to rise (Seccareccia, 2019b) and that the share of labour in national income has continuously declined in most OECD countries, at least since the 1990s (see OECD, 2015a, 2015b; ILO, 2014). However, recent arguments about the fear of inflation put more emphasis on the role played by the money used to finance projects seeking to achieve full employment, that is, on expansionary monetary and fiscal policies. For instance, Krugman (1996, p. 41) maintained that: The Federal Reserve can print as much money as it likes, and it has repeatedly demonstrated its ability to create an economic boom when it wants to. Why, then, doesn’t the Fed try to keep the economy booming all the time? Because it believes, with good reason, that if it were to do so—if it were to create too many jobs—the result would be unacceptable and accelerating inflation. In other words, the constraint on the number of jobs in the United States is not the U.S. economy’s ability to generate demand [. . .] but the level of unemployment that the Fed thinks the economy needs in order to keep inflation under control.

The same argument has been echoed recently by Palley (2019, p. 6) who thinks that a 2 per cent unemployment rate is the threshold beyond which increases in demand are ‘likely to produce high inflation’. The objection to financing job-creating programmes, and indeed to paying for social services and infrastructure projects, through creation of money is justified by the idea that government spending must, ultimately, be paid for with taxes. This is a basic premise in the neoclassical theory of public finance and had dominated the thinking of most early Keynesians (see Musgrave and Musgrave, 1989), but it is also defended by some contemporary postKeynesians. For instance, Palley (2019, p. 3) argues that ‘There is a money financed free lunch as long as the economy is below full employment, but the free lunch inevitably disappears. If programs are permanent, they ultimately have to be paid for with taxes or they will generate inflation’. Mainstream economists such as Toye (2000) maintain that all government spending must be financed with taxes, and that creation of money and borrowing must be avoided – because in his view, taxes are the only

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‘earned’ income for the government. Toye’s policy recommendations came in the form of a stern warning to those who would dare pursue active, expansionist policies to move the economy closer to full employment. Toye (2000, pp. 33–34) wrote, Some governments, when faced by an unsustainable fiscal deficit and a total of public expenditures that should not be further reduced, turn to other forms of public finance than raising tax revenues. They try to borrow their way out of the problem, and to print money [. . .] The very limited scope for financing government expenditure by domestic borrowing and by printing money has long been appreciated. [. . .] Only reckless, desperate or oppressive governments venture beyond the limits, which are relatively easily calculated, of these forms of finance.

It should not be surprising, then, that ever since the Great Depression, with the exception of a few initiatives of direct job creation by g­ overnments (e.g. the New Deal in the US), the typical policy has always been limited to attempting to reduce unemployment but never to eliminate it – thus vindicating Keynes’s (1936, p. 373) statement that ‘The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes’. How did post-Keynesians deal with these ‘outstanding faults’? By accepting to anchor unemployment to inflation, one simply explains away the need for a full employment programme. As for the pernicious question of unequal distribution of wealth and incomes, it is often overlooked by most post-Keynesians or addressed timidly by a few, and therefore it remains a fundamental characteristic of what Davidson (2015, pp. 136–144) calls ‘a civilized capitalist economic system’. Building an egalitarian society is certainly a project that may take a long time to materialize, but the following steps towards that end can be implemented immediately and their results will show within the mandate of an elected government: (a) the implementation of a full-employment policy by guaranteeing a job to everyone who is willing and able to work, and (b) the elimination of social scarcity and deprivation by guaranteeing universal access to a social minimum that includes education and health and so on. It is not particularly difficult to accomplish these objectives, as they can be part of the mandate of a government that allies itself with the working class and the masses. However, the overarching objective of a full-employment strategy should be an alteration of the income and wealth distribution in favour of the working class, because otherwise it would have simply increased the enrolment of workers into the wage relationship while keeping intact the current pattern of distribution – that is, it may

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only increase the number of the working poor. In this respect, Seccareccia (2004) has demonstrated the futility and the danger of attempting to achieve a low-wage type of full employment since in this scenario there remains a massive disguised unemployment that would actually drive the economy into deflation and widen the inequality gap. The obvious implication is that the project of an egalitarian society requires the implementation and achievement of a high-wage form of full employment. As pointed out by Seccareccia (2004), such an objective is consistent with the original proposal by Keynes (1936) and is supported by other post-Keynesians for whom full employment and redistribution of wealth and income cannot be dissociated. In what follows, I propose an action plan that can bring us closer to this goal (see other proposals by Forstater, 2004; Darity, 2010). It has been suggested elsewhere that, to increase its effectiveness, the strategy of full employment must be based on two pillars (see Bougrine, 2006) but it necessarily requires a complete transformation of the current social order and the creation of a new economic system – a regime change: (a)  In the private sector, the state shall actively promote the creation of community and/or worker-owned enterprises in the production of goods and services. (b) The state itself shall maintain a wide web of public enterprises whose primary focus will be the provision and management of public goods and social services but will also operate in all other industries and sectors, including banking and finance – thus ensuring a process of socialization of investment. The proliferation throughout the economy of community and worker owned and managed enterprises is crucial to the achievement of a permanent and sustainable full employment for several reasons. The first and most obvious is that it breaks away from the capitalist logic, which is built on profit maximization for the private owners or shareholders; an objective that is almost always achieved at the expense of workers either through the wage/pay scheme, conditions under which work is performed, the intensive use of labour-saving technology and so on – issues that are at the centre of the class struggle between workers and capitalists. Worker owned and managed enterprises will produce useful and healthy goods and services for their local, regional and national communities and do not have to abide by the efficiency principles of the private capitalist firm. For instance, they can choose the technology that best suits their interests in terms of employment levels, health and environmental effects and so on; as is done in negotiations between labour unions, managers and the state in some

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northern countries, such as Sweden and Denmark (see Jamison, 1991). Schutz (2011, pp. 192–195), after giving a list of such existing workers’ owned and managed enterprises and discussing their merits, argued that the real obstacle to their proliferation is obviously the legal or institutional framework. Similarly, Wolff (2012) gives useful details as to how such enterprises can be made successful and viable. The other important reason is that by directly managing their own enterprises, workers eliminate the sclerotic hierarchy that is typical of the private capitalist corporation and upon which is built the unequal distribution of income and earnings. Jossa (2015) considers that what he calls labour-­managed firms represent a move toward an alternative mode of production, since in capitalism firms are owned and managed by capitalists. The immediate implication of this change is the elimination of the high salaries and perks paid to CEOs and top managers and the appropriation of profits – important sums that can be added to the total surplus to be distributed equitably among those who produce it; namely the workers. The idea of course is not to always distribute the totality of the surplus among workers. Funds will be retained for the expansion of the enterprise and the improvement or development of other activities such as re/training, entertainment, relations with suppliers and consumers and so on (see Wolff, 2012). What is important for us here is to understand that worker owned and managed enterprises have the clear potential, and the advantage, of creating more jobs and absorbing more unemployed workers than do privately owned capitalist corporations. What is even more important is that these workers are no longer selling their labour power, their ‘commodity’ as Lenin put it, to others and will therefore escape that oppressive feeling of dependency and subjugation (see Jossa, 2015). But ownership by workers should not contradict the public character of these productive resources, which in any case can always be declared by law to fall within the public domain. The viability of the worker owned and managed enterprises will be at risk if not vigorously supported and defended by the state – hence the importance of the second pillar of our strategy, the public sector. The activity of public enterprises shall not be limited to the provision of public infrastructure and social services. There is nothing that should prevent them from also engaging in the production of consumer and capital goods. Public enterprises are essential for the success of a full-employment agenda, not because they are not motivated by profit but because they can easily be directed to areas and sectors where unemployment is high (see Schutz, 2011, p. 190–192). Workers need the skills and education required to perform their jobs (e.g. design, production, sales and marketing, ­management). Workers and their families need to be healthy, they need to

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have decent housing, access to outdoor facilities and parks, theatres and arts. They need to have all these things as a social minimum, the provision of which is best guaranteed through public enterprises. The Welfare State did provide some of these resources in some countries, particularly during the period following the Second World War. However, with the resurgence of neoliberal ideas, which then came to dominate policymaking since the late 1980s, even the limited contribution by the Welfare State to the social minimum has been severely curtailed by the implementation of the principles of ‘sound finance’ and ‘rationalization’ of government ­spending – which justified the privatization of the provision of these resources, wage freeze in the public sector, removal of subsidies and massive layoffs of public sector employees. The immediate consequence, now a stylized fact, has been the increase in poverty rates and impoverishment of workers who cannot afford the market-set higher prices to access these resources. Since the end of the Second World War, advanced industrialized countries have experimented with both the interventionist and free-market strategies. And if we are to judge policies by their effects, then the choice of strategy does not really need much debate and justification. Capitalism flourished and had its ‘glorious years’ when the interventionist strategy reached its apogee. Devastating recessions and crises became recurrent when the state retreated and when regulations were dismantled and market forces became unfettered. Market-oriented policies have produced a lot of human misery and that can and should be stopped. There is an urgent need to institutionalize intelligent social and economic policies to eradicate all forms of poverty and privation. In this context, the state has the ultimate moral and legal responsibility to design an economic system that ensures the equitable distribution of resources for the well-being of all citizens and to scrap a system that serves the interests of a dominant social class at the expense of the others. The idea of the state as an employer of first resort (EFR) may sound peculiar at first, but after a serious reflection, it makes sense. Others have argued that the state should instead act as an employer of last resort (ELR)  – hiring workers only when they fail to find jobs in the private sector (e.g. Mitchell and Wray, 2005; Wray, 2010). But such a strategy does nothing to change the class structure of capitalism with its unequal distribution and uneven development, which is the main source of permanent and often rising unemployment. Seccareccia (2013) argued that ELR workers would continue to play essentially the same role as the existing pool of unemployed workers and that the strategy does not alter the power relationship in the ‘labour market’, which means that employment levels would still continue to depend on the ‘state of confidence’ of the capitalist. By c­ ontrast, the state as an EFR can direct its enterprises

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into ­employment-generating sectors and activities thereby easily creating skilled, socially useful and productive jobs that pay good wages and contribute to the sustainable growth and development of the economy. As mentioned above, a strategy of full employment is vehemently opposed by conservative economists and policymakers on the grounds that: (i) the government cannot afford all these expenditures, and (ii) if the government did venture beyond the limits of ‘sound finance’, it will cause a budget deficit that would ruin the economy through inflation and higher interest rates. Sardoni (2016), however, has shown that full employment in a growing economy is compatible with deficit spending so long as public expenditures target the increase of the productive efficiency of the economy. Other studies have demonstrated that the arguments of sound finance are simply wrong and fail miserably to understand real-world events (see, among others, Lerner, 1947; Smithin, 1999, 2016; Davidson, 2015); arguing that sovereign governments using their own currency face no financing constraints (see, Wray, 1998b; Bougrine and Seccareccia, 2002; Smithin, 2003–2004; Mosler, 2010). Several central bankers have agreed that this is indeed the case. This is the topic of the next section.

THE THEORY OF MONEY AND INTEREST Marc Lavoie and Mario Seccareccia were among the first to have popularized the idea that money is created ex-nihilo, out of nothing, by a stroke of the banker’s pen. Indeed, along with Alain Parguez (1984) and Augusto Graziani (1990), they are pioneers of the circuitist school (Parguez and Seccareccia, 2000). It was because of their contributions that we came to understand money as credit/debt, as a social relation that comes into existence once credit is issued and lends itself to destruction once debt is paid off. In a capitalist economy, such a relation is essentially between firms and banks. Money is injected into the economy by banks in the form of credit-loans to finance production and commerce, and withdrawn from it as those loans are paid back. This understanding led to the development of the theory of endogenous money, which means that money is created within the system as private, creditworthy, economic agents present their financing needs to commercial banks. This marked a clear break with the dominant view according to which money was exogenously determined and vertically introduced into the system (see Moore, 1988). The implication of the endogenous view of money is that commercial banks can create as much money as the economy needs, with the obvious assumption that banks deal with creditworthy borrowers. In terms of a ­diagrammatic representation, it means that, for any given price (rate

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of interest), the supply of credit money is very elastic, i.e. horizontal. Accordingly, money can no longer be thought of as a given stock whose scarcity limits the financing of investment projects. The only obstacle to expanding investment opportunities and stimulating economic growth is the cost of borrowing, and obviously the expected returns on such investments. However, due to the complex nature of the payments system, account deposits are transferred from one bank to another – thus making one bank indebted to another, which means that commercial banks will need to settle their debts vis-à-vis each other, and for that they need ‘settlement balances’, or what is commonly referred to as ‘reserves’. These reserves are nothing more than money created – again ex nihilo – by the central bank, and which together with banknotes form what is called ‘central bank money’. How do commercial banks get these reserves and banknotes? In accordance with the monetary circuit theory, just as households and firms need a third party liability (bank money or credit from the bank) to discharge their own debts, banks also need a third party liability (reserves or central bank money) to extinguish their own debts. Since the central bank is the ultimate provider of these reserves, commercial banks have no choice but to get these reserves either by selling, to the central bank, their own assets (usually government securities) or by borrowing them at the rate of interest charged by the central bank. Can the central bank refuse to supply commercial banks with the needed reserves (and banknotes)? Lavoie (2014, p. 207) explains that ‘the central bank has no choice but to provide the commercial banks with the loans they ask for (unless it wishes to create chaos in the economy, as ATMs get empty). The central bank is left, however, with a powerful tool: setting the rate of interest at which the commercial banks will be forced to borrow the required amounts of banknotes’, adding that ‘The situation is identical when compulsory reserves are taken into consideration’. Therefore, in this framework, it must be clear that the creation of money is driven by the demand for it. Money is created endogenously as a response to the need for liquidity by agents. Firms and households address their demand for money to commercial banks, which supply these agents with the credit needed to finance their transactions. In turn, commercial banks in need of liquidity (reserves or banknotes) address their demand to the central bank, which again supplies the needed money. It might be worthwhile emphasizing here that while banknotes take a physical form, reserves are purely scriptural, which means that the central bank creates them simply by crediting the accounts, held at the central bank by those commercial banks requesting the loan. This procedure is confirmed by the Chairman of the US Federal Reserve, Ben Bernanke, in

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an interview with Scott Pelley on the CBS programme 60 minutes. Bernanke (2009) stated, ‘The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed’. Once they have received the loans, i.e. reserves, indebted commercial banks can use them to settle their debts toward other commercial banks. Here, the central bank can and does play the role of a clearing house. In the same manner as a commercial bank transfers credits from one bank account to another in accordance with the orders that follow from the payments involving transactions done by its ‘customers’, the central bank also moves credits from the account of the commercial bank that becomes indebted to the account of the bank that receives the deposits. There is another way through which commercial banks get reserves, and that becomes evident when government operations are taken into consideration. From the previous discussion, it must be clear that the government, represented by the Treasury (the ministry of finance), cannot create its own money to finance its spending. In the monetary circuit theory, the government must get advances, a loan from the bank. In principle, it can be any bank but for obvious reasons, the preference is for the central bank. The practice and procedures tend to vary from one country to another, but it always boils down to the same thing: the government gets a loan or a line of credit from its central bank. Typically, the government puts its own securities (bonds) as a collateral. As explained above, the loan to the government is recorded as an asset on the central bank’s balance sheet and as a liability on the government’s own balance sheet. And by this process, the central bank advances money to the government simply by putting a credit in its account. Having now secured a positive amount of money in its account – a credit to it by the central bank – the government can start making payments to its employees and other suppliers of goods and services by transferring to them some of those credits. All these expenditures lead to a flow of liquidity (money) from the public sector into the private sector, thus adding to the latter’s liquid holdings (or monetary assets). Indeed, as private agents receive their payments, these are deposited in their bank accounts – either through direct deposits or via cheques, and represent an increase in their deposits, which are assets to their depositors and liabilities to the banks. Here, it is worth quoting Marriner S. Eccles (1947), Chairman of the US Federal Reserve Board (1934–1948) when answering questions from the members of the Committee on Banking and Currency of the House of Representatives, who wanted to know how the government pays for its expenditures. ‘Question: How did you get the money to buy those $2,000,000,000 of Government securities [and advance that money to the government]? Mr. Eccles: We created it.

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Question: Out of what? Mr. Eccles: Out of the right to issue credit, money. Question: And there is nothing behind it, is there, except the Government’s credit? Mr. Eccles: We have the Government bonds. Question: That’s right, the Government’s credit. Mr. Eccles: That is what your money system is’. The process may in fact involve several successive steps, which can be summarized as follows: the cheques or e-deposits that increased the private agents’ deposits are held by the banks as claims on the government and thus are recorded as an equal increase in their assets. Banks’ claims on the government in this form are called ‘reserves’. Banks can claim these reserves by presenting the cheques or e-deposits to the central bank, which keeps accounts for both the government and commercial banks. In a setting where the central bank is the banking arm of the government, the central bank executes the operation simply by crediting commercial banks’ accounts (that is, by adding to their reserves) and debiting the government’s account by an equal amount. Government spending results in a net injection of liquidity (money) into the private sector; the government is now running a deficit, but the private sector has a surplus. We conclude that government spending increases the private sector’s incomes and, therefore, that the accumulated deficits – the public debt – add to the private sector’s financial wealth (see Bougrine, 2017). It should be noted, however, that with the rise of monetarism and the associated ideas of ‘fiscal responsibility’ and ‘sound finance’, neoliberal policies have succeeded in imposing severe restrictions on how central banks could participate in financing governments’ expenditures and in some cases making it illegal for central banks to advance funds to their own governments – hence, severely hampering the role of public policy in fighting poverty and other economic and social problems. Governments, such as those in the European Monetary Union, are now forced to rely on taxes and loans from private lenders, namely banks. A solution to this obstacle is the public ownership of all banks, including commercial banks, which would then act as State Development Banks. When the government remains indebted to the central bank and when the latter is publicly owned and is therefore the government’s banking arm, the issue of a government’s debt to its own bank becomes largely a technical issue. However, we can point out at this stage that any taxes collected by the government are deposited in its own account at the central bank as credits and would, therefore, serve to lower the amount of the debt (loan). If the government is eager to pay down its debt to the central bank, it can withdraw more money from the private sector by various ways and use the proceeds in the same way as taxes. All these withdrawals lead to a decrease in liquidity in the private sector and, from an accounting perspective, they are recorded in exactly the opposite manner of recording government spending.

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One further observation is worth making in this respect. The sustained injections, for example through government spending, necessarily result in an increase in banks’ reserves and therefore in the amount of liquidity in the banking system. The increased liquidity can have two consequences: (1) it causes the rate of interest to fall, as inter-bank lending becomes cheaper, and (2) it may lead to inflation. The latter effect, which is the only one emphasized by neoclassical economists, is in fact highly unlikely for as long as the economy is below full employment, and anyway, as Lerner (1943) showed, this is easily resolved through taxation. The first effect is more of a short-run nature and tends to manifest itself almost immediately. The inter-bank lending rate is also sensitive to a decrease in liquidity and tends to go up as banks’ reserves fall. It is for this reason that central banks nowadays rely heavily on the technique of increasing or decreasing reserves in order to manipulate the inter-bank rate and bring it close to the central bank’s chosen target. Government spending and taxing – injections and withdrawals of ­liquidity – are important policy tools that help the government and its central bank achieve the desired target rate of interest and the ‘­balancing’ between the two is done with this objective in mind – not for the concerns of avoiding a deficit or attempting to achieve a surplus in the public budget, as neoclassical economists would like us to believe. If inflation is caused by the injection of too much liquidity in the system, then the ­government has no difficulty in withdrawing that excess amount and putting a break on inflationary pressures. The fear of inflation from deficit spending seems unjustified, but it serves a purpose. It creates uncertainty about the efficacy of the interventionist strategy and makes policymakers reluctant to pursue an active programme that seeks to eliminate unemployment and inequality in the distribution of wealth and incomes.

CONCLUSION This chapter argues that it is time for progressive post-Keynesians to go beyond the traditional stabilization policies and start working toward the institutionalization of a more egalitarian economic system that would replace the current capitalist regime of production. The chapter proposes an action programme toward that end. It suggests that, in a first step, the government starts by (1) implementing institutional changes supporting the creation of worker owned and managed enterprises. At the same time, (2) the government needs to set up public corporations in all sectors of the economy, through which the government would act as an employer of first resort (EFR); all of which would be financed by (3) a network of

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public banks. The chapter also explored the type of policies to support the viability of such a programme.

NOTE 1. William Thompson, Thomas Hodgskin, Henri de Saint-Simon, Pierre Joseph Proudhon, Charles Fourier, and many others, sought to abolish private property because it allowed idle and unproductive property holders to snatch a share of income to which they are not entitled. They denounced the concentration of wealth in the hands of a minority and fought for social justice and the general welfare of society. To this end, many of them had proposed a cooperative production system and government regulation instead of laissez-faire.

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8.  International money: where do we stand? Claude Gnos and Sergio Rossi INTRODUCTION The nature and role of money are a subject that inflames academics, not only within the economics profession but also in the social and political sciences, as well as in theology and philosophy. A number of scientists have been attracted by the study of money, and of its essence in particular, as Ingham (2004) shows with painstaking detail with respect to sociology. Yet, as Schumpeter (1954/1994, p. 289) noted long ago, ‘views on money are as difficult to describe as are shifting clouds’. In spite of two centuries of monetary economics, it is indeed no exaggeration to claim that ‘the definition of money can still be regarded as an almost unresolved issue’ (Bofinger, 2001, p. 3). As a matter of fact, although money has been fully dematerialized and its linkage to any physical yardstick has been abandoned everywhere, several economists and the general public still think of it as a thing that is somehow comparable to real goods and financial assets. This conception derives from the idea that today’s bank money is a refinement of commodity money, which most economists consider indeed as a commodity.1 This view is the result of a time-honoured representation (see, notably, Menger, 1892; Brunner and Meltzer, 1971), according to which money is a medium of exchange – particularly in the form of a commodity – subdividing trade into two separate transactions, with real goods and/or (productive) services being exchanged for money and subsequently money for goods, as depicted by Clower (1967). In this story, even paper and bank monies are considered as (immaterial) goods or financial assets, whose quantity is exogenously determined by monetary authorities. This view also affected the Bretton Woods conference in 1944 and then all the political discussions on reforming the international monetary regime after the US dollar standard collapsed in the early 1970s. It has survived to, and is still well alive in, the present days of financial globalization and capital account liberalization. As such, it continues to affect the current policy debate on how to 117

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design an international monetary regime in order to limit, if not to avert, the occurrence of other financial crises in the future. In fact, it should be noted that central bankers have recently come round to the endogenous view on money, without, though, giving up the conventional view as regards the nature of money (see Rochon and Rossi, 2013; McLeay et al., 2014). This is so much so that both national and international monies are considered as media of exchange and, hence, as objects of trade, for which there exists a supply and a demand on the market place – be it the money or the foreign exchange market. This chapter focuses on a number of essential questions about the nature of international money that have not been definitively answered by the economics profession yet. Can a national currency (such as the British pound, the US dollar, or the euro) play the role of international money essentially? What are the basics for the creation of a truly international money? Which institution should issue it? What are the links between money and credit at the international level? Is it possible to design an international monetary system conducive to financial stability as well as real economic growth? In answering these questions, this chapter shows that the nature of inter­national money is not different from the nature of national money: both are a double-entry record in a bank’s ledger, which is the means of recording and finally settling debt obligations between trading partners on any markets (see Lavoie and Seccareccia, 2016). The structure of this chapter is as follows. The next section addresses the nature of money, which is the same at the national and international level. The third section focuses on the required changes and institutions in order to build an orderly working international monetary regime, that is to say, a true system of international settlements. The fourth section suggests that the international settlement institution, to be set up, might also grant (a limited) financial assistance to those countries whose trade balance is in deficit, if its settlement facilities are completed with some lending facilities much in line with a central bank’s role in domestic settlement systems. The fifth section briefly points out the main benefits of an international monetary order based on the emission of an international money. The final section concludes.

THE NATURE OF MONEY, NATIONAL AND INTERNATIONAL To show that the nature of money is one and the same through both time and space, it is a logical (as opposed to a chronological) approach that we will follow in our monetary analysis. This approach is both novel, in the

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sense of being rather uncommon in today’s economic analysis, and old, in so far as its milestones are to be found in the history of monetary thinking that spans over the last 250 years. Indeed, authors such as Smith, Ricardo, and Keynes had a number of intuitions about the incorporeal essence of money, which have been an object of critical discussion for a very long time now in the history of monetary thinking, with neither a definitive rejection of their path-breaking views nor a definitive settlement of the debate on the nature of money (see Seccareccia, 1996; and Lavoie, 1999). Without entering here into the history of monetary thought, let us point out that Ricardo provided a conceptual distinction that has the power to lead to a kind of Copernican revolution in monetary macroeconomics. In his last work, he namely distinguished between relative and absolute value (Ricardo, 1823/1951), a distinction that Schmitt (1984) forged ahead and that, notably, led him to distinguish relative from absolute exchanges. Now, an absolute exchange is not an exchange between two equivalent and distinct objects – which is the definition of a relative exchange – but a transformation of one object into its monetary representation, or vice versa. Clearly, a transformation implies a single object, which exists in one form or another at any point of time. For instance, when wage earners are remunerated through banks for the labour they carried out on behalf of firms, a newly produced output is then formed as a bank deposit, which is the result of an expenditure of money and labour on the factor market. The workers’ physical output is thereby transformed in and ‘defined by a sum of money income deposited with the banking system’ (Cencini, 2001, p. 31). Indeed, the meaning of an absolute exchange on the factor market is that ‘wages are not merely the result of an expenditure of money but the product of an expenditure of labour’ (Schmitt, 1984, p. 95, our ­translation). As a logical consequence of the absolute exchanges that occur on the factor market, which, let us repeat, transform a physical output into its monetary representation (bank deposits), all exchanges on the market for produced goods and services – that is to say, between a sum of money income and any bundle of items – are actually transformations, to wit, absolute exchanges: indeed, consumers dispose of their bank deposits to transform these deposits into their physical ‘content’, as it were, that is, produced output (goods and services). Now, the fact that exchanges on the factor as well as on the product market are absolute is the result of money being a means of payment (rather than a medium of exchange). Indeed, as Cencini (2005, p. 295) notes, ‘[a]s long as money is conceived of as a positive asset, exchanges can only be perceived as relative transactions between two distinct objects, each of them taking the place of the other’. In fact, money is merely a bookentry device that is used by agents in order to settle their debt obligations.

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Consequently, money measures, in numerical terms, all those objects that are dealt with in a monetary production economy. These objects are the result of production, and exist in the form of bank deposits until deposits holders spend them on the product market, thus converting these deposits into their physical content (to wit, goods and services). That money is essentially the form by which the value of produced goods (its content) is expressed was clearly understood by Smith (1776/1976, p. 289), when he argued that ‘[t]he great wheel of circulation [that is, money] is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods, and not in the wheel which circulates them’. As a form of value, money defines the value of output numerically, and is thus a unit of account. Yet, through the absolute exchange that takes place on the factor market, money is not an empty form but carries the output it measures. As a result, money has purchasing power, because it has the power of purchasing the product, and indeed can be transformed into it on the product market, in an absolute exchange as we explained above. Money is thus a means of payment, not merely a unit of account. In this regard, Keynes’s (1930/1971, p. 3, italics in the original) famous distinction between money of account and money proper illuminates monetary macroeconomics. ‘The money of account is the description or title and the money is the thing which answers to the description’. This is the distinction we pointed out above between a numerical form (money of account) and the result of the association of the numerical form with its real content, which occurs on the factor market when wages are paid out by banks on firms’ demand.2 Current output is the ‘thing’ that is numerically expressed by money, which ‘can only exist in relation to a money of account’ (Keynes, 1930/1971, p. 3). The numerical expression of produced goods and services is their monetary definition, and corresponds to their costs of production (in wage units, as noted by Keynes (1936/1973, Ch. 4); see also Rossi (2001, pp. 122–130)). ‘Real goods [and services] are the very object of money’s purchasing power, whereas money is the numerical form of current output. This is, in terms of the modern monetary approach to macroeconomics, the message implicit in Keynes’s argument’ (Cencini, 2001, p. 55). The concept of absolute exchange is not limited to a monetary economy of production, of course, but applies also to the international monetary economy, which is an exchange economy, because there is no international production as such. As a matter of fact, there is no production outside (that is, between) the countries composing the world economy, even if the latter may be ‘globalized’ as in the present days of transnational corporations and financial liberalization. Indeed, a transnational busi-

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ness is a business producing in more than one country, but this does not mean that it produces in the international economy. As Guttmann (1988, pp. 273–274) pointed out, the essential difference between a national and the international economy is that the former is a monetary economy of production and exchange, whilst the latter involves exchange only. Now, international exchange concerns both produced output and national currencies that are the objects of supply and demand on the foreign exchange market, whose turnover is currently a multiple of a country’s GDP on few working days and which is subject to speculation. As a matter of fact, the present regime of international payments transforms currencies from means of payment into objects of trade: their exchange rates vary thus according to sales and purchases on the foreign exchange market, and in this market speculation arises with a view to making huge capital gains from exchange rate variations. Indeed, this kind of speculation is the main cause of exchange rate fluctuations, which in turn become the main incentive to speculate on foreign exchange transactions. In fact, exchange rate volatility exists as a result of relative exchanges between national currencies in the foreign exchange market. Indeed, in the current regime of international payments, no absolute exchange exists, because all exchange rate regimes and foreign exchange transactions elicit relative exchanges between two distinct local currencies, each of them taking the place of the other in an agent’s account. ‘In this context, exchange rates elude any rational determination, and are symptomatic of the disorder caused by the divergence between conceptual consistency and structure of payments’ (Cencini, 2005, p. 297). The numerical nature of money requires international payments to be carried out by an absolute, not by a relative, exchange, in order for these payments to comply with the logic of payments and in this way guarantee exchange rate stability. In order for this to occur, national currencies have to be used in conformity with their nature as a means of payment, which amounts to saying that they must not be used as if they were positive assets and thereby objects of trade. This can be done if, and only if, current exchange rate regimes – from free floats to currency boards and monetary union – are all replaced by an international system of absolute exchanges, in which each currency is exchanged against itself via a common standard of value, that is to say, a means of payment at the international level, as we will explain in the next section. This is indeed a crucial step to stabilize exchange rates on the foreign exchange market. It can only occur if a truly international settlement institution is set up, perhaps in the same buildings of an already existing financial institution such as the Bank for International Settlements in Basel or the International Monetary Fund in Washington DC, to which the mandate of implementing a stable

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monetary system between sovereign countries might be given by a new Bretton Woods conference before too long. Let us explore this avenue in the remainder of this chapter.

TOWARDS A SYSTEM OF INTERNATIONAL PAYMENTS Today, the international monetary economy does not have a true system of payments. In fact, the present regime of international payments is a nonsystem, as Williamson (1977, p. 73) put it. Certainly, a system of payments, such as those that can be observed in a national economy, makes sure that market exchanges have no destabilizing effects on either total supply or total demand, as each agent’s sale on any given market implies a purchase by the same agent on another market within the domestic economy.3 This means that all exchanges are conversions, that is to say, transformations of a good or service into its monetary representation (on the factor market) or vice versa (on the product market). This is not what occurs today in the international monetary arena, which is a disordered set of currency pairs captured into relative exchanges that move national currencies around in two-sided transactions, usually across borders. In fact, the orderly working of an international settlement system requires a truly international money, as it really existed before the First World War in the form of gold bullion. ‘Years ago, money was an international thing: if you had the money of one country you could change it into the money of another at a fixed rate, and you never had to think which currency you held’ (Keynes, 1980, p. 3). As a matter of fact, in the gold standard system there was an international standard, that is, gold, which rendered the different national currencies homogeneous owing to the convertibility principle. In the absence of such a standard, which does not need to be a physical standard but may be purely numerical (in the form of a double-entry record), local currencies are bound to remain heterogeneous and exchange rates volatile. Hence, the re-establishment of a true system of international payments requires the world to revert to the structure of the international gold standard system, which was indeed ‘a means for trading goods against goods’ (Keynes, 1980, p. 12). To be true, Keynes insisted on the importance of money as a means of payment both at the national and at the international level. The rationale for his policy-oriented argument, nonetheless, was that ‘[any] trading transaction must necessarily find its counterpart in another trading transaction sooner or later’ (Keynes, 1980, p. 18). In fact, the only possible way to grant this outcome is to switch from relative to absolute exchange rates, that is, to

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conceive of international payments as instantaneous events through which each local currency is changed against itself, albeit through the intermediation of a common (numerical) standard (see Cencini, 2005, pp. 323–327). Before expanding on this point, it may be useful to make it clear that the reference to the gold standard system is not inappropriate here, as in this system two entities were indeed operating: as a currency, gold was actually distinct from its material content. Just as Ricardo (1811/1951) showed in his time (Gnos, 1998), when a country happened to export gold as a consequence of the convertibility clause, it was in fact exporting a commodity and not its currency. In fact, what we argue below is that an international numerical standard would precisely cause countries to systematically keep their currencies and export goods (including financial assets) as a counterpart to their imports. Let us expand on this point. Consider two countries, A and R (which may also represent the rest of the world, facing country A), and assume that country A has to pay R for some commercial (or financial) items that its residents imported from R. If the international payment between A and R has to become an absolute exchange – to replace the current relative exchange that does not guarantee exchange rate stability – country A has to recover its currency, money A (MA), as soon as it surrenders it in payment of a commercial (or financial) import from R. This means that country R (that is to say, the rest of the world) has to be led to spend the deposit in MA as soon as country A transfers to it the corresponding property right (in fact, a deposit cannot leave the banking system where it has been formed). In order for this to occur, an international settlement institution must be set up, with the principal task of making sure that all economic transactions between any two currency areas are absolute, instead of relative, exchanges. This requirement means that country R has to spend an amount of money R when it is informed by country A that it is entitled to a deposit in MA in the banking system of the latter country. It also means that country A has to obtain property of a deposit in MR as soon as it disposes (as a result of the international settlement) of a deposit in MA. Both these operations need a common numerical standard in order for MA and MR to be made homogeneous, so as to give rise to an orderly working international monetary system, whereby all exchange rates will remain stable because every demand for a given currency is simultaneously a supply for the same currency and the same amount (Figure 8.1). The new international monetary order being a system in which goods are traded against goods in the spirit of Keynes (see above), any commercial or financial item imported by a country (A) must be paid for with an equivalent export of securities, which are goods in their financial ­representation.4 This transaction is not a barter trade, however, because a

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z MR

z MR

Commercial or financial importer

z MR

securities

y MA

goods/financial assets

International settlement institution

Figure 8.1  Absolute exchanges in the international monetary order

Country A

Exporter of securities

y MA

Central bank

y MA

z MR

Country R

Importer of securities

y MA

Central bank

Commercial or financial exporter

z MR

y MA



International money: where do we stand? ­125

means of final payment is involved both within and between countries.5 In country A, an amount of MA is disposed of by the (commercial or financial) importer, who obtains goods or financial assets in (an absolute) exchange. In country R, the exporter of goods or financial assets is finally paid by an amount of MR (via the domestic banking system, headed by the national central bank), which defines an identically equivalent purchasing power with respect to the value exported (in commercial or financial form) to country A (and that country A pays for with securities defining the financial representation of the goods, services or financial assets exported by R). Note that the transaction on securities is induced by the commercial or financial transaction carried out by residents. As such, the former transaction might involve the State of either country (A and/ or R), since there might be no private sector resident willing to sell (or to buy) those securities that are purchased (or sold) by a non-resident (that is, a resident in a different currency area). In the international monetary space, as a result, all national currencies (MA and MR) are the object of an absolute exchange, whereby a sum of MA is transformed into itself via the monetary intermediation of the international settlement institution, in so far as a sum of MR is also transformed into itself simultaneously and through the same monetary institution. In so doing, the international settlement institution makes sure that no excessive demand of a currency (be it positive or negative) can exist, as every sum of national money is both demanded and supplied instantaneously. To be sure, it takes an instant – that is, a zero duration in time – to enter a payment in a bank’s ledger. If this payment is international, that is to say, between countries, and expressed in a common numerical standard, to wit, international money sensu stricto, then international transactions are absolute exchanges that leave a currency’s exchange rates unaffected by cross-border (either commercial or financial) trade.

INTERNATIONAL MONEY EMISSION AND FINANCIAL ASSISTANCE The creation of a new international monetary order crucially depends on the emission of a truly international money, whose name might be important for psychological reasons and/or for avoiding political conflicts, but that we do not want to propose here, as this issue lies outside our present concern. The emission of international money, IM, for any payment between countries will make sure that delivery of a (commercial or ­financial) item takes place if, and only if, the corresponding final payment occurs internationally – that is, for each country concerned as a whole

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Table 8.1  T  he result of an emission of international money in an absolute exchange International settlement institution Assets

Liabilities

1.  Central bank of country A 1 xIM 2.  Central bank of country R 1 xIM

Central bank of country R 1 xIM Central bank of country A 1 xIM

(see Figure 8.1). In this regard, the new international monetary machinery will replicate the recent advances in the management of domestic real-time settlement systems, in which a so-called delivery versus payment protocol has been introduced in order to make sure that the delivery of a financial asset occurs if, and only if, the corresponding final payment occurs, too (Bank for International Settlements, 2005). Let us illustrate this mechanism by referring to the stylized example that we provided in the previous section. When the central bank of country R is informed that it is entitled to an amount of international money by the international settlement institution, it must decide whether to lend this amount directly to a deficit country (such as country A) or to spend it for purchasing securities on the international financial market. If country R lends this amount to country A, this means that country A sells an equivalent amount of financial assets to country R. In this case, the bookentry situation after this financial transaction has taken place, and has been finally settled in international money, is depicted in Table 8.1, where the first double-entry refers to the international payment of country A’s import of commercial or financial items, whilst the second double-entry concerns the payment by country R for its purchase of securities (sold by country A to finance its imports). Starting from tabula rasa in order to explain rather than to assume things, Table 8.1 shows that, as a result of the international payments in IM through the international settlement institution, no country has a monetary deficit, as all international debts are finally settled by a transfer of securities. If so, then national as well as international monies are used in a purely circular way, that is, as a means – and not as an object – of payment. Indeed, country A ends up with a net financial outflow, as it sells an amount of securities to finance its final payment to country R (through the international settlement institution). Needless to say, these securities, whilst they provide the means to finance a country’s net commercial imports, are in no way the ultimate export of a deficit country: any trade deficit can only be paid eventually through a net export of goods

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or services, thus compensating over time a country’s trade deficit with the same country’s trade surplus. The sale of securities, nonetheless, provides a bridge between the present and the future, notably, between a trade deficit and a trade surplus recorded by the country considered (A) with respect to the rest of the world (R). In other words, if R spends the sum of IM it is entitled to as a result of its trade surplus (worth x units of IM) for purchasing those securities that are sold by country A, then this allows the latter country to find on the international financial market the funds it needs to pay for its trade deficit finally (and really). In the end, international money disappears as the reflux principle indicates (Table 8.1). What happens, however, if R does not spend the sum of IM it is entitled to as a result of its trade surplus, for buying the securities sold by country A, which seeks to finance its trade imbalance? In this case, the international settlement institution might play a more active role than merely issuing the numerical standard of international payments: it may act as a financial intermediary and sell its own securities. Indeed, instead of selling its securities to country R, country A might sell them to the international settlement institution, which, in so doing, advances a payment that country A will benefit from when exporting goods or services. If so, there might be two kinds of financial assets behind the second double-entry in Table 8.1: country A’s securities sold to the international settlement institution, and this institution’s securities sold to country R. All these securities may be denominated in either local currencies (MA, MR, or any other country’s currency) or in international money, the important thing being in fact that the final settlement of these financial transactions between countries occurs using international money as a vehicle, that is, as a means of payment, whose load is the amount of securities transferred from the seller to the buyer. By selling its own securities (or debt certificates) on the international financial market, the international settlement institution would collect private as well as public capital and invest it in those countries most in need of a recovery, and in which otherwise capital would not flow. Well managed, this financial intervention can prove extremely helpful in an attempt to reduce today’s discrepancies between rich and poor countries (Cencini, 2005, p. 325). Needless to say, all those open-market and lending operations carried out by the international settlement institution would have to be supervised and to respect the principles of sound banking as well as the so-called international best practices. These lending facilities are not to be granted ad libitum, but some limit must be provided, and an interest rate must be paid by all those countries obtaining (unconditional) financial assistance from the international settlement institution. Indeed, the interest rates paid by deficit countries on their borrowings, from either

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surplus countries or the international settlement institution, would depend on the extent of their trade deficit, stock of foreign debt, and capital account balance. As a matter of fact, a country recording a financial deficit is hardly in a position to issue new debt instruments at favourable terms. It must accept either the onus of paying higher rates of interest on new debt, or that of slowing down the national economy by a hike in domestic interest rates in the hope of attracting foreign investment (both short and long term). Alternatively, or additionally, this country may devaluate, hoping thereby to boost exports and thus to improve its trade balance in a not too distant future. The system of international payments that we propose here, in fact, is not a system of irrevocably fixed exchange rates. The emission of international money will homogenize exchange rates, which as a result will be stable, although they will not be fixed, because countries will be free to modify them if they deem them inappropriate to attain their (domestic and/or external) policy goals. This is indeed a benefit, not a flaw, of the new international monetary order that we propose in this chapter. Let us elaborate on this.

MAIN BENEFITS OF AN ORDERLY WORKING INTERNATIONAL MONETARY SYSTEM As we pointed out in the previous section, if all international settlements are carried out through the monetary as well as financial intermediations of the international settlement institution, any national currency involved will be instantaneously exchanged against itself via international money. In the example we analysed in the previous section, for instance, y units of MA are supplied (against x units of IM) in payment of country A’s trade deficit, at the same time as y units of MA are demanded (against x units of IM) in payment of the securities sold by country A. Similarly, z units of MR are demanded (against x units of IM) in payment of country R’s trade surplus, at the same time as z units of MR are supplied (against x units of IM) in payment of the securities bought by country R. Each currency being simultaneously supplied and demanded against an identical amount of international money, exchange rates can never be affected by international transactions – be they on product or financial markets (hence, speculation cannot alter exchange rates in such a system). The first benefit of this new system will notably consist of introducing a mechanism by which any surplus country (such as R) spends its positive balances in international money as soon as it earns them, so that at the end of each settlement day no credit balances will be held idle at the international settlement institution.6 If the latter balances are not spent

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by surplus countries for purchasing the securities sold by deficit countries (such as A), a protocol will make sure that end-of-day balances held by countries at the international settlement institution are automatically spent by them for purchasing the securities sold by this new institution. Further, and more importantly, in this system any participating currency will have an exchange rate that is stable (although it is not fixed) with respect to international money, therefore also in terms of any other participating currency, in a framework of fully liberalized capital account transactions – without this being at odds with a higher degree of flexibility in domestic policymaking. In fact, the structurally-modified international monetary system that we propose as a new world monetary order will grant another crucial benefit to its participating countries, because it increases their room for manoeuvre when gearing their economic policies (particularly an independent fiscal and monetary policy) to the needs of their domestic economies, including output growth and hence full employment. The international settlement system proposed in this chapter will make sure thereby that all cross-border payments take place in an orderly monetary framework, that is, with no disturbances on the foreign exchange market that might put in danger the goal of exchange rate stability and its ensuing macroeconomic benefits, as well as with no inconsistency between external and internal monetary policy goals.

CONCLUSION The nature and role of money are still far from being clearly understood by academics and national as well as international policymakers around the world (see Gnos, 2006). Yet, provided that we fully grasp the numerical essence of money at the national level, an understanding of the need to transpose this analysis at the international level is not far from our reach. In this chapter we pointed out that the nature of money, national and international, is scriptural rather than corporeal: money is a double-entry record in a bank’s ledger, and as such has to be distinguished from the objects of trade, both within and across national borders, in theory as well as in practice. This first step is crucial for problem solving, both at the national (as concerns notably inflation and unemployment) and at the international (exchange rate volatility) level. Once it is understood that the nature of money is the same within and between the countries participating in foreign trade, it is a matter of logic to design the missing institution for the final settlement of international transactions for the countries involved as the set of their residents. Let us hope that a multidisciplinary approach to this question will be able to settle all those institutional, political as well

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as psychological issues related to reforming the current international monetary regime, to make a true (orderly working) payment system out of it.

NOTES 1. Rochon and Rossi (2013) argue that, in fact, even commodity money was not a commodity when used as a means of payment, whose supply was indeed endogenously determined by the ‘needs of trade’. 2. This is the hallmark of money endogeneity, as noted also by monetary circuit theorists (Lavoie, 1987; Graziani, 1990; Seccareccia, 1996; Parguez and Seccareccia, 2000). See Rochon and Rossi (2013) for analytical elaboration. 3. This is tantamount to saying that there is an identity between each agent’s sales and purchases on all the markets considered altogether. See Cencini (2005, pp. 286–290) for analytical elaboration of this identity, which was first pointed out by Schmitt (1975). 4. When a firm issues and sells securities on the financial market, it does so to fund a purchase of capital goods, which are real goods used in the production process. If so, then securities represent the underlying real goods. When an individual (household) issues and sells securities, perhaps to a bank, in order to fund a purchase of (durable) goods, s/he is advancing an income s/he will earn in the future as a compensation for having produced real goods or services (a future wage, whose payment defines an absolute exchange as noted above). 5. Payment finality means that ‘a seller of a good, or service, or another asset, receives something of equal value from the purchaser, which leaves the seller with no further claim on the buyer’ (Goodhart, 1989, p. 26). See also Rossi (2005, 2007). 6. This contrasts with the workings of TARGET2, whose monetary–structural flaws have been revealed by the euro-area crisis that burst in 2009. See Simonazzi et al. (2013), Lavoie (2015), Rossi (2016), Febrero et al. (2018).

REFERENCES Bank for International Settlements (2005), New Developments in Large-Value Payment Systems. Basle: Bank for International Settlements. Bofinger, P. (2001), Monetary Policy: Goals, Institutions, Strategies, and Instruments. Oxford: Oxford University Press. Brunner, K. and A.H. Meltzer (1971), ‘The uses of money: Money in the theory of an exchange economy’. American Economic Review, 61(5), pp. 784–805. Cencini, A. (2001), Monetary Macroeconomics, A New Approach. London and New York: Routledge. Cencini, A. (2005), Macroeconomic Foundations of Macroeconomics. London and New York: Routledge. Clower, R.W. (1967), ‘A reconsideration of the microfoundations of monetary theory’. Western Economic Journal, 6(1), pp. 1–8. Febrero, E., J. Uxo and F. Bermejo (2018), ‘The financial crisis in the eurozone: A balance-of-payments crisis with a single currency?’. Review of Keynesian Economics, 6(2), pp. 221–239. Gnos, C. (1998), ‘The macroeconomic foundations of the comparative-cost ­principle’. History of Economic Ideas, 6(2), pp. 89–96. Gnos, C. (2006), ‘Reforming the international payment system: An assessment’. In Rochon, L.-P. and S. Rossi (eds), Monetary and Exchange Rate Systems:

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A Global View of Financial Crises. Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 127–139. Goodhart, C.A.E. (1989), Money, Information and Uncertainty, 2nd edn. Basingstoke: Macmillan. Graziani, A. (1990), ‘The theory of the monetary circuit’. Économies et Sociétés, 24(6), pp. 7–36. Guttmann, R. (1988), ‘Crisis and reform of the international monetary system’. In Arestis, P. (ed.), Post-Keynesian Monetary Economics: New Approaches to Financial Modelling. Aldershot, UK and Brookfield, WI, USA: Edward Elgar, pp. 251–299. Ingham, G. (2004), The Nature of Money. Cambridge: Polity Press. Keynes, J.M. (1930/1971), A Treatise on Money. London: Macmillan. Reprinted in The Collected Writings of John Maynard Keynes, Vols V and VI. London and Basingstoke: Macmillan. Keynes, J.M. (1936/1973), The General Theory of Employment, Interest and Money. London: Macmillan. Reprinted in The Collected Writings of John Maynard Keynes, Vol. VII. London and Basingstoke: Macmillan. Keynes, J.M. (1980), The Collected Writings of John Maynard Keynes (vol. XXV Activities 1940–1944. Shaping the Post-War World: The Clearing Union). London and Basingstoke: Macmillan. Lavoie, M. (1987), ‘Monnaie et production: Une synthèse de la théorie du circuit’. Économies et Sociétés, 21(9), pp. 65–101. Lavoie, M. (1999), ‘The credit-led supply of deposits and the demand for money: Kaldor’s reflux mechanism as previously endorsed by Joan Robinson’. Cambridge Journal of Economics, 23(1), pp. 103–113. Lavoie, M. (2015), ‘The Eurozone crisis: A balance-of-payments problem or a crisis due to a flawed monetary design?’ International Journal of Political Economy, 44(2), pp. 157–160. Lavoie, M. and M. Seccareccia (2016), ‘Money and banking’. In Rochon, L.-P. and S. Rossi (eds), An Introduction to Macroeconomics: A Heterodox Approach to Economic Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 97–116. McLeay, M., A. Radia and R. Thomas (2014), ‘Money creation in the modern economy’. Bank of England Quarterly Bulletin, 54(1), pp. 14–27. Menger, K. (1892), ‘On the origin of money’. Economic Journal, 2(6), pp. 239–255. Parguez, A. and M. Seccareccia (2000), ‘The credit theory of money: The monetary circuit approach’. In J. Smithin (ed.), What is Money? London and New York: Routledge, pp. 101–123. Ricardo, D. (1811/1951), The High Price of Bullion, a Proof of the Depreciation of Bank Notes. In P. Sraffa and M.H. Dobb (eds) (1951), The Works and Correspondence of David Ricardo (Volume III, Pamphlets and Papers 1809– 1811). Cambridge: Cambridge University Press, pp. 47–127. Ricardo, D. (1823/1951), ‘Absolute value and exchangeable value’. In Sraffa, P. and M.H. Dobb (eds) (1951), The Works and Correspondence of David Ricardo (Volume IV, Pamphlets and Papers 1815–1823). Cambridge: Cambridge University Press, pp. 357–412. Rochon, L.-P. and S. Rossi (2013), ‘Endogenous money: The evolutionary versus revolutionary views’. Review of Keynesian Economics, 1(2), pp. 210–229. Rossi, S. (2001), Money and Inflation, A New Macroeconomic Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar (reprint 2003).

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Rossi, S. (2005), ‘Central banking in a monetary theory of production: The economics of payment finality from a circular-flow perspective’. In Fontana, G. and R. Realfonzo (eds), The Monetary Theory of Production: Tradition and Perspectives. Basingstoke: Palgrave Macmillan, pp. 139–151. Rossi, S. (2007), Money and Payments in Theory and Practice. London and New York: Routledge. Rossi, S. (2016), ‘The euro must be abandoned to achieve European monetary integration’. International Journal of Political Economy, 45(1), pp. 72–84. Schmitt, B. (1975), Théorie Unitaire de la Monnaie, Nationale et Internationale. Albeuve: Castella. Schmitt, B. (1984), Inflation, Chômage et Malformations du Capital: Macroéconomie quantique. Paris and Albeuve: Economica and Castella. Schumpeter, J.A. (1954/1994), History of Economic Analysis. London and New York: Routledge. Seccareccia, M. (1996), ‘Post Keynesian fundism and monetary circulation’. In Deleplace, G. and E.J. Nell (eds), Money in Motion: The Post-Keynesian and Circulation Approaches. London and New York: Macmillan and St. Martin’s Press, pp. 400–416. Simonazzi, A., A. Ginzburg and G. Nocella (2013), ‘Economic relations between Germany and Southern Europe’. Cambridge Journal of Economics, 37(3), pp. 653–675. Smith, A. (1776 [1976]), The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. 2: An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. Williamson, J. (1977), The Failure of World Monetary Reform, 1971–74. New York: New York University Press.

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9.  Endogenous money, liquidity preference and confidence: for a qualitative theory of money Edwin Le Heron MONEY BETWEEN SOVEREIGNTY AND CONFIDENCE Money is an institution that can only function when it perfectly manages the relationship between sovereignty and confidence. The foundation of this monetary relationship can focus on two directions: either a top-down process based on sovereignty so as to justify public confidence in the money; or a bottom-up process starting from building confidence through coordination and learning among individuals to explain the organization of a sovereign monetary authority. Starting from the three hierarchical levels of confidence (methodical, hierarchical and ethical1) highlighted by Michel Aglietta and André Orléan (2002), the first process emphasizes the importance of a sovereign political power as the foundation of confidence and multiplies the rules and norms necessary for methodical confidence, while being a guarantor of the social values in the monetary compromise issuing from ethical confidence. The monetary order is based on the exercise of hierarchical political power from top to bottom. Money thus becomes a ‘total social fact’ (Simmel quoted in Aglietta, 2008, p. 4). The second process is systematically opposed to a monetary order that would be confiscated by a power deemed to be illegitimate in the matter: first of all, money must belong to the people and constitutes an economic rather than a political matter. Confidence in money is then primarily a ­horizontal process between economic agents. Private money is a radical design of this approach, such as the Bitcoin, whose regulation is entrusted to a tamper-proof algorithm and totally decentralized registration procedures. But even with a sovereign monetary power, this one must be subjected to a bottom-up validation process and it can be independent of political power. The requirement of an independent central bank goes in 133

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this direction. Paraphrasing Emile Durkheim’s approach, money would be methodologically holistic, although it is individualistically ethical. Unlike credibility, confidence is a process based on reciprocity (Carré and Le Heron, 2006). Only the third deeper level of ethical confidence can effectively manage the tension between sovereignty and confidence, since if values come from the people, recognized by a majority of individuals in a given space, they must be explicitly formulated by the political power, in a constitution for example, and guaranteed by a sovereign state or a community of states. Thus, money is a crucial political institution concerning which democracy must be exercised perfectly so that confidence can be maintained. But this does not solve the question of values at the foundation of ethical confidence: are they directly at the macro-level as sovereignty might suggest or are they located fundamentally at the level of the individual, questioning the process of building confidence in a money as a public good? The construction of a convention is at the heart of this question. We find in the whole history of monetary thought two great traditions which are opposed by articulating themselves around the two ‘topdown’ or ‘bottom-up’ processes, traditions that Schumpeter (1954 [1983]) summed up by the opposition between the monetary analysis and the real analysis. The terms of this opposition in history, justifying confidence in money between these two processes, are numerous, overlapping and partly interconnected. Presenting some of them (Table 9.1) can be pedagogically interesting and enlightening: However, as ethical confidence shows, managing the tension between sovereignty and confidence makes it necessary to link some of the features of these two processes. We will show that if Keynes favours sovereignty, Table 9.1  Top-down and bottom-up processes Top-down process

Bottom-up process

Monetary sovereignty Money as a symbol Endogenous money Quality of money Money as a flow Expectation of the future   value of the output Money as a public good and   public debt Money as liquidity Social value

Monetary coordination and mimesis Money as a commodity Exogenous money Quantity of money Money as a stock Assessment of the present value of   output and capital Money as a private good and private debts Hoarded money Individual values

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with ‘monetary authority’ and therefore the top-down process, he often seeks to make important features of these two processes compatible and shows us that, for the monetary institution to work, a more nuanced and complex analysis is needed. But ambiguities can appear. After quickly developing some opposing points in monetary history (point 2), in order to deduce from there theoretical and institutional features, which seem to us crucial for the understanding of money, we shall confront (point 3) two ambiguities in the monetary analysis of Keynes’s General Theory2 (Lavoie, 2014, pp. 180–274; Le Heron, 1986). The first is the traditional opposition noted by post-Keynesians between the principle of liquidity preference, which favours the stock dimension of money, and the theory of endogenous money at the heart of the financing of output, which focuses on the flow dimension. The second ambiguity is knowing when Keynes talks about interest rate, which rate is he talking about? Is it the short-term rate under a convention managed directly by the monetary authority or the long-term rate, partially a result of the mimetic spirit of the speculators? Finally (point 4), we suggest a solution allowing us to overcome these two ambiguities by generalizing liquidity preference, particularly to commercial banks (Le Heron 1984, 2008; Le Heron and Mouakil, 2008). This proposal is applied to the modelling of the monetary question in a post-Keynesian stock-flow consistent framework.

FOR A QUALITATIVE THEORY OF MONEY Money: Symbol or Commodity? From antiquity to the beginning of the twentieth century, the debate opposes the supporters of money as a symbol to those of money as a commodity. The former place the monetary question at the heart of political economy by considering money essentially as a political issue, as a balance between power, society and law, while the proponents of commoditymoney are wary of this monetary institution and abuses of politics and seek to anchor the currency on an indisputable economic value, a commodity such as a quantity of precious metals. If money is a symbol, sovereignty appears to be necessary for the implementation of monetary confidence. This approach is often close to the top-down process. On the other hand, the proponents of commodity money seek to extricate themselves from the question of sovereignty and develop a confidence close to the bottom-up process, based on individual rationality and validation by the market. For a long time, ranging from the Greek philosophers to the Physiocrats, money is considered a symbol, with the princely mintage, a symbol of the

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law. From the time of the Greek philosophers, money has been considered as falling under the law and thus of the legislative power, which assures the hierarchical confidence. For Aristotle, money does not exist in nature. The precious metal does not determine the value of money, but only contributes to methodical and hierarchical confidence. Thanks to princely mintage, which adds additional value to the value of the precious metal, the function of financing the economy and the state is accepted very early, notably by scholastics and mercantilists, but controlled. However, Nicolas Oresme affirms: ‘The Prince is the regulator and not the owner of the money’ (quoted by Gonnard, 1935, p. 116). This idea of money as a common good, not to be accumulated by an individual, will be taken up later by Quesnay. For the Physiocrats, money must always circulate for the good of all. It is a flow whose quantity does not matter. Quesnay talks about predatory finance. Then we witness at the end of the eighteenth century the triumph of commodity-money with Anne Robert Turgot in 1769 and Adam Smith in 1776, followed by classical and neoclassical economists. They reject monetary financing in favour of the single saving. Confidence in money must come from trust in the value of the commodity that underpins it. The scarcity of precious metals is a radical way of constraining the quantity of money by a ‘natural’ regulation. After the interlude of commodity-money in the nineteenth century, the twentieth century sees the gradual disappearance of the latter and money finally cuts the link with gold, at the national level after the First World War, and, at the international level, with the end of Bretton Woods agreements in 1971; the symbol-money triumphs definitively, which implies this symbol must be managed effectively so that confidence is established. The era of modern central banks begins. Active Money Versus Neutral Money The debate then changes in nature by questioning the status of money in macroeconomics. On the one hand, we find economists for whom money is neutral, at least in the long run (neoclassical, monetarist). For these economists, money is not the solution, but the problem, especially because of inflation or credit cycles. Only savings and the rentier can effectively finance the real economy. On the other hand, we find economists for whom money is active (Keynesian, Institutionalist). For them, money is the solution to the scarcity of ex-ante saving, banks replace the rentier at the heart of the financing and free up investment. Thus we move from the ‘commodity-money vs. symbol-money’ opposition to the ‘neutral money vs. active-money’ opposition.

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Those who were reluctant to use money to finance the economy and sought to anchor it to commodities (gold or silver for instance) become those who assert its neutrality or, as with Milton Friedman (1969), his need for short-term neutralization. These orthodox economists develop a dichotomist approach in which economic analysis focuses on real phenomena analysed outside monetary relations. Money intervenes only to explain inflation or economic cycles because of an excess of its quantity. The question of its quantity is then essential to ensure confidence. The financing of the economy must be regulated by the available saving, i.e. the loanable funds. Therefore, the rentier by his savings allows investment. Finance can be at the heart of the accumulation of capital and growth. Money remains essentially a unit of account and a mere neutral market intermediary, but does not affect the economic equilibrium seen as an equilibrium of real exchange. Money is exogenous to economic activity, as if fallen from a ‘helicopter’. Any attempt to give other functions to money encounters insurmountable theoretical difficulties. After abandoning the control of the quantity of money by the counterpart requirement in gold or silver (commodity-money), monetarist economists will try, with the credit multiplier, to impose a minimum counterpart in high powered money, i.e. central bank money. In view of the practical failure of this theoretical proposal, today, they impose through the Basel agreements, a capital constraint on commercial banks. Without paying too much attention to the counterparts of monetary creation, orthodox economists continue to insist on the mere amount of money and the means to constrain monetary creation. However, with Basel II and III, we note capital ratios that are proportional to the risks of financing, which is a step towards a qualitative approach to money. As for the partisans of symbol-money, the progress of monetary theory in particular thanks to John Maynard Keynes and Joseph Schumpeter, allows them to justify the positive and active role of money in particular in the financing and the determination of output. Thus money makes it possible to remove the constraint of ex-ante saving by financing investment and innovation, justifying the increase in ex-post saving. We can formulate the characteristics, which are the basis for monetary analysis and the theory of endogenous money by four propositions. The first three propositions were highlighted by Schumpeter (1954 [1983], pp. 390–392) in opposition to the analysis of the real phenomena: ●●

●●

Money is not neutral and is introduced at the beginning of the theoretical construction, which refutes an ideal model of barter. Money is endogenous to the process of production. Analysis is essentially macroeconomic.

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Output is influenced by the flow of expenditure of monetary income and is not constrained by saving. Supply does not systematically create its own demand. Say’s law is not verified. Time is irreversible. Uncertainty is the framework of economic activity. It is impossible to refuse the neutrality of time without refusing the neutrality of money (Le Heron, 1984).

Schumpeter emphasizes the role of banks as producers of private money whose risk assessment of entrepreneurs’ projects can allow the financing of innovation without the need to ex-ante saving. Credits make deposits; banks are crucial economic agents for the growth and evolution of capitalism. Quality Theory of Money3 Versus Quantity Theory of Money With the General Theory, John Maynard Keynes develops a production economy with money. Active money allows the financing of output and protection against uncertainty. The created money corresponds to the promise of future wealth, i.e. the anticipated demand by entrepreneurs determines their effective output. The framework is a ‘monetary theory of production’4 (JMK, 1933 [1973], CW13, p. 408). With the principle of effective demand, money is endogenous. With the theory of endogenous money, it is not so much the quantity of money that is important, as its quality: the quality of the production projects and of the entrepreneur’s expectations; the quality of their valuation by the banks. If, for Marx, output must succeed in making the ‘dangerous leap’ from value to price, for Keynes, produced wealth must succeed the ‘dangerous leap’ from money to value. Indeed, the creation of money appears as an expectation of value. Money is an advance (liabilities) on the production of value of tomorrow (assets). Since loans create the deposits, thus creating a ‘power to buy’, these deposits only make sense if they can subsequently convert into a real good. So, money’s ‘power to buy’ becomes a real ‘purchasing power’. The difference between the ‘power to buy’ and the ‘purchasing power’ of money is time of production and validation of real wealth. It is obvious that creation of money is a bet on the future and thus basically a form of speculation. But this speculation must be done directly on the production of future real wealth, i.e. on a flow of future real value, and not through the valuation of past or present stock of capital. Keynes makes this difference using the terms ‘enterprise’ and ‘speculation’ (JMK, GT, p. 158). For example, creating money to buy financial assets or old real estate, as in the United States from the late 1990s to the 2007 crisis, generates a

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demand flow in front of a stock of assets, which produces a rise in prices of these financial assets, leading to a speculative bubble without production of real wealth. Power to buy, an essential feature of money, has become a purchasing power, which is nothing more than a higher valuation of the same assets. But how does one justify this rise in valuation for the same assets: either they were underestimated in the past, or they are overvalued today. Only time will give the very subjective answer to these alternatives. According to Keynes, this ‘speculative money’ does not have the quality of the money created for a productive project, allowing an additional real wealth creation as a counterpart to the monetary promise. Keynes prefers the ‘spirit of enterprise’ that can develop economy in the long run through monetary creation. The important thing is not the creation of money, but the quality of wealth creation that it allows. A quality theory of money is an essential requirement for any macroeconomist. If the counterpart of monetary creation consists mainly of private debts, money is a public or social debt. Private debts must be repaid, but the same is not true for social debt. This explains the importance of a controlled relationship between social debt and private debts, implying the high quality of the counterparts of money. Confidence in money is therefore dependent on the qualitative assessment made by the population about the social debt. This qualitative assessment focuses on objectives and outcomes and builds on the dominant political compromise. Ethical confidence, through the values resulting from the social compromise, remains the most crucial. It is complex to obtain because the vision of the society of tomorrow can easily change in the future. The euro is a perfect example, especially with the lack of a European social debt clearly identified by individuals. Ethical Confidence: Top-down or Bottom-up Process? Money is not a simple economic instrument, but a social link that measures the cohesion and functioning of society. The monetary paradox is to constitute a common norm, a general equivalent, of being a public good, but at the same time to be the place of individual power issues: the financing of microeconomic risks, hoarding, private banks in competition, the struggle for the sharing of added value determining the purchasing power of individuals. Only confidence in the monetary institution and the corresponding social project can solve this paradox. Without respecting a complex balance between sovereignty and confidence, money loses its legitimacy and can disappear. The monetary authority will contribute to confidence by setting the rules and managing the technical quality of the currency, relying

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in particular on the regulations driven by the central bank in a top-down approach. But for trust to be real, it must proceed with the consent of all economic agents who must therefore freely share the same moral and social values as the sovereign power. Ethical confidence comes from a bottom-up approach and has to found a moral basis incorporated, for example, in the constitution of the state. Thus, the monetary order is at the heart of the social pact, the confidence based on the adhesion of the citizens giving legitimacy to sovereignty. Sovereignty can thus determine the rules, which will reinforce the confidence of the population. This makes the monetary institution a fundamental institution of capitalism and regulation between private debts and social debt. To believe that the markets, especially the financial ones, can regulate and measure by price the political consensus around these values is certainly an illusion and perversion of which only economists are capable. Today seeing the damage caused by over 20 years of financialized liberalism and the difficulties of the euro area, we must return to Keynes and his thoughts on money. The current crisis is above all a crisis of meaning and a deep misunderstanding of monetary phenomena. It invites us to deepen the monetary theory of Keynes, as Marc Lavoie has done in all his works. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity [. . .] The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. (JMK, GT, p. 155)

Keynes warns us against the fetish of liquidity and the morbid desire to accumulate money individually. Money is a flow that anticipates the creation of social wealth and should not be reduced to a stock of money crystallizing the endless desires of individuals. Freud thought that money was a way for men to avoid looking in each other’s eyes. Keynes asks us to open our eyes and recognize the character of money as a public good. However, if Keynes largely adopts the top-down process of confidence, by privileging sovereignty with the concept of monetary authorities, by adopting the conventional and institutional dimension of a symbol-money, the character of public good highlighted by the Scholastics, the essentially circulatory dimension by the Physiocrats, the importance of financing by money in place of ex-ante savings, by developing the importance of the quality of the counterparts of endogenous money and by accepting a social debt funded by the money, it will however develop, in the General Theory, elements belonging rather to the bottom-up process. Indeed, with the principle of the liquidity preference applying to a stock of money, but

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also with the importance of mimesis in speculation, Keynes integrates with portfolio arbitrations a darker side of the money. The preference for liquidity can make money a predator of output.

TWO AMBIGUITIES ABOUT MONETARY ANALYSIS IN KEYNES’S GENERAL THEORY When we examine the monetary analysis of Keynes’s General Theory, we are impressed by the very different treatment of the money and the interest rate between the beginning, from Chapters 1 to 11 inclusive, and the rest of the book, especially Chapters 13 to 18 of Book IV, The Inducement to Invest. Chapter 12, The State of Long-Term Expectation, is an essential link between these two treatments of money and interest rate. The beginning of Chapter 12, §1 and §2, leans very clearly towards the treatment in the first part, emphasizing the state of confidence and the spirit of enterprise; §4 and §5 emphasize the second idea, in developing the financial markets and the spirit of speculation, i.e. the Wall Street paradigm. This shift is well illustrated in §3, §6 and §7, which summarize the opposition between the two approaches to money and interest rate, where Keynes clearly shows his preference for the framework of the first part. His crucial articles of 1937 will clearly confirm this observation. The first approach will become the heart of post-Keynesian thought while the second will constitute the frame of the Keynesian synthesis, notably through the IS-LM model. Let’s summarize the approaches and oppositions between the two parts of the GT. Endogenous Money Versus Preference for Liquidity Endogenous and supply of money and exogenous rate of interest In the first part, where Keynes develops the innovative concept of effective demand, money is a flow allowing ex-ante the financing of output and investment. Firms’ expectations of demand5 and expectations of the profitability of investments6 will determine the level of output and thus the need for financing. Therefore, the demand for money is endogenous to output and the supply of money is demand-led. Banks finance the creditworthy firms. This demand for money, as Keynes asserts in Chapter 11, is made at an exogenous interest rate determined by the monetary authority. Thus, supply and demand for money are endogenous, driven by the expectation of demand by firms. The monetary interest rate is exogenous. This interest rate controlled by the monetary authority is the short-term interest rate.

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Preference for liquidity, the exogenous supply of money and the endogenous rate of interest In the second part of the GT (Chapters 13 to 18), the liquidity preference principle develops an endogenous demand for money by adding the novel motive for speculation to the other output-related motives. Then, money supply is considered as exogenous as equal to the ex-ante stock determined by the effective demand. Monetary creation (money as flow) is related to output and not to speculation. The speculation motive introduces here a portfolio analysis between money and fixed-rate bonds based on expectations of the future interest rate. Given the stock of money, the liquidity preference applied to the distribution of household saving, that is to say the income of households not consumed, endogenously determines the interest rate. This financial market interest rate, which incorporates the state of long-term expectation from Chapter 12, is the long-term interest rate. Chapter 12: the link between the two approaches to money in the GT Chapter 12 seeks to link the two approaches. If the anticipation of output is based on the short-term expectations discussed in Chapter 5, investment, that is also part of the effective demand, depends on the long-term expectations discussed in Chapter 12. Moreover, if investment through the marginal efficiency of capital (Chapter 11) corresponds to the term enterprise (first approach), Chapter 12 shows that entrepreneurs may have an interest in buying already existing productive capital on the financial markets if this capital is cheaper than the new investment. Speculation can then be useful to entrepreneurship. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased. (JMK, GT, p. 151)

However, by developing the conventional nature of long-term expectation and showing that professional speculators are more interested in shortterm changes than in long-run profitability calculations, Keynes concludes that the dominance of finance and speculation means that long-term expectation is largely determined by short-term mass psychology: They are concerned, not with what an investment is really worth to a man who buys it ‘for keeps’, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. (JMK, GT, p. 154)

Keynes hesitates between the world that he wishes to be animated by enterprise spirit (approach 1) and the reality that seems to give more and more room to predatory speculation (approach 2).

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Endogenous money, liquidity preference and confidence ­143 If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organization of investment markets improves, the risk of the predominance of speculation does, however, increase. (JMK, GT, p. 158)

If Keynesian synthesis developed around the preference for liquidity during the ‘thirty glorious years’ (following the Second World War) by ­preferring approach 2, it did so relying mainly on an overdraft economy and not on the financial markets. The ‘financial repression’ during this period had made the monetary financing of output more stable and compatible with the enterprise spirit dear to Keynes. But the choice of neoliberalism to free the financial markets (de-specialization, deregulation, disintermediation) after 1980 and establishing banks as the keystone of this speculative approach to capitalism, brought back the old demons severely criticized by Keynes in Chapter 12. Short or long-term rate of interest? A second ambiguity of the GT is whether Keynes mainly talks about the short-term interest rate, the exogenous rate determined by the monetary authority, or the long-term endogenous rate issuing from the preference for liquidity. Marc Lavoie (2014, pp. 230–232) brings out this opposition within post-Keynesians: I think it is fair to say that horizontalist post-Keynesians have the target rate of interest of the central bank in mind when they talk of ‘the’ rate of interest. This for them is the base rate – the benchmark rate. On the other hand, structuralist post-Keynesians view the long-term rate of interest as ‘the’ rate of interest.

Keynes absolutely refuses to develop the interest rate as balancing saving and investment, since this relationship depends from his income theory. He makes the interest rate a monetary rate, the price of renouncing liquidity and thus resulting from supply and demand for money. The fluctuating element in the demand for money comes essentially from the speculation motive, i.e. from agents’ expectations about future interest rates. ‘For its value partly reflects the uncertainty of the future. Moreover, the relation between rates of interest for different terms depends on expectations’ (JMK, GT, footnote p. 145). Confidence is the keystone of this process. However, at the beginning of the GT, Keynes considers the interest rate as a highly conventional variable, fixed by the monetary authority, which can anchor expectations. Then, he speaks about the exogenous short-term rate of interest:

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The short-term rate of interest is easily controlled by the monetary authority, both because it is not difficult to produce a conviction that its policy will not greatly change in the very near future, and also because the possible loss is small compared with the running yield. (JMK, GT, p. 203)

However, if he uses it in his theory of the determination of output (shortterm expectations), he also uses it for investment, which nevertheless refers to long-term expectations. With the preference for liquidity, he developed the fixed-rate bond-money arbitrage developed from Chapter 13 of Book IV of the GT. Keynes (GT, p. 203) argues that ‘the long-term rate may be more recalcitrant’ to control by monetary policy. But it [long-term rate] may fluctuate for decades about a level which is chronically too high for full employment; particularly if it is the prevailing opinion that the rate of interest is self adjusting, so be rooted in objective grounds much stronger than convention. (JMK, GT, p. 203)

If Keynes develops a conventional theory of interest in an environment of uncertainty, he will elegantly attempt to resolve this ambiguity between short- (approach 1) and long-term (approach 2) expectation as the main element of his determination. He opposes a top-down analysis for the short-term rate to a bottom-up analysis for the long-term rate. Either the convention is directly a macroeconomic convention driven and managed by the monetary authority through monetary policy, and this convention will be fairly stable – this is the short-term exogenous interest rate of the first part of the GT, taken up by post-Keynesians – or ‘it is evident, then, that the rate of interest is a highly psychological phenomenon’ (JMK, GT, p. 202), having therefore microeconomic foundations relative to long-term expectations of speculators. But even in this case, Keynes shows that the mass psychology and the mimesis of crowds will lead to a conventional rate that can be relatively stable. This is the rate of liquidity preference and long-term expectations of speculators. Keynes (GT, p. 203) concludes: It might be more accurate, perhaps, to say that the rate of interest is a highly conventional, rather than a highly psychological, phenomenon. For its actual value is largely governed by the prevailing view as to what its value is expected to be. Any level of interest which is accepted with sufficient conviction as likely to be durable will be durable. (Emphasis by Keynes)

He optimistically concludes that the monetary authorities finally have the means to manage this convention, even in the long run, if it conquers the confidence of public opinion by means of an appropriate monetary policy,

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i.e. ‘practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded’ (JMK, GT, p. 202). The theory of credibility developed by the New Keynesians is not far off. Such comfort as we can fairly take from more encouraging reflections must be drawn from the hope that, precisely because the convention is not rooted in secure knowledge, it will not be always unduly resistant to a modest measure of persistence and consistency of purpose by the monetary authority. (JMK, GT, p. 204)

Keynes therefore opts for a top-down convention initiated and managed by the monetary authorities, showing once again his preference for his first approach with a long-term rate derived from the short-term rate of monetary policy. The necessary condition of this stability is that the spirit of speculation is not dominant. In The General Theory, Keynes warns us against an economy governed by the Wall Street paradigm. Questions to answer for a post-Keynesian synthesis These ambiguities in the monetary analysis of Keynes’s GT led to two solutions and to endless and largely sterile debates among the post-Keynesians. On the one hand, horizontalist post-Keynesians preferred the first part of the GT by developing the theory of endogenous money. The money supply is then endogenous, driven by the demand for money corresponding to the financing of effective demand. This financing is made at an exogenous ex-ante interest rate, which is the short-term rate determined by the monetary authority according to monetary policy. A mark-up is added to switch to the long-term rate. There is no room for Keynes’s theory of liquidity preference. On the other hand, structuralist post-Keynesians, but also Keynesians (with IS-LM model), take up the second approach by developing the preference for liquidity. If the demand for money remains endogenous, the money supply is considered exogenous, implemented by the monetary authority. The interest rate is then an endogenous long-term rate resulting from portfolio choices made on the financial markets. Four problems must be solved if we want to make a proposal allowing a synthesis of the two conceptions of money in the GT. The first is to make the theory of endogenous money compatible with the principle of liquidity preference, thus of reconciling the flow and stock dimensions of money. This raises the question of an endogenous money supply consistent with the principle of liquidity preference. The second is which interest rate are we talking about? It is necessary to explain the structure of interest rates, from the short-term rate determined

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by the monetary authority to the long-term rate resulting from the financial markets. The third is, as Keynes realized in 1937 with his article ‘The “ex-ante” Theory of the Rate of Interest’ (JMK, CW14, pp. 215–223), to dispose of an ex-ante interest rate available to determine the level of investment and not just the interest rate fixed ex-post by the household preference for liquidity in the allocation of saving. The fourth and last problem is that banks, which are at the heart of the financing of a monetary economy of production, seem neutral towards the theory of endogenous money because supply is accommodative and adjusts to demand. Admittedly, they solely finance creditworthy firms, but nothing is said or theorized about this solvency valuation. It is a ‘black hole’.

GENERALIZATION OF LIQUIDITY PREFERENCE TO THE BANKING SECTOR IN A PK-SFC MODEL I suggested a solution in my previous work (Le Heron, 1984, 1986, 2002) in order to make compatible the two approaches of monetary analysis in the GT and to solve these four problems. This solution will be summarized before showing how it can be integrated into a post-Keynesian stock-flow consistent model (PK-SFC) (Le Heron and Mouakil, 2008). The proposal is to generalize the principle of liquidity preference, especially to commercial banks. The liquidity preference is directly related to the state of confidence that Keynes also analyses for entrepreneurs and banks. Banks, which may be regarded as entrepreneurs in the money production process, can worsen unemployment by rationing, depending on their state of confidence, the desired financing by firms.7 Banks can also arbitrate between the various capital assets to finance firms. Bank liquidity preference clarifies the assessment of credit solvency and the arbitrage between different types of capital asset. This means that, in general, the banks hold the key position in the transition from a lower to a higher scale of activity. [. . .] The investment market can become congested through shortage of cash. It can never become congested through shortage of saving. This is the most fundamental of my conclusions within this field. (JMK, CW14, p. 222)

Even if the money supply remains ‘demand driven’, it becomes endogenous through the explicit modelling of the bank’s behaviour and the state of confidence through the lender’s risk. Banks are no longer neutral

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because they can ration the financing requested by firms. The first and fourth problems are solved. Moreover, having removed the liquidity preference applied to the distribution of household saving, which determined ex-post the interest rate, we obtain an ex-ante short-term interest rate set by the monetary authority regarding their monetary policy. However, by integrating the state of confidence and expectations of banks into the endogenous determination of the long-term interest rate, that is to say by introducing the lender’s risk in the mark-up applied to the short-term interest rate, we obtain an endogenous ex-ante long-term interest rate set by the commercial banks. The second and third problems are also solved. It follows that, if the liquidity preferences of the public (as distinct from the entrepreneurial investors) and of the banks are unchanged, an excess in the finance required by current ex-ante output (it is not necessary to write ‘investment’, since the same is true of any output which has to be planned ahead) over the finance released by current ex-post output will lead to a rise in the rate of interest; and a decrease will lead to a fall. I should not have previously overlooked this point, since it is the coping-stone of the liquidity theory of the rate of interest. (JMK, CW14, p. 220)

The liquidity preference is then considered as a general principle. The liquidity preference of banks and therefore the banking behaviour becomes crucial to the setting of interest rates and to the financing and determination of output. One would assume that ‘finance’ is wholly supplied during the interregnum by the banks; and this is the explanation of why their policy is so important in determining the pace at which new investment can proceed. [. . .] one could regard the rate of interest as being determined by the interplay of the terms on which the public desires to become more or less liquid and those on which the banking system is ready to become more or less unliquid. This is, I think, an illuminating way of expressing the liquidity preference theory of the rate of interest; but particularly so within the field of ‘finance’. (JMK, CW14, p. 219)

Modelling the liquidity preference generalized for banks in a PK-SFC model (Le Heron and Mouakil, 2008; Le Heron, 2008) makes it possible to explain banking behaviour in three directions: (1) A first set of equations makes endogenous the supply of money by commercial banks. Banks are no longer necessarily totally accommodating, so we can observe monetary rationing, i.e. a supply of money (ΔF) that is lower than the desired demand of financing from firms (ΔFd). The behaviour of banks may therefore be another

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explanation for unemployment or the outbreak of crises. If the lender’s risk of the commercial banks is zero (LR 5 0), then we find the strict horizontalist case with an offer satisfying the firms’ demand (∆F 5 ∆Fd). But, with a very high lender’s risk (LR 5 1), banks refuse all requests from firms for new financing. Monetary rationing is complete (credit crunch). A second contribution of this model is to integrate the amortization of the debt. Thus, in the case of high rationing, only the money corresponding to the previous accepted commitments continues to circulate, reducing each period by the amount of amortization of the debt. The stock of money may decrease. The lender’s risk includes, for example, leverage ratio (lev) compared with acceptable conventional leverage ratio (levc), a Tobin ratio (q) and the interest rate of monetary policy (icb) as a proxy to inflation expectations. ∆F 5 ∆Fd · (1 2 LR)(9.1)

with 0 # LR # 1

LR 5 a1 · (lev 2 levc) 2 (b1 · q21) 1 (c1 · icb)(9.2) with a1, b1, c1 constant. (2)  A second set of equations, based on Tobin’s portfolio theory, determines the financing allocation by capital asset between equities (E), fixed rate bonds (BF), commercial papers (CP) and variable rate loans (L). If, in the GT, the liquidity preference determined the expost distribution of household saving, it now determines the ex-ante choice of capital assets by the banks according to the expected returns of each capital asset. All capital assets must be integrated, explaining the structure of bank balance sheets. This arbitrage is applied to the stock of each financial asset for the total stock of financing (F). The stock dimension of money is added to the flow dimension of the monetary financing of output (ΔF). The λ coefficients must respect the constraints highlighted by Godley and Lavoie (2007). BF 5 (λ10 1 λ11 . rbfa 2 λ12 . rea 2 λ13 . il 2 λ14 . icp) . F(9.3) E 5 (λ20 2 λ21 . rbfa 1 λ22 . rea 2 λ23 . il 2 λ24 . icp) . F(9.4) L 5 (λ30 2 λ31 . rbfa 2 λ32 . rea 1 λ33 . il 2 λ34 . icp) . F(9.5) CP 5 (λ40 2 λ41 . rbfa 2 λ42 . rea 2 λ43 . il 2 λ44 . icp) . F (9.6a) CP 5 F 2 BF 2 E 2 L(9.6b) with λij constant.

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(3) A final set of equations explains the structure of interest rates. The long-term rate (il) depends on the banks’ liquidity preference and, therefore, on the state of confidence (lender’s risk) of banks. The spread between the short and the long-term rate is not constant. Thus, the curve of the interest rate structure per term is not constant, but partly endogenous, which can lead to an ‘inverted curve’, i.e. with long-term rates lower than short-term rates. il 5 icb 1 lr 1 χ(9.7) with χ constant lr 5 a2 . (lev21 1 levc) 2 b2 . q21(9.8) with a2, b2, levc constant and c 5 convention on the ‘normal’ debt ratio.

CONCLUDING REMARKS We have seen that Keynes favoured a top-down conception of confidence in money, especially through endogenous money, developed in the first part of The General Theory. The flow of money, as expectation of future real output, is thus useful to economic growth. This choice is also reflected in the interest rate convention, since the nature of this convention is holistic and not the merely result of the interaction of independent economic agents. However, Keynes shows the duality of the monetary fact with the preference for liquidity and the spirit of speculation on the financial markets that he develops in the second part of The General Theory. Money can be sought and accumulated for itself, becoming a reservoir of our desires. His normative conclusion is that capitalism is in serious danger in privileging the financial markets point of view in the choice of investments. This is the challenge of the crucial Chapter 12 of The General Theory. The development of ‘financialized capitalism’ since 1980 and the major crisis of 2007 proves that he was absolutely right. With the generalization of liquidity preference to banks, we have shown that it is possible to combine the two General Theory conceptions of money in a post-Keynesian stock-flow consistent model, but by making banks an essential element in the service of entrepreneurship within a ‘monetary economy of production’. The danger that still lurks today is that the banks are serving the spirit of speculation and the development of financial markets, undermining the ethical confidence of the people in

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money. It is up to the monetary authorities to prevent this alternative in order to regain confidence, and it goes well beyond the simple search for financial stability.

ACKNOWLEDGEMENT I would like to thank Professor Trudy Bolter for helping me with the translation.

NOTES 1. The methodical confidence is based on procedures, rules ensuring the regularity of the payment system. Hierarchical confidence is the trust that the public authority imprints on money. Ethical confidence, the most profound, insists on money as a social construct that conveys the values and norms of a community. 2. All references to the Collected Writings of John Maynard Keynes will hereafter be referred to by JMK followed by the volume and page numbers, except The General Theory by GT. 3. We find the expression ‘Quality Theory of Money’ as title of a paper by Hendershott criticizing the Quantity Theory of Money in 1969. 4. Keynes entitled his course of lectures in the Michaelmas terms of 1932 and 1933 ‘The Monetary Theory of Production’, breaking with the previous title ‘The Pure Theory of Money’ used since 1929–1930. 5. Chapter 3 The Principle of Effective Demand and Chapter 5 Expectation as Determining Output and Employment. 6. Chapter 11 The Marginal Efficiency of Capital. 7. We consider that banks finance the state without rationing.

REFERENCES Aglietta, M. (2008), Monnaie, lien social et démocratie. Report on the seminar Philosophie et Management of 3 August 2008. Accessed 3 July 2018 at http://www. philosophie-management.com/docs/2007_2008_Argent/08_03_08-_Seminaire_-_ Aglietta_-_Compte-rendu.pdf. Aglietta, M. and A. Orléan (2002), La monnaie: entre violence et confiance. Paris, Odile Jacob. Carré, E. and E. Le Heron (2006), ‘Credibility versus confidence in monetary policy’. In Wray R. and Forstater M. (eds), Money, Financial Instability and Stabilization Policy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar, Chapter 4, pp. 58–84. Friedman, M. (1969), The Optimum Quantity of Money and Other Essays. Chicago: Aldine Publishing. Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Basingstoke: Palgrave Macmillan.

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Gonnard, R. (1935), Histoire des doctrines monétaires dans ses rapports avec l’histoire des monnaies, Tome 1: de l’Antiquité au XVIIe Siècle. Paris: Sirey. Hendershott, P. (1969), ‘A quality theory of money’. Nebraska Journal of Economics and Business, 8(4), pp. 28–37. Keynes, J.M. (1933), ‘A monetary theory of production’. From Der Stand und die Nächste Zundkunft der Konjuncturforschung: Festschrift für Arthur Spiethoff, reprinted in The General Theory and After, Part I Preparation, The Collected Writings of J.M. Keynes, [1973], volume XIII. London: Macmillan St Martin’s Press, pp. 408–411. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, reprinted in The Collected Writings of J.M. Keynes, [1973], volume VII. London: Macmillan St Martin’s Press. Keynes, J.M. (1937), ‘The “ex-ante” theory of the rate of interest’. The Economic Journal, December, reprinted in The General Theory and After, Part II Defense and Development, The Collected Writings of J.M. Keynes, [1973], volume XIV. London, Macmillan St Martin’s Press, pp. 215–223. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Le Heron, E. (1984), Neutralité et contraintes monétaires. PhD, Paris I Panthéon – Sorbonne. Le Heron, E. (1986), ‘Généralisation de la préférence pour la liquidité et financement de l’investissement’. Économie et Sociétés, collection Monnaie et Production, 6(7), pp. 67–93. Le Heron, E. (2002), ‘Monnaie, financement et taux d’intérêt en analyse Keynésienne’. Les Cahiers Lillois d’Économie et de Sociologie, no. 38, November. Monnaie et Taux d’Intérêt en Analyse Keynésienne, pp. 9–12. Le Heron, E. (2008), ‘Fiscal and monetary policies in a Keynesian stock-flow consistent model’. In J. Creel and M. Sawyer (eds), Current Thinking on Fiscal Policy. Basingstoke; Palgrave-Macmillan, Chapter 8, pp. 145–175. Le Heron, E. and T. Mouakil (2008), ‘A post Keynesian stock-flow consistent model for the dynamic analysis of monetary policy shock on banking behavior’. Metroeconomica, 59(3), pp. 405–440. Schumpeter, J. (1954 [1983]), Histoire de l’analyse économique, volumes I, II and III. Paris: NRF. Smith, A. (1776 [1999]), La Richesse des Nations, Paris, 2 volumes. Paris: GF-Flammarion. Turgot, A.R. (1769), Formation et distribution des richesses. J.T. Ravix and P.M. Romani (eds). Paris: GF-Flammarion.

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10. High finance, political money and the US Congress: a quantitative assessment of the campaign to roll back Dodd–Frank Thomas Ferguson, Paul D. Jorgensen and Jie Chen INTRODUCTION For months the suspense built up. By the late Spring of 1987, the initial trickle of anxious conjectures had swollen into a raging torrent of speculation and suspicion. On 2 June 1987, the worldwide guessing game came at last to an end: the White House announced that President Reagan would nominate Alan Greenspan to replace Paul Volcker as Chair of the Federal Reserve Board. Markets reacted with shock: ‘the news stunned the financial markets, which had come to regard a third term for Mr. Volcker as highly probable. Bonds finished with one of the biggest losses on record, and the dollar tumbled’ (Hershey 1987). At the time, the official story was that Volcker had indicated in a letter that ‘he did not wish to be reappointed after eight years in the job’. Even then many doubted that was the whole truth: ‘It appeared that White House efforts to persuade Mr. Volcker to remain were minimal. It is understood that Mr. Volcker would have accepted a reappointment to the post if the President himself had urged him to do so. But no such effort was made’. In fact this gloss was an epic understatement, linked closely to a second – and far more profound – misjudgment: ‘Economists and other analysts said Mr. Greenspan, in taking a job that is sometimes described as the second most influential in the nation, was unlikely to pursue a policy markedly different from Mr. Volcker’s’.1 The truth, as a few insiders knew, was very different. At a crucial White House meeting of top Republicans convened to discuss Volcker’s fate, the hostility of Treasury Secretary James A. Baker and his Deputy, Richard 152

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Darman to the six-foot, seven-inch cigar chomping Fed Chair spilled out into the open. GOP Senate Leader Robert Dole and Senate Budget Committee Chair Pete Domenici, who came suspecting that Baker and Darman wanted to substitute Greenspan, pressed a case for reappointing Volcker. They questioned whether his experience and knowledge of international economic issues did not make him irreplaceable. Baker flatly rejected this, saying that he and Darman now knew enough to deal with the G7 issues. Eventually the discussion worked around to the reasons for Baker’s opposition. The Treasury Secretary responded by naming two issues: Volcker’s skepticism about financial deregulation and, in particular, his opposition to repeal of the Glass–Steagall Act, the New Deal measure that severed investment from commercial banking. Asked why that issue was so important, Baker’s answer was startling direct: possible repeal of Glass–Steagall was the signature issue used by investment bankers, led by Robert Rubin, then of Goldman, Sachs, to raise money from their cohorts on Wall Street for the Democratic Party. Getting rid of Glass–Steagall, Baker explained, would alter the balance of power between the two major parties by depriving the Democrats of a central revenue stream.2 Baker’s artless response is uniquely instructive for this chapter. Many Americans have long suspected that large corporations rip them off. Evidence is piling up that their suspicions are fully justified, especially in regard to finance. One careful quantitative assessment (by Epstein and Montecino 2016) published by the Roosevelt Institute conservatively suggested that, between 1990 and 2005, ‘U.S. finance has cost the American people between 13 and 23 trillion dollars [. . .] a huge sum representing between two-thirds (66%) and one and a third (133%) of a year’s aggregate income in the US (GDP)’, amounting to ‘between $30,000 and $68,000 for every man, woman and child in the US and as much as $170,000 per family’. More recently, Edward Kane has documented how ‘Too Big to Fail Banks’ treat the public as a silent equity partner, whose only function is to absorb losses and provide subsidies when things go awry, while ­reserving the upside for themselves (Kane 2017). But Baker’s comment highlights something else that is distinctive about finance: it is among the most politically active of all US industries. Consider, for example, how it measures by a very obvious yardstick: total political contributions. We know from past work that published tabulations of aggregate campaign contributions come with very large margins of error. They typically underestimate total spending and the broader category of ‘political money’. Still, numbers compiled by the Center for Responsive Politics put finance at the very top of the heap for just about every year between 1998 and 2015.3

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The industry also ranks perennially at or near the top of another major category of political spending: recorded lobbying expenditures. These numbers, derived from reports filed with the federal government by lobby­ ists, are even less reliable than campaign finance numbers. Unregistered ‘shadow lobbying’ is swelling, in part because of a change in the law and in part because in recent years former politicians angling for top jobs in future administrations seem to be trying harder to keep their noses clean by directing major lobbying efforts at one remove. But the message about political reach is the same.4 Another telltale indicator of political activity, counts of people shuttling through the famous ‘revolving door’ from Congressional staff jobs to industry lobbying slots stretch back only a decade, but, again, finance ranks high in the listings, year after year.5 We ourselves find it difficult to believe that all this political firepower plays no role in sustaining the lopsided tributary system that Epstein and Montecino, Kane, and other scholars document. Polls suggest that most Americans agree with us.6 Yet, curiously, within the academy and the major media, the notion that political money could have this kind of force – that is, durably cement control of crucial public policies in the hands of a relative handful of giant concerns at the expense of the broad population – is not only rejected, but widely scorned. Even after the tumultuous events of 2016, mainstream political science and economics continue to emphasize the determining role of voters and elections – of ‘median voters’ in the specialized language of these disciplines – in controlling the state (Ferguson, Jorgensen, and Chen 2018). Corruption happens sometimes and money becomes important in certain special cases, but in the mainstream view it does not drive the system. The astronomical sums spent on lobbying are typically waved aside as securing ‘access’ rather than real policy influence, with all questions brushed off about what the former could possibly be worth were it not linked to the latter. Perhaps even more remarkably, the tumescent campaign ­expenditures of recent elections are confidently dismissed: There is something of a scholarly consensus at least for campaign spending in congressional races. However this consensus stands in stark contrast to the popular wisdom echoed by pundits, politicians, and reform advocates that elections are essentially for sale to the highest bidder (spender). Decades of social science research consistently reveal a far more limited role for campaign spending [. . .] the best efforts at identifying the treatment effect of money in congressional races yield fairly similar substantive results: candidate spending has very modest to negligible causal effects on candidate vote shares.7

Assessments of Congress run broadly parallel. A mountain of studies purport to tease out the influence of money on roll call votes in the House

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and Senate; the mainstream literature mostly professes that money doesn’t matter there, either. An influential survey of ‘36 empirical studies of contributions and roll call votes’ concludes, for example, that ‘the weight of the evidence so far favors the view that contributions are unrelated to voting behavior’.8 The wave of negative appraisals has a bright side: it has stimulated scrutiny of what else representatives do besides voting on bills that donors might pay for. But mostly this research facilitates blithe dismissal of the whole question of money and politics. Full length studies of Congress routinely join this rush to judgment, as do the endless streams of political science textbooks portraying American political life as the working out of a radiant democratic ideal. Institutionally oriented studies of policymaking are no different. They emphasize bureaucratic politics, sheer inertia (‘path dependence’), or personalities of top decision makers, not money, with a few exceptions. A handful of studies temper this Panglossian complacency with specialized discussions of cases where the facts are sometimes so stark they cannot credibly be denied, but they are exceptions, not the rule. In the 1980s, analysts working in the tradition of Law and Economics, which developed with substantial support from interest groups favoring the deregulatory policies Greenspan incarnated, let in a breath of fresh air.9 They drew attention to the ways ‘special interests’ – often rather nebulously defined – act to thwart what virtually all of these analysts presumed to be the superior workings of the invisible hand of the market. In the 1990s, as the mighty campaign to repeal the Glass–Steagall Act that separated investment from commercial banking swept all before it, some researchers turned their attention to financial regulation. A few studies by scholars with backgrounds in economics became increasingly realistic. Some even reported that, indeed, money did appear to influence legislators with a few even suggesting that Congress might organize itself to facilitate such dealings. These ‘Chicago School’ analyses of ‘rent seeking’ are often empirically compelling and of great interest, particularly those by Krozner and Stratmann.10 There is no question they enriched economics and ­political studies. As the new century dawned, some papers made another major advance by directly linking political contributions and lobbies with the earlier, often rather formless, literature that examined legislator’s control of bureaucratic agencies. The result was that some of the pathways banks and other concerns used to control key regulatory agencies became clearer.11 Suggestions of a deep relation between political money and party politics of the type Baker’s comments imply are not really to be found in these studies, however. The issue is not principally that his remarks imply that one of globalization’s most basic ingredients – financial deregulation

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– acquired much of its momentum in the US from explicit calculations of partisan advantage: that might be inferred from the affluently funded Republican campaign to seize control of the Congress in 1994 superintended by the redoubtable trio of Newt Gingrich, Phil Gramm, and Haley Barbour – though as Brooksley Born notoriously discovered, the Clinton administration was anything but hostile to financial deregulation and provided decisive support for virtually all the later measures that paved the way to the 2008 disaster.12 The flashbulb revelation is that that campaign’s most iconic measure – repeal of Glass–Steagall – was an integral part of an effort to alter the partisan balance of the political system as a whole. The idea that party politics and individual industries are this deeply entwined is foreign to the Law and Economics approach. That focuses on individual markets for particular outcomes in the context of formal political structures that are largely taken as given, not constrained by the kinds of broad social and economic forces and coalition building that figure in studies of partisan political realignments and similar macro-political shifts.13 Though in some papers voters almost drop out of the picture, in fact the underlying model, at least implicitly, is always a variant of ‘public choice’ appealing ultimately to the median voter. For a long time, indeed, this tradition has fellow travelled with political science writings that mostly write off the influence of political money, however inconsistently. In the Chicago tradition, deregulation also hovers in the background both as a normative ideal and a policy aspiration. If special interests promote that goal, the implicit assumption is that the rest of us should be grateful for the happy coincidence of private and public interest and celebrate the resulting renewal of democracy and free markets that deregulation brings. The notion that deregulation was really a scheme that might advance very narrow interests made but a fleeting appearance in this literature, as the sweeping campaign to abolish Glass–Steagall reached a climax in the Gramm–Leach–Bliley Act of 1999. The idea that the whole process was really an integral part of a gigantic political-economic doom loop never surfaced even as lobbying and political contributions spiraled up and up in the new century. Save for a thin stream of work that always highlighted the links between political parties, money, and industrial outcomes, the beginnings of a reappraisal had to wait for the collapse of the world financial system in the fall of 2008. As they and the world struggled to dig out of the wreckage, a handful of economists took more critical looks at how political money and lobbying set the stage for the catastrophe. Nearly all these studies focused on the United States. Igan and Mishra studied how Congressional representatives changed their minds about deregulation between 1999 and 2006 as political contributions poured in and lobbying intensified (Igan

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and Mishra 2014). Igan, Mishra, and Tressel (2014) also showed that the financial firms that lobbied the most did the worst in the crisis. Mian, Sufi, and Trebbi (2013) compared how contributions from financial firms and constituency interests influenced Congressional votes on key legislation as the financial system collapsed in 2008. Their argument was polyvalent: they claimed that constituency interests – the demand for mortgage relief in districts with high percentages of defaulting ­homeowners – inspired Congressional support of the Foreclosure Prevention Act of July 2008, while, they asserted, financial sector contributions propelled the vote in favor of the famous TARP bank bailout program. Another paper highlighted political money: It showed that after 2002 the mortgage finance industry mounted a concerted effort to target political contributions to legislative districts with high rates of subprime borrowers, leading them to underscore once again ‘the important role of both constituent and special interests in housing and housing finance public policy during the subprime mortgage credit expansion from 2002 to 2007’ (Mian, Sufi, and Trebbi 2013). These latest studies, we think, mark a real advance over earlier work. The care and imagination that have gone into them is obvious. Though they deal only with finance, they greatly advance our understanding of how political money protects the ‘Overcharges’ documented by our colleagues. We hope, though we have doubts, that champions of the traditional approach to money and politics will take some of their lessons to heart. But these works scarcely exhaust the subject of Congress and money. All these papers mis-measure political contributions fairly severely – in some cases by almost 50 percent. Other claims they advance are also implausible or plainly wrong. A paper by Tahoun and van Lent, for example, shows that the personal finances of Congressional representatives and their spouses played a significant role in the 2008 vote to bailout the banks. Congressional families that preyed together stayed together: representatives who themselves or with their spouses were heavily down in the market were much more likely to support the bailout, even controlling for campaign contributions. In a finding that raises fundamental questions about the real dynamics of Congress and regulated industries, they also show that banks in which powerful members of the banking committees held stock received proportionally bigger allocations of TARP funds than other banks and got the funds on average more than a month and a half earlier and on better terms (Tahoun and van Lent 2016). This is truly Gilded Age politics. Many of the latest literature’s weaknesses arise from the fact that, save for Tahoun and van Lent, the authors have not really shaken off the influence of the older median voter approach to analyzing elections. Nor do

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they take sufficient account of how big money has reshaped the organization of Congress itself in the period they analyze. In particular, Mian, Sufi, and Trebbi mix elements of the Neoclassical Law and Economics tradition with some of the weakest aspects of the mainstream Congress literature. They misunderstand how financial interests work through party leaders and misinterpret the role of constituency interests in the legislative battles over mortgage relief. The measure they hail as a triumph of constituency interests was in fact the first in a long line of successful battles waged by financial interests to block mortgage relief for ordinary Americans. They also slide past some important questions about what ‘constituency’ interests actually are. Separately and together, Marc Lavoie and Mario Seccareccia have written extensively on finance and banking systems. With Republicans and many Democrats once again championing banking deregulation, we think it is appropriate to honor their scholarly research by a closer look at how the financial sector actually operates on the American government. Using the banks’ long campaign to weaken the Dodd–Frank financial reform bill in Congress as a case study, this paper takes up the problem that has most resisted analysis: the question of how money influences Congressional voting. Of course we accept the traditional caution that Congress is not the only arena that is crucial for policymaking. Obviously Presidents and bureaucracies also wield political power, while court decisions also count heavily. But a full assessment of how all of these combined to forward the deregulation of finance would be a task well beyond the scope of a single paper. But along with claims about the irrelevance of campaign finance to the outcome of elections, roll call voting in Congress has traditionally been the pons asinorum of American politics, buttressing claims that money doesn’t really matter. Sustaining an argument that money is telling in the hard case of floor votes would put the entire discussion on a different ­footing – rather like the recent demonstration, which this paper, too, exploits, that Congressional election outcomes are in fact closely related to election spending (Ferguson, Jorgensen, and Chen 2016). Carrying the argument on floor votes would complement that finding and show that claims that industry money does not matter are as hollow as Fourth of July speeches. Our discussion begins with a critical review of existing work on Congress, money, and the political economy of deregulation. We try to pinpoint the most common misunderstandings that cloud mainstream discussions. In our view, the key issues do not turn on questions of theory, or only theory: most are quite baldly empirical, although nuances vary depending on the specific industries under discussion. Because just about everyone has some idea of what banks, insurance companies, and mutual

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funds are – if hardly shadow banks, hedge funds, or private equity, nor the complex relations between them and various regulatory authorities – there is a floor below which studies of finance cannot sink in at least identifying the major players. But complications of industrial structures are not what principally lead most studies of money and politics hopelessly astray. The literature’s main problem is a failure to take sufficient account of the complexities of political money. This complexity occurs at two levels. Political money has a dizzyingly protean character, which most studies slide past. Campaign contributions and lobbying are not necessarily decisive. Only recently, for example, have analysts realized that banks can not only provide campaign contributions to members of Congress, but can make them direct personal loans at concessionary rates (Tahoun and Vasvari 2016). These show in no campaign finance tabulation. Neither do other aspects of the personal finances of Congressional representatives that receive even less attention, such as the role their own portfolios play in their voting decisions (Tahoun and van Lent 2016). The larger research problem, however, is as mundane as it is debilitating and derives from the byzantine ways political money is reported by the Federal Election Commission and the Internal Revenue Service (which chronicles so-called ‘527’ funding of often towering sums). Most of the apparent empirical support for claims that money doesn’t matter arise from omissions here. Much of the literature suffers from a fatal problem of measurement, which usually afflicts even papers that do find that money matters. The plain fact is, as we will show, that standard research practices in the field fail to notice enormous amounts of money hidden in plain sight in existing data sources. After sorting out these issues, we sketch a broad brush picture of how finance uses the political system and, especially, the party system, to its advantage. We begin by documenting how, as national party competition evolved into a struggle in which national party leaders focus on amassing gigantic sums of money to compete across the country, affluent segments of the industry became major players in the industrial coalitions that define each party. As a consequence, conflicts over finance frequently assume sharply partisan forms. Each party develops a strong ‘elective affinity’ with major segments of each industry (in the famous phrase that Max Weber lifted from Goethe to describe ideology), just like the now quite superseded split between investment and commercial banks that Baker decried. These alignments normally show in Congressional voting patterns on major legislation affecting these sectors. Many are near perfect party line votes. This ‘sedimentation’ of parties and industry segments poses an obvious

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empirical challenge: is it possible to tie variations in overall political money directly to changes in the partisan balance of Congress? Standard analysis in both economics and political science mocks the very idea as hopeless. Building on earlier published work, however, we have shown that is not true: party balances within both the House and the Senate in elections since 1980 closely follow the proportionate breakdown of overall money in the races (Ferguson, Jorgensen, and Chen 2016). This ‘linear model’ of Congressional elections explains the most fundamental feature of the Congressional landscape, the partisan breakdown of both chambers, and puts us in precisely the space Baker’s comment outlined: the macro-flows of money that are critical to the functioning of the party system itself. Once one acknowledges this pecuniary influence on the partisan balance, the obvious next question becomes how these alignments translate into individual pieces of legislation. Our approach is a straightforward extension of our general investment approach: given the centrality of partisan conflicts to legislative outcomes in recent decades, when Congress stalemates, explaining legislation involves accounting for how enough votes break off from their usual (partisan) alignments to pass legislation. This is one place where political money really shows up as important, in our view. Not surprisingly, a close look at papers finding that money matters discloses many that test whether enough money can move legislators off earlier stances, with broader alignments taken as a given. Our own tests in this paper focus on the battles over financial reform in the wake of the 2008 financial collapse. The scale of the disaster that engulfed both the world and the American financial system in 2008 was so overwhelming that efforts to fix the financial system had to tackle far more issues than major bills in Congress normally would. The result was the now famous Dodd–Frank reform bill, an unusually broad ‘omnibus’ measure containing a swath of relatively mild reforms that passed narrowly along near perfect party lines when the Democrats controlled both houses of Congress. Mild or not, the bill aroused the ire of virtually the whole financial sector, from the big banks and Wall Street to pay day lenders, less a handful of investors (nearly all in hedge funds, not banks) who feared the potentially apocalyptic consequences of another financial collapse. We use the industry’s long campaign to weaken, slow down, or repeal Dodd–Frank as a kind of natural experiment for making our own empirical case for the importance of political money. Throughout this drive, Republican unity on proposals to water the legislation down or eliminate the bill has been virtually iron-clad. But once the GOP won control of the House in the fateful 2010 election, its ability to move legislation has often depended on convincing some Democrats to break ranks. The US Senate, by contrast, is a small chamber, where limited numbers make reliable

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statistical analysis problematic from the start. In addition, the Democrats have maintained a strong position there since Dodd–Frank passed, even after they lost control of the chamber in 2014. Because of the way the Senate functions, the history of efforts to modify Dodd–Frank there is thus basically one long stalemate. We therefore focus on the much larger House to build our case. From 2010 forward, the Republicans repeatedly brought forward measures to alter the law. Some of these never got out of committee. But others did and reached the floor. Some actually passed the House, with the help of breakaway Democrats, though most were stopped in the Senate and never became law, with the conspicuous exception of what became known as the ‘Swaps Pushout’ amendment that decisively altered basic provisions of Dodd–Frank applying to derivatives. Passage of that measure attracted national attention, as Massachusetts Senator Elizabeth Warren made a close to unprecedented appearance on the House floor and J.P. Morgan Chase Chair Jamie Dimon personally telephoned representatives to urge passage. Like several papers which have found money to be a factor in Congressional voting, we tackle the question of whether money can explain the Democratic defections by using a statistical design that eliminates many of the most common objections to inferences about money’s influence on floor votes. This same stratagem allows us to bypass problems in taking account of hard-to-test-for influences that might otherwise complicate assessments, such as the influence of think tanks and cultural factors that we cannot reasonably estimate specific monetary values for or apportion to specific congressional districts. The core idea is to build a panel of legislators who took multiple votes on watering down the Dodd–Frank legislation over time. (The technical details of our models are all in the Appendix to this chapter; and our exposition makes clear what these terms mean, we hope, to readers without a background in econometrics or statistics.) By focusing on Democrats who initially voted for the legislation and then changed their minds, it is possible to turn these legislators – whose districts basically don’t change in a short period of time, either – into their own statistical controls.14 They are the same people, with the same basic ideology, the same cultural and think tank influences, etc., that previously voted to support the legislation. We combine this ‘fixed effects’ design with very careful measurements of time-varying factors, such as political money, while also considering other variables normally neglected – such as personal loans to representatives from financial houses – to resolve doubts about whether money or something else changed the solons’ behavior. Our results show that financial sector money played a substantial role

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in weakening Dodd–Frank among once friendly Democrats. A more conventional mixed logistic panel regression on both Republicans and Democrats buttresses this conclusion.

MONEY IN POLITICS: THE NEED FOR A FULL SPECTRUM ANALYSIS So let us proceed straight to what conventional discussions of money and politics miss about political money. These omissions, we have already suggested, occur at two different levels. The first involves the foreshortened view of the subject that most discussions stick with. Political money strikingly resembles the electromagnetic spectrum – the portions that you see represent but a fraction of the whole phenomenon (Ferguson 2014). In the case of finance, parts of the spectrum that do not normally register with most observers represent major flows of resources. Consider Figure 10.1, for example. Let us read from left to right, starting with the first panel. Business from banks is the bread and butter of many law firms; historically a large proportion of the best known law firms have had major banks as principal clients. Political contributions from members of these firms mostly track the interests of their clients, because protection of their clients implies protection of themselves. In addition, as Stigler noted long ago, lawyers have a huge advantage over most professionals in that they can be legally and easily paid for services that would raise eyebrows if invoiced by anyone else – a point impressed on one of us when 1. 2. Payments to Payments to Lawyers for Political Services Figures (After Many Stigler hundreds of 1975, see millions of text.) dollars Substantial, includes but certain unknown directors fees, speaking fees, book contracts; some ‘research’ and philanthropic ‘advice’ from consultants

3. Foundations and Charitable Grants Many not political; some that do go through think tanks $296 billion in total giving in 2006; perhaps 3 to 5% might count as broadly political

4. Lobbying Legal definition is very narrow. 2010 on the record totals approx. $3.5 billion. $ refers to Washington, DC. Lobbying in states and cities also large

5. Think Tanks Rapid growth especially since 1970s in 2005 major DC based think tanks spent approx. $411 million. Many more now outside Washington, DC not included in estimate

6. Formal Campaign Spending Total expenditures on federal campaigns only $5.2 billion in 2008; state and local spending heavy, too

7. Value of Stock Tips, IPOs To Political Figures ‘Event Analysis’ studies suggest very large in certain periods, see text

8. Public Relations Spending Some certainly affects politics

Figure 10.1  The spectrum of political money

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the House Speaker of the state legislature represented the bank providing his family’s mortgage at the closing on a home.15 The first of these means that significant sums do not appear in inventories of campaign contributions as coming from finance, while the second form of payment would not normally be recognized as ‘political’ money at all. It is remuneration for a perfectly legal service that the bank happens to bestow on the Speaker of the House or whomever. The position of banks and other industries with respect to these prerogatives is not symmetrical: banks likely enjoy a unique position, because of the volume of legal business they have to offer. The result is not only that total contributions from the financial community are mismeasured but that designated hitters flood the landscape even as few can recognize which teams they play for.16 The next spectrum entry is for certain of enormous importance, but not easily quantified. It affects not only how firms deal with the Executive branch of government, but the myriad other institutions in which their emissaries are housed as they move back and forth between public and private spheres (including the mass media, which essentially never requires interviewees to disclose business ties). Some cases would be funny were the consequences not so weighty: before taking a top slot in Obama’s White House, one aide collected almost $900,000 in payments from Goldman Sachs for advice on ‘philanthropy’, for example (Cassidy 2011). News stories also reveal that some top private sector executives have clauses in their contracts awarding them substantial bonuses if they leave for ‘public service’, such as the contract former Treasury Secretary Lew had with Citigroup (Ferguson, Jorgensen, and Chen 2016). In recent decades, essentially all senior staff in the White House appear to enjoy ties of this sort, with finance in some form probably the most common source, reflecting its privileged position in the economy as globalization and financial deregulation drove up its share of total US business profits. Banks and other financial firms (either directly or through foundations they control) also make substantial charitable grants. These have rarely attracted attention, though a giant grant from J.P. Morgan Chase to a New York City Police Foundation at the height of Occupy Wall Street raised eyebrows.17 What is on the record is not reassuring: a substantial proportion of America’s largest firms make grants to spouses of Congressional representatives or related political networks in districts where the firms have obvious interests. Again, the total amounts are unknown, but the most detailed studies indicate very substantial numbers.18 Lobbying has already been mentioned. The huge scale of these expenditures attracts intermittent comment, but, again, reported numbers seriously underestimate the true size of spending. The principal problem is that the technical definition of lobbying is much narrower than common

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usage; many contacts with Executive branch personnel, the White House, and other parts of the government escape the narrow legal definition, while many organizations that any reasonable person would count as lobbying never register (Ferguson 1992). A second giant omission arises from so-called ‘shadow lobbying’ by former Congressional leaders. These retire to Washington law firms, do not register as lobbyists, but then bring in huge fees, sometimes while directing former associates who do register. Research by Mirko Draca supported by the Institute for New Economic Thinking demonstrates that such arrangements have become very significant.19 The next category, think tanks, has clearly figured importantly in advancing the political agenda of big finance. The scale of the spending over the last generation is enormous, but, as usual, defies a single summary statistic. Essentially not one, but whole wolf packs of think tanks of varying stripes promoted every major step of deregulation, from the earliest measures under Jimmy Carter to the successful efforts to permit higher leverage ratios of investment houses even as the clock on the hour of doom approached midnight. Heritage, the American Enterprise Institute, Cato, and the Brookings Institution all joined in the cheerleading. So did many smaller organizations at both the national and the state level (which was often important, since state blue sky laws and other obstacles to the untrammeled promotion of mortgages and other forms of bonds had to be revised).20 Finance also enjoyed a peculiar advantage of ‘creative federalism’ as a long campaign by right wing foundations, businesses, and billionaires pushed first the bourgeoning field of finance and then economics generally to embrace models of the economy that favored deregulation; indeed, to make such models almost the only thinkable thoughts in many departments and schools. This elaborately funded process, which forged ahead all over the United States, in turn, set off deeper institutional changes in the way journals are ranked and faculty evaluated. Putting a price tag on such efforts is difficult; the Institute for New Economic Thinking has several studies in process. But there is no question that the total spending was astronomical, especially when one considers investments across the United States in business schools and departments of finance and economics. Financial deregulation also became part of the message of virtually all major and many minor think tanks at both the federal level and many states, in the latter through vehicles such as the famous ALEC – American Legislative Exchange Council.21 It should be unnecessary to note that these efforts spilled dramatically over into the major media, which right up to moment world finance collapsed swallowed nostrums about ‘reputation’ as a substitute for regulation, ‘rational expectations’, the omnipotence of

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monetary policy and uselessness of fiscal policy, and the advent of a new era of a ‘great moderation’. The next spectrum category, formal political spending, is sufficiently complicated to require a section in its own right. We, accordingly, skip past it now to finish surveying the other categories of the spectrum. The research indicating that both Senators and House representatives benefit from stock tips and other forms of inside information is suggestive with respect to both sectors.22 In the long stock market super cycle leading up to the 2008 crash, stocks in finance often did extraordinarily well. One can conjecture that tips involving financial firms were likely common, but without going through the mountains of evidence that Congress for a long time made very difficult to access, it is impossible to say for sure. The task is comparable to trying to sort out how much general spending on public relations – a truly giant industry – rubs off on political figures, causes, and aims. All one can say is that because many financial firms advertise extensively, the sums involved in both types of spending are likely very large. Some facts are clear: there is no question, for example, that top Congressional leaders were heavily involved in lucrative Initial Public Offerings by Wall Street firms, with some cut into literally dozens of deals. These are essentially revivals of the legendary ‘Morgan preferred’ lists brought to light by the famous Pecora Committee of the early New Deal.23 All these forms of political money are weighty omissions, but they pale in significance by comparison with the literature’s maladroit treatment of formal campaign contributions. At its starkest, the problem is this: from the earliest days of the Federal Election Commission, exceptions, additions, and loopholes around rules governing legal contributions and expenditures have proliferated. Congress has many times enacted rules that appeared to close off gushing torrents of money while in fact opening new ones. After more than a generation, the result is worthy of Gogol: a maze of bureaucratic spending and expenditure categories that failed to put many effective limits on total money long before the famous Citizens United allegedly opened the floodgates. These classifications evolved – ‘soft money’ rose and fell, while spending from 527s rose and rose, years before anyone had ever heard of Super Pacs. Many loopholes exploited, as the Supreme Court did in Citizens United, the obvious fiction that contributions that did not stream directly into candidates’ own political campaign committee were somehow on a higher plane than other forms of money and would not be appreciated by candidates in the same way as direct gifts into their own campaign coffers. Indeed, some analysts straight-facedly claim that such contributions should not really be accounted ‘political’ contributions at all and thus are free of any taint of corruption. All of these representations are silly; the ‘independent’ contributions ebb

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and flow over the course of campaign cycles like other forms of political money and the FEC and court decisions have so eviscerated the meaning of ‘independence’ that the term is now little more than a joke. Candidates can, under some circumstances, remain in the room while personnel known to be close to the candidate make pitches to donors. In our own work, we have always taken the approach that a contributed dollar is a dollar, and summed all relevant categories of money. But virtually no other researchers consistently proceed this way. Different agencies have responsibilities for recording these streams of money. The FEC reports most, but the IRS, as mentioned, tabulates contributions to 527 organizations, which have long had the right to spend as much money as they like, though for a while their expenditures were slightly hedged in by nearly meaningless prohibitions that turned into stale jokes, such as ‘magic words’ that supposedly signaled endorsement of the candidates they were trying to boost. The IRS and FEC reporting systems are also completely different and incompatible, so that combining them in one file requires arduous recoding and transformations. But the greatest hurdle of all is perhaps the mish mash of non-standard names of both individuals and firms jumbled all together in these databases. Partly for understandable reasons, neither agency makes any serious effort to standardize names or addresses of people on their rosters. For less comprehensible reasons, though both agencies routinely accept seriously incomplete reports and obviously inaccurate or misleading entries. For example, they let many business executives who are still active on the boards of large firms get away with claiming to be ‘retired’ [. . .] Perhaps the greatest data stumbling block, though, is the complexity of the contribution rosters. Investors who make multiple contributions rarely use exactly the same form of their name. Many maintain several different offices and residences in different parts of the country. When reporting contributions, they list first one and then the other in no consistent fashion. ‘Mr.’ and ‘Mrs.’ and ‘Senior’ and ‘Jr.’ also flit back and forth like the Cheshire cat. Hyphenated names can place people in entirely different parts of the alphabet, depending on whether they use the hyphen or not. And so on. The toxic combination of wild diversity and incompleteness also characterizes the reported names of corporations, regardless of whether they are referenced merely to indicate the affiliations of individual contributors or record direct expenditures out of their treasuries to Super PACs, 527s, and similar vehicles. Large concerns, especially big banks, have vast numbers of subsidiaries and subunits; often those names, rather than the parent’s, are reported (Ferguson, Jorgensen, and Chen 2013)

The chaotic reports make summing all the files and sorting through all the variant names and companies hugely labor intensive. The inevitable consequence is that nearly all researchers take short cuts. In many cases these short cuts lead to disastrous omissions and hopeless underestimates. Probably most academic studies that purport to assess the influence of

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money, for example, rely on a single narrow category of total spending that the FEC has for years made relatively easy to obtain: contributions from political action committees (PACs). PACs, however, typically represent less than half of all contributions to congressional campaigns. For example, in 2008, PAC contributions to House candidates were only 29 percent of all money spent in House races, and PAC contributions only swell to 35 percent of all money if outside spending is not included (these percentages include PAC giving to all federal committees organized by the politician). In presidential campaigns PACS amount to far, far less – indeed the total is so derisive that many presidential candidates, particularly Democrats, make the grandly meaningless gesture of announcing that they will not accept contributions from them. They can do this with complete confidence that individual contributions and outside spending will safely tide them over. 527 and Super Pacs also represent enormous piles of mostly separate money. Some PACs occasionally donate to 527s, which spend lavishly, but the number is minuscule: we estimate that only 1.7 percent of all 527 donations from 2001 to the end of 2015 come from PACs, with the rest originating from individuals, businesses, or unions.

ANALYZING MONEY-DRIVEN SYSTEMS OF PARTY COMPETITION By far the most important point revealed by more accurate tabulations over time of total election money is the critical role aggregate spending plays in Congressional candidate success. We have seen how conventional assessments denigrate the importance of money in elections. The point is constantly reinforced during elections by press articles trumpeting one or another race in which a heavily financed candidate flops embarrassingly. But, in fact, this phenomenon is far less common than usually imagined. Presidential elections are essentially one offs and heavily influenced by outside media coverage, but if one looks at Senate and House elections, where there are many more cases, the pattern that emerges is precisely the reverse: in major party elections, the proportional division of campaign finances predicts the final vote between the major party candidates extremely well. Figures 10.2, 10.3 and 10.4 are taken from an earlier paper of ours; they plot proportional spending and the vote shares of the major parties. Figure 10.2 shows the pattern in the 2012 House elections. Figures 10.3 and 10.4 display the entire pattern of elections for both House and Senate since 1980 (OLS R sq; see Ferguson, Jorgensen, and Chen, 2016, 2020). The straight line character of the association is obvious, though two

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Bayesian spatial latent instrumental variable regression: Pseudo-R squared = 0.864; OLS Rsq = 0.841 See discussion and tables in Ferguson, Jorgensen, and Chen (2016, 2020)

Figure 10.2  C  ampaign expenditures and vote shares are strongly associated generations of scholars somehow failed to notice it (Ferguson, Jorgensen, and Chen 2016). We believe that these findings are important in their own right: skeptics must now admit that the ‘optics’ of money in politics no longer work in their favor. A generation and a half of straight lines stretch credulity rather far. But doubters still have one avenue open: they can object that this uncanny coincidence occurs year after year thanks to shifts in public opinion mostly imperceptible to the general public though known to contributors by one means or another (such as unpublished polls): that is, another unmeasured variable, candidate popularity, really drives the money. We happily concede that ‘reciprocal causation’ between money and prospective votes happens, but a detailed investigation shows that the effect of money is direct and powerful in its own right. One problem with the retort is that no actual institutional mechanism for coordinating money and politics likely works with the unearthly regularity our linear model

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Figure 10.3  Campaign expenditures and vote shares. House elections, 1980–2014

Source:  Ferguson, Jorgensen, and Chen (2016).

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suggests. More important, however, are two more basic considerations: in some cases one can rule out the possibility that polls drove money that, after it did flood in, produced unforeseen surges of the dimensions our model predicts. No less importantly, state of the art techniques for estimating unobserved variables do not produce results consistent with strong claims for popularity. They produce, in fact, the reverse: it appears that the millions of Americans who think they live in a money-driven political system are right (Ferguson, Jorgensen, and Chen 2016; Jorgensen, Jones, and Song 2018). Acknowledging the importance of aggregate money flows to the partisan split in Congress transports us right into the world implied by Baker’s comments. It is also a crucial step in explaining how finance and, likely, a handful of other outsized interests, cement themselves into the foundations of a political system that is formally controlled by voters. This is a chapter, so space does not permit detailed discussions of the evolution of US party systems. All we can do here is to outline an ‘investment approach’ to understanding party competition that provides the foundation for the empirical tests in this essay. In a system such as the US, where the costs of information and political action for most voters are relatively high, political parties are, first of all, bank accounts. This means that power passes by default to blocs of investors who provide the finance that the system runs on. Appeals that cannot be financed cannot reach voters, no matter how many of them might be attracted. This is the fatal defect in the median voter approach (Ferguson 1995). From the early 1970s on, globalization weakened labor and greatly advantaged business, but especially internationally oriented business that could easily move factories, techniques, and people. Since then, impatience with the old political formulas of the New Deal that constrained American businesses – the social welfare state, activist fiscal policies for full employment, state protection of labor organizations, progressive taxation, etc. – has driven increasing numbers of major investors and business firms into ever more active forms of opposition. Like a giant storm front spawning new tornadoes as it sweeps onward, the tempest blows first of all through the Republican Party, generating ever more radical demands from various blocs of businesses. The Democrats have been torn between their mass base and the pull of big money, resisting the long drift to the right, but pulled along and at times seeking to run ahead of it.24 These straightforward claims are easy to test and they have been. Through the 1990s, empirical analysis of the Democratic money always revealed a handful of industries over-represented: exactly as Baker recognized, investment bankers seeking to preserve Glass–Steagall were front

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and center. Other industries included major parts of telecommunications, energy, and defense. These alignments were about principal, not principles, but a common thread that ran through most was an emphasis on tempering of laissez-faire with the use of the state as a catalyst, along with the expansion of free trade – a principle shared by many but not all Republicans, depending on the era (Ferguson 1995). In the 1970s, the seniority system in Congress collapsed. This is usually ascribed to Liberal Democratic dislike of Southern dominance, but in fact pressure for more campaign funds also provided important impetus (Wright 2000). Senators and House members seeking to advance within the chambers responded by embracing what was sometimes referred to as the ‘California’ system. Representatives seeking support from their colleagues for committee chairs and other leadership positions spread political contributions around. This led to a rapid proliferation of new institutional devices for getting and spending political money, including the explosive diffusion of so-called ‘Leadership Pacs’. Newt Gingrich, Tom Delay, and other Republican leaders then moved to centralize as much of the money as possible, keeping computer tabulations on how much individual representatives who sought plum committee assignments contributed to national congressional committees controlled by the leadership. The Democrats copied this system, actually moving, at times, to a formal posted price system for committee and party assignments (Ferguson 2014). Over time, the changes in Congress and the broader economy led to a nationalization of party competition, in which top political leaders worked with blocs of investors, and their allies in the press to standardize appeals, buzzwords, and much else, as they sought to enlist more and more investors. Party ‘ideology’ in this sense reflected appeals the investors and political leaders confected to enhance the mass appeal of these moneydriven aggregates; it only very imperfectly represented any demand from the base (Ferguson 2014). In this increasingly top down political system, the keys to power were money and media, so that major segments of giant sectors such as finance, telecoms, or energy, inevitably emerged virtually as ‘vested’ interests in their party factions by dint of the enormous streams of steady cash they could provide. Quantitative analyses of these blocs suggest a striking persistence of many alignments down through the years.. Obviously, finance changed fundamentally with deregulation. In a short account, the partisan consequences of the development can be summed up as follows. With Volcker out of the way and Greenspan playing a key role, pressure to deregulate grew exponentially, as economists, finance scholars, think tanks, the media and endless streams of financiers grew ever more enthusiastic.

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High finance, political money and the US Congress ­173 [B]eginning in 1987, the Federal Reserve accommodated a series of requests from the banks to undertake activities forbidden under Glass–Steagall and its modifications. The new rules permitted nonbank subsidiaries of bank holding companies to engage in ‘bank-ineligible’ activities, including selling or holding certain kinds of securities that were not permissible for national banks to invest in or underwrite. At first, the Fed strictly limited these bank-ineligible securities activities to no more than 5% of the assets or revenue of any subsidiary. Over time, however, the Fed relaxed these restrictions. By 1997, bank-ineligible securities could represent up to 25% of assets or revenues of a securities subsidiary, and the Fed also weakened or eliminated other firewalls between traditional banking subsidiaries and the new securities subsidiaries of bank holding companies. Meanwhile, the OCC [Office of the Comptroller of the Currency], the regulator of banks with national charters, was expanding the permissible activities of national banks to include those that were ‘functionally equivalent to, or a logical outgrowth of a recognized bank power’. (Commission 2011)

The Comptroller, it should be noted, is appointed by the President. Both George H. W. Bush and Bill Clinton chose men who strongly favored deregulation, as had every president since at least John F. Kennedy. Initially, these moves to deregulate finance continued to draw sharp opposition from investment houses. Over time, their opposition tailed off and the tides of money shifted. With Robert Rubin often chairing national Democratic Party fundraising efforts, especially in presidential election years, academic work that mostly focused on political action committee donations missed most of the action. Eventually, however, reality began to assert itself. In a paper that stood out for its common sense, Stratmann studied representatives who had earlier voted against legislation repealing Glass–Steagall. Limiting the comparison clarified matters: even though Stratmann relied on PAC donations alone as his measure of money, he succeeded in showing that money was changing minds (Stratmann 2002). Krozner and Stratmann (1998) also proposed and tested a suggestive model that argued that Congress organizes itself to facilitate deals between industry groups and representatives. They proposed that reputations for reliability would be advantageous for representatives appealing to interest groups for funds and thus that longer-serving representatives would tend to specialize in one or the other side of warring industrial blocs, and they produced data that supported this. This was a reputational model that implied radically different conclusions from the bromides about reputation substituting for regulation championed by Alan Greenspan. By the mid-1990s, the Siren’s song of deregulation began to captivate even the investment banks and insurers. As markets boomed at home and overseas, and privatization caught fire around the world, investment houses turned into gold mines. Operating in a global environment brought in big foreign competitors in major markets, while the scale of operations

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went generally up. With many famous Wall Street partnerships turning themselves into public companies, financial supermarkets began to look attractive even to investment bankers. In 1996, the Securities Industries Association changed position on Glass–Steagall. With visions of sugarplums dancing in everyone’s heads, the different parts of the industry began looking to make a deal. The head of the American Bankers Association summarized what happened next: Because we had knocked so many holes in the walls separating commercial and investment banking and insurance, we were able to aggressively enter their ­businesses—in some cases more aggressively than they could enter ours. So first the securities industry, then the insurance companies, and finally the agents came over and said let’s negotiate a deal and let’s work together. (Commission 2011)

The final act in this drama became a legend in the adroit use of political money. Citigroup sought Federal Reserve approval to buy Travelers, a huge insurance company. The Fed approved, citing a loophole, but set conditions that would force major divestments if the law were not changed within five years. With President Clinton publicly asserting that Glass–Steagall was obsolete, major bankers, led by Citigroup co-chairs Sanford Weill and John Reed, began mass assaults on Congress in favor of repeal, while banks and other financial institutions spent almost $400 million on political contributions and lobbying in just a year. At a critical moment when it looked like the deal might still come apart, Robert Rubin, who had recently left as Secretary of the Treasury, jumped back into the negotiations. Rubin was at the time negotiating the terms of his next job as an executive without portfolio at Citigroup. But this was not public knowledge at the time. Deploying the credibility built up as part of what the media had labeled ‘The Committee to Save the World’ (Rubin, Fed Chair Alan Greenspan and thenDeputy Treasury Secretary Lawrence Summers, so named for their interventions in addressing the Asian financial crisis in 1997), Rubin helped broker the final deal. (Weissman 2009)

Repeal of Glass–Steagall led to further orgies of deregulation. Investment houses pushed to lift older limits on leverage, which involved putting pressure on the Securities and Exchange Commission, in part through Congress (Ferguson and Johnson 2009a). More broadly, financial institutions and real estate interests seeking to expand mortgage lending mounted extensive campaigns to loosen restrictions on mortgages even further. Igan and Mishra show how this worked. They developed an innovative database of lobbying by firms in finance and real estate and attempted to connect the lobbying with changes of position

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in favor of deregulation on individual bills by Congressional representatives. They concluded that the lobbying blizzard substantially influenced legislators’ voting, though they claimed to be agnostic about whether the lobbying reflected primarily the provision of information or crude rent seeking. We admire their ingenuity in squeezing as much information as possible out of the sketchy official lobbying reports to estimate amounts spent by individual firms; while, as they realize, their method delivers only approximate results, these more than suffice to nail down their general case (Igan and Mishra 2014). We are less persuaded by some of their specific assertions about the weight of network connections (the ‘revolving door’). Lobbying records, as they know, do not link lobbyist efforts to individual representatives, and they are therefore forced to resort to indirect methods to estimate the effects of lobbying on individual Congressional representatives. We are quite persuaded of the importance of personal connections and the ‘revolving door’ from Capitol Hill to K Street (the eponymous center of lobbying in DC) by Congressional staff – who can forget the famous remark of Jack Abramoff, Tom (‘The Hammer’) Delay’s infamous ally, that staffers who were promised jobs did more for his firm when they were on the inside than when they came outside?. But we are not confident that Igan and Mishra’s indirect way of tackling this question actually measures what they believe it does. Their decision to count a lobbyist as ‘connected’ to a legislator if the lobbyist previously worked for him or her is obviously unassailable; but they also count lobbyists as connected if the they worked in the past for another representative who served on the same committee with the legislator the lobbyist worked for. We do not believe this is uniformly realistic. First of all, it takes no account of the varying size of committees. In the much smaller Senate, where their principals are often spread thin, staff often conduct major negotiations and the claim might be defensible. But House committees are often gigantic – the Financial Services Committee that passed on Dodd–Frank had more than 70 members, including very junior members put there by House leaders precisely so they could attract donations to help their re-election. In addition, as many studies of Congress emphasize, in the much larger House, representatives normally sit on fewer committees and thus do not need to delegate so much negotiating to the staff. We, accordingly, suspect Igan and Mishra’s broad definition of connectedness likely produces an inflated estimate that reflects other influences besides the revolving door. Most seriously, however, it ignores the importance of partisanship in constraining personal connections. We are prepared to believe that, in committees, Congressional staffs develop amicable relations with most representatives on their side of the aisle, but we

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are skeptical that readily extends to many staff working for representatives of the other party. In our experience, this sometimes happens, but in recent decades is much less common given the hardening of partisan divisions on the Hill. Igan and Mishra’s analysis covers precisely the moment when the notorious ‘K Street Project’ of Tom Delay, Jack Abramoff, Rick Santorum and other Republican hardliners stirred unprecedented acrimony by attempting to make Democratic (former) representatives and staffers unemployable as lobbyists; we doubt very much that acquaintance with members of the other party helped many staffers in that period (Continetti 2006). In another paper (Igan, Mishra, and Tressel 2014) show that firms lobbying heavily before the crisis took bigger risks and then suffered larger losses in the crisis. Once government bailout programs began, however, these firms were more likely to be bailed out than firms that were not lobbying so heavily. In both papers, Igan and her colleagues allude to political contributions, indicating that the measure they have in mind is PAC contributions. But they rest their cases almost entirely on their novel lobbying data, so no real damage is done. The same, alas, is not true of perhaps the best known paper to emerge from the debris of 2008, the Mian, Sufi, and Trebbi (2010) study of ‘The Political Economy of the US Mortgage Default Crisis’. While we very much admire this paper’s incisiveness and the alacrity with which it tackles large questions with novel datasets, we think it is seriously mistaken at several different levels. Mian, Sufi, and Trebbi believe that by sharpening issues and perceptions the crisis created an unusual opportunity to analyze empirically a classic problem of political theory – the relative weight of ‘constituent and special interest pressure’ versus ‘ideological preferences’ in legislators’ voting. They look closely at two key legislative measures passed in the 2008 crisis. The first is the American Housing Rescue and Foreclosure Prevention Act, passed in July. This provided ‘up to $300 billion in Federal Housing Administration insurance for renegotiated mortgages and unlimited support for Freddie Mac and Fannie Mae’ the two giant privately owned but informally federally backed ‘government sponsored enterprises’ that played crucial roles in supporting mortgage lending. The second is the Emergency Economic Stabilization Act that created the famous TARP bailout program for banks in October. They see the earlier housing bill fundamentally as an effort to provide benefits to Americans in trouble on servicing their mortgages: as they describe it, its essence was ‘an expected net transfer to households that are in (or near) default on their mortgages’. Their touchstone for understanding why it passed in the form it did thus becomes constituency interest,

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measured by the rate of mortgage defaults in various congressional districts. Noticing that only three Democrats voted against the final bill in late July, they conclude that this ‘shows the importance of ideology and political party affiliation’ since ‘85 of the 233 Democrats’ voting in favor of the bill ‘have mortgage default rates below the median default rate among Republican districts’. ‘In other words, despite low mortgage default rates among their constituencies, many Democrats vote in favor of the bill’ (Mian, Sufi, and Trebbi 2010). Here arise our first qualms about their argument. We think they skip too lightly past an important empirical point that cloaks a potentially serious theoretical pitfall. Their argument postulates that constituency interests in districts with relatively high rates of mortgage default are clear cut, though that interest is treated as varying with the local representative’s party identification, that is, according to whether the defaults are hitting predominantly Republican or Democratic areas within districts. We are quite prepared to entertain this, or the simpler hypothesis that high rates of mortgage defaults tout court will push representatives to vote for the bill, but we have major reservations. First, both at the time (see, for example, the discussion by Swagel (2009), then in the Treasury) and later, popular opinion in districts was sharply divided. Only months later, indeed, with much help from Fox News, did the mortgage debt relief question set off the Tea Party firestorm. In this instance, we think, Mian, Sufi, and Trebbi’s confidence that reality was simplifying perceptions and issues is misplaced. Especially in 2008, in most districts, default rates were (still) not that high; it is quite possible that average voters (the ‘median voter’) may not have shared the view that their interests lay in bailing out over-extended homeowners. We think there is a compelling case that many should have believed this, however: we take the point made by some critics of the Tea Party’s agitation that widespread foreclosure of homes drags down the value of housing in entire districts. But this argument needs to be made, not assumed, and requires fairly subtle framing, since it makes important assumptions about local microeconomic situations, as well as voters’ knowledge and possibly, ideologies. Mian, Sufi, and Trebbi just assume its truth. But their argument has far bigger problems. Rather clearly appealing to the popular perception of the Democrats as less committed to laissezfaire and more solicitous of lower income voters (the formula they use to identify which parts of districts lean toward each party), Mian et al., do not inquire further into the roots of the Democrat’s favorable view of the bill. In particular they do not analyze whether contributions from the financial service industry and real estate had any influence on the party’s

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representatives or leadership. They treat the party’s response as purely ideological and partisan in a commonsense way and turn to analyzing the Republicans. Here they assert that their statistical study shows that Republicans who broke with their party were driven principally by constituent pressures. GOP representatives from districts in which rates of default increased sharply over that of 2005, they argue, were those most likely to break from the rest of the party and vote in favor of the bill. They specifically deny that campaign contributions from finance and real estate were at all related to these decisions and they argue that the more conservative a representative’s ideology, the greater their tendency to stick with the party’s majority position against the bill. Their picture of how the parties clashed is a high tech reaffirmation of common views about each party’s mass base and the usual confidence that democratic political structures force parties to respond seriously to popular will. They would have done better to consider a full-throated investment approach and look much more closely at the key pieces of evidence they cite. Their bedrock claim that the heart of the bill involves ‘an expected net transfer to households that are in (or near) default on their mortgages’, for example, is not really the heart of the matter, in two distinct senses. First, as some congressional representatives complained at the time, what the bill centrally provided for were net transfers to financial institutions, not homeowners. That is, the bill’s main beneficiaries were plainly not Americans in trouble with their mortgage but financial institutions, including many that may have had little or no interest in mortgages per se, but which had huge interests in preventing a collapse of the world financial system. As the bill came up for consideration, the prospect of such a collapse was becoming all too real. Earlier in the spring, the famous old investment house of Bear Stearns had been rescued from collapse in the nick of the time by an unprecedented effort organized by the Treasury and the Federal Reserve System involving a Fed subsidized, shotgun merger with J.P. Morgan Chase. But that only slowed deterioration in financial markets, it did not stop it. As mortgage markets seized up, investors began fleeing the bonds of Fannie Mae and Freddie Mac, the two giant privately owned but informally government sponsored enterprises (GSEs). The Shadow Bailout that ­ Treasury Secretary Paulson, Federal Reserve Chair Ben Bernanke, and the Bush administration were counting on to get them past the election before key decisions inescapably became public threatened to break down, taking the entire world financial system with it.25

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With the Chinese and foreign sovereign wealth funds warning that they would dump their GSE securities if nothing was done, Treasury Secretary Hank Paulson was forced to reach for his ‘big bazooka’. Senator Dodd later publicly stated that he believed the Secretary’s assurances that if the Congress gave him the authority to rescue Fannie and Freddie, he would never have to exercise it, but that did nothing to change the fact that, absent a massive new round of federal support, the end of July threatened to be the end of everything. For the Republicans, including the party’s presumptive nominee, John McCain, another giant federal bailout coming so soon on the heels of the Bear Stearns debacle was pure poison. Realizing that it would need Democratic votes to pass any legislation, the White House dropped its veto threat and started negotiating with the Democrats in control of both houses. With the exception of Congressman Barney Frank, Chair of the House Financial Services Committee, and a handful of other Democrats, aid for Americans in trouble on their mortgages was in fact almost no one’s priority in the legislative bargaining. Frank and his supporters advocated allowing judges to alter the terms of mortgages as part of the process of renegotiating them. By ‘cramming down’ new terms, judges could force banks and mortgage servicers to offer relief. The financial industry, h ­ owever, was totally opposed. Then and all through the next administration, every time debt relief for Americans in mortgage difficulties came up as an issue, banks, mortgage companies and servicers set up howls of protests. As a Business Week story later recounted: The industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell Business Week. ‘We were like the Dutch boy with his finger in the dike’, says one business advocate who, like several colleagues, insists on anonymity, fearing career damage [. . .] In public, financial institutions insist they’ve done their best to prevent foreclosures. Most argue that giving bankruptcy courts increased clout, known as cram down authority, would reward irresponsible borrowers and result in higher borrowing costs. . . (Grow, Epstein, and Berner 2009)

Mian, Sufi, and Trebbi do not examine the battle over the mortgage cram-down option in their paper. They do, though, acknowledge Barney Frank’s exasperated public statement as the bill passed that ‘I would be very ­disappointed’ in financial institutions if ‘having helped us formulate this [that] they don’t take advantage of it’. But instead of querying the terms of the financial industry’s ‘help’ they allude to ‘implicit pressure to write down principal in order to initiate renegotiations’ and then dismiss the issue:

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While it is possible that the legislation could have been written to be even more favorable to defaulting homeowners by making renegotiation mandatory, as evidence by the press coverage, the legislation was perceived at the time of voting as being a substantial intervention by the government in favor of delinquent mortgage debtors. (Mian, Sufi, and Trebbi 2010)

It is true that the Wall Street Journal and the New York Times hailed the legislation as epoch making, but no serious assessment of the bill should rest there. Plenty of evidence, including earlier pieces in the New York Times, provide an altogether different key to the puzzle. Mian, Sufi, and Trebbi should not have ignored Frank’s outburst, nor the mountain of evidence that became public long before their article appeared about what insiders knew. More than a year before the final vote, the battle lines were clear: In early 2007, as overextended borrowers began to default on too-good-to-betrue subprime mortgages, housing experts sounded an alarm heard throughout Washington. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, wanted to push a bill requiring banks to modify loans whose enticingly low ‘teaser’ interest rates soon give way to tougher terms. But he knew that with Republicans strongly opposed, he lacked the muscle, according to Senate aides. So Dodd did what politicians often do. He convened a talkfest: the Homeownership Preservation Summit.   A who’s who of banking executives gathered on Apr. 18, 2007, behind closed doors in an ornate hearing room in the marble-faced Dirksen Senate Office Building. Dodd told them they needed to get out in front of the foreclosure fiasco by adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether. . .   Some from the industry denied a foreclosure problem existed, including Sandor E. Samuels, at the time chief legal officer of subprime giant Countrywide Financial. They vowed to continue selling loans with enticing introductory rates as well as those requiring minimal evidence of borrowers’ income. ‘We are going to keep making these loans until the last second they are legal’, Samuels later told a fellow participant.   On May 2, 2007, Dodd’s office issued a ‘Statement of Principles’ stemming from the summit. It outlined seven vaguely worded industry aspirations, such as making ‘early contact’ with strapped borrowers and offering modifications that could include lowering loan balances. The principles had no effect, some summit participants now concede.   Much of Dodd’s attention shifted to his campaign for the Democratic Presidential nomination. Senate Banking Committee spokeswoman Kate Szostak says Dodd aggressively pursued the foreclosure issue, but ‘both the industry and the Bush Administration refused to heed his warnings’. The lawmaker accepted $5.9 million in contributions from the financial-services industry in 2007 and 2008. (Grow, Epstein, and Berner 2009)

The stonewalling continued right through 2008. Mian, Sufi, and Trebbi point to the ‘Hope for Homeowners’ provisions of the bill that finally

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passed as making their case. This is a mistake. The banks and servicers had too much at stake: if they wrote down any loans, normal accounting principles would force them to write down all similar loans on their books. This they could not afford, if they wanted to remain solvent.26 By early 2008 it was obvious that Hope Now wasn’t halting a significant percentage of foreclosures. Democrats in Congress began gathering ideas for a government-sponsored remedy. Many of those ideas came from the industry. Lobbyists and congressional aides referred to one concept as ‘the Credit Suisse plan’. Another, ‘the Bank of America plan’, would allow borrowers to refinance mortgages with loans guaranteed by the Federal Housing Administration. Representative Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, had solicited BofA’s advice via an old Boston acquaintance, Anne Finucane, the bank’s chief marketing executive and a politically active Democrat. He assigned several aides, including Michael M. Paese and Rick Delfin, to work out the details. Francis Creighton, a Democratic former staff member on the Financial Services panel who had gone to work as a lobbyist for the Mortgage Bankers Assn., negotiated with Paese and Delfin. Creighton’s Republican colleague Gustafson huddled with aides to such GOP lawmakers as Representative Spencer Bachus and Senator Richard Shelby, both of Alabama. Before long, the anti-foreclosure provisions were being altered in ways the industry favored. Shelby, the ranking Republican on the Senate Banking Committee, along with other Republicans insisted on the pro-industry language in exchange for their support, aides say. In the end, the program included stiff up-front and annual fees and a requirement that homeowners pay the government 50 percent of any future appreciation in the property’s value – all of which made it much less attractive to borrowers. Moreover, the banks’ participation was made entirely voluntary; there was no way to pressure them to cooperate. Congress approved Hope for Homeowners on 26 July 2008, as part of a larger measure imposing restrictions on the mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE). At the Mortgage Bankers Association, lobbyists gathered in Gustafson’s corner office to lift plastic cups of wine in celebration. Those familiar with Hope for Homeowners anticipated that its fine print would discourage all but a few borrowers. ‘We knew it was likely to have limited appeal’, says Preston, the former secretary of HUD, which oversees the FHA. George Miller, executive director of the American Securitization Forum, a Wall Street trade group, calls the program and its 25 refinanced loans ‘useless’ because of the onerous details.27

In fact, despite a veritable symphony of resonant promises and widely trumpeted programs, widespread debt relief never happened. The power of the banks and mortgage servicers was simply too great – not only in 2008, but later, throughout the Obama administration, whose first Secretary of the Treasury himself strongly opposed it, since it would damage the banks.28

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Mian, Sufi, and Trebbi’s claims about constituency influence driving that bill miss the institutional reality: passage of the mortgage provisions reflected the triumph of banks and mortgage servicers. But why then does the trio fail to detect any influence of contributions from finance and real estate in the vote? Part of the answer, of course, is straightforward: they never looked closely at the Democrats. They do consider whether Democrats might have other reasons to vote for the bill besides mortgage defaults in their districts and ideology. But another part of the answer is that, without realizing it, they, too, too were underexposing their X-rays. In sharp contrast to most analysts, Mian, Sufi, and Trebbi made a serious attempt to go beyond PAC contributions. They contracted with a respected public research organization to compile individual contributions from executives. That organization is careful and does good work, but it does not run the type of checks that we do when aggregating data. This is easy to see: Mian, Sufi, and Trebbi’s made their dataset public; it shows slightly more than $50 million in total contributions from finance and real estate. A look at their dataset inspired us to compile our own for the 2007–2008 election cycle in the House. It is almost twice as large, showing contributions of over $90 million. Per congressman and woman, this difference is huge. Strikingly, total contributions for the 2007–2008 cycle to Congressional Democrats from finance and real estate substantially exceeded those to Republicans. It seems clear that the trio’s negative results for political money with respect to the Republicans on the mortgage relief vote should not be accepted nor their claims that ideology and constituency propelled the Democrats. They did not follow the money closely enough. For now, we certainly believe their conclusion is plausible that campaign contributions from finance were a massive force in pushing TARP through, especially on the fateful second vote, in the wake of the market collapse occasioned by Congress’s rejection of the first version of the legislation. But the bailout was an exceptional event. There is strong evidence that another set of factors also played a role: In an imaginative and careful study, Tahoun and van Lent (2016) have shown that besides industry contributions, the personal portfolio situations of Congressional representatives and their spouses also played a substantial role: regardless of party, representatives who were down heavily in the market were much more likely to support the bailout, though extremely conservative legislators were less likely to take this step. Their paper, too, relies on PAC contributions as the measure of political money, so the exact weight of the personal considerations will need further assessment. But their controls are otherwise very complete and we believe

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their conclusion is likely to hold up. Our only reservation is that their paper, like Mian, Sufi, and Trebbi’s, is not able to take account of the myriad ‘sweeteners’ added to the final version of the legislation to attract enough support to pass. As Ferguson and Johnson observed, the final amended text was ‘loaded with more pork than an Oscar Mayer refrigeration car’: a farrago of tailored tax breaks, special projects, and other goodies designed to win the hearts and minds of wavering representatives.29 There is no straightforward way to insert these into a regression equation, absent more information than is ever likely to emerge. Probably the best one can do is to rerun a combination of the various models with more accurate data for contributions – a task for another time.

BETTER ESTIMATES OF CONGRESSIONAL VOTING AND POLITICAL MONEY Sometimes the weight of inherited tradition is overwhelming, no matter how stark the empirical evidence. Thus, for example, as Igan and her colleagues pile up evidence that lobbying affects Congressional voting, they recurrently pause to glance at increasingly far-fetched hypotheses that might explain away their findings. In the midst of showing how financial houses dispatched wave after wave of lobbyists promoting ever weaker mortgage regulations, for example, they wonder whether all this activity and related campaign contributions was intended merely to give valuable information to America’s solons (Igan and Mishra 2014; Igan, Mishra, and Tressel 2014). Up to a point, we are sympathetic to all these pains: there is no need to improve a powerful case by overstatement and care in dealing with alternative hypotheses is a cardinal virtue. But when even the underexposed X-rays testify to the power of political money, we think continuing to nourish such misgivings borders on satire. The idea that lobbying and contributions on this scale could possibly be directed simply to informing Congressmen and women is outlandish. Never mind that the papers underestimate political money, the tidal wave of outlays they document just shouldn’t be there. If mere information were the issue, then campaign contributions would not really be necessary at all, save perhaps at some low level sufficient to gain basic ‘access’. Lobbyists present on scene could surely see to it that Congressional staffs and their principals were duly informed. Purely intellectual processes of information transmission would far more closely resemble the ‘Aha Erlebnis’ patterns emphasized by the old Gestalt psychologists: at the start, subjects might thrash around, but then once they grasped the point, they would hold on to the insight. A hundred million dollars or more of reinforcement every

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election would not be necessary if the problem were simply cognitive, nor would be the clouds of lobbyists. In fact, of course, what these papers really show is that Gestalt psychology or, indeed, any excessively intellectual approach, is of little help in understanding how Congress changed its ‘mind’ on deregulation. These little piggies went to market – and any diminishing returns that may have set in with regard to expenditures had little to do with insights of any kind. With issues of the magnitude of financial regulation, contests for allegiance of Congress partake more of the logic of arms races, if not direct auctions. Arms races, though, are typically expensive, complex, and messy. We are, accordingly, not surprised that studies of Congressional voting on issues such as financial deregulation frequently turn into the statistical equivalent of the perfect storm. Incentives to hide avenues of influence are strong; some are little recognized or perhaps even still unknown and for sure many we discuss in our text, such as the differential extent of free market propaganda in the preceding generation, defy useful measurement. The list of potential factors influencing legislative behavior embraces not only political money, but many cultural and institutional forces. We nevertheless believe it is possible to build on the work just reviewed to sharpen the picture of how political money works on Congress. As it happens, certain features of the Dodd–Frank financial reform legislation actually lend themselves to surmounting many of the usual difficulties. First of all is the clarity of the battle lines. Most legislative struggles in the United States do not take the form imagined in Progressive interpretations of American history, in which the interests of the broad public clash with business groups. On the contrary, save in exceptional times, active political conflicts principally revolve around various blocs of investors and industrial sectors, with appeals to the public at best playing marginal roles (Ferguson 1995). Dodd–Frank, however, reverted to the Progressive archetype: the ­struggle against it turned into a crusade waged by an almost monolithic financial sector. Especially after the shocking Republican victory in the special election to fill the seat left vacant by the death of Massachusetts Senator Edward Kennedy (only days after recently bailed out Wall Street houses announced giant bonus payments) squeezed a panicked Obama administration to support what became known as the ‘Volcker Rule’, virtually the entire sector mobilized against it (Ferguson and Chen 2010). The extraordinary unity only deepened after the legislation passed. For researchers, this has the happy implication that elaborate checks for intra-industry differences can be dispensed with. Virtually all money from finance can be treated the same.

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Dodd–Frank also became a textbook example of our earlier point about how sectoral interests can play directly into partisan competition. The measure became law early in 2010, when the Democrats controlled both houses of Congress, and was rapidly swept up into the golden whirlwind that formed on the Republican side in opposition to everything the Obama administration proposed.30 The original legislation passed both houses along party lines – in each chamber exactly three Republicans voted with the Democrats in favor of the bill. Subsequent struggles to change the law, with one conspicuous exception (the hostile attitude of the US Treasury, as long as Tim Geithner remained at its helm), unfolded within that intensely partisan atmosphere.31 In November 2010 the Democrats lost control of the House in an historic landslide. They retained control of the Senate, however, until 2014, though by a thin margin that essentially froze most business. Because, as mentioned earlier, the Senate is both much smaller and far more easily tied up by procedural rules, statistical analysis of that chamber is much harder. For our investigation of how political money influences Congress, we therefore concentrate on the House. That body voted four times on proposals for significant changes while the 113th Congress (elected in November 2012) was in session and once more immediately after the next Congress convened. The first vote came, perhaps appropriately, on the day before Halloween, 2013, on the drolly titled ‘Swaps Regulatory Improvement Act’.32 The second vote concerned the so-called ‘Consumer Financial Freedom and Washington Accountability Act’, taken on 27 February 2014.33 A third vote came on the ‘Consumer Protection and End User Relief Act’, taken on 24 June 2014.34 The final vote in the 113th Congress came on the so-called ‘Swaps Pushout’ provision, weakening the Volcker Rule and regulations on derivatives in the course of a memorable lame duck session late in 2014. That provision passed, amid scenes of high drama that attracted national attention, including the extraordinary appearance of Massachusetts ­ Senator Elizabeth Warren on the floor of the House to stiffen the spines of wavering Democrats, and human wave lobbying by major banks, including phone calls to individual Congressional representatives by J.P. Morgan Chase Chair, Jamie Dimon. (Bank lobbyists had succeeded in inserting the provision into a bill appropriating funds for the budget of the United States; the bill also contained a provision supported by leaders of both parties vastly raising the ceiling on political contributions.)35 Almost immediately after the new House elected in November 2014 convened, the House voted again on a ‘Regulatory Accountability Act of 2015’, the final bill we consider here.36 The party alignments on all these measures are clear and so is the trail

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of political money, as our Appendix tables show: Republicans were flush with money from finance.. Many Democrats, however, also received large contributions from that quarter, with many wavering and sometimes voting to undo parts of the legislation. Borrowing a tactic that Stratmann and others have used, we decided to exploit all those votes by Democrats who had previously voted for Dodd–Frank and survived to cast repeated votes on the later bills (including a handful who lost in 2010, but staged comebacks). This tactic makes sorting out competing influences much more tractable. It controls automatically for many sources of possible variation, including the individual representative’s own personality, values and party affiliation. In effect, the procedure turns the representative into his or her own control. No less helpfully, in the very short run, it is not plausible that many other influences, such as variations in the strength of market propaganda in different districts, or most other institutional factors, including district and constituency characteristics, change rapidly enough to matter. They can thus be treated as constants or ‘fixed effects’. By contrast, factors such as political money do change, sometimes dramatically, and they can be measured fairly precisely, as we explained earlier, provided one is willing to do the work. Also varying over time are representatives’ links to lobbyists via revolving doors (staffers come and go), personal loans to representatives from financial houses, service on the Financial Services Committee (whose members leverage – indebtedness – is now known to triple within a year after they join the committee),37 and the margin of victory in the last election. A more subtle issue involves the ideologies of individual representatives; we think those require scrutiny as a possible influence, but indices based on behavior, not depth psychology, suggest that they should not be treated as a purely personal variable reflecting an essentially unchanging psyche: in practice, ideology seems clearly to drift over time. We thus do not treat it as fixed, but use an index calculated for the Congressional sessions we analyze as a control.38 These variables and the ensemble of time varying measures should allow us to sort out political money’s distinctive role with more accuracy. We estimate two models for finance. Both are technically mixed logistic panel regressions. They are logistic, because like Igan and Mishra, we think it is most helpful to conceptualize votes of individual representatives as reflecting either ‘pro-bank’ or ‘anti-bank’ sentiments. They are mixed models, because we allow the constant term in the regression to vary with each House vote, thus treating it as a random effect rather than imposing a single value for all five votes we examined. The first model is the more reliable and important analysis for reasons just explained. It refers only to Democrats who both voted originally for

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Dodd–Frank and on later revisions. We also use the larger dataset, including Republicans, to estimate a more conventional (and less reliable) model for the same bills.39 Both models are specified formally in Appendix 1; our discussion here focuses on the meaning of our results. Since, as we have often emphasized, Congressional districts occupy distinct areas in space, the first task is to see if this colors our results. (Spatial data often fail to be ‘independent’ in the sense many ordinary statistical analyses require; spatial ‘autocorrelation’ can deform studies quite like the better known case of temporal autocorrelation and can therefore throw results off (Cliff and Ord 1981)). Although all the papers we have discussed neglect this step, it is obvious that they should run such tests. Moran tests are the usual technique for identifying spatial autocorrelation, but our dependent variable is binary (pro- or antibank). We thus use the ‘BB joint count test’ instead (Cliff and Ord 1981). This reveals that spatial autocorrelation is not a problem for our equation for the Democrats alone.40 However, as usual in our experience with fuller sets of Congressional district data, spatial autocorrelation is a problem in our second, more conventional model that adds the Republicans who voted on Dodd–Frank. For panel regressions covering multiple votes in time and space, remedying this is far easier said than done, because of sometimes large differences in the number of votes cast and who cast them. Methods for dealing with such situations are just developing. We have followed the method in Zhu, Waller, and Ma (2013) to produce a spatial version of our panel regression. The first equation, for the Democrats alone, analyzes the factors that drove individual Democrats to break with their party’s line and turn proBank, after voting originally in favor of Dodd–Frank. The votes occur at different periods, so we took care to measure the inflow of contributions from the financial sector in terms of time periods that made sense. Thus, for example, for votes cast in 2013, we combined total contributions during the 2012 election with contributions for 2013, adding in the additional contributions for the later votes in the following year, including the lame duck session. We used the 2013–2014 election cycle totals for the single vote held in January of 2015. We considered the percentage of total money raised by each Congressman or woman’s race along with total outside money that came from finance as well as the absolute totals. The different formulations turned out not to matter; both were statistically significant. Using absolute amounts has some interesting implications in other contexts, so we employ that in this chapter. Our results indicate that for every hundred thousand dollars that Democratic representatives received from finance, the odds they would break with their party increased by 13.9 percent. To put that into perspective, consider that, as Appendix Table A10.9 shows,

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Democratic representatives who voted in favor of finance often received $200,000 to $300,000 from that sector – enough to tempt even saints. That table also implies that contributions to the Democrats from finance look more than a little like the US income distribution, with an average (mean) much higher than the median. Or in plain terms, financial houses tend to pour money into a part of the party. We considered the possibility that members of Congress might be influenced by personal loans, which would come mostly from finance.41 Tahoun and Vasvari reported, however, that the loan variable didn’t seem important across the whole House. Although we have some misgivings that data for loans in 2014 might be incomplete, our results came out the same: total loans for the House as a whole didn’t matter. But a dummy variable for membership on the Financial Services committee was powerful: the odds of a representative breaking with the party went up by 90 percent if he or she sat on Financial Services. We attribute this absurd result to exactly what Tahoun and Vasvari suggest: favorable loans from financial houses.42 We also tested to see if it mattered if a representative left Congress after the 2014 session. We note that some papers, for reasons that mystify us, sometimes treat representatives exiting Congress as disinterested o ­ bservers. Our expectation, or fear, was exactly the reverse: that in the midst of the epic campaign to weaken Dodd–Frank, many lawmakers were open for business, perhaps looking to impress potential future employers (many are lawyers, after all, and huge numbers of lawyers work for banks, as already noted; and a few were candidates for the Senate, which implies an urgent need for truly vast sums of money). Our results were not encouraging: representatives leaving Congress were almost three times more likely to break with their party and side with the banks than other Democrats.43 We also found that more conservative representatives, as measured on a rating scale that ran from 0 to 100 for the 113th Congress, were more likely to side with the banks by 9 percent for each percentage point more conservative their ideology was. We tested various specifications for ‘revolving door’ influences, including various cumulative measures and recent changes. Some displayed positive coefficients, but never attained statistical significance and so are dropped from the equation. Neither did margin of victory matter; so much for constituency influence at a real auction. An approach less rigorously austere than our first model is also possible. It is not difficult to estimate a straightforward mixed logistic panel regression for everyone in the sample – representatives who were in Congress at the time of the Dodd–Frank vote and who voted on the various bills we examined. Bringing in the Republicans, however, makes a model that looks at variations in views rather pointless; not many Republicans changed. This model thus becomes much more conventional.

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Such a model obviously needs Party as a control; it should also consider whether total employment in finance and real estate or district median income affects the vote, along with the other variables examined above, such as revolving doors and margins of victory. In this model, however, a BB joint count test indicated that spatial autocorrelation was a problem in this much larger dataset. We thus require a regression corrected for both spatial and temporal conditional autocorrelation. This is far easier said than done; the techniques are just developing. We developed such a model by building upon work in disease mapping and estimated it using Bayesian techniques.44 This time the dependent variable – what we are trying to explain – is an Anti-Bank vote. We employ Bayesian techniques to allow us to take account of both spatial and temporal variation, which makes our results look a bit different. The second part of Appendix 10.1 discusses them out in detail. Qualitatively, though, they are straightforward and in line with our findings for the Democrats alone. An obvious difference is that here, as in the Baker example mentioned earlier, party differences matter: Democrats are much more willing to vote against the banks. But it is also true that the more money representatives garner from finance, the less likely they are to vote against them. Similarly, members of the House who left in 2014 were reluctant to break with financial interests as were more conservative members. In this equation, in contrast to the earlier one, however, margin of victory does matter modestly. Representatives voting against financial houses, it seems, generally have higher margins of victory in the previous election, suggesting that members in tighter races perhaps are more careful about offending a potentially powerful interest group. District employment in finance did not matter, while median income mattered too little to be worth including in the equation.

CONCLUSION: TIME FOR SOME CLARITY We do not want to overstate our results. Nothing in our findings suggests that the entire Congress is for sale, at least on single votes. Nor, we emphasize, do they suggest that only money matters in the business of legislation. But our analysis of the banks’ long campaign to modify Dodd–Frank in the pre-Trump era suggests that it is time that the long history of skepticism toward claims that money influences legislative voting should come to an end. Analysts need to take much more care measuring the money flows to legislators than they typically have, especially with regard to contributions from individuals and outside money that does not go through official campaign committees. When those contributions are fully

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reckoned in, premature judgments that money doesn’t matter are likely to be overturned. Our analysis of Democrats who first supported the Dodd–Frank reforms only to reverse themselves is particularly telling; the method allows one to dismiss virtually the entire arsenal of excuses invoked to explain away such behavior. The other statistical analyses, while less airtight, are still very compelling. Taken as a whole, the pattern they display is too obvious to need much emphasis: substantial numbers of legislators sell out the public interest in exchange for political money. We may not confront the best Congress money can buy – it could be worse, after all; the coefficients in our equations could be even larger – but the reality is bad enough. Especially considering our earlier analyses of the ‘linear model’ of money in Congressional elections, we think the case for understanding Congress in terms of an investment approach is compelling, even as America now appears to have embarked on a parody of the Gilded Age.

ACKNOWLEDGMENTS We are particularly grateful to Mirka Draca, Edward Kane, and Benjamin Page for invaluable advice on earlier drafts of the paper. We also thank Robert Johnson, Dennis Kelleher, Frank Medina, and Matt Stoller for much help in pinning down facts and documentation in various parts of this essay. Thanks also to Francis Bator, Walter Dean Burnham, Ahmed Tahoun, and Peter Temin for helpful discussions. This paper is a substantially revised version of an earlier essay issued as a working paper by the Roosevelt Institute (Ferguson, Jorgensen, and Chen 2017). It draws liberally from campaign finance data collected as part of a project supported by the Institute for New Economic Thinking. The views we express here, however, are our own and not those of any institution with which we are affiliated.

NOTES   1. Hershey (1987); the quotations in the previous paragraph also come from this article.   2. This account comes direct from an eyewitness.  3. The Center’s totals appear on their website: https://www.opensecrets.org/lobby/top. php?indexType=i&showYear=2016. Note that totals vary for all industries depending on the definition; thus, including real estate with the rest of finance, as is often done, produces substantially higher totals. We see no point in refining numbers for this essay; no reasonable way of counting will remove either finance from its high perch.   4. See again the Center website: https://www.opensecrets.org/lobby/top.php?indexType​=i&​ showYear=2016. Most of the data are for subsectors of finance, so adding them is neces-

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  5.  6.  7.

  8.   9. 10. 11. 12. 13. 14.

15. 16.

17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

High finance, political money and the US Congress ­191 sary to get more accurate totals. For cautions on shadow lobbying, we are indebted to the authors of the piece on the revolving door, cited just below. On the revolving door, see Blanes i Vidal, Draca, and Fons-Rosen (2012); for data, see https://opensecrets.org/revolving/; exactly how far these data go back is unclear; most of it seems to post-date 2006, though some earlier data also appears. See, for example, the CBS News Poll summary at: http://www.cbsnews.com/news/ poll-americans-say-money-has-too-much-influence-in-campaigns/. Milyo, Jeff, ‘Campaign Spending and Electoral Competition: Towards More Policy Relevant Research’, final draft of paper to be published in The Forum: A Journal of Applied Research in Contemporary Politics; available on the web from the Campaign Finance Institute at http://cfinst.org/Bibliography_detail.aspx?Bib_ID=BIBCFI000542; Vol. 11, No. 3 (October 2013), pp. 437–454. See also Ansolabehere, de Figueiredo, and Snyder (2003), but also the discussion in Ferguson (2005). This is de Figuerido and Edwards’ (2015) summary of Ansolabehere, de Figueiredo, and Snyder (2003). See the discussion of the Bradley Foundation in Mayer (2016) and the acknowledgements in, for example, Krozner and Stratmann (1998). Krozner and Stratmann (1998); see also their various separate pieces. For a review of that literature, though covering more industries than finance, see, for example, de Figuerido and Edwards (2015). Ferguson (2014) places the 1994 effort in precisely this context; more broadly on the Clinton administration, deregulation, and political money, see Ferguson and Johnson (2009a; 2009b). The literature on the latter is gigantic, but see Ferguson and Chen (2005). Some districts were altered by redistricting after the 2010 election. But 2010 cleaned out enormous numbers of Democratic legislators and nearly all of them disappeared forever. They thus can’t disrupt continuity. Whatever influence redistricting had after that must be small indeed. Our spatial regression takes account of the new districts; that along with the specific control for ideology in our equations should catch any tiny influences. See the discussion in Ferguson (1992); Stigler (1975). This ease of camouflage affects quantitative studies like ours. Other things equal, when you see the lawyers in a large bank’s main law firm flocking to a candidate, one can be virtually certain that the bank is also benefitting, too. But certainty is hard come by in this world. In our own tabulations of money from finance, we do not reckon in contributions from lawyers, unless they work directly for financial firms. High levels of accuracy and reliability in the compilation of our measures of interest group and firm spending is the overriding aim. Yves Smith, http://www.nakedcapitalism.com/2011/10/is-jp-morgan-getting-a-good-retu​ rn-on-4-6-million-gift-to-nyc-police-like-special-protection-from-occupywallstreet.html. See the references and discussion in Ferguson (2014), but also Bertrand et al. (2018). The paper will appear shortly. The literature is now large, but see for example Saloma (1984) or Ferguson and Rogers (1986). A particularly detailed study of the early stages of deregulation is Dixon and Noble (1981). For finance, see also Commission (2011). For ALEC, see, for example, Mayer (2016). See Ziobrowski et al. (2004; 2011). Some later work has suggested that the size of the returns has dropped; see the discussion in Ferguson, Jorgensen, and Chen (2016). See for example, Johnson (2011). The literature is now large, but see for example, Ferguson and Rogers (1986) for the early stages; for later, Ferguson (1995) and, especially Ferguson (2014). Ferguson and Johnson (2009a; 2009b). The next few paragraphs on the 2008 crisis rely on these extensively documented essays. The point was clear from the beginning. As Grow, Epstein, and Berner (2009) reported: ‘A major reason financial institutions and investors are so determined to avoid modifying loan terms more aggressively has to do with accounting nuances, say industry

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27.

28.

29. 30. 31. 32. 33. 34. 35.

36. 37. 38.

39.

40. 41.

Credit, money and crises in post-Keynesian economics l­ obbyists. If, for example, a bank lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump [. . .] A desire to postpone this devastating situation helps explain lenders’ intransigence, says Rick Sharga, vice-president of marketing at RealtyTrac, an Irvine (Calif.) firm that analyzes foreclosure patterns’. See also below, on Treasury Secretary Geithner. Grow, Epstein, and Berner (2009); note that in the year before the American Economic Review published Mian, Sufi, and Trebbi’s account, Ferguson and Johnson published their criticism of an earlier version of the paper that highlighted the empirical problems and the fact that banks wrote the key provisions. See Ferguson and Johnson (2009b). See the devastating account of Geithner’s views by the Special Inspector General for the TARP Program in Barofsky (2012). Perhaps the best place to follow the twists of turns of the housing relief issue is Yves Smith’s website, Naked Capitalism, http://www. nakedcapitalism.com/. In the end, even lawsuits that were said to have been won yielded little. But the topic is too big to tackle here. Ferguson and Johnson (2009a); cf. the discussion of the Senate version of the bill in Hitt and Lueck (2008), which indicates bargaining on behalf of high tech firms and drug companies, not the voting constituency influences suggested by Mian et al. The tables in Ferguson, Jorgensen, and Chen (2013) outline the overarching patterns of industrial support for each major party in the 2012 presidential election. Several different Congressional staffers have drawn our attention to the Treasury’s hostile position under Geithner, which in any case should be obvious to anyone familiar with the details of policy in that period. The vote is recorded here: https://www.govtrack.us/congress/votes/113-2013/h569. The vote is recorded here: https://www.govtrack.us/congress/votes/113-2014/h85. The vote is recorded here: https://www.govtrack.us/congress/votes/113-2014/h349. For the political funding provisions, see for example Gold and Hamburger (2014); for the record of votes, see https://www.govtrack.us/congress/votes/113-2014/h563. For years, a substantial number of social scientists have promoted the idea that allowing political parties to raise more funds would somehow fix many problems of money in politics. We have consistently derided those expectations. The US has now run this experiment in real time; is there anyone who thinks that the 2016 election was improved over that of 2012? See our discussion in Ferguson, Jorgensen, and Chen (2016). For the voting, see https://www.govtrack.us/congress/votes/114-2015/h28. Members of House Financial Services follows the list in http://media.cq.com/pub/com​ mittees/; for leverage, see the discussion in Tahoun and Vasvari (2016). That paper’s tests rule out the hypothesis that the high leverage precedes membership on the committee. Scaling Congressional voting is virtually a cottage industry and analysts differ on their favorites. For reasons too complicated to discuss here, we use the scores for conservatism compiled by ‘That’s My Congress’, at http://thatsmycongress.com/house/113byalpha. html. The source obviously has a point of view, but we think this index is perfectly satisfactory for our purposes and avoids some pitfalls of others. The site explains the method of calculation, in which higher scores indicate higher percentages of ‘conservative’ behavior. In general, indices tend rather closely to track each other and we doubt substituting others would change anything. Note that our dataset was designed to catch members of both parties who voted on Dodd–Frank; this means that representatives who entered Congress later are not included. Their inclusion would be desirable, but would add hugely to the data requirements, so we save that task for a later paper. This is less mysterious than it might seem. It may reflect the scattered quality of Democrats who survived to make it into our sample. The loan data are available, in an extraordinarily difficult form to use, from the website of the Center for Responsive Politics. We believe the data for 2014 are likely less than complete.

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42. Tahoun and Vasvari (2016), note that as discussed above, they were able to rule out notions that high leverage preceded membership on the committee. It is, perhaps, still open to someone to claim that members trying to get close to banks seek membership on the committee, but they would have to be doing that without visible reward until they got on. Once they are on, however, then Tahoun and Vasvari show the rewards are tangible, over and above campaign finance. Their evidence bolsters our inclination to report our results here; the significance level is barely weaker than usual; some analysts might question its inclusion otherwise. 43. We doubt very much that anyone left Congress out of fear of the banks, but if you believed somebody did, the results then look all the worse. 44. We followed principally Zhu, Waller, and Ma (2013), as discussed above. 45. Traditionally the Speaker of the House often does not actually cast a vote. The leader of the opposition sometimes also does not vote. In all of these votes, however, what the leader favored was clear, including one case in 2014 where Representative Pelosi split from the administration to preserve Dodd–Frank. So as not to lose them as cases, we have counted them in. 46. The significance level here is somewhat weak: 0.118, marginally below what some statisticians would accept. We think the level is too close to be sensibly dropped, given what else we now know about membership on the committee. 47. Thus, the total number of representatives voting numbers substantially less than the entire membership of the House, though it is still quite large. 48. In our tests, district median income showed up as borderline in terms of statistical significance, but its substantive weight (as indicated in Table A10.9), is so marginal we dropped it from the model.

REFERENCES Ansolabehere, Stephen, John de Figueiredo, and James Snyder. 2003. ‘Why Is There So Little Money in U.S. Politics?’ Journal of Economic Perspectives 17(1), 105–130. Barofsky, Neil. 2012. Bailout. New York: Simon & Schuster. Bertrand, Marianne, Matilde Bombardini, Raymond Fisman, and Francesco Trebbi. 2018. Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence. Cambridge: National Bureau of Economic Research. Blanes i Vidal, Jordi, Mirko Draca, and Christian Fons-Rosen. 2012. ‘Revolving Door Lobbyists.’ American Economic Review 102(7), 3731–3748. Cassidy, John. 2011. ‘Obama’s Bailout Boys.’ New Yorker, 21 January. Cliff, A. D., and J. K. Ord. 1981. Spatial Processes, Models and Applications. London: Pion. Commission, Financial Crisis Inquiry. 2011. Final Report of the National Commission on the Causes of the Financial and Economic Crisis of the United States. Washington, DC: U.S. Government Printing Office. Continetti, Matthew. 2006. The K Street Gang. New York: Doubleday. de Figuerido, Rui J.P., Jr., and Geoff Edwards. 2015. The Market for Legislative Influence Over Regulatory Policy, http://faculty.haas.berkeley.edu/rui/deF%20 and%20E%2071015.4a.pdf. Dixon, David, and David Noble. 1981. ‘By Force of Reason: The Politics of Science and Technology Policy.’ In The Hidden Election: Politics and Economics in the 1980 Presidential Campaign, edited by Thomas Ferguson and Joel Rogers, 260–312. New York: Pantheon.

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Epstein, Gerald, and Juan Antonio Montecino. 2016. ‘Overcharged: The High Cost of High Finance.’ Roosevelt Institute. Ferguson, Thomas. 1992. ‘Money and Politics.’ In Handbooks to The Modern World – The United States, edited by Godfrey Hodgson, 1060–1084. New York City: Facts on File. Ferguson, Thomas. 1995. Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems. Chicago: University of Chicago Press. Ferguson, Thomas. 2005. ‘Holy Owned Subsidiary: Globalization, Religion, and Politics in the 2004 Election.’ University of Texas Inequality Project, Working Paper 32. Ferguson, Thomas. 2014. ‘Big Money, Mass Media, and the Polarization of Congress.’ In Polarized Politics: The Impact of Divisiveness in the US Political System, edited by William Crotty. Boulder: Lynne Rienner Books. Ferguson, Thomas, and Jie Chen. 2005. ‘Investor Blocs and Party Realignments in American History.’ Journal of the Historical Society 5(4), 503–546. Ferguson, Thomas, and Jie Chen. 2010. 1, 2, 3, Many Tea Parties? A Closer Look at the 2010 Massachusetts Senate Race. Accessed 18 August 2013. Roosevelt Institute Working Paper, https://rooseveltinstitute.org/roosevelt-working-paperma​ny-tea-parties/. Ferguson, Thomas, and Robert Johnson. 2009a. ‘Too Big To Bail: The “Paulson Put”, Presidential Politics, and the Global Financial Meltdown, Part I: From Shadow Banking System To Shadow Bailout, Part I.’ International Journal of Political Economy 38(1), 3–34. Ferguson, Thomas, and Robert Johnson. 2009b. ‘Too Big To Bail: The “Paulson Put”, Presidential Politics, and the Global Financial Meltdown Part II: Fatal Reversal–Single Payer and Back.’ International Journal of Political Economy 38(2), 5–45. Ferguson, Thomas, and Joel Rogers. 1986. Right Turn: The Decline of The Democrats and the Future of American Politics. New York: Hill & Wang. Ferguson, Thomas, Paul Jorgensen, and Jie Chen. 2013. ‘Party Competition and Industrial Structure in the 2012 Elections.’ International Journal of Political Economy 42(2), 3–41. Ferguson, Thomas, Paul Jorgensen, and Jie Chen. 2016. ‘How Money Drives US Congressional Elections.’ Institute for New Economic Thinking, Working Paper 48. Ferguson, Thomas, Paul Jorgensen, and Jie Chen. 2017. Fifty Shades of Green: High Finance, Political Money, and the US Congress. New York: Roosevelt Institute. Ferguson, Thomas, Paul Jorgensen, and Jie Chen. 2018. Industrial Structure and Party Competition in an Age of Hunger Games: Donald Trump and the 2016 Election. New York: Institute for New Economic Thinking. Ferguson, Thomas, Paul Jorgensen, and Jie Chen. 2020. ‘How Money Drives US Congressional Elections: Linear models of Money and Outcomes.’ Structural Change and Economic Dynamics. In press, https://doi.org/10.1016/j.strueco.2019.​ 09.005. Future of American Politics. New York: Hill & Wang. Gold, Matea, and Tom Hamburger. 2014. ‘Party Fundraising Provision, Crafted in Secret, Could Shift Money Flows in Politics.’ Washington Post, 10 December. Grow, Brian, Keith Epstein, and Robert Berner. 2009. ‘Homewreckers: How Bank Lobbyists Undermine Home Owner Rescue Efforts.’ Business Week, 12 February.

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Hershey, Robert D., Jr. 1987. ‘Volcker Out After 8 Years as Federal Reserve Chief; Reagan Chooses Greenspan.’ New York Times, 3 June. Accessed 21 August 2016, http://www.nytimes.com/1987/06/03/business/volcker-out-after-8-years-asfederal-reserve-chief-reagan-chooses-greenspan.html?pagewanted=all. Hitt, Greg, and Sarah Lueck. 2008. ‘Senate Vote Gives Bailout Plan New Life.’ Wall Street Journal Updated, 1 October. Igan, Deniz, and Prachi Mishra. 2014. ‘Wall Street, Capitol Hill, and K Street: Political Influence and Financial Regulation.’ Law and Economics 57(4), 1063–1084. Igan, Deniz, Prachi Mishra, and Thierry Tressel. 2014. ‘A Fistful of Dollars: Lobbying and the Financial Crisis.’ In NBER Macroeconomics Annual 2011, edited by Doron Acemoglu and Michael Woodford, 195–230. Chicago: University of Chicago Press. Johnson, Dave. 2011. ‘License to Profit: Legalized Corruption in the United States Congress.’ Truthout, 6 December. Jorgensen, Paul, Michael D. Jones, and Gaboo Song. 2018. ‘Public Support for Campaign Finance Reform: The Role of Policy Narratives, Cultural Predispositions, and Political Knowledge in Collective Policy Preference Formation.’ Social Science Quarterly 99(1), 216–230. Kane, Edward J. 2017. Ethics vs. Ethos in US and UK Megabanking. Institute for New Economic Thinking. Krozner, Randall, and Thomas Stratmann. 1998. ‘Interest-Group Competition and the Organization of Congress: Theory and Evidence from Financial Services’ Political Action Committees.’ American Economic Review 88(5), 1163–1187. Mayer, Jane. 2016. Dark Money. New York: Doubleday. Mian, Atif, Amir Sufi, and Francesco Trebbi. 2010. ‘The Political Economy of the US Mortgage Default Crisis.’ American Economic Review 100(5), 1967–1998. Mian, Atif, Amir Sufi, and Francesco Trebbi. 2013. ‘The Political Economy of the Subprime Mortgage Credit Expansion.’ Quarterly Journal of Political Science 8(4), 373–408. Saloma, John S. 1984. Ominous Politics. New York: Hill & Wang. Stigler, George. 1975. The Citizen and the State. Chicago: University of Chicago Press. Stratmann, Thomas. 2002. ‘Can Special Interests Buy Congressional Votes? Evidence from Financial Services Legislation.’ Journal of Law and Economics 45(2), 345–374. Swagel, Phillip. 2009. ‘The Financial Crisis: An Inside View.’ Brookings Papers on Economic Activity (Spring). Tahoun, Ahmed, and Laurence van Lent. 2016. ‘The Personal Wealth Interests of Politicians and the Stabilization of Financial Markets.’ Institute for New Economic Thinking, Working Paper. Tahoun, Ahmed, and Florin Vasvari. 2016. ‘Political Lending.’ Institute for New Economic Thinking, Working Paper No. 47, https://www.ineteconomics.org/rese​ arch/research-papers/political-lending. Weissman, Robert. 2009. ‘Reflections on Glass–Steagall and Maniacal Deregulation.’ Common Dreams, 12 November. Accessed 3 September 2016, http://www.com​ mondreams.org/views/2009/11/12/reflections-glass-steagall-and-maniacal-dereg​u​ la​tion. Wright, John R. 2000. ‘Interest Groups, Congressional Reform, and Party Government in the United States.’ Legislative Studies Quarterly 25(2), 217–235.

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Zhu, Li, Lance Waller, and Juan Ma. 2013. ‘Spatial-Temporal Disease Mapping of Illicit Drug Abuse or Dependence in the Presence of Misaligned Zip Codes.’ GeoJournal (1 June), 463–474. Ziobrowski, Alan J., J.W. Boyd, Ping Cheng, and Brigitte J. Ziobrowski. 2011. ‘Abnormal Returns from Common Stock Investments of Members of the United States House of Representatives.’ Business and Politics 13(1), 1–22. Ziobrowski, Alan J., Ping Cheng, J.W. Boyd, and Brigitte J. Ziobrowski. 2004. ‘Abnormal Returns from the Common Stock Investments of the United States Senate.’ Journal of Financial and Quantitative Analysis 39, 661–676.

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APPENDIX 10.1 THE CAMPAIGN AGAINST DODD– FRANK IN THE HOUSE OF REPRESENTATIVES: STATISTICAL MODELS Our main text presented the results of our statistical tests of how political money affected voting on measures to weaken the Dodd–Frank financial reform legislation in the United States House of Representatives. This appendix details our formal model of the House votes to amend the bill in 2013–2015. We hope our exposition will be accessible to readers of widely differing backgrounds. As discussed earlier, the focus of the first study is not the passage of Dodd–Frank itself, but the subsequent votes to weaken the legislation between 2013 and early 2015. By focusing on representatives who originally voted in favor of the bill and later changed their votes, it is possible to bypass many potential methodological pitfalls that can shadow efforts to pinpoint political money’s role in bringing about these changes of heart. Since virtually all Republicans opposed the bill from the outset and never changed their minds, the problem turns into an analysis of why Democrats who originally voted for the bill broke with the rest of their party to ­support pro-bank measures. We consider House voting on five different bills. Four of these came in the 113th Congress that was elected in November 2012. The fifth vote took place in January 2015, immediately after the new Congress elected in 2014 convened. We begin by defining time, t 5 1, 2, 3, 4, and 5 corresponding to the ­successive votes described in our main text: Swap2013Oct, ConFinWeak​ Feb2014, CustProtFinWeakJune2014, SwapsOminbusDec2014, and House​ 185RegAcctJan2015, respectively. The total number of ­representatives in the House at the time Dodd–Frank went through (including a few who did not vote) and later cast ballots on the roll calls we examine are, respectively, 251, 249, 243, 251, and 211. Of these, 120, 121, 119, 124, and 104 were Democrats who voted in favor of Dodd–Frank, of which 84, 118, 102, 92, and 101 voted ‘Anti-Bank’ in line with the party majority in the later votes. Not all Democrats were so steadfast: in the successive votes, 36 (30 percent), 3 (2.48 percent), 17 (14.29 percent), 32 (25.81 percent) and 3 (2.88 percent) broke with their party and joined the Republicans in voting ‘pro-Bank’. These we denominate via a dichotomous variable Break Party. This is defined as Break Party 5 1 for DEM representatives who voted Pro-Bank, otherwise, Break Party 5 0. Table A10.1 brings all this together in summary form.45

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Table A10.1  C  ounts and percentage Democrats representatives breaking party for the five roll calls Time of vote Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

Breaking party

Not breaking

All

36 (30.0%) 3  (2.5) 17 (14.3%) 32 (25.8%) 3  (2.9%)

84 (70%) 118 (97.5%) 102 (85.7%) 92 (74.2) 101 (97.1%)

120 121 119 124 104

Let Yit 5 1, if breaking party holds, and Yit 5 0, if the representative does not break party; also let pit 5 P(Yit 5 1), for t 5 1, 2, 3, 4, and 5, and i 5 1, 2, ,. . ., nt; nt [ { 120, 121, 119, 124, 104 } .



Since a BB joint count test indicated that spatial autocorrelation is not a problem, we employ logistic regression with a random intercept to analyze the influences on the odds of breaking party on these votes (interpretation via odds ratios is a common method of explicating results of logistic regressions).. The equation we estimate is:

ln a

pit b 5 β0 1 β1T1i 1 β2T2i 1 β3T3i 1 β4T4i 1 β5ConservR1314i 12pit 1 β5LeftCongressAfter2014i 1 β6MemberBanking1314i



1 β7TotalMoneyFinit 1 bi,

where bi is a random effect distributed as N(0, σ2b) and Tti 5 1, for subject i at time t, with Tti 5 0, otherwise. As explained earlier, we tested a wide variety of variables, ­including various specifications of ‘revolving door’ linkages, representatives’ margins of victory, and loans by financial institutions to the entire House. The ­variables making it into our final equation are these: Money is a time-varying covariate scaled in $1,000 units, such that for time 5 1 and 2, Money 5 AMOUNTfinance2012 1 AMOUNTfinance2013; for time 5 3, 4, and 5, Money 5 AMOUNTfinance2014 (which includes sums for the entire electoral cycle of 2013–2014).

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ConservR1314, a measure indicating where representatives place on a conservatism scale in that particular Congress, where 0 is the lowest score and 100 is highest, as discussed in the main text. LEFT_CONGRESS_AFTER_2014 refers to representatives who did not run for election in 2014 and thus left Congress. Member Banking 13–14, indicating that the representative served on the Financial Services Committee in the 113 Congress. These last three are fixed rather than time varying covariates. Descriptive statistics for the independent variables are listed in Tables A10.2 and A10.3 for the five time periods comparing the representatives who broke with the party vs. those that did not. Those who Left Congress After 2014 and who served on the Financial Services Committee (Member Banking 13–14) are more likely to break with the party. Representatives who have higher values of ConservR1314 and Total Money Fin ($1,000) are also more likely Table A10.2  C  ounts and percentages of members leaving Congress and serving on House Financial Services Committee for Democrats Time of vote Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

Left Congress After 2014

Member Banking 13-14

Leaving

Not Leaving

Member

Not Member

15 (12.5%) 15 (12.4%) 16 (13.5%) 17 (13.7%) 0 (0.0%)

105  (87.5%) 106  (87.6%) 103  (86.5%) 107  (86.3%) 104 (100.0%)

17 (14.2%) 17 (14.1%) 15 (12.6%) 15 (12.1%) 13 (12.5%)

103 (85.8%) 104 (85.9%) 104 (87.4%) 109 (97.9%) 91 (87.5%)

Table A10.3  Comparison of percentages of breaking party Time of vote Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

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Left Congress After 2014

Member Banking 1314

Leaving

Not Leaving

Member

Not Member

33.3% (15) 13.3% (15) 31.3% (16) 58.8% (17) NA (0)

29.5% (105) 0.9% (106) 11.7% (103) 20.6% (107) 2.9% (104)

58.5% (17) 0.0% (17) 13.3% (15) 53.3% (15) 0.0% (13)

25.2% (103) 2.9% (104) 14.1% (105) 22.0% (109) 3.3% (91)

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Table A10.4  D  escriptive statistics of means and standard deviations of the interval level variables Variables

Time of vote

ConServR1314 Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015 Total Money Fin ($1,000)

Breaking party

Not breaking

All

19.0 (12.5) 48.3 (13.3) 31.2 (15.0) 21.7 (15.1) 48.0 (6.9)

10.2 (11.3) 12.1 (11.7) 10.0 (10.0) 9.8 (10.7) 10.6 (10.6)

12.9 (12.9) 13.0 (12.9) 13.1 (12.1) 12.9 (13.0) 11.7 (12.2)

Swap2013Oct

410.0 (432.4) 131.4 (152.5) 215.0 (296.0)

ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

269.9 (81.0) 269.9 (470.7) 335.5 (438.6) 117.2 (51.5)

211.3 (300.7) 151.1 (208.9) 116.9 (149.9) 157.3 (220.5)

212.7 (297.2) 168.0 (262.9) 173.3 (272.6) 156.2 (217.5)

to break with the party. See the discussion below of the output in Table A10.4. Note that: 1. Of those voting at Time 1, Swap2013Oct, there were 15 representatives who eventually left Congress in 2014; of them, 33.3 percent broke with the party compared with 29.5 percent of those who did not leave. Seventeen subjects were members of the Financial Services Committee (Banking) in 13–14, out of them, 58.5 percent broke party, while of the 103 were not members of the Financial Services Committee in 13–14; only 25.2 percent broke with the party. 2. At Time 2, ConFinWeakFeb2014, 15 representatives left Congress after 2014; of them, 13.3 percent broke party compared with only 0.9 percent of the 106 subjects who did not leave. Of the 17 representatives who voted and were members of Financial Services in 13–14, none broke with the party this time, while of the 104 who were not members, 2.9 percent broke with the party. 3. At Time 3, CustProtFinWeakJune2014, 16 representatives left Congress after 2014; of them 31.3 percent broke party compared with 11.7 percent of the 103 members who did not leave. Fifteen representatives were members of Financial Services in 13–14; of them, 13.3 percent broke with the party, while of the 105 who were not members of Financial Services, only 14.1 percent broke with the party. 4. At Time 4, SwapsOminBusDec2014, 17 subjects were leaving Congress after the lame duck session; of them 58.8 percent broke with the party

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Table A10.5  E  stimated coefficients and odds ratios for ‘breaking party’ based on a mixed logistic model Parameter Swap2013Oct (Exp(β01βt)) ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015(Exp(β0)) ConServR1314 Left Congress After 2014 Member Banking1314 Total Money Fin ($1,000)

Estimate (β)

Standard error

Odds ratio (e   β   )

P-value

3.0086 –0.8738 1.8467 2.7856 –5.6561 0.0858 1.0349 0.6300 0.0013

0.5977 0.6694 0.5202 0.5452 0.5263 0.0117 0.4986 0.4039 0.0005

0.071 0.002 0.022 0.055 0.003 1.089 2.815 1.897 1.001

,0.0001 0.1918 0.0004 ,0.0001 ,0.0001 ,0.0001 0.0379 0.1188 0.0099

compared to but 20.6 percent of the 107 members who were not leaving. Of 15 representatives who were members of Financial Services in 13–14, 53.3 percent broke with party while of the 109 ­representatives who were not members of Financial Services in 13–14, 22 percent broke with the party. 5. At Time 5, House195RegAcctJan2015, no one who could vote had left Congress after 2014. None of the 13 subjects who were members of Financial Services broke with the party. Of the 91 subjects who were not members of Financial Services, 3.3 percent broke with the party. The first five entries in Table A10.5 refer to the estimate of the intercept for the fixed effects of the five time periods. In logistic regression, coefficients are commonly interpreted by reference to odds ratios, that is, how a unit increase in the predictor changes the odds of the outcome being evaluated for. In this case, the outcome is a Democrat who previously voted for Dodd–Frank breaking with the rest of the party and voting pro-Bank. Thus, the estimated coefficient for representatives who serve on the Financial Services Committee – (Member Banking 13-14) is 0.63 and the odds ratio is 1.9, indicating that the odds of breaking with the party increase by 90 percent compared with representatives who do not serve on this committee.46 Note that this means that the odds have almost doubled, not that the absolute probability has, since in a logistic regression the latter changes with the value of the predictor in a non-linear way. The estimated coefficient for ConServR1314 is 0.08 and the odds ratio is 1.09, indicating that for every unit increase in ConServR1314 – the ­representative’s score on the index of Conservatism – the odds of ‘breaking party’ increase by 9 percent. The estimated coefficient for Left Congress

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Table A10.6  Counts and percentages for voting for the five roll calls Time of vote

Anti-bank

Pro-bank

All

Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

  93 (37.1%) 125 (50.6%) 109 (44.9%) 129 (51.4%) 107 (50.7%)

158 (62.9%) 123 (49.4%) 134 (55.1%) 122 (48.6%) 104 (49.3%)

251 249 243 251 211

Table A10.7  C  ounts and percentages of members leaving Congress and party at 2012, Democrats and Republicans Time of vote

Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

Party 2012

Left Congress After 2014

DEM

GOP

Leaving

Not Leaving

133 (53.0%) 133 (53.4%) 130 (53.5%) 136 (54.2%) 113 (53.6%)

118 (47.0%) 116 (46.6%) 113 (46.5%) 115 (45.8%) 98 (46.4%)

38 (15.1%) 38 (15.3%) 33 (13.6%) 36 (14.3%) 0  (0.0%)

213  (84.9%) 211  (84.7%) 210  (86.4%) 215  (85.7%) 211 (100.0%)

After 2014 is 1.04 and the odds ratio is 2.8, indicating that the odds of a representative’s ‘Breaking Party’ are almost three times higher if he or she left Congress after 2014. The estimated coefficient for Total Money Fin is 0.0013 and the odds ratio is 1.001, indicating that for every $100,000 increase in Total Money from Finance, the odds of ‘breaking party’ increase by 13.9%. For perspective, the entries in Table A10.4, particularly for the successful push by the banks on the ‘Swaps Pushout Rule’ in December 2014, show that a considerable number of the Democrats who broke with their colleagues took in several hundred thousand dollars from finance. A Bayesian Model for Both Democrats and Republicans The second model we estimate is for both Democrats and Republicans who voted on the bills just analyzed, who also voted originally on Dodd– Frank.47 As discussed, what we are trying to explain is a vote against the banks. Let Zit 51, be the individual voter who votes against banks (Anti-Bank) at time t, t 5 1, 2, 3, 4, and 5 and I 5 1, 2, ,. . ., nt; nt [ { 251, 249, 243, 251, 211},

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Table A10.8 Comparison of percentages (%) for voting against the banks (Anti-Bank) Time of vote

Party 2012 DEM

Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

68.4% (133) 94.7% (133) 83.1% (130) 73.5% (136) 94.7% (113)

Left Congress After 2014

GOP

Leaving

Not Leaving

1.7% (118) 0.0% (116) 0.9% (113) 25.2% (115) 0.0% (98)

28.9% (38) 36.8% (38) 36.4% (33) 27.8% (36) NA (0)

38.5% (213) 53.1% (211) 46.2% (210) 55.3% (215) 50.7% (211)

and pit 5P { Zit 51} be the probability of voted for Anti-Bank for subject I at time t. Our Spatial-Temporal Logistic Regression model using a Bayesian approach is defined as follows: pit b 5 β0 1 β1T1i 1 β2T2i 1 β3T3i 1 β4T4i 12pit 1 β5ConservR1314i 1 β5LeftCongressAfter2014i 1 β6MarginVictoryi



log a



1 β7Party 1 β8TotalMoneyFinit 1 θit, θi,t 0 θj2i,t | N ( 2 θ i,t , σ θ2i,t /mi,t )

where θi,t captures district clustering via a Conditional Autoregressive n 1 (CAR) model, in which 2 θi,t 5 mi.t g j2i θij,t , mi,t is the number of neighbors of district I, at time t, with θij,t 51 if j and I are neighbors and 0 otherwise. Here we again present a table showing all the variables that made it into the final equation. Note that: 1. At Time 1, Swap2013Oct, there were 133 Democrats, of which 68.4 percent voted against the banks, while of 118 Republicans, 1.7 percent voted Anti-Bank. Of 38 subjects who left Congress after 2014, 28.9 percent voted Anti Bank; of 213 representatives who did not leave Congress after 2014, 38.5 percent voted Anti Bank. 2. At Time 2, ConFinWeakFeb2014, of 133 Democrats, 94.7 percent voted Anti-Bank; of 116 Republicans, none voted Anti-Bank. Of 38 representatives who left Congress after 2014, 36.8 percent voted AntiBank; of 211 representatives who did not leave Congress after 2014, 53.1 percent voted Anti-Bank. 3. At Time 3, CustProtFinWeakJune2014, of 130 Democrats, 83.1 percent voted Anti-Bank; of 113 Republicans, 0.9 percent voted

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Table A10.9  D  escriptive statistics of means (SD) for the interval level variables Variables ConServR1314

Time of vote

Swap2013Oct ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015 Total Money Swap2013Oct Fin ($1,000) ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015 Margins of Swap2013Oct Victory % ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015 Median Swap2013Oct Income ($1,000) ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 House195RegAcctJan2015

Anti-bank

Pro bank

All

12.1 (14.9) 12.3 (11.7) 10.9 (12.0) 23.3 (27.1) 10.7 (10.7) 127.1 (146) 203.6 (292.5) 144.7 (203.6) 124.9 (176.1) 152.5 (215.3) 47.0 (25.1) 45.4 (25.6) 46.1 (26.1) 44.6 (26.4) 48.8 (23.6) 51.7 (15.2) 52.9 (16.9) 54.2 (17.2) 52.9 (15.6) 52.5 (16.2)

54.2 (25.0) 65.4 (15.4) 61.6 (18.8) 53.7 (24.4) 65.6 (15.3) 414.7 (671.6) 413.4 (726.2) 286.3 (465.9) 317.3 (466.9) 290.1 (470.0) 37.9 (27.1) 36.2 (27.5) 36.1 (26.8) 36.8 (26.0) 38.0 (26.9) 54.5 (15.0) 55.0 (12.1) 53.2 (13.7) 54.7 (15.4) 53.8 (13.8)

38.6 (29.8) 38.6 (29.9) 38.9 (29.9) 38.1 (29.9) 37.8 (30.5) 308.1 (557.2) 307.3 (560.0) 222.8 (377.9) 218.4 (361.5) 220.3 (369.5) 41.3 (26.6) 40.9 (26.9) 40.6 (26.1) 40.8 (26.5) 43.5 (25.8) 53.5 (15.1) 53.9 (15.6) 53.6 (15.4) 53.8 (15.5) 53.2 (15.0)

­ nti-Bank. Of 33 representatives that left Congress after 2014, 36.4 A percent voted Anti-Bank; while of 210 who did not leave Congress after 2014, 46.2 percent voted Anti-Bank. 4. At Time 4, SwapsOminBusDec2014, of 136 Democrats, 73.5 percent voted Anti-Bank; while of 115 Republicans, 25.2 percent voted AntiBank. Of 36 representatives who left Congress after 2014, 27.8 percent voted Anti-Bank; of 215 representatives who did not leave Congress after 2014, 55.3 percent voted Anti-Bank. 5. At Time 5, House195RegAcctJan2015, of 113 Democrats, 94.7 percent voted Anti-Bank while of 98 Republicans, none voted against the banks. The variables in the final equation are presented in Table A10.10. This table can be read like that for the earlier model, except that this time we are testing for what makes representatives vote against finance, and estimating the model using Bayesian techniques that take account of both spatial and temporal variations, which makes the output look somewhat different. This regression, just like the previous one, indicates money matters for the outcomes of roll call votes: the more money from finance representatives receive the less likely they are to vote anti-Bank.48

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Table A10.10  E  stimated coefficients and odds ratios for voting ‘Anti-Bank’ based on a spatial temporal logistic model Parameter House195RegAcctJan2015(Exp(β0)) Swap2013Oct (Exp(β01βt)) ConFinWeakFeb2014 CustProtFinWeakJune2014 SwapsOminBusDec2014 Party 2012 ConServR1314 Left Congress After 2014 Margin of Victory (%) Total Money Fin ($1,000)

2.5%

Median

97.5%

Odds ratio (eβ)

0.0279 –2.7210 –0.3497 –1.7980 –0.4853 2.3470 –0.0819 –2.2510 0.0013 –0.0029

1.0420 –1.9360 0.4465 –0.9406 0.2334 3.0840 –0.0668 –1.5480 0.0073 –0.0021

2.3340 –1.0950 1.2580 –0.0301 0.9338 4.1140 –0.0494 –0.7319 0.0133 –0.0012

2.839 0.1443 1.5628 0.3904 1.2629 21.8456 0.9354 0.2127 1.007 0.9979

The estimated coefficient for Total Money Fin is –0.0021 and the odds ratio is 0.9979, indicating for every $1,000 increase in money from finance, the odds of a vote against the banks decrease by 0.21%. (Since this time Republicans are included, note from Table A10.9 that the average and median levels of contributions are substantially higher.) Members scoring high on Conservatism are substantially less likely to vote against the banks – in the table, the estimated coefficient for ConServR1314 is –0.0668 and the odds ratio is 0.94, indicating that the odds of an ‘Anti-Bank’ vote decrease by 6 percent with each percentage point rise in the Conservatism index. The estimated coefficient for Party 2012 is 3.084 and the odds ratio is 21.84, implying that Democrats are far more likely to vote against the banks than Republicans. The estimated coefficient for Left Congress After 2014 is 22.2510 and the odds ratio is 0.2127, indicating that the odds of representatives who left Congress after 2014 voting Anti-Bank were much lower than for the rest of the body – only 21 percent as much. Finally, in this equation, in contrast to the earlier one, the margin of victory does matter; the coefficient suggests that for every 1 percent increase in the margin of victory, the odds of an anti-Bank vote rise by 0.7 percent. Those who dare to vote against financial houses, it appears, are those who enjoy mostly higher margins of victory in the previous election.

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11. International rentiers, finance and income distribution: a Latin American and post-Keynesian perspective Esteban Pérez Caldentey and Matías Vernengo INTRODUCTION John Maynard Keynes interpreted economic history as a conflict between productive and unproductive capitalism.1 He identified unproductive capitalism with rentier behavior. Although Keynes is mainly known for his analysis of national capitalist rentiers, he also analyzed rentier behavior at the international level, equating it with creditor nation actions to hoard precious metals, a reserve currency or surplus balances.2 In this sense, international rentiers acted much like domestic rentiers, placing a brake on expenditure, the expansion of demand, full employment at the global level, and, in general, on economic progress. International rentier behavior not only applies to nations but can also characterize the actions and strategies of agents, such as the financial sector, which has experienced a process of significant growth and transformation as a result of deregulation and liberalization. The expansion of global financial assets was driven in the 1990s and up to the Global Financial Crisis (2008–2009) by global banks and the emergence of large complex financial institutions. A part of banks’ strategy to increase profitability centered on expanding their trading in assets including in foreign exchange, equities and commodities. Global banks have played an important role in commodity markets by their dealings in over-the-counter derivatives markets by lending to commodity dealers and also by having an active presence in the physical hoarding of commodities. This trading strategy contributed, to a large extent, to the transformation of commodities into financial assets and in raising their price during the so-called commodity boom (2002–2011) and thereafter. In the particular case of commodity producers, such as those of Latin 206

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America, the rise in commodity prices can have a significant effect on economic activity captured by the difference between the gross domestic product (GDP) and income. When commodity prices increase this translates into a favorable terms-of-trade effect and a rise of income over GDP. This has a fundamental implication as it means that real sector performance can be determined by financial factors. The variation in commodity prices also has an effect in the functional distribution of income. This is illustrated with the case of Latin American commodity producing countries where the rise in the terms-of-trade was accompanied by an increase in the profit share as a percentage of GDP. In order to understand the effects of the financialization of commodity markets and its impact on Latin America we use a combination of ideas that build on the old Latin American Structuralist School, with its center at the Economic Commission for Latin America and the Caribbean, and a broad an encompassing view of the ideas developed by post-Keynesian authors. In this regard, the work by Marc Lavoie and Mario Seccareccia (L&S), both individually, and their extensive collaborations, has been influential in our own research and methodology. In particular, we see L&S contributions as suggesting the need for a broad and methodological coherent heterodox alternative to the mainstream of the profession. This chapter is divided into six sections. Following this introduction, the second section discusses our view of the meaning of post-Keynesian economics, as informed by L&S methodological views. The third section analyzes Keynes’ views on domestic and international rentiers, through our post-Keynesian lens. The fourth section focusses on modern international rentiers in commodities trading, that is, global banks and commodity trading firms. The fifth section centers on the effects of the financialization of commodities, and its relation to the functional distribution of income. The final section concludes.

THE MEANING OF POST-KEYNESIAN ECONOMICS Over the last few years, a literature on the historical appearance of heterodox groups and its relation to the mainstream of the profession, including a history of post-Keynesian economics has emerged. For the most part the literature emphasizes the negative aspects of the heterodoxy, as a reaction to neoclassical economics, and the various strands of fragmented heterodox schools of thought. Marc Lavoie, together with the late Fred Lee, has been at the forefront of rethinking the meaning of heterodox economics, with a preoccupation of proposing a set of principles that can

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be seen as heterodox, that are independent of the mainstream and that at the same time can be applied to different branches of economics (Lee and Lavoie, 2012). We see this commitment to a broad, theoretically grounded view of heterodoxy to be associated to some extent with L&S’s particular approach to economics, that was influenced both by the more traditional Anglo-Saxon post-Keynesianism, but also, and, perhaps more forcefully, by the FrancoItalian Circuit School. We see L&S as straddling different traditions, providing the linchpin for a methodological synthesis of alternative heterodox traditions. The Circuit School centers on the definition of money, and how money enters the process of production, in ways that are reminiscent of some aspects of old classical political economy. In addition, as Hicks famously noted, monetary theory is closer to real-world institutions than other branches of economics. Note that in his discussion of heterodox and post-Keynesian economics Lavoie (2014, p. 6) adopts a definition from John Weeks, a Marxist author, that is essentially compatible with the views of classical political economy authors, arguing that ‘I prefer the definition offered by John Weeks [. . .] who objects to the standard definition of economics based on scarcity, proposing instead that “economics is the study of the process by which society brings its available resources into production, and the distribution of that production among its members”’. In our view, the historical-institutional method adopted by Latin American Structuralists also emphasizes the forces behind the reproduction of society, and the process by which the transformation of the structure of production determines and promotes the wealth, and poverty of nations. In that sense, the approach to heterodox economics that emphasizes the technical conditions of production, and the conflictive role of distribution behind the determination of the prices that allow for the reproduction of the material conditions for accumulation, and the quintessential Keynesian notion of effective demand, are, in a sense, at the heart of L&S and of our view of the definition of economics. Note that L&S think in terms of prices fixed by firms by adding a mark-up on costs in a world of imperfect competition. This is essentially a description of price-setting behavior by firms, irrespective of whether free competition holds or there are obstacles to it. It is essentially descriptive of the behavior of firms, and perfectly compatible with classical political economy views of value and distribution, as noted by Lavoie (2014). In that respect, the role of the exogenous interest rate, conventionally and institutionally affected by the policy of the central bank, points to the relevance of rentiers interests in the determination of income distribution. Seccareccia and Lavoie (2016, p. 208) have explored both the relevance of

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financialization, and what might be termed the revenge of the rentiers, in contrast to Keynes’ euthanasia of the rentier, in explaining the demise of the Golden Age of Capitalism. Seccareccia and Lavoie (2016, p. 208) argue correctly that, for Keynes: . . . monetary policy determined short-term rates and, in turn, representative opinion or rentier expectations of the future behavior of the central bank would affect, albeit imperfectly, the long-term rate of interest, thereby making interest rates a ‘highly conventional’ phenomenon instead of a ‘real’ phenomenon determined by productivity and thrift, as in the loanable funds theory. Consequently, monetary policy decisions and conventions were at the very heart of interest rate determination.

This understanding of the role of monetary policy, we would add monetary policy in the center countries in particular, was at the core of Keynes’ opposition to the rentier class, as noted by L&S. More specifically, according to L&S, high interest rates would have distributive effects, improving the position of ‘[h]igh-income groups (rentiers and entrepreneurs) would have a higher propensity to save than low-income groups (wage earners), and, as is well-known, this became the basis for post-Keynesian theories of consumption behavior as put forth by Nicholas Kaldor, Joan Robinson, and Luigi Pasinetti’ which would have a contractionary effect on the economy. If classical political economy authors put great emphasis on distributive conflict between workers and capitalists, post-Keynesians, like L&S, following Keynes, put greater emphasis on the role of rentiers and the conflicts between creditors and debtors.

DOMESTIC AND INTERNATIONAL RENTIERS IN POST-KEYNESIAN PERSPECTIVE According to Keynes, during the 19th century, capitalism entered a phase in its development which he termed the investment system characterized by the growing importance of contracts that ‘provide for the payment of fixed sums of money over a long period of time’ (Keynes, 1971 [1923], p. 4). This set the stage for the separation between the business (industrial capitalist, producers) and the investor (rentier) classes which had divergent and opposing interests. The distinction was also important for many Marxist authors, notably in the case of Rudolf Hilferding. Note that this is essentially an analytical distinction since, from a real-world perspective, in many cases there was, and still there is, great fluidity between members of those classes. The dominant economic discourse and the Gold Standard and sound finance policy prescriptions not only reinforced this cleavage but also gave

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the upper hand to the rentiers over the capitalist class. This is exemplified by several of the historical events and episodes that engulfed Keynes’ mind and attention following World War I, including war debts and debt service, inflation and deflation episodes and the attempts to reinstitute to the gold standard. One of the main consequences of World War I was the accumulation of debt by both the vanquished (Germany) and the Allies (Britain, France) of the war. The Peace Treaty (the Treaty of Versailles) forced Germany to pay reparations payments that were established by the Reparations Commission in 1921 at 132 billion gold marks. The reparations payments were to be made on a rising scale for 42 years. For its part, between 1914 and 1920, British national debt increased from 29 to 148 percent of GDP. Orthodox policies including macroeconomic adjustment, deflation or the restoration of the gold standard regime increased the real value of the debt, thus, increasing the share of income and output of the rentier while at the same time, increasing the burden born by the productive classes (Dillard, 1946). Keynes opposed the increase in debt because it could lead to the transformation of a nation into a rentier state to the detriment of productive activities. As he put it (Keynes, 1983, p. 160): . . .it is extraordinarily important that we as a nation do not become, as time goes on, a rentier nation depending on interest from bonds and cut off from the living enterprises of the day, where constructive things are being done and today’s wealth is being earned [. . .] It would be a great misfortune if we were to see others, let us say the Americans, owning [. . .] the equities of the new enterprises of each generation [. . .] whilst the life offices of Great Britain were diverting the saving of their policyholders almost exclusively into the bonds of the old things, which, ‘have stood the test of time’.

It was on this basis that Keynes opposed Churchill’s revaluation of sterling to its pre-war value. This amounted to a policy of deflation, bringing a reduction in exporters’ earnings and a significant transfer to the rentier class. Keynes proposed to confront the debt problem by imposing a domestic capital levy by both victors and vanquished and then by lowering3 the rate of interest on the debt. As both of these options proved to be impracticable, he favored a long-run increase in prices. The evolution of inflation was influenced by the financial needs of governments and the power of the debtor class (Keynes, 1919). Inflation benefitted the productive class and deflation the rentier class. An entrepreneur can only become an entrepreneur by first becoming a debtor. As a result, by lowering the debt burden inflation acted as a stimulus on enterprise and at the same time allowed this emerging class to break free of its ties with the influence of the past. As Keynes put it:

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inflation was a means by which each ‘generation can disinherit in part its predecessors’ heirs’. Contrarily, deflation heightens the dominance of the past over the wealth-creating class. Hence his famous quote: ‘. . .it is worse in an impoverished world, to provoke unemployment than to disappoint the rentier’ (Keynes, 1971 [1923], p. 36). In Keynes’ work there is a clear evolution of the importance of the rentier. In his earlier writings, Keynes assimilated the rentiers (i.e., the creditors, that is ‘the holders of bonds and debentures and preference shares and gilt edged securities’) to the ‘comparatively poor’ while the debtors (‘holders of ordinary and deferred shares, private merchants and the entrepreneurs class’) represented the rich segment of society so that the relief of debtors at the expense of creditors could not be considered a desirable distribution of wealth (Keynes, 1983, p. 716). In later books, pamphlets and papers, he switched views, and rentiers are identified with the wealthier segments of society. At this stage rentiers appear as the beneficiaries of changes is the value of money. In The General Theory of Employment, Interest and Money (Keynes, 1978 [1936], pp. 158–161), rentiers appear in a more active role and importance in terms of determining the outcome of the behavior of the private sector. By holding liquid assets rather than bonds and by exploiting the ‘scarcity-value of capital’ rentiers can rein in spending, preventing effective demand from reaching a level compatible with full employment. Rentiers are also equated with speculators who ‘destabilize the economy by their irrational behavior in the stock market’ (Lavoie and Seccareccia, 1988, p. 150).4 Note that Keynes emphasized the role of the conventional interest rate, which was not merely psychological, and that was influenced by institutional factors. Rentier behavior not only characterized the conduct of a segment of the private sector, (the functionless investors), but also that of countries and, more specifically, creditor countries. In the same way that, within an economy, the private sector could, by speculating, destabilize the economy and generate unemployment, countries could do something analogous. Countries hoarded precious metals, reserve currencies or surplus balances, putting debtor countries in difficulties, in particular forcing them into contractionary stances that had a negative effect on the global economy as a whole. As Keynes explained in a speech to the House of the Lords on 18 May 1943: . . .the world’s trading difficulties in the past have not always been due to the impoverishment of debtor countries. They may be caused in a most acute form if a creditor country is constantly withdrawing international money from circulation and hoarding it, instead of putting it back again into circulation, thus refusing to spend its income from abroad either on goods for home consumption or on investment overseas [. . .] employment and the creation of new

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incomes out of new production can only be maintained through the expenditure on goods and services of the income previously earned. This is equally true of home trade and of foreign trade. A foreign country equally can be the ultimate cause of unemployment by hoarding beyond the reasonable requirements of precaution. Our plan must address itself to this problem also [. . .] In attempting to tackle this problem the British plan breaks new ground. (Keynes, 1980, p. 273)

As early as in 1924, in Indian Currency and Finance, Keynes (1971 [1924]) argued that the India’s propensity to hoard precious metals had been ‘ruinous’ to her economy. Furthermore, the Indian case exemplified the fact that a surfeit of gold can do at least as much damage as a shortage. . . [and that] . . . [i]t is not likely that we shall leave permanently the most intimate adjustments of our economic organism at the mercy of a lucky prospector, a new chemical process, or a change of ideas in Asia. (Keynes, 1971 [1913], p. 71)

Later, in 1929, Keynes argued how the absence of dynamism in world economic activity was due to creditor nations which by accumulating balances rather than spending pursued a ‘course of action that was calculated to bankrupt the debtor countries’ (Keynes, 1983, p. 183). In 1932 in the World’s Economic Outlook, Keynes referred to the accumulation of gold as a key obstacle to world growth and prosperity. In this way Keynes emphasized this rentier-like attitude of creditor countries as he would do later on in his proposal for a currency union. While, in The General Theory, Keynes argued for a decline in the rate of interest, the need for the euthanasia of the rentier at the national level, in his Clearing Union proposal he sought to avoid the rentier-like behavior of creditor countries by incentivizing them to spend their surplus balances. The key innovation of Keynes’ Clearing Union proposal consisted in putting the burden of adjustment on debtors and creditors symmetrically. Both had to adjust their balance sheets to allow the proper distribution of the effective demand and granted to the whole Keynes scheme an expansive bias. In an international system, lowering the interest rate was insufficient to bring about the ‘euthanasia of the rentier’, a proper distribution of spending power was also necessary. In this regard, as argued by Carabelli and Cedrini (2014): ‘The project of an International Clearing Union (ICU) should therefore be read through the lens of Keynes’s vision of economic history as a permanent conflict opposing producers to rentiers’. However, in contrast to individual or private sector rentiers, the behavior of international rentiers is more organized, and it is part of conscious governmental policy.

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INTERNATIONAL RENTIERS IN MODERN GUISE Since the thrust for deregulation began in the 1980s, the financial sector has experienced significant growth and changes over time which have reinforced the predominance of rentier over productive capitalism.5 In 1980, the value of global financial assets and GDP were similar (US$13 and 11.1 trillion). Two decades later, the value of global financial assets reached US$203 trillion, representing six times the current value of GDP, US$33 trillion. In 2016, the value of global assets was roughly 14 times that of GDP, US$1,102 and 78 trillion respectively (see Figure 11.1). The expansion of global financial assets was driven in the 1990s and up to the Global Financial Crisis (2008–2009) by global banks and the emergence of large complex financial institutions, including the expansion of the so-called shadow banking system and the emergence of systemically important financial institutions (SIFIs) that are too large to fail. These operate as a worldwide network of offices and subsidiaries, with centralized financing that is distributed within the financial group as part of a global strategic plan and dominate the global financial system. Large complex financial institutions have grown substantially in the last decade, account for the bulk of financial intermediation between countries and bring together services and institutions such as banking, insurance, 16 14 12 10 8 6 4 2 0

1980 1990 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016

Sources:  World Bank. World Development Indicators (2019a); Deutsche Bank (2015).

Figure 11.1  E  volution of the ratio of the value global financial assets to world GDP (1980–2016)

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s­ ecurities and asset management in terms of their institutional organization, structure, and instrument toolkit. The emergence of global banks was accompanied by a process of concentration and rise in profitability. Available evidence for all deposit insurance financial institutions in the United States shows that their number declined from 13,631 in 1985, to 3,864 in 2005 and to 1,278 in 2018. At the same time the total asset share of deposit financial insured institutions whose assets exceeded US$250 billion rose, and which numbered 3, 6 and 9 in 2000, 2005, and 2018, represented 10 percent, 37 percent, and 49 percent of the total for those respective years. These include, for 2018, the Bank of New York Mellon (US$286 billion in assets); GRP US Holds (US$302 billion in assets); Capital One (US$305 billion in assets); PNC FNCL SVC GROUP (US$370 billion in assets); USBC (US$459 billion in assets); Citigroup (US$1,406 billion in assets); Wells Fargo (US$1,689 billion in assets); Bank of America (US$1,782 billion in assets) and JP Morgan Chase (US$2,2 19 billion in assets). Due their sheer size, the first four big banks, Citigroup, Wells Fargo, Bank of America and JP Morgan Chase, hold 50 percent of the total banking system assets and more than 80 percent of the banks with assets above US$250 billion.6 The rise in bank profitability, which accompanies increase in asset growth, is visible from the 1990s until the start of the Global Financial Crisis (Figure 11.2). The available data shows that the quarterly rate of 60

20 15

50

10

40

5 0

30

–5 –10

20

–15

10

–20 –25 0 0 0 1988Q4 1990Q1 1991Q2 1992Q3 1993Q4 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2 2012Q3 2013Q4 2015Q1 2016Q2 2017Q3 2018Q4

0

Profitability

Asset growth

Assets > $250 Billion (left-hand axis)

Source:  Financial Deposit Insurance Corporation (FDIC) (2019).

Figure 11.2  A  ll deposit insured institutions. Profitability, asset growth and total asset share of banks with assets . US$250 billion, 1984–2018 (Quarterly data. In percentages)

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return of equity (ROE) averaged 5.5 percent between 1984 and 1990, increasing to roughly 12.7 percent between 1991 and 2007. As a result of the Global Financial Crisis, the ROE dropped to 7.7 percent and thereafter it recovered reaching 10 percent between 2016 and 2018. The latest data for 2018 shows a ROE of about 12 percent for banks with assets above US$10 billion. Part of banks’ strategy to increase profitability centered on expanding their trading in assets, including in foreign exchange, equities and commodities. For the period 2003–2008, the asset growth of United States commercial banks was driven by loans and leases, trading in assets and securities. These contributed 43, 11 and 12 percent to total asset growth during the said period (Baily et al., 2015). For its part, for the period 2000–2006 trading revenue represented 38 percent of total non-traditional revenue before falling to 1.9 percent during 2007–2008 as a result of the Global Financial Crisis. In the case of commodities markets, global banks have played an important role in three ways (Lane, 2012). First global banks have become important commodity dealers in over-the-counter derivatives markets. At the global level, commodity trading revenues were estimated at US$2 billion in 2003 reaching a peak of over US$14 billion in 2008 and then experienced a decline, and are currently at US$4 billion (Meyer and Hume, 2014). However, available data on commodity derivatives shows values that are much higher, and these followed closely the commodity super cycle. In 2003, the value of the notional amounts of commodity derivatives outstanding at the global level was estimated at US$1.6 trillion increasing to US$14 trillion in June 2008. Currently the value of global commodity derivatives stands at US$2.1 in trillion (BIS, 2019). Second, global banks have provided a significant share of lending to commodity dealers and, more importantly, in some cases have become highly interconnected with commodity dealers (commodity trading firms).7 The business of commodity trading firms consists in holding commodity stocks storing them over time, moving them around the world, making markets in both physical commodities and derivatives (Lane, 2012). Commodity stocks are used as collaterals, in order to obtain the required liquidity to finance their activities. This has become a general practice for a wide range of commodities including gold, copper, iron ore, and, to a lesser extent, nickel, zinc, aluminum, soybean, palm oil and rubber. Some of the most illustrative examples are available in the case of China where financing commodity deals occur in the presence of capital controls and a significant positive local-to-foreign interest rate differential. The most simple financing deal consists, in general terms, in a domestic company using a warrant of a commodity (a document issued by logistic

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Source:  Author’s own on the basis of World Bank (2019b).

–0.01 –0.04 0.00

Agriculture and Energy Energy and Metals and Minerals Agriculture and Metals and Minerals

0.43 0.60 0.67

4.4 29.7 –13.8 9.3

1970–1980

1960–1970 2.0 16.8 –13.2 5.9

18.1 116.9 –6.9 26.2

1970–1980

1960–1970 0.0 8.0 –1.8 2.7

5.6 40.6 –17.9 10.5

1970–1980

0.7 5.7 –3.3 2.1

Mean Maximum Minimum Std. Dev.

Mean Maximum Minimum Std. Dev.

Mean Maximum Minimum Std. Dev.

1960–1970

0.16 0.04 0.69

1.4 43.4 –18.0 12.2

3.0 48.4 –19.2 13.8

1990–2000

Energy

–0.7 7.8 –8.7 3.9

1990–2000

–0.03 0.36 0.33

Correlations

–0.9 27.2 –18.0 9.2

1990–2000

0.74 0.63 0.56

6.2 38.5 –35.9 14.7

2000–2010

8.1 48.4 –31.8 16.9

2000–2010

3.3 21.9 –13.5 6.8

2000–2010

Metals and Minerals 1980–1990

–0.3 42.8 –32.2 12.0

1980–1990

–0.4 13.6 –11.6 6.2

1980–1990

Agriculture

0.34 0.36 0.37

6.7 33.7 –30.7 10.7

2000–2008

10.5 48.4 –25.1 14.7

2000–2008

4.1 21.9 –7.5 6.1

2000–2008

0.70 0.75 0.68

–3.7 17.5 –16.5 7.7

2010–2015

–4.3 18.5 –29.9 13.2

2010–2015

–0.8 18.0 –8.3 6.6

2010–2015

Table 11.1 Rate of growth of commodity prices in agriculture, energy, metals and minerals (1960–2015, in percentages) and correlation coefficients



International rentiers, finance and income distribution ­217

companies which represent the ownership of the underlying asset, in this case a commodity) to borrow a foreign exchange short-term loan.8 The warrant is then sold for cash in the domestic market and the proceeds are invested in asset yielding a higher rate of return than the interest to be paid on the foreign exchange loan (due to the significant positive local to foreign interest rate differential, i.e. the difference between a US letter of credit interest and a Chinese wealth management asset). The asset is then liquidated, and the foreign loan is paid. This procedure can be made continuous to earn recurrent returns as follows: a domestic company using a warrant of a commodity (a document issued by logistic companies which represent the ownership of the underlying asset, in this case a commodity) to borrow a foreign exchange short-term loan. The warrant is then sold (i.e., exported) by the company to an offshore subsidiary and receives the equivalent of the value of the warrant in foreign exchange. In this way, foreign exchange is brought into the country circumventing capital controls. The foreign exchange in then converted to local money and invested in assets yielding a higher rate of return than the interest to be paid on the foreign exchange loan (due to the significant positive local to foreign interest rate differential). The company then obtains a new foreign exchange loan and buys a warrant from the offshore subsidiary and then sells the warrant, again bringing in foreign exchange. With the proceeds the company pays the first loan, but in this case does not need to liquidate the investment. The process of buying and selling warrants between the domestic company and the offshore subsidiary is repeated to pay back the second foreign exchange loan. This provides an incentive to increase the stock of commodities and, in so far as they hold significant stocks of commodities, increase their price, and boost profits and liquidity. According to existing data, the ten most important commodity trading firms increased their revenues substantially during the commodity boom, reaching over a trillion dollars (US$ billion 310.3, 1,378.7 and 1,105.4 in 2004, 2013 and 2017) (Table 11.2). According to Gibbon (2014), in 2013 the revenues of these ten global commodity trading firms represented 8 percent of global trade and 25 percent of global trade in commodity products. One of the contributors to increasing revenues and also profits is financial activities. Schneyer (2011) argues that the business of commodity trading firms’ centers, to a great extent, on proprietary trading. This ­business strategy has been an important contributor to generate commodity price inflation and the accompanying capital gains which is a form of rent, even though growing demand, particularly in the short term, and changing supply conditions continue to exert effects on commodity prices, as before.9

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Table 11.2  M  ajor trading commodity firms: headquarters, revenues and commodity trades (selected years) Firm

Headquarters

Revenue $US billion

2018

2004

2013

2017

Vitol Glencore Cargill

Switzerland Switzerland United States

61.0 72.0 62.9

307.0 232.7 136.7

231.0 219.8 114.7

Trafigura Koch

Switzerland United States

17.6 40.0

133.0 115.0

180.7 110.0

Mercuria Noble

Switzerland Hong Kong

0.0 8.6

112.0 97.9

104.0 46.0

Gunvor Archer  Daniels Midland Louis  Dreyfus

Switzerland United States

0.0 36.2

91.0 89.8

0.4 62.3

Netherlands

12.0

63.6

36.5

310.3

1,378.7

1,105.4

Leading commodities 2018 Oil and gas Metals and mining Agriculture (crop and livestock) Oil Energy, oil and gas, minerals Raw materials, energy Agriculture, energy, metals and minerals Energy, raw materials Agriculture (oil seeds) Agriculture (oil seeds, grains, cotton, coffee), metals

Source:  Gibbon (2014) and information provided by commodity trading houses.

Finally, global banks have become involved in the physical trading of commodities, in the same way as commodity trading firms, holding physical inventories, making markets in commodities and by providing shipping and commodity storage (Lane, 2012). The available evidence indicates that the accumulation of inventories has been, at times, undertaken by some of the former investment banks of the United States, including Goldman Sachs, JP Morgan, and Morgan Stanley. As noted by the United States Senate Permanent Subcommittee on Investigations in their report on Wall Street Bank involvement with Physical Commodities (2014, p. 3): Until recently, Morgan Stanley controlled over 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JP Morgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the LME. In 2012, Goldman owned 1.5 million metric tons of aluminum worth $3 billion, about 25% of

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International rentiers, finance and income distribution ­219 the entire U.S. annual consumption. Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage business in the United States. Those large holdings illustrate the significant increase in participation and power of the financial holding companies active in physical commodity markets.10

The role of global banks along with that of commodity trading firms in commodity trading contributed, in no small manner, to increasing the profitability of commodity investment. According to Bhardwaj (2010), between 31 January 2004 and June 2008, commodity futures’ rate of return (19.5 percent) more than doubled that of equity (6.0 percent). Also, the commodity investment option was justified theoretically by arguing the risk of investing in commodities was lower than that of equities. Consequently, investing in commodities yielded a high rate of return to investment and with a lower risk relative to other investment alternatives (Gorton and Rouwenhorst, 2004).

FINANCIALIZATION, COMMODITIES AND INCOME DISTRIBUTION IN LATIN AMERICA Broadly speaking, financialization can be defined simply as the disproportionate growth of finance with respect to real activities in the economy (Epstein, 2006; Palley, 2007). Most discussions of financialization tend to suggest that financialization went hand in hand with the rise of neoliberal policies and with a change in the growth regime, particularly in advanced or central economies. Lavoie (2012–13, p. 27) argues that: Financialization thus transformed a growth regime that relied on high real wages and high business investment into a regime based on high consumption spending and ever-rising household gross debt, justified by high prices in the stock market and the real estate market.

Even if the growth regime was not driven by business investment, since investment is driven by the accelerator and is not autonomous, and the changes in growth are less associated from a switch from private ­investment to private consumption, it is still correct that financialization came hand in hand with public policies that constrained economic growth.11 In the case of Latin America, the Neoliberal Era that followed the Debt Crisis of the early 1980s, and collapse of the developmental state, where it existed, was related to a reconfiguration of the forms of integration with the global economy, one that implied the export of commodities, mostly in

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South America, and the export of people, directly through immigration or indirectly by using cheap labor in the ‘maquila’ sector, in Central America and Mexico (Pérez Caldentey and Vernengo, 2010). In particular, in South America, where commodities regained importance in the economic structure, the financialization process, and the financialization of commodities, as described in the previous section, played an important role in the fortunes of the region. The rise in commodity prices lifted the balance of payments constraint and was instrumental in allowing for higher growth, and for the redistributive policies associated with the so-called pink tide of left-of-center governments that allowed for a lower Gini coefficient in the region. The causes of the rise in commodity prices are certainly complex, and go beyond the conventional argument that it was all due to the China effect, since it is clear that in many cases the increase in Chinese demand had no significant impact, as is evident in the case of oil markets (Jenkins, 2009). Note that supply side factors might have played a central role, in particular the impact of appreciated currencies, which are often associated with higher wages, and higher production costs in dollars, in commodity producing countries. Figure 11.3 shows the relation between the broad dollar exchange rate and commodity prices and an inverse relation is visible, and detectable in statistical analysis.12 In this sense, the reversal of the political situation that allowed for 250.00

140.0000 120.0000

200.00

100.0000

150.00

80.0000

100.00

60.0000 40.0000

50.00

20.0000

1995M6 1996M6 1997M6 1998M6 1999M6 2000M6 2001M6 2002M6 2003M6 2004M6 2005M6 2006M6 2007M6 2008M6 2009M6 2010M6 2011M6 2012M6 2013M6 2014M6 2015M6 2016M6 2017M6

0.00

Commodity Price Index

0.0000

US RER

Source:  World Bank and FRED.

Figure 11.3  Commodity prices and US real exchange rate

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higher real wages, and more appreciated currencies in parts of the periphery, particularly Latin American commodity producers, allowed the supply conditions in commodity markets to change and became associated with declining pressures, a depreciation of their currencies, lower wages, and lower prices of production for commodities. In this context, the financialization of commodities, and the increase in speculation in commodity markets, which also played a crucial role in the rise of commodities, add an element of instability for peripheral countries in the region. The relationship between commodities and financial markets was analyzed through an empirical methodology that determines the contribution of a set of different regressors to the explanation of the variation of a given variable (Grömping, 2006).13 The explanatory variables included an index of economic activity, the federal funds rate, the stock market index and the three-month bond yield, and the dependent variable used was a general commodity price index. The exercise was carried out for the period 1993–2007 and 2008–2018. The results (Figure 11.4) show that the index of economic activity (a real explanatory variable) which explained 69.2 percent of the variation in commodity prices in the period 1993–2007 only explained 18.7 percent in the 2008–2018 period. Contrarily the explanatory power of the stock market index increased significantly from 6.1 to 41.2 80 70 60 50 40 30 20 10 0

Index of economic activity

Federal Funds Rate 1993–2007

Stock market

Three-month Bond Yield

2008–2018

Source:  On the basis of Bloomberg (2019)

Figure 11.4  R  elative importance of the determinants of commodity prices (1993–2007; 2008–2018)

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percent between the first and second periods. This analysis presupposes that supply conditions are relatively fixed, which is not necessarily the case for all commodities, as noted above, and shows that when the analysis emphasizes the demand elements the role of financial speculation was significant larger than the increase in economic activity, often associated with higher growth in China, and to a lesser extent India, and the increased demand for commodities. This adds an additional element of instability to the position of Latin American economies, particularly those that are commodity exporters in South America. Central to this argument is the effect of commodity prices in functional income distribution. Further, variation in commodity prices have a direct effect on economic activity. This can be easily seen by ­expressing gross national disposable income (NIt) as gross domestic product (GDPt) plus net factor payments to the rest of the world (NPRWt) , current transfers (CTt) and the terms-of-trade effect (TTEt) ,14 i.e.:

NIt 5 GDPt 1 NPRWt 1 CTc 1 TTEt(1)

The terms-of-trade effect equals the volume of goods and services exports (Xt) (or exports at constant prices) multiplied by the change in the trade price index:

TTEt 5 Xt

(Px 2Pm) Pm

Px 5 Xt a 21b(2) Pm

where Px, Pm 5 unit price indices for exports and imports. Using equation (2) to substitute TTEt into equation (1) gives:

Px NIt 5GDPt 1NPRWt 1CTc 1Xt a 21b(3) Pm

According to equation (3), if other factors remain unchanged, an improveP ment in the terms of trade (  Δ Pmx   ) translates into a rise in gross national disposable income (NIt) . Setting out from equation (3), it is possible to decompose the difference between gross national disposable income (NIt) and gross domestic product (GDPt) into net factor payments to the rest of the world (NPRWt) , current transfers (CTt) and the terms-of-trade effect (TTEt) . In the case of natural resource producing and exporting countries (Bolivia, Chile. Colombia, Ecuador, Peru, Venezuela), gross national disposable income (NIt) tended to out-space gross domestic product (GDPt) during the commodity boom and the terms-of-trade effect (TTEt) is the

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Table 11.3  D  ifferential between income and GDP as a percentage of GDP (selected economies of Latin America), 1990–2015   Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru República Dominicana Uruguay Venezuela LAC

1990–2000 2001–2008 –1.5 2.5 –1.5 –4.5 –1.5 –0.8 –7.9 7.7 2.2 2.8 –2.1 –4.8 0.3 –1.2 –1.3 1.4 0.0 –9.3 –2.1

–1.6 12.4 –1.9 3.1 1.8 –4.5 3.9 12.3 10.3 4.5 2.3 2.8 –6.0 –9.2 1.9 1.0 –2.7 7.0 0.7

2009

2010

2011–2015

–0.1 19.2 –0.4 10.4 3.2 –5.3 8.3 9.9 10.7 8.4 1.4 3.1 –9.7 –2.8 3.3 1.3 –3.2 10.6 1.7

–0.3 23.42 –0.4 19.9 5.5 –5.5 12.0 8.0 9.8 7.5 3.6 2.1 –11.0 –2.8 6.0 0.8 –3.5 13.9 3.0

0.5 28.4 1.2 17.8 6.0 –7.3 13.0 6.2 8.7 1.1 2.0 2.3 –10.6 0.5 6.7 –1.7 –2.0 15.1 3.2

Source:  Authors’ own estimations on the basis of national accounting data.

main factor accounting for this difference. In the cases of Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela, the differential between income and GDP as percentage of GDP was 2.5, 24.5, 21.5, 27.9, 21.3 and 29.3 percent. In 2010, these reached 23.4, 19.9, 5.5, 12.0, 6.0 and 13.9 percent respectively (Table 11.3). The above analysis has a fundamental implication for assessing the performance of economies affected by variations of commodity prices. Given the changes in the financial global markets and the role of global banks, the dependency of growth on commodity prices means that real sector performance is determined, to great extent by financial factors. In so far as the financial context is favorable to commodity prices, the effective rate of growth of Latin American countries affected by commodity prices can be much higher than that of GDP. Additionally, changes in commodity prices also affect functional income distribution This can be seen by decomposing the gross national disposable income (INt) between the wage bill (wages and salaries) and profit (gross ­operating surplus):

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INt 5 WNt 1 Bt(4)

where, WNt 5 wage bill at time t. Bt 5 surplus at time t. Putting together equations (3) and (4), the sum of the wage bill and profits can be expressed as a function of the domestic product (GDP), the terms-of-trade effect (TTE), net factor payments to the rest of the world (NPRWt) , and current transfers (CTt)

WNt 1Bt 5GDPt 1NPRWt 1CTc 1Xt a

Px 21b(5) Pm

According to equation (5), an improvement in the terms of trade (Px   /Pm) can result in a higher wage and/or in higher profits. In the particular case of many Latin American countries, the improvement in the terms-of-trade lead to a rising profit share. This trend can be observed for Latin American countries whose productive and export structure specializes in natural resources including Bolivia, Colombia, Paraguay, Peru and Venezuela (Table 11.4). In the cases of Bolivia, Chile, Colombia, Paraguay, Peru and Venezuela, the profit share stood in 2002 at 59.4, 53.3, 62.8, 63.0, 72.6 and 63.9 percent respectively. In 2006, the profit shares for these economies had increased to 65.6, 60.9, 64, 65.6, 75.8 and 66.4 percent. Almost a decade later, in 2014 the profits shares remained above those registered in 2002 in the cases of Bolivia, Chile, Colombia and Paraguay, even when the Gini coefficients in the region improved during the same period.15 This suggests that, in some cases, the financialization of commodities, and the increased speculation in commodity markets, with the higher volatility of the terms of trade, not only created problems with respect to the external vulnerability of the countries in the region, but it might also, Table 11.4  P  rofit share for selected Latin American countries (2002, 2006, 2010 and 2014). In percentages Countries

2002

2006

2010

2014

Bolivia Chile Colombia Paraguay Peru Venezuela

59.4 53.3 62.8 63.9 72.6 63.9

65.6 60.9 64.0 65.6 75.8 66.4

67.7 59.8 63.4 67.3 66.6 67.6

65.7 55.9 63.0 65.5 65.0 58.6

Source:  Authors’ own estimations on the basis of national accounts data for the respective countries.

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like financialization in advanced economies, have had a negative impact on functional income distribution.

CONCLUSION The collapse of the Golden Age of Capitalism, which in Latin America went hand in hand with the demise of the period of high growth associated to the State-led industrialization period after the Debt Crisis, took place at the same time as a process of financialization of the global economy, and a return of what might be termed Rentier Capitalism. Lavoie and Seccareccia’s work emphasized the role of rentiers, and on monetary policy, building on the work of Keynes and other post-Keynesian authors, in creating conditions for higher levels of inequality, and, in turn, lower levels of economic growth. Our analysis builds on this post-Keynesian perspective, to analyze the role of financialization and international rentier interests and its relation to income distribution in Latin America. We suggest that the financialization of commodity markets, by increasing returns to what are increasingly financial assets, might have led to an increase in the profit share of several countries in the region. In this view, the financialization of commodities, which went hand in hand with the neoliberal turn, plays an insidious role. While higher commodity prices, which, in part, can be ascribed to speculation in these markets, were instrumental in lifting the external constraint, they created the conditions, with the fluctuation and instability that characterizes financial markets, for greater financial fragility. In addition, even though in the last commodity boom, the pink tide and the so-called natural resource nationalism created conditions for income redistribution, the higher commodity prices also led to higher profits shares in many countries in the region, worsening income inequality, in an already very unequal region.

ACKNOWLEDGMENTS The authors are Chief of the Financing for Development Unit at the Economic Commission for Latin America and the Caribbean (ECLAC, Santiago, Chile) and Professor of Economics at Bucknell University (Lewisburg, Pennsylvania). The opinions here expressed are the authors’ own and need not coincide with the institutions with which they are affiliated. An earlier version of this paper was presented at the Eastern Economic Association in New York (March 2019) and the authors are grateful for the comments received.

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NOTES   1. See Carabelli and Cedrini (2014) and Dillard (1946).   2. See Carabelli and Cedrini (2014).   3. As he put it, (Keynes, 1919, p. 280): ‘As regards internal debt, I am one of those who believe that a capital levy for the extinction of debt is an absolute prerequisite of sound finance in every one of the European belligerent countries’.   4. Note that Keynes’ views on the determination of the rate of interest are part of his long struggle to abandon marginalist ideas. In particular, he rejected the Loanable Funds theory of interest. However, by retaining the idea of the Marginal Efficiency of Capital (MEK) in the determination of the rate of interest, the very notion of the natural rate that he wanted to discard, ends up being reintroduced. There could always be a rate of interest low enough to increase the MEK to the level that would be compatible with full employment. The very notion of relative scarcity must be abandoned. On this see Pivetti (1991).   5. In fact, if the regulation of international financial markets had imposed, in some way, Keynes’ euthanasia of the rentier during the so-called Golden Age of capitalism, then the deregulation, which started with the collapse of Bretton Woods in the 1970s, can be seen as the revenge of the rentiers. See Smithin (1996).   6. FDIC (2019); Bloomberg (2019).  7. Two examples of interconnectedness between global banks and commodity trading firms are: the trading alliance and eventual license and consulting agreement between Crédit Suisse and Glencore Strata; and the purchase of the trading company Phibro by Citigroup/Glencore, one of the major commodity trading firms. It specializes in energy and metals. From available evidence prior to its merger with Xstrata (a mining conglomerate) in 2013, Glencore controlled roughly 60 percent of global zinc stocks, 50 percent of copper, 30 percent of aluminum, and 25 percent of coal (Toussaint, 2014). As of 2015, Glencore had the tenth place in the Fortune Global 500 list of the world’s largest companies. Phibro trades in crude oil, oil products, natural gas, precious metals and also agricultural products.   8. See Credit Suisse (2014a, 2014b), Goldman Sachs (2014), Morgan Stanley (2014) and Tang and Zhu (2014).  9. The higher profitability of investing in commodities has also lured institutional ­investors, including pension funds, into the commodities business. 10. It should be noted that these former investment banks, renamed commercial banks after the Crisis, saw an important decline in leverage. Goldman Sachs, and Morgan Stanley saw their leverage fall from roughly 33 to 12 between 2007–2008 and 2012 (according to our calculation based on Bloomberg) and, thus, had to turn to other business strategies such as investment in commodities to maintain their profit levels. Leverage is equal to the ratio of assets to equity. This is one of the possible definitions of leverage. It expresses the relationship of the total assets of the firm to the portion owned by shareholders. It is an indicator of the extent to which a firm uses debt to finance its operation. If the leverage ratio is equal to 10, debt and equity represent 90 percent and 10 percent of the financial intermediary’s acquisition of assets respectively. 11. In most post-Keynesian stories about the financialization period, the growth regime went from wage-led to debt-led, explained to some extent by wage stagnation and a substitution of rising private debt levels, to maintain consumption patterns, which made the system more unstable. See, for example, Barba and Pivetti (2009). That argument is seriously questioned by Mason (2018), which shows that the rise in private debt has been associated with, on average, higher interest rates faced by households. He also notes that household borrowing finances mostly asset acquisition, not consumption, and the narrative that emphasizes the role of debt driven consumption in promoting economic growth after the demise of the Golden Age of capitalism. 12. Serrano (2013) shows that long-term supply condition might also affect the prices of commodities, and that the rise of commodity prices was to some extent associated with

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higher real wages in the countries that produce commodities, an argument that can be traced back to Raúl Prebisch’s preoccupation with the role of wage differential between the center and the periphery in explaining the tendency of commodity prices to fall. 13. If the model is written y 5 B0 1 B1x1 1 B2x2 1 B3x3 1 B4x4 1 B5x5 1 eit . Then R2 g 5 ( y^ 22 y) 5 g 5i51( y ι 22y) . R2 measures the proportion of variance of y, which is explained by the five i51 it regressors in the model used in the previous equation. Different statistical methods take this formula as a basis for estimating relative importance. One such method was that developed by Lindeman, Merenda and Gold in 1980 (Grömping, 2006). The algorithm consists of making p permutations (number of independent variables) and observing the change in R2 when the regressor is added to or removed from the model, in other words: reductionvar 5 var (Y 0 xj, j [ P ) 2var (Y 0 xk, k M d S) . Where P is the set of all ­permutations of p regressors and M is the set of variables to add to the model in the permutation j. 14. See Kacef and Manuelito (2008). 15. Note that in many cases Gini coefficients reflect differentials among wage earners, and a reduction might be associated with an increase of lower wages, in particular minimum wages, with respect to the higher wages of the middle classes.

REFERENCES Baily, N.B., W. Bekker and S.E. Holmes (2015), ‘The big four banks: The evolution of the financial sector’, Part I. The Brookings Institution. Economic Studies at Brookings. Bank of International Settlements (2019), OTC Commodity Derivatives Data. Geneva: BIS. Barba, A. and M. Pivetti (2009), ‘Rising household debt: Its causes and macroeconomic implications–a long-period analysis’. Cambridge Journal of Economics, 33(1), 113–137. Bhardwaj, G. (2010), Investment Case for Commodities? Myths and Reality, Vanguard Research. Bloomberg (2019), Bloomberg Data Base. Banking Statistics. Carabelli. A.M. and M.A. Cedrini (2014), ‘Keynes, the Great Depression, and international economic relations’. History of Economic Ideas, 22(3), 105–135. Credit Suisse (2014a), Commodities Advantage: A Bit of Winter Chill. Fixed Income Research, 20 February. Credit Suisse (2014b), Base Metals: Copper. Collateral Damage. Fixed Income Research, 21 February. Deutsche Bank (2015), The Random Walk. Mapping the World´s Financial Markets 2014. Deutsche Bank. Dillard, D. (1946), ‘The pragmatic basis of Keynes’s political economy’. Journal of Economic History, 6(2), 121–152. Epstein, G. (ed.) (2006), Financialization and the World Economy. Northampton: Edward Elgar. Federal Deposit Insurance Corporation (FDIC) (2019), Bank Statistics. Gibbon, P. (2014), ‘Trading houses during and since the Great Commodity Boom: Financialization, productivization or. . .?’. DIIS Working Paper, 12. Goldman Sachs (2014), Metal Detector. Days Numbered for Chinese Commodity Financing Deals, March 18.

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Gorton, G.B. and K.G. Rouwenhorst (2004), ‘Facts and fantasies about commodity futures’. NBER Working Paper No. 10595. Grömping, U. (2006), ‘Relative importance for linear regression in R: The package relaimpo’. Journal of Statistical Software, 17(1), 1–27. Jenkins, R. (2009), ‘The Latin American Case’. In Jenkins, R. and E. Dussell-Peters (eds), China and Latin America: Economic Relations in the Twenty-first Century. Bonn: Deutsches Institut für Entwicklungspolitk. Kacef, O. and S. Manuelito (2008), ‘El ingreso nacional bruto disponible en América Latina: una perspectiva de largo plazo’, serie Macroeconomía del Desarrollo, No. 69 (LC/L.2982-P/E), Santiago, Comisión Económica para América Latina y el Caribe (CEPAL). Keynes, J.M. (1919), The Economic Consequences of the Peace. New York: Penguin Books. Keynes, J.M (1932), The World’s Economic Outlook. The Atlantic Monthly, 149(5), 521–526. Keynes, J.M. (1971 [1913]), The Collected Writings of John Maynard Keynes. Vol. 1. Indian Currency and Finance. New York: St. Martin’s Press. Keynes, J.M. (1971 [1923]), The Collected Writings of John Maynard Keynes. Vol. IV. A Tract on Monetary Reform. New York: Cambridge University Press. Keynes, J.M. (1971 [1924]), The Collected Writings of John Maynard Keynes. Vol. II. Indian Currency and Finance. New York: The Macmillan Press. Keynes, J.M. (1978 [1936]), The Collected Writings of John Maynard Keynes. Vol. VII. The General Theory of Employment, Interest and Money. New York: Cambridge University Press. Keynes, J.M. (1980), The Collected Writings of John Maynard Keynes, Vol. XXV: The Clearing Union. New York: The Macmillan Press. Keynes, J.M. (1983), The Collected Writings of John Maynard Keynes, Vol. XII. Economic Articles and Correspondence. Donald Moggridge (ed.). New York: St. Martin’s Press. Lane, T. (2012), Financing Commodity Markets. Remarks. BIS. Mimeo. Lavoie, M. (2012–13), ‘Financialization, neo-liberalism and securitization’. Journal of Post Keynesian Economics, 35(2), 211–229. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar. Lavoie, M. and M. Seccareccia (1988), ‘Money, interest, and rentiers: The twilight in rentier capitalism in Keynes’ General Theory’. In Hamouda, O. and J.N. Smithin (eds), Keynes and Public Policy After Fifty Years. Vol. 2. Aldershot, UK: Edward Elgar, pp. 145–158. Lee, F. and M. Lavoie (2012), ‘Preface’. In Lee, F. and M. Lavoie (eds), In Defense of Post-Keynesian and Heterodox Economics: Responses to their Critics. London: Routledge. Mason, J.W. (2018), Income Distribution, Household Debt, and Aggregate Demand: A Critical Assessment. Levy Economics Institute, Working Papers Series No. 901. Meyer, G. and N. Hume (2014), ‘Wall Street banks count commodities trading profits’. The Financial Times, 14 May. Morgan Stanley (2014), The Commodity Manual. Collateral Damage in Copper and Iron Ore, Morgan Stanley Research Global, 17 March. Palley, T.I. (2007), Financialization: What it is and Why it Matters. Levy Economics Institute, Working Paper No. 525. Pérez Caldentey, E. and M. Vernengo (2010), ‘Back to the future: Latin America’s

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current development strategy’. Journal of Post Keynesian Economics, 32(4), 623–644. Pivetti, M. (1991), An Essay on Money and Distribution. London: Palgrave Macmillan. Schneyer, J. (2011), Corrected: Commodity Traders: The Trillion-Dollar Club. Business News, 28 October. Seccareccia, M. and M. Lavoie (2016), ‘Income distribution, rentiers, and their role in a capitalist economy’. International Journal of Political Economy, 45(3), 200–223. Serrano, F. (2013), ‘Continuity and change in the international economic order: Towards a Sraffian interpretation of the changing trend of commodity prices in the 2000s’. In Levrero, E., A. Palumbo and A. Stirati (eds), Sraffa and the Reconstruction of Economic Theory: Volume II. UK: Springer, pp. 195–222. Smithin, J. (1996), Macroeconomic Policy and the Future of Capitalism: The Revenge of the Rentiers and the Threat to Prosperity. Aldershot: Edward Elgar. Tang, K. and H. Zhu (2014), Commodities as Collateral. Mimeo. Toussaint, E. (2014), Banks Speculate on Raw Materials and Food, 7 March, www. cadtm.org. United States Senate Permanent Subcommittee on Investigations (2014), Committee on Homeland Security and Governmental Affairs. Wall Street Bank Involvement with Physical Commodities. Majority and Minority Staff Report, November. World Bank (2019a), World Development Indicators Data Base. Washington DC: World Bank. World Bank (2019b), Pink Book of Commodity Statistics. Washington DC: World Bank.

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PART 2

Crises and post-Keynesian economics

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12.  Is macro in crisis? Sheila Dow INTRODUCTION The contributions of Marc Lavoie and Mario Seccareccia to macroeconomics are many, important and various. These contributions extend beyond their own research to their leadership in fostering others’ research. They have exercised this leadership, not only through their editing activities (most recently Lavoie and Seccareccia, 2017), but also in creating a supportive and productive academic environment at the University of Ottawa. I benefited from this myself first in 1983 when I was invited to present a seminar there. For the first time, I encountered impatience with what was then the required convention for heterodox economists of discussing the mainstream account of a topic before moving on to the heterodox alternative. This was a liberating experience. Lavoie and Seccareccia share a fundamental concern to tailor economic analysis to addressing pressing socio-economic problems. Rather than being constrained, as is typical among mainstream economists, by internal methodological concerns, Lavoie and Seccareccia have pursued methodologies according to external methodological concerns, choosing whatever best suits the real policy problem at hand. They are methodological pluralists, allowing for a range of approaches to analysing a complex, evolving reality, while (as is proper for methodological pluralists) arguing strongly for the relative merits of their own chosen approach while critiquing alternatives (as in Seccareccia’s, 1988, critique of idealisation in mainstream economics, and Lavoie’s, 2018, critique of DSGE modelling). They also accordingly explore relevant developments in the history of economic thought. This has two consequences. First, the subject matter isn’t confined to whatever can be handled by mainstream methodology. Seccareccia (2015) for example has addressed issues of social justice and social provisioning. While Robbins (1932) had argued that any issue involving choice under scarcity is economic, the mathematical analysis of any issue in terms of constrained optimisation severely limits scope. While, in principle, Robbins’ 231

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definition of economics allows for an imperial expansion of economics to cover subjects normally addressed by other disciplines (­ sociology, psychology, politics, etc), in practice only those aspects of social, individual or political behaviour which are amenable to deterministic (if stochastic) representation can be analysed. Not only does this mean that an economistic approach to other disciplines impoverishes them, but also that economics itself is impoverished to the extent that economic behaviour itself is not deterministic. Indeed, many policy issues are excluded by inattention, due to methodological constraints, to such crucial factors as evolving institutions, and crucial goals such as social justice. Second, a willingness to allow for a range of approaches (while necessarily choosing one of them) highlights the issue of perspective. Lavoie (1983) presented an early analysis of difference in perspective, focusing on the significance of the national language of the economist. More generally, any approach is founded in an understanding of the nature of the subject matter (a perspective) from which follows an appropriate selection of questions, and methods for developing and appraising theory. One perspective will focus on class, for example, another on entrepreneurial behaviour, and so on. Methodological pluralism follows from an understanding of the subject matter as being too complex to be encompassed within one universal theoretical structure. Theoretical analysis inevitably abstracts, and there are many possible ways of doing that. All of this is highly pertinent to the fact that economics, and particularly macroeconomics, is in crisis – again. The mainstream approach has fallen sadly short on both counts, not only among its critics within economics, but more widely in society. Economic arguments for the liberalisation of the financial sector, and then for austerity policies (after an initial fiscal expansion) and quantitative easing, were presented as the product of technical expertise, detached from politics and ethics. Yet the resulting increase in income disparities (including disproportionate gains in the financial sector which had created the economic and fiscal crisis) and erosion of social services had profound implications for politics and for ethics. The purview of economists had been too narrow to address these concerns, in anticipation or in retrospect. The public backlash against economists has been fuelled by a clear difference in perspective between those economists who, disregarding issues of social justice, see an economic rebound following the crisis, and members of the public experiencing stagnant wages, job insecurity and rising inflation, compounded by continuing limits on the provision of social services. It is not a matter of truth having been replaced by ‘fake news’, but rather of different understandings of socio-economic conditions – different perspectives. To address difference of perspective, mainstream

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economics needs to abandon, not its search for truth, but its claims to have a monopoly of truth. Much has been written on the financial and economic crises, not only in terms of the methodological limitations on mainstream theory in attempting to analyse them, but also in making important strides in building up alternative analyses. Indeed, much of importance has been written in this vein by Lavoie and Seccareccia themselves, or under their academic ­leadership. What is offered here is a particular focus on current discussion of the economist as expert, and on the issue of ‘fake news’, as a way of thinking about the purview of economics and about the importance of perspective. As self-professed experts, we economists identify ourselves as developing theory and its application in order to promote the public good. Yet there has been a widespread rejection of expertise – especially economic ­expertise – and a flourishing of ‘fake news’ as an alternative basis for support for particular political positions. It seems so obvious that economists should support the role of experts and condemn the rejection of facts as fake news. But clearly there is a common view among much of the citizenry that experts and their presentation of facts do not correspond to lived experience. This view needs to be taken seriously, requiring an unpacking of the notions of expertise and facts. Here we consider the different forms that expertise, facts and their presentation may take, challenging the binary understanding of reason/ unreason and facts/fake news. The purpose therefore is to develop a more nuanced approach to expertise and facts which bridges the gap that currently exists with public discourse (see further, Dow 2017). This approach extends from methodology, to theory, to policy design and presentation, to constructive efforts to engage the citizenry with economics. The aim is not to condone wilful rejection of expertise or facts, but to encourage a better understanding of how expertise and facts may legitimately be differently understood, as well as developed, and therefore of the kind of discourse within which any one understanding is to be communicated and defended. In what follows, we therefore start by considering two broad strands in the critique of expertise, and then focus on the one that promotes a broader understanding of expertise than that offered by mainstream economics. We explore how economics might be done differently, considering what is entailed in a ‘search for truth’ in general and in the nature of facts in particular if we move beyond the binary mainstream understanding of these concepts. In the process we draw on Adam Smith’s pertinent work on the philosophy of science and on rhetoric. The core underlying issues are epistemological.

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THE TWO FACES OF THE CRITIQUE OF ECONOMIC EXPERTISE The rise of populism has encouraged the rejection of expertise as supporting the perspective and interests of the socio-political establishment, a turn prompted not only by ‘fake news’ but also crucially by real e­ xperience, which contradicted establishment accounts of the ‘facts’. The austerity policies introduced to deal with the fall-out of the crisis damaged the employment, income and social-service prospects of many people, while it caused moral outrage that those who were identified as causing the crisis (bankers) emerged relatively unscathed. As economies resumed growth, the fruits of austerity policies were seen not to trickle down through the income scale, as employment conditions for many worsened and real wages stagnated. Indeed the combined effects of austerity policies and quantitative easing were seen to worsen economic conditions for the least well-off while enhancing the value of the financial assets held by the welloff. The economics profession, identified as promoting austerity policies and quantitative easing as a means of restoring economic health, was therefore seen by many as serving the interests of the financial sector and the top 1 percent. Expertise which had been presented as technocratic and value-neutral had for many come to be identified as having served sectional interests. This was also the perception of many ‘leavers’ in the UK, during the Brexit referendum debate, in reaction to economic research propagated by HM Treasury which was seen to back the ‘remain’ side.1 The inference was then made by many that it is valid to choose any experts and ‘facts’, which support prior beliefs; any other experts can be tarred as biased and any other facts can be tarred as ‘fake news’. This approach reflects a postmodern approach to truth: all expert opinion and all facts are equally valid (or equally invalid) and we are free to choose among them. The ‘establishment’ has had the power to promote one form of expertise and one representation of the facts as ‘true’, ensuring that the experts and facts which support its interests hold sway. Populist movements have challenged this power, and along with it, establishment expertise and facts. But an additional current in the critique of expertise cuts across the argument about the power of the establishment over expertise and facts. A core critique of expertise is that it has not been very effective; it has focused on its failings as expertise. In the US, President Trump’s view is that the experts are ‘terrible . . . Look at the mess we’re in with all these experts we have’ (Gass, 2016). As a result he has stripped government departments of swathes of expert public servants and advisory panels, while at the same time his critique has been extended to challenging public

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statistics as ­purveying ‘fictions’ (Rocco, 2017). In the UK too, experts have been challenged on quality grounds. Government minister Michael Gove (2016) explained that experts were being disregarded because they purport to ‘know what is best and get it consistently wrong’. The conclusion that might be reached from the Trump/Gove critique might be that economic experts need to raise their game – stop being ‘­terrible’ and stop getting it ‘consistently wrong’. To the extent that mainstream economists have addressed the critique of expertise, this is the line that has been taken (see for example Caballero, 2010). In their defensive answer to questioning by HM the Queen on economists’ apparent failure to predict the crisis, Besley and Hennessey (2009) admit to a ‘forecasting failure’ but hold out the prospect of improvement in expertise, whose success in forecasting future crises ‘will depend on the candour with which we dissect the lessons and apply them in future’. In a review of the Oxford Handbook of Professional Economic Ethics (DeMartino and McCloskey, 2016), Krueger (2017) is similarly sanguine about the capacity of mainstream economics to continue to successfully address any challenges. She reflexively employs the mainstream framework to justify its superiority in ensuring progress without need for further argument or inducement: The rewards for overturning received wisdom are sufficiently strong to provide incentives that, if anything, are biased against doing research supporting received knowledge. [. . .] In addition, when policies fail to achieve their objectives, the incentives for investigating the causes of failure are strong. In the process, there is learning, and knowledge advances. (Krueger, 2017, p. 216)

Since this review was a trenchant critique of a volume devoted to explaining the need for attention to be paid to the professional ethics of economists, the view was being perpetuated that economics is a purely technical subject, detached from politics as well as ethics, with inbuilt forces for progress. The populist critique is thus being roundly rejected, reflecting a modernist position among the mainstream. But it poses a false dichotomy that the only possible choice is between one agreed best way to produce economic advice on the one hand and ‘anything goes’ on the other. In particular, the postmodern argument against any singular expertise and account of facts is not the only expression of populist sentiment. Another strand is the critique of the whole notion of a singular expertise and account of facts on the grounds that it reflects systemic forces within capitalism.2 From this perspective, knowledge production and propagation are indeed the outcome of power relations, but they are also the outcome both of the diversity of experience and of the epistemological impossibility of establishing a singular true account of socio-economic processes. While experts seek truth, they cannot demonstrate it, but only seek to persuade

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others of the value of their analysis. This requires engagement with the range of real experience in society, and a recognition of the values embedded in any economic analysis. It also requires an understanding of how, and how far, facts can be established and theories defended with respect to an open socio-economic system. It requires a recognition of the sociopolitical aspect of knowledge production and dissemination. In short, it requires that economics be done differently. The case against business as usual in economics has been made now so often and so persuasively that in what follows we seek to move on, taking seriously the popular concerns with economic expertise and fake news. While there is clearly scope for economists to ‘do better’ in some sense, the systemic approach employed, for example by Earle, Moran and WardPerkins (2017), raises much more profound issues with economics and its relationship with society. In what follows we pursue this approach in order to map a more constructive path for the discipline in response to critiques.

DOING ECONOMICS DIFFERENTLY The starting-point for doing things differently is a critique of mainstream economics. But this is something which has been so well-articulated, by Lavoie and Seccareccia, among a wide range of commentators and scholars, that it does not require repetition here. What does require emphasis, and is our focus here in light of current debate, is that the failings of mainstream economic theory and application with respect to the crisis follow, not so much from expertise as such, but from the mainstream approach itself. It is the mainstream view of what constitutes reliable knowledge that accounts, not only for the content of theory and its application, but also for the way in which these have been presented to policymakers and the public. It is this approach which defines expertise in technical terms and which promotes the understanding of a binary divide between facts and ‘fake news’. Certainly mainstream economics has been changing, with an increasing emphasis on application of theory and drawing on a wider range of evidence. Yet the underlying approach remains scientistic, in the sense that it is based on the application to economics of the logical positivist approach to the physical sciences, whereby technically-derived theories are tested against facts which are presumed to be theory-neutral. There are important consequences. First, since economic theory is portrayed as value-free, it stands apart from the moral issues that have exercised public discourse and the drivers of populist politics. But second, its conclusions are presented with confidence (if not arrogance) that the scientific process

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ensures that they are as close to the truth as possible. Economic predictions are presented as being subject only to measurable risk – even the crisis was portrayed retrospectively as a long tail risk. In contrast, the challenge to expertise from a systemic perspective addresses the scope for a different kind of expertise from what is offered by the mainstream, and a different understanding of what is understood by ‘the facts’. Rejecting expertise in the form of a technocratic, amoral, positivist exercise, and a binary understanding of facts as true or false, opens up the possibility of a different kind of expertise and of facts, i.e. a different approach. Alternatives to the mainstream are grouped loosely within different schools of thought, each of which pursues its own methodology to build (uncertain) knowledge with respect to its own ontology. But there is sufficient in common between these schools of thought that we can consider an alternative approach to the mainstream in fairly general terms. What the various heterodox schools of thought share is an open-system approach to knowledge about an open-system reality (Chick and Dow, 2005). A purely open system (i.e. one which allows for no simplification or abstraction) defies analysis. The differences between schools therefore refer to the different ways in which their ontologies divide up reality for the purposes of theorising (Loasby, 2003). But this segmentation is only provisional given the awareness of those factors being left out of the analysis (the individual in Marxist analysis, class in neo-Austrian analysis, etc.). Models require explicit provisional closures, But as Keynes (1936, pp. 297–298) put it, the factors that have been left out of a model are kept ‘at the back of our heads’, to be reintroduced again when considering how to apply a theory to a real-world context. Given the open nature of the subject matter it is not possible, even in principle, to capture it in one formal model. Rather than the mainstream aim to identify and refine the best model (see for example Caballero, 2010), the aim is to build up a useful range of arguments within a pluralist methodology. In the case of many schools of thought, such as Post-Keynesianism, this plurality includes formal mathematical models.3 Indeed heterodox schools of thought take what might be called a political-economy approach, which recognises that economic relations are embedded in society, in history, in politics and in moral judgements. In segmenting economic analysis from the other cognate disciplines, economists inevitably have to make assumptions about what is being taken as given, notably moral positions. Economics cannot simply be a technical subject, with normative judgements left to the politicians. Rather, theory that purports to conclude what is best for social welfare must involve ethical judgements. Thus, for example, however much this might be denied, mainstream economists presume the ethical merit of factors being paid according to market valuation of marginal product.

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For economists to apply their theories to policy, and to persuade both policymakers and the citizenry of the merit of their proposals, their presumptions, e.g. about values, need to be brought to the fore and opened up to debate. This requires engagement with citizens whose needs economics should be serving. Engagement is also warranted by the partial nature of any group of economists’ ontology – their understanding of reality. Not only do different schools of thought understand reality differently, but so do different groupings within society. Doing economics differently therefore does not refer just to practices within academia, but also to the engagement of academic economists with society. As Earle, Moran and Ward-Perkins (2017) argue, this requires a dual approach of actively promoting understanding of economics among citizens, as well as actively engaging with their understanding of economic experience.

EXPERTISE AND THE SEARCH FOR TRUTH Public engagement was a concern for Adam Smith. Like modern heterodox schools of thought, he saw the role of the expert as being to try to make sense of a complex reality. Given that complexity, no one theory could be demonstrated to be true; rather, a theoretical system was like an imaginary machine (Smith, 1795 [1980], IV, p. 19), the product of the expert’s imagination, and representing the expert’s judgement as to the relevant causal mechanisms: ‘A system is an imaginary machine invented to connect together in the fancy those different movements and effects which are already in reality performed’. How the expert promotes to non-experts the idea that this system explains real events follows from Smith’s theory of knowledge. For him, theories could not be demonstrated to be true, but rather to be psychologically satisfying (or not) in their capacity to explain puzzling phenomena. It was up to the expert to persuade others that her judgement is sound. Smith differentiated between physical scientists and social scientists in terms of their engagement with the citizenry. He argued that physical scientists, like mathematicians, could operate for long without the need to persuade others of the merit of their theories; this allowed their theories to be developed without much of an outside check with reality. ‘Natural philosophers, in their independency upon the public opinion, approach nearly to mathematicians, and, in their judgments concerning the merit of their own discoveries and observations, enjoy some degree of the same security and tranquillity’ (Smith, 1759 [1976], III.2.20). A major factor in the uncritical acceptability of theories in the natural sciences was the satisfaction promoted by an apparently complete explanation of events.

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But Smith warned of the dangers of imaginary theoretical systems being thought to be real systems; the aesthetic appeal of a large formal system, without detailed support from evidence – such as that of Descartes – could be particularly seductive (Smith, 1795 [1980], IV, pp. 65–66), though it ‘does not perhaps contain a word of truth’ (Smith, 1762–63 [1983], ii, p. 134). Social scientists in contrast were kept on track by the need to persuade, relative to real experience. In Smith’s words (see Smith, 1759 [1976], VII. ii.4.14): A system of natural philosophy may appear very plausible, and be for a long time very generally received in the world, and yet have no foundation in nature, nor any sort of resemblance to the truth [. . .] But it is otherwise with systems of moral philosophy and an author who pretends to account for the origin of our moral sentiments, cannot deceive us so grossly, nor depart so very far from all resemblance to the truth.

It is telling that we now find that economics has been allowed to stray from a reality check as it too has become more like mathematics and more distanced from popular discourse. Of course Smith was not arguing against expertise as such – far from it. Indeed his discussion of expertise represented his first use of the idea of the division of labour, that some members of society specialised in pursuing knowledge, giving greater attention to reason than the rest of the population (Skinner, 2001). There was no intrinsic difference between the expert and the non-expert. Considering the core difference between the philosopher and the porter, Smith (1776 [1976]: I.ii.4) concluded that it derived ‘not so much from nature, as from habit, custom, and education’. While the citizenry’s understanding has been threatened lately by the pervasiveness of fake news, non-experts for Smith always have the potential for understanding; but education was necessary to unleash that potential, with social benefits which justify its public provision (Smith, 1776 [1976], V.i.f.61). Experts are different from others in that they are motivated by a sense of wonder at unexplained phenomena, and the need to develop explanations to set their minds at rest (Smith, 1795 [1980]). Indeed, as the social psychologist Kahan argues (see for example Kahan et al., 2017), this curiosity encourages an open-minded willingness to set aside current beliefs. For Hume and Smith, superstition was the result of being unwilling to examine beliefs, something which should be countered by education. Yet belief is a necessary element of theorising. The core elements of a logical positivist view of expertise are reason and evidence, which are seen to be sufficient to pursue truth. But Smith (like Hume) saw (provisional, uncertain) knowledge as arising from the combination of reason and evidence with belief, imagination and the passions. Indeed the passions were

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primary, providing the motivation for scientific enquiry itself. It was then imagination which allowed the scientist to envisage connections, within an open system, which are the basis for any theory (Loasby, 2003). And it was belief that underpinned understanding of evidence. We need to consider the role of belief with respect to evidence further in the context of the issues surrounding fake news. Belief is the combined product of history, social norms and personal experience. Hume (1739–40 [1978]) argued that, without belief in some form, science could not proceed at all. While others (including Kant) misinterpreted Hume’s belief as religious and without foundation in real experience, for Hume it was a reasoned understanding of the complex real environment supported by social convention and personal experience, i.e. ontology, or in Kuhn’s terms, Weltanschauung. Kuhn (1962 [1970]) argued that, for the dominant paradigm, evidence which challenges this worldview may be swept aside for a long time. But this can only persist until the contrary evidence becomes recognised in society so widely as an anomaly that it constitutes an effective challenge. That evidence is understood differently by the dominant paradigm, the challenger ­paradigm, and society. The recent crisis is a case in point. Which brings us to fake news. Is it legitimate to interpret evidence in any way at all? When are facts not facts? Some statements can be categorised definitively as true or false – that a piece of legislation has or has not been passed, that a data series displays a particular average value over a given length of time, etc. But discourse then moves quickly into matters of interpretation – over conceptual priors of data series, over methods of data collection, over statistical techniques, and so on. Even more scope is provided for different interpretations when ‘factual’ statements are made which presume the operation of causal mechanisms. Thus, for example, it can be argued by some that measures are required to counteract the trend that poverty in work is rising. At the same time others may argue against intervention, pointing to rising employment rates and arguing that employment is the most effective route out of poverty. Each of these accounts rests on a different understanding of the economic process. In particular, a logical positivist framework as employed by the mainstream, encourages the idea of model forecasts as being definitive (at least within a probability distribution). This idea has been particularly damaging for public trust in economics, since forecasts are often wrong. That the forecasts are the outcome of supposedly stochastic relationships, and covered by the ceteris paribus clause, does not help matters when the forecasts are made with such confidence on the basis of expertise apparently inaccessible to the citizenry. It is no wonder that, when economists make predictions that turn out to be wrong, some take it as open season on making up ‘facts’.4

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But this observation doesn’t provide licence to assert anything as fact. How experience is expressed as evidence involves interpretation and mediation through understandings of causal mechanisms which require the exercise of judgement. The reasoning applied to this task itself can take different forms. Mainstream economics employs deductive classical logic, which relies on the initial premises being true. But, as Keynes (1921) argued, the complexity of real systems is such that any knowledge must be subject to uncertainty, such that classical logic has extremely limited purchase. He proceeded to analyse how we establish grounds for belief under uncertainty, as the basis for action. This required what has been termed ‘human logic’ (Dow 2016a), a pluralistic collection of chains of reasoning based on premises relevant to a particular circumstance, to which judgement is applied.5 It is the very complexity of the phenomena and mechanisms with which we deal as economists that requires our expertise, and our capacity to exercise judgements which we are obligated to explain and defend (Dow, 2016c). We seek truth without being able to achieve it. The best we can do is arrive at conclusions for policy proposals which we can justify and defend to non-economists, as well as fellow-economists. Given the complexity of the modern economy, it is not reasonable to expect the public to mirror the understanding of specialist economists – that is what expertise is for.6 Nevertheless, we are witnessing what happens when economists fail to communicate effectively with the public. Smith (1762–63 [1983]) wrote extensively on rhetoric, with advice which still holds good today if you accept his view of knowledge. In particular, he advocated tailoring an argument to the audience, taking account of their prior beliefs about the world, and couching the argument for a new theory in terms which are already known: ‘. . .we observe, in general, that no system, how well so ever in other respects supported, has ever been able to gain any general credit in the world, whose connecting principles were not such as were familiar to all mankind’ (Smith, 1795 [1980], II, p. 12). But the paradox is that the economist’s appeal to the existing beliefs of a particular audience is in fact a means to challenge belief, by the application of reason and the marshalling of evidence, and the appeal to the audience’s imagination by means of a telling analogy. (This contrasts with the organisational tendency of social media silos to reinforce beliefs, whatever their foundation.) But an appeal to the imagination can be misused by means of an arguably-false analogy. For example, the arguments for austerity were particularly persuasive because they were couched in terms of a household budget – even though that analogy was highly misleading (Dow, 2015). Indeed, it is a particular challenge for economists to persuade of the validity of arguments at the macro level.7 We have seen the disconnect between government assertions of economic prosperity at a macro level on the one

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hand, and individual experience of lack of prosperity on the other. It is a core issue for economics that, while macro models may reasonably segment reality for the purposes of partial argument, the final argument needs to accord ultimately with individual or social experience.8 Communication with a non-expert audience is bound to be more effective the greater the shared understanding of the material, hence the strategy promoted by Earle, Moran and Ward-Perkins (2017) to promote public education in economics.9 But, as Smith (1795 [1980]) argued, the audience needs to have a motivation to learn which is prior to the exercise of reason. Such an argument has resurfaced recently in Harford’s (2017) application to economics of the work of Dan Kahan who finds that scientific curiosity seems to counteract biases in political information processing (see for example Kahan et al., 2017). Harford (2017) concludes that economists ‘don’t need to explain ourselves better. We need to ignite in people this curiosity, this sense of wonder, the sense that the economy is a thing that is a mystery to be unravelled’.

CONCLUSION If ‘fake news’ means the deliberate attempt to deceive, then it is not reasonable to argue that economists are purveyors of fake news. Economists in general seek truth, and aim to serve society, according to their own lights. But economists can be very misleading in ways which have proved to be highly damaging to public trust. By regarding economics as a proficient technical subject, forecasts have been made with undue confidence and discussion of values has been disregarded. When forecasts have proved to be wildly wrong, and when economic advice has gone against particular social values, economists have lost respect as experts, and, worse, been suspected of serving sectional interests – ‘fake experts’ purveying ‘fake news’. The origins of this unfortunate situation need to be understood in order for the problem for economics to be addressed. It is the mainstream approach to economic knowledge10 that accounts for the problems of overconfidence and the refusal to discuss values. Public trust therefore requires the kind of alternative approach offered by non-mainstream economics. Here we have emphasised the interdependence between the content of non-mainstream theories and their application on the one hand and economists’ engagement in this process with policymakers and the public on the other. It has been argued here that there needs to be an increased focus on mechanisms to promote a constructive discourse between macroeconomists and the public. None of this is to denigrate the enduring role of expertise, but rather to encourage greater modesty among economists

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about the scope of that expertise. It is also to encourage on the one hand better receptiveness among economists to public inputs to their expert analysis, and on the other hand better communication of their expertise. Were these considerations to be taken on board, notably by mainstream economists, macroeconomics need no longer be in crisis.

ACKNOWLEDGEMENT This chapter is based on a presentation on ‘How far are Economists Purveyors of Fake News?’ to the 2017 Annual INET Conference in Edinburgh.

NOTES   1. Interestingly this was not the case in Scotland during the Independence referendum debate, when economists commanded an unusually high level or respect.   2. These two strands were embodied in the two new political parties (Social Credit and the Canadian Commonwealth Federation) forged in the Canadian Prairies in the 1930s out of populist movements. A core focus was on the role of the banks in the Depression; Social Credit saw the cause in the evil nature of bankers while the CCF saw the cause in the nature of capitalism. See Dow (2016b).  3. See Lawson’s (2009) critique of the efforts of Colander et al. (2009) to replace the mainstream model with a better one which would capture the crisis.  4. These tensions come to a head in political debate, e.g. around the UK’s Brexit referendum in 2016. While academic economists tended to be more circumspect, HM Treasury’s economists were more bold in their point predictions, and these were the ones which were given most media coverage.   5. The different schools of thought, which apply this approach, having different ontologies, employ different premises and different methods.   6. There is no effective market for ideas, so we cannot rely on the market to sift out the ideas with most support. The most obvious shortcoming of a neoclassical analysis of such a market is that full information is by definition inaccessible.  7. For neo-Austrians the answer is that only arguments at the individual level are acceptable.   8. In the UK, Bank of England Chief Economist has been holding public meetings to improve understanding of real experience as input to Bank analysis.   9. There is of course also the important question of the education of economists themselves, a matter on which the student movement has been taking a lead (see for example Earle, Moran and Ward-Perkins, 2017). 10. Its dominance in turn can be traced back to a range of causal forces.

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13. Stagnation and crisis: understanding credit flows in Latin America from a circuitist perspective Eugenia Correa and Wesley C. Marshall INTRODUCTION Mario Seccareccia and Marc Lavoie have for decades proven to be careful and demanding researchers. Seccareccia is mostly known for his contributions to the theoretical debate on monetary policy, the theory of the monetary circuit and the history of economic thought, and has become a leading critical voice on the role of the state and banks in the evolution and current functioning of monetary economies of production. Seccareccia’s many years of dedication to the International Journal of Political Economy have exposed him to a great diversity of ideas, and his sound judgment has made him a reliable guide in a wide range of academic issues. In many of the major controversies that have at times divided the thinking of heterodox economists, Seccareccia has consistently been a voice of balanced reason, while at the same time offering staunch rebukes for misled macroeconomic policy. In particular, he took on essential issues such as austerity (Seccareccia, 1996), as well as its supporting economic methodology, particularly the use of the IS-LM model (Seccareccia and Lavoie, 2015) that has led mainstream economics down as a slippery path. Within Post-Keynesian debates, Seccareccia has nicely addressed the issue of ‘post-Keynesian fundism’ (Seccareccia, 1996), and the role of taxation in the monetary circuit, among others. Indeed, Seccareccia (1996) refuted Weintraub’s vision of ‘funding’, on the one hand, by the conventional financing theory on which that vision is based; and, on the other, by recovering Graziani and Parguez, framing the problems of corporate insolvency of one kind or another within the continuity of access to credit: In an economy in which bank credit is the primary mode of financing productive activity, the exigencies of the payment system require that initial bank finance must go towards the purchases of all types of production, 246

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Stagnation and crisis ­247 whether it be of fixed or of circulating capital, or, as described by Graziani (1990: 16), both of consumption and of capital goods. Any initial finance that falls short of this norm would lead to problems of structural insolvency since firms would be unable to realize fully money profits and, under specific conditions, extinguish their debts vis-à-vis the banking system. (Seccareccia, 1996, p. 400)

The role of taxes, in addition to its place in Lerner’s post-Keynesian vision, has been an important point of the debate that the theory of the monetary circuit deals with as part of the moment of monetary reflux that destroys the money created to finance spending: ‘taxes must therefore be conceived as a component of the reflux phase of the monetary circuit, while state expenditures are a necessary component of the flux phase’ (Parguez and Seccareccia, 2000, p. 111). Insofar as taxes do not finance spending, but destroy part of the money created for financing, they can act both on price level and profits, and also on the level of expenditure. The fact that taxes do not determine the destination of expenditure does not mean that they do not have an impact on employment: ‘at the macroeconomic level, the primary function of taxes, therefore, is not to finance government spending but, rather, to regulate the economy by preventing inflation (when private spending might be too high) and unemployment (when it is too low)’ (Bougrine and Seccareccia, 2002, p. 74). Indeed, it is Seccareccia’s deep historical understanding of both economic theory and practice that has allowed him to promote heterodox economics and steady the ship of Post-Keynesian economics, correctly addressing many issues that have both attracted and somewhat divided the attention of the Post-Keynesian public. Mario is a rare breed of economist, as he certainly follows in the traditions of great critical economic thinkers, yet he applies his thinking to today’s world through a consistently non-sectarian approach to understanding the diverse realities of our societies and economies. Such well-founded academic pragmatism has led to important breakthroughs in crucial areas. For example, the contributions to the theory of the monetary circuit made by Seccareccia have combined the analyses developed from several debates and have allowed a substantial leap in Post-Keynesian theoretical knowledge about money and financing. Since the early 1990s, we find in the work of Seccareccia a revealing line of thought linked on the one hand to the very understanding of money and credit, as flows that create and extinguish debts, and, on the other, to the role of public credit and deficitary expansion of spending on growth and profits, especially in developing countries. Beyond his duties of weighing in on the debates around him, Seccareccia also changed the debate, and often times in the best of academic company.

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Extensive work with Marc Lavoie and Alain Parguez has simultaneously given value to all three’s lines of thinking, while also moving economic theory forward and changing how many understand economics. Although he is recognized as a Canadian economist, Seccareccia’s concerns have not been limited to developed capitalism, and many works dedicated to clarifying issues of development economics can be found in his oeuvre. The careful understanding of the specificities of growth processes based on primary exports and the contrast between Latin American (LA) and Canadian experiences is one example. Yet Seccareccia has also examined other issues of vital importance to underdeveloped countries, such as fiscal policy, international fiscal policy, and currency management. His academic curiosity has led him into many theoretical challenges, and, in recent years, towards institutionalist thinking and the ideas of Karl Polanyi. Seccareccia has also focused more recent research on Neoliberalism and processes of development and underdevelopment, and again, he has worked in excellent company, in this case with Kari Polanyi. Although many theoretical debates with original contributions can be found in the work of Seccareccia, this chapter focuses on understanding external credit flows to developing countries, especially those of Latin America. Apart from the introduction, the paper is organized as follows. First, we situate LA economies within the monetary circuit and in the context of repeated crises, to then analyze the role of public debt both during the crisis and in its wake. We later examine more specifically the case of Mexico, which contends with both a foreign dominated banking sector and high levels of external indebtedness. We round out the chapter with several considerations regarding inflation targeting and a few general conclusions.

UNDERSTANDING LATIN AMERICAN REALITY THROUGH THE FRAMEWORK OF THE MONETARY CIRCUIT We fully believe that the theory of the monetary circuit is the most dynamic, adaptive and useful approach to understanding the monetary–credit realities of the countries of Latin America, even though this was not its initial objective. Yet the study of external indebtedness can open new paths in the search to resolve over-indebtedness and in advancing an agenda for development, considering elements such as the control of capital flows, the regulation of public and private external debt ceilings, flexible exchange rates, and domestic financial systems with public banks, among others. The adaptive and dynamic nature of the monetary circuit theory is particularly useful to understanding the monetary–credit realities of Latin

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American countries. In the last five decades, the largest LA economies have experienced different moments of external credit contraction, dollarization processes, abrupt capital outflows, hyperinflationary stages and manifest deteriorations of credit in national currency, along with employment and investment. All of these episodes have been analyzed using conventional explanations based on straightforward neoclassical ideas, from the simplest to the most sophisticated: the scarcity of savings, excessive monetary creation, the excesses of public spending, the errors of monetary policy, low productivity, corruption in the public sector and additionally, and why not, overpopulation. Regarding external credit and the successive crises coming directly from its contraction, even critical analyses of the external debt crisis of the 1980s from Latin American structuralism, well recognized for its Keynesian foundations, were more focused on the ideas of external bottlenecks, export insufficiency, dependence on the importation of capital goods for industrialization, and the terms of trade. The analyses that most appropriately placed the process of the debt crisis as one explained from the behavior of international credit and its broad trends and ebbs and flows came from the Post-Marxist theoretical framework applied to what was the current reality regarding money and credit in Latin American countries (Lichtensztejn, 1980, 1984 and 2009; Lichtensztejn and Baer, 1986). Since the crisis of 1982, rivers of ink have flowed on the issue of external debt in developing countries. Ideas that connected external debt to external trade imbalances were soon overcome to the extent that links between the different credit markets were shown to be far larger and the conditions in which liquidity plays out in open financial markets were given more importance. In turn, ideas that supported the need to import capital in the face of narrow domestic savings were also repeatedly discussed and logically defeated, as in economies with free capital movement, these flows depend on the differentials of profitability among different portfolio compositions. Thus, ideas linking the conditions of capital profitability were emerging with increasing force in the literature on external debt. Particularly when taking into account the possibilities of access to different levels of profitability for domestic capital with or without the international expansion and external capital flows, the credit–external debt process appears not as a formula for financing domestic investment, but rather the means by which a certain portion of profitability can be reaped in foreign currency, as a shifting portion of all that obtained by domestic or foreign capital in the domestic market.

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The Role of External Debt in the Crisis Towards the end of the first stage of the great neoliberal wave that began at a global level in the 1970s, the accelerated rise in interest rates effectuated by the Federal Reserve from 1979 to 1982 triggered a series of financial crises both in the US and Latin America. Certainly, these had a set of fundamental causes, as has been analyzed in previous articles (Correa, 1992; Girón, 1995; Guillén, et al. 1989), and particular emphasis has been focused on the financial reforms that weakened all financial systems (Díaz-Alejandro, 1985; Correa, 1998), and made banks and larger companies into large external borrowers. With a further neoliberal round of financial deregulation and opening, and interest rate hikes in the US in the mid-1990s, the results were very similar. In the banking and financial crises of the 1980s and 1990s, external indebtedness faced several moments of credit restriction, producing for Latin American countries an increase of external debt of $230 to $722 billion between 1980 and 2000. Short-term debt alone went from $65.4 billion to $102 billion; the service of the external debt significantly increased from $43 to $162 billion or, as a percentage of exports, from 37 to 40 percent; the interest payments alone increased from $23 to $53.4 billion per year (World Bank Database). Indeed, in both decades of financial crises, external debt should not have been a problem and it was only when international credit stopped that it became one. Virtually any level of indebtedness in a foreign currency involves high risks if the refinancing process, which is normal in any financing contract, is shut out by the largest credit sources, private transnational banks, in the case of the 1980s crises, and the global banks and the institutional investors in the crises of the 1990s. The long-term external debt net transfers, defined as debt service less debt disbursements, had been positive from 1970 to 1981, and negative from 1982 to 2006 (with the exception of 1995 and 1998). During this period, Latin America has not received capital flows for long-term debt; on the contrary, new debt provisions have not always been sufficient to pay off long-term debt. Thus, in most of these years, the ability to pay maturities and to not fall into suspension of payments has depended on the flow of short-term debt. These relationships of broad domination, as well as the fall in the expectations of growth in the banking business, led and even forced the sale of the banks to foreign financial entities in many developing countries, particularly between the mid-1990s and the early 2000s. Such was the case of the largest economies in the region, Argentina Brazil and Mexico, where foreign banks came to represent more than 40 percent of total deposits in Argentina and Brazil in the early 2000s, while in Mexico these banks were occupying close to 90 percent of national deposits. With the open instability

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of the crisis, the subsidiaries of foreign banks deepened the problems of domestic credit: highly concentrated, excessively expensive and very limited. Financing for the non-mortgage domestic non-banking private sector maintained little space for local expansion, particularly in the context of companies of very questionable solvency and a reduced internal market. As has been pointed out in other works (Cull et al. 2010; Correa, 2004), the presence of foreign banks has advanced in many economies of the emerging world, especially those with more fragile financial systems, and with a recent history of previous banking crises, often as a result of the illiquidity of the international financial market for refinancing the external debt. In international financial markets, in just three or four years (from 1996 to 1999), global banks changed rapidly. These changes were driven by new financial markets and strong competition from the strengthening of new and powerful institutional investors; by the generalized fall in the profitability of their traditional activities; and, by a slow recovery of economic activity in the economies of the center. The same international crises were an expression of the sharpened interbank competition with successive moments of credit restrictions that turned into the Asian crisis and later the financial crises in Brazil, Russia and Southern Europe. One of the most recent examples of banking crises caused by the shutout of external refinancing is the case of Greece. However, for other countries it has meant the deterioration and marginalization of credit and domestic financing and local investment capacity, and of public spending and the tax collecting capacity of governments. All this helps shape the course of very diverse political and social paths, but with a reshuffling of the bloc in power opening more or less space to the interests of transnational corporations. The change in the financial business towards the expansion of mortgages and consumer credit has advanced more in the post-crisis years (2009–2017), as well as the financing for acquisitions of companies, both in agricultural and urban areas. Post-crisis Years and External Debt With the great crisis, in only ten years between 2007 to 2016, Latin America’s total external debt went from $800  billion to $1.7 trillion, or from 17 per cent to 40 percent of GDP; short term debt grew from $134 to $269 billion; the annual debt service from $142 to $289 billion, or from 17.4 to 29.5 percent of exports; the annual payments of interest increased from $47 to $80 billion (World Bank Database). The important expansion of business from global corporations to the emerging world has once again raised the problem of profit transfers to parent companies and global financial capital, for now, through the

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accelerated increase in external indebtedness of the firms themselves. Total external debt considering public debt in the hands of non-residents, despite its dynamic growth, especially since 2010, still does not even represent 35 per cent of the GDP for developing countries and 38 percent for Latin America. Without justification, this measure is applied to measure the financial health of developing countries. It is an especially low level when considering the much higher amounts that other developed countries have accumulated. However, it can be a very high level if this debt is mostly used to pay for debt service, or to support financial speculation and crime. The dynamics of short-term external debt is very notable, as these permit countries to cover the maturities of their liabilities year after year. Issuing short-term debt only to pay part of the accumulated debt has important consequences on the sovereignty of the debtors. Specifically, the short-term debt depends on the day-by-day evaluation that each country receives from the credit rating agencies, who have the power to increase the cost of credit and even stop such flows. The banking and macroeconomic supervision that they exercise, accompanies that of the IMF, although the latter is more flexible, can more specifically target agents participating in the economy, and has a greater capacity for response. Moreover, the rating agencies do not yet have the prestige and resistance that the IMF has shown in the face of years of errant economic diagnoses and policy recommendations. The tendencies of external credit in Latin America make it clear that: external indebtedness has not been a source of external savings that complements the lack of domestic saving; new debt flows are indispensable to avoid suspensions of payments; short-term debt has been instrumental in filling the gap between debt payments and debt flows; short-term debt is more susceptible to changes in financial markets and the portfolio movements of institutional investors and to trends in interest rates and credit ratings; the necessary liquidity for servicing debt in addition to short-term debt has required other sources, such as the IMF or a positive trade balance or positive foreign direct investment flows. Paying debt commitments makes countries much more vulnerable to IMF policies and the interests of foreign creditors. The monetary circuit is thus exposed with the credit creation of the global banks and the monetary destruction when the payment of the debt service is made. Thus, considering only the limited flow of debt, it can be said that developing countries as a whole, and those in Latin America in particular, have a speculative credit position in Minsky’s (1982) definition. This situation has only been manageable through short-term external debt and the placement of public debt among non-residents in order to avoid falling into a partial or total suspension of payments. Identifying the credit flows and the speculative position directly is of interest to characterize the position

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of the creditors of the developing world and especially of Latin American countries. However, it does little to help the condition of the debtor countries, who are, even in times of stability, subject to adjustment policies and structural reforms. The theory of the monetary circuit, in contrast, allows us to consider the conditions of the debtor countries, which are subject to a limited growth of investment and profitability of local capital, conditioning the expansion of the largest economic groups in their internationalization. Mexico: A Case of External Indebtedness with a Foreign-controlled Banking Sector In this section, some of the consequences of the domination of foreign banks on the behavior of external indebtedness are analyzed. The purpose is to show how these banks, in their operation, demand a constant and growing external public and private debt, beyond the transfer of profits to their parent companies. This is far from their presence in the Mexican financial system that was supposed to allow for stable financing, strong credit in national currency and de-dollarization. Their operation in the country has meant the opposite and internal and external public debts are essential components for its performance. In Mexico, foreign global banks have subsidiaries that represent more than 80 percent of total banking assets, dominated by Spanish banks. The sale of banks to global banks took place, as in other countries of the developing world, from the last half of the 1990s into the first years of the new century. As has been historically the case in Mexico, the operation of the banks is very articulated with, and dependent on, the central bank, the treasury of the federation and, more recently (although to a much lesser extent), on the treasuries of the state governments. Yet public companies are important borrowers of banks, which is why the public sector is its main debtor with around 50 percent of the total credit. The other three profitable segments of its operations are mortgage lending and its securitization; the administration of workers’ savings funds; and fees for payment services. The main beneficiaries of the growing and high international reserves of the central government are precisely the foreign banks, which require constant access to large amounts of liquidity in foreign currency. The external debt and the high annual debt provisions provide support for the daily operations of the big banks. Access to external sources of liquidity for subsidiaries of foreign banks does not only depend on the business strategy of their parent companies, but also and especially on the governments of the countries where their subsidiaries are located. This applies particularly in times of tight international credit, in which conglomerate banking competition may be questioning their monthly flows. So, for

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example, when Mexico suffered the crisis of 1982, local banks practically had no other interest than to recover the sources of international liquidity, As noted, all Latin American countries, with notable but partial exceptions, suffered banking crises that allowed for the entrance of a systemic presence of global banks, essentially limited to a handful of American and Spanish banks, along with British HSBC. During this period, generally from the mid-1990s to the early 2000s, all hard currency pegs were broken and inflation targeting became continental practice – again with important outliers. In this period, the control of credit also became important in suppressing inflation via suppressing growth. The branches of the most important global banks have effectively restricted credit towards the productive economy of the region. There have been no significant banking crises in the region. Even in the turbulent moments of the US panic of 2007–2009 and the Euro crisis of 2007–2014, no systemically important banks have left the market in Latin America. We therefore have had a foreign dominated banking sector that for the 15 years or so since its consolidation, does not particularly lend to productive endeavors, indeed acting as an agent of austerity, but that has not suffered crises either. As discussed, between bank bailouts and foreign debt payments, the Mexican Treasury also applies constant macroeconomic austerity. The current design of the national pension system only adds to the problem, as the mandatory savings of workers in the retirement system is currently funding more than 26 percent of the internal resources of the financial system (World Bank, 2018). The retirements and pensions of a large part of the Mexican working class are therefore being channeled from pensioners towards financial markets, with the latter generally gaining and the former losing out (Correa, 2015). Inflation Targeting or Incomes Policy One of the important public policy mechanisms of austerity is inflation targeting (IT), which has been widely applied in the region since the turn of the century. In a 2010 book chapter, Seccareccia and Lavoie (2010, p. 39) state that . . .the government of New Zealand was simply trying to implement a public sector incomes policy by seeking to set numerical targets on the various departments of government, including the central bank (see Fischer, 1995: 36). In the process, there came the idea that the central bank could serve as a strategic instrument to extend the numerical targets that were being imposed on the public sector agencies to the entire economy via an inflation target. In that sense, it may be said that, from its origin, IT was conceived by policy makers as just another type of incomes policy.

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This appreciation is hard to argue with. Whether today in Latin America and Canada, or almost a hundred years ago in the United Kingdom (Keynes, 2010), the maintenance of high interest rates generally benefits financial rentiers at the expense of employment, production, and productive investment. Seccareccia and Lavoie use the term incomes policy, as the fixing of interest rates to unemployment ultimately negatively effects both households and national production. Seen in this light, inflation targeting could easily be renamed growth targeting. This point is strongly suggested by Fontana and Palacio-Vera (2006). Other heterodox authors have made important contributions to the debate. For example, Rochon (2016) emphasizes the dynamic of defending ideology from the results of its practical application. Our focus accepts these points. In addition, Karl Polanyi states that ‘the structuralists did not dispute the fact that high interest rates and tight credit can suppress inflation’ and we certainly agree as well. However, we would argue that at the current juncture, with financialization becoming ever more established within Latin America and regarding the region’s economic relations with the rest of the world, that it is the common element of shared economic policies that is perhaps the most relevant. Carrasco and Ferreiro (2014) make a particularly important contribution in regard to the point, demonstrating the surprisingly close and recently increasing convergence between macroeconomic policies and results among LA countries. In other words, all of Latin America is now well enmeshed in what Parguez (2010) has denominated ‘the predatory double monetary circuit’. Without a doubt, there is great variation among Latin American countries in their dealing with this external restraint. In this chapter, we have attempted to highlight several of the factors that have placed Mexico in a position of heightened financial external vulnerability.

CONCLUSION As mentioned towards the beginning of this chapter, the monetary circuit was not developed as an analytical tool for underdeveloped and in particular Latin American economies. Likewise, Seccareccia’s focus was not originally designed for the region. Yet, in both cases, they have been invaluable in our current understanding of Latin American economies. The monetary circuit approach has offered the theoretical framework necessary to understand the inflows and outflows that have historically favored developed over developing countries. These flows cannot be explained solely by the commercial and technological dynamics that underlie analyses of terms of trade, nor in the dynamics of productivity

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and savings, but precisely in the institutional conditions over which the whole credit–debt process takes place. The greater the economic burden that external debt exerts on debtor countries, the greater the pressure for the international expansion of local companies, and the lower the capacity of the debtor economies to grow through investment and local employment. In turn, economic liberalization and deregulation drive the forces of domestic growth towards the activities of low investment, and quick and high returns, reproducing a vicious circle that spending and public investment are conditioned to support. This opens new questions about the economic relations between these regions, in our days these are certainly somewhat blurred. This in turn leads to a historical view of the various economic relationships between companies and elites and rulers. Credit–debt relationships between companies, banks and governments are signaling the direction of analysis to come. Much like criticisms of IS-LM based models are equally valid at home and abroad, heterodox economists from the periphery owe a great deal of gratitude for the intellectual leadership of Mario Seccareccia for analyzing the flaws in mainstream theory and policy, as well as building on previous great thinkers in order to develop the analytical framework necessary to identify these flaws and their impacts. In the process, Seccareccia and the colleagues that he has most closely worked with have also shown that under today’s system of globalized financialization, cumulative effects become much more uniform around the globe, affecting both developed and underdeveloped countries in similar ways.

REFERENCES Bougrine, H. and M. Seccareccia (2002), ‘Money, Taxes, Public Spending, and the State Within a Circuitist Perspective’. International Journal of Political Economy, 32(3) Fall, pp. 58–79. Carrasco, C.A. and J. Ferreiro (2014), ‘Fundamentos macroeconómicos y la Gran Moderación en América Latina’. Ola Financiera, 7(17). Correa, E. (1992), Deuda Externa y Crisis en América Latina, Ed. IIEc-UNAM, México. Correa, E. (1998), Crisis y Desregulación Financiera, Ed. Siglo XXI, México. Correa, E. (2004), ‘Cambios en el sistema bancario en América Latina: características y resultados’ en Instituto Español de Comercio Exterior y Instituto Complutense de Estudios Internacionales, Claves de la Economía Mundial, Universidad Complutense de Madrid. Correa, E. (2015), ‘Budgetary Impact of Social Security Privatization: Women doubly unprotected’. International Journal of Political Economy, 44(4), pp. 260–276. Cull, R., M. Peria and M. Soledad (2010), ‘Foreign Bank Participation in Developing Countries: What do we know about the drivers and consequences of this phe-

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nomenon?’. Policy Research Working Paper No. WPS 5398. World Bank. https:// openknowledge.worldbank.org/handle/10986/3882 License: CC BY 3.0 IGO. Diaz-Alejandro, C. (1985), ‘Good-Bye Financial Repression, Hello Financial Crash’. Journal of Development Economics, 19(1–2) September-October, pp. 1–24. Fontana, G. and A. Palacio-Vera (2006), ‘Is There an Active Role for Monetary Policy in the Endogenous Money Approach?’. In Gnos, C., and L.-P. Rochon (eds), Post-Keynesian Principles of Economic Policy, Cheltenham: Edward Elgar, pp. 49–56. Girón, A. (1995), ‘Fin de Siglo y Deuda Externa: Historia sin fin’. Mexico: IIEcUNAM and Cambio XXI. Guillen, A., G. Vidal and E. Correa (1989), Deuda Externa Grillete de la Nación. Mexico: Nuestro Tiempo. Keynes, J.M. (2010), ‘The economic consequences of Mr Churchill (1925)’. In: Essays in Persuasion. London: Palgrave Macmillan. Lichtensztejn, S. (1980), ‘De la Crisis al Colapso Financiero Internacional’. Revista Economía de América Latina, 5, segundo semestre. Lichtensztejn, S. (1984), ‘De Las Políticas de Estabilización a las Políticas de Ajuste’. Economía de América Latina, 11, Mexico: Centro de Investigación y Docencia Económica y Centro de Economía Transnacional. Lichtensztejn, S. (2009), ‘Una Aproximación Metodológica al Estudio de la Internacionalizacion Financiera en América Latina’. Ola Financiera, 2. Lichtensztejn, S. and M. Baer (1986), Fondo Monetario Internacional y Banco Mundial. Uruguay: Nueva Sociedad. Minsky, H.P. (1982), Can ‘It’ Happen Again? Essays on Instability and Finance. Routledge. New York. Parguez, A. (2010), ‘El Doble Circuito Monetario Depredador: Los costos de la plena integración al sistema financiero y productivo multinacional’. Ola Financiera, 6, mayo-agosto. Parguez, A. and M. Seccareccia (2000), ‘The Credit Theory of Money: The Monetary Circuit Approach’. In Smithin, J. (ed.), What Is Money? London and New York: Routledge, pp. 101–123. Rochon, L.-P. (2016), ‘In Pursuit of the Holy Grail: Monetary policy, the Natural Rate of Interest and Quantitative Easing’. Studies in Political Economics, 97(1), pp. 87–94. Seccareccia, M. (1996), ‘Post Keynesian Fundism and Monetary Circulation’. In Deleplace, G. and E.J. Nell (eds), Money in Motion: The Post Keynesian and Circulation Approaches. London: Macmillan, pp. 400–416. Seccareccia, M. and M. Lavoie (2010), ‘Inflation Targeting in Canada: Myth Versus Reality’. In Fontana, G., J. McCombie and M. Sawyer (eds), Macroeconomics, Finance and Money: Essays in Honour of Philip Arestis. New York: Palgrave Macmillan, pp. 35–53. Seccareccia, M. and M. Lavoie (2015), ‘Sir John and Maynard Would Have Rejected the IS-LM Framework for Conducting Macroeconomic Analysis’. Institute for New Economic Thinking, (March 19), https://www.ineteconom​ ics.org/perspectives/blog/sir-john-and-maynard-would-have-rejected-the-is-lmframework-for-conducting-macroeconomic-analysis. World Bank (2018), Megadata Indicators. Gross Domestic Savings (% of GDP). Available at https://data.worldbank.org/indicator/NY.GDS.TOTL.ZS (accessed 21 January 2018 [Google Scholar]).

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14. Secular stagnation and the curse of contemporary Eldorados: whatever happened to broad-impact products? Laurent Cordonnier INTRODUCTION: THE ECONOMIC AND FINANCIAL CRISIS OF THE LAST DECADE HAS LED TO A RESURGENCE OF DEMAND-SIDE EXPLANATIONS The goal of this article is to offer an explanation, complementary to those that already exist, that might lend credibility to the secular stagnation viewpoint. This explanation, or this hypothesis, at the very conjectural stage at which we will be able to formulate it here, is not entirely new. It is based on the idea that what is lacking today in the inducement to invest is any stimulus arising from the existence of broad-impact goods capable of coordinating in a structured way a production norm and a consumption norm that would support a virtuous macroeconomic loop. Drawing on analyses by the French school of regulation, this interpretation combines supply and demand factors to account for the chronic shortfall in effective demand and, consequently, the mediocre performance in terms of growth of the developed economies for several decades now. Thanks to (if one can put it that way) the economic and financial crisis of the past ten years, a number of highly mainstream economists have looked into the reasons why the global economy, and more particularly the OECD countries, with the USA at the top, have to this point not recovered their previous momentum. Observing the persistent gap between actual and potential growth since 2008, they have come to recognize that this persistent output gap does not fit well with their canonical explanatory model.1 That model posits that the economic fluctuations generated by an economic shock (such as the one set off by the subprime crisis) will average around a trend-line (set by the potential growth rate) and fade over time until they match that line. This disagreement between facts and theory 258

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would seem to cast deep doubt on the doctrine and invite its supporters to open the range of assumptions and explanations deemed plausible in accounting for the mediocrity of economic growth over many long years. The standard-bearer of this re-examination and theoretical shift has without question been Larry Summers. In a series of widely noted papers, Summers (2013, 2014, 2015, 2016) pondered the persistence of the output gap and the further gap it introduced between facts and theory. In an effort to give some weight to his pondering, he did not hesitate to dramatize the issues in the debate by holding up the looming specter of a secular stagnation arising largely from factors long repressed by the mainstream. Under the banner of this somber conjecture (secular stagnation), he did not mince words in calling the doctrine into question. The theory is at odds with the facts, is what Summers (2015) says in substance. We need different theories. The events of the last decade should precipitate a crisis in the field of macroeconomics. Textbook theories emphasize the business cycle as the central phenomenon to be explained. The emphasis is on understanding the fluctuations around average levels due to various shocks. The experience of Japan in the 1990s and now that of Europe and the United States suggests the need for theories that explain a more important and troubling phenomenon—protracted stretches of growth that are well short of previous trends or estimates of potential along with incompatibility between full employment and financial stability.

While the questioning is clear cut and unvarnished, still more surprising is the theoretical about-face made to support this conjecture of secular stagnation. The mainspring of the crisis was said to lie in a deep, general and tenacious imbalance between savings and investment. Developing this analysis in an article published in Business Economics, Summers  (2014) summarized his perception of things this way: In sum, I would suggest to you that the record of industrial countries over the last 15 years is profoundly discouraging as to the prospect of maintaining substantial growth with financial stability. Why is this the case? I would suggest that in understanding this phenomenon, it is useful at the outset to consider the possibility that changes in the structure of the economy have led to a significant shift in the natural balance between savings and investment, causing a decline in the equilibrium or normal real rate of interest that is associated with full employment.

If it weren’t for the classical-neoclassical syntax propping up the fiction of a self-regulating market of loanable funds, supposed to adjust (via fluctuation of the real interest rate) the willingness to save and the desire to invest, one might think this was Keynes talking.2 In Summers’ mind, what

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we are facing leaves no room for doubt: it is a chronic shortfall, attributable to ‘structural’ causes, of total aggregate demand, fueled by an excess of savings compared with the opportunities or the willingness to invest. The turnabout is striking, coming from one of the solidest pillars of the economic orthodoxy that has reigned since the early 1980s – supply-side economics, structural unemployment, ineffective budgetary policy, etc. As if he needed to convince us that he was not shamefully making this conversion to demand-side economics, Summers even goes after Say’s Law, the core of the orthodoxy, using tone and rhetoric one might think right out of Keynes’ General Theory: We are seeing very powerfully a kind of inverse Say’s Law. Say’s Law was the proposition that supply creates its own demand. Here, we are observing that lack of demand creates its own lack of supply. (Summers, 2014, p. 71)

Quite as interesting are the reasons Summers cites to explain this imbalance – which simply has to be called structural – deriving from excess savings on the one hand and a shortfall in investment on the other. We will quickly review these reasons, some being quite worthy of consideration, in the second section, and will discuss, as have others (Hein, 2015; Roubtsova, 2016) the explanations Summers ignores, which are precisely those put forward by the post-Keynesians. We will stress that the main challenge is to explain why firms still invest so little, while they generally continue to make very large profits. In the third section we will present the theoretical inspiration that leads us to propose a hypothesis to add to, or to complement, those presented in the second section. This hypothesis, which might be called ‘the curse of contemporary Eldorados’, is a kind of reactivation or extension of analyses that French regulation theory produced in the 1970s and 1980s about the ­coordination  – always problematic within modern capitalism – of the consumption norm and the production norm. This line of thinking made a central part of its analyses the pivotal role played by ‘broad-impact’ goods such as the automobile or household appliances in the virtuous cycle of the post-war period. These goods were the keystone of an orderly structuring of supply and demand on the macroeconomic level, providing a positive outlet for the productivity gains they engendered. The question that arises today is whether anything has taken the place of those broadimpact goods in contemporary capitalism. This is the question we will take up in the fourth section, and to which we will try to provide an answer. To put it first in an allusive and somewhat opaque manner (in the hope that what follows will supply the expected clarifications), we will suggest that early 21st-century capitalism may lack Eldorados to excite the animal

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spirits of firms very deeply or for very long. This very lack of Eldorados (the absence of new frontiers opening up new horizons and of prospects stimulating the ­inducement to invest) would benefit from being formulated as a kind of curse that attaches to contemporary goods. These goods seem for the time being (we refrain from rash prophecy) to be unable to combine the necessary features that would dynamically structure and couple supply and demand patterns. In choosing goods as the prism for focusing on the difficulties of contemporary capitalism, we are aware that we run the risk of a certain fetishism, whereby factors refracted in goods are taken to be the causes of secular stagnation while the actual causes and effects brew elsewhere. We cannot escape this possible criticism a priori. Nor, in a way, should we, because the hypothesis advanced here, that of the curse of contemporary Eldorados – or the lack of broad-impact goods – is based in part on the idea that goods are the image of the economic system, that in this way they show us the problems of our time, of which they are partly the cause and partly the refraction. We will point out in our conclusion that this hypothesis corroborates the thesis that the contemporary accumulation regime is an effort to keep alive, or help to survive, a kind of capitalism that seeks profit without accumulation.

THE REASONS FOR SECULAR STAGNATION ACCORDING TO SUMMERS The reasons Summers gives to explain the persistent gap between actual and potential growth since the 2007 crisis definitely derive from a demandside analysis that highlights the structural factors likely to maintain an imbalance that fails to resolve spontaneously, between the overall propensity to save and the inducement to invest. It is worthwhile restating these reasons, both for what they teach us about the sluggishness of contemporary capitalism and for what they leave out. The Causes of Excess Saving According to Summers, excess saving comes from four different causes. The first relates to income distribution. The ratio of profits to wages, on the one hand, has significantly altered in favor of businesses. And business has seen its savings skyrocket. At the same time, the inequalities in the distribution of individual incomes have reached historic peaks (this is particularly true in the United States) since the first half of the twentieth century, enriching those households with the highest ­propensity to

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save. This explanation is given straightforwardly, with charts to back it up: Changes in the distribution of income, both between labor income and capital income and between those with more wealth and those with less, have operated to raise the propensity to save, as have increases in corporate-retained earnings. [. . .] An increase in inequality and the capital income share operate to increase the level of savings. (Summers, 2014, p. 69)

The second cause of excess saving, mentioned in a later article (Summers, 2016) is the uncertainty regarding the duration and the amount of pensions that will be paid to employees in the decades to come – without making clear what type of system, fully funded or pay-as-you-go pension, generates this uncertainty. Be that as it may, such uncertainty encourages precautionary savings by households, which goes against the expansion of opportunities offered to firms. The third cause of excess saving is undoubtedly more cyclical. It comes from the restrictions on household credit, following the collapse of the housing bubble, as well as the more general debt reduction movement on which a large number of entities embarked (businesses, banks, households) to try to reduce their leverage ratio. Without minimizing the extent of this movement, one needs to say that it is a cyclical phenomenon, a kind of predictable pendulum-swing after years of excess, rather than a fundamental, structurally determined trend. The fourth reason mentioned by Summers is the increasingly obvious accumulation of foreign financial assets by Central Banks and sovereign funds. Allow us to add the further insight that these phenomena are more a reflection of global geo-economic imbalances between saving regions and spending regions (which show up in international trade imbalances) than a product of the behavior of Central Banks and sovereign funds themselves. Broadly, what we see at issue behind this accumulation of foreign financial assets by these entities is that the countries accumulating trade surpluses do not take advantage of them to increase their domestic demand (and reduce their external savings) so as to reap the benefits of their competitiveness, while providing additional demand to their trading partners. Of all the reasons advanced by Summers – the increase in unspent corporate profits, the decline in the wage share, the rise of income inequality among households, trade imbalances, the formation of precautionary savings for retirement – the first three are certainly the better documented. It is less clear, however, that the formation of precautionary savings by households (in anticipation of retirement or something else) has played an important role globally. If we can trust a very extensive study by Chen et al.

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(2017) carried out on the national accounts of 60 countries, representing 85 percent of world GDP, quite the opposite is true. Household savings were found to have constantly declined from the early 1980s until 2015 (apart from an uptick at the beginning of the 2008 crisis that Summers undoubtedly has in mind), losing the equivalent of 5 percentage points of GDP. While in the vicinity of 13 percentage points of GDP in 1980, the current savings of households represented no more than 8 percentage points of GDP in 2015. The most remarkable thing, although hardly astonishing to anyone familiar with the Kalecki relationship,3 is that business savings, for their part, followed a strictly inverse trend, gaining 5  points over the same period, from 8 to 13 percentage points of GDP. The real question that arises (besides trade imbalances), if one has faith in the thesis of excess saving in relation to investment, seems then to be why this gigantic shift of household savings to firm profits does not provide an equal stimulus of business investment, whose net rate of growth has continued to decline during the same period. Stripped to its essence in this way, the secular stagnation hypothesis comes down to inquiring, more simply, why capitalism has taken a turn (if not secular, at least for 30 years now) toward a regime of ‘profit without accumulation’. The bulk of the imbalance between savings and investment has shown up at the firm level. Firms have for decades accumulated profits they have not put into investment, preferring (a) to pay dividends or buy stock back from their shareholders (which does not appear clearly in the series by Chen et al. (2017), undoubtedly because this trend in the major formerly industrialized countries is diluted across the 60 countries studied), and (b) to accumulate cash and financial assets, to the point that they are ‘swimming’ in them, as Summers (2014) himself puts it. The Causes of Low Investment It is therefore necessary to turn to the reasons that explain the weakness of investment for nearly 40 years now. Summers (2014) offers three principal explanations.4 Changes in production models The first factor that explains the slowdown of accumulation is the change that has occurred in production models. Summers explicitly refers to ITC companies such as Apple, Google or WhatsApp, ‘who find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard’ (Summers, 2014, p. 69). Their production model consists precisely of being able to create significant revenues (and achieve top market

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valuations) while using very little productive capital, and also very little labor. One cannot count on the expansion of this sector, then, to provide a useful outlet for savings – which is accumulating on the asset side of these companies’ balance sheets – when the sector is so thrifty in terms of capital spending. The demographic slowdown The second factor mentioned by Summers is the slowdown in the growth of the working population in the formerly developed countries, which was proposed back in the 1930s by Hansen (1939), from whom Summers borrows the concept of ‘secular stagnation’. At this point it is probably enough simply to refer to Hansen, without further explanations. We may surmise that Summers draws a relationship – just as Keynes (1937) did, before Hansen – between the low anticipated increase of the working population and the weakness of the market prospects for consumer goods or capital goods that will need to be produced in the future, such as housing. These opportunities will in fact not arise, given that in the future one will not be able to count on greater disposable income from future workers who will never be born. Somber demographic projections provide a poor inducement to invest today. Lower prices of capital equipment The third factor said to induce a slowdown in investment spending is the decline in the prices of capital equipment relative to all goods and services produced. In this regard, Summers produces a quite edifying statistic: the ratio of the capital equipment price index to the GDP price index fell 20 percent between the early 1980s and 2015 (though the drop looks to have been curbed since 2007). This means that even if the inducement to invest had been maintained constant in volume during this entire period, expenditure for the purchase of capital assets would still have fallen 20 percent in value, in relation to all other types of expenditure. The useful opportunities offered to savings were reduced accordingly. These three explanations of the sluggishness in accumulation are interesting, because they do not involve the reasons most commonly mentioned but are quite plausible hypotheses, positing causes at least as significant and persistent as the phenomenon we are trying to explain. All three are based on the idea that this is not so much the appetite to invest which is lacking as the actual need for it. New models of production, demographics and a decline in prices reduce in an ‘objective’ way the need to undertake large capital expenditures.

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Reasons Neglected by Summers: The Raising of the Financial Hurdle Rate and the Increase in the Concentration of Firms The most remarkable thing, however, about the reasons given by Summers – all of them plainly acceptable from a Keynesian point of view – is that he seems to miss the two main ones. At no time does he mention higher hurdle rates or appear to lend the slightest attention to the increasing concentration of firms. These ‘oversights’ have been clearly highlighted by Hein (2015). They involve the explanatory factors which have been among the main contributions of post-Keynesian economics for the last 25 years (Hein, 2016): (i) the inclusion of income distribution in long-term growth models when dealing with monopolistic or oligopolistic competition, which enables firms to determine to some extent the ratio of wages to profits; and (ii) the demonstration of the harmful role played by the financialization of firms on their expansion policies – due to more stringent requirements by shareholders as to expected return on investment. The combination of these two ‘secular’ trends, both making firms more rent-seeking, results in a kind of regime of profit without accumulation, creating the torment of an increased propensity to save (higher profit margins) and decreased inducement to invest (a higher financial criterion, as Keynes would say).5 Recent evaluations of the financial drain on the firm created by shareholders reflect this (Lavoie and Seccareccia, 1999, 2016; Cordonnier et al., 2014). Certainly, these are not the only unorthodox ideas that might shed light on the secular stagnation viewpoint (see Roubtsova, 2016, for a bracing review of those contributions), but the fact that they are not cited by Summers does show there are limits on just how far the re-examination is allowed to go. Someday perhaps the re-examination will go further, inasmuch as these explanations are starting to emerge from mainstream sources. A highly-detailed econometric study by Gutiérrez and Philippon (2016) on the United States, using sectoral data laid across company data, established rather convincingly that the two principal causes of low ­ investment since 2000 (in comparison to what would be expected in light of higher c­orporate profits and Tobin’s Q ratio) are greater industry concentration and stock ownership by institutional investors termed ­ ‘quasi-indexers’.6 Concentration would decrease competition between firms, while the ‘tighter’ governance applied by the ‘quasi-indexer’ funds would make ­short-termism dominate. These two factors alone, according to the c­ alculations of the authors, explain 80 percent of the investment shortfall given high levels of profitability and the Q ratio.

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One Reason Ruled Out by Summers: The Decline of Productivity Gains Another cause of secular stagnation it would be wrong to leave aside is the steep downward trend in productivity gains since the end of the 1970s.7 The French School of regulation has from its beginnings (Aglietta, 1976; Boyer, 1979; Bertrand, 1983) made this one of the primary explanatory factors for the crisis in the Fordist accumulation regime. Gordon saw also this as the main reason for the paltry growth experienced by the formerly industrialized countries since the 1970s. He returned to this explanation recently (Gordon, 2015) in taking the secular stagnation point of view. This downward trend in productivity gains, which must be taken seriously, is curiously – and it seems, very paradoxically – dismissed out of hand by Summers and on the grounds that it would be a supply-side explanation! Too eager, apparently, to embrace Keynesian doctrine all at once and with no guilty concessions, Summers (2016) makes this objection to Gordon: ‘If the primary culprit were declining supply (as opposed to declining demand), one would expect to see inflation accelerate rather than decelerate’. Yet there is room for such structural causality in demand-side economics. The downward trend in productivity gains, whatever the explanation, is certainly not favorable to investment, since it decreases any urgency felt by firms to add to their productive capital. The inducement to invest may indeed be depressed because competition between firms depends less critically on putting new capital goods into their plant, when it does not hold a clear enough promise of lowering costs by saving labor. The demand for investments in productivity or for profitability (as opposed to the demand for investments in capacity) could therefore have faltered under the effect of these declining opportunities and, due to the brake thus put on effective demand, may in return have helped reduce the expansion of market opportunities and, finally, the need for investment in capacity. This recessionary loop would fit easily into the stagnation thesis defended by Steindl (1952). It was clearly formulated by Husson (2008), who sees in the structural changes of corporate demand one of the essential causes of the slowdown in productivity, which will then reduce opportunities for profitable investments. The slowdown in accumulation is not the foremost reason for the deceleration in productivity. On the contrary, it is because productivity – as an indicator of anticipated profits – has slowed down that accumulation has been discouraged and growth restricted, with additional feedback effects on productivity.

It is this line of thinking we would like to extend, by clustering other explanatory factors with what is most often considered as a supply-side

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factor – the decline of productivity gains – to produce a demand-side analysis inspired by regulation theory. The latter opens up the possibility of a dynamic and reflexive coordination between supply factors and demand factors, through the structuring of norms of production and consumption.

THE ROLE OF BROAD-IMPACT GOODS: AN INSPIRATION FROM REGULATION THEORY For our part, we believe that other reasons at least as important as those just mentioned, but perhaps more speculative at this stage, have played a role in the slowdown of accumulation. It may be useful to group those reasons here under the epithet of ‘curse of the contemporary Eldorados’. The central idea is that the accumulation of capital by private enterprises is decisively based on the anticipation of growth opportunities (‘lodes of ore’) that are sufficiently well identified and sizable enough to draw a substantial fraction of actors to invest in these promising sectors, such that a selfperpetuating loop is established around the powerful impetus given by these investments. Due to the expansion of business, employment and revenues that result, and ultimately to the validation of the initial bets by the expenditure of these revenues, the initial ‘incitement’ to invest is maintained. The centerpiece of a successful feedback loop, as we see it, is the development, production and dissemination of broad-impact goods, the absence of which can, inversely, quickly exhaust the lodes that give rise to Eldorados. A Paradigmatic Case: The Automobile The automobile represented this type of Eldorado in exemplary fashion during the post-war golden age. It led multiple actors to coordinate their bets (and wrap their strategies) around the development of this product – through the construction of roads, refineries, hotels, repair services, etc., and also through the urbanization that it accelerated, the spatial reconfiguration it encouraged (between the city center, large residential areas, housing developments, suburban commercial areas), and so forth – to such a degree that we could term the automobile, and this type of good in general, a ‘broad-impact good’, in the sense that it seems to combine all the right features for the economy to create a home for it. This type of good requires large investments for its production and incurs enormous production costs, in labor especially – and, as we know: without enormous costs, no large profits. A product like the car fits ideally into the social imagination brought by modernity, and partly helps to shape it, by turning the cardinal goods and cardinal values that frame this imagination (freedom, ubiquity,

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liquidity, technicality, individual sovereignty, comfort, time-saving, etc.) into merchandise. It seems at the same time the most appropriate for providing a limitless playing field for conspicuous consumption, driven by emulative rivalry (Veblen, 1899; Girard, 1978; Dumouchel and Dupuy, 1979). On top of all that, its development induces an economic, spatial, and semantic reorganization that is capable of redefining an entire chain of commercial functions taking shape around it and serving its use (roads, hotels, repair services, shopping centers, etc.), thus giving full impetus, at both the microeconomic and macroeconomic levels, to the dynamics of an era. The real question is what are today the goods and services able to rise to the role of this broad-impact good, able to cause persistent Eldorado effects, and not simply cheap fads proving themselves ex-post to have been non-self-fulfilling prophecies (as exemplified by the bursting of the dot. com bubble in the early 2000s). Arguably, our contemporary Eldorados are not adequate, or they are for the most part constitutionally defective in terms of the qualities we have just mentioned. As Husson (2008, p. 64) quite rightly observed, ‘the multiplication of innovative goods was not sufficient to constitute a new market as large as the automobile’s, which entailed not only the automotive industry but maintenance services and urban and road infrastructure’. Without claiming that the horizon is permanently closed off and that there will never again be a new frontier for capitalism, it is worthwhile pointing out precisely what seems to be lacking in the Eldorados of our time. That is what we are trying to sketch out here, accepting that this first attempt will in some respects be cursory and suggestive. Broad-impact Goods in the Coordination of Production and Consumption Norms In the late 1970s and early 1980s, the founders of the regulation school, in France, greatly contributed to the explanation of the extraordinary dynamic of post-war capitalism, bringing one of its mainsprings to light: the concomitant and coordinated development of a Taylorist–Fordist mode of production that multiplied productive capacities and of mass consumption for its output. Boyer (1979, p. 43) made this ‘original mode of interaction between production norms and consumption norms’, as he called it, the distinctive feature, ‘the nature’ of the accumulation regime in place after 1945. Basically, the latter is defined by an initial coordination between a certain type of work process (the generalization and extension by Fordism of the principles

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Secular stagnation and the curse of contemporary Eldorados ­269 of Taylorism) and a revolutionizing of the reproduction conditions of the labor force, with capitalism, thanks to the expansion of mass consumption, taking over a growing fraction of labor expenditure. At the most basic level, a predominantly intensive accumulation regime centered on mass consumption initially matched the development of Sectors I and II, ensuring a degree of consistency in their relative expansion, based on a certain proportionality in their growth. In a way it is the transformation of production conditions in the consumer goods sector which (a) fuels the expansion of sales in the capital goods sector and (b) enables, due to the lowering of prices – and to the new conditions of wage income formation – the extension to workers of the mode of consumption previously reserved for various strata of the lower middle class. (Boyer, 1979, pp. 43–44)

It is this fine articulation that Bertrand modeled in detail, showing that the strong growth of the post-war period rested on a ‘powerful coordination of three dynamic components’ (Bertrand, 1983, p. 336): strong gains in productivity in the consumer goods sector (which could have resulted in the massive destruction of jobs); a ‘rapid, regular and sustained increase in wage earners’ disposable income’ (Bertrand, 1983, p. 336) in line with the productivity gains of this sector (thwarting, by the expense of wage consumption, the potentially destructive effect on employment of those very gains in productivity); and a ‘major accumulation’ in the consumer goods sector, resulting in production in the capital goods sector, and ensuring thereby attractive profits in the consumer goods sector.8 This happy articulation between production norms and consumption norms, as the regulationist writers have repeatedly emphasized, is not the product of some genius aiming at reconciliation:9 ‘it was the result of a confrontational, fumbling, explosive and blind evolution in society, but converging little by little in this way’ (Bertrand, 1983, p. 329).10 Nor was it simply the result of a highly ordered arrangement of purely quantitative relationships between the proportionate development of the productive sectors (consumer goods on the one hand and capital equipment on the other), productivity gains, and the change over time of real wages, etc. Beyond the quantities, the right mix between production and consumption norms (and the resulting ‘virtuous’11 dynamic) could not have come about without the right qualitative conditions, of which the institutionalization of a consumption norm around cardinal goods, fully articulated in this systemic reorganization of the accumulation regime, has undeniably been the driving and structuring force. When the new regime was set in place, explains Aglietta (1976, p. 186), We see the structure of the consumption norm appearing at the same time as its conditioning by the capitalist production relationships. It is structured by two goods: average public housing [author’s note: and all the household a­ ppliances

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that determine its habitability], which is where individual consumption takes place; and the automobile that is the individual means of transportation ­compatible with the separation of dwelling and workplace.

It is indeed around these two goods, each of which in reality stands for a very large basket of goods in its wake, that the post-war world began to turn and that the virtuous macroeconomic loop went to work. These goods, if we can reduce them to this status, on the one hand firmly and sustainably incited the appetite to consume, while reinforcing the wage claims already well justified by Fordist working conditions and made operative by monopolistic regulations and, on the other hand, offered to firms a new, sharply-defined frontier and a horizon without apparent limit. The new Eldorado was here: in the development of wage consumption, for which the order forms seemed to be made out generously and for a long time, around all that would bring about the civilization of the automobile and the interiors (not to mention the exteriors) of a lower middle-class dwelling. The role of those broad-impact goods, as they may be called, has therefore been decisive in the Fordist accumulation regime. They incited and structured a regime driven at once (and complementarily) by investment and wages. Such complementarity is the necessary condition for an Eldorado arising from wage consumption to be viable, and a bit sustainable, by ensuring acceptable profitability (on average and overall) in the long run. Indeed, it is not enough to have workers produce consumer goods for other workers, with increasing efficiency, in order to be in business. If firms recover in revenues (through the expenditure of wages on consumption) only the amount of wages that they have previously spent in the cost of production, the venture would quickly come to a halt. Taken one by one, each firm in the consumer goods sector can, granted, look at the expansion of the total mass of wages as a great new opportunity for its quest for profit; but taken all together, they cannot make profits by only getting revenue from the wages they paid in production. The concomitant stimulation of investment has therefore been a key element in increasing overall expenditure beyond the mere expenditure of the costs of production. The investment expenditure was both ‘driven’ by intensification of the mode of production of wage-earners consumption goods (Fordism) and ‘incited’ by the limitless lodes that seemed to glimmer on the horizon. The question is figuring out what today could act as an Eldorado, which it seems capitalism cannot do without (short of a mediocre existence trying to do business against wages), and what are the broad-impact goods that would provide depth, sustainability and stability.

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THE CURSE OF CONTEMPORARY ELDORADOS AND THE LACK OF BROAD-IMPACT GOODS The provisional and rather speculative answer that we will be able to give here is that, for the moment, it is not clear what these goods or products (before they become goods) might be. But before coming to this dark diagnosis (dark for the dynamics of capitalism but undoubtedly less so for the planet), it is helpful to clarify what is meant by a ‘broad-impact good’, by setting out more clearly the ‘right’ qualities it needs to be such. We are not unaware that such an exercise runs the risk of succumbing to a certain fetishism of goods, in attributing to their nature what is in reality the refraction at their level of underlying social relationships, of established customs, of historically imposed institutional constraints, of inherited socio-political compromises, and of the dynamics of desire and needs – lumped together, shaped and blended by five centuries of commodification. That is a risk we accept. By treating the question this way – where are our broad-impact goods and what might they look like? – we deliberately chose a perspective that says that the conditions (moral, institutional, political, macroeconomic, etc.) favoring the development of the accumulation of capital are refracted in goods, and that to deal with their make-up is to speak at the same time of all the rest, which is to say of what is liable to ensure a ‘proper coordination’ of the modes of production and modes of consumption. This is a perspective that views the screen rather than the light source. But this is sometimes the sharper image.12 The Right Characteristics of Broad-impact Goods A broad-impact good is a complex of products whose transformation into goods turns out (or promises) to be beneficial on a large scale, by generating at once: the microeconomic (though nevertheless massive and coordinated) incentives for its final demand and for its anticipation (through the investment expenditure); the organizational conditions for its market penetration; and the appropriate macroeconomic properties to make it a powerful engine for expansion. This requires, in our opinion, at least seven constituent qualities, four of which are more to do with its use value, and three more to do with its exchange value. (i) Connection to the established social imagination  The product or the complex of products involved must maintain a close connection with the cardinal goods or cardinal values (themselves of broad impact) which structure the social imagination

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established by modernity and the era in question (Castoriadis, 1975). Among these cardinal goods or values are certainly freedom (the myth of individual sovereignty and autonomy), ubiquity, rationality and progress, immortality or eternal youth, liquidity and, for our time, the middle-class way of life and its promise of ‘comfort’, entertainment, escape and leisure. What is involved is more than a connection, rather a matter of transmutation. A broad-impact good is one which is able to draw its meaning from the thick-bottomed, very shallow pool (structured from an anthropological, political and sacred point of view) of meaningful and desirable resources, in order to transcode these into a benefit which will incorporate certain of their attributes, or, putting up a good front, produce a simulacrum or show of these attributes. In this light, a clothespin has very little to offer. A sailboard is better. We will try to refrain from always mentioning the automobile and household appliances. (ii) Insertion in the functional chain of goods  The broad-impact good is also one which has been able to insert itself (to make its place) in the functional chain of existing goods and of practices at a given time, which went ahead without it to operate its round of customary relationships where each commodity already has its place and responds aptly to its fellows in the language of ‘who and what uses what’. To make its place, the good must be sufficiently strong and sharp to break a link in the functional chain of existing goods and practices, move into the round and, ideally, reorganize the self-referential lexicon established prior to its arrival, within which each use value was defined by a mirror reference to the others and to practices shaped around them (a hammer is used to drive a nail in a partition designed and purchased specifically to receive it, in order to attach a frame used to decorate the room – a nail that can be removed without a problem when the house is sold, thanks to the nail puller and invisible spackle bought at the home improvement store). On this aspect, which could be called the ‘practical side of things’, and to achieve that, the right good must be able to rely on three major arguments: the time and energy that it saves its user, its snowballing dependency factor increasing efficiencies, and the complementarity or subservience of other goods, practices and activities. The washing machine offers to an obvious degree the first and the third arguments. The mobile phone came in due to the second argument (it becomes difficult to do without a mobile phone once a certain threshold of use is reached in the population) and due to the third: the mobile phone is well adapted to the just-in-time society and reinforces it by disrupting the old practices of planned

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coordination and providing thereby the solution to the problem of coordination that it creates. (iii) Vector of rivalrous strategies  The third property that gives a good the ability to penetrate and invade is the option to fit into the demonstrative, rivalrous or narcissistic strategies employed by the modern individual (de-socialized then re-socialized by the mediation of goods). The irresistible appeal certain products hold derives from their ability to add luster to their owners, to project themselves in the sphere of desirable objects. The products most able to support ostentation, status display, accumulated wealth, beauty, self-sufficiency, singularity of the ego, etc., are also the most apt to make their place in the round of goods if to begin with they lack, or partly lack, functional attributes or if they are specifically intended to scorn this tone or register. Rivalrous or narcissistic ostentation, as one might call this third component of the broad-impact good,13 is rather obviously the register on which the mobile telephone relied when it was introduced and that it continues to cultivate (through the breadth of product offerings) in addition to its successful inclusion in the functional chain. This is, even more obviously, the essential basis of the luxury products or travel industries. Travel, besides its adoption into the middle-class way of life, gives a fairly good sign of the purchaser’s status, wealth, originality, detachment from materialism, etc. This is perhaps even more true of pleasure boats, backyard swimming pools, beauty treatments, prosthetics, the trendiest appliances and so on. (iv) Invoiceability  To finish up with the good attributes that can be expected on the ‘use value’ side, with incidental swing to the ‘exchange value side’, just as decisive in the success of an attractive good is that, for both supplier and user, it is plainly something to be paid for individually. The issue here is not about owning or renting the acquired good (renting being a form of individual ownership, giving simply a right of use for a defined time). The question is whether there is someone, in terms of final demand, who considers that it is indeed up to him or her to pay for the benefits contained in the good, even though he or she has been receiving all the benefits from his or her own point of view. The presence of externalities or, more generally (because externalities are a special case) a low degree of ‘invoiceability’ of the good, are nearly prohibitive obstacles in the path of a broad-impact good (notwithstanding the usefulness or desirability of a supporting or transcoding good). The thermal renovation of buildings, for example, which could come forward as the new Eldorado of

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the century (now that the previous Eldorados have created the emergency and that the established social imagination is starting to include the desire to ‘save the planet’), obviously runs up against this externality-laden component of the product in question, which makes it difficult to invoice individually. The same goes, in another area, for numerous ‘products’ that have come out of the ITC revolution. As to the latter, the complex intertwining between the producers of the service (or services, often bundled), the collateral contributors (enlisted voluntarily or by force), the beneficiaries of the windfall, the users through circumstance or need, the advertising people, the content providers, the contributing or collaborative users (consumers making contributions or put to work), the wellintentioned or naive vectors (transmitters, dispersers, amplifiers on the ‘social networks’), etc., makes it difficult in many cases to identify the agent to whom to send the invoice and who is also prepared to receive it. Without even mentioning the moral dispositions, misunderstandings and states of minds that are inclined to consider these products as naturally (or normatively, or politically) free of charge, or which tend to doubt (sincerely hypocritically) that there is even a product, or which simply cannot figure out the use value and value it at its ‘fair value’. It goes without saying that one of the first qualities of the broad-impact good is not to have these original flaws. If the qualities we have just stated describe nothing more or less than the good features which all merchandise should possess to have use value, what distinguishes the broad-impact goods from the rest is the level of excellence they must achieve in each of these areas (and on the whole product line), together with equally good performance in the exchange value aspect, which must be present next. (v) Imposing production costs  The major, inescapable, essential (so to speak) quality of the broad-impact good is to be costly to produce. To put it rather baldly: a broad-impact good is first of all an imposing product in terms of value added, whose price is therefore significant, and firmly defended on the market by a costly production process, in terms of both direct and indirect labor. To claim the role of an Eldorado, it must bear the promise, with all the complementary goods that follow in its wake (derived from it or subordinated to it), of considerable economic activity, a voracious employer and, in the usual measure – in due proportion – accompanied by massive profits. It can be tricky to come up with figures a priori, but there

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is some point in giving an idea: a complex of goods comprising the assortment of expected benefits of a broad-impact product that could not mobilize or bring in its wake 5 percent to 10 percent of the working population, would not be a serious contender. The ideal profile, which everyone has in mind, is of course the automobile,14 whose economic interest (in this specific way) came from being very costly in terms of production and use, while being accompanied by a downward trend in costs, due to the continuous productivity gains that have allowed its invasion. The family helicopter, in this regard (though surely not in all regards, as we shall see) could have had or could have its chance as well. (vi) Replicability  Even if this seems self-evident, and even appears completely tautological: to be adopted on a massive scale, the attractive good must be replicable at will. It is necessary that the technologies, raw materials and skills be available – and themselves be producible and reproducible at will, or readily at hand – to ensure large-scale replication on the supply side. This is unarguably the question which arises with regard to the future of the family helicopter or tourist trips in space, not to mention the widespread use of electric cars. (vii) Investment ratio  Finally, though this is not a secondary criterion, for a broad-impact good to be interesting in terms of the overall workings of the economic system, it absolutely must possess the specific features that facilitate the macroeconomic loop. In a monetary production economy, the principal constraints on expansion are not found on the supply side. They lie in a chronic insufficiency in the willingness to invest relative to the desire to save. Consequently, a complex of goods intended to produce general (and not just sectoral or crossindustry) ripple effects must mobilize enough indirect labor for the investments necessary to its production to exhibit an investment ratio (Gross Fixed Capital Formation (GFCF) to value added) greater than the society’s propensity to save. This does not mean that a good deficient in this regard cannot make its place in the round of goods and prosper there. It does mean that it would do so at the expense of others, by helping to aggravate rather than alleviate the economy-wide bottlenecks. An economy in which all production is done with an investment ratio lower than the average propensity to save would be chronically recessionary. It would therefore be inappropriate to characterize as broad-impact a good which was ill-conceived in this regard, since in the final analysis this is one of the primary collective benefits that we look for – to be, through

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the investment it mobilizes, a net contributor to total demand and to total profit formation. We ought to go so far as to say, to be perfectly clear, that from a macroeconomic standpoint, this is the only important quality, the other six being rather the conditions for achieving it on a satisfactory scale. What Has Become of the Eldorados of the Fordist Period? If we now return to the question that prompted the preceding ­digressions – where are our broad-impact goods? – the first thing to note is that the Eldorados of the Fordist period appear to have vanished in a quite unexpected fashion. As the pioneers of regulation theory accurately perceived, the main ‘lodes’ mined by the post-war accumulation regime were housing15 (and to a not insignificant degree, household appliances) and the automobile (in the broad sense), which is to say: the products and features that prefigured and partly achieved the extension to the working classes of the middle-class or upper middle class way of life.16 It should be quite striking, for anyone taking up the story at this point, and with a fresh eye (under a veil of ignorance of what followed), that the lode was clearly abandoned in the middle of the mining operation. One might ask why the extension of the upper middle-class way of life to all wage earners (though sitting high enough in the collective imagination) did not continue at the same brisk pace, expanding ad libitum the spectrum of its attributes, run through the blender of Fordism, following seemingly ready-drawn convergence lines: after the suburban cottage or the three-rooms-plus-kitchen, the five-room floor-through with patio and the second home; after the car, the family helicopter and the pleasure boat; after prepared foods, dining out in fancy restaurants (whose number seems to have increased a thousand fold); after the domestic robot, the robotic servant (able to do everything: the household shopping, the cooking, bathing the children, etc.); after ready-to-wear, designer fashion (whose workshops, now industrial chains, also seem to have increased a thousand fold); after airplane travel, space travel, and so on and so forth. In all that, even selecting out some of it, wasn’t there enough work for another hundred years and effective demand to go with it? There are undoubtedly plenty of reasons that might explain the fact that the extension of the upper middle-class way of life to all wage earners has stalled out on the road. Undoubtedly the ‘starting price’ of the goods mentioned (the family helicopter, the recreational boat, the second residence or the robotic servant) is thought to be too high, and would require considerable consumer debt, which the promised productivity gains and increased disposable income that would ensue do not seem, beforehand, to collateral-

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ize sufficiently. Undoubtedly, too, the invasion of these goods quickly, or in advance, ran into problems of availability and spatial organization (at least for the first three). It is possible that once spaces were restructured by and around the car, the goods that followed had no good place to go. One must, however, refrain from impatiently supplying answers, some of which are at first blush too obvious,17 to this question of the premature obsolescence of the Fordist consumption norm. In any case, not before sincerely and patiently delving into the inventory of this unrealized upper middle-class Eldorado, starting by defending the hypothesis that there was a broad enough range of products to provide the broad-impact goods necessary to prolong a development model whose manufacturing and distribution secrets are well understood (though the planet may die all the sooner). Such an inventory, which cannot be undertaken properly here, might have the merit of showing that the causes of the blockage were undoubtedly largely external to the broad-impact goods themselves. Labor’s revolt against the Taylorist–Fordist mode of production – a mode of production that would have had to be extended to these new goods – may go some way to explain it. As well as the first signs of the ecological crisis.18 But the macroeconomic disorders that accumulated in the late 1970s and early 1980s (the end of Bretton Woods, the oil shocks, monetarist throttling, neo-liberal policies and the beginnings of financialization) were certainly enough to throw a wrench into the post-war accumulation regime, until all the actors recombined their strategies apart from this dynamic equilibrium, itself of broad impact (but by just barely), as Harrod (1939) had described. Where are the New Broad-impact Goods? The waning of the golden age and the partial dismantlement of the Fordist consumption norm have apparently not been followed by a new wave of product innovations with the structuring capability of the earlier period. It is certainly not the case that the candidates were (or are) lacking to take up the baton from the broad-impact goods that provided the Eldorados of the post-war period. But it is quite possible that these candidates have so far not put together the right characteristics, the ones indispensable to create a new dynamic equilibrium among accumulation, productivity gains and expanded market opportunities. That is the conclusion one may hazard, stressing the provisional nature of this conjecture. The unfulfilled promise of the new information and communication technologies The new information and communication technologies (ICTs) have for several decades tried out for this role of a new Eldorado, but for the

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moment have not fulfilled their promise. The reasons for that were spelled out soon enough, even before the ‘dot-com bubble’ burst (Gadrey, 2000). The work of Gordon (2000) has shown that this sector still occupies a fairly small share of total economic activity, and that its external effects have been minor in the economy as a whole. The ICT firms mostly revolutionize their own production and lower the costs of capital goods, as Summers has pointed out – which runs counter to the favorable effects upon the expansion of total demand that had been hoped for. They also contribute without doubt to the replacement of the old modes of production and distribution for which they substitute, though without mining new ores of growth, since they do not create genuinely new goods.19 The uncertainties lurking in their business models do not help matters (who is to pay for their services? How, when, until when?); and the market structures that they engender, by lowering the costs of communication and transportation, seem to carry many of the disadvantages of the ‘winnertake-all society’ (Franck and Cook, 1995). The instability generated by the continuous innovations they produce, far from stimulating competition through investment, often makes the wait-and-see option more attractive. Eldorados within reach but facing a low propensity to ‘put down money for them’ If we now turn to the Eldorados that should beckon us – all of the goods and services, including investments, which are or will be necessary to ensure the energy- and ecology-based transition of our modes of production – we are already well aware of the difficulties that keep them from having the obvious appearances of a gold rush. These difficulties, quite often summed up as a matter of financing, boil down to two major contradictions or curses. To a large extent, the benefits expected from the energy and ecology transition are the characteristic features of collective goods (which come along with the free-rider problem), as with avoiding global warming or saving the oceans from pollution. Providing these goods means financing them with taxes. However, society and the body politic then have to contend with getting popular consent for yet another increase in socialized spending as compared with personal spending. To another extent, the benefits expected from these investments will be hardly noticeable (except in the long run) by their so-called beneficiaries. This is the case with home insulation or electric cars. The extra utility hoped for with such investments does not kindle a sufficient propensity to pay the bill spontaneously. A great many Eldorados which seem within reach, such as investments in education, better funding of the legal system, improvements in urban planning, beautification and improvement of the quality of housing, the

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construction of a ‘wonder city’, as Keynes (1933) said,20 appear to be victims of this curse on collective goods or goods with little perceived marginal utility. Moreover, as services are very often involved (and not readily industrializable goods), they are at the same time victims of cost disease (Baumol, 1993), which would require an over-socialization of demand in order to ensure their procurement – at a time when the trade-off in favor of collective consumption is increasingly rejected, starting with the political class. Eldorados competing to take over our (limited) time Another striking aspect of the goods or services which are supposed to open sufficiently broad vistas of investment and production to drive future growth is that they seem to be in competition (with each other) to grab our time, just as much as, if not more than, our wallets. This trait, not much acknowledged as far as we can tell, is potentially loaded with consequences for the investment dynamic. As opposed to the goods and services and infrastructure that structured the consumption norm during the Fordist period (Aglietta, 1976; Boyer, 1979) – the car, household appliances, the telephone, the supermarket, mass transportation, etc. – those which are necessary to our covetous nature of the moment, shaped by the ‘revised sequence’21 of the ICTs and by a society of entertainment, amusement and narcissism, seem to claim our time rather than save it. The multiplication of TV channels, the profusion of video games, the explosion of internet content (information, documentation, music, movies, series, shopping sites), the invasion of the digital social networks, the expansion of destinations and forms of tourism or amusement, the proliferation of narcissistic services (fitness rooms, tanning beds, spas for health and youth, beauty products, cosmetic surgery and prosthetics) – all these new segments in the supply of goods and services offered to our faculty of desire (especially goods) are clearly users of time, and unluckily cannot be easily replaced by consumption by proxy or by sublimation. Their expansion is just as surely limited by the amount of time we can spend on them as by the disposable income we have to buy them. However, as high as the barrier of disposable income may be lifted, under certain conditions, in a selffulfilling projection (with the supply of new goods creating the income and capital expenditures that get them sold), the time each person has is still not extensible. Multiplying the number of television channels by 50 will not multiply by 50 our ‘disposable brain time’ to watch them. These new Eldorados, at the intersection of ICTs, medical progress, new materials and the narcissistic or amusement society, are mining lodes whose depletion can be glimpsed from the first fall of the pickax. The investments resulting from their meritorious efforts to exploit them are for this reason largely

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investments made for the sake of winning market share (shares limited by our free time) rather than of expanding those markets. These efforts tend to cannibalize each other in a competition whose benefits are potentially zero-sum. On the macroeconomic level, these zero-sum investments do not have only unfortunate effects. They should perhaps be put in the (good) category of investment expenditure that does not generate new production capacity (since the time to consume them is limited).22 In this, they help to resolve today’s demand problem positively (by providing a useful outlet for savings), without deferring it until tomorrow (since they do not increase production capacity). But this happy effect on the short-term macroeconomic loop may not be enough to brighten the outlook of the investors concerned. In the long-term, their strategies, taken together, will not have the effect of extending their new frontier. They can only go into such investments with an awareness that their Eldorados are over, from the get-go, and that everyone will not come back covered in gold. Is there a gloomier prospect to really depress the ‘animal spirits’ of entrepreneurs? No doubt, we have to see here one more reason why the accumulation of capital has slowed down. Many other causes of sluggish investment There are probably many other factors and many other structural causes that could be mentioned in support of the thesis that animal spirits are very low. Going on with this inventory might seem like a remorseless witness for the prosecution. ‘Forgotten’ from our list: the deformation of the structure of production costs tending toward a ‘zero marginal cost of production’, the growing difficulty of securing ownership rights on product and process innovations, the diminishing returns on knowledge, the ecological constraints (the depletion of certain resources and the proliferation of environmental standards designed to prevent the destruction of ecosystems), the volatility of consumer fads and their abandonment, etc.23 Without claiming that all these elements necessarily pull in the wrong direction, the presumption of guilt is still quite strong. There seems to be a lengthening parade of obstacles blocking the triumphal march of capitalism and unlimited accumulation.

CONCLUSION In trying too hard to pick out all the reasons damping down productive capital accumulation, one could lose sight of the essential point. The picture that emerges, when you stand back and look at everything we have just talked about, is that of a sort of rent-seeking capitalism desperate for

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Eldorados. The dynamics of capital accumulation are not being driven, for the time being (one must of course refrain from prophecies), by the outbreak and systematization of a third industrial revolution, able to structure at once a new productive system, new broad-impact goods and a consumption norm that would ever so fortunately bolster each other. Facing this obstructed horizon, the concentration of firms and shareholder governance have put in place the functional structures of a regime of profit without accumulation, where it is more important to hold existing assets than to produce new ones, to participate in the feast of this society of profits without prosperity (Lazonnick, 2014).

NOTES   1. DSGE-type models, either neo-classical or neo-Keynesian in origin.   2. Eichengreen (2015, p. 66) repeats almost the same explanation of secular stagnation, and sets it up as a definition: ‘Here I define secular stagnation as a downward tendency of the real interest rate, reflecting an excess of desired saving over desired investment, and resulting in a persistent output gap and/or slow rate of economic growth’.   3. The Kalecki equation posits that the profits made by all firms in a given period are equal to (and determined by) the investment made by these firms during the same period, plus the consumption out of dividends, plus the balance of trade, minus net government spending and minus the savings of wage-earning households. With regard to these latter savings, their relationship to firms’ profits is fairly easy to understand. If employees save 1 euro, they subtract 1 euro from what they spend with firms, while the firms have previously paid them this euro by paying their wages. This euro saved therefore is included in firms’ production costs but does not appear in their revenue. This plainly means one euro less of profit for all firms. Conversely, if the savings of wage-earning households decline by 1 euro, firms’ profits increase by 1 euro, since the firms get 1 additional euro of income without having had to supply this additional revenue by paying an extra euro of income to households. This is the phenomenon of communicating vessels between household savings and firms’ profits which explains why the two series produced by Chen et al. (2017) are perfectly inverted (with allowance for the variations of lesser magnitude observed in net government spending).   4. Putting aside the more cyclical or secondary factors, such as credit rationing or the desire to reduce debt when the crisis hit in 2008.   5. More generally, as was well explained by precursors (Steindl, 1952; Baran and Sweezy, 1966), under monopolistic competition, an increase in margins in no way necessitates spending the resulting ‘surplus’ on investment.   6. These investment funds are defined by Gutiérrez and Philippon (2016) as institutional investors with ‘diversified holdings and low portfolio turnover’. They represent about 60 percent of the equity held by institutional investors.   7. For long-term statistical series (1973 to 2015), comparing the UK, the USA, Japan and Germany, see Carlin and Soskice (2017).   8. Bertrand (1983, p. 311) does not cite Kalecki, but his model is so made that ‘there are neither wages saved, nor profits consumed: it follows that the rate of profit of the whole must as trend be equal to the rate of accumulation, and wages distributed in S1 benefiting S2’.   9. This is a criticism that has been made of the regulation school (Husson, 2001), especially about the contributions focused on the quest for a new accumulation regime liable to ‘succeed’ Fordism.

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10. To quote Bertrand (1983, p. 329) more fully, ‘Such a change does not come of itself: it involves too many upheavals in all sectors of social life, to be reduced merely to a thought-out plan. It was the result of a confrontational, fumbling, explosive and blind evolution in society, but converging little by little in this way (in the western capitalist countries) or leading elsewhere (Eastern Europe, etc.). In reality it takes time and quite a bit of turmoil—a crisis (1929) and maybe a war (1940) would seem historically to have been its high price. The outcome was a true revolution: the capitalist revolution in postwar France, (as also in the Federal Republic of Germany, Japan, etc.) and the extension of capitalist forms of organization throughout S2, the consumer goods sector. It is this (r)evolution which seems to us to lie at the origin of the rapid, long-term growth in the post-war French economy’. 11. ‘Virtuous’ in respect of growth, but probably not in all respects: in particular, deteriorated working conditions and environmental damage. 12. Those who love the cinema and dark rooms will share this opinion. 13. Attempting a bold synthesis of Veblen (1899), Girard (1978) and Baudrillard (1970). 14. And all of its complementary or derivative goods, such as roads, repair shops and scrap­ yards, the production and distribution of fuel, the tourism sector, insurance, hospitals, etc. 15. Of which the model, if not the rule, was the housing development (Aglietta, 1976). 16. As Boyer (1979) stressed. See the long quotation already given above. 17. A helicopter for every household could generate too many accidents, and would necessitate unprecedented urban spatial reconfiguration, as well as driver training out of the reach of the majority of users, etc. This is undoubtedly what people said about cars before 95 percent of households had them, and which signals, from atop these warnings, the pedigree of a broad-impact good. 18. The relationship between the ecological crisis and the disruptions of macroeconomic forces is not as obvious as it seems. The depletion of natural resources (and the rise in their price) has certainly created a problem in terms of recycling oil profits and rents. It has without doubt also clouded the outlook for efficiency gains expected on the production side and thereby reduced the inducement to invest, by depressing animal spirits and releasing the competitive pressure on firms. (When the prospects for productivity gains decrease, the cost of the wait-and-see option – due to the (non-) replacement of ­equipment – also decreases.) But outside of that (the depletion of natural resources), it is not clear how in a general way the damage caused to the environment would disrupt effective demand itself. To make the ecological crisis a triggering factor (among others) of the crisis in Fordism, one would have to be convinced that these things came into play as early as the 1970s (which is certainly not impossible). But it is entirely plausible that the ‘ecological constraint’ showed itself much more plainly in the decades that followed, once the regulations and tax policies were put in place to try to stave off disaster. These social responses and policies without doubt crimped the Eldorados based on an environmental ‘anything goes’, while offering at the same time profitability niches for alternatively produced goods and alternative production methods. All in all, it is difficult to pin down the role of the ecological crisis in the waning of the post-war economic forces. 19. The ‘optimistic’ version of this third industrial revolution long in coming is that it may come to pass someday, when the ‘range of adaptations’ called for by the ICTs has stopped destroying the technological complementarities of the old production model, at last revealing the potential effectiveness of the new model (Eichengreen, 2015). 20. ‘If I had the power to-day, I should most deliberately set out to endow our capital cities with all the appurtenances of art and civilization on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford and believing that money thus spent not only would be better than any dole but would make unnecessary any dole. For with what we have spent on the dole in England since the war we could have made our cities the greatest works of man in the world’ (Keynes, 1933 [1982], p. 242). 21. See Galbraith (1968). 22. Fiebiger and Lavoie (2016).

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23. As Fiebiger and Lavoie (2016) have shown, household consumption definitely plays a stabilizing role in the business cycle, since it is less volatile (in volume) than investment, and also because it is partly fed by financing not strictly dependent on current income and furthermore does not directly generate new productive capacity. This does not rule out that the fickleness and unpredictability of consumer choices at the microeconomic level can make firms’ investment decisions riskier. In sum, consumer behavior could be both stabilizing (as to the cycle), and moderating (as to trend).

REFERENCES Aglietta, M. (1976), Régulations et Crises du Capitalisme, Paris: Calmann-Lévy. New edition. Paris: Odile Jacob, 1997. Baran, P. and P. Sweezy (1966), Monopoly Capital: An Essay on the American Economic and Social Order. New York: Monthly Review. Baudrillard, J. (1970), La Société de Consommation. Paris: Gallimard. Baumol, W.J. (1993), ‘Health care, education and the cost disease: A looming crisis for public choice’. Public Choice, 77(1), pp. 17–28. Bertrand, H. (1983), ‘Accumulation, régulation, crise: Un modèle sectoriel théorique et appliqué’. Revue Économique, 34(2), pp. 305–343. Boyer, R. (1979), ‘La Crise Actuelle: Une mise en perspective historique’. Critiques de l’économie politique, nouvelle série, No. 7–8, pp. 5–113. Carlin, W. and D. Soskice (2017), ‘Stagnant productivity and low unemployment: Stuck in a Keynesian equilibrium’. CEPR Discussion Paper, DP12369. Castoriadis, C. (1975), L’Institution Imaginaire de la Société. Paris: Seuil. Chen, P., L. Karabarbounis and B. Neiman (2017), ‘The global rise of corporate saving’. Working Paper 736, Federal Reserve Bank of Minneapolis. Cordonnier, L., T. Dallery, V. Duwicquet, J. Melmies, and F. Van de Velde (2014), ‘A la Recherche du Coût du Capital’. Revue de l’IRES, 4, pp. 111–136. Dumouchel, P. and J.-P. Dupuy (1979), L’enfer des Choses: René Girard et la logique de l’économie. Paris: Seuil. Eichengreen, B. (2015), ‘Secular stagnation: The long view’. American Economic Review, 105(5), pp. 66–70. Fiebiger, B. and M. Lavoie (2016), ‘Trend and business cycles with external markets?: Non-capacity generating semi-autonomous expenditures and effective demand’. Metroeconomica, 70(2), pp. 247–262. Franck, R.H. and P.J. Cook (1995), The Winner-Take-All Society. New York: Free Press. Gadrey, J. (2000), Nouvelle Economie, Nouveau Mythe? Paris: Flammarion. Galbraith, J.K. (1968), The New Industrial State. Boston: Houghton Mifflin. Girard, R. (1978), Des Choses Cachées Depuis la Fondation du Monde. Paris: Grasset et Fasquelle. Gordon, R.J. (2000), ‘Does THE “New Economy” measure up to the great inventions of the past?’. Journal of Economic Perspectives, 14(4), Fall, pp. 49–74. Gordon, R.J. (2015), ‘Secular stagnation: A supply-side view’. American Economic Review, 105(5), pp. 54–59. Gutiérrez, G. and T. Philippon (2016), ‘Investment-less growth: An empirical investigation’. NBER Working Paper No. 22897, http://www.nber.org/papers/ w22897.

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Hansen, A. (1939), ‘Economic progress and declining population growth’. American Economic Review, 29, pp. 1–15. Harrod, R. (1939), ‘An essay in dynamic theory’. The Economic Journal, 49(193), March, pp. 14–33. Hein, E. (2015), ‘Secular stagnation or stagnation policy? Steindl after Summers’. Levy Economics Institute of Bard College, Working Paper, No. 846. Hein, E. (2016), ‘Post-Keynesian macroeconomics since the mid 1990s: Main developments’. Institute for International Political Economy, Berlin, Working Paper, No. 75/2016. Husson, M. (2001), ‘L’école de la régulation, de Marx à la fondation Saint-Simon: un aller sans retour?’. In Bidet, J. and E. Kouvelakis (eds), Dictionnaire Marx Contemporain. Paris: PUF. Husson, M. (2008), Un Pur Capitalisme. Lausanne: Editions Page Deux. Keynes, J.M. (1933 [1982]), ‘National Self-Sufficiency’. The Yale Review, 22(4), pp. 755–769. Republished in The Collected Writings of John Maynard Keynes, vol. XXI. London: Macmillan, 1982. Keynes, J.M. (1937), ‘Some economic consequences of a declining population’. Eugenics Review, April. Reprinted in The Collected Writings of John Maynard Keynes, vol. XIV: The General Theory and After, Defence and Development. Moggridge, D. (ed.). London: Macmillan and Cambridge University Press, pp. 124–133. Lavoie, M. and M. Seccareccia, (1999), ‘Interest rate: Fair’. Encyclopedia of Political Economy, Volume 1. O’Hara, P.A. (ed.). London, New York: Routledge, pp. 543–545. Lavoie, M. and M. Seccareccia (2016), ‘Income distribution, rentiers, and their role in a capitalist economy. A Keynes–Pasinetti perspective’. International Journal of Political Economy, 45(3), pp. 220–223. Lazonnick, W. (2014), ‘Profit without prosperity: Stock buybacks manipulate the market and leave most Americans worse off’. Harvard Business Review, September. Roubtsova, M. (2016), ‘How secular is the current economic stagnation?’ Document de travail du CEPN, No. 2016-09. Steindl, J. (1952), Maturity and Stagnation in American Capitalism. Oxford: Blackwell. Summers, L.H. (2013), ‘Allocution, IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer’. Washington, DC, 8 November, http://larrysummers. com/imf-fourteenth-annual-research-conference-in-honor-of-stanley-fischer/. Summers, L.H. (2014), ‘U.S. economic prospects: Secular stagnation, hysteresis, and the zero lower bound’. Business Economics, 49(2), pp. 65–73. Summers, L.H. (2015), ‘Demand side secular stagnation’. American Economic Review, 105(5), pp. 60–65. Summers, L.H. (2016), ‘The age of secular stagnation. What it is and what to do about it?’, https://www.foreignaffairs.com/articles/united-states/2016-02-15/ age-secular-stagnation. Veblen, T. (1899 [1965]), The Theory of the Leisure Class: An Economic Study of Institutions. New York: A.M. Kelley.

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15. Seccareccia and Lavoie on financial crises. Linking the real and financial sectors of the economy: the major contribution of post-Keynesians Joëlle Leclaire INTRODUCTION Nothing makes the link between the financial sector and the real sector clearer than a financial crisis. When the financial system is running smoothly and supporting the activities of the real sector, creating a decent number of good jobs, supporting aggregate demand adequately, providing a fair store of value for current and future retirees, then the link between the sectors seems almost invisible. For the most part, it takes a financial crisis to highlight the fact that there is a deep and necessary bond between finance and real production. The roots of this link between the financial and real productive sides of the economy form one of the most foundational pillars of discussion for post-Keynesian economists. Understanding this nexus is potentially the most significant contribution that post-Keynesian economists can bring to the table. These models, based on the work of Keynes, Robinson, Kalecki, and Kaldor, and more, integrate the idea that money is essential to production (cf. Lavoie, 1984, pp. 772–773, 2014, p. 183; Kregel, 1984a, 1984b, 1998; Graziani, 1989, p. 2; Rossi, 2006, p. 121). The way money is integrated in post-Keynesian models provides an important starting point. Money in the Keynesian, Robinsonian, Kaleckian, and Kaldorian models is not taken as an input into production, per se, but monetary values are superimposed onto a multi-sector model. Perhaps the best example of this branch is Kregel’s work. He depicts Keynes’ General Theory as a financial model where monetary values determine the level of private investment (Davidson, 1972, p. 102; Minsky, 2008, p. 195; Kregel, 1983, 1984b, p. 142, 1998; Wray, 1993, p. 544). Like other post-Keynesian models, Kregel integrates a structural component where the ­ distribution between the 285

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i­nvestment and consumption goods sectors determines output, employment, and growth. In this way, post-Keynesian models take financialmonetary values as a starting point. These nominal values change over the course of the production cycle and impact the distribution of income between the investment and consumption sectors. More recently, our economic models have integrated money as an essential input into production. Keynes alluded to the role of money as an input into production (cf. Keynes, 1973 [1936], p. 173) but the monetary circuit originally proposed by Parguez, Graziani, and Schmitt, and brought to us in large measure via Seccareccia and Lavoie’s work, introduced a new level of precision and understanding to the linkages between the real and financial sides of the economy (cf. Graziani, 1989; Bellofiore and Passarella, 2016; Parguez, 1984; Rossi, 2006). The circuit approach suggested that money should be taken as an input into production, just like labor and physical capital. With the exception of the Dijon–Fribourg branch, the monetary circuit also has a feature that complements and further supports Davidson’s and Kregel’s discussion of Keynes’ General Theory. The monetary circuit model incorporates time into the production process (Davisdon, 1972; Kregel, 1983, 1984a, 1998; Graziani, 1989, pp. 4–5; Lavoie, 2014, p. 269; Rossi, 2006, p. 124). Now money and time are incorporated in an expanded and more precise conception of the macroeconomy. This article will look at the nexus between the financial and real sectors, from the perspective of the work of Secccareccia and Lavoie to highlight their significant contribution to our understanding of financial crises. Specifically, we will look at circuit theory, endogenous money and the determination of the overnight target rate, federal government deficit spending, employment and economic growth. The focus will be on how a deeper understanding of these elements improves our knowledge of financial crises. Seccareccia and Lavoie, each in their own way, have developed a useful discussion of the interaction of the financial side and real side of the economy, which helps us understand how their relationship is symbiotic in nature, and essential to understanding financial crises. Specifically, Seccareccia and Lavoie integrate the ideas of the Franco–Italian circuitists, Parguez, Schmitt, and Graziani in particular, who show that production is financed by banks, which are explicit in the model (Graziani, 1989, pp. 4–5; Bellofiore and Passarella, 2016; Rossi, 2006, p. 122). Seccareccia and Lavoie’s work supports the idea that production is financed directly by banks that create deposit balances ex-nihilo and they hold the position that central banks determine the overnight rate exogenously. Seccareccia and Lavoie strongly support a positive relationship between government deficit spending and its impact on the state of financial sector

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balances. Seccareccia uses the financial sector balances approach to show that household debt now plays a significant role in offsetting non-financial business surpluses. As he explains, that position is not sustainable and is likely to lead to a financial crisis. Similarly, Lavoie indicates that securitization of household debt threatens the stability of the financial structure and should not be permitted. Taken together, they see the financial and economic system as one that needs to be supported by government spending and better regulated.

THE MONETARY CIRCUIT The theory of the monetary circuit was developed in the late 1950s in France, most notably by Alain Parguez (1984) and Bernard Schmitt (1996), and in Italy by Augusto Graziani (1989, 1994); (Graziani, 1989, p. 1 also mentions Francois Poulon of Bordeaux and Alvaro Cencini; Rossi, 2006, mentions Le Bourva, 1962 as potentially the first circuitist). Graziani explains that, until his 1989 English-language article, the literature on the monetary circuit is exclusively in French and Italian. The latter articles are written by French, Italian, and Canadian scholars (Graziani, 1989, p. 2). Current branches of the circuit school would be Italian and French as before, with a French–Canadian contingent, and Modern Monetary Theory (MMT), and despite their reluctance in being associated with the circuit, the Fribourg–Dijon school as well. We now also see more Englishlanguage work. Part of the reason that circuit theory is known to English-language scholars has to do with Lavoie and Seccareccia. With his discussion of the monetary circuit starting the in the early 1980s, Lavoie’s work was instrumental in bringing this French and Italian perspective to Canada, and making it well-known in the US and the UK post-Keynesian circles. American post-Keynesians with Italian links, Wray and Kregel, were also involved in the development of the circuit approach (cf. Kregel, 1984a, in the first number of Monnaie et Production, and Wray, 1991). Lavoie and Seccareccia facilitated the creation of long-lasting connections between the French, Italian and English-speaking Keynesian economists working on money and production. The three groups of circuit theorists the Italian and the two French schools had very similar conceptions of how money enters the economy. The goal of firms is to recapture the wage bill to repay their debt to banks. Firms take back the wage bill by selling the proceeds of production back to workers and selling financial securities to get any remaining saving (Lavoie, 2014, pp. 269–270; Seccareccia, 2013, pp. 280–281; Wray, 1993, pp. 547–550; Graziani, 1989, pp. 4–5; Rossi,

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2006, p. 124). The circuit approach considers financial markets as an intermediary where household saving offsets firms’ capital accumulation (Graziani, 1989, p. 7; Seccareccia, 2013, p. 281; Lavoie, 2014, pp. 269–270; Wray, 1993, p. 550). Debates exist between the three circuit schools. The most important points of discussion include whether banks provided loans for both capital goods and the wage bill, the time dimensions of production, lending and debt repayment, and also the creation and existence of profit and value (Graziani, 1989, pp. 4–12; Bellofiore and Passarella, 2016, pp. 244–245; Parguez and Seccareccia, 2000, pp. 105, 108–109; Rossi, 2006, p. 124). Of all the insights brought forward by the circuit, the most problematic seems to be the conditions under which loans, thus money, nets out to zero for the economy as a whole (Graziani, 1989, p. 18; Parguez and Seccareccia, 2000, p. 102; Bellofiore and Passarella, 2016, pp. 244–245; Rossi, 2006, p. 126). Indeed, Parguez and Seccareccia (2000, p. 102) write: ‘Credit money, as a rule, is thus created only to be destroyed in the circulatory process and not to be held’. When all bank loans are repaid, no profit exists, and, most importantly, no money exists either (Rossi, 2006, p. 128). This leaves a net lack of money in the system. The way circuitists (again, except the Fribourg–Dijon school) resolve this dilemma is by integrating time. Not all loans are repaid at any given point in time. This makes profit and net monetary balances in the system possible at each point in time. Net monetary balances exactly equal total outstanding loan balances. The monetary circuit cannot close when money balances are demanded as a store of value in the face of uncertainty (Graziani, 1989, p. 19; Bellofiore and Passarella, 2016, p. 244). Existing monetary balances are thus offset by loan balances (Parguez and Seccareccia, 2000, p. 105). As a result, household liquidity preference can prevent closure of the circuit because as households hold onto cash balances, those balances are not recaptured by the firms to be used to extinguish debt, and thus the monetary circuit cannot close, and may also face a value problem (Graziani, 1989, p. 19; Seccareccia, 2013, p. 281; Bellefiore and Passarella, 2016, p. 244; Rossi, 2006, pp. 130–131). Firms may choose to sell financial assets to households in order to recapture the saving and this would close the circuit, However, the circuit will not close if cash balances are not entirely taken back by the sale of securities. In the late 1990s, Neo-chartalists provided an alternative way to close the circuit by adding government net money creation (Wray, 1998). Now, government spending adds balances to the economy which do not need to be backed by a loan. Bond sales are used in this model to maintain interest rates rather than finance government spending. Here, net monetary creation, thus the funding of profit, or net private sector saving, is possible due to government deficit spending (see also Graziani’s model as discussed

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in Bellofiore and Passarella, 2016, p. 245). Neo-chartalists call this the vertical circuit: government spends first, then a certain proportion of the expenditure refluxes back to the government in the form of taxes (Wray, 1998, pp. 111–115; Lavoie, 2013a, p. 8). Within this context, the bank money circuit developed by the French and Italian schools is expressed as a horizontal circuit. With respect to the horizontal circuit, when all loans are repaid, no new money exists in the economy to account for private sector saving (Wray, 1998; Lavoie, 2013a, p. 6; Parguez and Seccareccia, 2000, p. 102; Graziani 1989, p. 18; Bellofiore and Passarella, 2016, p. 245; Rossi, 2006, pp. 128–129). Parguez, creator of the French monetary circuit approach, adopted the majority of the elements of the neo-chartalist conception of the circuit. He also helped to refine and integrate the ideas of the state money approach with those he had spearheaded in the original circuit approach (cf. Parguez and Seccareccia, 2000, p. 102). For instance, Parguez and Seccareccia (2000, p. 102) indicate that debt is always the other side of spending in a capitalist economy: ‘At the macroeconomic level, spending in a monetary economy is always and everywhere in the nature of debt financing’. From this statement, among others, it’s not clear whether Parguez and Seccareccia believe that government deficit spending must be offset by bond issue, or by the not yet refunded commercial bank loan balances (see also, Parguez and Seccareccia, 2000, p. 111). Lavoie’s view is that government deficit spending is always funded by Treasury bond sales to the central bank (Lavoie, 2013a, pp. 9–10). The only reason this is important is that neo-chartalists such as Wray, Kelton, and, Fulweiler, contend that of net new government spending need not be offset by new bond issues (Wray 1998, 75, Lavoie 2013a, pp. 9–10). Parguez and Seccareccia (2000, p. 119) indicate that neo-chartalists place more importance on taxes than do circuitists in general. But in line with the neo-chartalist position, they indicate that government spending that creates new production of public goods or gives rise to new private investment is not inflationary, unless the expenditure is wasteful (Parguez and Seccareccia, 2000, p. 120). This is also exactly what Keynes argues in the General Theory. He stated that new government spending creates new jobs, or new goods or services, is beneficial, while expenditures that bid up existing prices are inflationary, whether this spending originates from the government or from private sector spending (Keynes, 1973 [1936], pp. 118–119; see also Wray, 1998, p. 84). The monetary circuit helps us better understand a number of elements that underlie financial crises. For example, increases in households’ liquidity preference may prevent firms from recapturing the entire wage bill via household purchases of goods, services, and financial securities. The ensuing inability of firms to validate production, and repay their loans to

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banks, could lead to a breakdown of the incentives for banks to continue financing production (cf. Graziani, 1989, p. 19; Seccareccia, 2013, p. 281). This in turn, could lead to a financial crisis.

ENDOGENOUS MONEY AND THE EXOGENOUSLY DETERMINED OVERNIGHT RATE Seccareccia and Lavoie have been able to connect the ideas of the French and Italian circuitists with the endogenous money approach taken by post-Keynesians (Lavoie, 2013a, pp. 5–7, 2014, pp. 182–183; Parguez and Seccareccia, 2000, p. 116). The post-Keynesian endogenous money approach simply indicates that banks create deposits by granting loans. Therefore, loans create deposits, a position that is also expressed as investment creates savings: as opposed to the neoclassical position where deposits are used to create loans, or savings creates investment. Kalecki was the first to state this position expressly (Kalecki, 1971, p. 83; Kaldor, 1956, p. 96). For post-Keynesians, which is also true for circuitists, money is created ex nihilo by banks to finance production (Lavoie, 2014, p. 193; Parguez and Seccareccia, 2000, p. 105; Bellofiore and Passarella, 2016, p. 244; Rossi 2006, p. 122). Money creation occurs for the purpose of production in response to creditworthy loan requests and does not depend on existing central bank reserves, and is therefore endogenous, or internal to the economic and financial system, rather than an add-on to that same system. In the late 1980s, post-Keynesians elaborated the endogenous money position arguing two opposing points of view (Moore, 1988). The first point of view, called structuralist, was that the overnight interest rate was determined at the intersection of supply and demand of reserves (Pollin, 1991, pp. 374, 393; Palley, 1996, p. 106). The opposing point of view, called horizontalist, was that the overnight rate was determined exogenously by the central bank and could be set at any level the bank deemed met social needs (Moore, 1988). Although Wray (1995, pp. 278–280) argued that both structuralist and horizontalist positions were essentially compatible, because both looked at the interest rate but did so from different perspectives, many post-Keynesians still contend that holding a structuralist or horizontalist perspective facilitates a better understanding of the working of the macroeconomy. Seccareccia and Lavoie fall into this camp (cf. Seccareccia and Lavoie, 2013). They identify themselves with the horizontalist position indicating that central banks set targets for the overnight rate and are able to hit those targets without fail, under all but the worst conditions (Lavoie, 2011, pp. 5, 12). Lavoie (2011) argues that when the Fed neutralizes, and even when it does not (cannot neutralize), it still hits

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the target or nearly so, except temporarily, under conditions of severe financial crisis (Lavoie, 2011, pp. 10, 12). Briefly stated, the horizontalist position is that banks make loans to creditworthy borrowers, regardless of whether the bank has the reserves necessary to make loans. Reserve requirements needed to comply with federal regulations are calculated after loans are made. If required reserves are needed, the bank will purchase those reserves on the open market, or, when no reserves can be obtained on the open market, banks will borrow from the discount window (Wray, 1998, pp. 102–104). The supply and demand for reserves by banks on the open-market determines the effective overnight interest rate which will fall closely within range of the target overnight rate determined exogenously by central bank officials (the FOMC in the US). The reason this position is called horizontalist is because reserves will be supplied as needed at any given interest rate determined by the central bank, whether via bond sales/purchases in the open-market, repurchase agreements, or from direct discount loans to banks. Operationally, the central bank must meet all creditworthy demands for reserves, or it will jeopardize the stability of the financial system (see also Lavoie, 2011, 5; Minsky, 2008 [1986], p. 49; Wray, 1998, p. 105). By way of contrast, the structuralist position is that the greater the demand for reserves by banks, the more the overnight interest rate will increase (Palley, 1996, pp. 105–106; Pollin, 1991, pp. 374, 393). This position assumes a fixed level of reserves. Lavoie and Wray both agree on the impact of federal government deficit spending on the overnight interest rate (Lavoie, 2013a, p. 11, 2011, pp. 20–21; Wray, 1998, pp. 85–86). The overnight interest rate target is always determined exogenously, but the effective rate fluctuates to reflect the supply/demand of Treasury securities and reserves in the economy which are determined by government deficit spending, and central bank open-market purchases/sales of Treasury securities and/or commercial bank assets. While in all monetary systems the target interest rate is determined exogenously, the effective rate is determined differently depending on the operational system adopted by the monetary authorities. For example, in Canada, a corridor system exists where the target overnight interest rate sits at the center of a range with the upper bound at the rate commercial banks pay on reserve balances, and the lower bound at the rate paid on balances commercial banks keep at the central bank (Lavoie and Seccareccia, 2013, p. 76). Lavoie and Seccareccia (2013) explain that the American monetary system started to move toward a corridor system in 2003 when the Fed set the discount rate above the Federal Funds Rate target (Lavoie and Seccareccia, 2013, p. 78). They indicate that this transition to a corridor system was completed in 2008 when the Federal

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Reserve started to pay interest on reserves (Lavoie, 2011, p. 11; Lavoie and Seccareccia, 2013, pp. 78–79). Lavoie (2011) argues that the corridor system in the US surfaced out of necessity at the time of the 2007–2008 financial crisis in the US because the central bank faced a large amount of excess reserves and could no longer neutralize (meaning sell bonds to offset) the large injections of cash into the economy which occurred as a result of large purchases of assets by the central bank (Lavoie, 2011, pp. 4, 8). He argues that, at first, the Fed sought to sop up excess reserve balances and thereby get the Fed Funds Rate near its target by selling Treasury securities, thus replacing cash with interestearning bonds (Lavoie, 2011, p. 8). Liquidity preference was so high, however, that commercial banks kept excess reserves beyond the amount that normally would have been offset by a supposed ‘normal’ amount of Treasury bond sales, and the Fed stopped selling Treasury securities to offset its liquidity injections caused by purchases of non-performing assets from commercial banks. Instead of selling Treasury bonds to offset its purchases of assets, the central bank shifted to purchasing the nonperforming assets directly and started paying interest on reserves (Lavoie, 2011, p. 9). As Lavoie explains, the overnight interest rate would have fallen precipitously given this build-up of reserves and given the scale of Fed asset purchases, so the Fed started paying interest on reserves kept at the central bank, instead of selling bonds. Thus, the Fed switched to paying interest on reserve balances directly instead of selling bonds to establish a positive interest rate. My understanding of the argument, however, is that a floor to the interest rate might not be required, and that even under the worst conditions the interest rate would not tend to fall to zero if there were a positive demand for cash balances as expressed by a strong degree of liquidity preference. Given that the effective Federal Funds Rate is determined at the intersection of the supply and demand for reserves in general, rather than for required reserves specifically, the interest rate floor need not be set exogenously. Hence, Lavoie (2011) and Lavoie and Seccareccia (2013) contend that the version of the corridor system that emerged in the US was a floor system, where the overnight Federal Funds target rate is equal to the Federal Funds deposit rate, or to zero if the central bank does not pay interest on reserves (Lavoie, 2011, p. 18). Regardless of the operational specifications from one country or monetary system to another, it is always the case that banks make loans when creditworthy borrowers ask for them, and purchase required reserves as needed at an interest rate that is targeted by the central bank. Hence, money is endogenous and the interest rate is determined exogenously.

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Conditions of financial crisis increase liquidity preference such that central bank open-market sales of Treasury securities may need to be really high if the central bank is aiming to offset all liquidity injections by the government and the central bank. If the overnight rate is determined at the intersection of the supply and demand for reserves, it would fall as more reserves were injected into the system. The high levels of liquidity preference which prevail when we have a financial crisis would suggest that higher levels of reserves would be demanded by the commercial banks seeking to cushion themselves against potential future blows. This higher demand for reserves could act as an offsetting feature to the increases in reserves made by government deficit spending and/or central bank purchases of assets. Establishing a corridor system, where banks pay a discount rate as the top boundary and another rate paid to banks on reserves being the lower bound, is another way the central bank can conceive to hit its overnight interest rate target. When they’re deficient, banks are not going to pay more for reserves than the central bank discount rate. Certainly banks with excess reserves might seek to make a higher interest rate than the interest rate the central bank pays on reserves. Thus, the corridor system establishes a range for the interest rate, but this range is effectively brought into being, and the actual Federal Funds Rate is determined, at the intersection of the supply and demand for reserves in the open-market. Regardless of the specificity of the determination of the overnight interest rate, the endogenous money approach contends that the central bank provides reserves on demand. Reserves are provided to commercial banks after loans are made. Banks are not limited in the number or value of loans made, but they are limited to making loans to creditworthy borrowers who are likely to be able to repay the loans. Providing unlimited reserves as needed creates financial stability and is a fundamental part of the lenderof-last resort capability of the central bank.

HOUSEHOLD DEBT AND SECURITIZATION: SOLUTIONS TO GROWING FINANCIAL INSTABILITY A significant branch of Seccareccia and Lavoie’s work focuses on the functioning of the banking system and the changing landscape of its lending practices, which are now more dependent on household lending and less on the indebtedness of business (Seccareccia, 2012, p. 71; Lavoie, 2013b, p. 231). These changes in the financial structure have led Seccareccia to promote the use of deficit spending to restore a positive net financial position to households. Lavoie, on the other hand, suggests

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that securitization of household debt should be forbidden, which would make banks responsible for the risks associated with increased household lending (Lavoie, 2013b, p. 232). As Seccareccia explains, there have been two movements that have destabilized the current financial landscape. The first is the constant attack on deficit spending, and the second is the redirection of existing private sector surpluses toward the business sector and away from households (Seccareccia, 2012, pp. 71–73, 2013, p. 282, 2014, p. 568; Lavoie, 2013b, pp. 217–218, 224). Macroeconomic stability, thus stability in production, employment and economic growth, is supported by the workings of automatic stabilizers, federal budget items that grow during downturns to offset declines in private spending. Automatic stabilizers have been eroded over the last 40 years with the attack on deficit spending, and the foundation of the macroeconomy has been compromised (Seccareccia, 2012, p. 73, 2014, p. 574). The second trend is that private sector surpluses have been accumulating as business rather than household balances. This causes concern for the well-being of middle and lower-income households whose expenditures are increasingly being funded by large amounts of debt (Seccareccia, 2012, p. 72, 2013, pp. 282–283; Lavoie, 2013b, pp. 217–218). Lavoie indicates that the current accumulation regime is ‘a regime based on high consumption spending and ever-rising household debt, justified by high prices in the stock-market and real estate market. . .’ (Lavoie, 2013b, p. 2017). Household debt is offset by the new growing nonfinancial private business surpluses (Seccareccia, 2013, p. 283; Lavoie, 2013b, pp. 216, 217–218). What this means is that traditional nonfinancial firms are making a growing proportion of their income from the sale of financial assets to household, and/or indebting households. Seccareccia (2013, p. 283) writes: ‘In this hyperfinancialized system, the dynamics of credit creation have been sustained not by business indebtedness but by household indebtedness. . .’. These trends create a new degree of instability for the macroeconomy because they make a large part of debt repayment and nonfinancial private business profitability dependent on the stagnating employment income of households, rather than growing business profits. Stagnating household incomes result from weak and extinct labor unions that make it possible for firms to pay low wages (Lavoie, 2013b, pp. 218, 220). Households’ financial position is further compromised by increasing debt loads used to feed a growing marginal propensity to consume (Lavoie, 2013b, p. 217). Lavoie explains that governments and central banks, faced with globalization and financialization, have not supported the maintenance and strengthening of unions, or regulated the banking and non-bank sector adequately. The result is low wages, weak households, and unstable financial relationships

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between banks, households, and private business (Lavoie, 2013b, pp. 220, 222, 231). Prior to financialization, banks were responsible for holding private sector debt, most of which was held by the business sector. It was a credit–debit relationship between business and banks, which was heavily determined by government regulations, and accordingly backed up by government guarantees and the central bank’s lender of last resort function. Post-financialization, we find ourselves in a world where a large and growing number of the credit–debit relationships are between business and the household, with banks playing a new role (Seccareccia, 2013, pp. 283–284, 2014, p. 573). While banks still originate loans, they now package and sell the loans to non-bank financial actors. This process of securitization created a rift between the interests of the lender, whose main interest is to make as many loans as possible, and those of the final investor, whose main concern is the profitability of the asset. Bank capital requirements that would normally have supported new loans on bank balance sheets are evaded when loans are packaged and sold to non-bank actors. This leads banks to generate loans beyond what used to be considered safe leverage guidelines because the loans are no longer on the books of the banks (Lavoie, 2013b, pp. 229–230). The risk of this additional leverage is transferred to the financial market with the purchase of the packaged loans. Thus, a failure to make payment on loans will reverberate, not only initially through banks as had been the case in the past, but also through holders of the packaged loans: pension funds and other institutional investors. Because households and nonfinancial business are the ultimate holders of these loans (via pension funds and institutional investments), both bear the risk that was originally borne by financial businesses (banks) and protected by government guarantees and especially by the lender of last resort function of the central banks (Lavoie, 2013b, pp. 231–232). Lavoie advocates for regulation on non-bank financial businesses and the abolition of securitization (Lavoie, 2013b, p. 232). Seccareccia proposes the idea that re-establishing and strengthening automatic stabilizers via federal deficit spending would improve the stability of the macroeconomy (Seccareccia, 2012, p. 74). Even more than strong automatic stabilizers, he argues (as did Keynes, Minsky and others) that government deficit spending in the form of public investment should take up a great enough share of total investment, up to three-quarters of total investment, such that it would offset fluctuations in total investment enough to maintain permanently robust levels of productivity and employment (Seccareccia, 2012, p. 80; Keynes, 1980, pp. 322–323, quoted in Seccareccia, 2012, p. 74; see also Keynes, 1973 [1936], pp. 320, 325, 376–378; Minsky, 2008 [1986], pp. 330–333). Here, Seccareccia explicitly

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links the well-being of the real economy to fluctuations in the financial side of the economy. He states: ‘If public investment were strong enough, the greater “make-weight” provided by the higher amount of public investment would ensure that it would be more difficult for future financial shocks to drag down the “real” economy’ (Seccareccia, 2012, p. 80). There are several different elements to a public investment strategy such as the one recommended by Seccareccia and formerly endorsed by Keynes, some of which are specific to our current financial landscape. For instance, one element of a large public investment program is that federal government deficit spending could be directed to create net surpluses in the household sector, restoring household savings, which would make households more resilient to shocks in employment levels, and to changes in interest rates on household debt (Seccareccia, 2013, p. 297). Another related element would be that public investment could be directed to maintain high levels of employment and productivity. In this scenario, public investment could take up a greater or lesser share of total investment with the goal of keeping employment and/or production levels stable. Here, a public jobs program offers an excellent tool for achieving employment and price stability, as discussed elsewhere (Minsky, 2008 [1986], pp. 343–349; Wray, 1998, pp. 122–154; Tcherneva, 2013, pp. 291–292; Leclaire, 2007, pp. 58–60). Ideally, the program could be set up such that the federal government current account would actually show surpluses from returns made on public investment, such as increased tax revenue offsetting much more stable employment income earnings, or profits on publicly funded government enterprises, such as the post office, or public day care, senior care, and/or medical care programs (Keynes, 1980, quoted in Seccareccia, 2012, 76; cf. Tcherneva, 2013, pp. 294–295; Leclaire, 2015, pp. 307–308). Surpluses could be used to ‘pay off’/offset any bonds (if any exist) held on capital account that were used to ‘finance’ long-term public investments (Keynes, 1980, pp. 366–367, quoted in Seccareccia, 2012). Alternatively, as Keynes argued, current account surpluses could be used to ‘fund’ new public investment, generating ever greater returns to the current account, albeit at a new higher debt-to-GDP level. This process could continue until the business cycle is wiped out (Keynes, 1980, quoted in Seccareccia, 2012, p. 76). A policy of high publicly-directed investment that focuses on providing goods and services that are not being provided adequately by the private sector compliments and enhances the existing economy and provides for more stability for households and firms with respect to fluctuations in employment and, financial sector flows, including profits, prices, and interest rates. The post-Keynesian position explicitly describes the important role of government deficit spending in creating net financial surpluses in

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the ­ private and/or the external sectors (Kalecki, 1971, p. 85; Lavoie, 2014, p. 310; Godley and Lavoie, 2007, pp. 36–37, 95; Wray, 1998, p. 75; Seccareccia, 2012, p. 71, 2013, p. 297; Godley, 1999, pp. 10–11). Currently, these financial balances show that many households are heavily indebted, especially to non-financial business, a position that both Seccareccia and Lavoie explain is unstable. As part of a solution to this dilemma, Seccareccia seeks to increase deficit spending via automatic stabilizers to restore a positive balance to households. Lavoie proposes a ban on the securitization of household debt by banks, and the regulation of the shadow banking sector. Simultaneously then, we find that Seccareccia and Lavoie consider that the financial and economic system, as it is currently structured, requires a much greater level of investment and should be better regulated. Investment would potentially take the form of government-directed investment in socially useful programs, most specifically when the level of private investment is not great enough to bring stability to household balances. New regulation of non-bank financial firms would remove securitization of household debt from the table.

CONCLUSION When it comes to understanding financial crises, how we organize the link between the real and financial sectors of the economy is crucial. Many post-Keynesians use a financial Keynesian model like the one elaborated by Davidson, Kregel, Minsky, and Wray, where financial values determine the investment decision. Employment, output, and economic growth result from the decision to invest, and the decision to invest is a financial choice based on the relative rates of return (Davidson, 1972, p. 102; Minsky, 2008, p. 195; Kregel, 1983, 1984b, p. 142, 1998; Wray, 1993, p. 544). Seccareccia and Lavoie’s work, by incorporating the ideas of the monetary circuit into the post-Keynesian endogenous money framework, enhance our ability to understand and appropriately deal with financial crises. More precisely, the monetary circuit model shows where money enters the economy and how banks and financial institutions are at the center of financial crises and the decision to invest in financial assets or production (Parguez and Seccareccia, 2000). Liquidity preference and its impact on the economy is made clear within the monetary circuit model and underlines the monetary shortfall that makes liquidity preference a significant factor in financial crises. The work of Seccareccia and Lavoie also links the concept of endogenous money creation with exogenous interest rate determination. This relationship highlights the role that the central bank plays in its relationship with the federal government in maintaining financial stability, s­ pecifically

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during times of crisis by providing reserves on demand. Seccareccia and Lavoie also discuss the role of securitization in promoting household debt growth within the wider context of financialization. Naturally, they oppose the separation of the loan from the originator, favoring a ban on securitization of household debt in order to remove the growing systemic risk with which it is associated. Financialization has also meant a change in the nature of financial relations. The business sector now offsets its surpluses with household sector debt. This puts households in a precarious position that Lavoie and Seccareccia maintain could be improved by increasing federal government deficit spending via increasing public investment to restore our deteriorated automatic stabilizers. Ultimately, a public investment strategy would continue until most of the household sector was brought back to a relative financial surplus position. By zeroing-in to the relationship between the real and financial sectors of the economy, the work of Seccareccia and Lavoie has brought us a much stronger understanding of financial crises. In particular, their work on the monetary circuit highlights the role of banks during a crisis. Their discussion of the endogeneity of money and the determination of the interest rate shows that during a financial crisis, the central bank’s lender of last resort function maintains liquidity in essentially the same way it does during periods of relative calm: by providing reserves on demand. Finally, Seccareccia and Lavoie’s work on financialization has promoted the support of household financial balances by banning securitization of household debt and increasing government spending on public investment on automatic stabilizers. The purpose is to strengthen households so they can better weather the next financial storm.

ACKNOWLEDGMENT This is a revised version of a chapter in Rochon and Monvoisin (2019).

REFERENCES Bellofiore, Riccardo and Marco V. Passarella (2016) ‘Introduction: The theoretical legacy of Augusto Graziani’. Review of Keynesian Economics, 4(3), pp. 243–249. Davidson, Paul (1972) ‘Money and the real world’. Economic Journal, 82(325), pp. 101–115. Godley, Wynne (1999) ‘Seven unsustainable processes: medium term prospects and policies for the United States and the world’. Levy Institute Special Report, Annandale-on-Hudson: Levy Economics Institute. Godley, Wynne and Marc Lavoie (2007) Monetary Economics: An Integrated

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Approach to Credit, Money, Income, Production and Wealth. New York: Palgrave Macmillan. Graziani, Augusto (1989) ‘The theory of the monetary circuit’. Thames Papers in Political Economy, Spring, pp. 1–26. Graziani, Augusto (1994) ‘La Teoria monetaria della produzione’. Firenze: Banca Popolare dell’Etruria e del Lazio. Kaldor, Nicholas (1956) ‘Alternative theories of distribution’. Review of Economic Studies, 23(2), pp. 83–100. Kalecki, Michàl (1971) Selected Essays on the Dynamics of the Capitalist Economy 1933–1970. Cambridge: Cambridge University Press. Keynes, John Maynard (1973 [1936]) The Collected Writings of John Maynard Keynes. Vol. 7, The General Theory of Employment Interest and Money. London: Macmillan. Kregel, Jan (1983) ‘The multiplier and liquidity preference: two sides of the theory of effective demand’. In A. Barrère (ed.), Keynes Today: Theories and Policies. London: Macmillan, 1985 (1983). Kregel, Jan (1984a) ‘Théorie de l’économie monétaire de production et politique monétaire’. Economies et Societés. Série Monnaie et production, no. 1. Kregel, Jan (1984b) ‘Constraints on the expansion of output and employment: real or monetary?’. Journal of Post-Keynesian Economics, 7(2), pp. 139–152. Kregel, Jan (1998) ‘Aspects of a post-Keynesian theory of finance’. Journal of Post-Keynesian Economics, 21(1), pp. 111–133. Lavoie, Marc (1984) ‘The endogenous flow of credit and the post-Keynesian theory of money’. Journal of Economic Issues, 18(3), pp. 771–797. Lavoie, Marc (1992) Foundations of Post-Keynesian Economic Analysis. Brookfield: Edward Elgar. Lavoie, Marc (2011) ‘Changes in central bank procedures during the subprime crisis and theory: repercussions on monetary theory’. International Journal of Political Economy, 39(3), pp. 3–23. Lavoie, Marc (2013a) ‘The monetary and fiscal nexus of neo-Chartalism: a friendly critique’. Journal of Economic Issues, 47(1), pp. 1–31. Lavoie, Marc (2013b) ‘Financialization, neo-liberalism, and securitization’. Journal of Post-Keynesian Economics, 35(2), pp. 215–233. Lavoie, Marc (2014) Post-Keynesian Economics: New Foundations. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Lavoie, Marc and Mario Seccareccia (2013) ‘Reciprocal influences: a tale of two central banks on the North American continent’. International Journal of Political Economy, 42(3), pp. 63–83. Leclaire, Joëlle (2007) ‘Seeking full employment in a modern world’. International Journal of Political Economy, 36(3), pp. 47–62. Leclaire, Joëlle (2008) ‘US deficit control and private-sector wealth’. Journal of Post-Keynesian Economics, 31(1), pp. 139–149. Leclaire, Joëlle (2015) ‘Women and investment: the role of fiscal policy’. International Journal of Political Economy, 44, pp. 296–310. Minsky, Hyman (2008 [1986]) Stabilizing an Unstable Economy. New York: McGraw Hill. Moore, Basil (1988) Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge: Cambridge University Press. Palley, Thomas (1996) Post-Keynesian Economics: Debt, Distribution and the Macro Economy. New York: St. Martin’s Press.

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Parguez, Alain (1984) ‘La dynamique de la monnaie’. Economies et Sociétés, Cahiers de l’ISMEA, Tome XVIII, no. 4, Avril, pp. 84118. Parguez, Alain and Mario Seccareccia (2000) ‘The credit theory of money: the monetary circuit approach’. In Smithin, J. (ed.). What is Money? New York: Routledge: pp. 101–123. Pollin, Robert (1991) ‘Two theories of money supply endogeneity: some empirical evidence’. Journal of Post-Keynesian Economics, 13(3), pp. 366–396. Rochon, Louis-Phillipe and Virginie Monvoisin (2019) Finance, Growth and Inequality. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Rossi, Sergio (2006) ‘The theory of money emissions’. In Arestis, P. and M. Sawyer (eds), A Handbook of Alternative Monetary Economics. Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 121–138. Schmitt, Bernard (1996) ‘A new paradigm for the determination of money prices’. In Deleplace, G. and E. Nell (eds), Money in Motion: The Post-Keynesian and Circulation Approaches. Houndmills: Macmillan, and New York: Palgrave, pp. 105–138. Seccareccia, Mario (2012) ‘The role of public investment as principal macroeconomic tool to promote long-term growth’. International Journal of Political Economy, 40(4), pp. 62–82. Seccareccia, Mario (2013) ‘Financialization and the transformation of commercial banking: understanding the recent Canadian experience before and during the international financial crisis’. Journal of Post-Keynesian Economics, 35(2), pp. 277–300. Seccareccia, Mario (2014) ‘Banking sector viability and fiscal austerity: from rhetoric to the reality of bank behavior’. Journal of Economic Issues, 48(2), pp. 567–574. Tcherneva, Pavlina (2013) ‘Fiscal policy for the great recession and beyond’. In Cynamon, Barry, Steven Fazzari and Mark Setterfield (eds), After the Great Recession. New York: Cambridge University Press, pp. 291–299. Wray, L. Randall (1991) ‘The inconsistency of monetarist theory and policy’. Economies et Sociétés, Série Monnaie et production, no. 8. Wray, L. Randall (1993) ‘Money, interest rates, and monetarist policy’. Journal of Post-Keynesian Economics, 15(4), pp. 541–569. Wray, L. Randall. (1995) ‘Keynesian monetary theory: liquidity preference or black box horizontalism’. Journal of Economic Issues, 29(1), pp. 273–282. Wray, L. Randall (1998) Understanding Modern Money: The Key to Full Employment and Price Stability. Cheltenham, UK and Northampton, MA, USA: Edward Elgar.

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16. On the changing nature and geography of crises: lessons for a sustainable internationalization Pascal Petit INTRODUCTION Crises, financial or otherwise, tend to affect trade partners differently, according to the specificities of the pattern of internationalization in which they find themselves. With an increasingly still multidimensional internationalization, the understanding of the dynamics of crises becomes an important issue, if only to design a sound governance of international exchanges, limiting the crises and their detrimental effects. This chapter tries to investigate how crises have been received so far, and stressing the damages brought by their continuous neglect by orthodox economists. The unabashed dominance of the neoliberal/free market ideology has pushed the market-led internationalization into an impasse. The challenge of environmental change can help to overrun this dominance, which the global financial crisis curiously did not succeed in doing. Economists can contribute to the great transformation required, provided they learn to draw lessons from past and upcoming crises.

ENTERING TIMES OF CONTINUOUS CRISES Crisis has become a buzzword. If one tries to follow the rise of the word in our media, it would show an impressive increase in our common means of communication since the turn of the 1980s. Basically, it all started in the 1970s with what progressively appeared as the end of the post-World War II international political and economic order. It was clearly linked with the reoccurrence of financial crises following the shift to a regime of flexible exchange rates following the end of the gold exchange standard, insured by a fix convertibility of the dollar. The oil crisis that followed this gave a strong echo to the word crisis, all of which was soon followed by another 301

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crisis: price inflation. This brouhaha of various crises led in the early 1980s to a dramatic turn towards a neoliberal ideology of free market economy heralded by two populist leaders, e.g. Reagan in the US and Thatcher in the UK, and was soon spreading all over the world, countries and international institutions alike, contributing within a decade or so to the demise of the socialist block and their nearly full adhesion to the new free market ideology. The thing is that even after a decade or so of this U-turn towards this new free market governing principles, the word crisis seemed to be used just as frequently, and if anything even increased in our media, and referred now to all kinds of topics: economies as a whole, sectors, regions or global governance. Financial crises, from the Mexican, Brazilian, Russian and Asian crises up until the 2001 dot com crisis and the big global financial crisis (GFC) of 2008, account for much of the overuse of the word. Yet, how can the financial sector, so prone to generating crises, also rise in such importance at the same time? All over the world, people have praised the virtues of the finance industry, and the best students since the start of the new century all wanted to enter the finance industry (see Colander, 2008, for the elites of US students). And even more surprising, up until 2008, the finance industry was never really blamed for contributing to financial crises. A possible first reason may be that these crises were not fatal for the economies concerned and some could believe that they were the prices to pay for the successes of this industry, as in a game with successes and failures where you go on as long as you think that the goods of successes overtake the bads of failures. This is a rather realistic approach as long as overall you really measure well these goods and bads, and neglect the ‘redistribution’ that occur between losers and winners in the meantime. After all (and because of this overall approach) the figures of rising inequalities between personal incomes or between regions that showed up in these last 40 years do match with such philosophy. Still, that is not the end of the story if one wants to explain why the word ‘crisis’ has become so common in our daily exchanges. In the first place, one has to acknowledge that crises are not all of the same size. Beyond the five mega crises evoked above, there is a continuous flow of smaller crises. In their exhaustive inventory for the IMF, Laeven and Valencia (2012) conclude that from 1970 to 2011, there were 146 banking crises and 218 currency crises, to which one can add 66 episodes of sovereign debt crises. If only on this account, crises have been part of the daily life of people working in finance. Internationalization of finance activities as well as the development of information and communication technologies progressively led to the global diffusion of concerns over these diverse financial crises.

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These echoes have been amplified by the impact of these crises on other activities not to mention the many crises that occurred directly in other activities, induced in different ways by the rising competition tied to an increasing internationalization of markets, as we shall stress hereafter. At this stage, the question is ‘how did finance keep some credence despite this environment of constant crises’? There are two possibilities: (i) they kept their credit, and showed they effectively could manage these risky situations and, despite the high number of various crises, deliver an overall largely positive outcome, or (ii) a collective myopia led to under-assess the outcome, by claiming the damages of the crises could have been far greater had the authorities not intervened (which had costs), and second, that huge global disasters were near misses. This collective myopia was by no mean genuine. A crowd of free marketers has been praising the value of the new neoliberal economic principles. Their credibility rose with time until 2008 when the magnitude of the crisis and of the public interventions required in emergency showed their insane dangerousness. Some economists had stressed the dangers of the development of such myopia, either because such myopia led economic agents to take excessive risks, a stand strongly exposed in the work of Minsky (see Lavoie and Seccareccia, 2001), or because this myopia translates into increasing imbalances between macroeconomic aggregates, deficits or debts, which post-Keynesians like Godley warned were unsustainable.1 But by and large, the economics profession has been hopeless (see Seccareccia, 2011). The last big global financial crisis (GFC) of 2008 is very telling in that respect. The episode of the letter to the Queen of the UK gives a superb illustration of this dual reading of the ‘event’.

THE EPISODE OF THE LETTER TO THE QUEEN The blow of the 2008 GFC was so huge (see Galbraith 2014) and far ranging that many citizens thought that it could be fatal for free market ideology, considering, if only, the massive bailing out required to avoid bankruptcies of ‘too big to fail’ institutions. Such ‘public’ interventions in a world so much convinced of the virtues of markets appeared somehow as a revolution. The bashing of the finance industry rapidly became widespread. The UK Queen, visiting the London School of Economics in November 2008, expressed this astonishment, asking why it was that so few economists had foreseen such a ‘recession’. The question was rightly addressed to major representatives of a profession in which, a great majority of whom had been the fervent priests of the new free market religion. The answer came some nine months later on behalf of the British

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Academy2 claiming that at the height of the crisis the situation was too complex with too many interdependencies so that any diagnostic pushing for intervention could have then provoked the outburst of a mega crisis, as they said: ‘There was a broad consensus that it was better to deal with the aftermath of bubbles in stocks markets and housing markets than to try to head them off in advance’, adding ‘Credence was given to this view by the experience, especially in the US, after the turn of the millennium when a recession was more or less avoided after the dotcom bubble burst’. The line of defence was clear. The finance people have been doing their jobs properly, as always. Individual risks have been rightly seen as small. Indeed at the end of the day, a major collapse of the world economy had been avoided. No mention is made in the letter of massive public interventions, nor of the economic and social impacts of the GFC on the world economy. The letter simply admits a ‘collective’ failure in ignoring how all these individual risks could add up to such a series of interconnected imbalances, leading to a vast risk for the system as a whole. Blaming a failure on the collective imagination is, though, a bit short and many thought that this blunder could be fatal for free market ideology. A group of economists then rightly stressed in a follow up letter to the Queen3 that such blindness was somehow inscribed in the way the discipline was taught. They claimed that the discipline had turned too much in favour of abilities to deal with formal techniques (to ground its professionalism) and became less and less attentive to real world institutions and events. Exclusive specializations on narrow areas of enquiry to the detriment of any synthetic vision as well as little attention paid to other social and human sciences were also criticized. These insufficiencies in the expertise of economists working or influencing governments, banks and businesses, have clearly a responsibility in the collective myopia, which was stressed in the first answer to the Queen. In the aftermath of 2008, when the extent of the damage of the GFC unfolded, it seemed quite clear that the dominance of the above orthodoxy had been a major weakness in the governance of a more internationalized world economy. The death of neoliberalism seemed then an unavoidable and beneficial evolution.

THE NON-DEATH OF NEOLIBERAL ECONOMICS The aftermath of 2008 showed to what extent some financial practices had been hazardous if not fraudulent. Reforming finance was everywhere on the agenda, nowhere more so than in the US where the Dodd–Frank reform was laboriously constructed and endlessly debated. Similar reforms were attempted in Europe. In most cases the remaining fragility of banking

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institutions and the huge costs of the recent bailout led to extreme cautiousness; and all the more so since the GFC had led to a sharp slowdown in the growth of most of the developed economies and a large increase of their public and private indebtedness. The emerging economies, which had benefited from the neoliberal internationalization of the last two decades of the 20th century, then had to face the challenge of becoming the driving forces pulling the growth of the world economy. The role mainly fell to China, the only continent-economy in a position to act as strongly as required to avoid a worse collapse of the world economy. Ironically, the saviour of the world economy was the least market-oriented economy of all (if only in view of the WTO criteria). The context was thus favourable to an apostasy of the neoliberal economic heresy, and a deep reform of economics towards a real moral and political science, which should be its best ambition. Yet, ten years after, this does not seem to have happened, as rightly stressed by Crouch (2011). Certainly the elites of the students are less in a hurry to join the finance industry and more of them are in search of jobs in which they can invest themselves in socially meaningful activities. Certainly some arrangements have been made in various universities, where now and then, new modules or pressure groups that refer to the post GFC debate are added, for a more pluralist approach to economics. But whether these innovations will gain enough momentum to produce a new majority of pluralist economists seems doubtful. Certainly finance bashing remains frequent among politicians and businessmen, but reforms remain unfinished, partial if not reversed (as risks being the case with the Dodd–Frank act in the US). But by and large complacency reigns, and banking sectors are left to do what they call their best to reflate sluggish economies. Their intermediation seemed necessary to reboot economic growth, and no one dares to constrain it, even if only marginally. In order to ease this reflation, a policy of quantitative easing has been displayed, whereby the amount of money on the market has been kept constantly growing (see Figure 16.1). No nation state has been in position to constrain meaningfully the activities of this internationalized banking industry. The shareholder value has largely remained the alpha and omega principles of their actions.4 It led to waves of mergers and acquisitions, waves of speculations on various assets, but to very little productive investments (see Figure 16.2) – the very reason why they had been preserved from strict mission-oriented public interventions. And in the meantime, as strange as it may seem, the neoliberal doctrine has not disappeared, nor given way to any mea culpa or expression of strong wills of reforms. The silence from the free-marketers has been astounding, as if nothing important had happened and business could

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130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 1960

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Source: World Development Indicators database, World Bank.

Figure 16.1  M  onetary aggregate M2, representing money and quasi money as a percentage of world GDP 26

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Source: World Development Indicators database, World Bank.

Figure 16.2  Capital formation as a percentage of world GDP

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go on as usual. Even the claim that orthodox policies had help to get out of the crisis at a minimum cost has not been sustained as, over time, the consequences of the recognized damages have been constantly increasing. No lesson could be drawn either from the list of the Nobel Prize winners in the aftermath of the GFC. When the Nobel Prize winners of the early stages of the crisis were rather critical of a pure neoliberal free market ideology (Paul Krugman, in 2008;5 Elinor Ostrom and Oliver Williamson, in 2009), 13 out of the 14 winners that followed from 2010 to 2017 were either experts in formalism or crude defenders of the modern neoliberal ideology of the efficiency of market mechanisms, the exception being Robert Shiller (who wrote in 2000 on the irrational exuberance of financial markets). This was a clear sign of the non-death of neoliberalism, along with the marginal nature of the changes that took place in the education cursus in economics. Still considering the importance of the GFC and the many questions on economic governance that it raised, be it on the magnitude, scope and duration of public interventions (after the bailing out) or on the adjustments of the rules of competition to be applied to large multinational firms, the most surprising was the relative silence of the apologists of free market efficiency. Such a relatively low profile for over a decade is congruent with the idea that the diffusion of the neoliberal economics was somehow, from the start, a silent revolution.

A LASTING SILENT REVOLUTION The relative silence of the orthodoxy on the GFC may be telling in itself of a crude reality on the diffusion of the neoliberal free market ideology. From the start, this ideology of free markets has neither been fully debated, nor its good practices fully exposed. Market forces were, for the propagandists of this market ideology, some deus ex machina, and even the old debates on the measures to be taken to limit monopoly powers and the like were played down. Ex post, such ‘silence’ in democracies, when oligopolies were developing, sounds strange. It relied on a strong belief by the governing elites and institutions in the efficiencies of the firms competing in markets, progressively extending following the continuous process of internationalization induced by the liberalization of trade. This movement was itself actively channelled by the internationalization of the finance industry, which boosted the mobility of capital and launched successive waves of mergers and acquisitions. Much emphasis in the political debates was put, in the early times of the diffusion of this free market ideology, on the consumer surplus that such liberalization of trade would bring. The extension of the role of the big distributors such as Walmart helped to show widely

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the reality of these consumer surpluses, with its counterparts in terms of downwards pressure on the employment and wages in the consumption goods industries. This last part was little discussed and simply looked upon as a secondary drawback. Furthermore, the rising power of multinational firms boosted by this trade extension strengthened their position vis-à-vis the States, which were in the same process forced to reduce the extent of their interventions in the economic activities. In countries where the State had been investing to see that full employment conventions remained central guiding principles, such shifts appeared undemocratic. Some saw in the rebalancing of power that occurred through this market-based internationalization the rise of a post democratic era (see Crouch, 2004, 2011; Streeck, 2014). This image of a silent revolution, transgressing what was expected in western democracies, inherited from the post-World War II era, was reinforced by President Manuel Barroso himself in 2010, when – at the heart of the European crisis that followed the GFC – he presented, as head of the EC, a set of measures to be taken by member states to limit the impact of the crisis. Presenting himself as the embodiment of the ‘silent revolution’, this reduction of Member States prerogatives was well taken. It illustrated a core element in the process of a market-geared internationalization as stressed by Stephen Gill (2015b, 2016). This transformation then appears as fully congruent with the change assessed by Ulrich Beck (1992), whereby our modern industrial societies, as forged in the aftermath of World War II with their welfare objectives, have been turned by successive structural changes into ‘risk societies’, where basic risks, namely security in employment, health, income, must increasingly be managed by the individuals themselves. This is coherent with the rise in inequalities observed in most economies over the decades under view. In essence, the emergence of risk societies à la Beck are somehow the dual of the societies in continuous crises, as emphasized above. The question then is whether these risk societies are crisis proof. The promoters of the ‘silent revolution’ do think that our developed capitalist societies can overcome such crises (and that the GFC is but one mere episode in this structural change), which does not imply major retooling of the governance of developed economies.6 The silence of orthodox economists has to be seen as a support of this conviction. Still, this way of questioning the sustainability of our development trajectories just keeps out a major challenge, which is not new but has been much more clearly exposed and acknowledged in the last decade, namely the environmental challenge.

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SUSTAINABILITY AND THE BROAD ENVIRONMENTAL CHALLENGE The environmental threat should not be seen in the first place as a new challenge emerging from the GFC, but should be considered as a new challenge to which the old free market ideology will give some patchy solutions so that business can go on as usual. The warnings on the environmental threat occurred, at least in the world of economists, in 1972, with the Meadows Report. Stressing the limits to growth came precisely at the time of the crisis of the post-war regimes. The diffusion of the neoliberal free market agenda that followed did not pay much attention, if any, to this warning, all glued in the silent revolution just mentioned, all of which made things worse. Indeed, the progressive mobilization of the State, supported by the UN, remained relatively negligible, at least for the business world. For sure one should not ignore a mobilization like the Kyoto Protocol but it was somehow a dead end as long as it was mainly directed towards developed economies at a time when the internationalization had opened up to the emergence of large economies, with rapid industrial growth impacting the global environment. The dynamics of the Kyoto Protocol petered out with the exit of the US. Such mobilization started to have an impact on States and public opinions but not enough to change the power relation between states and big corporations. The silent revolution was even counterproductive: it led many multinationals, for instance, to move some of their most dirty processes to developing countries, who in turn were less likely to launch strong environmental policies.7 Given all this, one is led to observe that if free market ideology as applied to a global level had any benefits, it was its contribution to economic growth in developing economies. This has not been kept silent: the marketled internationalization has helped some developing countries to catch up (at different rates, not all were as successful as the so-called emergent economies) and it led to a reduction in absolute poverty worldwide. The fact that it was accompanied in most cases by a rise in inequality within countries is another issue, even if in itself this lack of solidarity is not, by nature, something facilitating environmental policies as we shall see. But going to the broad picture of mobilization of countries on environmental issues, this delocalization of industries shifted a lot of environmental hazards in the developing world, all of which further weakened the logic of the Kyoto Protocol. No wonder then CO2 emissions over the whole period have been rising all along even after 2008 (see Figure 16.3), much like the rise in monetary means (see Figure 16.2), which helped fuel the internationalization of the production processes. The GFC crisis, and austerity policies it led to in developed economies,

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7.5 7.0 6.5

5.5 5.0

Oil Crisis

6.0

Great Recession

8.0

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4.5 4.0 3.5 3.0 2.5 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source:  Carbon Dioxide Information Analysis Centre (CDIAC).

Figure 16.3  C  O2 emissions estimated for the world economy in millions of kilotonnes of carbon per year made this situation worse. The case of China is very illustrative of this logic. As a continent economy, which depends on the dynamics of global demand, the Chinese economy had to find ways to accelerate its internal demand quickly in order to avoid being trapped by the slowdown of the developed world. The figures on domestic investments are very telling, creating overcapacities, as well as provoking locally huge pollution disasters. All of which led China to rapidly change its position in climate negotiations, agreeing that all nations had to contribute to environmental policies as much as possible. This was the basis for the success of the COP21 in Paris in December 2015, where nearly all nations agreed to commit to actions (the famous INDCs8) to be followed up in yearly COP conferences. This change could be the start of a new era where States would reorganize and create a new power relations with multinational firms. It was just the beginning of a process that for all actors was bound to be long. Was it

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de facto a turn away from the global governance instituted by the silent revolution? This remains an open issue. Predictably, free marketers tried again to sell the idea that a market for CO2 emissions could solve the problem. But in a forum where countries are so diverse that in the COP negotiations such a proposition appears awkwardly unrealistic, one is bound to accept a big diversity of actions. But things are changing with the rise of this environmental crisis, and big multinationals are starting to worry over the outcome of these new relations where internationalization would no longer be the only result of market mechanisms but would have to integrate new objectives. More generally, since the silent revolution, they have taken steps to show this good will, for instance with the diffusion of schemes such as Corporate Social Responsibility (CSR). In fact, attempts have been made to ‘Measure, Report and Verify’ (MRV), in conjunction with all stakeholders, a set of indicators, a process not unlike the one that has been adopted in Paris (at the COP21) for governments. Still the GFC, with its pressure on competitiveness, left little room to manoeuvre for these MRVs. Actually one can see that in many cases the protocols could not support the last phase, ‘Verify’, which was actually the real phase of power-sharing between the firms and the stake holders (see Capron and Petit, 2011). Considering the blockage of the WTO (World Trade Organization), over the impossibility of the dispute settlements mechanisms working effectively, the multinationals are forced to pay attention to what can be decided between States and international institutions at such meetings as the COPs. In effect, the actions and commitments of multinational firms at the last COP22 and 23 meetings have been positive. However, one cannot be too optimistic as the silent revolution has had many harmful, rather unnoticed – or seemingly unrelated – implications. Beyond the transfer of production processes and activities, the ‘silent revolution’ has contributed to a strengthening of the competitiveness relations, all of which has induced transgressions in the quality of products. Cheating has become part of the game to an extent that no one could have imagined. For instance, one of the most recent and surprising examples occurred in the car industry: Volkswagen who has so far been fined some $30 billion for its fraud on emission norms. Since then, other car makers such as Peugeot, and others, faced similar scandals. Similarly, scandals of similar magnitude have been found in other industries. Monsanto with its products (such as Roundup), although bought by Bayer,9 is still facing a class action lawsuit and fines.10 The list continues, and could be quite long if we were to tally all the issues of product safety that a fierce and largely unregulated international competition has raised. As we stressed, mechanisms of regulation of these types of conflicts, be they local, such as CSR processes of many types, or

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WTO rules, have turned out to be quite ineffective. Meanwhile, the noodle bowls of bilateral trade treaties do not offer a solution, or means by which effective global norms could be implemented. We need to find new means of actions. Regional and international institutions are claiming to be allowed to monitor and enforce these exchanges, and to heavily fine big firms that would not respect the norms. We may be entering a new phase, however, in which international exchanges would strongly be checked by stakeholders. Negotiations, even if only on labelling products, do show that this transition will take a long time. And all the more so that finance still plays a key role in the global governance, unabashed by the attempts to reform. We are far from returning to the ‘primitive finance’ that Bidhe (2009) was rightly calling for. Moreover, experts who should help to settle the disputes under view have been delivering contradictory reports, some of them tied to vested interests in the industries under investigation. This safety issue is bound to remain a problem for quite a long time. All the more so as free marketers (often silent on the issue, again) are still playing down the importance of these frauds. How to get out of this impasse? Can the way out be speeded up given the environmental challenge is pressing? Economists can help with such an outcome, provided a large majority of them join in a more realistic approach to the globalizing world in order to forge new paths of sustainable development.

AN AGENDA OF RESEARCH AND TEACHING THAT ADDRESSES DIRECTLY THE DYNAMIC OF CRISES To meet its legitimate objective of being a moral and political science, contributing to improve in fair and sustainable ways the development of the world economy, economics has to address upfront the study of crises. This could be the main lesson of the last decade. There is, in effect, a clear divide between economists who do pay attention to crises11 and those who somehow neglect them, assuming that in the end, with patchy public interventions, market forces will help to find a way out of the crisis. This forgets the cost of such neglect. More than a decade after the crisis, assessing the real cost of the GFC in a comprehensive way is nearly an impossible task. We need to consider not only the slowdown in economic growth, but also the misbehaviours that went with it (distorting competition and degrading further the environment); also, we cannot forget the reactionary political impacts on deceived populations, hurt by the increases in inequalities (in income and well-being). All this shows clearly that economics should dramatically turn all its efforts to the understanding of crises, by considering them as symptoms to be understood in their contexts with specific origins

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and implications, conditionalities of outcomes, and potential efficiency of diverse sets of interventions, much like in medicine. The task is not easy. It requires strong cooperation and exchanges with all other social and human sciences. As Gramsci wrote: ‘the crisis consists precisely in the fact that the old is dying and the new cannot be born. In this interregnum, a great variety of morbid symptoms appear’,12 which hints at the interest and difficulty of the task. All the more so that, in the current stage of internationalization, the flow of crises has to be investigated, taking into account differences in cultures, in geography as well as in levels of integration in this evolving ‘world economy’. The environmental challenge, ‘embedded’ in crises, is very demanding. Economists of orthodox obedience will not go very far in that direction with their ‘one size fits all’ instinctive medication, as shown by the proposition of a unique global CO2 market. On the other hand, heterodox economists, for whom crises have always been objects of concern, still have to work harder. For sure, post-Keynesians have devoted efforts and made significant contributions to clarify many facets of financial crises (precisely, as illustrated in the works of Marc Lavoie, 2014; and Mario Seccareccia, 2010). In this mission, regulationists have distinguished crises of accumulation (close to the imbalances stressed by post-Keynesians such as Godley) from crises of regulation (linked to evolutions of the structural forms, which stand in contradiction to the ‘dominant’ political convention; see for instance the work of Robert Boyer (2015). In this task, we should not forget the more teleological stand of the Marxist approach, in which capitalism, as the dominant mode of production, is by essence prone to recurrent crises of over accumulation, calling for a drastic depreciation of assets (see Boccara, 2013). In the current global context, in addition to being confronted with the major challenge that environmental change represents, clearly these diverse approaches are more complementary than contradictory. The reorientation of economics towards a more upfront comprehensive approach to crises implies that social and political activities require cooperative efforts in order to develop analyses and predicaments in full mutual understandings with the other social and human sciences. The magnitude of the challenge can help in this direction, and the death of neoliberalism will rapidly become a non-issue. The recent Covid-19 health crisis has crucially raised this issue: either there is a clear understanding of the endogeneity of this health crisis and, as such, our societies will be able to undertake the big transformation required, or they will remain prone to existential crises. This transformation does not only concern the governance of our international relations but also of their internal social compromises that frame the respective roles of markets and non market activities in our societies. This endogenous dimension of the crisis is not directly linked with the environmental changes provoked

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by human activities, even if viruses originate so far mainly at the borders between wild and urbanised areas, constantly renewed by continuous deforestation. The direct causes of the disasters that such a pandemic can create stem from the speed of its diffusion worldwide and the difficulties of the health systems to cope with sudden waves of patients. These are not, however, exogenous shocks, as these risks are well known, at least since the pandemics that occurred at the turn of the century with the SARS virus (2002), and the subsequent experiences with the AIDS and Ebola viruses. Lessons were drawn and some measures taken (which can be tracked down in the debates on the precaution principle at the time, leading in some countries to the setting of specific institutions . . . with modest means). But the global financial crisis of 2008 put an end to this process of rising consciousness and contributed to other logics to prevail. On one side, the extension of global value chains in the pharmaceutical industry led to an over-concentration of production sites in Asia (mainly in China and India), increasing profits and shareholder values at a time when a slower growth at world level was threatening them. On the other side, the post 2008 rise in public debts led to austerity policies, especially in public health systems, often submitted to harsh short-sighted policies of costs reduction. By and large the global domination of a neoliberal ideology, reinforced after 2008, accounts for much of the limited capacity of our health systems to contain the effects of pandemics. The challenges for our societies are to find agreements on new international and national compromises that would efficiently reduce their vulnerabilities. Regarding such international accord, it has clearly to be multilateral, reforming and giving a bigger role to the WHO to ensure a fully fledged health security of our trade and investment transactions. The question is trickier regarding the changes in our national compromises, which imply innovative organisational schemes in public services, involving local communities in a mix of various types of activities, The various experiences of solidarities that emerged in the course of the 2020 sanitary crisis should be a major source of inspiration for these much expected social innovations that will enable our societies to meet the challenge of pandemic risks. Helping to draw the lessons of this health crisis with its huge impacts on our societies should be a major task for social scientists.

NOTES  1. For the seven unsustainable processes stressed by Godley in 1999 see http://www. levyin​stitute.org/publications/seven-unsustainable-processes. As for the reasons of these unsustainabilities, see Godley and Lavoie (2007).

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  2. And signed by two of its representatives, Tim Besley and Peter Hennessy, on 22 July 2009, https://www.euroresidentes.com/empresa_empresas/carta-reina.pdf.  3. https://www.researchgate.net/publication/299194993_THE_GFC_AND_UNIVERSITY​ _ECONOMICS_EDUCATION_AN_OPEN_LETTER_TO_THE_QUEEN.  4. With extravagant norms of rates of returns has denounced by Stiglitz, see his interview https://www.theguardian.com/business/2016/may/13/-new-era-monopoly-jos​ eph-stiglitz.   5. Just a year after the start of the crisis, Krugman wrote a book on the return of depression economics and crises, but advocated that things could be managed once the height of the crisis was over.   6. A qualified assessment of this kind was given by Bernanke in 2011, still president of the Federal Reserve Bank, a man who clearly saw the coming of the financial crisis in the excessive speculative behavior of the US financial market in the mid of the first decade of the 21st century.   7. We could call that the Bhopal effect to remember what a multinational in chemistry, Union Carbide, did in localizing in Pakistan a dangerous process, where an accident in 1984 provoked 3800 deaths. A case all the more symbolic that an economist (and high civil servant), Larry Summers, dared to stress understandingly the rationale of such move, considering the differences in the prices of human living in Pakistan and in the US.   8. Intended Nationally Determined Contributions.   9. A $62 billion deal that illustrates the game of mergers and acquisitions contributing to strengthen the power of big business. 10. So far in the matter of fines, big banks still keep the lead with up to $321 billion of fines from 2008 to 2016. 11. A central characteristic of heterodox economics (Seccareccia, 1992, 2015). 12. Quote from Gramsci (1971: 276); quoted in Gill (2015a).

REFERENCES Barroso, J.M. (2010), ‘The European Union and multilateral global governance’. Speech given at the European University Institute, Florence, 18 June. Available (accessed 5 June 2016) at: http://europa.eu/rapid/press-release_SPEECH-10322_en.htm?locale=en Google Scholar. Beck, U. (1992), Risk Society: Towards a New Modernity. London, Sage. Bidhe, A. (2009), ‘In praise of primitive finance’. The Economists’ Voice, February. Boccara, P. (2013), Théories sur les Crises, la Suraccumulation et la Dévalorisation du Capital. Paris: Editions Delga. Boyer, R. (2015), Economie politique des capitalismes. Théorie de la regulation et des crises. Paris: La Découverte. Capron, M. and P. Petit (2011), ‘Responsabilité sociale des entreprises et diversité des capitalismes dans la phase contemporaine d’internationalisation’. Revue de la Régulation, April. Colander, D. (2008), The Making of an Economist. Redux. Princeton: Princeton University Press. Crouch, C. (2004), Post Democracy. Hoboken, NJ: Wiley. Crouch, C. (2011), The Strange Non-Death of Neo-liberalism. Cambridge, UK: Polity Press. Galbraith, James K. (2014), The End of Normal. The Great Crisis and the Future of Growth. New York: Simon & Schuster.

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Gill, S. (ed.) (2015a), Critical Perspectives on the Crisis of Global Governance: Reimagining the Future. New York: Palgrave Macmillan. Gill, S. (2015b), ‘The geopolitics of global organic crisis’. Utopia: A Review of Theory and Culture, April–May(111), pp. 25–36. Gill, S. (2016), ‘Transnational class formations, European Crisis and the silent revolution’. Critical Sociology, 43(4–5), pp. 635–651. Godley, W. (1999), Seven Unsustainable Processes: Medium-term Prospects and Policies for the United States and the World. Strategic Analysis, January, Levy Economic Institute, Bard College, Annandale-on-Hudson, New York. Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Basingstoke: Palgrave Macmillan (paperback 2nd edn, 2012). Partial translation into Spanish, Economía monetaria: Una revolución contra la teoría económica superficial con el rigor de los modelos stock-flujo. Madrid: Martial Pons, 2012. Gramsci, A. (1971), Selections from the Prison Notebooks of Antonio Gramsci, trans and edited by Hoare Q. Smith. New York: International Publishers, Google Scholar. Krugman, P. (2009), The Return of Depression Economics and the Crisis of 2008. New York: W.W. Norton. Laeven, L. and F. Valencia (2012), ‘Systemic banking crises database: an update’. IMF Working Paper, WP 12/163. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations. Cheltenham: Edward Elgar (paperback edn 2015). Lavoie, M. and M. Seccareccia (2001), ‘Minsky’s financial fragility hypothesis: a missing macroeconomic link?’. In Bellofiore, R. and P. Ferri (eds), Financial Fragility and Investment in the Capitalist Economy: The Economic Legacy of Hyman Minsky, Volume II. Cheltenham: Edward Elgar, pp. 76–96. Seccareccia, M. (1992), ‘Wicksellianism, Myrdal and the monetary explanation of cyclical crises’. In Dostaler, G., D Ethier, and L. Lepage (eds), Gunnar Myrdal and His Works. Montreal: Harvest House, pp. 144–162. Seccareccia, M. (2010), ‘Credit cycles’. In Ciment, J. (ed.), Booms and Busts, An Encyclopedia of Economic History from Tulipmania of the 1630s to the Global Financial Crisis of the 21st Century, Vol. 1. Armonk, NY: M.E. Sharpe, pp. 188–189. Seccareccia, M. (2011), ‘Exposé de Mario Seccareccia sur le capitalisme financiarisé et la crise économique’. In Clain, O. and F. L’Italien (eds), Le capitalisme financiarisé et la crise économique au Québec et au Canada, Les séminaires Fernand-Dumont. Cap-Saint-Ignace (Québec): Éditions Nota Bene, pp. 252–265. Seccareccia, M. (2015), ‘Economics and history: why economists and policy makers need to understand the latter’. In Jo, T.-H. and F.S. Lee (eds), Marx, Veblen, and the Foundations of Heterodox Economics. London: Routledge, pp. 176–198. Shiller, Robert J. (2000), Irrational Exuberance. Princeton, NJ; Princeton University Press. Streeck, Wolfgang (2014), Du temps acheté. La crise sans cesse ajournée du capitalisme démocratique. Paris: Gallimard (translated from German, 2013).

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17.  Banking and financial crises Jan Toporowski INTRODUCTION Marc Lavoie and Mario Seccareccia have, together with John Smithin, been leading voices in recent discussions on monetary theory. Among Post-Keynesians they have stood out for their willingness to engage with the rapid evolution of policy, in the wake of the financial crisis of 2008, and for their creative approach to the doctrines of Post-Keynesian ­analysis. This chapter is therefore dedicated to them formally as well as in the sense that it presents a view of financial crisis that, in many respects, complements their original insights. There are few monetary economists today who doubt the idea that the supply of money is endogenous. That the number of such doubters is so reduced is, in good measure, due to the compelling case for endogeneity that has been put forward by the Canadian Post-Keynesians. The banking and financial crisis, however, stands out as something of an anomaly in this approach to monetary theory: if money, or credit, is generated by processes inherent in the functioning of the credit system according to need, then, by definition, a financial crisis cannot arise because of a shortage of credit. Such crises must be because banks refuse to lend as much as is ­necessary, or because of some disturbances in the price mechanism (a fall in asset prices, or a fall in the rate of profit in relation to the rate of interest). At this point, a common view is a resort to some notion of illiquidity arising out of the maturity transformation undertaken by banks. Since banks hold the deposits of the public, and hold longer-term loans as the asset counterpart of these deposit liabilities, the withdrawal of deposits in excess of the reserves of the banks creates a financial crisis when the banks run out of reserves to meet those deposit withdrawals. As a concession to long-term financing, the ‘bank run’ story is modified to allow banks to hold in their asset portfolio negotiable securities, in addition to non-­negotiable loans. A crisis then happens when the ‘forced’ sale of such securities causes their price to fall in such a way as to render the banks insolvent. 317

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Thus, the illiquidity of the banking system causes a financial crisis, in which banks cease to roll over short-term loans, or call in overdrafts that they advance on terms that allow the banks to demand immediate repayment. This is the standard model of a financial crisis that may be found in a remarkably wide range of works by authors as different as Diamond and Dybvig (1983), Kiyotaki and Moore (1997) Goodhart, Sunirand and Tsocomos (2005, 2006), De Walque, Pierrard and Rouabah (2010), as well as in perhaps the best-know book on the subject, Charles Kindleberger’s (1996) Manias, Panics and Crashes.

THE FINANCIAL CRISES OF ‘CLASSIC’ CAPITALISM Theories, based on the notion that bank deposit ‘runs’ result in a withdrawal of credit, which is then the crisis transmission mechanism to the real economy, have their intellectual roots in Mikhail Tugan-Baranovsky’s study of ‘English’ banking crises (Tugan-Baranovsky, 1923, originally published in 1894). Although never translated into English, TuganBaranovsky’s book was an important influence on a number of important theorists, including John Maynard Keynes (‘. . . I find myself in strong sympathy with the school of writers. . . of which Tugan-Baranovski was the first and most original. . .’ Keynes, 1930 [1971], p. 89). In fact, the financial crises studied by Tugan-Baranovsky were only the ones up to the Overend-Gurney scandal of 1866, whose notoriety was renewed during the recent financial crisis as commentators noted the last time that a British bank succumbed to a deposit ‘run’, before the collapse of the Northern Rock Building Society in September 2007. This did not stop other writers from drawing wide-ranging conclusions from those crises. For example, in his 1932 preface to the second edition of Hyndman’s Commercial Crises, originally published in 1892, Hobson described the significance of nineteenth-century bank crises for political economy as follows: . . . The interest of modern readers will be attracted by the common character of the nine crises of last century, and by the flood of light they throw upon the present troubles of the world. Even in the slump which followed the Napoleonic war the germ of all the later slumps was plainly discernible, the glut of commodities unsaleable by reason of the fall of prices, the stoppage of production throughout the industrial system, and the lingering waste of unemployment. In each succeeding crisis, though financial troubles figured as the immediate cause of collapse, the same paradox which confronts the world to-day was plainly visible, an acceleration of the power of production unaccompanied by a ­corresponding growth of purchasing and consuming power’. (Hyndman, 1932, p. vii)

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What is discernible here, and among the readers of Tugan-Baranovsky’s study, is the assertion of a ‘common character of the nine crises of the last century’ (i.e. those of 1815, 1825, 1836–1839, 1847, 1857, 1866, 1873, 1882 and 1890). The ‘flood of light’ that ‘they throw upon the present troubles of the world’, refers to Hobson’s underconsumptionist vision of mass unemployment. But the cause of the economic ‘collapse’ was seen as broadly similar ‘financial troubles’. The same view has been followed to this day, in the writings of those advancing a ‘standard view’ of financial crisis, with the possible exception of Minsky (Minsky, 1993; see Whalen, 2012). In this common view, there is no change in financial crisis: crises are similar episodes, and epitomised by the standard reserve shortage crisis that punctuated the period of ‘classic’ capitalism, roughly up to the Overend-Gurney crisis. Some go further than this: the econometric study of financial crisis over the last eight centuries is predicated on the notion that the features of all crises from early medieval times are broadly comparable (Reinhart and Rogoff, 2008). Contrary to this treatment of all financial crises, or at least the financial crises of capitalism, as more or less the same, this paper argues that it is necessary to distinguish between the financial crises of ‘classic’ capitalism and the crises of finance capitalism. ‘Classic’ capitalism is defined as the period of capitalism before the proliferation of long-term finance (Toporowski, 2017). The typical ‘classic’ capitalist was financed by his own personal wealth, short-term trade bills and short-term loans from banks. With industrialisation, the growing mechanisation of production left capitalists almost permanently short of finance, which was eked out by rolling over bills and short-term bank borrowing (Dobb, 1967, pp. 26–30; Niebyl, 1946, Chapter 3; Kindleberger, 1993, pp. 94–96). By the middle of the 19th century there were, of course, some joint stock companies, principally the great chartered trading companies (such as the East India Company, the Hudson’s Bay Company), the railway companies, and some coal mines (see Sweezy, 1938). But with thin capital markets, the newer (railway) companies found their stock subject to speculative booms and busts (Kindleberger, 1993, pp. 191–196). The financial crisis of ‘classic’ capitalism was essentially a banking one, and arose when a decline in bank reserves obliged banks to refuse to roll over the short-term loans on its books, or to discount bills presented to it by merchants or industrial capitalists. The crisis transmission mechanism led directly to production, because entrepreneurs were financing increasingly mechanised, or long-term, productive assets, with short-term credit. Faced with an inability to repay loans, or to pay bills falling due, the i­ ndustrial capitalist would cease production, to stem the outflow of expenditure and, in this way, the bank crisis became immediately an economic crisis.

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CREDIT ENDOGENEITY AND LONG-TERM FINANCE The establishment of legal procedures by which companies could be established with limited liability, more easily than by an act of the legislature, changed fundamentally the structure and dynamics of capitalism. An immediate consequence was the emergence of corporations dominating their markets: monopolies and cartels that arose not because of some inherent Marshallian long-term economies of scale, or natural monopolies or government trading licence, but because a company with access to longterm finance could buy up its competitors through buying up their shares in the stock market. A second consequence was the emergence of a new business cycle, arising out of the investment behaviour of large corporations and their ability to distort the distribution of profits in the economy. This institutional change lays the foundation for the industrial-financial theory of the business cycle in the 20th century, starting with Hilferding, and proceeding through Kalecki and Keynes (Toporowski, 2017). With the extension of the capital market and the much wider issue of stocks and shares, an important credit innovation proliferated. This was the practice of lending against the security of a quoted bond or stock (hence the widespread use of the term ‘securities’ to describe any valuable paper on which a loan could be secured). On the one hand, this practice helped to stabilise the capital market, both because it was possible to raise bank credit without actually having to sell the security, and because the most common reason for borrowing money in this way was to buy more securities in the capital market, thereby making that market more liquid, and accelerating the financial circulation of (bank credit) money. On the other hand, this practice of lending against the security of long-term bonds or shares gave rise to a substantial increase in bank credit money, far beyond the ability of any banking system to cover with the gold reserves available under the gold standard.1 This relationship between long-term finance and credit expansion (or financial circulation) may be illustrated as follows: Consider a bond issued at par with a face value of X, payable in time t. The purchaser holds only the bond as a financial asset, and therefore has a relatively illiquid portfolio. To make it more liquid, the financial investor holding it borrows up to the nominal value of the bond, against the security of the bond, a loan with a maturity of t21. The bank that lends the money ‘creates credit’ to satisfy the liquidity needs of the financial investor. The latter has now ‘recovered’ the bank credit advanced to buy the original bond, doubled the size of his financial portfolio, and has half of the assets in that portfolio in the form of bank deposits. This increase in the liquidity of the portfolio is not, of course, cost-free, for the

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investor now has a bank loan as a liability against half of the portfolio. The cost of this liquidity is the interest paid on the loan, minus the interest received on the counterpart bank deposits (see Toporowski, 2008). The bank that has ‘created’ the credit now has a secure, but relatively illiquid asset, in the form of a loan to the financial investor of value X, repayable at time t21. The obvious way to make the bank’s portfolio more liquid is to borrow against the security of the loan, itself secured on the original bond, so there would normally be no difficulty in refinancing this position. The new borrowing, repayable at time t–2, then creates an illiquid asset in the asset portfolio of another bank, so further borrowing takes place, and so on, until the total value of the credit created in the wake of the new bond issue is ΣXt2i (i 5 0, 1, 2,. . ., t) or t.X. It is assumed here that each successive loan is for a time period that is one unit shorter than the previous loan, in other words that borrowing money takes time. But in today’s age of electronic credit creation, a bond could be sliced up into an infinitesimal number of short loans and credits. The total value of the interest paid in this scheme is Σrt2i.X, where rt–0 is the long-term rate of interest, up to rt2(t21) which is the short-term rate of interest. Geometrically, this is the integral of the yield curve up to the maturity of the bond, multiplied by the value of the bond. This may seem a lot, given the possibility of infinitesimal sub-division of time periods. But it should be borne in mind that at each stage, bank credit expands pari passu with bank liabilities in the balance sheets of the respective financial intermediaries. Each intermediary’s lending is secured on a loan to another intermediary. Each intermediary’s interest payable on their borrowing is therefore partially offset by the interest received from the loan held in their asset portfolio. For financial intermediaries as a whole, the net interest received is merely the interest on the bond, ΣX (rt2i 2 rt2i21) or X.rt. What has happened is that each financial intermediary has sacrificed some fraction of the excess of the long-term rate of interest over the short-term rate in order to obtain a more liquid portfolio. Interest now is largely paid from interest received, rather than from real income, as in ‘classic’ capitalism. This is, in effect, Keynes’s ‘pure monetary’ liquidity preference theory of interest (Keynes, 1937 [1973]), with the added twist that the shape of the yield curve depends on the willingness of banks to lend against long-term securities, rather than, as Keynes suggested ‘on the terms on which the banks are prepared to become more or less liquid’ (Keynes, 1937 [1973], p. 221). This is because the banking system as a whole does not become less liquid as more credit is advanced, but more liquid, since, typically, bank credit that is the result of borrowing is turned over in the financial markets in bills, commercial paper and so on. The account of ‘financial’ endogeneity given above is, of course, rather

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simplified. The most significant complications arise because it is not usual to be able to borrow up to the full value of a bond, and with the use of equity or common stock as security for a loan. Since company shares do not have any fixed maturity or assured repayment value, their current market value fluctuates much more, in theory according to the value of expected future earnings, appropriately discounted, in practice according to the liquidity of the capital market (for example with central banks’ quantitative easing in recent years, or merger and takeover activity). This makes capital market inflation the foundation not only of speculative bubbles in the capital market, but also of processes of credit creation that feed excessive liquidity in those markets.

BANKING VERSUS CAPITAL MARKET CRISES In the early years of the 20th century, this credit expansion based on the apparently self-generating inflation of the markets for financial instruments was familiar to careful observers of the financial markets, such as Hartley Withers and John A. Hobson (Withers, 1909; Hobson, 1913). Indeed, this financially-secured lending, rather than the supply of bank reserves, was the basis of their idea of the functioning of monetary endogeneity. As Hobson put it: . . . the acceleration of purchasing power is not directly attributable to the increased output of gold. The influence of gold, either as coin or as a support of credit, is much smaller than has been represented. The great extension of bank credit, which constitutes the acceleration of the supply of money, is primarily due to three causes. Two of them relate to its supply, one to its demand. The rapid enlargement of enterprises in various countries, undertaken by states and municipalities, and accompanied by an equally rapid development of joint stock companies, has enabled a largely increasing proportion of property to figure as security for bank credit. Along with this movement has gone a wide extension of banking and of general financial apparatus [sic]. Thus there has been a great growth in those forms of wealth which are the real basis of credit and in the machinery which manufactures credit.

On the side of demand: The chief factor in the enlarged demand has been the opening up of new large profitable fields of investment for the development of new or backward countries, chiefly in America. . . (Hobson, 1913, pp. vii–viii)

As we now know, this prodigious expansion of credit was a factor in destabilising the gold standard of the time, precisely because credit expanded

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far beyond the possibilities of settlement by means of gold, and the preeminent world power could only maintain itself on the gold standard by forcing its empire to run trade surpluses and hold gold deposits in London (De Cecco, 1974). Even so, from the 1873 Vienna Stock Market Crash, through the Barings Crisis of 1893, the Knickerbocker Trust Crisis of 1907, the Great Crash of 1929, up to the 2008 crisis, crises occurred that were different from the earlier banking crises. The key difference between the financial crises inaugurated by the predominance of long-term finance, and those of ‘classic’ capitalism has been in the location of crises and their impact on capitalist enterprise. The newer crises were located in the markets for long-term securities, and involved the drying-up of liquidity, or buying, in the secondary markets for such securities. The impact on capitalist enterprise was however modified by the ability of corporations to ‘hedge’ their long-term productive assets with long-term finance. The need to roll-over short-term borrowing (or replace short-term funds committed to fixed capital investment) was now greatly reduced. This does not mean that capitalist economies dominated by corporations with long-term finance have not suffered from long periods of depression, and economic stagnation. Indeed, the period since the 1870s has been largely one of mass unemployment, except in war-time and for a couple of decades after the Second World War (Steindl, 1952, 1989). But economic depression is not the result of financial crisis but the consequence of inadequate investment. Some financial crises have had only a minor impact on business investment (for example the Knickerbocker Trust Crisis of 1907, or the Dot.Com bubble burst in 1999).2 The difference between the crises of ‘classic’ capitalism and those of finance capital arises because long-term finance stabilises the financing of corporations, at the expense of the stability of the capital market, where the securities by which that long-term finance is obtained are exchanged. In ‘classic’ capitalism, the entrepreneur who financed longterm assets with short-term loans, took on the burden of maturity transformation. Long-term finance hedged that risk by transferring it to the capital market. From there, the impact of that risk in the capital market depends on a much more complex set of balance sheet circumstances. What turned the 2008 financial crisis into an economic depression was the illiquidity of the capital market. This prevented commercial banks from liquidating their loan books through securitisation, leading to the breakdown in the inter-bank market as banks became illiquid. In their turn, business corporations, which had indebted themselves heavily in the money markets to finance merger and takeover activity (rather than fixed investment), found themselves unable to refinance their borrowing into long-term securities, or to roll over their short-term loans. As a result

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they were forced into cutting back their planned fixed capital investments (Toporowski, 2016). As exemplified in the title of Kindleberger’s (1996) classic book, Manias, Panics and Crashes, much is made in the literature on financial crises of the failure of confidence or trust that is a common feature of recent financial crises and those of the past. However, such failures are common to all reverses of expectations, and may be particularly dramatic in the case of the capital markets operating on the principles of Keynes’s ‘beauty contest’. Disappointments are symptoms of (or endogenous to) market reverses, rather than causing those reverses. The true causes and consequences of financial crises need to be sought in the balance sheets and the financial structures through which particular market conjunctures cause changes in business expenditure, rather than in the sentiments of those managing the balance sheets.

CONCLUSION Economic theory tends to lag behind economic practice, encouraged perhaps in its backwardness by the excessive respect that is given in economics to established wisdom. The modern economics literature largely ignores the structures by which credit is created on the basis of long-term finance, and the consequences of this credit creation for the stability of capital markets. In particular, whether through ignorance, or the need to constrain the modelling of financial processes, the literature on financial crises largely remains stuck in a conceptual framework derived from a particular and transitory dependence of capitalist enterprise in its ‘classic’ capitalist phase, on bank credit. This is reflected in the high regard accorded by monetary economists to the supposed effectiveness of changes in the short-term rate of interest, and the neglect of the long-term rate of interest that Keynes believed was the key monetary factor in economic dynamics. What is lost is an understanding of the processes of monetary endogeneity that arise with long-term finance, and the complications that such finance imposes on the transmission mechanism of financial crisis to the real economy. Without an understanding of those processes and that transmission mechanism we cannot understand the financial crises of today and the consequences of those crises for economic theory (did the crisis of 2008 really discredit ‘mainstream’ economics?) and for policy.

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NOTES 1. This is not strictly true. It is possible for a relatively small gold reserve to cover much larger financial payments, providing that that reserve circulates with adequate velocity. However, in a financial crisis, Gresham’s Law keeps gold out of circulation, as wealthholders seek to settle their obligations with credit instruments rather than gold. 2. That these crises occurred in periods of unemployment may have misled some authors into attributing the consequences of low investment to these financial crises.

REFERENCES De Cecco, M. (1974), Money and Empire – The International Gold Standard 1890–1914. Oxford: Basil Blackwell. De Walque, G., O. Pierrard and A. Rouabah (2010), ‘Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach’. Economic Journal, 120(549), December, pp. 1234–1261. Diamond, D.W. and P.H. Dybvig (1983), ‘Bank runs, deposit insurance, and liquidity’. Journal of Political Economy, 91(3), pp. 401–419. Dobb, M.H. (1967), Papers on Capitalism, Development and Planning. London: Routledge and Kegan Paul. Goodhart, C.A.E., P. Sunirand and D. Tsocomos (2005), ‘A risk assessment model for banks’. Annals of Finance, 1(2), pp. 197–224. Goodhart, C.A.E., P. Sunirand and D. Tsocomos (2006), ‘A model to analyse financial fragility’. Economic Theory, 27, pp. 107–142. Hobson, J.A. (1913), Gold, Prices and Wages with an Examination of the Quantity Theory. London: Methuen. Hyndman, H.M. (1932), Commercial Crises of the Nineteenth Century. London: George Allen and Unwin. Keynes, J.M. (1930 [1971]), The Collected Writings of John Maynard Keynes Volume VI A Treatise on Money in Two Volumes 2 The Applied Theory of Money. London: Macmillan for the Royal Economic Society. Keynes, J.M. (1937 [1973]), ‘The “ex ante” theory of the rate of interest’. In D. Moggridge (ed.), The Collected Writings of John Maynard Keynes Volume XIV The General Theory and After Part II Defence and Development. London: Macmillan for the Royal Economic Society. Kindleberger, C.P. (1993), A Financial History of Western Europe. New York: Oxford University Press. Kindleberger, C.P. (1996), Manias, Panics and Crashes, A History of Financial Crises. Basingstoke: Macmillan. Kiyotaki, N. and J. Moore (1997), ‘Credit cycles’. Journal of Political Economy, 105(2), April, pp. 211–248. Minsky, H.P. (1993), ‘Schumpeter and finance’. In Salvatore B., A. Roncaglia and M. Salvati (eds), Market and Institutions in Economic Development: Essays in Honour of Paulo Sylos Labini. New York: St. Martin’s Press. Niebyl, K.H. (1946), Studies in the Classical Theories of Money. New York: Columbia University Press. Reinhart, C.M., and K.S. Rogoff (2008), This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.

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Steindl, J. (1952), Maturity and Stagnation in American Capitalism. Oxford: Basil Blackwell. Steindl, J. (1989), ‘From Stagnation in the 30s to slow growth in the 70s’. In Berg, M. (ed.), Political Economy in the Twentieth Century. Oxford: Phillip Allan. Sweezy, P.M. (1938), Monopoly and Competition in the English Coal Industry, 1550–1850. Cambridge, MA: Harvard University Press. Toporowski, J. (2008), ‘Notes on excess capital and liquidity management’. Working Paper No. 549. Annandale-on-Hudson, New York: The Jerome Levy Economics Institute of Bard College, November, pp. 1–10. Toporowski, J. (2016), ‘The crisis of finance in Marxian political economy’. Science and Society, 80(4), October, pp. 515–529. Toporowski, J. (2017), ‘From Marx to the Keynesian revolution: the key role of finance’. Review of Keynesian Economics, 5(4), Winter, pp. 576–585. Tugan-Baranovsky, M.I. (1923), Pyeryodycheskye promyshlennye krizisy. Istoriya anglyskikh krizisov. Obshchaya teoria krizisov. Smolensk. Whalen, C.J. (2012), ‘Money manager capitalism’. In Toporowski, J. and J. Michell (eds), Handbook of Critical Issues in Finance. Cheltenham: Edward Elgar. Withers, H. (1909), The Meaning of Money. New York: Dutton.

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Full bibliography of Marc Lavoie and Mario Seccareccia BOOKS BY MARC LAVOIE Lavoie, M. (2020), Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. Lavoie, M. (2014), Post-Keynesian Economics: New Foundations, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing (paperback edition, 2015). Lee, F.S. and M. Lavoie (eds) (2013), In Defense of Post-Keynesian Economics and Heterodox Economics: Response to their Critics, London: Routledge (paperback edition, 2014). Lavoie, M. and E. Stockhammer (eds) (2013), Wage-Led Growth: An Equitable Strategy for Economic Recovery, Basingstoke, UK: Palgrave Macmillan and International Labour Office. Lavoie, M. and G. Zezza (eds) (2012), The Stock-Flow Consistent Approach: Selected Writings of Wynne Godley, Basingstoke, UK: Palgrave Macmillan. Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Basingstoke, UK: Palgrave Macmillan (paperback second edition, 2012). (Partial translation into Spanish, Economía monetaria: Una revolución contra la teoría económica superficial con el rigor de los modelos stock–flujo, Madrid: Martial Pons, 2012; forthcoming translation into Mandarin, Beijing: People’s Publishing House.) Lavoie, M. (2006), Introduction to Post-Keynesian Economics, Basingstoke, UK: Palgrave Macmillan (paperback second edition with additional postscript, 2009). (English translation and revision of L’Économie postkeynésienne.) Lavoie, M. (2004), L’Économie postkeynésienne, Paris: La Découverte (Repères). (Translated into Spanish, Barcelona: Icaria Editorial, 2005; translated into Japanese, Kyoto: Nakanishiya, 2008; translated into Mandarin, Hong Kong: Shandong University Press, 2009; translated into Persian, 2014; translated into Korean, Humanitasbooks 2016; translated into Greek, Gutenberg, 2018.) 327

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Lavoie, M. (1998), Désavantage numérique, les francophones dans la LNH, Hull: Vents d’Ouest. Lavoie, M. (1997), Avantage numérique, l’argent et la Ligue nationale de hockey, Hull: Vents d’Ouest. Lavoie, M. (1992), Foundations of Post-Keynesian Economic Analysis, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing ­(paperback edition, 1994). Lavoie, M. (1987), Macroéconomie: théorie et controverses postkeynésiennes, Paris: Dunod.

ARTICLES BY MARC LAVOIE Chapters in Books Lavoie, M. (2020, forthcoming), ‘Post-Keynesian labor market models’, in Kaufman, B. (ed.), Models of Labor Markets, Redwood City, CA: Stanford University Press. Lavoie, M. (2020, forthcoming), ‘Two post-Keynesian approaches to international finance: the compensation thesis and the cambist view’, in Bonizzi, B., A. Kaltenbrunner and R. Ramos (eds), Emerging Economies and the Global Financial System: Post-Keynesian Analysis, London: Routledge. Hein, E. and M. Lavoie (2019), ‘Post-Keynesian economics’, in Dimand, R. and H. Hagemann (eds), The Elgar Companion to John Maynard Keynes, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 540–546. (German translation in Forum Wissenschaft, 2019.) Lavoie, M. (2019), ‘Advances in the post-Keynesian analysis of money and finance’, in Arestis, P. and M. Sawyer (eds), Frontiers of Heterodox Macroeconomics, Basingstoke, UK: Palgrave Macmillan, pp. 89–129. Lavoie, M. and J.-F. Ponsot (2018), ‘Les courants et fondements théoriques de l’analyse post-keynésienne’, in Berr, E., V. Monvoisin and J.F. Ponsot (eds), La Théorie post-keynésienne: Historique, théories et politiques, Paris: Seuil, pp. 105–126. Lavoie, M. and D. Lang (2018), ‘Les déterminants du niveau de l’emploi’, in Berr, E., V. Monvoisin and J.F. Ponsot (eds), La Théorie post-keynésienne: Historique, théories et politiques, Paris: Seuil, pp. 221–238. Lavoie, M. (2018), ‘Production functions, the Kaldor–Verdoorn law and methodology’, in Arestis, P. (ed.), Alternative Approaches in Macroeconomics: Essays in Honour of John McCombie, Basingstoke, UK: Palgrave Macmillan, pp. 303–330. Lavoie, M. (2017), ‘Assessing some structuralist claims through a

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stock–flow framework’, in Rochon, L.-P. and S. Rossi (eds), Advances in Endogenous Money Analysis, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 353–378. Cripps, F. and M. Lavoie (2017), ‘Wynne Godley (1926–2010)’, in Cord, R. (ed.), The Palgrave Companion to Cambridge Economics, Basingstoke, UK: Palgrave Macmillan, pp. 929–953. Lavoie, M. (2016), ‘Post-Keynesianism’, in Faccarello, G. and H. Kurz (eds), Handbook of the History of Economic Thought, vol. 2, Schools of Thought in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 439–447. Lavoie, M. and E. Hein (2015), ‘Vägen till full sysselsättning’ (‘Going from a low to a high employment equilibrium’), in Johannsson, T. (ed.), Lönebildning bortom NAIRU (Wage Bargaining Beyond the NAIRU), Stockholm: Landsorganisationen Sverige, pp. 134–153. Lavoie, M. (2015), ‘Kalecki and post-Keynesian economics’, in Toporowski, J. and L. Mamica (eds), Michal Kalecki in the 21st Century, Basingstoke, UK: Palgrave Macmillan, pp. 51–67. Lavoie, M. (2014), ‘Macroeconomic paradoxes with Kalecki and Kaleckians’, in Bellofiore, R., E. Karwowski and J. Toporowski (eds), Economic Crisis and Political Economy, Volume 2 of Essays in Honour of Tadeusz Kowalik, Basingstoke, UK: Palgrave Macmillan, pp. 198–211. Lavoie, M. (2013), ‘Post-Keynesian monetary economics – Godley like’, in Harcourt, G. and P. Kriesler (eds), Oxford Handbook of PostKeynesian Economics, volume 1, Oxford: Oxford University Press, pp. 203–217. Lavoie, M. (2013), ‘The State, the central bank and the monetary circuit’, in Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 11–22. Lavoie, M. (2013), ‘Sraffians, other post-Keynesians, and the controversy over centres of gravitation’, in Levreto, E.S., A. Palumbo and A. Stirati (eds), Sraffa and the Reconstruction of Economic Theory, volume III: Sraffa’s Legacy: Interpretations and Historical Perspectives, Basingstoke, UK: Palgrave Macmillan, pp. 34–54. Lavoie, M. (2013), ‘Heterodox economics’, in Kaldis, B. (ed.), Encyclopedia of Philosophy and the Social Sciences, Los Angeles: Sage Publications, pp. 418–419. Lavoie, M. (2013), ‘Teaching Post-Keynesian economics in a mainstream department’, in Madsen, M.O. and J. Jespersen (eds), Teaching Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 12–33.

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Lavoie, M. (2012), ‘From macroeconomics to monetary economics: some persistent themes in the theory work of Wynne Godley’, in Papadimitriou, D.B. and G. Zezza (eds), Contributions in Stock–Flow Consistent Modeling: Essays in Honor of Wynne Godley, Basingstoke, UK: Palgrave Macmillan, pp. 137–153. Lavoie, M. (2012), ‘Consumer theory’, in King, J. (ed.), The Elgar Companion to Post Keynesian Economics, second edition, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, Cheltenham, pp. 100–105. Lavoie, M. (2011), ‘History and methods of post-Keynesian economics’, in Hein, E. and E. Stockhammer (eds), A Modern Guide to Keynesian Macroeconomics and Economic Policies, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 1–33. Lavoie, M. (2011), ‘Money, credit and central banks in post-Keynesian economics’, in Hein, E. and E. Stockhammer (eds), A Modern Guide to Keynesian Macroeconomics and Economic Policies, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 34–60. Lavoie, M. (2010), ‘A critique of profit maximization’, in Bougrine, H., I. Parker and M. Seccareccia (eds), Introducing Microeconomic Analysis: Issues, Questions and Competing Views, Toronto: Emond Montgomery Publications, pp. 143–150. Lavoie, M. (2010), ‘After the crisis: perspectives for post-Keynesian economics’, in Lee, F.S. and M. Lavoie (eds), In Defense of Post-Keynesian Economics, London: Routledge, pp. 18–41. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. (2010), ‘Eichner’s monetary economics: ahead of its time’, in Lavoie, M., L.-P. Rochon and M. Seccareccia (eds), Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics, Armonk, NY: M.E. Sharpe, pp. 155–171. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2010), ‘Surveying short-run and long-run stability issues with the Kaleckian model of growth’, in Setterfield, M. (ed.), Handbook of Alternative Theories of Economic Growth, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 132–156. Lavoie, M. (2010), ‘Post Keynesian consumer choice theory and ecological economics’, in Holt, R.P.F., S. Pressman and C.L. Spash (eds), Post Keynesian and Ecological Economics: Confronting Environmental Issues, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 141–157.

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Lavoie, M. (2010), ‘Two views on employment’, in Bougrine, H. and M. Seccareccia (eds), Introducing Macroeconomic Analysis: Issues, Questions and Competing Views, Toronto: Emond Montgomery Publications, pp. 137–145. Lavoie, M. (2009), ‘Taming the New Consensus: hysteresis and some other post-Keynesian amendments’, in Fontana, G. and M. Setterfield (eds), Macroeconomic Theory and Macroeconomic Pedagogy, London: Palgrave Macmillan, pp. 191–212. Lavoie, M. (2009), ‘Towards a post-Keynesian consensus in macroeconomics: reconciling the Cambridge and Wall Street views’, in Hein, E., T. Niechoj and E. Stockhammer (eds), Macroeonomic Policies on Shaky Foundations: Whither Mainstream Economics?, Marburg: Metropolis Verlag, pp. 75–99. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2009), ‘Le lockout de la Ligue nationale de hockey de 2004– 2005: causes et retombées’, in Fontanel, J., L. Bensahel and P. Chaix (eds), Regards sur l’économie et le management du sport et des sportifs professionels, Paris: L’Harmattan, pp. 109–132. Lavoie, M. (2008), ‘Widow’s cruse’, in Darrity, W. (ed.), International Encyclopedia of the Social Sciences, second edition, vol. 9, Detroit: Macmillan Reference, p. 96. Lavoie, M. (2007), ‘The economics of sport and the NHL lockout’, in Crossman, J. (ed.), Canadian Sport Sociology, second edition, Toronto: Thomson Nelson, pp. 197–219. Lavoie, M. (2006), ‘Endogenous money: accommodationist’, in Arestis, P. and M. Sawyer (eds), Handbook on Alternative Monetary Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 17–34. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2006), ‘Ice hockey’, in Andreff, W. and S. Szymanski (eds), The Edward Elgar Companion to the Economics of Sport, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 542–551. Lavoie, M. and W. Godley (2006), ‘Features of a realistic banking system within a post-Keynesian stock–flow consistent model’, in Setterfield, M. (ed.), Complexity, Endogenous Money and Macroeconomic Theory: Essays in Honour of Basil J. Moore, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 251–268. Lavoie, M. (2006), ‘A fully coherent post-Keynesian model of currency boards’, in Cnos, C. and L.-P. Rochon (eds), Post-Keynesian Principles

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of Economic Policy, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 185–207. Lavoie, M. (2006), ‘El dinero endógeno en un cuadro teórico y contable coherente’, in Piégay, P. and L.-P. Rochon (eds), Teorías monetarias ­poskeynesianas, Madrid: Akal, pp. 134–149. Lavoie, M. (2005), ‘Post-Keynesian consumer theory for the economics of sustainable forest management’, in Kant, S. and R.A. Berry (eds), Economics, Natural Resources, and Sustainability: Economics of Sustainable Forest Management, Dordrecht: Springer, pp. 67–90. Lavoie, M. (2005), ‘Lessons from asset-based financial systems with zeroreserve requirements’, in Fontana, G. and R. Realfonzo (eds), Monetary Theory of Production: Tradition and Perspectives, London: Palgrave Macmillan, pp. 257–268. Lavoie, M. (2004), ‘La necessitad de una alternative’, in Etxezareta, M. (ed), Crítica a la economía orthodoxa, Bellaterra: Universitat Autònoma de Barcelona, pp. 227–266 (translation of chapter 1 of Foundations of Post-Keynesian Economic Analysis, 1992). Lavoie, M. (2004), ‘Faut-il transposer à l’Europe les instruments de régulation du sport professionnel nord-américain?’, in Gouguet, J.-J. (ed.), Le sport professionnel après l’arrêt Bosman: une analyse économique internationale, Linoges: Pulim, pp. 61–84. Whitson, D., J. Harvey and M. Lavoie (2004), ‘Government subsidisation of Canadian professional sport franchises: a risky business’, in Slack, T. (ed), The Commercialisation of Sport, London: Routledge, pp. 75–100. Lavoie, M. (2004), ‘Circuit and coherent stock–flow accounting’, in Arena, R. and N. Salvadori (eds), Money, Credit, and the Role of the State, Aldershot, UK: Ashgate, pp. 136–151. Lavoie, M. (2003), ‘La monnaie endogène dans un cadre théorique et comptable coherent’, in Piégay, P. and L.-P. Rochon (eds), Théories monétaires post keynésiennes, Paris: Économica, pp. 143–161. Lavoie, M. (2003), ‘The tight links between post-Keynesian and feminist economics’, in Fullbrook, E. (ed.), The Crisis in Economics: The Post-Autistic Economics Movement: The First 600 Days, London: Routledge, pp. 189–192. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. (2003), ‘Consumer theory’, in King, J. (ed.), Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 68–72. Lavoie, M. (2003), ‘A fully coherent post-Keynesian model of the euro zone’, in Arestis, P., M. Baddeley and J. McCombie (eds), Globalization,

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Regionalism and Economic Activity, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 98–126. Lavoie, M. (2003), ‘A primer on endogenous credit-money’, in Rochon, L.-P. and S. Rossi (eds), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 506–543. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2003), ‘Les taux d’occupation des chambres d’hôtel dans les villes canadiennes: une autre mesure de l’impact économique des équipes sportives professionnelles’, in Lefebvre, S. (ed.), Sport et villes: enjeux économiques et socioculturels, Sainte-Foy: Presses de l’Université du Québec, pp. 203–226. Lavoie, M. and D. Whitson (2003), ‘The economics of sport’, in Crossman, J. (ed.), Canadian Sport Sociology, Toronto: Thomson Nelson, pp. 139–155. Lavoie, M. (2002), ‘The Kaleckian growth model with target return pricing and conflict inflation’, in Setterfield, M. (ed.), The Economics of Demand-Led Growth, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 172–188. Lavoie, M. (2001), ‘Pricing’, in Holt, R.P.F. and S. Pressman (eds), A New Guide to Post Keynesian Economics, London: Routledge, pp. 21–31. Lavoie, M. (2001), ‘The reflux mechanism in the open economy’, in Rochon, L.-P. and M. Vernengo (eds), Credit, Interest Rates and the Open Economy: Essays on Horizontalism, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 215–242. Lavoie, M. (2000), ‘Government deficits in simple Kaleckian models’, in Bougrine, H. (ed.), The Economics of Public Spending: Debts, Deficits and Economic Performance, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 122–134. Lavoie, M. (2000), ‘Les taux d’intérêt justes: l’impact des hausses des taux d’intérêt sur le niveau de vie’, in Gaffard, J.-L. and M. Glais (ed.), Monnaie, croissance et marchés: Essais en l’honneur de Jacques Le Bourva, Paris: Économica, pp. 71–86. Lavoie, M. (2000), ‘Economics and sport’, in Coakley, J. and E. Dunning (eds), Handbook of Sports and Society, London: Sage Publications, pp. 157–170. Lavoie, M. (1999), ‘Capital reversing’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 58–61. Lavoie, M. (1999), ‘Liability management’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 663–666. Lavoie, M. (1999), ‘Paradoxes’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 829–832.

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Lavoie, M. (1999), ‘Post-Keynesian political economy: major contemporary themes’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 883–887. Lavoie, M. (1999), ‘Sraffian and post-Keynesian linkages’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 1095–1098. Lavoie, M. (1999), ‘Sport’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London: Routledge, pp. 1082–1085. Lavoie, M. (1997), ‘Fair rates of interest in post-Keynesian political economy’, in Teixeira, J. (ed.), Issues in Modern Political Economy, Brasilia: University of Brasilia Press, pp. 123–137. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1997), ‘Loanable funds, endogenous money, and Minsky’s financial fragility hypothesis’, in Cohen, A.J., H. Hagemann and J.  Smithin (eds), Money, Financial Institutions, and Macroeconomics, Boston: Kluwer Nijhoff, pp. 67–82. Lavoie, M. (1996), ‘Monetary policy in an economy with endogenous credit money’, in Deleplace, G. and E.J. Nell (eds), Money in Motion: The Circulation and Post-Keynesian Approaches, London: Macmillan, pp.  532–545. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1994), ‘Money and credit’, in Arestis, P. and M. Sawyer (eds), The Elgar Companion of Radical Political Economy, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 278–282. Lavoie, M. (1993), ‘L’idéologie des discours budgétaires fédéraux: plus ça change, plus c’est pareil’, in Paquette, P. and M. Seccareccia (eds), Les pièges de l’austérité économique, dette nationale et prospérité économique, Montreal: Presses de l’Université de Montréal, and Grenoble: Presses de l’Université de Grenoble, pp. 105–130. Lavoie, M. (1993), ‘A post-classical view of money, interest, growth and distribution’, in Mongiovi, G. and C. Ruhl (eds), Macroeconomic Theory: Diversity and Convergence, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 3–21. Lavoie, G. and G. Grenier (1992), ‘Discrimination and salary determination in the national hockey league: 1977 and 1989 compared’, in Scully, G. (ed.), Advances in the Economics of Sport, volume 1, Greenwich: JAI Press, pp. 153–177. Lavoie, M. (1991), ‘Change, continuity and originality in Kaldor’s monetary theory’, in Nell, E.J. and W. Semmler (eds), Nicholas Kaldor and Mainstream Economics: Confrontation or Convergence?, London:

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Macmillan, pp.  259–278. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1991), ‘Comments on Thomas K. Rymes’ paper’, in Rymes, T.K. (ed.), Welfare, Property Rights and Economic Policy in a Democracy: Essays and Tributes in Honour of H. Scott Gordon, Ottawa: Carleton University Press, pp. 155–166. Lavoie, M. (1988), ‘La théorie post-keynésienne du circuit macro-­ économique, les échanges internationaux et les relations monétaires’, in Destanne de Bernis, G. (ed.), Théories économiques et fonctionnement de l’économie mondiale, Grenoble: Presses Universitaires de Grenoble, pp. 135–153. Lavoie, M. (1987), ‘Pourquoi faut-il recommander la lecture de Keynes de préférence à celle de Marx et Friedman aux chefs syndicaux?’, in Boismenu, G. and G. Dostaler (eds), La Théorie générale et le keynésianisme, Montreal: ACFAS, pp. 163–178. Lavoie, M. (1985), ‘La théorie générale: l’inflation de sous-emploi dans Les écrits de Keynes’, in Poulon, F. (ed.), Paris: Dunod, pp. 131–152. Lavoie, M. (1985), ‘Credit and money: the dynamic circuit, overdraft economics and Post Keynesian economics’, in Jarsulic, M. (ed.), Money and Macro Policy, Boston: Kluwer-Nijhoff, pp. 63–85. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Articles in Refereed Journals Fiebiger, B. and M. Lavoie (2020), ‘Helicopter Ben, monetarism, the New Keynesian credit view and loanable funds’, Journal of Economic Issues, 54 (1), pp. 77–96. Lavoie, M. (2020), ‘The subprime crisis ten years after: was Hyman Minsky a post-Keynesian economist?’, Review of Evolutionary Political Economy, 1 (1), forthcoming inaugural issue. Lavoie, M. (2020), ‘Heterodox economics as seen by Geoffrey Hodgson: an assessment’, European Journal of Economics and Economic Policies: Intervention, 17 (1), pp. 9–18. Lavoie, M. (2020), ‘Le monde étrange des taux d’intérêt négatifs: causes et consequences’, Les Possibles, (22), pp. 7–13. Lavoie, M. (2020), ‘Thoughts on post-Keynesian economics and emerging economies’, Cuadernos de Economía, 39 (80), pp. xi–xvii. Lavoie, M. (2020), ‘Book review of Shiozawa, Yoshinori; Morioka, Masashi; Taniguchi, Kasuhisa (2019): Microfoundations of Evolutionary Economics (Springer, Tokyo)’, Review of Evolutionary Political Economy, 1 (1).

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Lavoie, M. (2019), ‘A system with zero reserves and with clearing outside of the central bank: the Canadian case’, Review of Political Economy, 31 (2), pp. 145–158. Nah, W.J. and M. Lavoie (2019), ‘The role of autonomous demand growth in a neo-Kaleckian conflicting-claims framework’, Structural Change and Economic Dynamics, 51, December, 427–444. Lavoie, M. and S. Reissl (2019), ‘Further insights on endogenous money and the liquidity preference theory of interest’, Journal of Post Keynesian Economics, 42 (4), pp. 503–526. Lavoie, M. (2019), ‘Modern monetary theory and postKeynesian ­economics’, Real World Economics Review, (89), October, pp. 97–108. Hein, E. and M. Lavoie (2019), ‘Post-Keynesianische Ökonomik’, Forum Wissenschaft, 36 (3), September, pp. 4–8. Nah, W.J. and M. Lavoie (2019), ‘Convergence in a neo-Kaleckian model with endogenous technical progress and autonomous demand growth’, Review of Keynesian Economics, 7 (3), September, pp. 275–291. Lavoie, M. (2019), ‘Inconsistencies in the note of Dávila-Fernández, Oreiro and Punzo’, Metroeconomica, 70 (2), pp. 320–324. Fiebiger, B. and M. Lavoie (2019), ‘Trends and cycles with external markets: non-capacity generating semi-autonomous expenditures and effective demand’, Metroeconomica, 70 (2), pp. 247–262. Seppecher, P., I. Salle and M. Lavoie (2018), ‘What drives markups? Evolutionary pricing in an agent-based stock–flow consistent macroeconomic model’, Industrial and Corporate Change, 27 (6), December, pp. 1045–1067. Lavoie, M. (2018), ‘Rethinking macroeconomic theory before the next crisis’, Review of Keynesian Economics, 6 (1), Spring, pp. 1–21. Lavoie, M. and B. Fiebiger (2018), ‘Unconventional monetary policies, with a focus on quantitative easing’, European Journal of Economics and Economic Policies: Intervention, 15 (2), pp. 139–146. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2017), ‘A rejoinder to Tily’, Brazilian Keynesian Review, 3 (2), pp. 163–164. Kim, J.H. and M. Lavoie (2017), ‘Long-run convergence and growth in a two-sector model’, Korean Economic Review, 33 (1), Summer, pp. 179–206. Nah, W.J. and M. Lavoie (2017), ‘Long-run convergence in a neo-­Kaleckian open-economy model with autonomous export growth’, Journal of Post Keynesian Economics, 40 (2), pp. 223–238. Fiebiger, B. and M. Lavoie (2017), ‘The IMF and the new fiscalism: was

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there a U-turn?’, European Journal of Economics and Economic Policies: Intervention, 14 (3), pp. 314–332. Lavoie, M. (2017), ‘The origins and evolution of the debate on wage-led and profit-led regimes’, European Journal of Economics and Economic Policies: Intervention, 14 (2), pp. 200–221. Rahimi, A., B. Chu and M. Lavoie (2017), ‘Linear and nonlinear Granger causality between short-term and long-term interest rates: a rollingwindow strategy’, Metroeconomica, 68 (4), November, pp. 882–902. Lavoie, M. (2017), ‘Prototypes, reality and the growth of autonomous expenditures: a rejoinder’, Metroeconomica, 68 (1), February, pp. 194–199. Lavoie, M. (2016), ‘Rethinking monetary theory in light of Keynes and the crisis’, Brazilian Keynesian Review, 2 (2), pp. 174–188. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Cahen-Fourot, L. and M. Lavoie (2016), ‘Ecological monetary economics: a post-Keynesian critique’, Ecological Economics, (126), pp. 163–168. Lavoie, M. (2016), ‘Understanding of the global financial crisis: contributions of post-Keynesian economics’, Studies in Political Economy, 97 (1), pp. 58–75. Rahimi, A., M. Lavoie and B. Chu (2016), ‘Linear and nonlinear Granger causality between short-term and long-term interest rates during business cycles’, International Review of Applied Economics, 30 (6), November, pp. 714–728. Lavoie, M. (2016), ‘Frederic Lee and post-Keynesian pricing theory’, Review of Political Economy, 28 (2), April, pp. 169–186. Kim, J.-H. and M. Lavoie (2016), ‘A two-sector model with targetreturn pricing in a stock–flow consistent framework’, Economic Systems Research, 28 (3), pp. 403–427. Lavoie, M. (2016), ‘Convergence towards the normal rate of capacity utilization in neo-Kaleckian models: the role of non-capacity creating autonomous expenditures’, Metroeconomica, 76 (1), pp. 172–201. Lavoie, M. (2016), ‘Crise financeira, distribuição de renda e reflação pelos salários’, Cadernos do Desenvolvimento, 10 (16), pp. 147–170. Lavoie, M. and E. Stockhammer (2015), ‘Crecimiento basado en los salarios: concepto, teorias y politicas’, Revista de Trabajo, 11 (13), ­ pp. 21–42. Lavoie, M. (2015), ‘The Eurozone crisis: a balance-of-payment problem or a crisis due to a flawed monetary design?’, International Journal of Political Economy, 44 (2), Summer, pp. 57–60. Lavoie, M. (2015), ‘Should heterodox economics be taught in or outside

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economics departments?’, International Journal of Pluralism and Economics Education, 6 (2), pp. 134–150. Lavoie, M. (2015), ‘Debería la economía heterodoxa ser enseñada en departamentos de economía, o existe algún espacio para la economía backwater?’, Estudios Nueva Economía, Autumn, 5, pp. 7–19. Lavoie, M. (2015), ‘Teaching monetary theory and monetary policy implementation after the crisis’, European Journal of Economics and Economic Policies: Intervention, 12 (2), pp. 220–228. Lavoie, M. (2015), ‘The Eurozone: similarities to and differences from Keynes’s Plan’, International Journal of Political Economy, 44 (1), Spring, pp. 1–15. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Christie, T. and M. Lavoie (2015), ‘Entry discrimination in the NHL: evolution and the KHL effect’, Eastern Economic Journal, 41 (2), ­ Spring, pp. 214–229. Lavoie, M. (2014), ‘A comment on ‘Endogenous money and effective demand’: a revolution or a step backward?’, Review of Keynesian Economics, 2 (3), Autumn, pp. 321–332. Lavoie, M. (2013), ‘Crise financière, répartition des revenus et relance par les salaires’, Cahiers de recherche sociologique, 55, Fall, pp. 19–42. Lavoie, M. (2012–13), ‘Financialization, neo-liberalism and securitization’, Journal of Post Keynesian Economics, 35 (2), Winter, pp. 211–229. Lavoie, M. (2013), ‘The monetary and fiscal nexus of neo-chartalism: a friendly critique’, Journal of Economic Issues, 47 (1), March, pp. 1–32. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume II: Credit, Money and Production, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017; and in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. and E. Stockhammer (2012), ‘Wage-led growth: concepts, theories and policies’, International Labor Brief, December (in Korean). Lavoie, M. and P. Wang (2012), ‘The “compensation” thesis, as exemplified by the case of the Chinese central bank’, International Review of Applied Economics, 26 (3), May, pp. 287–302. Hein, E., M. Lavoie and T. van Treeck (2012), ‘Harrodian instability and the normal rate of capacity utilization in Kaleckian models of distribution and growth: a survey’, Metroeconomica, 63 (1), March, pp. 39–69. Lavoie, M. (2011), ‘The global financial crisis: methodological reflections from a heterodox perspective’, Studies in Political Economy, 88, Fall, pp. 35–57.

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Lavoie, M. (2011), ‘La enseñanza de Economía post-Keynesiana en un departamento ortodoxo’, Revista de Economía Crítica, 12, December, pp. 180–198. Lavoie, M. (2011), ‘Should Sraffians be dropped out of the post-Keynesian school?’, Économies et Sociétés, Oeconomica Series, 45 (7), June– July, pp. 1027–1059. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. and G. Daigle (2011), ‘A behavioural finance model of exchange rate expectations within a stock–flow consistent framework’, Metroeconomica, 62 (3), pp. 434–458. Hein, E., M. Lavoie and T. van Treeck (2011), ‘Some instability puzzles in Kaleckian models of growth and distribution: a critical survey’, Cambridge Journal of Economics, 35 (3), May, pp. 587–612. Lavoie, M. (2010), ‘Changes in central bank procedures during the subprime crisis and their repercussions on monetary theory’, International Journal of Political Economy, 39 (3), Fall, pp. 3–23. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. and J. Zhao (2010), ‘A study of the diversification of China’s foreign reserves in a three-country stock–flow consistent model’, Metroeconomica, 61 (3), pp. 558–592. Lavoie, M. (2010), ‘The possible perverse effects of declining wages’, International Journal of Pluralism and Economics Education, 1 (3), May, pp. 260–275. Lavoie, M. (2010), ‘Are we all Keynesians?’, Revista de Economia Politica – Brazilian Journal of Political Economy, 30 (2), April–June, pp. 189–200. Lavoie, M. (2009), ‘État social, employeur de dernier recours et théorie postkeynésienne’, Revue française de socio-économie, 2 (1), pp. 55–75. Lavoie, M. (2009), ‘Cadrisme within a Kaleckian model of growth and distribution’, Review of Political Economy, 21 (3), July, pp. 371–393. Lavoie, M. (2008), ‘Financialisation issues in a Post-Keynesian stock–flow consistent model’, Intervention: European Journal of Economics and Economic Policies, 5 (2), pp. 331–356. Lavoie, M. (2008), ‘Neoclassical empirical evidence on employment and production laws as artefact’, Rivista Economía Informa, (351), March– April, pp. 9–36. Lavoie, M. (2007), ‘Crítica a la economía orthodoxa: la necessitad de una alternative’, Apuntes del Cenes, 43, pp. 11–60. (Spanish translation of chapter 1 of Foundations of Post-Keynesian Economic Analysis, 1992). Lavoie, M. and P. Kriesler (2007), ‘Capacity utilization, inflation and

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monetary policy: the Duménil and Lévy macro model and the New Consensus’, Review of Radical Political Economics, 39 (4), Fall, pp. 586–598. Godley, W. and M. Lavoie (2007), ‘Fiscal policy in a stock–flow consistent (SFC) model’, Journal of Post Keynesian Economics, 30 (1), Fall, pp. 79–100. Kriesler, P. and M. Lavoie (2007), ‘The new view on monetary policy: the New Consensus and its Post-Keynesian critique’, Review of Political Economy, 19 (3), July, pp. 387–404. Godley, W. and M. Lavoie (2007), ‘A simple model of three economies with two currencies: Euroland and the USA’, Cambridge Journal of Economics, 31 (1), January, pp. 1–24. Lavoie, M. (2006), ‘Do heterodox theories have anything in common? A post-Keynesian point of view’, Intervention – Zeitschrift für Ökonomie Journal of Economics, 3 (1), pp. 87–112. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. and M. Seccareccia (2006), ‘The Bank of Canada and the modern view of central banking’, International Journal of Political Economy, 35 (1), Spring, pp. 58–82. Lavoie, M. (2006), ‘A post-Keynesian amendment to the New Consensus on monetary policy’, Metroeconomica, 57 (2), May, pp. 165–192. Godley, W. and M. Lavoie (2005–2006), ‘Comprehensive accounting in simple open economy macroeconomics with endogenous sterilization or flexible exchange rates’, Journal of Post Keynesian Economics, Winter, 28 (2), pp. 241–276. Lavoie, M. (2005), ‘Las teorias heterodoxas tienen algo en común? Un punto de vista postkeynesiano’, Lecturas de Economía (Universidad de Antioquia, Colombia), 63, July–December, pp. 43–76. Lavoie, M. (2005), ‘Les théories hétérodoxes ont-elles quelque chose en commun? Un point de vue postkeynésien’, Économies et Sociétés, série Oeconomica, 39 (6), June, pp. 1091–1124. Kriesler, P. and M. Lavoie (2005), ‘A critique of the new consensus view of monetary policy’, Economic and Labour Relations Review, 16 (1), July, pp. 7–15. Lavoie, M. (2005), ‘René Roy, the separability and subordination of needs, and Post Keynesian consumer theory’, History of Economics Review, 42, Summer, pp. 45–49. Lavoie, M. and G. Rodríguez (2005), ‘The economic impact of professional teams on monthly hotel occupancy rates of Canadian cities: a

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Box–Jenkins approach’, Journal of Sports Economics, 6 (3), pp. 314–324. (Reprinted in Andreff, W. (ed.), Recent Developments in the Economics of Sport, Volume 1, The International Library in Critical Economic Writings, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2011.) Lavoie, M. (2005), ‘Monetary base endogeneity and the new procedures of the Canadian and American monetary systems’, Journal of Post Keynesian Economics, Summer, 27 (4), pp. 689–709. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (2005), ‘Changing definitions: a comment on Paul Davidson’s critique of King’s history of Post Keynesianism’, Journal of Post Keynesian Economics, Spring, 27 (3), pp. 471–477. Lavoie, M. (2004), ‘Post-Keynesian consumer theory: potential synergies with consumer research and economic psychology’, Journal of Economic Psychology, 25 (5), pp. 639–649. Lavoie, M. (2004), ‘Au-delà de la traverse sectorielle de Hicks: croissance insoutenable et flexibilité du système productif’, Cahiers d’économie politique, 46, pp. 131–146. Dalziel, P. and M. Lavoie (2003), ‘Teaching Keynes’s principle of effective demand using the aggregate labor market diagram’, Journal of Economic Education, 34 (4), Fall, pp. 333–340. Lavoie, M. (2003), ‘Real wages and unemployment with effective and notional demand for labour’, Review of Radical Political Economics, 35 (2), Spring, pp. 166–182. Lavoie, M. (2003), ‘Faut-il transposer à l’Europe les instruments de ­régulation du sport professionnel nord-américain?’, Revue juridique et économique du sport, 67, June, pp. 11–34. Lavoie, M. (2003), ‘The entry draft in the National Hockey League: discrimination, style of play and team location’, American Journal of Economics and Sociology, 61 (1), April, pp. 383–405. Lavoie, M. (2003), ‘Kaleckian effective demand and Sraffian normal prices: towards a reconciliation’, Review of Political Economy, 15 (1), January, pp. 53–74. Lavoie, M. (2002–2003), ‘Interest parity, risk premia and post Keynesian analysis’, Journal of Post Keynesian Economics, 25 (2), Winter, pp. 237–249. Henry, J. and M. Lavoie (2002), ‘La traverse de Hicks dans son modèle horizontal bisectoriel: le réaménagement de la structure productive’, L’Actualité économique, 78 (1), March, pp. 87–114. Lavoie, M. (2002), ‘Dinero endógeno en un esquema coherente de existencias y flujos’, Questiones Económicas, 18 (1), pp. 107–135.

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Lavoie, M. and W. Godley (2001–2002), ‘Kaleckian models of growth in a coherent stock–flow monetary framework: a Kaldorian view’, Journal of Post Keynesian Economics, 24 (2), Winter, pp. 277–312. Lavoie, M. (2001), ‘Efficiency wages in Kaleckian models of employment’, Journal of Post Keynesian Economics, 23 (3), Spring, pp. 449–464. Lavoie, M. (2000), ‘A post Keynesian view of interest parity theorems’, Journal of Post Keynesian Economics, 23 (1), Fall, pp. 163–179. Lavoie, M. (2000), ‘Le chômage d’équilibre: réalité ou artefact statistique’, Revue Économique, 51 (6), November, pp. 1477–1484. Lavoie, M. (2000), ‘Un análysis comparativo de la teoría postkeynesiana del empleo’, Investigación Económica, 232, April–June, pp. 15–66. Lavoie, M. (2000), ‘The location of pay discrimination in the National Hockey League’, Journal of Sports Economics, 1 (4), November, pp. 401–411. Whitson, D., J. Harvey and M. Lavoie (2000), ‘The Mills report, the Manley subsidy proposal, and the business of major league sport’, Canadian Public Administration, 43 (2), Summer, pp. 127–156. Lavoie, M. (2000), ‘La proposition d’invariance dans un monde où les équipes maximisent la performance sportive’, Reflets et perspectives de la vie économique, 39 (2–3), pp. 85–93. Lavoie, M. (2000), ‘Les équipes sportives professionnelles n’ont pas d’impact économique significatif: le cas des Expos’, Avante, 6 (1), pp. 56–86. Lavoie, M. (1999), ‘The credit-led supply of deposits and the demand for money: Kaldor’s reflux mechanism as previously endorsed by Joan Robinson’, Cambridge Journal of Economics, 23 (1), January, pp. 103– 114. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume II: Credit, Money and Production, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017; and in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1999), ‘Investment functions in Sraffian and Kaleckian models’, Économie appliquée, 52 (1), pp. 119–125. Lavoie, M. (1998), ‘The neo-Pasinetti theorem in Cambridge and Kaleckian models of growth and distribution’, Eastern Economic Journal, 24 (4), Fall, pp. 419–436. Lavoie, M. (1998), ‘Simple comparative statics of class conflict in Kaleckian and Marxian short-run models’, Review of Radical and Political Economics, 30 (3), Summer, pp. 101–113. Henry, J. and M. Lavoie (1997), ‘The Hicksian traverse as a process of reproportioning: some structural dynamics’, Structural Change and Economic Dynamics, 8 (2), June, pp. 157–175.

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Lavoie, M. (1997), ‘Pasinetti’s vertically hyper-integrated sectors and natural prices’, Cambridge Journal of Economics, 21 (4), July, pp. 453–468. Lavoie, M. and P. Ramírez-Gastón (1997), ‘Traverse in a two-sector Kaleckian model of growth with target return pricing’, Manchester School of Economic and Social Studies, 55 (1), March, pp. 145–169. Lavoie, M. (1996–97), ‘Real wages, employment structure and the aggregate demand curve in a Kaleckian short-run model’, Journal of Post Keynesian Economics, 19 (2), Winter, pp. 275–288. (Reprinted in Sawyer, M.C. (ed.), The Legacy of Michal Kalecki, Intellectual Legacies in Modern Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 1999.) Lavoie, M. (1996), ‘L’euthanasie des rentiers et leur resurgence’, Noesis, 7, July–December, pp. 85–104. Lavoie, M. (1996), ‘Traverse, hysteresis, and normal rates of capacity utilization in Kaleckian models of growth and distribution’, Review of Radical Political Economics, 28 (4), pp. 113–147. Downward, P., M. Lavoie and P. Reynolds (1996), ‘Realism, simulations and post-Keynesian pricing models’, Review of Political Economy, 8 (4), October, pp. 427–432. Lavoie, M. (1996), ‘Unproductive outlays and capital accumulation with target-return pricing’, Review of Social Economy, 54 (3), Fall, pp. 303–321. Lavoie, M. (1996), ‘Horizontalism, structuralism, liquidity preference and the principle of increasing risk’, Scottish Journal of Political Economy, 43 (3), August, pp. 275–300. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume II: Credit, Money and Production, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017; and in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. and M. Baslé (1996), ‘La pensée monétaire de Jacques Le Bourva: analyse et historique’, Revue d’économie politique, 106 (2), March–April, pp. 269–291. Lavoie, M. (1996), ‘La traverse kaleckienne dans un modèle d’accumulation à deux secteurs avec coût complet: à la recherche d’une synthèse postclassique’, Cahiers d’économie politique, 26, pp. 127–164. Lavoie, M. (1996), ‘Mark-up pricing versus normal cost pricing in postKeynesian models’, Review of Political Economy, 18 (1), January, pp. 57–66. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.)

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Lavoie, M. (1996), ‘El modelo kaleckiano de crecimiento y distribución y su crítica neo-ricardiana y neo-marxiana’, Revista Buenos Aires Pensamiento Económico, 2, Spring, pp. 97–145. Lavoie, M. (1995), ‘The Kaleckian model of growth and distribution and its neo-Ricardian and neo-Marxian critiques’, Cambridge Journal of Economics, 19 (6), December, pp. 789–818. (Reprinted in Sawyer, M.C. (ed.), The Legacy of Michal Kalecki, Intellectual Legacies in Modern Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 1999.) Lavoie, M. (1995), ‘Interest rates in post-Keynesian models of growth and distribution’, Metroeconomica, 46 (2), June, pp. 146–177. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume III: Employment, Distribution, Growth, Development, Asset Bubbles and Financial Crises, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. (1994), ‘A Post Keynesian approach to consumer choice’, Journal of Post Keynesian Economics, 16 (4), Summer, pp. 539–562. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M. and W.M. Leonard (1994), ‘In search of an alternative explanation of stacking in baseball: the uncertainty hypothesis’, Sociology of Sport Journal, 11 (2), pp. 140–154. Saint-Germain, M. and M. Lavoie (1993), ‘Évolution comparée des revenus des francophones de l’Ouest’, Cahiers franco-canadiens de l’Ouest, 5 (2) Fall, pp. 155–176. Lavoie, M. (1992), ‘Jacques Le Bourva’s theory of endogenous credit-money’, Review of Political Economy, 4 (4), pp. 436–446. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1992), ‘A moeda em um programa de pesquisa comum para o pós-keynesianismo e o neo-ricardianismo’, Revista de Economia Politica, 12 (3), July–September, pp. 107–129. Lavoie, M. (1992), ‘Towards a new research programme for post-­ Keynesianism and neo-Ricardianism’, Review of Political Economy, 4 (1), pp. 37–79. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume I: Issues in Methodology, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Lavoie, M., G. Grenier and S. Coulombe (1992), ‘Performance differentials

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in the National Hockey League: discrimination versus style-of-play thesis’, Canadian Public Policy/Analyse de Politiques, 18, December, pp. 461–469. Saint-Germain, M. and M. Lavoie (1992), ‘Évolution comparée des revenus des Acadiens’, Revue de l’Université de Moncton, 25 (1–2), pp. 197–220. Saint-Germain, M. and M. Lavoie (1992), ‘Le statut économique relatif des femmes francophones au Canada’, Recherches féministes, 5 (1), pp. 31–57. Lavoie, M. (1991), ‘Noyau, demi-noyau et heuristique du programme de recherche néoclassique’, Économie appliquée, 44 (1), pp. 51–69. Lavoie, M. and M. Saint-Germain (1990), ‘Disparités linguistiques de revenus au Canada selon la langue parlée à la maison’, L’Actualité Économique, 67, September, pp. 346–371. Lavoie, M. and M. Saint-Germain (1990), ‘Évolution comparative des revenus des Franco-Ontariens’, Revue du Nouvel-Ontario, 12, pp. 125–149. Lavoie, M. (1990), ‘Thriftiness, growth and the post-Keynesian tradition’, Économies et Sociétés, 23 (7), pp. 123–134. Lavoie, M. (1990), ‘Le circuit dans la pensée post-keynésienne américaine’, Économie, 6, pp. 105–118. Lavoie, M. and W.M. Leonard II (1990), ‘Salaries, race/ethnicity and pitchers in Major League Baseball: a correction and comment’, Sociology of Sport Journal, 7 (4), pp. 394–398. Lavoie, M. (1989), ‘The economic hypothesis of positional segregation: some further comments’, Sociology of Sport Journal, 6 (2), pp. 163–166. Lavoie, M. (1989), ‘Stacking, performance differentials and salary discrimination in professional ice hockey: a survey of the evidence’, Sociology of Sport Journal, 6 (1), pp. 17–35. Lavoie, M., G. Grenier and S. Coulombe (1989), ‘Discrimination versus English proficiency in the National Hockey League: a reply’, Canadian Public Policy/Analyse de politiques, 15, March, pp. 98–101. Lavoie, M. (1987), ‘Monnaie et production: une synthèse de la théorie du circuit’, Economies et sociétés, 20 (9), pp. 65–101. Lavoie, M., G. Grenier and S. Coulombe (1987), ‘Discrimination and performance differentials in the National Hockey League’, Analyse de Politiques/Canadian Public Policy, 13, December, pp. 407–422. Lavoie, M. (1987), ‘La teoria del circuito monetario’, Metamorfosi, 5, pp. 7–36. Lavoie, M. (1986–87), ‘Systemic financial fragility: a simplified view’, Journal of Post Keynesian Economics, 9 (2), Winter, pp. 258–266. Lavoie, M. (1986), ‘Minsky’s Law or the theorem of systemic financial fragility’, Studi Economici, 29, pp. 3–28.

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Lavoie, M. (1986), ‘Chômage keynésien et chômage classique: un prétexte aux politiques d’austérité’, Economie appliquée, 39 (2), pp. 203–238. Lavoie, M. (1986), ‘L’endogénéité de la monnaie chez Keynes’, Recherches Économiques de Louvain, 52 (1), March, pp. 67–84. Lavoie, M. (1985), ‘La distinction entre l’incertitude keynésienne et le risque néoclassique’, Économie appliquée, 38 (2), pp. 493–518. Coulombe, S. and M. Lavoie (1985), ‘Discrimination à l’embauche et performance supérieure des franco-québecois dans la LNH: une mise au point’, L’Actualité économique, 61 (4) December, pp. 527–530. Lavoie, M. (1985), ‘La thèse de la monnaie endogène face à la non-­validation des credits’, Économies et sociétés, 18 (8), September, pp. 169–196. Lavoie, M. (1985), ‘The post Keynesian theory of endogenous money: a reply’, Journal of Economic Issues, 19 (3) September, pp. 843–848. (Reprinted in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1985), ‘Inflation, chômage et la planification des récessions: la théorie générale de Keynes et après’, L’Actualité économique, 61 (2), June, pp. 171–199. Coulombe, S. and M. Lavoie (1985), ‘Les francophones dans la Ligue nationale de hockey: une analyse économique de la discrimination’, L’Actualité économique, 61 (1), March, pp. 73–92. Lavoie, M. (1984), ‘Le Québec de 1944 et John Maynard Keynes’, L’Actualité économique, 60 (34), December, pp. 553–555. Lavoie, M. (1984), ‘The endogenous credit flow and the post Keynesian theory of money’, Journal of Economic Issues, 18 (3), September, pp. 233–258. (Reprinted in Musella, M. and C. Panico (eds), The Money Supply in the Economic Process: A Post Keynesian Perspective, The International Library of Critical Writings in Economics, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, 1995; in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume II: Credit, Money and Production, The International Library of Critical Writings in Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017; and in Lavoie, M., Post-Keynesian Monetary Theory: Selected Essays, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2020.) Lavoie, M. (1984), ‘Un modèle post-keynésien d’économie monétaire fondé sur la théorie du circuit’, Économies et sociétés, 59 (1), April, pp. 233–258. Lavoie, M. (1983), ‘Bilinguisme, langue dominante et réseaux d’information’, L’Actualité économique, 59 (1), March, pp. 38–62. Lavoie, M. (1983), ‘Loi de Minsky et loi d’entropie’, Économie appliquée, 36 (2), pp. 287–331.

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Lavoie, M. (1982), ‘Langue et théorie économique dominantes: quelques observations’, Monde en développement, 10 (41–42), pp. 109–116. Lavoie, M. (1982), ‘Structures financières, endettement et profits’, Économie appliquée, 35 (3), pp. 39–70. Lavoie, M. (1982), ‘Les post-keynésiens et la monnaie endogène’, L’Actualité économique, 58 (1–2), January–June, pp. 191–222. Lavoie, M. (1981), ‘The double taxation controversy’, Canadian Taxation, 3, Winter, pp. 224–231.

BOOKS BY MARIO SECCARECCIA Rochon, L.-P. and M. Seccareccia (eds) (2013), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State, Essays in Honour of Alain Parguez, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. Bougrine, H., I. Parker and M. Seccareccia (eds) (2010), Introducing Microeconomic Analysis: Issues, Questions, and Competing Views, Toronto: Emond Montgomery Publications. Bougrine, H. and M. Seccareccia (eds) (2010), Introducing Macroeconomic Analysis: Issues, Questions, and Competing Views, Toronto: Emond Montgomery Publications. Rochon, L.-P. and M. Seccareccia (eds) (2003), Dollarization: Lessons from Europe and the Americas, London and New York: Routledge. Paquette, P. and M. Seccareccia (1993), Vers le plein emploi: pour un renouvellement des politiques publiques, Montréal: Presses Universitaires de l’Université de Montréal. Paquette, P. and M. Seccareccia (1993), Les Pieges de l’austerite, Grenoble: Presses Universitaires de Grenoble and Montreal: Presses Universitaires de l’Université de Montréal. Seccareccia, M. (2002), North American Monetary Integration: Should Canada Join the Dollarization Bandwagon?, Ottawa: Canadian Centre for Policy Alternatives.

ARTICLES BY MARIO SECCARECCIA Chapters in Books Seccareccia, M. (2020), ‘Dualism and economic stagnation: can a policy of guaranteed basic income return mature market economies to les Trente Glorieuses?’, in MacLean, B., H. Bougrine and L.-P. Rochon

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(eds), Aggregate Demand and Employment: International Perspectives, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 34–51. Seccareccia, M. and D. Pringle (2020), ‘Money and finance’, in Whiteside, H. (ed.), Canadian Political Economy, Toronto: University of Toronto Press. Berr, E., O. Costantini, M. Llorca, V. Monvoisin and M. Seccareccia (2018), ‘Politique budgétaire et dette publique: les enjeux de l’intervention de l’État’, in Berr, E., V. Monvoisin and J.-F. Ponsot (eds), L’économie postkeynésienne: histoire, théories et politiques, Paris: Seuil, pp. 311–334. Seccareccia, M. (2016), ‘La teoría staples del desarrollo económico: aprendiendo del pasado y del presente de la experiencia canadiense’, in Déniz, J. and E. Correa (eds), Estratégias Primario-Exportadoras en un Mundo Global, México: M.Á.l Porrúa, pp. 151–172. Seccareccia, M. (2015), ‘Economics and history: why economists and policy makers need to understand the latter’, in Jo, T.-H. and F.S. Lee (eds), Marx, Veblen, and the Foundations of Heterodox Economics, London: Routledge, pp. 176–198. Seccareccia, M. (2015), ‘Bank of Canada’, in Rochon, L.-P. and S. Rossi (eds), Elgar Encyclopedia of Central Banking, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 34–36. Seccareccia, M. (2015), ‘Gresham’s law’, in Rochon, L.-P. and S. Rossi (eds), Elgar Encyclopedia of Central Banking, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 232–234. Blecker, R. and M. Seccareccia (2014), ‘Would a North American monetary union protect Canada and Mexico against the ravages of “Dutch Disease”? A post-financial crisis perspective’, in Epstein, G., T. Schlesinger and M. Vernengo (eds), Banking, Monetary Policy and Political Economy of Financial Regulation, Essays in the Tradition of Jane D’Arista, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 171–202. Seccareccia, M. (2014), ‘The role of public investment as principal ­macroeconomic tool to promote long-term growth: Keynes’s legacy’, in Konzelmann, S.J. (ed.), The Economics of Austerity, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 639–659. Rochon, L.-P. and M. Seccareccia (2013), ‘Alain Parguez’s contribution to political economy’, in Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State: Essays in Honour of Alain Parguez, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 1–7. Bougrine, B. and M. Seccareccia (2013), ‘Rethinking banking institutions in contemporary economies: are there alternatives to the status quo?’,

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in Rochon, L.-P. and M. Seccareccia (eds), Monetary Economies of Production: Banking and Financial Circuits and the Role of the State: Essays in Honour of Alain Parguez, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 134–159. Seccareccia, M. (2011), ‘Exposé de Mario Seccareccia sur le capitalisme financiarisé et la crise économique’, in Clain, O. and F. L’Italien (eds), Le capitalisme financiarisé et la crise économique au Québec et au Canada: Les séminaires Fernand-Dumont, Cap-Saint-Ignac, QC: Éditions Nota Bene, pp. 252–265. Seccareccia, M. (2010), ‘Employment and unemployment’, in Ciment, J. (ed.), Booms and Busts: An Encyclopedia of Economic History from Tulipmania of the 1630s to the Global Financial Crisis of the 21st Century, Vol. 1, Armonk, NY: M.E. Sharpe, pp. 230–236. Seccareccia, M. (2010), ‘Credit cycles’, in Ciment, J. (ed.), Booms and Busts: An Encyclopedia of Economic History from Tulipmania of the 1630s to the Global Financial Crisis of the 21st Century, Vol. 1, Armonk, NY: M.E. Sharpe, pp. 188–189. Seccareccia, M. (2010), ‘Employment and poverty: a critical perspective on guaranteed income programs’, in Bougrine, H., I. Parker and M.  Seccareccia (eds), Introducing Microeconomic Analysis: Issues, Questions, and Competing Views, Toronto: Emond Montgomery Publications, pp. 337–347. Seccareccia, M. (2010), ‘The determinants of consumption and saving from a heterodox perspective’, in Bougrine, H. and M. Seccareccia (eds), Introducing Macroeconomic Analysis: Issues, Questions, and Competing Views, Toronto: Emond Montgomery Publications, pp. 79–88. Seccareccia, M. (2010), ‘Pricing and the financing of investment: is there a macroeconomic basis for Eichnerian microeconomic analysis?’, in Lavoie, M., L.-P. Rochon and M. Seccareccia (eds), Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics, Armonk, NY: M.E. Sharpe, pp. 59–80. Seccareccia, M. (2008), ‘Aggregate demand’, in Darity, W.A. (ed.), International Encyclopedia of the Social Sciences, Vol. 1, second edition, Farmington Hills: Macmillan, pp. 49–51. Seccareccia, M. (2008), ‘Involuntary unemployment’, in Darity, W.A. (ed.), International Encyclopedia of the Social Sciences, Vol. 4, second edition, Farmington Hills: Macmillan, pp. 137–139. Seccareccia, M. (2007), ‘Critical macroeconomic aspects of deepening North American economic integration’, in Grinspun, R. and Y. Shamsie (eds), Whose Canada? Continental Integration, Fortress North America, and the Corporate Agenda, Montreal and Kingston: McGill–Queen’s University Press, pp. 234–258.

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Seccareccia, M. and M. Lequain (2006), ‘What can we learn from the EMU model? Lessons for Canada and Britain’, in Verdun, A. (ed.), Britain and Canada and Their Large Neighboring Monetary Unions, Hauppauge, NY: Nova Publishers, pp. 232–242. Seccareccia, M. (2006), ‘Is the Canadian dollar destined to disappear? A critical perspective’, in Vernengo, M. (ed.), Monetary Integration and Dollarization: No Panacea, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 109–131. Seccareccia, M. (2005), ‘Interest rates, interest spreads and monetary circulation: theoretical framework and empirical implications for macroeconomic performance’, in Fontana, G. and R. Realfonzo (eds), Monetary Theory of Production: Tradition and Perspectives, London: Palgrave Macmillan, pp. 269–284. Seccareccia, M. (2004), ‘Aspects of a new conceptual integration of Keynes’s Treatise on Money and the General Theory: logical time units and macroeconomic price formation’, in Arena, R. and N. Salvadori (eds), Money, Credit, and the Role of the State, Aldershot, UK: Ashgate Publishing, pp. 285–310. Bougrine, H. and M. Seccareccia (2003), ‘Le rôle des impôts dans l’économie nationale’, in Piégay, P. and L.-P. Rochon (eds), Théories monétaires post keynésiennes, Paris: Economica, pp. 162–176. Seccareccia, M. (2003), ‘Wages and labour markets’, in King, J.E (ed.), Elgar Companion to Post Keynesian Economics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 380–384. Seccareccia, M. (2003), ‘Pricing, investment and the financing of p ­ roduction within the framework of the monetary circuit: some ­preliminary evidence’, in Rochon, L.-P. and S. Rossi (eds), Modern Theories of Money, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 173–197. Parguez, A., M. Seccareccia and C. Gnos (2003), ‘The theory and practice of European monetary integration: lessons for North America’, in Rochon, L.-P. and M. Seccareccia (eds), Dollarization: Lessons from Europe and the Americas, London and New York: Routledge, pp. 48–69. Seccareccia, M. and A. Sood (2000), ‘Government debt monetization and inflation: a somewhat jaundiced view’, in Bougrine, H. (ed.), The Economics of Public Spending: Debts, Deficits and Economic Performance, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 98–121. Parguez, A. and M. Seccareccia (2000), ‘The credit theory of money: the monetary circuit approach’, in Smithin, J. (ed.), What is Money?, London and New York: Routledge, pp. 101–123. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume 2: Credit,

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Money, and Production, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Seccareccia, M. (1999), ‘Money, credit, and finance: history’, in O’Hara, P.A. (ed.), Encyclopedia of Political Economy, London and New York: Routledge, pp. 763–766. Bellofiore, R. and M. Seccareccia (1999), ‘Monetary circuit’, in O’Hara, P.A. (ed.), Encyclopedia of Political Economy, London and New York: Routledge, pp. 753–756. Iacobacci, M. and M. Seccareccia (1999), ‘Unemployment and underemployment’, in O’Hara, P.A. (ed.), Encyclopedia of Political Economy, London and New York: Routledge, pp. 1195–1198. Seccareccia, M. and A. Parguez (1998), ‘Les politiques d’inflation zéro: la vraie cause de la hausse tendancielle du chômage dans les pays occidentaux’, in Tremblay, D.-G. (ed.), Objectif plein emploi: le marché, la socialdémocratie ou l’économie sociale?, Montréal: Presses de l’Université du Québec, pp. 183–203. Paquette, P. and M. Seccareccia (1998), ‘La crise de l’emploi en Occident’, in Paquette, P. and M. Seccareccia (eds), Vers le plein emploi: pour un renouvellement des politiques publiques, Montréal: Presses de l’Université de Montréal, pp. 1–10. Bougrine, H. and M. Seccareccia (1998), ‘Assurance-chômage et chômage: analyse des effets sur la demande globale de travail depuis la Guerre’, in Paquette, P. and M. Seccareccia (eds), Vers le plein emploi: pour un renouvellement des politiques publiques, Montréal: Presses de l’Université de Montréal, pp. 151–175. Seccareccia, M. (1998), ‘Wicksellian norm, central bank real interest rate targeting and macroeconomic performance’, in Arestis, A. and M.C. Sawyer (eds), The Political Economy of Central Banking, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing Publishing, pp. 180–198. Seccareccia, M. (1997), ‘Early twentieth-century heterodox monetary thought’, in Cohen, A.J., H. Hagmann and J.N. Smithin (eds), Money, Financial Institutions, and Macroeconomics, Boston: Kluwer Academic Publishers, pp. 125–139. Seccareccia, M. (1996), ‘Post Keynesian fundism and monetary circulation’, in Deleplace, G. and E.J. Nell (eds), Money in Motion: The Circulation and Post Keynesian Approaches, London: Macmillan, pp. 400–416. Seccareccia, M. (1994), ‘Credit money and cyclical crises: the views of Hayek and Fisher compared’, in Colonna, M. and H. Hagemann (eds), Money and Business Cycles: The Economics of F.A. Hayek, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 53–73.

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Seccareccia, M. (1994), ‘Socialization of investment’, in Arestis, P. and M.C. Sawyer (eds), Elgar Companion to Radical Political Economy, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 375–380. Seccareccia, M. and A. Sharpe (1993), ‘Déficits budgétaire et compétitivité du Canada: une analyse critique’, in Paquette, P. and M. Seccareccia (eds), Les piéges de l’austérité, Grenoble: Presses Universitaires de Grenoble/Montréal: Presses de l’Université de Montréal, pp. 131–153. Seccareccia, M. (1992), ‘Wicksellianism, Myrdal and the monetary explanation of cyclical crises’, in Dostaler, G., D. Ethier and L. Lepage (eds), Gunnar Myrdal and His Works, Montreal: Harvest House, pp. 144–162. Seccareccia, M. (1990), ‘The two faces of neo-Wicksellianism in the 1930s: the Austrians and the Swedes’, in Moggridge, D. (ed.), Perspectives in the History of Economic Thought, Vol. 4, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 137–154. Seccareccia, M. (1990), ‘Le wicksellisme, Myrdal et l’explication monétaire de la crise’, in Dostaler, G., D. Ethier and L. Lepage (eds), Günnar Myrdal et son oeuvre, Montréal: Presses de l’Université de Montréal and Paris: Economica, pp. 41–58. Seccareccia, M. (1987), ‘Les courants de la pensée économique à l’origine de la Théorie générale: quelques éléments nouveaux d’interprétation’, in Boismenu, G. and G. Dostaler (eds), La Théorie générale et le Keynésianisme, Montréal: Éditions ACFAS, pp. 15–38. Seccareccia, M. (1985), ‘Immigration and business cycles: pauper migration to Canada, 1815–1874’, in Cameron, D. (ed.), Explorations in Canadian Economic History, Ottawa: University of Ottawa Press, pp. 117–138. Articles in Refereed Journals Seccareccia, M. and N. Kahn (2019), ‘The illusion of inflation targeting: have central banks figured out what they are actually doing since the global financial crisis? An alternative to the mainstream perspective’, International Journal of Political Economy, 48 (4), pp. 364­–380. Seccareccia, M. (2019), ‘From the age of rentier tranquility to the new age of deep uncertainty: the metamorphosis of central bank policy in modern financialized economies’, Journal of Economic Issues, 53 (2), June, pp. 478–487. Polanyi Levitt, K. and M. Seccareccia (2018), ‘Neoliberalismo: la perspectiva polanyiana’ (‘Neoliberalism: the Polanyian perspective’), Ola Financiera, 11 (31), September–December, pp. 1–21. Seccareccia, M. and E. Correa (2018), ‘Rethinking money as an institution

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of capitalism and the theory of monetary circulation: what can modern heterodox economists/institutionalists learn from Karl Polanyi?’, Journal of Economic Issues, 52 (2), June, pp. 422–429. Seccareccia, M. (2017), ‘Is high employment in the eurozone possible? Some reflections on the institutional structure of the eurozone and its crisis’, European Journal of Economics and Economic Policies: Intervention, 14 (3), December, pp. 351–371. Seccareccia, M. and E. Correa (2017), ‘Supra-national money and the euro crisis: lessons from Karl Polanyi’, Forum for Social Economics, 46 (3), pp. 252–274. Seccareccia, M. (2017), ‘Which vested interests do central banks really serve? Understanding central bank policy since the global financial crisis’, Journal of Economic Issues, 51 (2), June, pp. 341–350. Seccareccia, M. (2016), ‘Ingreso básico y pleno empleo: lecciones de Polanyi, Keynes y Minsky’, Ola Financiera, 9 (23), January–April, pp. 1–32. Seccareccia, M. and E. Correa (2015), ‘Supra-national money and the euro crisis: lessons from Karl Polanyi’, Forum for Social Economics, 44, pp. 1–23. Seccareccia, M. (2015), ‘Basic income, full employment and social provisioning: some Polanyian/Keynesian insights’, Journal of Economic Issues, 49 (2), June, pp. 397–404. Seccareccia, M. (2014), ‘Were the original Canada–U.S. Free Trade Agreement (CUSFTA) and the North American Free Trade Agreement (NAFTA) significant policy turning points? Understanding the evolution of macroeconomic policy from the pre- to the post-NAFTA era in North America’, Review of Keynesian Economics, 2 (4), Winter, pp. 414–428. Seccareccia, M. (2014), ‘Banking sector viability and fiscal austerity: from rhetoric to the reality of bank behavior’, Journal of Economic Issues, 48 (2), June, pp. 567–574. Seccareccia, M. (2013), ‘Budgetary deficits and overhanging public debt: obstacles or instruments to full employment? A Kaleckian/ Institutionalist perspective’, Journal of Economic Issues, 47 (2), June, pp. 437–443. Seccareccia, M. (2012–13), ‘Financialization and the transformation of commercial banking: understanding the recent Canadian experience before and during the international financial crisis’, Journal of Post Keynesian Economics, 35 (2), Winter, pp. 277–300. Seccareccia, M. (2012), ‘Understanding fiscal policy and the new fiscalism: a Canadian perspective’, International Journal of Political Economy, 41 (2), Summer, pp. 61–81.

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Seccareccia, M. (2011–12), ‘The role of public investment as principal macroeconomic tool to promote long-term growth: Keynes’s legacy’, International Journal of Political Economy, 40 (4), Winter, pp. 62–82. Bougrine, H. and M. Seccareccia (2009–10), ‘Financing development: removing the external constraint’, International Journal of Political Economy, 38 (4), Winter, pp. 44–65. Correa, E. and M. Seccareccia (2009), ‘The United States financial crisis and its NAFTA linkages’, International Journal of Political Economy, 38 (2), Summer, pp. 70–99. Blecker, R. and M. Seccareccia (2009), ‘Unión Monetaria Norteamericana y la enfermedad holandesa en Canadá y México’, Ola Financiera, 1 (3), May–August, pp. 108–150. Baragar, F. and M. Seccareccia (2008), ‘Financial restructuring: implications of recent Canadian macroeconomic developments’, Studies in Political Economy, 82, Fall, pp. 61–83. Seccareccia, M. and M. Lequain (2006), ‘What can we learn from the EMU model? Lessons for Canada and Britain’, Current Politics and Economics of Europe, 17 (2), pp. 289–315. Seccareccia, M. (2005), ‘Growing household indebtedness and the plummeting saving rate in Canada: an explanatory note’, Economic and Labour Relations Review, 16 (1), July, pp. 133–151. Bougrine, H. and M. Seccareccia (2004), ‘Alternative exchange rate arrangements and effective demand: an important missing analysis in the debate over Greater North American monetary integration’, Journal of Post Keynesian Economics, 26 (4), Summer, pp. 655–677. Seccareccia, M. (2004), ‘What type of full employment? A critical evaluation of government as the employer of last resort policy proposal’, Investigación Económica, 63 (247), January–March, pp. 15–43. Seccareccia, M. (2003–2004), ‘Is dollarization a desirable alternative to the monetary status quo? A critical evaluation of competing currency arrangements for Canada’, Studies in Political Economy, 71/72, Autumn, Winter, pp. 91–108. Bougrine, H. and M. Seccareccia (2002), ‘Money, taxes, public spending and the state within a circuitist perspective’, International Journal of Political Economy, 32 (3), Fall, pp. 58–79. Seccareccia, M. (2002), ‘Las bajas tasas de ahorro y el endeudamiento doméstico son factores que contraen el crecimiento económico?’, Cuestiones Económicas, 18 (1), pp. 169–190. Seccareccia, M. and M. Saint-Germain (2001), ‘Main-d’œuvre immigrante et développement dualiste: l’économie canadienne au milieu du XIXe siècle’, Histoire sociale/Social History, 34 (68), November, pp. 249–276. Bougrine, H. and M. Seccareccia (1999), ‘Unemployment insurance and

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unemployment: an analysis of the aggregate demand-side effects for post-war Canada’, International Review of Applied Economics, 13, January, pp. 5–21. Seccareccia, M. (1997), ‘The monetary system and entropy’, Jiyuu Keizai Kenkyuu, 9, March, pp. 1–18. Deriet, M. and M. Seccareccia (1996), ‘Bank markups, horizontalism and the significance of banks’ liquidity preference: an empirical assessment’, Économies et sociétés, 30, February, pp. 137–161. (Reprinted in Rochon, L.-P. and S. Rossi (eds), Post-Keynesian Economics, Volume 2: Credit, Money, and Production, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2017.) Seccareccia, M. (1995), ‘Keynesianism and public investment’, Studies in Political Economy, 46, Spring, pp. 43–78. Seccareccia, M. (1995), ‘The case against a two-tier benefits system for Canada’s unemployed’, Canadian Business Economics, 3, Winter, pp. 53–61. Paquette, P. and M. Seccareccia (1994), ‘Les pièges de l’austérité’, Policy Options/Options politiques, 15 (4), May, pp. 31–33. Seccareccia, M. and A. Sharpe (1994), ‘Canada’s competitiveness: beyond the budget deficit’, Économies et sociétés, 28, January, pp. 275–300. Seccareccia, M. (1993), ‘On the intellectual origins of Keynes’s policy radicalism in the General Theory’, History of Economic Ideas, 1 (2), pp. 77–104. Seccareccia, M. (1991), ‘Salaire minimum, emploi et productivité dans une perspective post-keynésienne’, l’Actualité économique, 67, June, pp. 166–191. Seccareccia, M. (1991), ‘An alternative to labour-market orthodoxy: the Post-Keynesian/Institutionalist policy view’, Review of Political Economy, 3, January, pp. 43–61. Iacobacci, M. and M. Seccareccia (1989), ‘Full employment versus income maintenance: some reflections on the macroeconomic and structural implications of a guaranteed income program for Canada’, Studies in Political Economy, 28, Spring, pp. 137–173. Seccareccia, M. (1988), ‘The realism of assumptions and the partial interpretation view: a comment’, Philosophy of the Social Sciences, 18 (4), December, pp. 523–526. Seccareccia, M. (1988), ‘Système monétaire et loi d’entropie: la notion gesellienne de préférence pour la liquidité’, Économies et sociétés, 22 (9), September, pp. 57–71. Parguez, A. and M. Seccareccia (1988), ‘A note on left-wing neo-­ conservatism’, Studies in Political Economy, 26, Summer, pp. 181–185. Seccareccia, M. (1988), ‘Systemic viability and credit crunches: an

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examination of recent Canadian cyclical fluctuations’, Journal of Economic Issues, 22 (1), March, pp. 49–77. Seccareccia, M. (1985), ‘The role of saving and financial acquisition in the process of capital formation under policies of austerity’, Économies et sociétés, 19 (8), August, pp. 253–271. Paquette, P. and M. Seccareccia (1984), ‘Les illusions de l’austérité’, Policy Options/Options politiques, 5 (4), July, pp. 33–35. Seccareccia, M. (1984), ‘The fundamental macroeconomic link between investment activity, the structure of employment, and price changes: a theoretical and empirical analysis’, Économies et sociétés, 18 (4), April, pp. 165–219. Seccareccia, M. (1983), ‘A reconsideration of the underlying structuralist explanation of price movements in Keynes’s Treatise on Money’, Eastern Economic Journal, 9, July, pp. 272–283. Henry, J. and M. Seccareccia (1982), ‘La théorie post-keynésienne: contributions et essais de synthèse – introduction’, l’Actualité économique, 58, January–June, pp. 5–16. Seccareccia, M. (1982), ‘Keynes, Sraffa et l’économie classique: le p ­ roblème de la mesure de la valeur’, l’Actualité économique, 58, January–June, pp. 115–151.

JOINT PUBLICATIONS BY MARC LAVOIE AND MARIO SECCARECCIA Books by Marc Lavoie and Mario Seccareccia Rochon, L.-P., M. Lavoie and M. Seccareccia (eds) (2010), Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics, Armonk, NJ: M.E. Sharpe. Baumol, W., A. Blinder, M. Lavoie and M. Seccareccia (2009), Macroeconomics: Principles and Policy, Toronto: Nelson Education (first Canadian edition). Baumol, W., A. Blinder, M. Lavoie and M. Seccareccia (2009), Microeconomics: Principles and Policy, Toronto: Nelson Education (first Canadian edition). Lavoie, M. and M. Seccareccia (eds) (2004), Central Banking in the Modern World: Alternative Perspectives, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. (Translated into Chinese, Beijing: China Finance Publishing House, 2007.) Lavoie, M. and M. Seccareccia (eds) (1993), Milton Friedman et son oeuvre, Montréal: Presses de l’Université de Montréal.

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Articles Written by Marc Lavoie and Mario Seccareccia Book articles Lavoie, M. and M. Seccareccia (2016), ‘Money and banking’, in Rochon, L.-P. and S. Rossi (eds), Introduction to Heterodox Macroeconomics, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 97–116. Lavoie, M. and M. Seccareccia (2012), ‘Monetary policy in a period of financial chaos: the political economy of the Bank of Canada in extraordinary times’, in Rochon, L.-P. and S.Y. Olawoye (eds), Monetary Policy and Central Banking: New Directions in Post-Keynesian Thought, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 166–189. Seccareccia, M. and M. Lavoie (2010), ‘Inflation targeting in Canada: myth versus reality’, in Fontana, G., J. McCombie and M. Sawyer (eds), Macroeconomics, Finance and Money: Essays in Honour of Philip Arestis, Basingstoke, UK: Palgrave Macmillan, pp. 35–53. Lavoie, M., G. Rodríguez and M. Seccareccia (2004), ‘Transformational growth, interest rates and the golden rule’, in Argyrous, G., M. Forstater and G. Mongiovi (eds), Growth, Distribution and Effective Demand: Alternative to Economic Orthodoxies, Armonk, NY: M.E. Sharpe, pp. 3–22. Lavoie, M. and M. Seccareccia (2001), ‘Minsky’s financial fragility hypothesis: a missing macroeconomic link?’, in Bellofiore, R. and P. Ferri (eds), Financial Fragility and Investment in the Capitalist Economy: The Economic Legacy of Hyman Minsky, Volume II, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, pp. 76–96. Lavoie, M. and M. Seccareccia (1999), ‘Interest rate: fair’, in O’Hara, P. (ed.), Encyclopedia of Political Economy, London and New York: Routledge, pp. 543–545. Lavoie, M. and M. Seccareccia (1991), ‘Préface: histoire d’un manuscrit’, in Henry, J., La théorie du commerce extérieur dans le temps historique: une analyse post-keynésienne, Paris: Presses Universitaires de France, pp. xi–xix. Lavoie, M. and M. Seccareccia (1988), ‘Money, interest and rentiers: the twilight of rentier capitalism in Keynes’ “General Theory”’, in Hamouda, O. and J. Smithin (eds), Keynes and Public Policy After 50 Years, Aldershot, UK and Brookfield, VT: Edward Elgar Publishing, pp. 145–158. Articles in refereed journals Lavoie, M. and M. Seccareccia (2019), ‘Some reflections on Pasinetti’s fair rate of interest’, Bulletin of Political Economy, 13 (2), pp. 85–111.

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Seccareccia, M. and M. Lavoie (2016), ‘Income distribution, rentiers and their role in a capitalist economy: a Keynes–Pasinetti perspective’, International Journal of Political Economy, 45 (3), pp. 200–223. Lavoie, M. and M. Seccareccia (2013), ‘Reciprocal influences: a tale of two central banks on the North American continent’, International Journal of Political Economy, 42 (3), Fall, pp. 63–84. Lavoie, M. and M. Seccareccia (2013), ‘Influencias reciprocas: una ­historia de dos bancos centrales en le continente norteamericano’, Ola Financiera, 6 (16), September–December, pp. 105–144. Lavoie, M. and M. Seccareccia (2006), ‘The Bank of Canada and the modern view of central banking’, International Journal of Political Economy, 35 (1), Spring, pp. 58–82. Lavoie, M., G. Rodríguez and M. Seccareccia (2004), ‘Similitudes and discrepancies in Post-Keynesian and Marxist theories of investment: a theoretical and empirical investigation’, International Review of Applied Economics, 18 (2), April, pp. 127–149. Seccareccia, M. and M. Lavoie (1996), ‘Central bank austerity policy, zero-inflation targets and productivity growth in Canada’, Journal of Economic Issues, 30 (2), June, pp. 533–544. Pressman, P., M. Seccareccia and M. Lavoie (1995), ‘High unemployment in developed economies’, Review of Political Economy, 7, April, pp. 125–132. Lavoie, M. and M. Seccareccia (1995), ‘Le taux de chômage naturel: ­déficiences et coûts sociaux d’un concept’, Économie appliquée, 48 (1), pp. 111–113. Seccareccia, M. and M. Lavoie (1989), ‘Les idées révolutionnaires de Keynes en politique économique et le déclin du capitalisme rentier’, Economie appliquée, 62 (1–2), pp. 25–48. Lavoie, M. and M. Seccareccia (1989), ‘Jacques Henry, 1933–1989’, l’Actualité économique, 65 (3), September, pp. 444–447.

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Index 100 per cent Money 7, 84 Abramoff, J. 175–6 Aglietta, M. 85–6, 88, 269 ALEC 164 animal spirits 102, 280 Arena, R. 56 Argentina 223, 250 Aristotle 136 Asian financial crisis 174, 251, 302, 310 Asimakopoulos, A. 18 austerity 14, 35, 232, 234, 241, 246, 254, 309–10, 314 Bachus, S. 181 bailouts 33, 157, 176, 178–9, 182–3, 254, 303, 305, 307 Baker, J.A. 152–3, 155, 159–60, 171, 189 balance sheet 29–30, 33–4, 47, 59, 110, 148, 212, 264, 295, 321, 323–4 Bancor Plan 35 Bank for International Settlements 121 Bank of America 214 Bank of Canada 32–4 Bank of England 33 Bank of Japan 33 Bank of New York Mellon 214 Barbour, H. 156 Barrère, A. 90 barter 3, 22, 58, 85–6, 123, 137 Basel agreements 137 Baumol, W. 14 Bear Stearns 178–9 Beck, U. 308 Bellofiore, R. 6, 56–7, 63 Bentham, J. 101 Bernanke, B. 109–10, 178 Bertrand, H. 269 Besley, T. 235 Bhardwaj, G. 219

Bidhe, A. 312 ‘big tent’ approach 15 Bitcoin 133 Blanc, J. 86 Blinder, A. 14 Bolivia 222–4 Born, B. 156 Bougrine, H. 5–7, 18, 27, 91 Boyer, R. 268–9, 313 Brazil 223, 250–51, 302 Bretton Woods 117, 122, 136, 277 Brexit 234 broad-impact goods 258, 260–61, 267–77, 281 Bush, G.H.W. 173 business cycle 23–4, 32, 102, 259, 296, 320 Caldentey, E.P. 8 Canada 35, 255, 287, 291 capitalism 5, 21–2, 24–5, 29, 33, 41–6, 48–54, 58–9, 62–6, 81, 86–8, 97–102, 104–8, 112, 138, 140, 143, 149, 206, 209, 213, 225, 235, 248, 260–61, 263, 268, 270–71, 280–81, 289, 308, 313, 318–21 Carabelli, A.M. 212 Carney, M. 34 Carrasco, C.A. 255 Carter, J. 164 Cedrini, M.A. 212 Cencini, A. 119, 287 central banks 2, 5, 17, 21–9, 32–3, 43, 47, 51, 70–72, 74–9, 85, 87, 89, 91–2, 98, 109–12, 118, 124–6, 133–4, 136–7, 140, 143, 208–9, 262, 286, 289–93, 295, 297–8, 322 Chen, J. 7–8 Chen, P. 262–3 Chester, L. 85 Chicago School 155–6

359

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Credit, money and crises in post-Keynesian economics

Chile 222–4 China 34, 49, 75, 87, 215, 217, 220, 222, 305, 310, 314 Chossudovsky, M. 18 Churchill, W. 210 circuit theory 14, 16, 28, 43, 45, 49, 56–8, 60–61, 63–6, 89, 109–10, 208, 246–9, 255, 286–90, 297–8 three generations of 27–30 Citigroup 163, 174, 214 classical economics 23, 136, 208, 259 clearing union 34, 212 Clinton, B. 156, 173–4 Clower, R.W. 117 Colombia 222–4 commercial banks 16, 28, 85, 89, 91–2, 108–11, 135, 137, 146–8, 153, 155, 159, 215, 289, 291–3, 323 Commons, J. 85 confidence 133–5, 139–41, 146, 149–50 Cordonnier, L. 9 Coronavirus pandemic 5, 313–14 corporate social responsibility 311 Correa, E. 9, 34–5 corridor system 291–3 corruption 154, 165, 249 Costa Rica 223 cost–push inflation 73–6 Covid-19 see Coronavirus pandemic credit 3–5, 41, 50, 62, 65, 88, 91, 108–9, 111, 146, 247, 249–53, 256, 262, 288, 294–5, 303, 317–24 understanding credit-money 21–35 credit crunch 148 see also rationing credit multiplier 89, 137 credit-money 21–35, 91 creditworthiness 4, 90–91, 108, 141, 146, 290–93 Creighton, F. 181 Crouch, C. 305 currency 6–7, 22, 24–5, 35, 43, 64–6, 87, 90–91, 108, 118, 121–5, 127–9, 135, 139, 206, 211–12, 220–21, 248–50, 253–4, 302 Daigle, G. 34 Darman, R. 152–3 Davidson, P. 15, 104, 286, 297

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de Brunhoff, S. 102 de Vroey, M. 56 De Walque, G. 318 deflation 23, 30, 33, 35, 105, 210–11 Delay, T. 172, 175–6 Delfin, R. 181 demand–pull inflation 73, 75 Denmark 106 deregulation 9, 32, 143, 153, 155–6, 158, 163–4, 172–5, 184, 206, 213, 250, 256 Deriet, M. 27 Descartes, R. 239 Dewey, J. 45 Diamond, D.W. 318 Dillard, D. 85 Dimon, J. 161, 185 division of labour 27 Dodd, C. 179–80 Dodd–Frank 158, 160–62, 175, 184–90, 197, 201–2, 304–5 Dole, R. 153 Domenici, P. 153 dot.com crisis 268, 278, 302, 304 Dow, S. 9 Draca, M. 164 Ducros, B. 15 Durkheim, E. 134 Dybvig, P.H. 318 dynamic stochastic general equilibrium model 32, 231 Earle, J. 236, 238, 242 Earn-first principle 101 Eccles, M.S. 110–11 economic growth 7–8, 14, 81, 109, 118, 149, 219, 225, 259, 261, 286, 294, 297, 305, 309, 312 Ecuador 222–3 Eichner, A. 16 Eisner, R. 43 El Salvador 223 employer of first resort 99, 107–8, 112 employer of last resort 107 endogenous money 1–2, 4, 6–7, 10, 14, 16, 23, 25–7, 29, 33, 41, 51, 84, 88–92, 108–9, 118, 133–50, 286, 290–93, 297, 317, 324 Engels, F. 46, 54

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Index ­361

environmental challenge 309–12 Epstein, G. 154 European Central Bank 33 European Monetary Union 111 exchange rate 9, 21, 34, 50, 121–3, 125, 128–9, 220, 248, 301 expertise 233–6 fake news 232–4, 236, 239–40, 242 fallacies of composition 30–32 Fannie Mae 176, 178–9, 181 Federal Election Commission 165–7 Federal Funds Rate 291–2 Federal Reserve 33–4, 79, 103, 109–10, 152–3, 159, 173–4, 178, 250, 290–92 Ferguson, T. 7–8, 183 Ferreiro, J. 255 fiat money 22, 28 see also currency Fiebeger, B. 2 financial crises 48, 91, 107, 232, 258, 285–98, 317–24 Asian crisis 174, 251, 302, 310 dot.com crisis 268, 278, 302, 304 GFC see Global Financial Crisis nature and geography of 301–14 financialization 8, 10, 42, 48–9, 85, 92, 207, 209, 219–21, 224–5, 255–6, 265, 294–5, 298 Finucane, A. 181 fiscal policy 14, 49, 69–71, 76–7, 80–81, 97–9, 129, 165, 171, 248 Fisher, I. 22, 30 Fontana, G. 6, 255 Fordism 266, 268, 270, 276–7, 279 Fox News 177 France 4, 210, 268, 287 Frank, B. 179–81 Freddie Mac 176, 178–9, 181 free market 107, 156, 184, 301–5, 307, 309, 311–12 free-rider problem 278 Freud, S. 140 Friedman, M. 2, 45, 73, 137 full employment 4, 23–4, 29, 41, 43, 48–9, 53, 97–9, 101–2, 112, 129, 144, 171, 206, 211, 259 as a policy objective 102–8

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Galbraith, J.K. 6, 69, 71–81, 85 GDP 25, 121, 153, 207, 210, 213, 222, 224, 251–2, 263–4, 296, 306 Geithner, T. 185 General Theory (Keynes) 7, 24, 30, 135, 138, 140–49, 211–12, 260, 285–6, 289 Germany 101, 210 Gibbon, P. 217 Gill, S. 308 Gingrich, N. 156, 172 Glass-Steagall Act 153, 155–6, 171–4 global banks 206–7, 213–15, 218–19, 223, 250–54 Global Financial Crisis 5, 30–31, 33–4, 138, 149, 156–7, 160, 176, 206, 213–15, 234–7, 248, 254, 261, 292, 301–5, 307–11, 314, 317, 323–4 globalization 117, 120, 155, 163, 171, 256, 294, 312 Gnos, C. 7 Godley, W. 29, 148, 303, 313 gold standard 22, 28, 35, 122–3, 136–7, 210, 301, 320, 322–3 Goldman Sachs 218–19 Goodhart, C.A.E. 318 Gordon, R.J. 266, 278 Gove, M. 235 Gramm, P. 156 Gramsci, A. 313 Graziani, A. 6, 16, 56–60, 62–7, 108, 246–7, 286–7 Great Depression 24, 104 Greece 251 Greenspan, A. 152–3, 155, 172–3 Guatemala 223 Gutiérrez, G. 265 Guttmann, R. 6, 25, 121 Hahn, F. 22 Hansen, A. 264 Harford, T. 242 Harrod, R. 277 Hayek, F. 21, 45 health care 5, 41, 44, 80, 104–5, 308 hedge funds 159–60 Hein, E. 265 Heinsohn, G. 3 Hennessey, P. 235

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Credit, money and crises in post-Keynesian economics

heterodox economies 4, 15, 30, 33, 35, 46, 56, 85, 207–8, 231, 237–8, 246–7, 255–6, 313 Hilferding, R. 209, 320 Hobson, J.A. 318–19, 322 Honduras 223 Hong Kong 218 Hope for Homeowners 180–82 horizontalism 26, 143, 145, 148, 290–91 household debt 287, 293–8 Hume, D. 22, 239–40 Husson, M. 266, 268 Hyndman, H.M. 318 hyperinflation 87, 249 Igan, D. 156–7, 174–6, 183, 186 IMF 252, 302 income distribution 5, 8, 17, 97, 188, 206–26, 261, 265 income inequality 5, 225, 232, 262, 312 India 75, 212, 222, 314 industrialization 225, 249, 319 inflation 2–4, 23, 48, 52, 69–77, 79–80, 97, 103–4, 108, 112, 129, 137, 148, 210–11, 217, 232, 247–8, 254, 289, 302, 322 cost–push 73–6 demand–pull 73, 75 Ingham, G. 117 Innes, A. 1 Innis, M. 3 institutionalism 85–7, 92, 136, 248 interest groups 155, 173, 189 interest rate 2, 5, 17, 23, 26, 31–4, 48–9, 51, 60, 69–72, 74–80, 91, 103, 108–9, 112, 127–8, 135, 141–4, 146–9, 180, 209–12, 215, 217, 250, 255, 259, 288, 291, 296–7, 317, 323–4 long-term 33, 135, 142–7, 149, 321, 324 natural rate of interest 2, 17, 32, 47 overnight rate 286, 290–93 short-term 23, 32–3, 135, 141, 143–7, 149, 321, 324 see also natural rate of interest International Monetary Fund 121 international money 34–5, 117–30 internationalization 10, 87, 253, 301–5, 307–9, 311, 313

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interventionism 107, 112 IS-LM model 34, 141, 145, 246, 256 Italy 4 Jevons, W.S. 100 job creation 7, 29, 104 Johnson, P. 183 Jorgensen, P.D. 7–8 Jossa, B. 106 JP Morgan Chase 161, 163, 178, 185, 214, 218 Kahan, D.M. 239, 242 Kaldor, N. 26, 209, 285 Kalecki, M. 42, 59, 62, 65–6, 98, 101–2, 263, 285, 290, 320 Kane, E.J. 153–4 Kant, I. 240 Kennedy, E. 184 Kennedy, J.F. 173 Keynes, J.M. 3–5, 7–8, 24–5, 34–5, 41, 56, 65, 86, 88, 90, 98–9, 101–2, 104–5, 119–20, 122–3, 134–5, 137–40, 143, 149, 206–7, 209–12, 225, 237, 241, 259, 264–5, 279, 285–6, 295–6, 318, 320–21, 324 General Theory 7, 24, 30, 135, 138, 140–49, 211–12, 260, 285–6, 289 Keynesianism 32–3, 45, 60, 88–9, 98, 102–3, 136, 141, 143, 208, 249, 265–6, 285, 297 Kindleberger, C. 318, 324 Kiyotaki, N. 318 Koo, R. 30 Koutsoyiannis, A. 18 Kregel, J. 56, 286–7, 297 Krozner, R. 155, 173 Krueger, A.O. 235 Krugman, P. 103, 307 Kuhn, T.S. 240 Kyoto Protocol 309 labour unions see trade unions Laeven, L. 302 laissez-faire 98, 172, 177 Latin America 8–9, 207–8, 219–25, 248–54 Lavoie, M. 1–2, 4–6, 8–10, 14, 21–35, 41, 56–7, 84–5, 88–9, 97–8, 108–9, 140, 143, 148, 158, 207–9, 219,

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225, 231–3, 236, 246, 248, 254–5, 285–98, 313, 317 Law and Economics approach 155–6, 158 Le Bourva, J. 89–90 Le Heron, E. 7 Leclaire, J. 10 Lee, F. 207 lender of last resort 293, 295, 298 Lenin, V. 106 leverage ratios 29–30, 32, 148, 164, 262 liquidity 6, 16, 24, 27, 30–31, 33, 109–12, 134, 140, 215, 217, 249, 252–4, 268, 272, 298, 320–23 preference 7, 24, 26, 88, 135, 140–49, 288–9, 292–3, 297, 321 loans 4–5, 50, 92, 111, 288, 290, 295 lobbying 154–7, 159, 162–4, 174–6, 185 long-term interest rate 33, 135, 142–7, 149, 321, 324 Luxemburg, R. 62 Ma, J. 187 Malinowsky, B. 3 Malthus, T. 23 Manuel Barroso, J. 308 market sector 72–3, 80–81 Marshall, A. 25 Marshall, W.C. 9 Marx, K. 27–8, 43, 45–6, 54, 56, 63–6, 101, 138 Marxism 208–9, 237, 249, 313 mass unemployment 74, 98, 319, 323 Mathusian trap 44 McCain, J. 179 Meadows Report 309 measure, report and verify 311 Menger, C. 86, 99 mergers and acquisitions 178, 305, 307, 322–3 Mexico 220, 223, 248, 250, 253–5, 302 Mian, A. 157–8, 176–83 Miller, G. 181 Minsky, H. 30–32, 57, 252, 295, 297, 303, 319 Mishra, P. 156–7, 174–6, 186 Mitchell, B. 28 Modern Money Theory 28, 48, 287 monetarism 25–6, 32, 73, 111, 136–7, 277

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monetary circuit see circuit theory monetary policy 2, 5, 14, 17, 23, 26, 32–5, 49, 69–81, 97–9, 129, 144–5, 147–8, 165, 209, 246, 249 money 1–4, 41, 64–5 creation of see money creation endogenous see endogenous money international 34–5, 117–30 macroeconomic dimension of 84–92 in politics see political money qualitative theory of 135–41 between sovereignty and confidence 133–5 standard view of ‘neutral’ 21–2 theory of money and interest 109–12 three dimensions of 85–8 understanding credit-money 21–35 money creation 6–7, 23–9, 42, 44–7, 49–51, 88–91, 103, 109–11, 137, 139, 142, 249, 288, 290, 297 money multiplier model 2, 51 money supply curve 2, 26 Montecino, J.A. 154 Monvoisin, V. 6–7 Moore, B. 26, 91 Moore, J. 318 Moran, C. 236, 238, 242 Morgan Stanley 218 multinational firms 307–11 Mundell-Fleming model 34 natural rate of interest 2, 17, 23, 32, 47 neo-chartalism 288–9 neoclassical economics 14, 18, 21, 69, 99–100, 103, 112, 136, 207, 249, 259, 290 neoliberalism 98–9, 107, 111, 143, 219, 225, 248, 250, 277, 301–7, 313–14 Netherlands 218 New Consensus Macroeconomics 1–2, 6, 69–80 New Deal 104, 153, 165, 171 Nicaragua 223 Obama, B. 163, 182, 184–5 OECD 103, 258 Oresme, N. 136 Orléan, A. 86 Ostrom, E. 307 Ould Ahmed, P. 85–6

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Overend-Gurney scandal 318–19 overnight rate 286, 290–93 PACs 167, 173, 176, 182–3 Super Pacs 165–7 Paese, M.M. 181 Palacio-Vera, A. 255 Palley, T. 103 Panama 223 pandemics 5, 313–14 Panopticon 101 Paraguay 223–4 Parguez, A. 6, 15–16, 18, 56, 62–3, 108, 248, 255, 286–9 Pasinetti, L. 209 Pasinetti Index 17 Paton, J. 85 Paulson, H. 178–9 Pelley, S. 110 pensions 41, 254, 262, 295 Peru 222–4 Petit, P. 10 Peugeot 311 Philippon, T. 265 Physiocrats 135–6, 140 Pierrard, O. 318 Pigou, A. 25 planning sector 72–3, 81 Polanyi, K. 3, 35, 45, 248, 255 political action committees see PACs political money 152–90, 197–205 Pollin, R. 102 Ponsot, J.-F. 6–7, 85–6 populism 234–6, 302 Poulon, F. 287 poverty 53, 73, 81, 98, 100, 107, 111, 208, 240 power relations 87, 107, 235, 309–10 precious metals 135–6, 206, 211–12, 215–16 price controls 76–7 price stability 23, 32, 53, 69, 74, 80, 296 see also stabilization policy privatization 107, 173 profitability 44, 141–2, 206, 214–15, 219, 249, 251, 253, 265–6, 270, 294–5 property rights 97, 123 protectionism 49–50 public enterprises 105–7

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public opinions 144–5, 168, 309 purchasing power 79, 120, 125, 138–9, 322 quantitative easing 2, 232, 234, 305, 322 Quantity Theory of Money 21–4 racism 100 rationing 41, 50, 74, 146–8 Reagan, R. 152, 302 real wages 58, 64–5, 75, 103, 219, 221, 234, 269 Reed, J. 174 regulation theory 260, 267, 276 regulationism 85 rent seeking 155, 175, 265, 280 rentiers 34, 53, 78, 97–8, 136–7, 206–19, 225, 255 Ricardo, D. 23, 119, 123 risk transfer 31 Robbins, L. 231–2 Robinson, J. 59–61, 209, 285 Rochon, L.-P. 1–2, 16–18, 255 Roco 5–6 Roosevelt, F.D. 28, 46 Rossi, S. 1, 7, 120 Rouabah, A. 318 Rubin, R. 153, 173 ruling class 42, 45–6, 54 Russia 251, 302 Rymes, T. 15 Samuels, S.E. 180 Samuelson, P. 98–9 Santorum, R. 176 Sardoni, C. 108 Sartre, J.-P. 45 Say’s Law 4, 23, 138, 260 scarcity principle 41 Schmitt, B. 56, 119, 286–7 Schneyer, J. 217 Schumpeter, J. 1, 3, 56, 59, 117, 134, 137–8 Schutz, E.A. 106 Seccareccia, M. 4–6, 8–10, 14, 21–35, 41, 56–7, 62–4, 84–5, 88–9, 91–2, 97–8, 105, 107–8, 158, 207–9, 225, 231, 233, 236, 246–8, 254–6, 285–98, 313, 317

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secular stagnation 9, 258–66 securitization 27, 31, 181, 253, 287, 293–5, 297–8 Servet, J.-M. 86 Setterfield, M. 17 shadow banking 159, 213, 297 Shaik, A. 18 Shelby, R. 181 Shiller, R. 307 short-term interest rate 23, 32–3, 135, 141, 143–7, 149, 321, 324 see also natural rate of interest Smith, A. 119–20, 136, 233, 238–9, 241–2 Smithin, J. 1–2, 317 social imbalances 6, 69, 73–81 social justice 231–2 social services 103, 105–6, 232 socialism 98, 101, 302 Solow, R.M. 71 sovereignty 133–5, 139–40 stabilization policy 69–81, 102, 112 stagflation 76 stagnation 99, 246–56, 266 secular 9, 258–66 standard of living 43, 99 State 5–6, 42–53, 62, 65, 92, 125, 308–9 Steiger, O. 3 Steindl, J. 266 Stigler, G. 162 stock-flow consistent model 29, 146–9 Stratmann, T. 155, 173, 186 structuralism 26, 143, 208, 249, 290–91 Sufi, A. 157–8, 176–83 Summers, L. 9, 259–66, 278 Sunirand, P. 318 Super Pacs 165–7 Sweden 102, 106 Switzerland 218 Sylos Labini, P. 59 systemically important financial institutions 213 Tahoun, A. 157, 182, 188 TARP 157, 176, 182 Taylor Rules 1, 32–3 Taylorism 268, 277 Thabet, S. 6 Thatcher, M. 302 Théret, B. 86

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think tanks 161–2, 164, 172 too big to fail 153, 213, 303 Toporowski, J. 10, 59 tourism 275, 279 Toye, J. 103–4 trade deficits 49–50 trade unions 65, 73–4, 76, 101, 105, 294 Trebbi, F. 157–8, 176–83 Tressel, T. 157 Trump, D. 234–5 Tsocomos, D. 318 Tugan-Baranovsky, M. 318–19 Turgot, A.R. 136 Turner, A. 92 unemployment 52–3, 69–70, 73–5, 78, 97–107, 112, 129, 146, 148, 211, 247, 255, 260, 318 benefits 100–101 reasons for 100–102 United Kingdom 92, 210, 234–5, 255, 287, 302–4, 318 United Nations 309 United States 5, 35, 45, 57, 76, 87, 89, 100, 103, 138, 152–90, 197–205, 214–15, 217–19, 234–5, 250, 254, 258, 261, 265, 287, 291–2, 302, 304–5, 309 urbanization 267 Uruguay 223 Valencia, F. 302 value chains 314 van Lent, L. 157, 182 Vasvari, F. 188 Veblen, T. 85 Venezuela 222–4 Vernengo, M. 8 Volcker, P. 152–3, 172 Volcker Rule 184–5 Volkswagen 311 Waller, L. 187 Walmart 307 Ward-Perkins, Z. 236, 238, 242 Warren, E. 8, 161, 185 Weber, M. 159 Weeks, J. 208 Weill, S. 174 Weldon, J. 14, 18

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welfare state 99, 107, 171 Wells Fargo 214 Wicksell, K. 10, 23, 71 Williamson, J. 122 Williamson, O. 307 Withers, H. 322 Wolff, R. 106 Woodford, M. 1

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workfare 101 working conditions 73, 270 World Health Organization 313–14 World Trade Organization 311–12 Wray, R. 3, 28, 59, 287, 289–90, 297 zero lower bound 33 Zhu, L. 187

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