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Evolution of Global Finance

Asad Zaman

Developments in money and finance are absent from conventional macroeconomic textbooks.

In previous posts regarding “New Directions in Macroeconomics“, I have discussed many dimensions missing from Modern Macro which must be incorporated, in order to create a Macroeconomics for the 21st Century. Previous posts were about Post-Keynesian, Modern Monetary Theory, and Political Economy. In this post, I will provide a brief summary of developments in money and finance which are completely absent from conventional Macro textbooks.

Somebody aptly quipped that ‘Trying to understand the economy without understanding money and finance is like trying to understand how birds fly, without taking the wings into account”.

The Hegelian anti-thesis of the orthodox economic position that money is neutral, is the idea that “money is everything”. Economics is just the analysis of monetary flows, both within a society, and globally. Karl Marx describes the change in perspective via the formulae C-M-C’ versus M-C-M’. In the first paradigm, commodities C are sold to get money M, in order to buy another set of commodities C’. This picture of a barter economy, in which money just facilitates exchange, is at the heart of modern economics; this is why money does not matter. However, in a capitalist economy, M(oney) is used to produce commodities C, and these are sold for more money M’. Money is the goal of production and sales, not an instrument for exchange of commodities. An economy where the drive for profits is the main motivation for productions and purchases, requires an entirely different analysis.

In his classic work on “The Long Twentieth Century: Money, Power, and the Origins of Our Times”, Giovanni (1994) describes how the accumulation of capital (wealth, money) has been the central driver of history over the past several centuries. Giovanni provides a wealth of historical details and a global context to support this thesis, based on a world-systems perspective. Many other authors, writing from money different perspectives, have documented how “money makes the world go around”.

In particular, Minsky’s (1986) analyses of this phenomena are of special importance from the economic point of view. Minsky studies the evolution of finance (and financial capitalism) over the 20th Century. The creation of Central Banking led to a wild expansion of credit in the roaring 20’s, and the resulting collapse of the Great Depression. This resulted in strong regulations on banking, as well as the emergence of a welfare state. Big government for counter-cyclical budgets and the Central Bank to regulate finance led to a stable capitalist system which worked for decades. As per financial fragility hypothesis of Minsky, stability generated large amounts of savings, and creation of competitive pressure to earn high returns by taking larger risks. Large amounts of money in pension funds and hedge funds created “Money Manager Capitalism”, where managers of massive amounts money have high incentives to take risks, because their interests as managers are not aligned with those of the owners. Managers of capital were able to change rules towards increasing de-regulation, and to privatize gains, while distributing losses to the general public. This increasing fragility has led to crises of increasing severity, culminating with the Global Financial Crisis.

Minsky’s theories are in radical conflict with orthodoxy in modern macroeconomics in many dimensions. In particular, Minsky (1986) argues that manager finance is inherently unstable. As the economy grows, this creates increasing incentives for risk-taking and leads routinely to crisis. This is the opposite of the orthodox view that economies tend towards stable equilibria. Minsky’s views are far better aligned with the data on hundreds of financial crises in the past few decades.


Prof Hyman Minsky

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