Pablo G. Bortz
A Realistic Analysis of the Market Oriented Capitalist Economy
Louis-Philippe Rochon and Virginie Monvoisin
The financial crisis that began in 2007 has generally shown the weaknesses of neoclassical theories and policies, in particular by highlighting the irrelevance of modern macro models such as the Dynamic Stochastic General Equilibrium (DSGE) model and its microfoundations, which has come under considerable attack in the last few years, even from the mainstream. Indeed, as Lavoie (2018, p. 15) observes, “there is considerable dissatisfaction with the current state of mainstream macroeconomics”, leading The Economist (2009) to refer to the “turmoil among macroeconomists”. As early as 2009, Krugman (2009a, Internet) was claiming “[t]he economics profession mistook beauty, clad in impressive-looking mathematics, for truth”. More recently, he once again criticised the quest for microfoundations (see 2013, Internet), arguing “so the truth was that microfoundations in macroeconomics had its moment, but failed utterly at the one thing it was sold, above all, as being able to do - namely, give a better explanation of why nominal shocks have real effects. Time, you might think, to reconsider the project”. A few years earlier, Solow, in a 2010 address to the United States Congress, disapprovingly claimed “I do not think that the currently popular DSGE models pass the smell test” (see Solow, 2010).
Marcello Spanò proposes an analysis of the composition of the yearly changes that occurred in sectorial balance sheets in fourteen founder countries of the European Union, from 1995 to 2015. He proposes a methodology based on stock-flow consistent accounting to analyse how superfluous financial flows grow and how they are allocated between sectors with different functions (purchasing power creators vs. users) and between different activities (real production vs. wealth appropriation), while also examining the impact of market revaluations on sectorial balance sheets. He reaches three important conclusions. First, an increasing amount of credit creation has not been allocated to the generation of real income; second, a prevalent and growing share of the excess finance has circulated within the domestic and foreign financial sector only. Third, financial asset revaluations, which are of the same order of magnitude as private sector transaction flows, have a high incidence on the sectorial net financial position.
Óscar Dejuán and John S. L. McCombie
Oscar Dejuán and John McCombie discuss how credit explosions leading to asset bubbles and an increasing burden of debt are an endemic disease of advanced capitalism. Indeed, even the traditional originate-to-hold model of banking is not free from such a virus. The novelty of the originate-to-distribute model of finance, based on the securitization of mortgage loans, is that it has assembled the machinery to accelerate the process. The limit to credit expansion derives from the potential (full capacity) growth of output. If there is a systematic gap between both rates, the credit-led growth will eventually become a debt- burdened growth.
Bruno Bonizzi and Diego Guevara
Bruno Bonizzi and Diego Guevara elaborate on the links between financialisation and private pension funds in emerging economies. Firstly, they show how public pension systems (PAYGO) began to be replaced by private pension funds (AFP) under the mainstream argument that savings generate investment. In the second part of the chapter, the authors show how the promises of the AFPs in the emerging countries have not been accomplished in terms of coverage, low pension values and reductions of fiscal pressures. Finally, they analyze how AFP can be understood as a financialisation enhancer in emerging economies, by increasing risk and dependence of global financial markets on local economies.
Alicia Girón and Marcia Solorza
This chapter examines how Argentina, Brazil and Mexico, through the processes of deregulation, liberalization and reform of the financial systems structure, were enrolled worldwide in the process of financialization, while the national banking industry insertion in the international financial circuits went deeper. Their research contextualizes the financialization process in the period after the breach of the Bretton Woods Agreement of the international monetary system, and the presentation of the degree of financial opening reached by those countries. The growth of financial services, current regulatory standards, and the levels of capital market deepening are analyzed.
This chapter begins by acknowledging the growing recent literature examining the macroeconomic implications of household debt linking it to rising inequality across developed economies, which in turn contributes to stagnant or declining real incomes for middle and lower income households. Wages stagnated with their decoupling from productivity growth and rising inequality; households maintained consumption with falling savings and rising indebtedness. This consumption behaviour can be understood in terms of the emulation of consumption patterns through a relative income effect. A range of authors have argued household debt was central to the global financial crisis. More generally it has been argued that with rising inequality, aggregate demand was only being sustained by rising household indebtedness before the crisis, and since then held back by limited growth in household incomes. Thus, economies are prone to stagnation offset by periodic unsustainable credit booms. To date, though, specific studies have focused almost exclusively on the US. There are a number of reasons why it may be useful to extend this analysis to European economies, allowing comparative tests of key hypotheses in this field. This paper provides a comparative analysis across European economies to test the key hypotheses here, examining how far changes in inequality across these economies can explain debt levels and how far aggregate demand was sustained by rising household debt.
Hanna K. Szymborska
Hanna Szymborska reviews policy proposals to reduce economic inequality in the context of the current institutional structures in the financial sector. It focuses on advanced economies, and the USA in particular. The chapter considers the impact the transformation of financial sector operations since the 1980s has had on income and wealth inequality. It provides an account of how this impact has undermined the effectiveness of policy instruments to tackle inequality. Having discussed why economic policy has failed to reduce income and wealth disparities in the USA, the author reviews policy proposals put forward in the inequality literature, drawing primarily from Stiglitz (2012), Piketty (2014), Atkinson (2015) and Galbraith (2016). These proposals are assessed in light of recent institutional changes in the US economy. The chapter calls for an explicit strategy to address wealth inequality alongside income, and highlights three areas of policy action to achieve sustainable reductions in economic inequality, focusing on wealth taxation, measures shaping the distribution of market wealth, and broader macroeconomic policy.
Hélène de Largentaye and Renaud du Tertre
Hélène de Largentaye and Renaud du Tertre argue that the casting aside in the 1970s and 1980s of economic policies inspired by Keynes’s theory highlighting the role played by aggregate demand, in favour of policies inspired by neo-liberal postulates, laid the foundations for a neo-liberal growth regime in France in the 1990s. “Ordo-liberal” economic policies, a European brand of neo-liberalism, were carried out throughout the European monetary integration process (1993-2007). Financial variables played a key role, replacing wages and job creation, which became adjustment variables. Consequently, employment and output growth were sacrificed. In the most recent period (2007-2016), the same economic policies did not succeed in dealing with the Great Financial Crisis and the subsequent European Sovereign Debt crisis, so that employment and output continued to perform poorly and debt kept increasing. Recovery from this depressed situation would require a major European investment programme which could lay down the foundations for a new “sustainable development regime.”