James Crotty

Owner–Manager Conflict and Financial Theories of Investment Instability: A Critical Assessment of Keynes, Tobin, and Minsky

Theories of the capitalist macroeconomy can be divided into those characterized by endogenously generated economic instability and those whose assumptions and structure guarantee the existence and attainment of equilibrium states or paths. We can again partition theories of endogenously generated instability into those in which the roots of instability are located exclusively in the “real” sector, those that root instability in the financial sector, and those models in which instability has dual roots-in which instability may be generated in either sector or simultaneously in both. It is an interesting fact that most theories of economic instability root unstable behavior almost exclusively in either the financial or the real sector. Marxian crisis theories generally focus on real-sector impediments to balanced growth, as do Keynesian multiplier-accelerator models; in these theories financial markets are either totally neglected or are of distinctly secondary importance. On the other hand, in several important Keynes-inspired theories there are no real-sector impediments to equilibrium; instability is exclusively grounded in ever-changing financial markets.

The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era

The evolution of financial markets in the neoliberal era has created serious problems for large nonfinancial corporations already harmed by the slow aggregate demand growth and destructive competition of the period. Financial market pressures led to shorter planning horizons, a declining allegiance of stake-holders to long-term corporate goals, and a large increase in the percentage of cash flow paid to financial market agents. The net result is a “neoliberal paradox”: financial markets demand that corporations achieve ever higher profits, while product markets make this result impossible to achieve. The neoliberal paradox helps explain the outbreak of financial accounting fraud in the late 1990s.

If Financial Market Competition is so Intense, Why are Financial Firm Profits so High? Reflections on the Current ‘Golden Age’ of Finance

In 1997 former Federal Reserve Board Chairman, Paul Volker, observed that the commercial banking industry was under more intense competitive pressure than at any time in living memory, ‘yet at the same time the industry never has been so profitable’. I refer to the seemingly strange coexistence of intense competition and historically high profit rates in commercial banking as Volckers Paradox. In this paper I extend the evaluation of this ‘paradox’ to all important and profitable financial markets and discuss three developments that together help resolve it. First, the demand for financial products and services has expanded very rapidly in this period. Second, while competition has indeed increased in many areas of financial services, it has not increased everywhere. Rising concentration in many financial markets has made it possible for key firms to exercise pricing power, while a spectacular increase in non-market, over-the-counter sales of complex financial products has allowed giant banks to achieve high profit margins in these markets. The core assumption of the ‘paradox’ is thus not universally valid. Third, all major financial market actors have increased the risk involved in their investment strategies and this has led to high average profit rates in the exceptionally stable financial conditions of the past few years. However, high risk strategies always bring low profit rates at some point; that is why they offer higher returns most of the time. When the exceptionally profitable conditions of the past few years evaporate, as they may be doing now, the high profit component of the paradox will vanish as well.

Globalization and Progressive Economic Policy: Multinational corporations in the neo-liberal regime

The lefts concern with globalization is, of course, nothing new. Marx wondered whether the process of globalization would crush incipient revolution in his “small comer of the planet.” And today, we ponder whether the recent acceleration of globalization will crush all national prospects for egalitarian and sustainable development. Yet, despite a good deal of hand wringing, discussion, and research, we are still quite far from understanding the implications of this much-discussed phenomenon for the lives of people, communities, and nations around the globe.

Structural contradictions of the global neoliberal regime

The paper argues that global Neoliberalism creates both chronic sluggish aggregate demand growth and chronic excess aggregate supply, and that these tendencies reinforce one another in a vicious circle. Stagnant global demand has unleashed destructive competition in core global markets, creating low profits, financial fragility, and over investment. Over investment generates the excess industry supply that sustains competitive intensity. The greater the competitive intensity, the greater the pressure on firms to cut wages and employment, and lobby for less generous social welfare spending, which further constrains aggregate demand. And so on.

The Effects of Neoliberal "Reforms" on the Post-Crisis Korean Economy

In December 1997, the IMF offered Korea loans. In return, Korea had to undergo radical neoliberal restructuring. Since 1997, growth has slowed, poverty and inequality have risen, investment spending has stagnated, and foreign ownership of Korean firms and banks has skyrocketed. We argue that the eight-year experiment with radical neoliberal restructuring has been a failure for the majority of Korea’s people.

From East Asian “Miracle” to Neo-liberal “Mediocrity”: The Effects of Liberalization and Financial Opening on the Post-crisis Korean Economy

Abstract In December 1997 the International Monetary Fund (IMF) offered Korea loans to help alleviate its financial crisis. These loans were accompanied by what the IMF called “extreme structural conditionality.” Korea was required to replace its traditional East Asian economic system with a neo-liberal model. We review economic performance in the neo-liberal era. Growth has slowed, poverty and inequality have risen, and investment spending has stagnated, while foreign ownership of Korean firms and banks has skyrocketed. We argue that foreign investment has not helped Korea. For example, by leading a shift from corporate to consumer lending, foreign control of Koreas financial markets has constrained capital accumulation and helped create an excessively indebted household sector, while making it harder for the government to adopt progressive economic policies. We conclude that the 8 year experiment with radical neo-liberal restructuring has turned out well for foreign capital and wealthy Koreans, but has been a failure for the majority of Koreas people.

Economic Performance in Post-Crisis Korea: A Critical Perspective on Neo-Liberal Restructuring

This paper evaluates the neoliberal economic restructuring process implemented in Korea following the 1997 Asian financial crisis. We first argue that the austerity macroeconomic policy of late 1997 and early 1998 was the main cause of the economic collapse in 1998, and that the decision of the IMF and President Kim Dae Jung to impose a radical neoliberal transformation of financial markets and large industrial firms in the depressed conditions of 1998, though defensible on political grounds, made the failure of these reforms virtually inevitable. A detailed analysis of the macro economy, labor markets, financial markets, and nonfinancial firms in Korea in the past three and one-half years shows that neoliberal restructuring has created a vicious cycle in which a perpetually weak financial sector fails to provide the capital needed for real sector growth, investment and financial robustness, while real sector financial fragility continuously weakens financial firms. Neoliberal policies may have pushed Korea onto a low-investment, low-growth, development path, one with rising insecurity and inequality. Meanwhile, the removal of virtually all restrictions on cross-border capital flows has led to a dramatic increase in the influence of foreign capital in Koreas economy. The paper concludes by arguing that Korea should reject radical neoliberal restructuring and instead adopt reforms designed to democratize and modernize its traditional state-guided growth model.

Is New Keynesian Investment Theory Really “Keynesian”? Reflections on Fazzari and Variato

Second, though New Keynesian theory is based on the standard ergodic stochastic assumption of Neoclassicism while Post Keynesian theory posits a nonergodic world of fundamental uncertainty (FU), Fazzari and Variato argue that the New Keynesian assumption of asymmetric information (AI) makes the two theories complements rather than substitutes. While their effort at cross-paradigm fertilization is admirable, the arguments they present in support of the complementarity thesis are not convincing.

Avoiding Another Meltdown

The authors argue that the current financial crisis, the worst since the Great Depression, can be seen as the latest phase in the evolution of financial markets under a radical financial deregulation process that began in the late 1970s. Deregulation accompanied by rapid financial innovation stimulated powerful booms that ended in crises. But governments responded to the crises with new bailouts that allowed new expansions to begin. As a result, financial markets have become ever larger, and the crises have become more threatening to society, which forces governments to enact ever larger bailouts. The authors provide a comprehensive set of regulatory solutions they believe will sharply reduce financial instability.