Jan Toporowski

The Economics and Culture of Financial Inflation

In this paper ‘financialisation’ is broadly defined as a process of inflating capital markets or more strictly financial inflation. The paper examines some of the social, economic and political consequences of financial inflation for the activities of companies and the operations in debt markets of an increasingly financial middle class. Financial inflation alters the behaviour of individuals and firms, and hence the character and dynamics of the capitalist economy and society. The first section of the paper explains the Kalecki–Steindl theory of enforced company indebtedness in a middle-class society. The second section shows how financial inflation makes companies over-capitalised, resulting in a decline in the trend of long-term investment. The third section shows how forced company indebtedness is modified as the middle classes extend their consumption financed through inflating asset markets. A conclusion sketches out some of the consequences of this financialisation for politics, social policy, and moral and cultural attitudes.

Monetary Policy in an Era of Capital Market Inflation

The theory of capital market inflation argues that the values of long- term securities markets are determined by a disequilibrium inflow of funds into those markets. The resulting over-capitalization of companies leads to increased fragility of banking and undermines monetary policy and stable relationships between short- and long-term interest rates, such as that postulated by Keynes in his theory of the speculative demand for money. Moreover, while the increased fragility of banking is an immediate effect, capital market inflation also creates an unstable Ponzi financing structure in the capital market as a whole.

The Stock-flow Consistent Approach with Active Financial Markets

Wynne Godley is best known for his insightful forecasting using stockflow consistent models. His insistence that economic stocks and flows should be consistently laid out was also, if less obviously, an insistence that all economic variables are interrelated. Accordingly, production could not be carried out without distributional implications. More importantly, for the theory of a modern credit economy, the financial flows that arise in the process of production and exchange have to be integrated into the model of the economy at large.

Excess Debt and Asset Deflation

The financial crisis that is spreading out from countries with the most ‘advanced’ financial systems to the rest of the world has not been well served by economic theory. That is to say, economic theories did not, as they should, prepare policymakers and practitioners for the crisis, and few theorists have been able to illuminate the course of the crisis and its implications with anything other than the insights that had conspicuously failed to prepare us for such a crisis. In the mainstream, new classical economics has modelled a very attenuated financial system, driven by ‘rational’ individuals exchanging real resources to obtain such allocations in general equilibrium that maximize utility functions now and over time. Disturbances arise because of unanticipated ‘shocks’, following which general equilibrium is resumed. This unworldly philosophy ignores the very apparent macroeconomic imbalances that built up over many years (and therefore can hardly be described as ‘unanticipated shocks’) and that are now working themselves in the deflation of economies. However, it still plays a very real part in the thinking of policymakers. Their general equilibrium models still reassure us that what is clearly emerging as a lengthy deflationary process is a temporary response to the shock of bank defaults, and that stable growth will be shortly resumed (Bank of England, 2008). The new Keynesians have also been intellectually hamstrung by a methodological addiction to general equilibrium. This was used to model underemployment equilibria due to market ‘rigidities’. The more dynamic ‘financial accelerator’ model has a credit cycle driven by fluctuations in net wealth. However, this is still within a general equilibrium framework and with little explanation of the financial mechanics that have now broken down. Such mechanics are replaced by arbitrary constraints and lags imposed on the general equilibrium model, in order to generate a cycle (Bernanke and Gertler, 1989). Among behavioural economists Robert Shiller stands out for his embrace of what he regards as more realistic

Europe in Question and What to Do about It

mean inequality will inevitably disappear). So, though a ‘this time is different’ argument may not always apply, a ‘this time must be different’ statement can be a reasonable inference from historical evidence. Posed this way, Piketty’s concerns would have a very different contextual point of departure for speculation regarding the future. This may seem peripheral to Piketty’s concerns, as he states them; but remember how he positions his book—as political economy using data purposefully to shape our understanding of and solutions to the fundamental problem of inequality. In many respects the whole is a positional argument that opposes the future it predicts. But it is also a lost opportunity for something more ambitious—a political economy of positional arguments for possible futures. Pressman’s Understanding Piketty’s Capital is an excellent first step toward this more ambitious project.

Minsky, Crisis and Development

Introduction D.Tavasci & J.Toporowski Minsky Moments, Russell Chickens, and Grey Swans A.Vercelli The Transformation of the Financial System Y.Nersisyan & L.Randall Wray Financial Globalisation and Financial Exclusion G.A.Dymski Magdoff-Sweezy and Minsky R.Bellofiore & J.Halevi Reclaimed by the Mainstream? A.Nesvetailova A Minsky Perspective on the Global Recession C.J.Whalen Macroeconomic Imbalances in the U.S. J.S.Perelstein Minsky, Financial Structure and Development V.Chick Minsky in the New Financial Institutional Framework N.Levy-Orlik Money Manager Capitalism L.Ventimiglia & D.Tavasci Minsky au Vietnam S.Cheshier & J.Pincus Islamic Banking in Malaysia E.Karwowski Ponzi from the Start D.Bezemer, M.Hudson & J.Sommers Financial Crises in an Asian Transitional Economy R.Marshall & B.Walters Speculative Behaviour and Financial Fragility V.Arza & P.Espanol Financial Crises the Latin American Way M.Cruz & B.Walters Banks in the Korean Financial Crisis of 1997 J.P.Painceira Minsky and Indonesia Y.Matsumoto

Excess Capital and Liquidity Management

These notes present a new approach to corporate finance, one in which financing is not determined by prospective income streams but by financing opportunities, liquidity considerations, and prospective capital gains. This approach substantially modifies the traditional view of high interest rates as a discouragement to speculation; the Keynesian and Post-Keynesian theory of liquidity preference as the opportunity cost of investment; and the notion of the liquidity premium as a factor in determining the rate of interest on longer-term maturities.

Kalecki and the Declining Rate of Profit

In Kaleckis business cycle theory a fall in the rate of profit plays a key role in the onset of recession, causing a fall in investment. This paper shows how the falling rate of profit is an eventual corollary of the steady rate of capital accumulation, which Keynes saw as the key to securing full employment. The decline in the rate of profit may be avoided by a shift to increasingly capital-intensive techniques of production, or greater government indebtedness or foreign trade imbalances. It is suggested that these disequilibrating factors lie behind the success of rapidly growing capitalist economies in the second half of the 20th century.

Handbook of critical issues in finance

Contributors include: P. Arestis, R. Bellofiore, D. Bezemer, S. Blankenburg, H. Braun, T. Congdon, G. Cozzi, P. dos Santos, S. Dow, T. Evans, G. Ietto-Gillies, P. Kalmi, A. Kaltenbrunner, E. Karwowski, J. Kregel, S. Krishnan, M. Lawlor, C.G. Leathers, N. Levy Orlik, P. Lysandrou, D. Mayes, J. Michell, T. Mott, A. Nesvetailova, J.P. Painceira, R. Palan, J. Perraton, J. Powell, P. Raines, K. Ruziev, W. Song, E. Stockhammer, J. Toporowski, A. Trigg, E. Tymoigne, J. Tyson, L. Ventimiglia, S. Venugopalan, R. Wade, C. Whalen, M. Wolfson, G. Wood, L.R. Wray

Monetary adjustment and inflation of financial claims in the UK after 1980

This chapter explores two ways in which the UK financial system and the real economy developed out of step after 1980. It shows that companies and households took advantage of the easing of financial regulation by securing credit against assets with decreasing regard to the underlying real value of those assets. Hence, in the UK, financialisation largely took the form of inflation of financial claims.