Research Topics

A Kaleckian Perspective

This paper examines a major channel through which financialization or finance-dominated capitalism affects macroeconomic performance: the distribution channel. Empirical data for the following dimensions of redistribution in the period of finance-dominated capitalism since the early 1980s is provided for 15 advanced capitalist economies: functional distribution, personal/household distribution, and the share and composition of top incomes. Based on the Kaleckian approach to the determination of income shares, the effects of financialization on functional income distribution are studied in more detail. Some stylized facts of financialization are integrated into the Kaleckian approach, and by means of reviewing empirical and econometric literature it is found that financialization and neoliberalism have contributed to the falling labor income share since the early 1980s through three main Kaleckian channels: (1) a shift in the sectoral composition of the economy; (2) an increase in management salaries and rising profit claims of the rentiers, and thus in overheads; and (3) weakened trade union bargaining power.

In this paper the euro crisis is interpreted as the latest episode in the crisis of finance-dominated capitalism. For 11 initial Euro area countries, the major features of finance-dominated capitalism are analyzed; specifically, the increasing inequality of income distribution and the rising imbalances of current accounts. Against this background, the euro crisis and the economic policy reactions of European governments and institutions are examined. It is shown that deflationary stagnation policies have prevailed since 2010, resulting in massive real GDP losses; some improvement in the price competitiveness of the crisis countries but considerable and persistent current account imbalances; reductions in government deficit–to-GDP ratios but continuously rising trends in gross government debt–to-GDP ratios; a risk of further recession for the euro area as a whole—and the increasing threat of the euro’s ultimate collapse. Therefore, an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and strategies—in particular, the lack of (1) an institution convincingly guaranteeing public debt and (2) a stable and sustainable financing mechanism for acceptable current account imbalances—is outlined.

Writing Down Debt, Returning to Democratic Governance, and Setting Up Alternative Financial Systems—Now

The five-year-long crisis of Western finance capitalism is pushing advanced liberal societies to a breaking point. If governments continue to be proxies of finance capital and aspiring political leaders cheerleaders for their financial backers, a catastrophic economic scenario is not really as far-fetched as some might like to think. Governments, industries, and households are under debt bondage, with the result that revenues from every sector of the economy are being diverted toward interest payments and late fees for various loans taken out on largely exploitative, even fraudulent terms. Now, after years of building up a Ponzi financial regime, Western capitalism faces its ultimate test. Will it collapse, giving rise to long-term economic instability and authoritarian political regimes? Or will it find the strength and the wisdom to make a comeback?

What is called “capitalism” is best understood as a series of stages. Industrial capitalism has given way to finance capitalism, which has passed through  pension fund capitalism since the 1950s and a US-centered monetary imperialism since 1971, when the fiat dollar (created mainly to finance US global military spending) became the world’s monetary base. Fiat dollar credit made possible the bubble economy after 1980, and its substage of casino capitalism. These economically radioactive decay stages resolved into debt deflation after 2008, and are now settling into a leaden debt peonage and the austerity of neo-serfdom.

The end product of today’s Western capitalism is a neo-rentier economy—precisely what industrial capitalism and classical economists set out to replace during the Progressive Era from the late 19th to early 20th century. A financial class has usurped the role that landlords used to play—a class living off special privilege. Most economic rent is now paid out as interest. This rake-off interrupts the circular flow between production and consumption, causing economic shrinkage—a dynamic that is the opposite of industrial capitalism’s original impulse. The “miracle of compound interest,” reinforced now by fiat credit creation, is cannibalizing industrial capital as well as the returns to labor.

The political thrust of industrial capitalism was toward democratic parliamentary reform to break the stranglehold of landlords on national tax systems. But today’s finance capital is inherently oligarchic. It seeks to capture the government—first and foremost the treasury, central bank, and courts—to enrich (indeed, to bail out) and untax the banking and financial sector and its major clients: real estate and monopolies. This is why financial “technocrats” (proxies and factotums for high finance) were imposed in Greece, and why Germany opposed a public referendum on the European Central Bank’s austerity program.

The world’s worst economic crisis since the 1930s is now well into its third year. All sorts of explanations have been proffered for the causes of the crisis, from lax regulation and oversight to excessive global liquidity. Unfortunately, these narratives do not take into account the systemic nature of the global crisis. This is why so many observers are misled into pronouncing that recovery is on the way—or even under way already. I believe they are incorrect. We are, perhaps, in round three of a nine-round bout. It is still conceivable that Minsky’s “it”—a full-fledged debt deflation with failure of most of the largest financial institutions—could happen again.

Indeed, Minsky’s work has enjoyed unprecedented interest, with many calling this a “Minsky moment” or “Minsky crisis.” However, most of those who channel Minsky locate the beginnings of the crisis in the 2000s. I argue that we should not view this as a “moment” that can be traced to recent developments. Rather, as Minsky argued for nearly 50 years, we have seen a slow realignment of the global financial system toward “money manager capitalism.” Minsky’s analysis correctly links postwar developments with the prewar “finance capitalism” analyzed by Rudolf Hilferding, Thorstein Veblen, and John Maynard Keynes—and later by John Kenneth Galbraith. In an important sense, over the past quarter century we created conditions similar to those that existed in the run-up to the Great Depression, with a similar outcome. Getting out of this mess will require radical policy changes no less significant than those adopted in the New Deal.

In this paper I will follow Hyman Minsky in arguing that the postwar period has seen a slow transformation of the economy from a structure that could be characterized as “robust” to one that is “fragile.” While many economists and policymakers have argued that “no one saw it coming,” Minsky and his followers certainly did! While some of the details might have surprised Minsky, certainly the general contours of this crisis were foreseen by him a half century ago. I will focus on two main points: first, the past four decades have seen the return of “finance capitalism”; and second, the collapse that began two years ago is a classic “Fisher-Minsky” debt deflation. The appropriate way to analyze this transformation and collapse is from the perspective of what Minsky called “financial Keynesianism”—a label he preferred over Post Keynesian because it emphasized the financial nature of the capitalist economy he analyzed.

Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper).

Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.