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The world beyond West Lancashire

Proper grown-up economics for grown-ups

04.24.09 | 3 Comments

I suggested to Hopi, late the other night, that what he and like-minded real content-based bloggers might want to give some attention to is the essential differences between Keynesian and monetarist economics.

Let’s get down to the essentials, I suggested, of whether we should see the money supply as ‘real’, and as the most important driver for policy decisions, or whether we should instead see money and its supply as simply as only one part of the overall psycho-social mechanics of capitalist society.

Well, I didn’t say that, but it’s kind of what I meant.

And before I could say ‘Quantitative Easing is more complicated than just printing money’, there was heh presto, a hugely detailed response from Duncan and his mighty Economics Blog. I mean, the guy’s typing fingers must have melted.

Now Duncan is a proper economist, not a pretend media one like Robert Peston or someone. For starters, he used to count all the money in the UK economy. No really, he did. Not by hand certainly, but his Bank of England job really was to ‘compile all the UK’s monetary data’.  He says so himself.  I mean, that’s proper adding up.

So when he posts on stuff, he does detail.  Not easy detail, and you need to read what he links to as well, but important detail.  I’m not done with all the stuff he’s provided myself yet, but I will read it.

There’s so much in his post that it’s difficult to pull out particular nuggets, but there is one bit that stands out for me:

‘Basically the growth of the shadow banking system and the use of Special Purpose Vehicles (SPVs) in securitisations has potentially ‘broken’ the monetary data.

Simply put there are now lots of quasi-banks which are not technically banks and so not treated as banks in the official data. Their holdings of money are included in the monetary data and have the effect of inflating the numbers – even when it will have no effect on economic activity in the traditional sense.’

It seems to me that here may be the point of connection between Duncan ‘post-Keynesian’ economics, which comes complete with class-based analysis, and the Marxian concept of ‘Fictitious Capital’, the term used (Capital, Vol 3, p 573-4 of International Publishers’ 1967 edition or see here) to describe how the capitalist class uses the banking industry and its more recent ‘non-banking’ but ‘money holding’ offshoots to assist its own further capital (or is that now capitalisation?) accumulation, by effectively creating a parallel system of financing to which only it has access and from which only it can profit.

And I think that’s the next subject of bloggy enquiry, for me as far as my limited understanding will take, but maybe for others to run further with.

Duncan is great in his analysis of how the system, based on what might be described as the fundamental illegitimacy of fractional reserve banking, actually works, what the real reasons for credit blockage may or may not be, and why quantitative easing may actually – when you work it all through – be a good way to deal with recession as it ‘makes it easier to finance the budget deficit’.

But what he does not yet do is move from the underlying economics to the underlying politics, or even poltical philosophy. Though I think he might if we ask him, as he seems keen.

For me, the next logical (though still tenative) step is to return to the essential point that the whole financial kit and caboodle of banks and non-banks as, in the end, the biggest source of power for capitalism, but to explore how the new ‘non-banking-but-acutally-banking’ industry have multiplied that power by stealth.

For me, Duncan’s assessment that the ‘growth of the shadow banking system and the use of Special Purpose Vehicles (SPVs) in securitisations has potentially ‘broken’ the monetary data’ may actually be more than a national accounting problem.  It may be more an assessment of how 21st century capitalism has moved on, in a way actually predicted by postmodern thinking, to become entirely self-perpetuating (a Baudrillardian virtual reality, if you like).

That is, to the extent that the link between finance and the ‘real economy’ is no longer relevant for large amounts of capital, so the potential for a two-way conduit of labour/money flow, however exploitative, between the capitalist and working classes has gone, and only a one way drain on the labours of an exploited working class now exists (see also this very good US article analysing the concept of fictitious capital against the reality of, say, GM or GE making most of its profit not from production but from the financing aspects of their operation).

As Mil has said, this may be the real 21st Century Fix.

Meanwhile, back in Daleland, I expect the trolls will keep on slobbering over the simplistic monetarist prescription of Thatcherite handbag economics – a misunderstanding of the capitalist economy which John McFall nailed a few months ago, as essentially out of keeping with the real world.

For myself, I prefer my economic all grown up like Duncan’s.

Now we just have to condense it into an A4 leaflet.

Further dated but still good reading: David Harvey (1982) The Limits to Capital (University of Chicago Press)

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