Abstract
We adopt the Post Keynesian input-output framework pioneered by Wynne Godley to delve into both the causes and consequences of financialization. The distinction between National Income accounting and stock-flow-consistent modelling is showcased. Also, the political economy foundations of financial economics are unearthed. Constructively, the elements of a planned strategy to reinvent the accumulation of capital are sketched. Also, we show how “asset-based reserve requirements” and the issue of government bills and bonds can be “creatively manipulated” by the state to deliver superior and stable social outcomes.
Highlights
Financial economics is the extension of general equilibrium theory to the future with unknown dates and states of the world
The approach is actively developed by the circuit approach to monetary macroeconomics according to which the Central Bank (CB) of a country is seen, in terms of credit disbursement and reflux, as no different from a commercial bank (Passarella 2014)
Political economy is privileged to capture the capitalist economy as an aggregate driven by the class behaviour of agents
Summary
Financial economics is the extension of general equilibrium theory to the future with unknown dates and states of the world. By not creating any means for their instruments to reflux, modern governments have effectively imposed an infinite term to maturity on their offerings so that their fair value is zero. The importance of this reflux for the monetary system was recognized by John Law in 1705. There is an independent literature and ongoing debate about how finance and the real might connect From the latter cajoling innovations in the former to the revolutionary thesis that monetary-financial mechanisms must be installed before industrial revolutions take off, econometricians and historians have been hard at work. Access to finance acts as trigger of regime change
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