Book review: The Economics of Financial Turbulence: Alternative Theories of Money and Finance, by Bill Lucarelli

Abstract

The Economics of Financial Turbulence: Alternative Theories of Money and Finance, Edward Elgar: Cheltenham, 2011; 183 pp: 9781849808781, 67 [pounds sterling] (hbk) The stated aim of this interesting and concise book is to provide an alternative heterodox explanation for the 2007-9 financial meltdown and global economic slump. Utilising both Marxian and Keynesian theories of the credit cycle and endogenous money creation, it argues that the ascendancy of finance in recent decades was the driving force behind the rise of neoliberal ideology and, under the guise of the efficient markets hypothesis, paved the way (via the widespread deregulation of finance) for the onset of the most severe economic and financial crisis since the Great Depression. In the author's estimation, the magnitude and duration of the current crisis and the immediate (Keynesian) response by the leading capitalist governments to counter its devastating aftermath has laid bare the ideological bankruptcy of the neoliberal agenda that has held sway over economic theory and policy since the early 1980s. In order to avoid future economic disasters, the author calls for a 'restoration of full employment policies', 'the reregulation and nationalisation of the financial system', and the reformation of the 'international financial and monetary architecture' in the tradition of the Keynes plan (p. 145-6). The book, as the author himself acknowledges, is more a collection of self-contained critical essays based on previously published work, including Capital & Class, than a cohesive body of work. It is organised into three major parts: Marxian Perspectives, Heterodox Theories of Endogenous Money, and The Roots of the Current Crisis. In light of the above, some of the chapters, particularly the first two, dealing with Marxian theories of abstract labour, money, and the credit cycle appear to this reviewer to be written more for specialists in the field and somewhat disconnected from the rest of the work. On the other hand, Chapters 3, 4, and 5, which focus primarily on Keynesian and heterodox theories of financial instability and debt-deflation, including Minsky's 'financial instability hypothesis', lay a firm conceptual basis and coherent tie-in to the last two chapters, which examine the roots of the current crisis. In view of space constraints and my limited knowledge of some of the literature cited by the author, I will confine my review to representative chapters from each major part, viz., Chapters 2, 5, and 6, as well as offering some critical remarks on the book's policy recommendations in light of more recent economic and political events. Chapter 2, entitled, 'A Marxian theory of money credit and crisis', builds on Marx's familiar M-C-M' circuit (where M'= [DELTA]M) to drive home the point that the sole aim of capitalist production is to realise the surplus value embodied in commodities into profit, i.e. their monetary expression (M'). Money--not commodities --is from the outset the starting point of production in a capitalist economy and, in order to obtain it, industrial capitalists must finance it with credit received at interest from the money capitalists in the banking sector. The latter have accumulated these reserves or hoard of cash from accumulated savings deposits, the backward flow of idle funds from industrial capitalists over the course of the business cycle, and the induced issue of unlimited bank money (credit). The new (expanded) circuit becomes M*-M-C-M'-M*', where M* denotes interest-bearing capital. In this antagonistic relation, industrial capitalists working with borrowed money capital (M*) now receive a net profit at the end of the money circuit (denoted M*'), after deducting the interest paid to the money capitalists (bankers). Anything that disrupts this ever-expanding and recurring monetary circuit, such as a sudden fall in the rate of profit due to limited demand by workers and capitalists or a sharp rise in the wage share at the peak of the business cycle, unleashes a crisis of overproduction which, in turn, is further exacerbated by a sharp increase in 'liquidity preference' that follows the fall in the profit rate. …