There have been numerous books written about the global crisis. Another book on this topic needs to differentiate its product. This book attempts to do that by discussing the role of money in a capitalist economy as one of the underlying causes of the crisis. Written by a Marxist scholar, it is based on previously published papers in the Journal of Australian Political Economy, Capital and Class, and Real World Economics Review. Its aims are to examine financial crises and the role of money in a capitalist economy from a theoretical perspective.
Although the title suggests that the cause of the recent global crisis is the role of money and finance in a capitalist world, the author focuses the underlying causes of the crisis. For another explanation along these lines see Reference VaroufakisVaroufakis (2011). In the ‘Introduction’, Lucarelli bases his arguments on Marx’s analysis of capitalism: the pursuit of profits leads to over-accumulation; capitalists seeking alternatives for investment move into financial markets; and the result is asset price bubbles which in turn lead to crises. A crisis functions to restore profitability, and the process begins again. Lucarelli stresses the importance of Marx’s concept of money and money supply as an endogenous variable. For Marx, money and finance provide the underlying possibility of crises, but the cause of crises is over-accumulation and a falling rate of profits.
In Chapter 1, ‘A monetary theory of production’, Lucarelli provides a discussion of Marx’s concept of value (use value and exchange value), money as a unique commodity and the role of money in the M-C-M' circuits of capital. In Chapter 2, ‘A Marxian theory of money, credit and crises’, Lucarelli discusses the unique properties of money: he approvingly quotes Reference BellBell (2009) ‘Money purchases commodities, but commodities do not purchase money’. But that is not correct: when I sell my labour power, I am in effect purchasing money – commodities do purchase money. He misses an important point about the role of money: in Reference Clower and ClowerRobert Clower’s (1969) words, ‘money buys goods, goods buy money, but goods do not buy goods’. In a monetary economy, as Clower demonstrated, if we cannot sell our labour power (i.e. if there is unemployment), we do not have an income, and hence cannot demand goods and services. There is an interesting discussion of Marx’s arguments that the expansion of credit creates the conditions for crises. Much of this discussion is similar to Reference JunankarJunankar (1982).
Chapter 3 on ‘Money and Keynesian uncertainty’ provides an interesting discussion of Keynes’ stress on the importance of uncertainty (as distinguished from ‘risk’), the role of liquidity preference and a critique of Say’s Law and the concept of the neutrality of money. Chapter 4 on ‘Endogenous money: heterodox controversies’ provides an extended discourse on various post-Keynesian theories of money, covering the Horizontalist, Structuralist and Circuitist schools of thought. The essential point is that central banks do not control the money supply: the money supply depends on the credit being extended to the private sector by the commercial banks. Or to put it succinctly, the demand for money creates its own supply. The various strands of post-Keynesian theories are discussed, but it is not clear how important this discussion is to the central aim of this book – to examine financial crises.
In Chapter 5, ‘Towards a theory of endogenous financial instability and debt-deflation’, Lucarelli argues that ‘… there is a coherent theoretical lineage between Kalecki and Minsky in their treatment of endogenous money’ (p. 85). He argues that financial instability is not a random occurrence but a normal pathology of capital accumulation. There is a good discussion of the role of investment, of Kalecki on increasing risk and investment and of endogenous financial instability. The discussion links this analysis to Marx’s problem of the realisation of surplus value. There is a discussion on Kalecki and monopoly prices, but its relevance to the main argument is not clear. On page 99, Lucarelli starts with the statement that the ‘debt-deflation theory of depressions was first formulated by Reference VeblenVeblen (1904)’. But this is after discussing Kalecki and Minsky: it would have been better if he had kept to a chronological and logical order. Why does he not try to trace the lineage of endogenous financial instability theory from Marx, to Veblen, to Irving Fisher, to Keynes’ concept of uncertainty, to Kalecki, to Minsky, to Kaldor?
The section on Veblen was a revelation for me as I had not read Veblen on The Theory of Business Enterprise (Reference Veblen1904):
This cumulative extension of credit through the enhancement of prices goes on, if otherwise undisturbed, so long as no adverse price phenomenon obtrudes itself with sufficient force to convict this cumulative enhancement of capitalised values of imbecility (!). (p. 106, exclamation added)
In Chapter 6, ‘Financialization: Prelude to crisis’, Lucarelli’s arguments are familiar: he refers to global trends that included an increase in privatisation, the increased role of financial markets, the deregulation of financial markets, the squeezing of labour, stagnant real wages in the United States, increased inequality, increased reliance on credit, housing and financial bubbles and so on. There is a discussion of the role of Asian surpluses in helping to fund US budget deficits and current account deficits and a questioning of how long this is likely to continue.
In Chapter 7, ‘Faustian finance and the American Dream’, the author sets out to examine ‘… the immediate causes of the financial meltdown …’ (p. 132). Needless to say, Minsky moments are mentioned. The story in this chapter is a well-known one of low interest rates, deregulated financial markets (the repeal of the Glass-Steagall Act in 1999), easy lending, creation of new financial instruments, CDOs and CDSs, a housing boom based on sub-prime mortgages and so on. The crash came with a collapse in the housing market, the AIG crash, the bail out of Fannie May and Freddie Mac, the Lehmann brothers collapse and so on. The US government ‘socialize[d] the losses and privatize[d] the profits’ (p. 141).
The concluding chapter discusses some policies that include re-regulation of the financial sector, state intervention, the role of the government to act as the ‘Employer of Last Resort’ and a reform of the international monetary system along Davidson plan lines of an International Money Clearing Union.
There is much in this book that makes one think, but the author seems to provide snippets of work by different economists, rather than writing a book on the history of economic thought that carefully tries to link the work of different writers and provide a coherent story about the way that financial instability developed over time and led to a crisis. That does not necessarily mean that those authors saw their work as developing someone else’s ideas. But we can, with hindsight, see the links between the earlier works. For a book that is concerned with alternative theories of money and finance, there is no mention of Wicksell or of the important work by Reference HicksJohn Hicks (1979, Reference Hicks1989) in his later life.
Overall, I found the book was a collection of essays loosely linked together. To provide an explanation of a crisis, we need to explain (a) the underlying causes of the crisis; (b) what is the (immediate) trigger that led to the crisis; and (c) the transmission processes (the propagation mechanism). However, I did not find a coherent argument showing how the endogenous nature of money can be the underlying cause of crises. If the supply of money is endogenous, as argued by the author, it cannot be the cause of the crisis. Money and finance provide the means by which the crisis is propagated. The underlying cause can be explained, à la Marx, by the inherent contradictions of a capitalist society. There is some discussion of the immediate causes of the crisis in Chapter 7, but it is not linked to the discussion in Chapters 3 and 5.
This is a book that provides much information for people interested in heterodox theories of money and the crisis and is recommended reading for students.
