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This book deals with the structural origins of economic and financial crises. It explains that both economic theories and policies need to be grounded on a monetary macroeconomic analysis of the working of domestic and international economies. The volume outlines reform proposals to make sure that banking activities respect the nature of money.





Confronted with the most serious economic and financial crises since the 1930s, economists should feel the need to question their approach to economic analysis as well as the conceptual background of mainstream economics. Their mathematically sophisticated models, whether neoclassical, new classical, Keynesian, or New Keynesian, have clearly proved to be incapable of avoiding, let alone explaining, the devastating crises that are hampering our economies both nationally and internationally. The reason for this failure lies in their poor understanding of the logical laws governing our economic systems based, as they are, on bank money.
Alvaro Cencini, Sergio Rossi

Modern Principles of Monetary Macroeconomics


1. The Monetary Macroeconomics of Modern Economic Systems

What is money and how do banks issue it? How is it associated with physical output? Is it endowed with a positive value since its very creation, or does it acquire its purchasing power, and how? Is it necessary to distinguish between money proper and money income? If yes, what is their logical relationship? These are some of the questions dealt with in this chapter, where we endeavour to show that the specific nature of bank money remains, in part, a mystery and needs to be investigated starting from its bookkeeping origin. Too often identified with a commodity or an asset, money is mainly perceived as a stock that can circulate more or less rapidly within the economy and whose cost has a direct impact on production. Is this definition consistent with the way money enters those payments that banks carry out? A rigorous analysis based on double-entry bookkeeping shows that this is not the case, because money is intrinsically valueless and can only derive its value or purchasing power from production. The classical distinction between nominal and real money finds a new raison d’être in the distinction between money and income, where the latter is the result of a transaction through which money (a simple numerical form) integrates produced output as its real content. This new macroeconomic analysis of money and income leads to a fundamental dismissal of the old-fashioned idea that money creation is nothing less than a credit creation, or in other words that, by issuing money, banks originate credit, that is, a loan granted to the economy and financed by banks themselves. In fact, banks act as monetary as well as financial intermediaries, and credit is never financed through money creation.
Alvaro Cencini, Sergio Rossi

2. The Macroeconomic Laws of Monetary Production Economies

In this chapter, we will show that, when referred to money and income, economic laws are no less rigorous than physical laws. Their validity is not influenced by economic agents’ behaviour, since they belong to the category of identities, and not to that of equilibrium conditions. Whatever decision may be taken by individuals or institutions, these laws remain unaltered. They set the logical rules at the roots of any economic system based on bank money. As such, they do not refer to any specific economic policy, but rather to the monetary structure on which our economic systems are founded. In other words, they pertain to the logical infrastructure making up for the conceptual and practical framework within which economic agents are free to take their decisions. Economists have argued for a long time about the primacy of identities over conditions of equilibrium, and vice versa. Following Walras’s (1874/1984) contribution, and despite Keynes’s (1930/1971) suggestions, it is today almost generally accepted that economic laws are mainly behavioural, and founded on microeconomics. Mathematics is widely used, and equations of various kinds and complexity are considered as one of the best tools available to represent the real world of economics. Identities are rarely referred to, and when they are it is to transform them almost immediately into conditions of equilibrium. Our aim is to re-establish the logical priority of identities and show that they are the very foundation of macroeconomic analysis. We will do so by starting from a reappraisal of Say’s law, and a reinterpretation of Keynes’s identity between global demand and global supply, to end with Schmitt’s law of the necessary equality between each agent’s sales and purchases.
Alvaro Cencini, Sergio Rossi

Business Cycle and Crisis Theories: A Fundamental Critique


3. Business Cycles versus Boom-and-Bust Cycles

At the beginning of our discipline, economic crises were considered as disconnected and random events caused by exceptional and disparate contingencies and occurrences such as wars, political and social unrest, food shortage, natural disasters, and so on. Economists as well as bankers and businessmen soon started to realize that crises were much less isolated than it was generally thought, and that their recurrence was not random. Juglar (1857) was one of the first researchers to attempt to account for the recurrence of crises starting from statistical observation. Initially trained as a physician, the French economist is considered by Schumpeter (1954/1994: 1123) ‘as to talent and command of scientific method, among the greatest economists of all times’. Starting from a series of statistical data about banknotes circulation, bank deposits, discount, and metallic reserves for France, England, and the United States — which he correlates to the volume of commercial transactions, the price of corn, rent, public revenue, and variations in population — Juglar (1857, 1889) asserts that monetary and commercial crises are strictly interrelated and are the unavoidable price to be paid for the evolution of capitalism.
Alvaro Cencini, Sergio Rossi

4. From Monetarism to the New Classical Synthesis

The aim of this chapter is to show that both monetarism and the new classical synthesis fail to provide a satisfactory analysis of the working of our economies and of the way disorders may arise, disrupting the economic system taken as a whole.
Alvaro Cencini, Sergio Rossi

5. From Keynes to Post-Keynesian Economics

Keynes is unanimously considered as the ‘father’ of modern macroeconomics, and his followers have endeavoured to emphasize the crucial role played by macroeconomic concepts in seeking a theory capable of explaining both the orderly working of our economies and the insurgence of pathological states leading to the burst of economic and financial crises. Their interpretation of Keynes’s analysis, however, is not univocal, and some important differences exist between their approaches and the models they advocate. A classification of their contributions in the different schools of thought that call themselves Keynesian is not always easy and is meaningful only to the extent that it helps one to better understand the alternatives offered by each school. In this chapter, we will analyse the contributions of Keynesian, New Keynesian, and post-Keynesian economics in order to verify if they succeed in reaching a better understanding of the origin of crises than their neoclassical counterpart. In particular, we will show that, despite their emphasis on the role played by monetary disturbances and market imperfections, Keynesian economists of all schools fail to reach this goal.
Alvaro Cencini, Sergio Rossi

6. Economic Crises and Their Relationship to Global Supply and Global Demand

Does it make sense to analyse crises in terms of global supply and demand? Can they be explained consistently with the necessary equality between supply and demand required by modern macroeconomic analysis? These are the crucial questions we will address in this chapter. Starting from Say’s law and Keynes’s logical identity between Y and C + I, we will first investigate the problem of whether or not the insurgence of an economic crisis entails their rejection. Indeed, the possibility of reconciling a situation of disequilibrium with the identity of global supply and demand seems very remote if not altogether inexistent. On the other hand, however, quantum macroeconomics provides clear logical evidence that the identity between global supply and demand is at the heart of economics. This can only mean that, eventually, economic crises will have to be explained without denying this identity. This is not what the followers of mainstream economics claim. Both neoclassical economists (whether advocates of the New Classical or of the real business cycle approach) and Keynesian economists (whether members of the New Keynesian or the post-Keynesian school) believe in some kind of general equilibrium framework and ascribe the outbreak of economic crises to factors affecting either the supply side or the demand side of their models.
Alvaro Cencini, Sergio Rossi

The Monetary Macroeconomics of Crises


7. Capital Accumulation and Economic Crises

In the first section of this chapter we will examine how some of the most renowned economists of the past have explained capital. Undoubtedly, capital is one of the central concepts of economics and yet there is still no consensus among economists on how to define it. The questions raised by Smith (1776/1991) concerning the logical relationship between capital and saving, and between circulating and fixed capital, are no longer on the agenda, and yet they have never been satisfactorily answered. This is even more so with regard to the relationship between capital and economic value. Well-known economists of the past such as Ricardo, Marx, Walras, Böhm-Bawerk, and Keynes have addressed this question and, with the notable exception of Walras, have reached the conclusion that capital cannot be considered as a direct source of economic value. However, none of them denies the impact capital has on prices, and it is since Ricardo’s (1817/1951) Principles that economists are aware that a satisfactory theory of value must account for the presence of capital. In particular, both Ricardo and Böhm-Bawerk (1889/1959) emphasize the role played by time in enabling capital to be an indirect source of economic value. Keynes’s analysis of capital is another important contribution to a correct understanding of this concept and encapsulates all the deepest insights of his predecessors concerning the role of saving and time. By introducing these elements into a theoretical framework where the presence of money and banks is essential, Keynes opens the way to the modern macroeconomic analysis of capital and to Schmitt’s (1984a) quantum macroeconomic approach.
Alvaro Cencini, Sergio Rossi

8. Interest, Rate of Interest, and Crises

Interest and capital are two closely related topics that have been widely discussed by economists. Although in today’s economic literature interest is mostly identified with contract-interest on loans and its rate with the market rate of interest, the problem of its origin has still to be satisfactory solved. Economists of the past struggled to argue the existence of an original interest enabling that of the interest on loans, where the latter is essentially nothing but the effect of the former. They all agreed that capital is at the origin of interest, yet they disagreed about the kind of causal link that exists between these two concepts. Is capital a direct or an indirect cause of interest? The question whether or not capital is a macroeconomic factor of production is still open today and, despite appearances to the contrary, still a subject of controversy. Indeed it is only thanks to Schmitt’s quantum macroeconomic analysis that a final answer is possible, the payment of human labour being the only transaction capable of transforming money into income.
Alvaro Cencini, Sergio Rossi

9. The International Dimension of Financial Crises

Is the present system of international payments an orderly one? And if not, why and what are the consequences? These are the questions asked in this chapter, which is devoted to the analysis of international transactions and their impact on financial crises. The inconsistency between the way money should be used in transnational payments and how payments are actually carried out between nations is not difficult to discern or detect: what should be a mere numerical means of payment becomes an asset that is exchanged against other assets. Yet money does not change its nature when it is used internationally, which is why transnational payments that do not comply with the vehicular nature of money are hopelessly pathological and the source of monetary disorder that feeds speculation and propels financial crises.
Alvaro Cencini, Sergio Rossi

10. Reforming Domestic Payment Systems

The global financial crisis that erupted in 2008 highlighted that banks do not make a clear distinction between the monetary and the financial intermediation they carry out, as explained in this volume. Indeed, in the early drafts of his Treatise on Money, Keynes (1973a: 91) noted that a bank is both a ‘money purveyor’ and a ‘credit purveyor’ within a monetary economy of production. This distinction has been lost in both economic theory and policy since then. It was, nevertheless, at the core of Ricardo’s (1824) Plan for the Establishment of a National Bank. As he observed, ‘[t]he Bank of England performs two operations of banking, which are quite distinct, and have no necessary connection with each other: it issues a paper currency as a substitute for a metallic one; and it advances money in the way of loan, to merchants and others’ (ibid.: 276). Since these two operations are conceptually distinct, Ricardo (1824: 276) explained that they can be carried out by two separate bodies, ‘without the slightest loss of advantage, either to the country, or to the merchants who receive accommodation from such loans’. In fact, as we will argue in this chapter, this functional separation is not only harmless but a structural factor of financial stability, because it allows to avoid that banks issue empty money in purely financial transactions that do not generate new income within the economic system as a whole.
Alvaro Cencini, Sergio Rossi

11. Reforming the International Monetary System

As we have seen in Chapter 9 and as widely recognized by economists all over the world, ‘[t]he international monetary and financial systems are clearly in trouble, and reforms are called for’ (Dooley et al. 2009: 4). This call for reforms of the international monetary regime is far from new. Before and after the Bretton Woods conference, where the discussion centred on Keynes’s and White’s proposals, several plans of reform were proposed and debated, among these Schumacher’s (1943a, 1943b) and Stamp’s (1963). With the partial exception of White’s plan, which de facto merely enabled the passage from the sterling exchange standard to the US dollar exchange standard, none of these plans was retained and the world went on using what was to be universally labelled a non-system of international payments. The need for a reform capable of eradicating the international causes of monetary instability and financial crises has grown stronger year after year and has now reached a critical urgency. However, as Dooley et al. (2009: 4) emphasized, ‘in weighing potential dimensions of reform, there remains considerable uncertainty and debate about the relative importance of factors that have driven and continue to drive the current crisis’. Indeed, unless the origin of international monetary disorder is correctly individuated, no successful plan of reform can be envisaged. Now, quantum monetary macroeconomics provides a new analysis of monetary and financial disorders, and is equal to the task of suggesting a solution that can take three alternative forms: a reform concerning any single country, a reform concerning a group or a community of countries, such as the EU, and a reform of the entire system of international payments.
Alvaro Cencini, Sergio Rossi


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