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This book discloses the economic foundations of European fiscal and monetary policies by introducing readers to an array of alternative approaches in economics. It presents various heterodox theories put forward by classical economists, Marx, Sraffa and Keynes, as a coherent challenge to neo-classical theory. The book underscores and critically assesses the analytical inconsistencies of European economic policy and the conservative nature of the current European governance. In this light, it examines the political obstacles to proposals to reform the European monetary union, as well as those originating in the neo-mercantilist German model. Given its scope and format, the book offers a valuable asset for researchers and members of the general public alike.

Inhaltsverzeichnis

Frontmatter

1. Economics: A Political and Mathematical Discipline

Abstract
This introductory chapter discusses the nature of the economic discipline. Economics has to do with the production and reproduction of the material living conditions of society, and is therefore at the crossroads between natural, quantitative and political sciences. The central theme of economics is income distribution, how output is distributed among the components of society. This theme has obvious political implications, and it is not surprising that in the history of economic thought several theories have arisen in this regard. These theories influence our social–political beliefs. The issue of income distribution has implications for other central themes, such as economic development. We introduce two approaches: the surplus approach characteristic of the classical economists of the eighteenth and nineteenth centuries and of Marx; and the neoclassical or marginalist approach that arose as a reaction to the former at the end of the nineteenth century, which is mainstream today. There is also a third theory, that of John Maynard Keynes, which brought a considerable upheaval in the dominant theory and is, in many ways, closer to the surplus approach.
Finally, the chapter presents our work plan, from the analysis of distribution theories, through monetary analysis, to the debate on the eurozone crisis.
Sergio Cesaratto

2. The Surplus Approach

Abstract
This chapter introduces the surplus approach. The surplus is that part of the social product that is available to the community, or its élite, once it has set aside what is needed to reproduce the same output, that is, for replacement of the means of production and for the subsistence of the working class. The chapter examines some applications of the concept in relation to the birth of ancient civilizations and German mercantilism. Next, it explains the evolution of the ideas of the classical economists and Marx. These economists shared the idea that income distribution depends on power relations between the social classes. A solution to some of the difficulties they encountered was suggested by Piero Sraffa, an economist who was close to Gramsci, Keynes and Wittgenstein. In addition to rediscovering the classical approach, Sraffa also challenged mainstream theory on the basis of analytical problems in its fundamentals. In the 1960s, this criticism led to the so called “two Cambridges controversy”, which involved the brightest economists of the time. The most prominent, Paul Samuelson, admitted that the criticism was correct. Today the controversy is rarely mentioned in university courses, evidently because it has uncomfortable implications for mainstream theory.
Sergio Cesaratto

3. Marginal Economics

Abstract
This chapter introduces mainstream economics. Marginal (or marginalist) theory is based on a harmonic view of income distribution, unlike the conflictual approach of classical theory. According to marginal theory, every “factor of production” (labour, “capital” and land) is rewarded in proportion to its presumed contribution to production. According to the surplus approach, capital exploits labour, whereas in marginalist theory no one exploits anyone. We also examine the marginalist belief that in the absence of obstacles, the free market leads to full employment of labour and of the other “factors of production”.
We then consider marginalist monetary analysis. This is particularly important because it forms the basis of the European treaties for the currency union. According to marginalist monetary analysis, if the markets for production factors and goods are flexible enough, the economy tends towards full employment. Monetary policy is therefore of no help for achieving full employment but is only concerned with price stability. Keynes was critical of this view. However, he did not have enough analytical tools to undermine it definitively. Thanks to the results of the “two Cambridges controversy” we have such instruments today. The chapter explains in an introductory way where the analytical problems of marginalism lie.
Sergio Cesaratto

4. The Incomplete Revolution

Abstract
This chapter deals with Keynes’s critique of marginalist theory. Keynes questioned the idea that market flexibility leads to full employment. He regarded aggregate demand as the main determinant of production and employment levels. For Keynes, as for Marx, increasing inequality in income distribution depresses aggregate demand. He believed that monetary policy could have real effects on the economy, but was hampered by distrust of the financial markets, and regarded fiscal policy as a necessary tool for full employment.
Keynes also believed that saving was not the driver of economic growth, but rather a factor that depresses aggregate demand. In his theory, investment depends on entrepreneurs’ expectations of future aggregate demand. Keynes’s main theoretical contribution lies in the idea that investment determines saving, and not vice versa as in mainstream economics. This theoretical innovation has important implications for the role of banks. According to Keynesian theory, banks do not intermediate saving, but create money out of nothing to fund investment. This view is called endogenous money theory. Finally, we examine the limits of Keynesian criticism of marginalism and how, by integrating Sraffa’s criticism with that of Keynes, a complete alternative to marginalism can be developed.
Sergio Cesaratto

5. Money and the External Constraint

Abstract
The focus of this chapter is twofold. First, we return to the theory of endogenous money, providing further details on how banks create money in the form of loans to businesses and households. Secondly, we open our economy to foreign trade and introduce another workhorse of heterodox economics, the “balance of payments constraint”. We explain what the balance of payments is: far from being a boring accounting document in which foreign trade and financial transactions are recorded, it is a key to many important questions. In particular, it tells us how countries that want to grow faster in order to catch up with more developed nations often find themselves stuck in unsustainable foreign debt and financial crises. This is because when a country grows faster, it ends up importing more goods from abroad. These must be paid for in international currencies (e.g. in dollars), that can be obtained through exports or through borrowing from foreign banks. Debt in foreign currency is risky because the country may fail to increase its exports and therefore to repay its foreign debt. The final part of the chapter discusses the Modern Money Theory thesis that the balance of payments constraint is overestimated.
Sergio Cesaratto

6. Dying of Europe?

Abstract
This chapter deals with current economic problems, particularly those in Europe, the world’s developed region most in difficulty. It starts with Italy, the weakest link in the European Economic and Monetary Union (EMU), examining its path from the economic miracle of the 1950s and 1960s to recent decades of stagnation and even decline.
The European crisis of the past decade resembles foreign debt crises that have involved many emerging countries in the past. Europe is divided into “core” and “peripheral” countries. Peripheral countries borrowed from core countries, which happily granted loans to expand their exports to the periphery. Subsequent austerity measures were designed to bring the resulting imbalances under control. However, coordinated use of monetary and fiscal policy could have avoided much unnecessary suffering.
The chapter finally examines two obstacles to change in Europe. The first concerns German “monetary mercantilism”, a problem for the EMU and the global economy. Secondly, history teaches that a monetary union is only viable if supported by political solidarity between the units that compose it, as in the case of the United States. Americans feel part of a nation. In Europe, mistrust and a divisive doctrine, ordoliberalism, prevail.
Sergio Cesaratto

7. Count Draghila

Abstract
This chapter examines the European crisis from the point of view of monetary policy. Based on the monetary issues discussed in the previous chapters, we explain how monetary policy works in ordinary circumstances. We then look at non-conventional measures initiated by the ECB in 2008. The ECB’s action became more effective with Draghi, but could only partially make up for the absence of appropriate European fiscal policy. In fact, European fiscal policy, based on pursuit of a balanced budget and obsession with public debt, does not work in tandem with monetary policy. From a Keynesian viewpoint, the central bank should primarily serve fiscal policy in the pursuit of full employment as well as price stability. Finally, we explain a controversy that raged in 2011–2012, but has never really died down: Target2, the European payment system. Appendix 1 completes our analysis of ECB monetary policy from a central bank balance sheet perspective. This is an excellent vantage point for reviewing conventional and unconventional monetary policies. Appendix 2 provides further details of Target2, discussing whether Target2 imbalances constitute real debt between EMU countries.
Sergio Cesaratto

Backmatter

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