Evolutionary Financial Macroeconomics

Giorgos Argitis

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351670685
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Thorstein Veblen and Hyman Minsky are seminal thinkers who place great importance on the interaction between processes that link finance and financial markets with economic and social evolution. This book makes a contribution to the recontextualisation of the habitual, non-evolutionary and laissez-faire macroeconomic theory and policy, thus exposing the relevant contribution of the macro-theories of Veblen and Minsky.

The book starts with an elucidation of Veblen's cultural theory of insufficient private demand, waste and financial fragility and instability. It shows how speculative and parasitic leverage engenders solvency illusions and risk, pecuniary efficiency, low quality liability structures and socially destructive boom-bust cycles. Minsky's creative destruction liquidity processes and coordination failures of cash flow escalate the aforementioned path-dependent developments and explosive dynamics of capitalist economies. The main themes of the book are the cultural, evolutionary and holistic vision of macroeconomics, the evolving habits of mind, routines and financial institutions, the speculative, manipulated and unstable financial markets, as well as the financial macroeconomic destabilizing effects of pecuniary and parasitic consumption and investment.

This book will be of great interest to researchers, intellectuals and students pursuing economics and finance.

1 Veblen’s Cultural Macroeconomics

Introduction

Veblen envisioned a cultural, holistic theory of macroeconomics.¹ This theory is unified within his general system² of social change where the actions and the behaviour of men are the subject matter. The evolution of the macro-system is conceptualised as a process of adaptation to a business environment that continuously and cumulatively changes under the influence of the evolving financial institutions. The evolution of financial institutions hinges on the natural selection of the fittest habits of thought and on the conflict between the instinct of workmanship and the pecuniary and emulative instincts.

In this chapter, I will trace the importance and enduring value of Veblen’s insights that arguably form a valuable contribution to the building of evolutionary foundations for macroeconomics. My framework of interpretation underlines that Veblen introduced certain preconceptions and habits of thought that can recontextualise the subject matter of macroeconomic analysis.³ I will argue that the essence of Veblen’s macroeconomic theory is the elucidation of the cultural foundations of production, finance, prices, distribution, effective demand and economic growth, which differentiate the age of petty capitalist from the age of speculator, businessman and banker. Moreover, many of Veblen’s insights could prove very valuable for those delving into the peculiar macroeconomic circumstances encompassing the financialised model of contemporary capitalism. Throughout his writings, over-leverage and deleverage, the recurring turbulence of financial markets, irrationalities of financing and funding, financial speculation and price manipulation as well as the depression, crisis and debt-deflation tendencies in credit-driven capitalist economies loom large as processes that determine the direction of macroeconomic change.⁴ Of interest, too, is that Veblen’s vision of the relation between the evolving financial institutions and the structure and functioning of the macro-system advances the comprehension of the course of financialisation.

The evolution of financial institutions

Veblen’s macroeconomic theory is based on the Darwinian principles of variation, inheritance and selection and on the principle of cumulative causation.⁵ The essence of this theory is that a process of ‘financial macro-institutional mutationism’⁶ is the causal mechanism of macroeconomic change. The fundamental presumption is that the evolution of financial institutions is essential because it governs a capitalist economy’s cyclical trends, growth and welfare potentials. The macroeconomy is a sub-system, along with other – i.e. financial, productive, distribution – sub-systems, of the larger socio-cultural order in which it is embedded. As a part of a larger cultural complex, the macro-system is an ongoing process that reflects and affects the cumulative nature of the evolving socio-economic process.

In Veblen’s cultural, holistic approach, macroeconomic analysis should not concentrate upon the behaviour of key macro-variables that detail a quantitative depiction of the macroeconomy. Rather, it should investigate macroeconomic changes in light of the prevailing institutions in the business enterprise system. As I have argued elsewhere, (Argitis, 2016, p. 836):

this is the reason that Veblen’s conceptualisation does not focus entirely on the notions effective demand, overproduction, and the determinants of growth, of business cycles and employment. His aim was to elucidate the interaction between macro-evolution and the institutional adaptation of the business enterprise system.

Indeed, for Veblen, the proper subject of macroeconomics is the analysis of the cause and effect of the interconnectedness of the two most important institutions of capitalism namely the industrial system and the business enterprise. A point to stress is that Veblen placed emphasis on the interconnectedness between these two institutions because of their cultural dependence on the evolution of pecuniary habits of thought. Mitchell (1969) remarked the cultural difference between industry and business. He observed that, in Veblen’s system, business enterprise is the art of making money, while the machine process is the modern art of making goods. In Veblen’s (1919, p. 92) words,

the business man’s place in the economy of nature is to make money, not to produce goods. The production of goods is a mechanical process, incidental to the making of money; whereas the making of money is a pecuniary operation, carried on by bargain and sale, not by mechanical appliances and powers. The businessmen make use of the mechanical appliances and powers of the industrial system, but they make a pecuniary use of them.

This passage clearly displays Veblen’s attention to the repercussions of the peculiar nature of business capital on the industrial system and on an economy’s capacity to produce. On this ground, Mitchell (1969) underlined that Veblen’s concern was to scrutinise how the business enterprise suppresses industrial efficiency, despite the fact that most economists, due to their habitual frame of mind, have viewed business enterprise as a great means for industrial development and growth.

To understand how industrial efficiency is suppressed, Veblen devoted his consideration to the reasons that make the macro-systems of a ‘natural economy’ and of a ‘money economy’ to be substantially dissimilar from the macro-system of a ‘credit economy’. Veblen (1904) maintained that the most distinctive aspect of a money economy is the goods market, which, however, is no longer the dominant factor in a business enterprise economy since the capital market has taken the first place. In his frame of mind, the institutional distinction between a money economy and a credit economy discloses the dual nature of capital, which, in turn, reveals the adaptation processes of the business enterprise system to the evolving financial institutions. In the Theory of Business Enterprise, Veblen (1904) distinguished capital into physical or tangible and immaterial or intangible capital, and claimed that this distinction ‘naturally’ emanates from the evolution of capital from competitive proprietary business to large corporations. In many of his writings he demarcated the institutional connotations of the difference between tangible and intangible assets. Veblen (1919, pp. 69–70) endorsed that

tangible assets, it appears, are such assets as represent the earning-capacity of any mechanically productive property; whereas intangible assets represent assured income which cannot be assigned to any specific material factor as its productive source. Intangible assets are the capitalised value of income not otherwise accounted for. Such income arises out of business relations rather than out of industry; it is derived from advantages of salesmanship, rather than from productive work.

The distinction between tangible and intangible capital is the origin of the division between the industrial and the business spheres of an economy. Veblen defined industry as the older order of capital that was principally identified in the form of machine processes. These processes generated income creation and distribution procedures, while their aim was the satisfaction of human needs. A point worth emphasising is that Veblen habitually used the concept of industry to refer to technology and its decisive role in growth dynamics as well as in social change. In contrast, he defined business as the processes of accumulating intangible assets and as procedures of market valuation and revaluation of tangible and intangible capital as putative earning-capacity. He envisaged intangible assets to represent no actual input to the produced output of goods and services but only a powerful claim to the distribution of the product surplus on property grounds, which appears to be institutionally legitimate.

Veblen used the distinction between industry and business to decode the causes of macroeconomic evolution. Veblen (1904, p. 18) originally visualised macroeconomic order and change to depend on

the keeping of the balance in the comprehensive machine process of industry (which) is a matter of the gravest urgency if the productive mechanism is to proceed with its work in an efficient manner, so as to avoid idleness, waste, and hardship.

This passage displays that economic growth and macroeconomic change are hypothesised to hinge upon the accumulation of tangible capital, industrial efficiency and waste. Notably, the fact that Veblen concluded that there is an inverse relationship between industrial efficiency and waste. Nonetheless, industrial efficiency is not an ordinary condition of the business enterprise system. Veblen (1904, p. 17) recognised that

a disturbance at any point, whereby any given branch of industry fails to do its share in the work of the system at large, immediately affects the neighbouring or related branches which come before or after it in the sequence, and is transmitted through their derangement to the remoter portions of the system.

Veblen seemed to suppose that macroeconomic order relies on an uninterrupted interchange of the various industrial processes. Seen from another angle, Veblen hypothesised that the growth dynamics of the multifaceted technological structure of the business enterprise system depend upon the harmony of the inter-industrial relations. But, Veblen proclaimed that industrial disorder is the most characteristic feature of the business enterprise system. This key assertion allowed him to surmise that the macro-system will tend to constantly operate below its full productive capacity. For Veblen, an economy’s actual growth rate is very likely to be constantly below its potential growth rate.

He diagnosed as a possible reason for this macroeconomic underperformance the failure of businessman to function as a decisive factor in the management of the various industrial plants and processes, and in the supervision of the interstitial adjustments of the system. Besides, he remarked that such a failure is larger when technological progress is faster and the industrial system is more complex. After that, Veblen went deeper and scrutinised the causes of industrial disorder in light of the institutional structure of a real-world credit economy. In this regard, he underlined that any branch of industry, which inevitably enters in economy’s credit system, is a complex bargaining process of money contracts, purchase and sale of goods and services and assets and goods prices. Furthermore, he upheld that the credit system is a structure of pecuniary transactions which, in Veblen’s (1904, p. 27) words, “take place at the hands of the businessmen and are carried on by them for business ends, not for industrial ends”. This division between industrial and pecuniary transactions was fundamental to his macro-vision. The reason is that this division qualified him to argue that the performance of the macro-system depends on the co-evolution between industrial and pecuniary processes that generates economic and pecuniary values, respectively.

Veblen (1901; 1908b) visualised the economic values as the real or tangible values, which are created by industrial processes and industrial employment. Economic values are commodities or services that accomplish personal and social needs. In contrast, pecuniary or market values are the final products of the business system and of pecuniary employment. Gruchy (1967, p. 108) marked out that pecuniary values are exchange values derived by market forces.

At bottom these pecuniary values are psychological rather than substantial, and consequently they have all the variability that goes with psychological phenomena. Unlike economic values which rest on material circumstances reducible to objective terms of mechanical, chemical, and psychological effect, pecuniary values rest on the uncertain foundation of vendibility.

In Veblen’s system, vendibility means the competence of a product to bring pecuniary profit to businessman. Gruchy (1967) observed that vendibility is a matter of pecuniary serviceability, which might vary not in harmony with material serviceability or social utility, but in accordance with changes in mass or crowd psychology. These psychological changes are apparent mostly in periods of panic and speculation when there are significant discrepancies between economic and pecuniary values. In this regard, Mitchell (1969, p. 633) pointed out that

the commodities which are highly vendible may not be goods which are highly serviceable. Thus, the modern system of putting business in control of industry involves a constant bias in the direction of turning out goods which are fitted primarily to catch the purchaser’s eye and appeal to his monetary desire rather than things which really gratify human wants.

In Veblen’s theorising, as Gruchy (1967) argued, sometimes there is a high degree of coincidence between these two types of values that implies a harmonious relation. When this happens, pecuniary values are rough depictions of economic values. But there are also times when discrepancies between the streams of economic and pecuniary values prevent the latter from being ample measures of economic values. In this context, Veblen’s macroeconomic scrutiny was directed to illuminate why there is not a permanent coincidence between economic and pecuniary values and whether it is feasible for the difference between them to diminish. It is worth noting that the institutional distinction between economic and pecuniary values crystallises the formation of Veblen’s preconception concerning the repercussions of the institution of credit system for economic growth and community’s welfare. In so doing, Veblen thoroughly researched the macroeconomic ramifications of the liquidity allocation and distribution inefficiencies that depict the business enterprise system. For Veblen (1919, pp. 92–93)

the highest achievement in business is the nearest approach to getting something for nothing. What any given business concern gains must come out of the total output of productive industry, of course; and to that extent any given business concern has an interest in the continued production of goods. But the less any given business concern can contrive to give for what it gets, the more profitable its own traffic will be. Business success means getting the best of the bargain.

The institutional reasoning behind Veblen’s argument is that the structure and functioning of the business and financial systems engender pecuniary habits of thinking. The latter cumulatively and selectively become customary and eventually come to form the institutional setting which governs the structure of industrial, financial and distribution relations. Habits of mind, conventions and customs of conduct are passed on to the other sub-systems of an economy through adaptive processes in financial contracts and arrangements in business traffic. However, as Rutherford (1984) denoted, institutions are also themselves habits and routines that influence the process of selection. The consequences of the prevailing institutional setting are further strengthened because of financial innovations that activate new processes of competition and imitation for pecuniary gains.⁷ According to Veblen, financial innovations restructure the credit relations and increase the degree of complexity and interrelatedness among an economy’s various sub-systems. But, financial innovations are, mostly, pecuniary institutions that oxygenate from business principles and pecuniary values. They are introduced into the credit system on the basis of making pecuniary private gain and not of promoting employment, output and social gain. For Veblen (1919), the habitual frames of mind enable the owners and managers of any given concern or section of the business system to use financial innovations to make gains for themselves at the cost of the community. Community’s welfare and the common good are best served by a higher production of economic values and by the efficient working of the industrial system at its full capacity. But, industrial efficiency is eroded by financial innovations, which, in conjunction with an increasing use of pecuniary debt, operate as an institutional channel that bequeaths certain habits and routines to the financing and funding processes in business and banking.

Financial markets, corporation finance and macroeconomic adaptation

The macroeconomic significance of pecuniary innovations and institutions is associated with the fact that they amplify the divergence between economic and pecuniary values. For Veblen, the adaptation process of the financial and macroeconomic structures is susceptible to institutions, which, in his system, are distinguished into two categories according to their purpose in economic activity. They are institutions of acquisition or of production, or as alternatively defined, institutions that serve the invidious or the non-invidious economic interests. The former category evolves around business principles, predatory instincts and the creation of pecuniary values, while the latter with machine processes and technology, the instinct of workmanship and the creation of economic values.

Veblen placed these two categories of institutions at the epicentre of his cultural theory of macroeconomics. As noted, he supposed that the structure of capital changes according to the evolving habitual frame of mind from the older order, where industry and business were unified, to the new order where they are separated, and, rather opposed. Veblen saw this separation as a systemic force that has induced significant structural and functioning modifications to various macro-sub-systems, i.e. investment spending, consumption spending, income distribution, technological relations, industrial structure, economic growth and livelihood. He continuously demarcated these macro-sub-systems as evolving cultural processes, which were parts of the co-evolution among industry, business and finance. He was groping towards a vision where macroeconomic change is anticipated in terms of the impact that the prevailing habits of thought, embodied in the evolving financial institutions, have on the separation of business from industry; and mostly on the speculative readjustments in the stock market valuation of business capital, which dishonour industrial capital and weaken businessmen’s determination to serve economic growth and community’s welfare.

As noted above, Veblen initially visualised the structure and functioning of macro-systems to rely on the complex technological interconnections of the industrial system, which rapidly grew on a large scale. His emphasis on the machine processes was crucially motivated by his belief in the decisive economic and social role of engineers, technicians and skilled workers. Veblen presumed that the principal aim of these social groups is to collectively coordinate all the sub-system...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• Introduction
• 1. Veblen’s Cultural Macroeconomics
• 2. The pragmatic basis of Veblen’s approach to economic policy
• 3. Unsustainable asset and liability structures, market processes and Minsky’s macroeconomics
• 4. Minsky’s institutional stabilisers and endogenous capitalist instability
• 5. Cultural financial foundations for evolutionary macroeconomics
• Epilogue
• References
• Index