Economic and Financial Crises: A New Macroeconomic Analysis

Book Preface

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.

As surprising as this might appear, inflation, involuntary unemployment, sovereign debts, financial bubbles, and global economic recessions are all negative effects of a single original cause: the erroneous conception of bank money. The import of this claim can only be evaluated once it is recognized that the emission of bank money is what characterizes all our economies. In the absence of banks, only pre-capitalist economies would exist. Without bank money, neither monetary nor financial intermediations would be possible, and the terms ‘inflation’, ‘deflation’, ‘financial bubble’, and ‘sovereign debt’ would be meaningless. Yet, this is not to say that these pathologies are the unavoidable consequences of the discovery of double-entry bookkeeping and the creation of banks. Banks make it possible to build an economic system based on the accumulation of capital. Whether such a system is an orderly or a disorderly one depends on whether it conforms or not to the nature of money, income, and capital. Bank money in itself is not the cause of any pathology; rather, it is the way money is kept distinct from or is mixed up with income and capital that determines whether the result is pathological or not.

The importance of bank money has been clearly perceived by many great economists of the past. From Smith’s distinction between nominal and real money to Keynes’s emphasis on the principle of double-entry bookkeeping, one can trace a line that culminates with the work of Schmitt and his unique definition of bank money. What distinguishes quantum macroeconomic analysis from mainstream economics is the definition of money and the relevance attached to it. According to quantum monetary analysis, money is a numerical form issued by banks as an asset–liability and associated with physical output through the payment of wages. Its great relevance derives from the fact that it enables the numerical expression of wages and makes it possible to express real goods numerically, in terms of wage units. Economics would not exist as a science if its object of enquiry could not be measured. As the Classics knew well, the determination of a unique and invariable standard of value plays a crucial role in the building of economics as a science. Yet, the search for such a standard is unavoidably hopeless so long as economic value is considered as a dimension. It was Walras who first recognized that economic value is essentially a numerical relationship and not a substance as the Classics believed. Unfortunately, Walras did not follow up on his intuition and was unable to find the numerical standard of value implied by it. It is with Keynes’s introduction of the wage units that a solution has appeared. But it is only once money is identified as an asset–liability that Keynes’s wage units acquire their full significance in economic analysis.