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Low Wages, Private Indebtedness, and Crisis A Monetary-Theory-of-Production Approach

Listed author(s):
  • Forges Davanzati, Guglielmo

    (Università del Salento)

  • Tortorella Esposito, Guido

    (Università del Sannio)

The aim of this paper is to provide an interpretation of the 2007-2009 economic and financial crisis using the framework of the monetary theory of production. This crisis essentially depends on policies designed to redistribute income at the expense of wage earners, with particular reference to labour market deregulation and restrictive fiscal policies. By reducing total demand, these policies have undermined firms' profits, thus driving firms to bankruptcy and consequently leading to a decline in money supply. At the same time, firms producing luxury goods have been obtaining profits from the spending of rentiers. We also suggest that banking policy ­ through "hoarding" caused by the fact that expectations of individual banks worsened owing to the lack of confidence in the possibility of recouping loans in support of production and consumption ­ can have further negative effects, as it involves a reduction in money supply and hence in production, employment, and wages. As a general result, an economic policy hindering public intervention has proved to be the main cause of financial crisis, while the drop in wages and employment has been its main effect.

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Article provided by Lavoisier in its journal European Journal of Economic and Social Systems.

Volume (Year): 23 (2010)
Issue (Month): 1 ()
Pages: 25-44

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Handle: RePEc:ris:ejessy:0041
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