The Second End of Laissez-Faire: The Bootstrapping Nature of Money and the Inherent Instability of Capitalism
"Globalization" can be understood as a grand experiment to test the laissez-faire doctrine of neoclassical economics, which claims that a capitalist economy will become more efficient and stable as markets spread deeper and wider around the world. The "once a century" global economic crisis of 2007-9 stands as a testament to the failure of this grand experiment. Following the lead of Wicksell and Keynes, this article argues that a capitalist economy is subject to an inevitable trade-off between efficiency and stability because of its essentially "speculative" nature. First, while a financial market requires the participation of a large number of professional speculators to support its risk-diversifying function, competition among professionals can be likened to a Keynesian beauty-contest that constantly exposes financial markets to the risks of bubble and bust. Second and more fundamentally, the use of "money" itself-the ultimate source of efficiency in a capitalist economy-is also the ultimate source of its instability. To hold money is to take part in the purest form of the Keynesian beauty contest, since we accept money only because we expect everybody else to accept it as money in turn. A speculative money bubble can plunge the real economy into depression, while a speculative money bust eventually leads to hyperinflation. Indeed, the Wicksellian theory of cumulative process shows that any disturbance in monetary equilibrium triggers a disequilibrium process that cumulatively drives all nominal prices further away from equilibrium. The Keynesian principle of effective demand demonstrates that it is the stickiness of nominal wages that saves the capitalist economy from its inherent instability, albeit at the expense of full employment. This article also contends that in the context of the current global crisis, monetary instability has manifested itself in the form of the collapse of liquidity in the financial markets as well as in the form of the loss of confidence on dollar as the key currency of global capitalism.
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