Introduction
There are different arguments in order to explain the crisis of
capitalism. These arguments have interpreted in different forms both by
capitalist approach and the socialist approach. Within that frame of these analysis about
crises, Hyman Minsky's ''financial instability hypothesis'' takes an important
place in these arguments. Hence, we begin with an explanation of the strengths
and weaknesses of that hypothesis. After that, we'll mention on the James
Crotty's article which is about the Centrality of Money, Credit and Financial
Intermediation in Marx's Crisis Theory. Then, we will continue with the basic
characteristics of the Marxian approach which is differed from Keynes and
Minsky. Finally, we will point on the Schumpeter's insights about the crisis
theories in addition to the Keynes, Minsky and Marx. Therefore, primarily, we
begin with the explanation of the background of the Minsky's financial
instability hypothesis. Then, together with the explanation of that hypothesis,
we will try to show its strengths and the weaknesses.
Background of the Financial Instability Hypothesis
We should have to consider both of the internal and the extarnal factors
in explaining the crises of capitalism. Generally, explanations depend on these
external factors, the internal factors take an important place. Here, at that
point, the Minsky's financial instability hypothesis confronts us within the
frame of the analysis of the internal problems. Before the explanations of that
hypothesis's strengths and weaknesses, we should briefly look at the other
arguments which underpin this hypothesis. Therefore, at this point, Marx's
(1976), Fisher's (1933) and Stiglitz's and Weiss's (1981) similar arguments are
placed as the building stone in order to understand the hypothesis. First of
all, the profit motive is lay under the Marx's argument. Pursuing for the
profits of the entrepreneurs creates production disorder and instability in the
economy as a whole. At that juncture, the beginning of the production disorder
is partly shaped by the loan of Money (Marx, 1976). This is used for the
purchase of the labor power and the means of production (Marx, 1976). Because
entrepreneurs invest more in case of the profit motive, there will be an
unstable and unplanned development in an economy. Also, there will be a
creation of credit chains so as to expansion of production and investment in
the process of that development (Marx, 1976). However, any trouble that will
occur in the production process will create problem for these credits and the
firms will begin to go in a bankrupt (Marx, 1976). This problem will be also
valid for the lenders as corporations. On the other hand, these issues will
cause to dissolution of asset values and to decrease in prices of that
financial assets (Marx, 1976). Hence, both of these problems will increase the
possibility of the capitalism downfall and cause to the creation of long
crises. The 1929 Great Depression and the 2007 Financial Crisis are the
examples of that situation. Secondly, in my opinion, Fisher's arguments have
important characteristics which are placed in the Minsky's approach. Fisher
specifies that the inefficient position of the financial markets, the economy
place up or down of the equilibrium (Fisher, 1933). He grounded that idea to
the 1929 Great Depression case. He also points that it is evolved a bankrupts
and crisis bound to debt deflation in case of the negative relations between
price movements and the debt amount in the market (Fisher, 1933). According to
Fisher, any bankrupty of firm will affect negatively to the other firms in the
case of the bound together of the firms with credit chains and hence, the
crisis will become inevitable (Fisher, 1933). We can also see that these
arguments are accordance with the Marx's interpretation. Finally, the main
point which is stress on by Stiglitz and Weiss, is the issue of asymmetric
information. They present possible troubles that can occur in financial markets
based on the asymmetric information argument. Stiglitz and Weiss mentions that
the asymmetric informations disrupt the credit markets (Stiglitz and Weiss,
1981). The banks can not support just as the profitable investment, they can
support unprofitable investments due to the asymmetric informations (Stiglitz
and Weiss, 1981). Therefore, the credits which will lend to firms, will
represent average value independently from the value of the investments
(Stiglitz and Weiss, 1981). In this case, meanwhile profitable investment will
not find the sufficient financial sources, unprofitable investment will find
more financial sources (Stiglitz and Weiss, 1981). That's why, at that
juncture, the importance of the uncertainty emerge together with the asymmetric
information. In my opinion, these arguments also present compatible views with
the Minsky's arguments about the troubles in financial markets.
Minsky and the Financial Instability Hypothesis
Briefly, according to financial instability hypothesis, the main reason
of the instability problem in different economies is depended on the high
borrowing rate of investors led by the financial system. As Minsky (1992)
points that '' the financial instability hypothesis is a theory of the impact
of debt on system behavior and also incorporates the manner in which debt is
validated ''. Therefore, mainstream economies are typically dwelled the
investment increases in company with indebtedness and following the depression
phase (Minsky, 1986). On the other hand, the theoretical basis of the Minsky's
Financial Instability Hypothesis can be seen in his famous book which is
Stabilizing an Unstable Economy. According to Minsky (1986), the fundamental
propositions of the financial instability hypothesis are
- Capitalist market mechanisms can not lead to a sustained, stable-price, full-employment equilibrium.
- Serious business cycles are due to financial attributes that are essential to capitalism (Minsky,1986).
Minsky (1986) also mentions that '' these propositions – and thus the
financial instability – stand in sharp contrast to neoclassical synthesis,
which holds that unless disturbed from outside a decentralized market mechanism
will yield a self-sustaining, stable-price, full-employment equilibrium ''.
The arguments of Minsky are coupled with the Keynes and he is one of the
leader economist of the Post-Keynesian approach. Minsky has an approach which
takes the financial structures and financial relations including the Keynesian
point of views. Minsky (1992) also points that '' as an economic theory, the financial instability
hypothesis is an interpretation of the substance of Keynes's '' General Theory
'' ''. Constructed his hypothesis in the
lights of these arguments, Minsky had a crucial contribution to an economic
literature as part of analysis of financial crises. In Minsky's approach, the
financing method of the investments and the results of the way of that
financing takes an important place. According to Minsky, the deficiency of the
Keynesian theory is the result of an exclusion of the capitalist financing
(Minsky, 1986). As it is seen that the financial transactions and the financial
relations are basic points to understand the capitalist crises according to
Minsky. So much so that, capitalism is a financial entire at heart (Minsky,
1986). There is a financial connection behind any transactions. The real
economy is mainly tied to financial relations. For that matter, we can say
that, for Minsky, finance is everything for capitalism. So that, at this point
which impelled Minsky to the financial instability hypothesis for an
explanation of crises of capitalism.
- How the ruling market mechanism achieves coherence in particular outputs and prices,
- How the path of incomes, outputs, and prices is determined, and
- Why coherence breaks down from time to time: that is, why is the economy susceptible to threats, if not the actuality, of deep depressions? (Minsky, 1986).
Furthermore, Minsky (1986) points that '' these questions need to be
answered in the context of the institutions and financial usages that actually
exist, not in terms of an abstract economy. It may be that what the
neoclassical theory ignores, namely institutions, and in particular financial
institutions, leads to the observations it can not explain ''.
So that, I will mention on the strengths and weaknesses of the Minsky's
Financial Instability Hypothesis in the lights of these above informations. I
will stress on three points for the strenghts which are the ideas for the price
and profit, the problem of investment and its financing harmonizing with the
uncertainy and risk and the criticism of the neoclassical economy within the
frame of financial instability hypothesis. On the other hand, the weaknesses
will constitute on the absence of analysis for class struggle in shaping of
capitalist relations and the insufficient explanations for the reasons of
people's indebtedness.
Neoclassical price theory is remain incapable to explain the market
efficiency due to not considering the capitalist economy with its sophisticated
financial structure (Minsky, 1986). As we know, according to neoclassical price
theory, the role of the price is to provide the scarce resource allocation and
to determine the production level in the economy. However, the relations of
price with debts and the other issues are neglected in that theory because the
usage of financial assets as money due to get profit from the production does
not place at the center of that price theory.
However, Minsky's investment analysis based on the price and profit
brings a new method to the macro dynamics. The prices have characteristics such
as creating profit, causing the way of borrowing and providing a new
possibilites of the new types of goods production as well as neoclassics'
arguments of determining the resource allocation and the production level
(Minsky, 1986).
Moreover, the validate of previous investments should be provided via to
the prices of production goods in order to incline new investments (Minsky,
1986). Therefore, capital prices and the financial asset prices play an
important role for the investment in that tendency (Minsky, 1986). In my
opinion, these two price order inclusion to investment provide a crucial
contribution to the modern macro dynamics.
Furthermore, the another important point of the Minsky's hypothesis is
the presenting of relationship between investment and its financing. According
to Minsky's argument, it is not possible to present the method of determining
of investment decision without pointing out the sources of the investment
financing (Minsky, 1986). At that juncture, three factors or the sources of
financing determine the investment which are cash flows and assets, internal
funds and external funds (Minsky, 1986). This last source which is external
funds is achieved by way of borrowing (Minsky, 1986). Minsky (1986) points of
the negative results of that funds as '' if external (borrowed) funds are
involved, then the supply of price capital also includes explicit finance costs
– most importantly the interest rate but also all other fees and costs – that
is, supply price increases due to lender's risk ''. At this point, we can also
see the adding of the uncertainty and the risk concepts into the investment
financing. For example, if the investment financing supports by the debts,
there will be an emergence of the risk in the payments of the debts with the
issue of uncertainty. If the debtor can not be able to pay their debts due to
any reason, the possible debt amount which can be taken in the latter period
will be interrupted (Minsky, 1986). In a similar way, according to Minsky, in a
period with a stable growth path of the economy, the banks will be more
volunteer to lend money and they will reduce the demanded margins of safety
from the customers (Minsky, 1986). As Minsky (1986) points that '' in a
recovery from a severe downturn, margins are large as expectations are muted;
over time, if an expansion exceeds pessimistic projections, these margins prove
to be larger than necessary. Thus, margins will be reduced to the degree that
projects are generally successful ''. Also, it can be expected that the banks
consider the informations of the customers backgrounds whether they paid the
loans just in time or not. However, Minsky (1986) points that '' the size of
the margins of safety determines whether a financial structure is fragile or
robust and in turn reflects the ability of units to absorb shortfalls of cash
receipts without triggering a debt deflation ''. Hence, the close relationship
with the investment decisions and the dynamic position according to economy of
the margins of safety, it propounds the financial aspect of the investment
(Minsky, 1986). In other words, investment is a financial phenomenon according
to Minsky (Minsky, 1986). That's why, as it mentioned above, the financial
relations are the main reason behind the evolution of capitalist crises. Also,
it is composed an important building stone against the neoclassical economy
with the introduction of uncertainty, risk and financing within the frame of investment.
Here, this financing issue of investment adds a new argument in order to
analysis of capitalist crises.
The another important point of the Minsky's argument is the critique of
the neoclassical approach in addition to his arguments for the relations
between the price and profit and the relations of financing of investment,
uncertainty and the risk. When you look at the neoclassical approach, the
problems are temporary in the economy. The system will automatically come to
the equilibrium. There is no need for any intervention because it interrupts
the automatic adjustment mechanisms (or, the adjustment mechanism of the
invisible hand). The role of the government is the protection of the market
rather than to intervene it. Also, one of the most important part of this
automatic adjustment mechanism is arised from rationality of people. In this
point, Minsky's criticism has an important place for the neoclassical approach.
According to Minsky, the rationality creates problems in the economic system
(Minsky, 1986). For instance, Minsky (1986) points that '' if the economy does
not conform to the general equilibrium theory, if it is endogenously unstable,
and if units behave accordingly, then rational expectations will exacerbate
instability ''. The system transform itself into a instable and financial
fragile situation with rational units which are pursued of profits (Minsky,
1986). In other words, in that point, the financial instability appears. At
that juncture, the financial instability is explained by the relations with the
existence of intermediate financial institutions, pricing of capital goods and
financial assets, fluctuations of their prices and the creation of profit
possibilities of these fluctuations (Minsky, 1993). One of the significant
point in the Minsky's hypothesis is the causation of any problems in the cash
flows to the increase of the indebtedness in case of investment (Minsky, 1986).
Also, according to Minsky, all economic units face with the restrictions on
cash flows (Minsky, 1986). That restrictions cause to increase in indebtedness
rate. On the other hand, although the indebtedness increase the growth,
investment and the profit rates, it creates the upward instability (Minsky,
1986). According to Minsky (1986),
'' because of the upward instability of the investment-financing-profit
interactions, from time to time, fragile financial structures emerge ''. He
(1986) also mentions that '' fragile financial structures regularly break,
which sharply reduces investment spending ''. Furthermore, any problems in the
cash flows increase the risk ratio of the borrowers and it widens the problems
to all economic units (Minsky, 1986). Hence, increase in debt ratio will
stimulate the financial instability with raising the interest rate and then
reducing the necessary financial resources (Minsky, 1986). So that, the
investment rate will fall (Minsky, 1986). Moreover, it brings the sale of
financial assets in order to find funds and it causes the fall of asset prices.
The speculative revenues will reduce and therefore, the debt/asset ratio will
deteriorate (Minsky, 1986). This processes can also show by Minsky's three
types of finance which are hedge finance, speculative finance and ponzi finance
(Minsky, 1986). Palley (2010) summarize these types finance like:
- In the hedge finance, borrower's expected revenues are sufficient to repay interest and loan principle.
- In the speculative finance, revenues only cover interest.
- In the ponzi finance, revenues are insufficient to cover interest payments and borrowers are relying on capital gains to meet their obligations.
In conclusion, investment and the financial relations are the key
factors in the financial instability hypothesis. Also, the arguments about the
prices, profits, uncertainty, risk, cash flows and the indebtedness bring new
ideas to the macroeconomic field. As it can be seen in 1929 Great Depression
and 2007 Financial Crisis, the financing of the investment with debts create
recovery, but latter, the economy ride into deep recession as a result of the
excessive debt ratio. Therefore, that point leads us to another issues which
are not handled in the Minsky’s analysis. These are the absence of analysis of
class struggle in shaping of capitalist relations and the insufficient explanation
of the reasons of people's indebtedness.
In my opinion, in addition to
the important arguments for the economic literature in the process of the
post-1980 financialization era, the hypothesis can be criticized within the
frame of the solution to crises. First of all, Minsky’s basic priority for the
provision of crises is the tight financial regulation process. In other words,
he points that financial regulation or the tight control system is the basic
indicator for the stability of the economic system (Minsky, 1986). However,
what is the validity of that policies as part of class struggle? Hence, I think
that the Minsky’s hypothesis and the solutions aimed at the crises can be
discussed as critically within the frame of class struggle. As it mentioned above that Minsky's
hypothesis is the causation of any problems in the cash flows to the increase
of the indebtedness in case of investment (Minsky, 1986). Also, according to
Minsky, all economic units face with the restrictions on cash flows (Minsky,
1986). That restrictions cause to increase in indebtedness rate (Minsky, 1986).
In other words, the indebtedness problem mainly depends on that restrictions.
However, if the main aim of the capitalism is to maximize profits, the basic
way to achieve it depending on the reducing of the costs. The labor costs,
thus, has the highest rate as a percentage relative to other costs. That's why,
capitalists try to repress the wage ratios. Moreover, the problems in the
accumulation process of capital and the reduces in the profit rates cause
structural changings within the capitalist system. Hence, beginning with the
1973 crisis, the financialization and the neoliberal process are examples to
that situation. That's why, I think that the way that going to the financial
instability process is the class struggle in capitalist mode of production.
Therefore, even though the economic process has a strong control mechanism or
regulation system, it will produce policies in order to repress the costs.
However, actually, Minsky did not ignore the problem of capital accumulation.
According to Minsky, the capital accumulation is one of the most important
economic problem and many issues are closely related with the capital
accumulation as part of an explanation of economic crises (Minsky, 1992b). In addition to the roles of producers and
financial intermediaries, there are also households, international units and
government in the monetary flows in an economy. The relations between these units
decide the capital accumulation and the performance of the system. The dynamic
relations which provides the capital accumulation are also the main sources of
the fragility and the instability (Minsky, 1992b). So, at this point, why did
Minsky analyze the capital accumulation process just within the frame of
monetary flows? I think that it is an important question. Hence, this question
brings me to the class struggle issue. For example, apart from the financial
relations, there is a deficiency due to not considering the capital accumulation
process in the real economy. At that juncture, according to Minsky, instability
causes from the deterioration of the debt-income relations (Minsky, 1995).
However, he did not explain why people indebted. I think that it is more than
restrictions on the cash flows. For instance, the repression on the wages could
not find in the Minsky's arguments.
Secondly, the other supportive
argument comes from the structural Keynesianism. One of the most important
characteristic of that approach is to handle the income distribution effect
upon the aggregate demand within the frame of the class struggle. In this
point, the Palley's arguments gives a detailed informations. In a sense, it
provides the development of Minsky's hypothesis. According to Palley (2010),
structural Keynesianism offers a synthesis of these points of view:
- It shares the generic Marxian point of view that there is an underlying real economy problem regarding wage squeeze and deterioration of income distribution, which ultimately gives rise to a Keynesian aggregate demand problem.
- It recognizes that finance played a critical role in sustaining the neoliberal regime by fueling asset price inflation and borrowing, which filled the demand gap created by the wage squeeze. That recognition opens the way for incorporating Minsky's financial instability hypothesis with financial excess being the way that neoliberalism staved off its stagnationist tendency. This in turn, explains why the crisis took the form of a financial crisis when it eventually arrived (Palley, 2010).
The
Roles of Money, Credit and Financial Intermediation in Marx's Crisis Theory
Generally, in the
Marxian crisis theories, the arguments are based on the problems in the real
economy. In other words, the roots of the capitalist crises are analyzed
depending on the problems in the real economy. That's why, in the Marxian
crisis theories, there are deficiencies about the explanation for the financial
crises. Of course, there are strong arguments about the process of finance, the
analyses are focused on the real sector. Also, the analysis of money and the
credit system is tried to conducted on the real economy. At this point, James
Crotty's arguments have an important points in order to fill the gap in the
financial theory of the Marxian approach. His work was conducted in attempt to
show the importance of money, credit and financial intermediation for the
analysis of Marxian accumulation and the crises theories. As Crotty (1985)
mentions that '' our major objective is to demonstrate that the neglect of
money and finance in the Marxian literature is inconsistent with Marx's own
emphasis on these aspects of accumulation and crisis and to show that the de
facto dismissal of the centrality of money and finance in much of this
literature is based on a basic misunderstanding of Marx's analytical
methodology ''.
As it mentioned above, the main aim of Crotty is an analysis of the
monetary and the financial phenomenon in addition to circulation and the
production in the Marxian crisis theories. According to Crotty, when Marx
conducted his arguments of simple commodity production (C-M-C) to commodity
exchange economy (M-C-M'), he also created a monetary theory in the part of
explanations for the functions of money in the capitalist system (Crotty,
1985). As Crotty (1985) mentions that '' before Marx even begins his analysis
of specifically capitalist production relations he has established that the
theory of money and credit and the theory of crisis are so intimately
interwined that they are analytically inseperable ''. Also, Crotty presents the
reasons of not having a constituted financial theory of the Marxian approach by
criticizing Marx and the latter Marxists depended mostly on the real economy in
order to analyze the capitalist crises (Crotty, 1985). As Crotty (1985) points
that '' the fundamental reason that the traditional crisis theory literature
incorrectly relegates monetary and financial aspects of crisis theory to such
an inferior analytical status is its failure to appreciate the theoretical
significance of Marx's analysis of the crisis potential of commodity exchange
''. For Crotty (1985), the important points are established at the highest
level of abstraction in the analysis of simple commodity production (SCP) and
in the 4th and 5th part of the Capital Volume 3.
Therefore he is conducted his theory based on these points. Crotty (1985)
points also that '' the Marx's criticism of the school of thoughts that see all
crisis as imposed by ''irresponsible'' financial activity on an otherwise
crisis-free capitalism have been frequently misinterpreted as an argument that
the financial system is an unimportant aspect of his crisis theory ''. In other words, emphasizing on
the financial system means the correction of the misunderstanding in the
Marxian crisis theories. At this point, it is began with the Marx's theory of
crisis potential of simple commodity production (SCP). Crotty points that the
concept of an abstract form of crisis in the theory of monetary and financial
behavior is played an important role within the SCP (Crotty, 1985). As Crotty
(1985) mentions that '' the term form refers to an economic model, in this case
a model of simple commodity circulation. The adjective abstract indicates that
the models to be considered are quite simple, incorporate little or no
institutional detail, and, most important, abstract as much as possible from
reference to specific relations of production... They are forms or models of
crisis because Marx used them to demonstrate that a commodity exchange economy
is crisis prone or has crisis potential independently of its specific
production ''. Moreover, Crotty states on 5 different money function as an
abstract forms of crisis which are placed in the SCP: money as a measure of
value (MMV), money as a means of circulation (MMC), money as a means of hoard
(MH), money as a means of payment (MMP) and money as a means of international
payments settlement (Crotty, 1985). The MMC and the MMP has an important role
at the center of crises. In this point, after the criticism of Say's Law based
on MMC, the more advanced functions of money as MMP transfom the economy into
more fragile by making it crisis-prone (Crotty, 1985).
So that, we begin with the MMV. Marx makes a difference between the
barter economy (C-C) and the SCP (C-M-C). The main factor is the inclusion of
money (M) into the circulation. With an explanation of Crotty (1985) '' SCP is
qualitatively different from barter in that it separates the acts of purchase
and sale in time and space and inevitably draws vast numbers of producers into
a complex, interlocked, interdependent system of social relations of production
and exchange ''. Here, the most important point is the invalidation of Say's
Law. According to Crotty (1985), '' the fundamental distinction between Marx's
analysis of the dynamics of advanced commodity exchange and the childish babble
of a Say or, one might add, of Walras or a Friedman, is precisely the
distinction between a monetary economy and a barter ''. As it mentioned above,
inclusion of the money into circulation means the end of process of barter
economy. Moreover, the time factor is incurred to the process (Crotty, 1985).
In case of the inclusion of money into economic process causes also inclusion
of two monetary concepts into the Marxian approach which are money as an asset
and velocity of money (Crotty, 1985). In this point, that situation can be seen
in the example of overproduction theory. As Crotty (1985) states that '' the
idea that velocity can slow down is intimately related to Marx's assertion that
there can be a general excess supply of commodities – a crisis of reproduction
– in SCP ''. In other words, people can want to hold cash money due to any
reason. At the end, it causes the excess supply of commodities. In addition to
this, the another characteristic of the money is the measure of value in SCP
(Crotty, 1985). By MMV, Marx refers to the estimate of the value of a commodity
made by its owner or by others prior to its actual sale (Crotty, 1985). Also,
MMV measures the expectations of commodity owners as to the value they will
receive in the market with the system of commodity exchange (Crotty, 1985). The
difference in time between MMC and MMV causes the development of crises
(Crotty, 1985). However, according to Marx, unless money uses as a means of
payments, it can not be emphasize of any crisis theory in the SCP. As Crotty
(1985) states that '' it is only with contracts, credit and financial
intermediation and with time-consuming interdependent production and circulation
process involving long-lived capital goods that the potential differences
between the price expectations that guide decisions to produce and prices
actually prevailing at the time of sale take on
a key, and often a dominating role in crisis theory ''. Here, it can be
seen the transition from SCP to commodity exchange economy (CEE). According to
Crotty (1985) '' theorizing MMP in SCP constitutes a qualitative increase in
the analytical power of the framework as a form within which to build a
concrete theory of capitalist crisis. And it is with the SCP-through-MMP
abstract form of crisis that Marx introduces contracts, and commercial credit
and paves the way for the introduction of financial intermediation into his
theory of crisis ''. The inclusion of MMP into the model prepares the basis of
financial crises with an increase of fragility in reproduction causing the
change in time (Crotty, 1985). According to Marx, the development of
circulation evolves with the contracts (Crotty, 1985). As Crotty (1985) mentions
that '' the first type of contract
discussed by Marx is one made to reduce the uncertainty involved in
obtaining a given commodity at a given time at a given price ''. Furthermore,
in the form of MMC, the commodities are sold due to use-value but in MMP form,
it changes in order to accumulation (Crotty, 1985). Also, for Crotty (1985), ''
the addition of the function MMP to the SCP form extends the separation in time
between pruchase and final sale involved in commodity circulation and makes the
process more complex: instead of two separate acts required to complete
circulation – C-M and M-C- we now have three -C-D; D-M and M-D, where D stands
for a debt contract ''. Also Crotty (1985) continues that '' according to Marx
that the necessity to sell, the forced sale of commodities by the indebted
commodity owner creates that aspects of an industrial and commercial crisis...
known as the monetary crisis and lays the foundations for the conceptualization
of the financial crises ''.
Besides, on the contrary to the MMV and MMC within the frame of
existence of money, MMP is unpredictable in order to exactly know the crisis in
SCP (Crotty, 1985). Crotty (1985) mentions that '' since purchase and sale,
supply and demand are independent, no agent can be sure that the labor embodied
in his commodities will be exchangeable for an equal amount of the socially
necessary labor time of others ''. Moreover, Crotty (1985) continues that ''
the agents in the first abstract form of SCP, in other words, are subject to the
anarchy of an economy not under their control. Therefore, they are vulnerable
to the threat of unforeseeable, unavoidable capital losses caused by an unequal
exchange of labor-time as prices fluctuate between production plan and sale ''.
However, Crotty points on the change of first abstract form of money in the
contract economy. Then, these contracts
and credits produces a fragility in the reproduction process which makes the
system more crisis-prone (Crotty, 1985). On contrary, it is not possible to arise
of any large-scaled fragilities and the crises in the MMV and MMC (Crotty,
1985). In other words, the incorporation of MMP to SCP increases the potential
of crisis. Finally, Crotty (1985) mentions that '' two central elements are
involved in Marx's stress on the significance of MMP...First, agents undertake
contractual commitments at one point in time to exchange money (or commodity)
at a specific time in the future. These contracts are based on estimates or
expectations of the prices and values that will prevail at the relevamt future
date...Second, the contract economy develops not just isolated reciprocal
future commitments between pairs of agents, but a complex interdependent system
of interlocked commitments drawing most agents into its web ''.
In
conclusion, Crotty presents 4 different phases according to their arguments at
the stage from SCP to capitalism. First, because the modern capitalism is a
commodity exchange mode of production, the analysis of the crisis potential to
simple commodity production must be incorporated and transformed into crisis
theory (Crotty, 1985). On the other hand, because capitalist mode of production
is indicated the highest stage of the production style, the complete model of
SCP is applicable to advanced capitalism's law of motion (Crotty, 1985). Also,
this point is the changing and developing point of the production relations. As
Crotty (1985) mentions that '' until we have theorized the production relations
of a particular mode of production and integrated this theory with the SCP
model, we can not develop an adequate analysis of its laws of motion ''.
Secondly, Crotty (1985) points that '' the development of capitalist social
relations proceeded historically alongside the evolution of the contract-credit
system in a symbiotic relation with it. Thus, although the abstract form of SCP
including MMP belongs to Marx's theory of commodity exchange, it is capitalism
that deepened, widened and intensified contract-credit system ''. At that
juncture, it indicates the development path of financial intermediation and
financial structure of capitalist mode of production (Crooty, 1985). Thirdly,
the key factor behind the dynamics of accumulation and crisis in capitalism is
the rate of profit (Crotty, 1985). Although there are many possibilities within
the frame of the analysis of that factor, Crotty (1985) states that '' the
important point is that accumulation, which requires some historically specific
minimum rate of profit to sustain itself, eventually causes the rate of profit
to decline, this destroying its most important condition of existence ''. This
point provides to the development of the unified theory of the capitalism
together with the increase in accumulation and decrease in profit rates
(Crotty, 1985). However, the main problem according to Crotty (1985) is '' the
failure to comprehend the existence and significance of the theoretical
articulation of the laws and tendencies of the rate of profit deduced from the
sphere of production with Marx's analysis of monetary and financial
phenomenon''. Finally, Crotty emphasizes
on the unity of circulation and production compatible to the integration of
these tendencies or laws of capitalist production relations into the analysis of abstract crisis forms to
construct a unified theory of the capitalist reproduction process (Crotty,
1985). Hence, Crotty (1985) states that '' a complete integration of the
spheres of circulation and production in the theory of accumulation and crisis
would have to consider all four effects of the contract-credit system: (1) the
overextension of the expansion, (2) the increasing vulnerability of the
expansion to adverse financial or nonfinancial developments, (3) the
codetermination of the timing of the crisis and (4) the deeping and widening of
the contradiction ''.
The Marxian Approach and Its
Basic Characteristics
One of the basic approach is
the Marxian approach which takes the capitalism as a whole and criticize it.
The main reason that makes this approach important is depended on the analysis
of dynamics of capitalism within the concept of historical process. So that, in
this title, I will point on the characteristics of the Marxian approach which
are also differed from the Keynes and Minsky. First, I will mention about the
Marx's method and his economics. Second, I will try to explain labor-value
theory, surplus-value and the sources of the exchange.
Primarily, one of the most
crucial idea of the Marxian approach is composed with the presenting the social
transformation in the historical context. Marx thought that the societies were
separated depending on their organizations of the mode of production (Fine and
Saad-Filho, 2004). Also, the mode of productions were shaped on the base of the
class relations. That's why, all these social concepts should have been defined
led by that class relations (Fine and Saad-Filho, 2004). Moreover, there was an
important role of the relations between theory and time in the analysis of the
societies. In other words, Marx embraced materialist concept rather than the
idealist concept in the societal developments (Fine and Saad-Filho, 2004). In
addition to this materialist concept, Marx possessed a dialectical approach due
to the ever-developing process of societies under the class struggles of mode of
production (Fine and Saad-Filho, 2004). Therefore, Marx determined the basic
characteristics and contradictions of the capitalist mode of production within
the frame of the dialectical materialism and he also analyzed the sources of
the historical developments and its dynamic according to this approach. In
other words, the mode of productions, social relations and historical
developments are analyzed under the dialectical materialism approach. Hence,
this kind of analysis is constituted the first main property of the Marxian
approach.
Secondly, the Marxian
labor-value theory is the other important characteristics. Actually, the ideas
of Ricardo has crucial importance in the Marxian labor-value theory. However,
Marx constituted its own theory different from the Ricardo (Fine and
Saad-Filho, 2004). According to Marx, it is not sufficient to base the sources
of value just to labor-time like Ricardo. The main reason is to have the
advanced commodity production system and the exchange-value and the use-value should
be examined very detailed under this commodity production (Fine and Saad-Filho,
2004). In other words, Marx differed the exchange-value and the use-value
within the commodity (Fine and Saad-Filho, 2004). Every commodity has use-value
and the exchange-value is the indicator of equivalence value between the
commodities. In other words, the use-value provides comparison between
commodities. At this point, the relations among the labor and the value become
clear. However, what is the main factor behind the comparison? Briefly, it is labor which produces use-value
in the production process. In other words, the main characteristics of all
commodities are to be a labor products (Fine and Saad-Filho, 2004). Of course, in
the analysis of the capitalist relations, the money should be add to this
concept. However, I will not mentions on that. So, this brief explanations
about the labor and value is the second break point from the Keynes and Minsky.
For instance, the labor is the building stone for the capitalist mode of
production according to Marxian approach, however, for Keynes and Minsky, labor
is a production factor.
Thirdly, another important
difference of Marx from Keynes and Minsky is shaped in the explanations of the
production process. Rather than the simple commodity production (C-M-C), in the
advanced capitalism there is a different production style (M-C-M') (Fine and
Saad-Filho, 2004). Marx pointed that the capital has an expansive
characteristic because of the profit motive Fine and Saad-Filho, 2004). The
production process can be depicted as
M – C (MoP and LP)...P...M'
Capitalists pay money-capital
(M) in order to purchase the commodity inputs (C) which are means of production
(MoP) and the labor power (LP) (Fine and Saad-Filho, 2004). The sources of this
money-capital can be acquired by borrowing or internal funds. These inputs
creates the productive capital (Fine and Saad-Filho, 2004). Production proceeds
by working of these inputs. The result is the different than M. In the phase of
production (P), there will be created more surplus value. That why, at the end
of exchange, M' will be exceeded the M. The difference constitutes the surplus
value. However, M' is also constituted the sources of profits. However,
capitalists should reduce the costs from that M' in order to reach the net
profit. The factors can be the payments of an interest or dividends (or some
sort of financial payments), taxes, reinvestment costs, advertisement costs,
non-productive costs and also bribes. On the other hand, the part of P...M'
shows the point of the capitalist crises. Any problems in the transition
process from P-M' can lead to capitalism into crises (Fine and Saad-Filho,
2004). The problems can be figured as insufficient demand, excess supply or the
disproportionately of capital. This point leads us to the analysis of surplus
value and the concept of exploitation.
As it mentioned above, class
struggle has an important role in the Marxian approach. The capitalist class
tries to repress the labor class in the production process. That's why, there
is a continuous struggle between capitalists and labors. The main aim behind
that repression depends on the creation
of the surplus value. There are two types of surplus value which are absolute
surplus value and the relative surplus value (Fine and Saad-Filho, 2004). First
of all, in the basis of the increase in absolute surplus value, it is found
increases of working time without increases in the wages (Fine and Saad-Filho,
2004). Furthermore, the consolidation of the production and the increase in
commodity production can also increase the absolute surplus value (Fine and
Saad-Filho, 2004). Finally, with a constant working time, increases of the
productivity can also provide increases in absolute surplus value (Fine and
Saad-Filho, 2004). Secondly, by way of decreases in the value of labor power
with the improvements of the commodity productions the relative surplus value
can be increased (Fine and Saad-Filho, 2004). For example, work day can be
remain same, however, the surplus value can be increased by way of reducing the
payments of labor power ratio in the actual work day. Because surplus value
represents the exploitation rate, increase in these two kinds of surplus value
also means the increases in the exploitation rate.
Creative Destruction and the
Rate of Increase of Total Output: Schumpeterian Approach
Finally, I will handle the
arguments of Schumpeter whose ideas have a significant role in the economic
literature. I will focus on his famous book which is Capitalism, Socialism and
Democracy. The issue about the industrial development of capitalist society was
placed at the center of Schumpeter's ideas. He was concerned on the dynamic
development model rather than static development model. In that point,
according to Schumpeter, development was the transition from old equilibrium
point to the new equilibrium point where the production and industrial
relations developed (Schumpeter, 1942). So, one of his crucial factor so as to
achieve that point was entrepreneurship and entrepreneurs (Schumpeter, 1942).
The main aim of an entrepreneur was to impel of the inactive entrepreneurship
by creating innovations (Schumpeter, 1942). In other words, it indicates the
transition from static to dynamic position by that innovations. He also
discussed that these innovations within his theory of '' Creative Destruction '' (Schumpeter,
1942). Depending to these brief explanations, I will point on two important
issues of Schumpeter which are the rate of increase of total output and the
theory of creative destruction.
Primarily, I begin with an
explanation with the rate of increase of total output. According to Schumpeter,
first criteria about the economic realization was the total production
(Schumpeter, 1942). However, he found that the calculations of the changing as
problematic for the amount of produced goods (Schumpeter, 1942). Therefore,
Schumpeter (1942) pointed about that '' for not only the material and the
technique of constructing such an index, but very concept of a total output of
different commodities produced in ever-changing proportions, is a highly
doubtful matter ''. In my opinion, he has an approach which is not compatible
with the Marxian crisis theories such as under-consumption. According to
Schumpeter, it did not exist any historical development as Marx stated that
wealthier people would become more wealthier and poorer people would become
more poorer (Schumpeter, 1942). In other words, it did not exist any change in
the income pyramid (Schumpeter, 1942). Also, the wages and the other income
types did not change (Schumpeter, 1942). Moreover, he stated that the poorest
part of the population would have been flourished with the renewal of
capitalism towards the 50 years from 1928 to 1978 in the lights of his
calculations of the rate of increase of total output and of the general
statistics (Schumpeter, 1942). However, in my opinion, it contrast with the
Marxian historical development theories of capitalism. In short, there is no
such a meaningful insights within the frame of profit motive and the
surplus-value theory. As a comparison, there will be a critique of Schumpeter's
rate of increase of total output towards the issues between 1980 – 2007 within
the income distribution concept. On the other hand, he also focused on the
sociologic data which were specified the increases and decreases of economic
activities as a part of analysis about the capitalist development process. In
that point, the revolutions were an important indicator. According to Schumpeter
(1942) '' these revolutions periodically reshape the existing structure of
industry by introducing new methods of production, new sources of supply, new
trade routes and markets to sell in and so on. This process of industrial
change provides the ground swell that gives the general tone of business: while
these things are being initiated we have brisk expenditure and predominantly ''
prosperity '' and while those things are being completed and their results pour
forth we have elimination of antiquated elements of the industrial structure
and predominantly '' depression ''. Furthermore, we can see that he often
related the consumption increases and the increase of the welfare. According to
Schumpeter, in all periods, we encounters of an increase in consumption
(Schumpeter, 1942). There is a factor which increases the wages (Schumpeter,
1942). In that matter, capitalist mechanism plays a strengthing role for the
welfare of masses (Schumpeter, 1942). In other words, the development in the
production increases specify the capitalist progress. At last, Schumpeter
stated that the unemployment was a tragedy in all situations (Schumpeter,
1942). Removal of an unemployment would be the most important characteristic of
socialism (Schumpeter, 1942). As Schumpeter (1942) mentioned that '' the real
tragedy is not unemployment per se, but unemployment plus the impossibility of
providing adequately for the unemployed without impairing the conditions of
further economic development ''. However, in my opinion, if we take this issue
from the Marxian point of view, capitalism does not need any support to the
unemployment in some situations. The reason is the necessity of the repression
of the wages. Also, that is conditioned the creation of the '' Reserve Army of
Labor ''.
Secondly, I will mention about
the creative destruction concept of Schumpeter. The Marxian surplus value
theory was supported to Schumpeter's creative destruction concept. According to
Schumpeter, new consumption materials, new production methods, new transportation
methods, new markets and new types of industrial organizations were both the
factors that provided the capitalist development (Schumpeter, 1942). Opening of
new markets and foreign markets, transition from handicraft workshops to
extensive factories kept to capitalism in renewal form. Also, these factors
continuously were destroyed the old ones and were created new ones. As
Schumpeter (1942) mentions '' this process of creative destruction is the
essential fact about capitalism. It is what capitalism contains in and what
every capitalist concern has got to live in ''. Within that frame of creative
destruction, Schumpeter analyzed the problem of capitalist development in two
ways: first, because capitalism has a long development path originating from
the factors placed on the system, it should have to analyze in long-time
period. Second, the analysis of the factors of the system could provide a more
strong points within the organic development process of capitalism (Schumpeter,
1942). Furthermore, innovative entry by the entrepreneurs was the disruptive
force that sustained economic growth within the frame of creative destruction
and it caused the powerful changing in the capitalist structure (Schumpeter,
1942). In other words, he specified that these innovations undermined the
capitalism's own institutional frameworks (Schumpeter, 1942). Naturally, these
would have a negative effects within the frame of economic development and the
crises. As Schumpeter (1942) stated that '' in breaking down the pre-capitalist
framework of society, capitalism thus broke not only barriers that impeded its
progress but also flying buttresses that prevented its collapse. That process,
impressive in its relentless necessity, was not merely a matter of removing
institutional deadwood, but of removing partners of the capitalist stratum,
symbiosis with whom was an essential element of the capitalist schema...The
capitalist process in much the same in which it destroyed the institutional
framework of feudal society also undermines its own ''.
Conclusion
In this article, we focused on
three different approaches which were Minskian, Marxian and Schumpeterian. We
first began with a short explanation about the background of the Minsky's
financial instability hypothesis which based on the ideas of Marx (1976),
Fisher (1933) and Stiglitz and Weiss (1981). After these explanations, we
stressed on the strengths and weaknesses of Minsky's approach within the frame
of the financial instability hypothesis. On the one hand, the strengths of that
approach included the relations between the price and profit; financing of
investment harmonizing with the uncertainty and the risk factor; and the
critique of the neoclassical synthesis. On the other hand, the weaknesses
included the absence of an analysis of class conflict and the insufficient
explanation of the reasons of people's indebtedness. Secondly, we stressed on
the Crotty's arguments about the roles of money, credit and financial
intermediation in Marx's crisis theory. These arguments gained a new
perspectives on the analysis of the financial crisis theory of the Marxian
approach. Thirdly, we pointed the difference of Marxian approach against the
Minsky and Keynes. So, we tried to explain the Marx's method and his economics,
labor-value theory, surplus value theory and the source of exchange. Finally,
we showed Schumpeter's ideas about the capitalist crises depending on his
arguments which were the rate of increase of total output and the theory of
creative destruction.
REFERENCES
1) Crotty, J. 1985. '' The Centrality of Money, Credit and Financial
Intermediation in Marx's Crisis Theory: An Interpretation of Marx's Methodology
''. in S. Resnick and R. Wolff, eds.
2) Fine, B. and Saad-Filho, A. 2004. Marx's Capital. Pluto Press.
3) Fisher, I. 1933. '' The Debt-Deflation Theory of Great Depression ''.
Econometrica.
4) Keynes, J.M. 1991. The General
Theory of Employment, Interest and Money. New York: A Harvest Book.
5) Marx, K. 1976. Capital. Vol
1. London: Penguin.
6) Minsky, H. 1986. Stabilizing an Unstable Economy. Yale
University Press.
7) Minsky, H. 1992. '' The Financial Instability Hypothesis ''. Working
Paper No. 94. Jerome Levy Economics Institute.
8) Minsky, H. 1993. '' Finance and Stability ''. Working Paper No.
93. Jerome Levy Economics Institute.
9) Stiglitz, J. and Weiss, A. 1981. '' Credit Rationing in Markets with
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