The premise of this interesting collection of essays is that our understanding of financial crises, what causes them and how we should respond to them is enhanced if we better understand the nature and role of money in capitalist economies, and if that understanding is informed by insights from sociology. The project is thus an inherently interdisciplinary one. The starting point for each essay is sociologist Geoffrey Ingham’s idea that money should be understood not simply as a commodity, nor even as an asset, but in terms of the institutional structure that stands behind it. At the centre of this structure are institutions such as the State, as the issuer of fiat currency; the banking system, as the issuer of close substitutes for narrowly defined money; the central bank, responsible for monetary policy; and financial regulators, responsible for the continued viability of the banking and broader financial systems. But it also includes participants and interests in the wider economy who are the users of money. The importance of sociology for the study of financial crises arises because interactions between participants in this system are determinative for the amount of money in existence and for the impact this money has on material life, and because such interactions are inherently social in nature.
A number of important themes emerge from the contributions made in the volume. The first is that money is central to the operation of capitalism rather than simply being a lubricant that facilitates the operation of real forces as suggested by neoclassical theory. A number of the essays examine the nature and role of money and whether the three functions of unit of account, medium of exchange and store of value, traditionally used to define money, are ultimately helpful. Malcolm Sawyer’s essay examines this issue in particular depth. He distinguishes between a store of value function, according to which money maintains its value long enough for it to be used in the next transaction, and a store of wealth function, according to which money holds its value in the longer term and thus can be held as an asset, but he argues that the unit of account and medium of exchange functions are foundational. He stresses the role of the State in specifying what can be used for these purposes and the influence of the central bank over the volume of (narrow) money and the terms on which it is available. This reflects a strong interest throughout the volume in the Chartalist theory of money. Randall Wray’s essay, for example, stresses this approach in the guise of Modern Monetary Theory (MMT), although as I will suggest below, the strength of his essay lies elsewhere.
David Woodruff explores the issue of why people choose certain monetary instruments to perform transactions-related functions and how money surrogates emerge, a question which neoclassical theorists have recently been revisiting with the application of search-theoretic models in an attempt to provide more thorough microfoundations for this dimension of money demand. Like Sawyer, Woodruff breaks down one of the traditional functions of money, distinguishing between its medium of exchange function, where it is only held between one transaction and another, and its means of payment function, where it is accepted in settlement for some debt. He interestingly argues that such choices can be affected by ethical stances. I myself am sceptical of the value of the search-theoretic agenda in recent mainstream monetary economics and thus wonder about the implications this might have for Woodruff’s analysis. It would also have been valuable to see how the perspective he offers on the emergence of surrogate moneys relates to the role of money substitutes in Kaldor’s theory of endogenous money or the perspective of the 19th century Banking School which both inform an important dimension of modern Post Keynesian monetary theory.
There is not, however, unanimity within the volume on the idea that the unit of account and medium of exchange roles of money are most important. For Hayes, the monetary nature of capitalist production in Keynes is central to his explanation for unemployment. Since output is heterogeneous in nature, the very concept of output expressed as a single measure requires the concept of prices expressed in some unit of account, and it is money that provides this unit. All contracts are therefore expressed in monetary terms, including labour contracts, and as a result, there is no practically observable real wage that can be negotiated to clear the labour market as in the neoclassical theory of employment. Money thus takes centre stage, and its role as unit account undergirds its use to facilitate transactions as well as the important concept of liquidity. The availability of liquidity and the terms of this availability as expressed by the interest rate then play a key role for determining the level of effective demand and thus of employment in Keynes’ framework according to Hayes. The conventional nature of the rate of interest has a clear role for the interplay of a range of political and sociological forces which thus indirectly affect the overall level of employment in the economy.
Luca Fantacci’s essay also argues that the accumulation of money as the central capitalist objective presupposes money’s store of value function (or what I think Sawyer would call its store of wealth function), particularly in times of irreducible uncertainty, and he links such uncertainty with crises and the increased demand for money it generates. This reduces aggregate demand and therefore results in higher unemployment. Sheila Dow provides a similar perspective, adding that the increased liquidity preference of banks during such times can further limit the spending of firms and individuals themselves willing to spend but who depend upon credit availability to finance this spending.
This first theme in the contributions of the Pixley–Harcourt volume is thus very important. Establishing the role that money plays in capitalism and the reasons for its centrality is fundamental to the objectives of the book, and some useful perspectives on this issue are provided. There are, however, two issues which deserve further thought. The first has to do with the concept of money illusion. While the case is convincingly made by the book’s contributions that money is far more important than is suggested by neoclassical economics, it could also be argued that it is because of the command that money offers over other resources that it has this centrality, even within the logic of much of the argument advanced in the book. For example, the idea of Marxian realisation discussed in Bob Jessop’s essay still presupposes that money is desired by capitalists because of the things to which it gives them access. There is therefore something in the idea of money illusion that needs further consideration and possibly reconciliation with the case for money’s pre-eminence as a goal in itself.
The second issue relates to the relationship between the various functions of money. Many of the contributions identify specific functions that are regarded as particularly important or even foundational for money’s operation. Thus, for the Chartalist theory, the unit of account function and Woodruff’s means of payment function are foundational, while for Fantacci’s and Dow’s explanations of unemployment, the store of value (or wealth) function is more important. But Ingham himself is critical of traditional economics because of its functionalist approach to the justification of particular economic structures such as money. This approach explains the existence of particular economic structures by the functions they perform, as though some kind of natural selection process was in operation to ensure the survival of the most efficient structures (see Reference InghamIngham, 1996: 251). Some reconciliation of the emphasis on money’s functions to this perspective in Ingham’s work would, therefore, be useful. For Ingham, it would seem that such a reconciliation might lie in showing how the institution of money serves the interests of powerful interest groups, and this may be straightforward for say the Chartalist theory of money in which the State plays such an important role. Nonetheless, some kind of explicit reconciliation would be useful given the strength of Ingham’s criticism of functionalism and the dominance of money’s functions in the various contributions in the Pixley–Harcourt volume. To the degree that such a reconciliation is possible, an examination of the relationship among the five functions of money identified in the book would also be useful and an exploration of whether a more holistic conception of money’s role might not integrate all of the functions rather than depend only on one or two as a number of the contributions suggest.
A second common theme that emerges from the contributions in Pixley and Harcourt’s book is the importance of how monetary issues are framed. Smithin’s essay outlines the need for appropriate philosophical and sociological contexts in order to frame the appropriate questions for examination in monetary economics and how these questions should be approached. Randy Wray’s essay is also very useful in its observation that the language applied from neoclassical economics to institutions such as the market or government is framed in particular ways. Thus, markets are (or should be) ‘free’, he observes, while governments ‘intervene’ and ‘regulate’ and their budgets ‘crowd out’ and ‘reduce initiative’. He argues that this language itself contributes to the outcome of debates over the true forces shaping economic phenomena and how society should respond to these forces. He correctly suggests that alternative framings are possible and that advocates of alternative positions should employ such framings. His own approach is to use the language of MMT to suggest an alternative framing, but he is careful to note that this approach is but one possible (although clearly his preferred) example from a range of heterodox positions. Sheila Dow also stresses the importance of framing, emphasising how such framing affects the approach of neoclassical economics to monetary and fiscal policy, especially around the idea of money neutrality so that monetary policy, for example, should only address the issue of inflation in the long run. Phillip Arestis also provides a very detailed account of the inadequacies of the New Consensus’ framing of monetary issues given the complete absence of a financial sector in this framework until the occurrence of the Global Crisis.
The observations associated with the second of the book’s themes are thus extremely pertinent. The relationship, however, among language, framing and theory is very complex. I have no doubt that language and framing play an important role in the process of theorising itself, as Reference PutnamHilary Putnam (2003) argues in relation to economics, but it is also true that the framing of approaches to government such as those correctly highlighted in Randall Wray’s essay accurately reflect the conclusions of neoclassical theory, and a neoclassical economist might point out that the descriptions of government cited by Wray are not arbitrary framing choices but ones supported by underlying, well-reasoned analysis. What this suggests, therefore, is that the issue of framing needs to be pushed back to even more conceptually foundational issues, and here, Smithin’s emphasis on economic epistemology is particularly important.
A third theme is the compartmentalisation and fragmentation of the disciplines that makes potentially fruitful interaction between economics and sociology more difficult. Andre Orlean’s essay argues that this compartmentalisation occurred in the early 20th century and that once economics and sociology were separated, the approach taken by economics to money systematically excluded any institutional factors from a careful consideration of money (except of course for a number of heterodox contributions such as that of Reference DillardDillard (1987) which is cited by several of the contributions in the Pixley–Harcourt book) while money came to be regarded as belonging to the realm of economics alone and was largely ignored by sociologists. The difficulty of engaging in genuinely interdisciplinary work in modern universities certainly supports Orlean’s contention about the negative impact of compartmentalisation and makes the project of Pixley and Harcourt’s book all the more important.
A challenge, however, for such a project lies in communication. Disciplines which have operated in isolation over long periods develop their own languages and methodologies that are likely to have considerable differences to other disciplines. Thus, researchers who engage in cross-disciplinary dialogue need to work at making themselves intelligible to their cross-disciplinary colleagues. As an economist, I confess to having found some of the sociological contributions in the Pixley–Harcourt volume tough going, and no doubt sociologists might say the same thing about some of the contributions from economists. Interdisciplinary researchers thus need to communicate as clearly and as plainly as possible, which is also a good check on ensuring that the ideas being communicated are coherent. In this respect, the work of Ingham himself sets a good example.
Having identified some of the common themes arising from the book’s premise that sociology has the potential to inform our understanding of money, it is worth asking how, specifically, such themes might affect our perception of the Global Crisis and the policies we should adopt in response to the Crisis. How, for example, should a basic Minskian interpretation of the crisis which involves the inflation of housing prices in the US after the so-called ‘long boom’ of the 1990s, endogenous credit availability, supporting financial innovation, increasing leverage, self-reinforcing expectations and an eventual unwinding of leveraged positions, be altered by insights flowing from Ingham’s work?
Here, I think, Vicky Chick’s contribution is most helpful, although it is one of the less explicitly sociologically conscious essays in the volume. Her clear historical analysis of the British financial system highlights a tension between competition and profitability in the balance of interests that shaped conditions in the system between the 1970s and the emergence of the Global Crisis. Prior to 1971, she suggests that the British banking system was a relatively stable oligopoly. It was heavily regulated, requiring banks, for example, to satisfy liquidity requirements, which they did partly by holding government bonds. Lending rates were set at 2% above Bank rate and deposit rates at 2% below, a profitable arrangement on the volume of bank intermediation made up of traditional household and business lending. It was an arrangement that was mutually beneficial for the banks (which were satisfied with their profits) and government (which was able to fund deficit spending via government bonds). It was also a remarkably stable arrangement since banks tended to be conservative in the type of lending they funded. Australia had a not dissimilar experience prior to the deregulation of the 1980s. But in Australia’s experience, the similar arrangement meant that when demand for credit was strong, the credit rationing that resulted from the banks’ conservative approach to lending was channelled to non-bank intermediaries which grew significantly as a result. This had an important impact on the Reserve Bank’s influence over the total volume of lending since that influence could only be exercised over the banking sector and this was a shrinking proportion of the financial system. The perceived effectiveness of monetary policy was thus being undermined as a consequence of this arrangement in the Australian context. As the principles of monetarism grew in importance across the 1970s, the lack of Reserve Bank control of over total lending thus built official pressure for deregulation. British monetary policy, however, relied more heavily on the impact of market operations on Bank rate and did not share Australia’s reliance on direct controls over the banking sector. But the tenets of monetarism also entailed a confidence in free markets and a belief in the positive welfare effects of competition, and this was influential in Britain.
Chick, therefore, describes how the arrangements in Britain changed with the implementation of Competition and Credit Control in 1971. This market-oriented policy sought to reduce the cost of intermediation by enhancing competition in the banking sector. Building societies thus began to challenge banks for their traditional business, and banks responded by chasing lending more aggressively, eventually relaxing their lending standards. In addition, banking regulation under the first Basel Accord increasingly shifted towards what Pixley calls a ‘light touch’ approach where banks were free to make decisions about lending and liquidity, provided they met capital requirements. Chick correctly points out that the incentive was created under this system for banks to progressively move lending ‘off balance sheet’. The competitive forces that drove this process were exacerbated in the 1990s when the very conception of what constituted banking began to change in mainstream banking theory so that banks were not defined by the structure of their balance sheets (long term and relatively illiquid loans funded by short term and relatively liquid deposits – what banking theorists called liquidity transformation), but chiefly by the credit assessment services they provided. The development of securitisation gave this approach further impetus and set up the conditions within which the Global Crisis was possible.
For Chick, it was thus the combination of intense competition, financial innovation and regulatory incentives that created the conditions that led to the Crisis. She consequently outlines some of the sociological forces that historically shaped the institutional structure which made the Crisis possible, although she does not focus explicitly on the interests of the various players that shaped these structures. To some degree, the essays of Jocelyn Pixley and Bob Jessop are complementary at this point since they more directly focus on such interests. The neo-liberal emphasis on competition in banking could thus be seen as an assertion of the interests of industrial capital over those of finance capital to the extent that the former depends upon the latter for its financing needs (a proposition that is not straightforward given the ability of large corporations to access financial markets without the need for intermediation). But a clear issue that arises from Chick’s essay is the possibility of a competition/stability trade-off where highly concentrated financial market structures appear to provide financial stability at the cost of granting participating institutions significant market power. The nature of such a trade-off clearly entails both sociological and political considerations and is worthy of further analysis. Chick’s contribution also signals the need for history and politics as well as sociology in any thoroughly interdisciplinary approach to understanding financial crises.
Charles Goodhart’s contribution also casts some light on sociological factors in helping to explain the nature of crises. His discussion of ‘group-think’ highlights how individuals rely on those they trust to form expectations of future asset price movements in the face of both significant uncertainty and large volumes of information. This provides some insight into the sociological foundations of momentum trading and asset bubble formation both of which are central to understanding financial crises. His approach contrasts strongly with the theory of rational expectations and the efficient markets hypothesis and is consistent with Ingham’s own analysis of the role of normative standards in deciding how large amounts of information can be sifted in the expectations formation process of things like future asset prices (Reference InghamIngham, 1996: 250).
In terms of policy responses, the most tangible suggestions come from the essay by Tom Burns, Alberto Martinelli and Phillippe DeVille. They diagnose the freedom of credit creation as lying at the centre of financial crises and thus recommend regulatory structures to limit this freedom in order to prevent the emergence of asset bubbles. They argue that credit creation should be seen as a public good and thus severely constrained. They also argue for the creation of public investment institutions through which savings can be channelled to more socially desirable uses and credit created to assist in this financing process where required. This sounds very much like having public banks with non-profit objectives that compete with private banks not for market share but in terms of alternative objectives such as where finance is channelled. Such a policy has the potential to be at least a partial solution to Chick’s competition/stability trade-off by injecting public competition into an oligopolistic banking market and suggests that the policy of privatising public banks is in error.
Whereas the Burns–Martinelli–DeVille suggestions focus on preventing asset price inflation and the emergence of bubbles in the first place, Luca Fantacci’s article explores suggestions in the work of Irving Fisher, Luigi Einaudi and J. M. Keynes for making money an unattractive asset to hold once a crisis has occurred and liquidity preference has increased. Whether such an approach will be effective in increasing spending as an alternative to holding money though is a serious question given Reference KeynesKeynes’ (1936) analysis in the General Theory that significant uncertainty negates the animal spirits of entrepreneurs and reduces their willingness to spend even in the face of low interest rates (p. 164).
Pixley and Harcourt’s book thus addresses an important but challenging set of issues. In the light of the Global Financial Crisis, there have been numerous calls from a range of quarters for research which draws upon multiple perspectives to examine what went wrong with financial markets and their oversight in the early 2000s. But as Orlean points out, genuinely interdisciplinary work is extremely difficult to undertake in modern universities, and there seems little prospect that this is changing if the recent demotion of historically related economics journals in the Australian Business Deans’ Council journal list is any indication. This makes the project of the book all the more important, and this is why it should be read and further work aimed at extending its analysis undertaken.
