The Financialization of Modern Economies in Monetary Circuit Theory

Abstract:     
In this paper, we aim at the introduction of an additional macroeconomic sector defined as a broad accounting category in the stock-flow consistent framework developed by Lavoie and Godley. Starting from the idea that many financial services supplied by commercial banks today do not fit into the categories of monetary and financial intermediation as defined by the theory of money emissions, we argue that the theoretical distinction between banks and non-banking financial institutions (insurance companies, venture capital firms, securitization firms, mutual funds etc...) is currently blurred in circuitist and Post-Keynesian literature. Furthermore, we draw on Karl Polanyi's groundbreaking work on the concept of haute finance viewed as a fundamental institution of the capitalist system at the end of the nineteenth century and the beginning of the twentieth century. We then abstract from the geopolitical, historical and institutional setting of Polanyi's time and we argue that some of his insights can be retained in spite of the dramatic changes the world economic system has experienced since the 1920s. We therefore attempt to define haute finance anew as a conceptual entity that pertains to the current situation of the world economy in the twenty first century. A very good example of the significant monetary flows arising out of financialization could be observed between the traditional banking system and the newly defined haute finance sector in the context of the massive securitization operations entailed by the transfer of credit risk. Those enormous financial flows between commercial banks and non-banking financial institutions have indeed become a defining characteristic of financial capitalism (as shown by the spectacular financial crisis that occurred in the summer 2007). We therefore argue that their macroeconomic consequences ought to be thoroughly singled out in a rigorous and consistent stock-flow framework. Finally, in order to perform the conceptual integration of the financialization of modern economies in monetary circuit theory, we develop an extended version of the Lavoie-Godley stock/flow framework including the haute finance sector defined as a broad accounting category that is constantly interacting with the other institutional sectors of the economic system (households, firms, banks, and the Government).

Keywords: haute finance, financialization, stock-flow consistent framework, monetary circuit theory

JEL Classification: B22, B41, B52, E12, E17, E44, E59

Accepted Paper Series