Money and Finance: The 'Real' Determinants of Economic Development by Jan Kregel

Money and Finance: the "real" determinants of economic developments

Before the recent attention given to the impact on economic performance of the globalization of finance, Keynes built a theory on the idea that money and finance were the “real” factors determining the behaviour of capitalist economies.

This was encapsulated in the aphorism “ the money rate of interest rules the roost”, irrespective of “real” productivity. While this theory was focused on the determination of the level of employment in an industrialized economy, it can also suggests that finance should be the major factor in the pattern of international commerce, rather than comparative advantage, and that financial flows will have an important impact on the policies of developing countries.

Minsky extended this approach by focussing on the impact of the structure of the financial system on the behaviour of developed and developing countries -- in particular on the instability of national and international markets. The turbulence experienced in the recent past in both financial and goods markets and trade flows, including housing, commodities (and the impact on food security) can be best understood as the result of a change in the operation of financial institutions and the financial structure in which they operate.

This Keynes-Minsky perspective then  provides an alternative analysis and the basis for a new approach to policy and financial reform.

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