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The Financialization Response to Economic Disequilibria

The Financialization Response to Economic Disequilibria

European and Latin American Experiences

New Directions in Post-Keynesian Economics series

Edited by Noemi Levy and Etelberto Ortiz

Europe and Latin America’s social and economic stagnation is a direct result of the unresolved phenomena of the financialization crisis that broke out in 2008 in developed countries. Editors Noemi Levy and Etelberto Ortiz analyze the limitations of economic growth and development under capitalist economic organizations where financial capital is dominant, as well as explore alternative economic policies.

Introduction: what are the issues now? Controversies about disequilibria, economic growth and economic policies

Noemi Levy and Etelberto Ortiz

Subjects: development studies, development economics, economics and finance, financial economics and regulation, political economy, post-keynesian economics


Mainstream economic theory and economic policy actions are based on an intellectual approach that establishes economic equilibrium as the central reference point around which economic and social processes are discussed, particularly the mechanisms that generate economic growth and redistribution of profits (Lucas, 1976; Goodfriend, 2002; Woodford, 2003). The major limitation of this theoretical approach is that it cannot account for changes in direction, or indicate how economic conditions change (Hicks, 1946; De Vroey, 1999); the use of comparative statics, in an ideal case, enables analysis of the change from one state of equilibrium to another. However, it does not explain the transition from one position to another over time (Woodford, 2003). Of particular importance to the situation currently facing the international economic system is the dismissal or improper interpretation of financial disequilibria (see Woodford, 2009). The major changes to the dominant theory, presented today by the New Macroeconomic Consensus (Woodford, 2003), are, first, a greater mathematical formalization and sophistication that does not offer explanations of the dynamic nature of the capitalist economy and, therefore, this perspective still fails to provide consistent arguments about the nature of the phenomena that supposedly established a balanced trajectory. Second, due to institutional changes (movement of capital in the international market) monetarism (which proposed control of monetary aggregates, Friedman, 1968) was displaced by the Austrian School’s monetary approach, reformalized in the New Classical Consensus (which rejects the conventional treatment of the quantity theory of money). The latter view is presented on the basis of a model where the money market is replaced by the interest rate, which is determined by a reaction function of the central bank (Hüfner, 2004) that deploys monetary policies aimed at stabilizing prices. This approach retains the postulate of the ‘Treasury Perspective’ (first raised in the 1930s), which is completely opposite to fiscal deficits and in favor of the reduction of wages (Hawtrey, 1913).