Financial Markets, Money and the Real World

Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.

Chapter 1: Keynes, You Should be Alive Today!

Paul Davidson

Subjects: economics and finance, money and banking, post-keynesian economics


Keynes’s fundamental insight was that we do not know – cannot calculate – what the future will bring. In such a world, money offers psychological security against uncertainty. When savers become pessimistic about future prospects, they can decide to hoard their savings [in liquid assets] rather than invest them in business. Thus there is no guarantee that all income earned will be spent. This amounts to saying that there is no natural tendency for all available resources to be employed (Lord Skidelsky1) The Englishman, John Maynard Keynes, was unquestionably the most important economist of the twentieth century. The policies he proposed to fight the Great Depression as well as those he worked on to develop a new postwar international monetary system helped save the entrepreneurial directed, market-oriented economies of the world from collapse. Keynes’s biographer, Lord Skidelsky suggests that the task Keynes ‘set for himself was to reconstruct the capitalist social order on the basis of improved technical management’.2 As a strong proponent of an improved capitalist system, Keynes did not criticize the existing system ‘on the grounds that it unfairly or unjustly distributed life-chances; rather, that the laissez-faire system did not protect economic and social “norms”. Injustice became a matter of uncertainty, justice a matter of contractual predictability’. (We shall see that the concepts of uncertainty, contracts and money were at the heart of Keynes’s revolutionary vision of the economy in which we live.) 1.1 POSTWAR ECONOMIC PERFORMANCE For almost a quarter of a century after the Second World War,...

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