Heterodox Analysis of Financial Crisis and Reform

Heterodox Analysis of Financial Crisis and Reform

History, Politics and Economics

Edited by Joëlle Leclaire, Tae-Hee Jo and Jane Knodell

Though the worst of the financial crisis of 2008 has, with hope, ebbed, it has forever changed the economy in the United States and throughout the rest of the world. Using the financial and economic crisis as a catalyst, this volume examines how to better regulate the financial system and what to expect in the future if no steps are made toward reform. This book lays the foundation for those steps by providing concrete ideas that will push policy in the direction of jobs growth and widespread prosperity.

Chapter 10: Business Competition and the 2007–08 Financial Crisis: A Post Keynesian Approach

Tuna Baskoy

Subjects: economics and finance, financial economics and regulation, institutional economics, post-keynesian economics


Tuna Baskoy* INTRODUCTION Post Keynesian explanations of the financial crisis in the USA in 2007–08, which influenced other countries as well, mainly focus on mechanics and technicalities rather than the elucidation of its dynamics. While some Post Keynesians overlook the impact of business competition, others acknowledge its importance, but do not examine how it gave life to otherwise seemingly independent factors that worked together and produce such catastrophic results in the USA as well as around the world. The following questions still require answers: what kind of role did competition play to produce the disastrous crisis? How did competition influence the business strategies of financial institutions in the process? A satisfactory explanation to this particular crisis as well as economic crises in general requires a closer examination of how business competition in the capitalist market economic system works. This chapter argues that business enterprises in Post Keynesian economics make strategic decisions under uncertainty to pursue power over pricing, investment and financing. Their goal is to manage competition to keep profit rates stable. However, it is difficult to achieve this goal under changing macroeconomic as well as microeconomic conditions. As profit margins decline, competitors become more aggressive and take greater risks in order to keep their share prices higher. This attitude, in turn, intensifies competition. Business enterprises take various actions in this stage such as cooperation agreements, cartels, mergers and acquisitions. However, they offer temporary solutions most of the time owing to slowing economic growth and shrinking profit rates. Then...

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