Roads to Social Capitalism
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Roads to Social Capitalism

Theory, Evidence, and Policy

Peter Flaschel and Sigrid Luchtenberg

The current crises in the financialization of capitalism, and their repercussions on the financial viability of entire countries, severely question the achievements of mainstream economics and its disregard of Keynes’s theory of effective demand and finance. In view of this, Peter Flaschel and Sigrid Luchtenberg consider roads to a type of capitalism that could eventually be considered as ‘social’ in nature. The authors underpin their study with theory, empirical evidence, and policy from a positive as well as a normative perspective. As points of departure for their concept of social capitalism, the theoretical framework provides a synthesis of the work of Marx, Keynes, and Schumpeter on ruthless capitalism, regulated capitalism, and competitive socialism.
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Chapter 5: Banking, Financial Markets and the Narrow Banking Idea

Peter Flaschel and Sigrid Luchtenberg

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5. Banking, Financial Markets and the Narrow Banking Idea The recommendations in this report aim to create a more stable and competitive basis for UK banking in the longer term. That means much more than greater resilience against future financial crises and removing risks from banks to the public finances. It also means a banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, efficiently channelling savings to productive investments, and managing financial risk. To those ends there should be vigorous competition among banks to deliver the services required by well-informed customers. Independent Commission on Banking (2011, p.7) 5.1 Introduction In this chapter1 we model the problematic role of modern banking – besides their traditional role as credit institutions – when banks are also acting as investment banks, by concentrating specifically on their stock market activities as a possible substitute for credit creation. We show that such a mixed orientation of the activities of commercial banks is endangered by unstable feedback structures which can imply that the steady state of the economy becomes repelling, if ‘Minsky Drifts’ are at work which drive crucial financial parameters beyond certain critical values. In contrast to such a situation of broad banking we will then provide a model of narrow banking and of Fisher’s (1935) 100% money idea where such tendencies towards real-financial market instability are eliminated through legal restraints. Moreover, this model will also show that such a narrow...

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