Edited by Ugo Mattei and John D. Haskell
Chapter 10: Debt and financial stability
Debt derives its legal status from the notion that it is a voluntary contract. Such voluntary contracts characterize the financing arrangements of merchant capitalists. Involuntary debt is of much older provenance in traditional societies where the need for minimal consumption with inadequate income gives rise to debt bondage. With the development of industrial capitalism, and the associated emergence of a credit system, debt comes to be a permanent feature of the economy. Involuntary debt now appears as ‘enforced indebtedness’ due to counterpart saving behaviour among households and firms. In the work of Minsky, such debt is a characteristic of Ponzi financing arrangements: whereas balance sheet operations give rise to debt financing of assets (a form of voluntary indebtedness), Ponzi financing is characterized by debt without a counterpart asset. This can be due to ‘enforced indebtedness’, but it can also be due to speculation and balance sheet operations. Thus, debt becomes an ‘endogenous’ aspect of a credit economy – in other words, it is not subject to voluntary choice or decision. This is most apparent in the case of government financing in a credit economy, where tax revenue and expenditure are determined by the evolution of national income, or private sector economic activity and debt is the balancing item. Let us step back and think through the logistics of debt as a voluntary contract. A liability to pay debts is an obligation that arises from the law surrounding contracts, that is, agreements between legal persons.
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