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11. A Theory of Capital Rationing

Author:
Jan Toporowski
Publication Date:
09-2010
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper revisits some of the issues originally put forward by the author as the theory of capital market inflation, in the book The End of Finance (Toporowski 2000). The paper makes much clearer the key assumptions and relationships between the operations of the capital market dominated by institutional investors, and the balance sheets of companies. In this way, it presents a theory of how macroeconomic dynamics may be affected by disequilibrium in the capital market. The first part of the paper examines the demand for new equity issues by institutional investors, namely insurance companies and pension funds. In the second part of the paper it is argued that the tendency of pension funds to mature may be a factor in forcing companies into debt and thus discouraging their investment and restricting their cash flow. The tendency towards forced indebtedness may be reinforced by an inelastic demand for capital by banks. The third part of the paper argues that the inelastic supply of capital in the capital market gives rise to processes of capital market inflation or deflation. The first of these may make banks more fragile. The second may contribute to deflationary processes in the macroeconomy. A fourth section argues that further instability is added by international capital market integration.
Topic:
Debt, Markets, Banks, and Investment
Political Geography:
Global Focus

12. A Note on Mundell-Fleming and Developing Countries

Author:
John Weeks
Publication Date:
03-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper inspects the statement found in macroeconomic text books that under a flexible exchange rate regime with perfectly elastic capital flows monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the domestic price level effect of devaluation be ignored. The price level effect is noted in some textbooks, but not analysed. When it is subjected to a rigorous analysis, the interaction between exchange rate changes and domestic price level changes render the standard statement false. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Monetary policy will be more effective than fiscal policy if and only if the sum of the trade elasticities exceeds the import share. Inspection of data from developing countries indicates a low effectiveness of monetary policy under flexible exchange rates. In the more general case of less than perfectly elastic capital flows the conditions for monetary policy to be more effective than fiscal policy are even more restrictive. Use of empirical evidence on trade shares and interest rate differentials suggest that for most countries fiscal policy would prove more effective than monetary policy under a flexible exchange rate regime. In any case, the general theoretical assertion that monetary policy is more effective is incorrect.
Topic:
Monetary Policy, Developing World, Capital Flows, Macroeconomics, and Fiscal Policy
Political Geography:
Global Focus

13. Niebyl, Money and Development

Author:
Daniela Tavasci, Jan Toporowski, and Radha Upadhyaya
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper examines Karl Niebyl’s critique of monetary theory against the typology of equilibrium, reflective and critical theories of money. It argues that despite fundamental criticisms of monetary theory, his analysis of money in capitalist development is essentially a reflective one. The paper goes on to show how the development of the capitalist firm in the twentieth century may give a more critical, disequilibrium, role to money and finance. The introduction presents a categorisation of theories of money. The second section shows the reflective nature of Niebyl’s theory of money comparing it to more recent disequilibrium or critical theories. As Niebyl’s work focuses to the changing function of money with the emergence of industrial capitalism, the next section deals with possible lessons for understanding money in a context of capitalist development. The fourth section reflects on Niebyl’s considerations on methodology.
Topic:
Development, Monetary Policy, Capitalism, and Industrialization
Political Geography:
Global Focus

14. The Economics and Culture of Financialisation

Author:
Jan Toporowski
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper examines some of the social, economic and political consequences of financial inflation for the activities of companies and the operations in debt markets of an increasingly financial middle class. In this paper ‘financialisation’ is broadly defined as the inflation of capital markets. The first section of the paper explains the Kalecki-Steindl theory of enforced company indebtedness in a middle-class society. The second section of the paper shows how financial inflation makes companies over- capitalised, resulting in a decline in the trend of long-term investment. The third section shows how forced company indebtedness is modified when the middle classes start to operate in inflating asset markets. A conclusion sketches out some of the consequences of this financialisation for politics, social policy, and moral and cultural attitudes.
Topic:
Culture, Finance, Social Policy, and Middle Class
Political Geography:
Global Focus