The Economic Institutions of Capitalism

Paolo Leon

QA - Rivista dell'Associazione Rossi-Doria, 2012, issue 4

Abstract: The 2008 crash has left all the established economic doctrines - equilibrium models, real business cycles, disequilibria models - in disarray. Part of the problem is due to Smith’s "veil of ignorance": individuals unknowingly pursue society’s interest and, as a result, have no clue as to the macroeconomic effects of their actions: witness the Keynes and Leontief multipliers, the concept of value added, fiat money, Engel’s law and technical progress, to name but a few of the macrofoundations of microeconomics. A good viewpoint to take bearings anew lies in comparing the post-Great Depression institutions with those emerging from Thatcher and Reagan’s economic policies: deregulation, exogenous vs. endoge- nous money, shadow banking vs. Volcker’s Rule. Very simply, the banks, whose lending determined deposits after Roosevelt, and were a public service became private enterprises whose deposits determine lending. These underlay the great moderation preceding 2006, and the subsequent crash.

Keywords: Macro foundations of microeconomics; Smith’s veil of ignorance; Fiat money; Endogenous money; Leverage (search for similar items in EconPapers)
JEL-codes: B12 E00 E40 (search for similar items in EconPapers)
Date: 2012
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