Low Wages, Private Indebtedness, and Crisis A Monetary-Theory-of-Production Approach

Guglielmo Forges Davanzati () and Guido Tortorella Esposito

European Journal of Economic and Social Systems, 2010, vol. 23, issue 1, 25-44

Abstract: The aim of this paper is to provide an interpretation of the 2007-2009 economic and financial crisis using the framework of the monetary theory of production. This crisis essentially depends on policies designed to redistribute income at the expense of wage earners, with particular reference to labour market deregulation and restrictive fiscal policies. By reducing total demand, these policies have undermined firms' profits, thus driving firms to bankruptcy and consequently leading to a decline in money supply. At the same time, firms producing luxury goods have been obtaining profits from the spending of rentiers. We also suggest that banking policy ­ through "hoarding" caused by the fact that expectations of individual banks worsened owing to the lack of confidence in the possibility of recouping loans in support of production and consumption ­ can have further negative effects, as it involves a reduction in money supply and hence in production, employment, and wages. As a general result, an economic policy hindering public intervention has proved to be the main cause of financial crisis, while the drop in wages and employment has been its main effect.

Keywords: Financial Crisis; Fiscal Policy; Labour Market Deregulation; Monetary Theory of Production (search for similar items in EconPapers)
JEL-codes: B51 E32 E44 G01 P16 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ejessy:0041

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