Holistic or systemic financial view

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By FERNANDO NOGUEIRA DA COSTA*

To make better individual decisions, we need a macroeconomic view of the economy as a whole, bringing together the dispersed elements

The distinction between flow and stock, in economics, is crucial. Flow refers to the dynamic movement, that is, over time, of a good, service, currency or financial security. It is initiated in a specific market and carried out within the economy as a whole. For example, in the production process a (real) flow of products and a (nominal) flow of income are generated. The latter can be allocated either to expenses or to investments in balances and stocks. The first one is aimed at meeting market demand.

The circuit of the two flows may not meet in the same proportion, at a given moment, generating stocks. These refer to the quantity stored, hoarded or in conservation of a good, currency or security. This good can be a raw material, a semi-finished or finished product. Goods can be stored for future sale, off-season supply, or speculation.

The total volume and value of stocks in an economy are subject to short-term cyclical fluctuations, related to inflation, interest and exchange rates. During the market period, if the price requested by the offeror (seller) does not find any demander (buyer), the stock of that commodity accumulates and the trader has to borrow working capital to pay his commitments.

He will compare between the financial expense with interest and the opportunity cost of failing to sell and not being able to earn interest on the money, instead of paying it. Your decision could be a liquidation, that is, providing liquidity to stocks above those planned by selling them cheaper compared to the previous asking price.

If you think the sale is not worth it and plan to keep stock, you will signal to suppliers that you do not need any more goods. These will reduce production and with idle production capacity, including placing workers on collective vacations, they may also postpone investment decisions to expand production capacity. In systemic terms, it generates a recession with a drop in jobs and income.

Effective demand is a crucial variable in determining stock levels. It is not just about consumption and investment, but also about replacing this private spending, when it is absent in the economy in recession, with public spending.

To make better individual decisions, we need a macroeconomic view of the economy as a whole, bringing together the dispersed elements. This requires abandoning the individualistic perspective of economic problems, in order to achieve a systemic, collective or holistic vision.

The analysis of the social process of production and consumption usually begins with the notion of commodity circulation rather than monetary circulation. Since the past, the focus on the agricultural production cycle has suggested that production is essentially a circular process: the same goods would appear, whether between products or between means of production, for example, seeds for future planting.

However, before this physiocratic vision, in the XNUMXth century, according to the encyclopedia The New Palgrave, in a writing from 1484, it was already read “currency is for the State as blood is for the human body”. The process of circulation of merchandise and currency between different social classes (landlords, farmers and merchants) and areas (countryside and city) was already clearly described.

Marxist political economy, in the XNUMXth century, presented circularity as an essential characteristic of the capitalist economy. In it, production for sale, an exchange value instead of use value just to meet consumption, was seen as an end in itself.

Since the emergence of pure neoclassical economics, economists have debated whether the cornerstone of economic theory would be the point of view of homo economicus around scarcity – and the best individual decisions under these conditions – or it would be the principle of circular flow with the point of view of system reproduction.

In this systemic view, the economic behavior of each individual is seen as determined by the reproduction requirements of the capitalist system. This theoretical approach is associated with the defense of some type of central planning by socialists, or systemic regulation by Keynesians, as a consequence of the fear regarding the “anarchy” of the free market.

In contrast, neoliberals defend capitalists (and/or rentiers) as free agents in determining final production or aggregate supply. Workers would be left with the following “degree of freedom” in their decisions: sell their labor force or die without being able to consume anything…

In its most basic terms, the circulation approach assumes, from the outset, that production depends on currency to hire the workforce and purchase raw materials, in response to the pressures of effective demand, also validated by currency. This currency is essentially bank money, that is, credit available in the current account, circulating (and multiplied) in a particular sequence of steps or rounds.

An analysis of these steps reveals the possibility of crises occurring in numerous ways, all of them born from intertemporal failures or “disproportionalities” in monetary payments, due to “leaks” in the monetary circuit. The capitalist system would reproduce itself without crisis if the outflows of the monetary flow in the form of expenditures or investments in financial balances of any social class became at least equal to the inflows received in return.

While a real flow develops, this monetary flow is simultaneously generated. By employing families' productive resources (real flow), firms remunerate them with income in the form of wages, rent, interest, profits (nominal flow). With the income received (monetary flow), families acquire purchasing power. They have the right to acquire the goods and services produced by firms (real flow), immediately, or preserve them to do so later in time, even in retirement – ​​or leave them as an inheritance.

In the market for resources necessary for production, involving both the labor market and the capital market, families are suppliers, while firms are demanders. In the goods and services market, the roles are reversed: firms control supply and families control demand.

Therefore, the circular flows of goods and currency are interdependent and explain the interrelationship between economic agents. Operations are made possible by monetary circulation and reflected by the relative price system.

Capitalist economies are “financialized” from the outset. The problems arise from “monetary leakage”, that is, a possible lack of currency in the circuit – and not an excess. There is a hierarchy among economic agents in the monetary circuit. Every production requires short-term initial financing, called Finance, and a final or definitive refinancing with funding in the long term.

The currency, as already said, is a credit currency and, therefore, endogenous, that is, created by market forces. There are macroeconomic laws only perceived in a holistic view of the interactions of their interdependent components – and not seen in microeconomic relationships (exchanges) between pairs of individuals as exposed by neoclassicism.

By didactic ease, families, non-financial companies, the State, banks and the rest of the world are distinguished. But personal, corporate, public, banking and international finances are intertwined in the double entry between assets and liabilities.

By consolidating the evolution of net financial assets by each aggregate sector, the difference between financial assets and liabilities revealed the net lending institutional sectors of the Brazilian economy: families (3/4 of the total granted) and the rest of the world (1/4 ). The net borrowing sectors were non-financial companies (less than 2/3) and the government (more than 1/3). Financial companies had the difference between assets and liabilities with a residue close to zero, due to the intermediation of resources. Through “financialization”, all these institutional sectors interact through the financing, money management and payments subsystems.

The circuit’s monetary flows are hierarchical. Companies cannot produce without access to cash advances from banks. Families cannot spend unless firms have decided to produce and distribute income. Companies cannot reimburse banks if families do not spend their income, either through consumption or through the acquisition of private debt financial securities. Banks cannot lend unless firms decide to produce, including in the case of direct credit to consumers.

This rests on the anticipation of the family's future income, dependent on the employment decisions of the group of companies. The role of families is, in this sense, totally dependent. Economic life is difficult, we have to learn to deal with it…

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/3r9xVNh]


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