better for society. So the financial sector should account for as small a percentage of
total economic activity as possible (Dietz/O’Neill 2013: 110). The people working
in it need to be paid for their managerial work since the actual value created for a
society begins elsewhere, in the productive economy.
Does this resemble the financial system of today? Certainly not. The idea that
finance is serving the economy is actively maintained, but increasing deregulation
has allowed its institutions to do far more than matching the received money with
credit needs. Today, private banks create a huge amount of the money themselves.
While governments still control currency, over 90 % of the money supply is issued
by private, commercial banks and institutions that leverage the deposited amounts
multiple times when issuing credit, i.e., debt (Daly/Farley 2010: 289–291).
Under the regulation of ‘fractional reserve banking,’ a bank only needs to have a
small sum to be able to create big amounts of money. A reserve requirement of
10 %, for example, means that the bank can use a $100 deposit to create $900 in
credit, out of which maybe $500 will make it into another bank account leading to
another $4500 of new money, and so on. In some cases before the financial crisis of
2008 these reserves were as low as 2–3 % or even zero.
Not all of this magically created money becomes productive credit by any
means. Most of it circulates between financial institutions, while only a third of it
enters the real economy (Scharmer/Kaufer 2013: 101–103). In practice this has
meant that, in the last few decades, the amount of money in circulation has been
growing much faster than the output of the real economy. Foreign exchange
transactions of $1.5 quadrillion outnumber international trade by a factor of 75
(Scharmer/Kaufer 2013: 94). This has led economists like Tobin (cited above) to
demand a financial transaction tax that would slow such speculative flows down
and provide some revenue that could be used by the government institutions
safeguarding the public good image with gigantic bailouts or guarantees.
So the idea of turning money into a commodity and then stripping it of any
real-world embodiment has led to what has been called the ‘financialization’ of
economies: all value that is exchanged is captured, counted and expressed in
monetary figures and thus easily transformed into financial instruments that can be
traded in markets. Unsurprisingly the financial sector now contributes about 10 %
of GDP in countries like the United Kingdom and the United States, up from 2.3 %
in the 1950s (Ferguson 2008: 6).
Meanwhile, the excess of ‘wealth’ leads to an increase of prices of already
existing assets like real estate and stocks, but not necessarily to the creation of new
production and innovation that would bring new use value to where it is really
needed. This was accelerated by making shareholder value the prime goal in corporate governance, and giving it greater importance than what is actually produced
and how. But if money’s purpose is to be applied for a good and quick financial
return, risk calculations in comparison to the estimated profits speak against poor
countries and people with non-Western legislation and a lack of purchasing power.
Behind this financialization trend and the increasing protection and privileging
of investors lies, of course, the view that money, as capital, is a commodity or input
factor equal to all the others. Of course it entitles its owner to a share of the
110
3 Why the Mainstream Economic Paradigm Cannot Inform …
total economic activity as possible (Dietz/O’Neill 2013: 110). The people working
in it need to be paid for their managerial work since the actual value created for a
society begins elsewhere, in the productive economy.
Does this resemble the financial system of today? Certainly not. The idea that
finance is serving the economy is actively maintained, but increasing deregulation
has allowed its institutions to do far more than matching the received money with
credit needs. Today, private banks create a huge amount of the money themselves.
While governments still control currency, over 90 % of the money supply is issued
by private, commercial banks and institutions that leverage the deposited amounts
multiple times when issuing credit, i.e., debt (Daly/Farley 2010: 289–291).
Under the regulation of ‘fractional reserve banking,’ a bank only needs to have a
small sum to be able to create big amounts of money. A reserve requirement of
10 %, for example, means that the bank can use a $100 deposit to create $900 in
credit, out of which maybe $500 will make it into another bank account leading to
another $4500 of new money, and so on. In some cases before the financial crisis of
2008 these reserves were as low as 2–3 % or even zero.
Not all of this magically created money becomes productive credit by any
means. Most of it circulates between financial institutions, while only a third of it
enters the real economy (Scharmer/Kaufer 2013: 101–103). In practice this has
meant that, in the last few decades, the amount of money in circulation has been
growing much faster than the output of the real economy. Foreign exchange
transactions of $1.5 quadrillion outnumber international trade by a factor of 75
(Scharmer/Kaufer 2013: 94). This has led economists like Tobin (cited above) to
demand a financial transaction tax that would slow such speculative flows down
and provide some revenue that could be used by the government institutions
safeguarding the public good image with gigantic bailouts or guarantees.
So the idea of turning money into a commodity and then stripping it of any
real-world embodiment has led to what has been called the ‘financialization’ of
economies: all value that is exchanged is captured, counted and expressed in
monetary figures and thus easily transformed into financial instruments that can be
traded in markets. Unsurprisingly the financial sector now contributes about 10 %
of GDP in countries like the United Kingdom and the United States, up from 2.3 %
in the 1950s (Ferguson 2008: 6).
Meanwhile, the excess of ‘wealth’ leads to an increase of prices of already
existing assets like real estate and stocks, but not necessarily to the creation of new
production and innovation that would bring new use value to where it is really
needed. This was accelerated by making shareholder value the prime goal in corporate governance, and giving it greater importance than what is actually produced
and how. But if money’s purpose is to be applied for a good and quick financial
return, risk calculations in comparison to the estimated profits speak against poor
countries and people with non-Western legislation and a lack of purchasing power.
Behind this financialization trend and the increasing protection and privileging
of investors lies, of course, the view that money, as capital, is a commodity or input
factor equal to all the others. Of course it entitles its owner to a share of the
110
3 Why the Mainstream Economic Paradigm Cannot Inform …