Volume 45 Number 179,
October - December 2014

Money and Financial Structures and Financialization: An Institutional and Theoretical Debate, Noemí Levy, National Autonomous University of Mexico, 2013.

This book provides a theoretical and empirical analysis of the relevance of the monetary and financial space and how it has been incorporated into orthodox and heterodox macroeconomic models. This analysis is key and is a precursor to building a theoretical scenario that recognizes the importance and effects of monetary and financial factors within economies.

The book is divided into three sections. The first two focus on the inclusion of monetary and financial spaces in orthodox and heterodox theoretical schools of thought, while the third evaluates the financial economic situation of some Latin American countries over the past decade, particularly with an exhaustive analysis of how neoliberal policies were implemented in Mexico and their repercussions.

The first section begins with a neoclassical introduction to money and bank credit. The main feature of money, according to the orthodox framework, is that any commodity can assume the function of money, that is, it has no specific function. In the neoclassical framework, money is seen as neutral, which implies that any exogenous change in the supply of money can produce a proportional change in absolute prices. Another feature of neoclassical theory is to build the real interest rate in a physical scenario in which savings are the portion of income not allocated for investment. This perspective believes that savings are the main source of financing, and as such, the stock market absorbs family savings and transfers them to the credit market, thereby setting up a channel between the savings and investment market and the credit market. The heterodox view of money believes that banks and the financial market are the basis for why Keynes rejected the idea of the veil of money proposed by orthodox theory. Keynes argued that effective demand determines economic activity and that the interest rate (its price) plays a key role in the trajectory of an economy. Likewise, Keynes rejects the theory of loanable funds and develops liquidity preference theory, which includes the monetary interest rate (absent in neoclassical analysis) and marginal capital efficiency (as opposed to the natural interest rate).

Within the framework of Keynes’ ideas, the author argues that there are two perspectives of money: prices and financing. The first argues a relationship between liquidity, the interest rate and financing, which are subject to the expectations of speculators. The second says that banks are the main suppliers of liquidity and therefore impact the demand for liquidity, which is more relevant to prices and investment. Finally, the book offers the view of horizontalists and circuitists, who question the liquidity preference and incorporate uncertainty in the decision-making of loaners and borrowers. The interest rate is a distribution variable defined by the central bank; this is a proposal that money is endogenous and not neutral. This section provides a brief introduction to the trajectory of neoclassical monetary theory, stressing its deficiencies and analyzing other ideas that would help build a theoretical framework to overcome the idea of the neoclassical veil of money.

The second section describes the relevance of the various theoretical approaches to the financial market. Neoclassical theory conceives of the financial market as a financial intermediary in which savings are the principal source of financing for banks, that is, they are ex ante savings equal to investment. This argument is a fundamental part of the efficient market theory, in which the current price of any financial bond is a good estimate of its intrinsic value, that is, prices fully reflect all information available. However, financial bubbles have contradicted the idea of an efficient market. There are also works introduced by Keynes, Minsky and Toporowski. The former two authors reject the idea that the capital market grants financing and accept that it is a space for intermediation. This is in contrast to the efficient market theory, which believes that the market provides earnings and liquidity for non-liquid assets, which would imply that prices are not an expression of their intrinsic value. Minsky’s work recognizes that financial markets are unstable and changing stock prices have an impact on the economic cycle. Finally, the book presents the theory of financial inflation, which maintains that the capital market is not related to financing investment and that the interest rate is a distributional variable determined by the central bank. The second section offers two perspectives on how financial markets function. The neoclassical version leaves no space for imbalance, while the other recognizes the instability of financial markets. The author is inclined towards the latter, which would seem correct and is of great theoretical value by strengthening and enriching the discussion of these topics.

The final section provides an empirical study of the economic and financial situation in Mexico, Argentina, Chile and Brazil starting with the implementation of neoliberal policies, and with that, the opening of capital accounts. Financial deregulation modified exchange rates, interest rates, credit amounts and the inflow and outflow of financial capital, breaking the borders of national economies to the benefit of foreign capital. The outcome of this new accumulation process was reflected in the diversification of financial assets and the predominance of financial capital in productive activities. It demonstrates that despite the fact that capital accounts were opened, the results were not as expected and neoliberal policies did not produce the desired effect to develop stock markets in Latin America.

The last section of the book analyzes the economic situation in Mexico in great detail, starting with the weakening of the import substitution model in the 1980s. Just like in the rest of Latin American countries, the Mexican economic structure was redefined based on the needs of foreign financial capital. Policies began to focus on opening many of the productive sectors by liberalizing manufacturing imports, the autonomy of the central bank and the entry of financial banking and non-banking multinational companies, restricting national control in various areas. Despite this economic opening, the financial system did not develop as it did in developed countries, nor did the financial institutions become mature enough to deploy sophisticated financial innovations. The author argues that “accumulation in the period of financial capital domination maintains the structural problems of the period of economic regulation, which are: financial and technological dependence and uncompetitive prices that limit economic growth.” In other words, the virtues promised by neoliberal policies were not attained. Rather, dependency on foreign physical and financial capital flows increased.

Consequently, this book’s major contribution resides in its combination of different theoretical perspectives and, based on a theory in which the monetary and financial spaces are relevant, it also offers an empirical analysis, thereby providing a complete overview of monetary and financial topics.

Isabel Rodríguez
Freie Universität, Germany

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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