Giuseppe Garofalo Claudio Gnesutta

1. Return to fundamentals: Fausto Vicarelli’s thought on finance vs growth and efficiency vs stabilityof the financial system Giuseppe Garofalo Claudio Gnesutta

2. A quotation from Vicarelli «…the idea that the accumulation of financial assets, both at home and abroad, becomes an attractive alternative to accumulation in certain critical moments of economic development is backed by numerous examples from history.» (F.Vicarelli, Capitale industriale e capitale finanziario, 1979, p. 19)

3. A theoretical option: Stabilizing/destabilizing factors Given that: the crisis is unlikely to end steadily with a return to the recent financial model, thus making a redefinition of free finance necessary, both in theory and practice, to make financial institutions compatible with the stability of the economic process; willthis re-definition be founded on an analytical context that interprets the working of the financial system on the basis of the assumption that the real situation is characterised simply by asymmetrical information and transaction costs and in this sense informs economic policy or will we have to referto a world in which there are no markets capable of absorbing “non-diversifiable risk”?

4. Summary • Finance and growth: the state of the art over the last forty years • Vicarelli’s thought • Suggestions for an interpretation of the new millennium’s crisis

5. A theoretical-historical perspective The “turning point” • Debate in the l970s and 1980s in Italy on the financial system and its influence on growth (besides Vicarelli, Carli, Ciocca, De Cecco, Nardozzi, Vercelli, ...]  Importance of institutional factors – References to Cameron, Gerschenkron, Goldsmith, Gurley-Shaw, Schumpeter, … • The theoretical debate was later focused on competitive equilibriums with perfect knowledge:  Arrow-Debreu + Modigliani-Miller  Fama: EMH (Efficient Market Hypothesis)  REH (Rational Expectations Hypothesis) [In finance VaR] +FIT (Flexible Inflation Targeting)

6. A glance at the italian tradition in economics Coherence of Vicarelli&C with the tradition of Italian economic thought, from the Italian Enlightenment, which is characteristically based on abstractions tempered by institutional awareness with a moderate use of an axiomatic approach [on this question, see Loria 1920, De Cecco 1989, Bocciarelli-Ciocca 1994, Faucci 1994 e 2000, Bellanca 2000, …]

7. The financial system inendogenous growth models Externalities

8. Finance and growth models: distinctive features

9. Approaches to financial system analysis • Bank-based view • Market-based view • Financial services view and ………, more specifically, Law and finance view (La Porta, Lopez-de-Silanes, Schleifer, Vishny 1998)  Importance of institutional factors (rule of law, law enforcement, …)

10. Restrictions of the standard approach • Uncertainty dealt with in terms of simple risk probability • Economic subjects’ lack of market power

11. Relevance of Vicarelli’s thought • Indissoluble connection between finance and growth (industrial capital and financial capital) • Complementary roles of (financial) markets and (financial) intermediaries • Inclusion of these questions in a context dominated by uncertainty and by uncompetitive behaviour of agentsinstability of finance

12. Vicarelli’s theoretical and methodological approaches •Reference to a “monetary economy of production” •Temporal dimension and role of “confirmation”: profit expectations promised by the subscribed assets have to be confirmed continuously •Equilibrium  “temporary” Implications •Extended concept of capital •Importance of income distribution: not only between wages and capital income, but also within capital income (role of rentiers) •Importance of international aspects •Market and state  political economics and economic policy

13. Finance, accumulation and democracy • The financial dynamics of an economy have to be assessed in relation to accumulation, especially with reference to the ability: - to allocate funds to the most innovative and therefore deserving projects (à la Schumpeter) - to manage (à la Hilferding) productive risks in the phases in which they are over-evaluated • Some limits on the quality of accumulation: 1. It has to activate innovation capable of obtaining increases in total productivity and consequent improvements in competitiveness in foreign markets; 2. The accumulation of capital tout court is not sufficient for the growth of prosperity in society. Importance of non-market forms of accumulation (public infrastructures, human capital, etc.) and the availability of a wide range of non-goods. The question is so important given the redefinition of the role of finance in society and its expansion into sectors previously covered by public welfare

14. Income distribution • The growth of the finance/product relationship inevitably leads to a growth in the income component of interest in the capital income and of this in total income; hence the greater pressure on wages • The growing inequality of income in favour of rentiers ends, as Vicarelli maintained, with “ the defence of high interest rates coinciding with the defence of the value of accumulated savings, but being in conflict with the objective of development, that is the formation of new savings”; the underestimation of the financialisation of the economy has actually produced very negative real effects on “the growth of the financial structure that is not coherent with the real base on which it should be founded”.

15. Policy implications • It is risky to delegate to the financial system the task of identifying the “general” conditions that govern growth and economic and social stability. In situations of uncertainty one institution, alone, cannot have all the relevant and necessary information; furthermore, it is burdened with too much responsibility from the point of view of the democratic process. • Institutions do not have to constrain the behaviour of economic agents through fixed rules, norms which are “objectively” rational, but rather find a common ground of obligations for different agents on which to realise a “synergy of forces, policies and behaviour instead of movements in a single direction or reliance on a single instrument” • “The creation of an expansionary climate cannot be left either entirely to the market or entirely to policies [because] relying on the market means being ready to pay very high costs at an economic-social level .... Relying solely on policies means, on the other hand, ignoring the reality of a market economy and being ready to pay very high costs at the efficiency level”

16. Suggestions for an interpretation of the new millennium’s financial crisis with caution for the time lag and reference to the core of problem

17. Non-competitive context • The financial system has developed into an oligopoly, in the shape of a pyramid, around some groups of global standing. • As in every oligopoly, the market processes have led to a lack of information for most operators, with financial relations being trustfully accepted even though they are increasingly opaque. • The economic results of the new operations have proved to be a strong stimulus for the imitation of sophisticated innovations; the greater complexity of the new finance has been “missed” by institutions monitoring the market • An excess of competition, which cannot be counterbalanced by a correct evaluation of the macroeconomic conditions, has developed into an excess of activity distorting the allocation of funds and risk with a short-termist attitude of financial institutions

18. Uncertainty and instability • “Finance” is not necessarily capable of guaranteeing that future commitments taken on today will be “confirmed” in the long term. • Instability cannot be contrasted only by a micro-prudential type of regulation of the financial apparatus. It is not enough to circumscribe present “local” crises and stop them from spreading to the whole financial system and then to the real system. • The Monetary Authorities tend to accept the equilibrium real interest rate in the financial market, considered as the long term stable position, as a reference for its own regulation of liquidity. Throwing all caution to the wind, this has led to the “financial market” being assigned the task of unfurling the “real” future of the economy and society.