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The Global Crisis of 2008 and Keynes's General Theory pp 75–93Cite as

Impact of Financial Globalization on the Scope of Economic Theory and Policy

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Abstract

This chapter deals with the changes in the global financial and economic environment over the last two decades that have led to an unprecedented increase in the global capital flows based on foreign direct investment and portfolio investment. The chapter shows that the process of globalization of production based on vertical intra industry trade between the advanced and largest developing countries has caused the production costs of globally active multinational companies to decrease, on the one hand, and has led to an increase in the global systemic risk of internationally active investment funds. An enormous growth of the global capital flows has led to a significant increase in the importance of prices of assets in the measurement of inflation, as well as in analysing the effects of monetary and fiscal policy. Therefore the process of globalization has actually caused that almost all the macroeconomic models and theories, whether based on the neoclassical or the new Keynesian thought, have failed in predicting and suggesting measures of economic policy that have been necessary to prevent the global collapse. Since the theories are mostly based on the law of decreasing returns, and on the role of the private sector companies and households’ goal functions in establishing the general equlibrium, not taking into account the importance of profit-motives of financial institutions and the importance of speculative demand for money for the analysis of investment cycle, they haven’t been able to offer a consistent theoretical explanation of the major causes of the global crises. The author ends this chapter by pointing out that Keynes’s theory of the demand for money with a special reference to the speculative demand for money has been an extraordinary theoretical achievement in the history of economic science, and is especially important for the analysis of current economic and financial problems in the world. In addition, the author calls for a new macroeconomic model based on two large economies one of which is a representative of the advanced countries and the other a representative of the developing countries.

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Notes

  1. 1.

    See the IMF webpage—Currency Composition of Official Foreign Exchange Reserves (COFER) http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf (accessed 9 March, 2014).

  2. 2.

    Reference [11]. http://www.imf.org/external/pubs/ft/fandd/2014/03/prasad.htm.

  3. 3.

    Reference [17].

  4. 4.

    Reference [1].

  5. 5.

    Reference [12], p. 47.

  6. 6.

    Reference [4], pp. 377–378.

  7. 7.

    Source: Board of Governors of the Federal Reserve System, Financial Accounts of the United States—Flow of Funds, Balance Sheets, and Integrated Macro Economic Accounts, 2nd quarter, 2013.

  8. 8.

    See Ref. [2], p. 115.

  9. 9.

    Reference [2], p. 120.

  10. 10.

    Reference [5], pp. 80–81.

  11. 11.

    Reference [7], Part II and Part III.

  12. 12.

    There is an excellent description of the way in which the production chains of multinational companies are connected with China, Japan, South Korea and the countries of south-east Asia in the following article: Yoshitomi M (2007) “Global Imbalances and East Asian Monetary Cooperation” (Ref. [19])

  13. 13.

    Reference [13].

  14. 14.

    Reference [8].

  15. 15.

    Reference [3].

  16. 16.

    Reference [18].

  17. 17.

    Reference [10].

  18. 18.

    Reference [16], p. 6.

  19. 19.

    The Bank for International Settlements—Committee on the Global Financial System, Op.cit., p. 11.

  20. 20.

    Data on the ratios of savings to investment as percentages of GDP for all the countries in the world may be found in the IMF World Economic Outlook for any given year that the interested reader or analyst wishes to analyse: http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx.

  21. 21.

    According to McKinnon, the United States’ interest does not in fact lie in putting constant pressure on the government of China to significantly appreciate the Yuan against the Dollar, with a view to eliminating trade imbalances. McKinnon thinks that it is in the American interest to control the level of prices, that is to avoid pressure on the prices of mass consumer goods imported from China as a result of appreciation of the Yuan. Were the Yuan to appreciate significantly over the short term, this could have a significant impact on destabilising price levels in the United States, which is not in this country's interest, because it wishes to maintain the leading role of the dollar in the world. See: Ronald McKinnon [9], “US Current Account Deficits and the Dollar Standard’s Sustainability—a Monetary Approach,” published in: Eric Heilleiner and Jonathan Kershner, edds. (2009), The Future of the Dollar, Cornell University Press, Ithaca and London, pp. 45–68.

  22. 22.

    Reference [6].

  23. 23.

    For a detailed description of these activities and the impact of adopting CP1, CP2, CP3 and the Basel II standards, See Reference [15], pp. 104–135.

  24. 24.

    Reference [14].

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  1. School of Economics and Business, University of Sarajevo, Sarajevo, Bosnia and Herzegovina

    Fikret Čaušević

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Čaušević, F. (2015). Impact of Financial Globalization on the Scope of Economic Theory and Policy. In: The Global Crisis of 2008 and Keynes's General Theory. SpringerBriefs in Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-11451-4_3

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