ABSTRACT
The economy is an aggregate of economic entities’ balance sheets and balance sheets are connected to each other by cash flows. In a capitalist economy, capitalists develop chains of cash flows through their economic activities driven by their various motivations, and financial structures evolve as they do so. Balance sheets have an asymmetric nature. Asset values in balance sheets represent capitalists’ expectations reflecting market prospects and may fluctuate. On the other hand, liabilities are payment commitments and are not flexible. This asymmetry between expectations and commitments creates volatility in a capitalist economy. Furthermore, realizable cash flows through the use or liquidation of assets determine the sustainable level of leverage in the economy. The downgrading of cash flows can lead to difficulties in meeting debt service and can cause shrinkage of asset values in balance sheets. As liabilities do not change, leverage increases. The higher the leverage the more vulnerable the economy. If leverage reaches an unsustainable level, cash-flow chains unwind and/or breakdown and crises may occur. A capitalist economy cannot operate without liabilities and is therefore fragile and unstable by nature. This book is based of an understanding of capitalist economies as fragile because of the ever-present risk of the breakdown of cash-flow chains.
