ABSTRACT

The recent decades have been characterised by a financial revolution in rapid growth and radical transformation. It is commonly held that the process of financial innovation was of decisive importance in fostering the long-lasting growth witnessed in all countries over this period, but particularly in the economy of the United States. In the course of time, however, some concern has been shown over the excessive weight of financial activities in the economic system due to a spree of innovative finance.1 Given this background, the issue of risk management has again been brought to the attention of economic agents, monetary authorities and the more aware researchers in economics. However, the search for ways to redistribute the debtor’s risk in the direction of other institutions and individuals ready to take it on with due compensation seems to be more the necessary result of the financial institutions’ modes of operation than a matter of economic theory and policy. The greater profitability of the originate to distribute model has been seen as a sign of greater efficiency, increasing confidence in the solidity of the financial institutions’ budgets, rewarded by the market with ever higher quotations.2 Their growing market value boosted the capital backing their investments and, by enabling further expansion of their activity (leveraging), intensified the innovative process on ever wider markets. This led to enhancement of the risk transfer-transformation function, structurally associated with the fundamental function of transfer-transformation of funds. Looking back to another episode of financial crisis – the crisis of the 1970s – I felt that, evaluating the processes that lead to restructure of the financial institutions, it was necessary to distinguish the “financial risk” from the “real risk”, meaning by the latter term “the expected variability, at the aggregate level, of capital income to be drawn from the productive process; in other words … the risk that the aggregate future returns on capital depart from the expectations that

prompted … its formation” (Gnesutta 1983, 81; author’s translation, italics added). The reference to the aggregate level of capital income is an important distinction since it brings the risk dimension back to the dynamics of the entire productive system and the trends in social relationships that determine the coordinates within which the flow of future incomes is brought about. Given that it is the complex of financial activities that generates the process by which the owners of productive capital assign its use to those who take on its management, then, as is classically recognised by the true bankers, the financial risk turns out to be a changed form of the risk on productive capital; it is the entrepreneurial risk on the future profitability of capital which is transferred to the holders of the financial assets. The (macroeconomic) efficiency of the system is therefore to be gauged on its capacity to trigger processes of redistribution of the risk on productive capital able to support and stabilise the future productive processes: the microeconomic viewpoint cannot suffice to govern a process whose roots are macroeconomics. The variability of the perception of macroeconomic risk is a characteristic of Keynes’s thought, seeing the interest he took in the degree of confidence fluctuations both of the financial institutions (the state of credit) and the firms regarding future productive conditions (the marginal efficiency of capital).3 It can reasonably be argued that the behaviour of economic agents coping with the risk inherent in financial relations is a decisive element in the Keynesian monetary theory of production (Keynes 1973, 408), or in other words that the dynamics of an economy cannot be understood without full awareness of how the financial risk is distributed at every point in time. Risk evaluation depends on the expectations regarding the variability of future incomes and thus on the capacity of the financial system to provide complete and accurate information on the current productive situation and its future trends. The need is for two different orders of information, one of an intersectorial nature regarding the current conditions offered by the various financial activities and the other of an intertemporal nature regarding future prospects for the economy;4 it is the latter that sounds out the real risk. If, as is the case in this chapter, I assume a non-ergodic economic process (Davidson 2003, 50-9), the promises of future yield incorporated in the stock of existing activities at a given moment are essentially uncertain, and there can therefore be no assuming sufficient information on the flow of capital incomes able to satisfy the overall requirement of returns on their assets on the part of wealth-owners. The fact that individual expectations find no “objective” point of convergence implies that the decisions of single agents (with different ways, opportunities and skills in gathering and processing the information available to them) do not necessarily tally. The gap between real risk and financial risk reflects the contrast between autonomous economic agents who, operating on different real and financial markets, are characterised by their own distinct information structures regarding specific parts of the macroeconomic process. With this chapter I wish to verify whether, and if so how, interpretation of the way a financial system operates is modified under the action of the behaviour of

agents in risk management, both real and financial. The starting point of my analysis (section 2) is a model that considers only two distinct and autonomous agents (entrepreneurs and rentiers), in the absence of any credit or monetary intermediary, thereby pointing out that the fundamental financial relationship lies in the structural link between the productive capital of the entrepreneurs and the wealth of the rentiers. This “substance” of the financial relationships takes on manifold “forms”, according to the particular contractual procedures adopted, of importance for the macroeconomic equilibria. In the following sections I will examine how the various conclusions emerge when I consider the operation of “outside” monetary (and financial) activities (section 3), and “inside” monetary (and financial) activities (section 4). By bringing money into the picture I can delineate its role and financial (and thus real) risk management, and the role of monetary policy vis-à-vis real accumulation. On the evidence of the picture that emerges I can interpret (section 5) some significant aspects of the present financial crisis which cast doubt on the idea that advanced financial systems are in themselves a guarantee of efficient allocation of financial funds in support of stable growth for productive capital.