The Financial System and the Global Crisis
Honouring our pain
My personal journey has equipped me to build an honest relationship with money. However, the reason why I decided to look for alternatives to commercial and investment banks was the daunting crisis we are undergoing. Warnings including the Great Recession of 2008, the latest Intergovernmental Panel on Climate Change (IPCC) report, and the yearly Oxfam statistics on wealth inequality, are indicating that we urgently need to rethink everything from where we buy our food, where we source our energy and where we invest our savings to the assumptions on which our entire economic system is based.
Money is said to be the blood that circulates in our economy, and banks the backbone of it, the ones who control the world. But banks have not always had as much power as they do now, nor played the same role when they were first created. With the evolution of the modern economy, though, banks have come to concentrate more power due to a sequence of laws and agreements. To understand how this came to happen, we need first to look at the economic narrative that banks (and all of us) are embedded in, one that heavily exploits the living world, encourages competition, and seeks growth at all costs.
The Circular Flow Diagram
Still present in economics textbooks and classrooms today, one of the first diagrams attempting to illustrate the foundational dynamics of our economic system is the Circular Flow of Income, drawn by the economist Paul Samuelson in 1948 (Figure 1). With the mission of finding a way to make economics more intelligible and accessible to the masses, his model was originally based on the representation of the economy as a pipe system, where money flows between different economic agents.
The diagram plots Public and Business, later renamed Households and Firms, as the two main agents of the economy, connected by an interdependent relationship of production and consumption. That is to say, households exchange their labour for salaries which will enable them to consume products and services offered by firms. Later adaptations of Samuelson’s diagram add three loops to the system involving banks, the government and trade, in the form of leakages and injections that direct income for other uses (Figure 2).
In this light, governments collect money from households in the form of taxes and invest it in (public and private) firms; trade accounts for the flow between imports and exports; and banks transform citizens’ savings into business investments. Still according to the model, when total leakages level off with total injections (lending equals borrowing), the economy would reach a stable state of equilibrium, where money would flow indefinitely, without the need of (new) money being added to or removed from the system.
Neoliberal economics, an agenda implemented around the 1980s but first elaborated in the late 1940s, built on top of this model the case for business to be at the core of the economy, while governments should stay on the edge, having minimal intervention. This school of thought, which is the main influence in today’s economic narrative, defends that a market-regulated economy, based on free-trade, would lead to economic growth and ultimate prosperity for all. Profit-maximisation was then established as the key goal and legal duty of business, as stated by Milton Friedman: “The social responsibility of business is to increase its profits”.
From this very brief glimpse into economic theory and modelling, we can see where our internalised pressure of ‘making more money’ comes from, as well as how the stage was set for business and banks to assume a leading role in keeping the economy running and growing. According to Kate Raworth, “what we draw determines what we can and cannot see, what we notice and what we ignore”. Therefore, the fact that the Circular Flow Diagram leaves out our economy’s primary sources of energy and materials, which are the sun and the biosphere, says a lot about how we have taken the natural world for granted and thus reached the current ecological crises. Along these lines, the model dismisses the diversity and plurality of types of households and firms, the caring economy and social capital — building and replicating an extremely narrow worldview.
When looking at money specifically, one other misleading aspect of Samuelson’s diagram worth mentioning is that the arrows going to and from the five economic agents look all the same, giving the impression that the flow of goods and money is always proportional between them. Following this logic, the amount of money that enters the household should be the same as the one coming out of it. This assumption, however, bears no resemblance to how our economy actually plays out. Instead, we see employers paying disrespectfully low wages, banks charging abusive interest rates and citizens acquiring significant levels of debt, all of which indicates that the flows of income are, in fact, seriously unbalanced. Another evidence that the system is nowhere near a state of equilibrium is the cyclical financial crises we have been witnessing since the Great Depression in 1939, the latest example being the global financial crisis of 2008, which was a consequence of appalling speculation and money injection in the form of investment in the real-estate sector. Lived experiences like those make us inquire into what else the diagram leaves absent. Questions such as who is controlling the creation of new money and who is leaking or retaining it arise and lead us to explore the role of banks in the economy.
References used for this article:
SHUMAN, M. (2012) Local Dollars, Local Sense: How to shift your money from Wall Street to Main Street and Achieve Real Prosperity. White River Junction: Chelsea Green Publishing.
ROBIN, V. and DOMINGUEZ, J. (2018) Your Money or Your Life: 9 steps to transforming your relationship with money and achieving financial independence. 2nd Rev. ed. New York: Penguin Books.
LIETAER, B. (2001) The Future of Money: A new way to create wealth, work, and a wiser world. London: Century.
RAWORTH, K. (2017) Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. London: Random House Business Books.
RICHARDSON, J. (2018) What is the economy and how is it supposed to work. [Lecture] Schumacher College, 10th September.
