“Bank finance has nothing to do with either saving or investment. Banks create liquidity ex nihilo, and the entrepreneurs’ opportunity to materialize their plans is not an issue that can be decided by savers. In the real world, entrepreneurial plans depend upon bankers’ choices.”

The latest issue of the European Journal of Economic and Social Systems deals specifically with the issue of “Money and Machinery”, i.e. what is the role of money and finance in the development of our economic system.

Guest editors are Andrea Fumagalli and Stefano Lucarelli known for their work in analyzing the mechanics of cognitive capitalism.

Their introduction is entitled, Money and Technological Change The Role of Financing in the Process of Evolution, and is very much worth reading.

In a gist, the topic of study is:

“The purpose of “Money and technological change” is to collect a number of papers focusing on the understanding of how credit and finance systems effectively operate. At the same time, the papers address the issue concerning both their role in shaping firms’ innovative strategies and determining their performances. Our scope is to show that capitalism is a monetary economy of production in continuous evolution.”

In their introductory essay, they discuss a very important contribution, that shows the crucial role that peer money will play in the next wave of development.

The essay in question is:

Badalian L., Krivorotov V., “Technological shift and the rise of a new finance system: the market-pendulum model”, European Journal of Economic and Social Systems, Vol. 21, No. 2, 2008, p. 231-264.

This essay is an update on the research and theories on long waves of development, as developed by Schumpeter and Kondratieff, as also recently updated by Carlota Perez in het book Technological Revolutions and Financial Capital.

In short, capitalist development is market by long cycles of about 50-60 years. In the first dynamic phase, a number of combined technological innovations is matched to crucial financial innovations, which provide the necessary investment vehicles, so that innovation can occur. But in the second phase, the very pathologies of financialization undercut growth, inevitably leading to a Systemic Sudden Stop, i.e. the very crisis we are going through.

For a new wave to occur, a new set of technological innovations must be matched by a new finance system.

Here is the crucial paragraph:

“The authors define market equilibrium as a period when the market functions at full capacity, and show that this lasts for only a few decades in the mid-movement of a pendulum. As supply-demand imbalances gradually increase, there is a Systemic Sudden Stop (3S), that is, a profound market failure, with scenarios ranging from the stagflation of the 1980s, the Great Depression of the 1930s, and similarly dramatic events in our past and present. These diverse situations were united by a simple fact – purely market-related forces could not resolve them on their own, starting long downturns, or worse, revolutions and wars. The implementation of a radically new technology able to restart growth after a 3S depends on finding a brand-new Accumulation Engine. Badalian and Krivorotov’s market-pendulum shows that the great historic shifts in technology and economic development were caused by the exhaustion of territory under domestication and its ability to feed many more people within a globalizing world. The need for more supplies pushed toward the cultivation of former wastelands, by developing radical technologies able to raise their output. The need in scale efficiencies then flipped the situation to shortages of demand. In this approach, financial systems play a crucial role. Historically, the challenge of living off a much harsher environment required great investments, with uncertain prospects of returns. The authors show that the 2008 crisis may be indicating the upper limits of the US- style financial system, overstretched to its extreme by the sheer size of the globalizing world. This is causing a 3S of an immense size while calling for new forms of financing, much more powerful in their capacity to raise funds and motivate the population.”

But where could such a new system of financing come from?

The answers of the authors are surprising, and create a juncture with our own work investigating monetary transformation and peer-based currency alternatives.

Fumagalli does not provide details of the alternatives described but quotes from Badalian and Krivorotov when they conclude:

“Surprisingly, these financing mechanisms, in their early form, might be available already, presenting a resurrection of old communal customs. Their diversity mirrors the variation of the local geo-climatic conditions including Sovereign Wealth Funds, community selfhelp groups, grassroots organizations, self-organizing virtual marketplaces on the Internet and other self-organizing commons.”

I am of course heartened by these conclusions which confirm the importance of continuing to monitor and study the field of monetary innovation.

And please note that the authors make a crucial analytical step:

far from seeing the new monetary innovation as mere defensive measures against the metldown, undertaken by local communities and affinity groups to become more resilient, they are actually seeing it as a crucial step in the radical reformation of the political economy, a conditio sine qua non for a new long wave of development to occur.