In order to comprehend the present state of capitalist economies and the related changes in economic policies, it is necessary to inquire into the structural transformations of capitalism. These cannot be put into the shallow notions of Neoliberalism and of Monetarism. The fragmentation of labour has been also the outcome of new forms of financialization that raise questions both for the Neoricardianism and the monetary heresies (post-keynesianism, circuitism), as well as for the Marxian tradition. Financial instability and the real crisis compel us to avoid the appeal of underconsumption theories and of analyses centred on the distribution of income, as weel as to a traditional reading of the tendential fall in the profit rate.

We should rather take up the contributions of those authors that already in the 1970s foresaw the role of debt and the exhaustion of Keynesianism (Magdoff and Sweezy and Minsky being likely the most relevant). Their farsighted contributions are all the more remarkable considering that in those years academic critical thought was busying itself with sterile disputes on the theory of prices of production and on the internal logical consistency of neoclassical theory. But we must also go beyond their lessons by showing that, in the wake of the rise of money manager capitalism and of capital asset price inflation, a paradoxical asset bubble driven Keynesianism came into being.

We aim therefore at explaining how, beginning with the United States, the maniacal phase of saving behaviour has made the traumatized workers also into indebted consumers. We then clarify the way in which this novel configuration was maintained and later becoming unsustainable plunging the world economy, China and India excluded, into a credit crunch, into debt deflation and into a depressive saving mode. These processes are analysed within the modifications of the geopolitical framework of world capitalism in relation to both Europe and Asia. We concentrate in particular on the contradictions of the European Neomercantilism, with special reference to Germany, France, Italy.

We argue that the present state of the European economic and political situation is deeply rooted in linking capitalist accumulation to attainment of export suprluses where, if for Germany, most of the net external balances are realized within Europe itself. We then show that such a process has led to the rise of one strong Neomercantilism (Germany) and to a weak one (Italy). We explain wage deflation under the euro-regime within these two polar cases and we outline the impact of China’s growth upon such a Neomercantilist self oriented area.

We then consider how industrial restructuring was part of this picture since the mid-1970s. From this perspective, two main causes of the crisis are analysed with reference to the household appliances and automotive sectors: firms’ and countries’ competition, and the way the value chain has been transformed, both leading to an over-production sway. The result was a novel centralisation without concentration. Productive networks or filières, based on the outsourcing of upstream production activities, and made up of many SMEs (small and medium enterprises), have been set up by the Original Equipment Manufacturers (OEMs). At the bottom of this ladder there are the “last”, the companies just supplying an output of a certain amount of simple manufacturing/processing activity or simple services; they are struggling to survive.

The overcapacity and the income stagnation, when not deflation, for the working class urged economies to find markets for their outputs, and to choose between Neomercantilism and the privatized "financial" Keynesianism based on bubble and debt typical of anglosaxon Neoliberal capitalism (with the latter allowing the feasibility of the former). In Europe, Germany, Italy and France, in this hierarchical order, have chosen a neo-mercantilist approach. The article analyse Germany as the eponymous champion of this strategy and the consequences of this choice.

We conclude by observing that in the light of the ongoing contradictions the challenge for the left is the socialization of the banking system, of investment and of employment. These perspectives can be however developed only if labour ceases to be seen as a factor of production, a mere linear coefficient multiplying a wage rate, or one of the commons (all fashionable fad nowadays), but as the class whose exploitation is rooted in production and whose autonomous point of view, opposed to capital, must drive economic policy from below.

This paper argues that while stock-flow models are successful in their synthesis of Cambridge-style growth models with flow-of-funds-based monetary and financial systems, the complexity of the resulting models, combined with the restrictions imposed by formal mathematical modelling, limit the degree to which further refinements of the models will provide insights into the workings of the capitalist system.
The paper highlights a number of important elements in heterodox financial theory and argues that there are significant problems in satisfactorily incorporating such elements into stock-flow consistent models. These include: financial development and innovation; the formation of endogenous speculative bubbles and their associated tipping points; and the observed shift in firms’ activities away from real investment towards balance sheet operations that occurs as financial systems become deeper and more complex.

It is argued that, as a result of the problems in incorporating such elements, the potential exists for stock-flow models to become the heterodox equivalent of general equilibrium theory. The primary focus of research would thus become the refinement of the techniques required to overcome the technical challenges involved in incorporating novel theoretical elements into the models, taking precedence over the more important task of deepening our understanding of the functioning of the economic system.

Thus, while superior to the neo-classical “New Consensus” monetary models, we argue that the potential for stock-flow models to form the basis of a post-Keynesian “New Consensus” is limited by the constraints imposed by the adherence to formal mathematical modelling.

In mainstream economic thought the exchange rate is considered a relative price, which restores equilibrium in production and exchange relations. Post-Keynesians stress the role of the exchange rate as an asset class per se, whose price is determined by short-term capital flows in asset markets characterized by fundamental uncertainty. This leads them to highlight the creative role of expectations and context and time specific nature of “fundamentals”. This paper proposes an analytical framework to understanding exchange rate dynamics in emerging countries, based on the application of Keynesâ™ liquidity preference theory and “own rate of return” analysis to international financial markets. This allows on the one hand accommodating the importance of short-term capital flows driven by return considerations. On the other hand, the focus on liquidity (premium) as driver of exchange rate dynamics accounts for speculative dynamics and the importance of financial structure, both on the micro and the macro level. In support of this theoretical framework the paper presents qualitative empirical evidence based on 50 semi-structured interviews with currency traders in Brazil and the City of London. The results not only corroborate the important role of short-term capital flows, both to the fixed income and the equity markets, and the context and time-specific nature of “fundamentals”, but also the importance of taking into account the hierarchic structure of international financial markets. Finally, the paper shows that while currency traders hold no notion of an underlying or equilibrium value of the exchange rate, as advocated by mainstream economics, they pay particular attention to the structure of the market in terms of exposure to possible exchange rate movements. This, it argues, had important implications for exchange rate dynamics in the international financial crisis.