Although, the deep negative impact of COVID-19 on Indian economy is a foregone conclusion but even before this corona issue the Indian economy was already in trouble. Therefore, in order to find out the remedial measures we will have to first understand as to why the Indian economy was in trouble even in pre-corona period, because the “basic reason and solution” of pre-corona crisis and post corona crisis are almost the same; only the magnitude of problem has changed, it has gone worse manifold. Therefore, we will first understand as to why the Indian economy was in trouble in pre-corona times.
Economic Slowdown: -Pre-Corona
It was quite surprising that Indian economy was in the grip of slowdown despite government was doing everything that was “theoretically correct” for economy i.e. inflation was quite contained, there was no policy paralysis, decisions were being made at very fast pace, projects were being cleared almost at lightning speed (that too without any “consideration”) etc. In addition to this the level of corruption (particularly at top level) has declined substantially, fiscal deficit was quite contained, so on and so forth. In short, one can easily say that this was (it still is) by far the most investor/business friendly government of India as far as “theoretical economics” is concerned. So why, despite all these positive factors, India was in the grip of slowdown even before corona? What were the reasons behind this?
This biggest reason was that policymakers of this regime are “too text-bookish” but the text-book theories of economics are not sound; they are based on two fundamentally wrong assumptions.
- The first wrong assumption is that “industrial capitalism is a self-sustainable economic system”. In other words, our text-book economics theories assume that “supply creates its own demand” i.e. according to our text books “in normal circumstances” whatever is produced in any capitalist economy can get bought/sold in that economy itself. This is so because “generally” the purchasing power of a capitalist economy (i.e. demand) is equivalent to value of total output of the economy (i.e. supply). Any mismatch between supply and demand is merely a temporary phenomenon which is taken care of by price level adjustment.
- The second wrong assumption of our text-books is that banks are “financial intermediary” i.e. they collect the deposit from depositors and lend the same to their borrowers.
1-Industrial Capitalism Not a Self-Sustaining System
In reality, the industrial capitalism (capitalism means the post-industrial revolution factory/mass production system in private ownership mode) has an inbuilt structural flaw that makes it asymmetrical in nature i.e. it doesn’t generate the sufficient demand “within the economic system” to sustain itself. In other words, it has an inbuilt tendency towards a persistent state of depression due to lack of “requisite demand”. For example, if the total value of output of any capitalist economy (i.e. total supply) is say, Rs.1000 then the economy “on its own” can generate a maximum demand of say Rs.700 or so. In this situation the production units (i.e. industrial firms) of the economy are unable to sell their entire output and as a result they undergo a substantial loss. Since profit making by the producers is the very aim and essence of capitalist production system therefore in absence of any profit-making environment/opportunity the industrial firms will collapse and cease any further operations; leading to a persistent state of depression. In order to understand this structural flaw of capitalism, let us briefly understand the asymmetrical nature of capitalist production system.
2-The Asymmetrical/Unbalanced Nature of Capitalist Production System
To understand this, let us assume a capitalist economy functioning in barter system. In this case, the wages and salaries to industrial workers will be given in form of commodities that their employer firm produces; for example, the workers of a textile mill get their wages & salaries in form of cloths, a crockery producer gives his employees crockery as wages & salaries etc. For the sake of simplicity let us assume that wages payout ratio is 80% of output uniformly across the economy i.e. 80% of the output of each firm is given as wages & salaries to its employees. The remaining 20% of the output is owned by the owners of the industries i.e. by the capitalists (or industrialists) as their “surplus production” or “profit”.
Now we can think of this capitalist economy as a “two tier economy”; one comprising of industrial workers who own 80% of output and other comprising capitalists/industrialists who own 20% of output. Let us assume that industrial workers “exchange” their share of output among one another and end up with a “basket of commodities” and so do the industrialists. However, in a capitalist economy, the industrial workers are quite large in absolute numbers and their share of output (i.e. 80% of output) is distributed among very high number of people i.e. it is very thinly distributed over a very large section of people. In other words, after exchanging his wages with labours of other industries an average industrial worker ends up with a “basket of commodities” that is well within his consumption capacity i.e. he will/can end up consuming the entire basket of commodities he receives as exchange value of his wages/salary. But what about the share of industrialists (or capitalists)? Capitalists are very few in numbers therefore “per capita profit or surplus production” is thousands of time more than “per capita wages”. Therefore, the per capita basket of commodities that an average industrialist will end up with (after exchanging his goods with fellow industrialists) will also be thousands of times more than that of an average industrial worker. Can an average capitalist (or industrialist) consume thousands of times more goods than an average industrial worker? Obviously, it is impossible. So, what the capitalists would do with their “surplus production” if they cannot consume it? What is its utility for them? If it is not of any utility for them why would they continue with the production? Will they not be better off by closing their factories/industries?
3-The Reason Why Capitalism Cannot Work in Barter Even Theoretically
The only way that this “surplus production” can be of any utility to capitalist class is when it is “converted into money”. Once the surplus production is converted into money the capitalist class gets all what it wants and will continue producing the commodities. In fact, the conversion of surplus production into money (i.e. the monetary profit) is the very essence and the aim of capitalist production system; even if the capitalists could “consume” all their surplus production they would not do so, rather they would convert that into money. That is why the capitalist production system cannot work in barter “even theoretically”, it needs a monetary environment to function.
Moreover, the “conversion of surplus production into money” is not a one-time problem for the capitalist system; it is a permanent state of affairs. Capitalist production system continuously creates the surplus production in each & every production cycle and surplus production of each cycle must keep getting converted into money; it is only then that a capitalist system can function. In other words, a capitalist system needs ever increasing money supply for sustaining itself, the moment money supply in capitalist system stops increasing any further, the system will collapse because further conversion of surplus into money will stop.
This illustration of capitalist system has been done in “barter system” and if we analyse the system in “monetary environment” we will find that capitalism to be a nonstarter from day one because the “consumer goods industries” (i.e. the firms making the “final product” of any economic process) would always be in huge losses if they are to sell their output “within” the economic system alone; in order to make any profit the industries will have to sell their goods “outside” the economic system. But for the sake of brevity it is not being “proven” here.
But where and how does that money keep coming from that converts the surplus production into money?
4-How Capitalism Functions?
Before going deeper into this we must know that capitalism came into existence during colonial era as a tool to suck money (gold/silver) from colonies; all the early capitalist countries were colonial powers only. Since the advent of capitalism, the primary means of converting the surplus production into money was “colonial exports”, without colonial exports the capitalism wouldn’t have survived even for a day because the colonial exports were the “source of profit” for the capitalist system. For capitalism, the colonies were the source of money that kept converting their surplus production into money. For approximately 150 years the colonial markets were the lifeline for capitalist production system. Over a period of time, the capitalist production kept on increasing but the money stock (gold/silver) of colonies kept on getting depleted (due to continuous sucking of money by capitalist industries). Due to this, the colonies were no longer able to absorb the surplus production of western capitalist industries in ever increasing volume. This resulted in collapse of capitalism; this incident is popularly known as Great Depression.
In order to overcome the great depression, the capitalist nations invented a trick to keep injecting huge dosages the money into the system. In order to facilitate the continuous injection of money into the system the first thing that was done was to abandon the so-called gold-standard. Once the gold-standard was abandoned, there was no upper limit upto which banks could create the money through credit expansion. Thereafter, that trick induced the demand “within the economic system” itself to quite unimaginable extent. This trick is known as the fiscal deficit (i.e. deficit spending) by governments. Through deficit spending, governments borrow the massive money from banks (mind it that deficit spending is financed by “borrowing money from the banks” NOT by “printing the money” as mainstream economics tells us) and put the same in the hands of their people to boost the demand artificially. It was the massive deficit spending by the capitalist nations’ governments that revived the capitalism after great depression. Since great depression, the deficit spending by the governments has been the main lifeline of capitalist economic system. After inventing this trick, there was no need for western capitalist powers to hold the colonies any more as they could have induced any level of demand for their goods within their own domestic markets and the colonial era soon came to an end after that.
Over the period of time, two other measures were invented to boost the demand artificially (1) consumer credit and (2) credit induced asset bubble creation. Therefore, in post-depression era the capitalist system is sustained by a combination of (1) fiscal deficit (2) consumer credit and (3) asset bubble creation. These measures are nothing but three tricks to keep injecting the money into capitalist economic system to artificially boost the demand. What ultimately matters here is the “total volume” money injected into the economy by these measures “put together”. For example, if money injection through consumer credit and asset bubble goes down then money injection through fiscal deficit has to increase to offset it. Similarly, if substantial money is injected through consumer credit and asset bubble then money injection through fiscal deficit may go down (i.e. government may reduce the extent of fiscal deficit). One must understand that we cannot restrain/curtail all the three measures simultaneously because if it happens then economy would go into recession or if restrain is severe the economy may well collapse into depression.
If you do a comparative analysis, you will find that economic growth is directly related to the overall credit growth by banks; during the periods of high credit growth the economy does well (i.e. it grows at a higher rate) whereas during the period of low credit growth (or credit crunch) the economy falters and it growth rate slips or it falls into recession. It is so because in period of high credit growth, money is created and injected in the economic system at a very high rate and this boosts the demand and the ultimate aim of capitalist production system i.e. “conversion of surplus production into money” is easily attained. On the other hand, in period of low credit growth (or credit crunch) the “conversion of surplus production into money” doesn’t happen easily and economy goes into slowdown or recession. But one can wonder as to WHERE does that money—which is injected into economy—comes from and HOW it is created?
This money comes from banks and banks create that money by making the loan. In modern world the commercial banks are the only institutions to create the money and the only way that commercial banks can create the money is by making the loans! That is why the volume of bank debt only keep on increasing, it cannot stop growing, the moment it stops growing the capitalist economy will collapse. But according to our text-books banks are “financial intermediary” and they lend the “deposited money” as loan. But if banks are financial intermediary and they lend the “deposited money” (i.e. from the “already existing stock” of money) as loan then how can the bank-lending create new money? The answer to this question is that banks are NOT the financial intermediary at all; they are simply the money creator out of thin air. Banks do not give the deposited money as loan but in process of making the loans they create money out of thin air and the money that is created in process of making the loans ends up as deposit in the banking system. The utility of banking system for capitalist economy is that of a “money creator” (by making loans) that facilitate the “conversion of surplus production into money” by artificially boosting the demand.
Given the limitation of space the full process of banking cannot be explained in this short article/paper but it will be explained as to why the (1) asymmetrical nature of capitalist economic system and (2) credit creation nature of banking in not openly accepted by the establishment and academia.
Explaining the Pre-Corona Slowdown in India
The three measures of sustaining the capitalist economy as discussed above have been the “standard and formal measures” to sustain the capitalist economic system, particularly in western capitalist countries. Like in other countries, in India too, the fiscal deficit has been the primary measure to sustain the economy but in post-liberalization era the consumer credit has also emerged as an additional measure. But India has stayed away, and thankfully so, from “credit induced asset bubble creation” because it is the most controversial, unstable and dangerous method to induce the demand. However, instead of “credit induced asset bubble creation”, there emerged a different kind of third way—the corruption induced & black money led parallel economy! Now we will understand the existing slowdown in India and the reason behind this.
- Modi government’s fierce crackdown on corruption, decision of note-ban and GST have substantially curtailed the black money economy. Although the academicians and media commentators don’t make much comment on it but this has significantly contributed to current slowdown in the economy. But the crackdown on black money is a very welcome step by the government because most of the benefit of black money led economic growth is appropriated by elite and entitled section of society; it hardly reaches the poor and downtrodden section of society (to whom it should actually reach).
- Thereafter, the government’s followed the text-bookish theory of “containing” the fiscal deficit and this has proven to be the most significant factor leading to current slowdown. In the light of asymmetrical nature of capitalism as discussed in this paper, this doesn’t need any further explanation as to why the “containment” of fiscal deficit causes slowdown.
- The slowdown in “real estate” was yet another major reason behind the slowdown as it slowed down growth of the “house loans” which was a significant factor.
Therefore, it is clear that the primary reason behind the slowdown in pre-corona time was that the money flow into the economy was choked substantially on account of above facts. It started with gradual slowdown in real estate since 2013-14, then measures to curtail black-money (like GST) also added fuel to the fire. But what topped it all was the “containment” of fiscal deficit whereas in that scenario it should have been increased to offset the decline in real estate and impact caused by GST/Note ban. The combined impact of all these was that money pumping into the economy slowed down substantially which caused the slowdown in the economy.
Finally, what exacerbated the situation was this government’s zeal to punish the “bank loan defaulters” and recover the bank loans. No doubt that likes of Neerav Modi and Mehul Choksi must be punished for their deeds but putting the genuine businessmen in the same category send a shockwave in business world. The zeal of recovering the “NPAs” from corporate sector created a scenario wherein even the genuine defaulters were treated quite harshly by banks and law enforcement agencies and every genuine businessman & industrialist was/is made to feel as “thief”. This made the situation even worse.
So, how the growth rate could have been increased? Obviously, by increasing the money flow in the economy and inducing the demand substantially. But, surprisingly, what government was thinking at those times was something quite extraordinarily bizarre/absurd thinking since it was again following the “text-books”.
7-The Mirage of Investment Spending Spurring the Growth
The government was (it still is) hoping that “investment spending” would revive the growth and that is why it offered huge tax concession to the corporates! In simple words, the government thought (it still thinks so) that corporates and industrialists would take loan from the banks and invest the same in making new factories, hiring more people and enhancing the production. This, in turn, will kick-start the economy!! This was/is nothing but wishful thinking of worst kind. Let us understand the absurdity of this line of thinking.
The bank credit has four components (1) government debt (for deficit financing) (2) consumer debt (3) financial sector debt (for asset bubble creation) and (4) corporate debt (for investment purpose). Out of these, first three are aimed at “increasing the demand” but the last one (i.e. corporate debt) is aimed at “increasing the supply”. Industries take the debt to invest in capacity expansion which leads to increase in supply/output and employment. But industries do take loans (to increase their output/supply) only when they are already selling their “current output” rather easily and smoothly; in such a situation they feel confident (and rightly so) that if they go for new investments, they can also sell even the “increased output” without any difficulty as well. However, if they find it difficult to sell even their current output there is no way they can be “induced” to go for further investment by taking further bank debt; no matter what the inducement. And it is quite logical, after all it will be insane to go for further investment if industries are finding it difficult to sell even their current level of output (i.e. to convert their existing surplus production into money). So, how can the industries could have been induced to go for further investment spending in pre-corona times? Following are the measures that government could have taken into pre-corona times to end the slowdown and revive the growth.
A-Increase Fiscal Deficit via Welfare Spending
The industrial firms can be induced to go for capex only if they are “easily converting their existing surplus production into money”. How can this be done? As explained above that this can be done only by injecting/pumping more money into the economy and the best way to do so is increasing the fiscal deficit by increasing the welfare spending. Another MNREGA type scheme can be devised. Once the deficit spending is increased on welfare measures it will induce the demand substantially which in turn will induce the consumer credit as well. The combined effect of the two will boost the demand substantially. It is only in this scenario that industrial firms will go for further investment.
B-Farm Loan Waiver (To Boost the Rural Demand)
The fact as to how the farm loan waiver will immediately boost the rural demand is so well clear that it needs no explanation. We are therefore discussing other aspect related to this. Theoretically, it may seem an “economically counterproductive” measure but in reality, it is not so at all. It is a wrong move in the eyes of theoreticians only because the “theory” itself is wrong. It is wrong move in theory because theory tells us that “banks are financial intermediary” which, as stated above, is a wrong theory in itself. Banks are simply the money creator out of thin air and the primary utility of banking system for a capitalist economy is as the creator of money. Therefore, what is important for economy is the creation of money by the banks NOT its repayment! Very ridiculous it may seem but this is the fact; given the limitation of space it is not being “explained” here as to why the “repayment of loan is NOT a very important factor for the economy”.
C-Tackling the Corporate Loans Issue
Almost all the big industries in the western industrialized nations are owned by “banks and financial institutions” because over a period of time banks/FIs have come to own the majority of equity/debt (i.e. shares/bonds) of the industries/corporates (now banks and F.Is. own more equity than original promoters). One can wonder as to what is the reason behind this? The reason is that (1) a substantial portion of the debt taken by the industries from the banks and financial institution keep getting converted into “equity” and (2) there is a permanent component of debt in capital structure of industries i.e. a substantial portion of debt is the permanent part of capital structure whose principal is not supposed to be repaid! If the industries are to repay these loans, they will go bankrupt as they cannot withstand that much of cash outflow. That is why some of the debts/loans are (1) converted into equity and some are (2) made the permanent part of capital structure. If these measures are not taken the industries will collapse under the weight of cash outflow that these loan repayments will cause. Beyond a certain point the industries cannot repay their loans and this fact must be accepted openly. India too needs to adopt to this strategy.
Post Corona Scenario
Now, note it that above measures were sufficient in pre-corona scenario only, is post-corona scenario, the things have gone far worse. Therefore, now something quite more is required in addition to above measures. Whereas the proposed pre-corona measures like increase in welfare spending and agri-loan waiver are can be implemented without much alternation but in post corona scenario what need very special emphasis and a radical approach is industrial and commercial sector of economy. To understand the impact of Covid-19 on the economy we will briefly understand the “normal functioning” of a capitalist economy.
The economy is like a circular flow/motion of money. Industrial firms hire and employ people to produce various kinds of goods & services (commodities) and pay them money in the form of wages and salaries. These people, in turn, buy-back the goods and services produced by industrial firms from the very money that the industrial firms gave them in form of wages & salaries. Once the firms get back this money in the form of their revenue (sales proceeds) they reproduce the commodities and this circular motion of money keeps on going like this. However, as explained above, there is always a substantial gap between value of the aggregate output (i.e. aggregate supply) and total income of the economy (i.e. aggregate demand) i.e. aggregate demand is always less than aggregate supply and in such a situation, the industrial firms would always remain in loss leading to a persistent state of depression in the economy. As already explained that this gap between supply and demand is met by pumping additional money into economy through (1) government budgetary deficit and (2) consumer credit by banks. The artificial income generation through these measures absorbs the surplus production of the economy that could not have been bought by normal wages & salaries. Therefore, in every cycle some additional money keeps getting added into this circular flow of money and it is this additional money that keeps the firms of capitalist system in profit. Now it is only under this frame of reference that we can understand the impact of Covid-19 on the economy and possible remedial measures.
Although, Covid-19 has affected almost all the sectors of economy but this impact is not uniform across the sectors, while some sectors have been hit quite severely and some sectors have been hit only mildly. For example, the sectors of tourism, hospitality, travel etc. are hardest hit sector whereas pharmaceutical sector is hit only mildly. The income of the people employed in those sectors have been hit accordingly i.e. the income of the people in hardest hit sectors has stopped almost completely whereas income of people in not-so hit hard sectors has also declined substantially (if not stopped completely). The lockdown has also created a huge army of unemployed people who have lost their job due to lockdown irrespective of the severity of the hit. In addition to this, scores of people in unorganized sectors, daily wages earners, hawkers, etc. have also been hit quite hard and income of those people too has either stopped completely or has came down quite sharply. In other words, a vast number of people have lost their jobs/income. The loss of jobs/income and decline in production is the primary impact of corona on the economy; there is a secondary impact of this on economy as well.
The purchasing power of the people who have lost their jobs/income has gone down quite severely. Therefore, the money that these people would have otherwise put into the economy to buy various kinds of consumer goods & services would not be there and it would further hit consumer goods sector quite adversely. There will be a spiral down impact on the economy. In other worlds, the circular flow of money in the economy has been broken/impeded at various points and all the firms of the economy will get affected by this by various degree. In this scenario, the only thing that can rescue the economy is massive pumping of money into economy by the government through increased deficit financing. The deficit financing will have to be increased quite substantially because it is an extraordinary situation, the circular flow of money has been stopped/broken at several points and the only thing that can fix it is money pumping by the government into the economy. Moreover, given the job scenario in the immediate aftermath of the corona crisis the consumer credit is also bound to take a massive hit and it is only the increased government spending that can fill this gap. Therefore, the government must go far very high spending and should not worry at all about the fiscal deficit.
Debt Problem of Industries
Revenue is down to an all-time low (almost zero in many sectors) due freezing/curtailment of production and other business activities but the businesses are still incurring some costs (fixed costs etc.) and it is making them go into red. Moreover, they are constantly incurring massive interest cost on their debt even when their business activity has gone down to very low (to zero in many cases). In addition to revenue loss, it is the second area of concern for industries. In this scenario, the “deferment” of interest & debt is too little a relief for the industries. What instead should happen in the debt and interest waiver to substantial extent. The industries most hit by Covid-19 should be given bigger relief into this. For making it possible the government can go for something like Quantitative Easing as the Federal Reserves of US has done there. Federal Reserves has announced a 2.3 trillion dollars package for “additional loan” to US businesses. In India, RBI should bring such a package for the waiver of existing loans instead for giving the additional loan as US Fed has done.
8-Why the Asymmetrical Nature of Capitalism and Real Nature of Banking is Not Accepted in Academia
Whenever any new system comes into existence it has to replace an already existing system, that is why it is heavily opposed by the then existing powers/forces/system; similar was the case with industrial capitalism as well. In fact, capitalism didn’t come into existence as a smooth ride (as we are taught in our text books i.e. as the so-called “industrial revolution”); rather it was ruthlessly “imposed” on the large sections of society against its wishes; that is why it was so heavily opposed. However, the basic point here is not to criticize the capitalism but to accept its shortcomings.
Among other things one of the strongest intellectual arguments against industrial capitalism was that it was not a self-sustainable or stable system and its lifeline was dependent on foreign/colonial exports; and it was quite a strong intellectual argument at those times. This argument was later termed as underconsumption theory. This argument had put industrial capitalism in a deep dock. To overcome this massive “intellectual challenge/argument” the pro-capitalist establishment of those times promoted some intellectuals who declared (without offering any logic/argument) that industrial capitalism was a “self-sustaining” system and those who followed this line were termed as classical economists. J.B Say was the first among major pro-capitalist intellectual who, to counter the underconsumption theory, came with declaration like “supply creates its own demand”. Later on, David Ricardo came up with his “savings-investment theory” to dodge the question about the self-sustainability of capitalist system. Thereafter, came the Karl Marx who not only tried to prove capitalism as a self-sustaining system but also said that capitalism was a sign of progress of humanity (although his carefully cultivated image is that of an opponent of capitalism)!
From then onwards, it has become a fashion/trend/dogma in western academic circles to depict capitalism as self-sustaining system. In fact, only those theories are recognized in western academic circles which begin by assuming (not by proving—mind it) capitalism as self-sustaining system. The theory that argued otherwise (and successfully so) has so deeply been buried that we don’t even know that any such theory/thought ever existed. As to how strong is the impulse to depict capitalism as self-sustaining system, can be understood by following fact.
By late 1910s it was becoming clear to everybody that capitalism was on its last legs as colonial markets were hardly able to absorb the surplus production of capitalist system. Economists were busy inventing various tricks and techniques to sustain the capitalism. One will be surprised to know that all the measures to sustain the capitalism in post-depression era (like deficit spending, welfare economics etc.) were the brainchild of various underconsumptionist economists only; most of whom gave their ideas well before the great-depression. For example, the policy of “deficit spending” was proposed by William Trufant Foster & Waddill Catchings in early/mid 1920s itself (i.e. well before the occurrence of great-depression) NOT by Keynes (to whom this credit is given) who published his book proposing similar measures in 1936 (i.e. when depression was basically over). So, one can wonder as to why the credit is given to Keynes, not to underconsumptionists? It is so because the underconsumptionist economists frankly “accepted” the asymmetrical nature of capitalism and proposed the offsetting measures (like fiscal deficit) on this basis. Whereas Keynes position on this was quite mercurial: —He proposed that capitalism is a self-sustaining system (!!) but “sometimes” due to “variety of reasons” (which cannot be explained!) effective demand may go below “equilibrium level” and whenever this happens the governments should go for deficit financing! It was for this gimmickry that he was accorded the status of demi-god of economics. One can clearly see the flaw of Keynesian logic, according to him governments should go for deficit spending only occasionally i.e. only when economy goes into recession whereas in reality all the governments across the world run a permanent deficit economy which is consistent with underconsumptionists logic. If any government goes without deficit financing its national economy will collapse instantly. Now one can understand as to how strong the impulse is in western academic circles to prove capitalism as self-sustaining system.
The second case is that of banking. Right since its beginning (i.e. even during gold standard times) the banking system was always a creator of money (not the financial intermediary) out of thin air and it was mostly owned by the Jews. Quite naturally, if some private individuals in society have the power to “create the money out of thin air”, it is bound to be opposed by other people in society. That is why, like capitalism, the banking too was opposed by a large section of society in the west. It was only to make the banking acceptable to the masses/society that the theory of banking as “financial intermediary” was concocted and popularized through media and academia. One will be surprised to know that till 1940s the “financial intermediary” theory of banking was heavily opposed in a large section of intellectual circles (particularly in Germany). Secondly, till 1940s it was used as a “defensive theory” to defend the practice of banking NOT as an unchallenged academic fact as it is done now. It was only after World War II that “financial intermediary” theory of banking was imposed in academia as a gospel truth i.e. when the World War II victors had their way all across the world. Interestingly the underconsumption theory too was given a far greater academic acceptance in pre-World War—II Germany and Italy!
यह भी पढ़ें…भारतीय ‘रणनीति’ से हारेगा कोरोना
Now the big question that arises is that what may be the implication of accepting the (1) asymmetrical nature of capitalism and (2) credit creation nature of banking. The first implication will be that economics, banking and finance will come out of “mystery zone” i.e. people will come to understand the “economics and finance” which they have NOT been understanding till now. The second implication will be policy making will become a lot easier because policy makers too will “understand” the issue. The most important lesson for policy makers is to know that capitalist economy doesn’t run on itself, instead it is made to run—artificially.
However, on the other hand the open acceptance of above facts will raise some very serious and tough questions on modern day economic and financial system and will put it into dock on several counts. In fact, it is to avoid these very questions that these facts are not accepted openly. However, we must accept that truth without getting worried about what question and debates it will raise because the end result of the debate will be good for humanity.