How to thaw credit, now and forever
Tuesday, October 28th, 2008
Mason Gaffney
October 25, 2008
In a follow up to Professor Gaffney’s The Great Crash of 2008, he now delves into how credit can be freed from the current crisis. The Great Reckoning awaits…
1. Introduction
Working capital is the bloodstream of economic life. It is physical capital, the fast turning inventory of goods in process and finished goods that supplies materials to the worker, and feeds and clothes her or his family. Short term commercial loans and trade credit buy it, but the capital is “real” — a fact often forgotten in the paper and virtual worlds of high finance whence come the highest inner circles of government.
The bloodstream metaphor harks back to François Quesnay, an 18th century French physician turned economist. Quesnay drew on William Harvey’s (1578-1657) earlier discovery of how blood circulates. Adam Smith and other classical economists followed Quesnay, distinguishing “circulating capital” from “fixed capital,” the kind that is stuck in the ground or otherwise lasts for many years. Today we call the bloodstream metaphor “macroeconomics”, elaborated but not always improved from Quesnay’s insights.
Now the economic blood is drained down, and what’s left is slushy. We need to restore and thaw it, and get it circulating, right away as well as over time. To understand how, let’s see what drained it away in the first place.
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