Amongst the most sensitive innovations brought to economics by Marx was the definition of value as that captured by prices of exchanged goods and services. As Mariana Mazzucato details and previously explained in this blog, defining value by a good or product fungibility has an immense impact on how we perceive value and its distribution.

The reallocation of capital by financial intermediaries (banks or asset managers) relies on Adam Smith’s invisible hand (Marx’s writing trails Smith’s). The profound influence of Marx’s concept of value by fungibility (and only this concept) is better seen in liberal societies and the deregulation of financial activities that occurred in the final decades of the XX century.

Consider how political results influence public investment allocation but political regimes seems to exert only moderate influence on economic outcomes that vary instead with the degree of Governments’ insulation from inneficiency-inducing private interests or with the country’s development stage.

Research also helps us understand growth in more stable in democratic regimes. Studying regime transitions, researchers found democracies improve the growth pace even if authoritarian regimes are theoretically more efficient (because unconstrained by democratic checks).

For instance, innovation as a catalyst of growth is more varied and efficient in democratic regimes. Democracies also promote growth through more efficient rule of law, higher human capital and more domestic investment. Specifically, banks operating in democracies allocate more capital to domestic firms as “transparent decisions regarding credit guarantee result in capital being allocated to the best places to maximize its effects.” 

Lending by financial institutions is constrained by conditions both endogenous and exogenous to the institution – yet lending constraints actually protect borrowers with better terms even if loan rates (ie the credit guarantee) are lower.

In value terms, restricting supply presents better opportunities to (credit) demand as it increases competition amongst customers of a monopoly (discouraging those with lower scores), while increasing returns, as stronger financial sectors are more lenient in extending loans. 

These observations imply both supply and demand engage efficiency strategies in supply-constrained markets – as markets are. The chart below depicts how more loans are issued to those with better borrowing conditions when the price paid is actually lower.

The functioning of financial intermediation posits two challenges to how we perceive value. 

The most immediate challenge is that supply constraints affect demand such that higher demand does not signify higher price (cf above chart), breaking Marx’s nexus and effectively questioning whether value is restricted to supply or demand – or rather found in the interaction of both.

The second challenge is how to change the logic explained in this blog post. Financial intermediaries search for lower risk that, with increasing returns industries and cumulative causation, shall necessary correspond to those seeking higher loan volumes (as empirically document above). This implies that loan volume restrictions would apply, much in the guise of recent macro-prudential frameworks.

Most importantly, not addressing this logic challenges a contribution of democracy for growth (the credit guarantee). 

Whether efficiency is increased through more efficient rule of law (hypothetically the US case) or constraints to firm growth (hypothetically the EU case), its success upholds the value of democracy itself.


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