Money, Banks and Finance in Economic Thought

Marx & Hayek on 'Real' versus 'Monetary' Explanations for the Fragility of Capitalism

Arnon Arie, BGU

Karl Marx (1818-1883) analysis of the capitalist system in Capital inferred that the system's fragility is rooted in 'Real' causes. Although Marx analyzed also contributing reasons entrenched in the banking and financial spheres in Capital III, published posthumously, these were secondary. John Maynard Keynes (1883-1946), although unlike Marx a supporter of the capitalist system and a critique of Marx, also argued in the General Theory that the fundamental causes for the fragility of the system are 'Real' rather than 'Monetary'. On the other end, Friedrich A. von Hayek (1899-1992), a dedicated supporter of capitalism, argued that the fragility of the capitalist system is rooted in 'Monetary’ causes, i.e. in the actions of the banks and Central Banks. In this paper I will review the two scholars' diverse explanations for the fragility they identified in the competitive economic system, however my focal point will be the possible remedies they suggested. Marx, as is well known, argued that in fact there was no such remedy, hence the prediction that the system's collapse would emerge sooner or later; Hayek, who blamed the banking sector for the fragility, argued in his 1930s theory of business cycles that more passive banks and Central Banks could provide in principle an answer to the fragility in the system. However, it was only in the 1970s when Hayek supported a radical reform in the monetary system which would terminate the existence of central banks and leave the monetary system to be ruled by 'free banking'. The analysis of fragility in capitalism of these three exceptional scholars is fundamental in understanding their more general positions, particularly those related to political issues and to their historical interpretations concerning the past and future of capitalism.

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Keywords: Capitalism, Fragility, Real versus Monetary Causes, Marx, Hayek

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