The title article of this collection suggests that a financial crash is preferable to a long process of debt deflation. A temporary failure of banking institutions may have less adverse impact on the economy than an extended period in which households and companies – in the case of households, burdened by excessive debt due to the inflation of the housing market, and in the case of companies, equity funds and merger and acquisition activity forcing companies into debt – use significant parts of the incomes to reduce their debt. Such debt deflation means that money which firms throw into circulation in the process of production and exchange does not all come back to them in the form of revenue, because households and other firms use it to repay debt. The resulting financial deficit of private business requires financing with further debt. In effect it becomes very difficult to escape excessive debt.

My title article suggested that the non-catastrophic, market alternative to debt deflation is a policy of inflation, ensuring that the growth of prices and wages is sufficiently high to reduce debt to more manageable proportions. But despite the bold claims of central bankers, it is not they who control inflation with their monetary policy, but inflation that controls central banks.

There is a strong case for the view that everything of interest about the Nobel Laureates in Economics of the last two decades has already been proclaimed in the official biographies that accompany their awards. Perhaps for this reason, Perry Mehrling chose as the subject of his most recent book not Robert Merton or Myron Scholes, who were awarded the Nobel Prize in Economics in 1997, but their co-author Fischer Black, who died in 1995 and therefore could not share in their award because the Prize is never awarded posthumously. Had he been alive and shared in the Prize, there is no doubt that a Nobel biography highlighting the ‘scientific discovery’ of the Black-Scholes option pricing formula would have captured all that was exciting about Fischer Black. Perry Mehrling's book demonstrates how much more can be said about someone whose life and career was as predictable as his acclaimed contribution to economics was uncontroversial.

Mehrling's attempt to invest Black with heroic qualities is perhaps the only major failure of this book. The son of a small-town businessman, Fischer Black's precocious ability in mathematics and computing brought him a scholarship to study physics and mathematics at Harvard. There, the famous American liberal university education ensured that he acquired no systematic knowledge of any subject in particular, but was able to dabble in social science and philosophy (he returned to the work of Willard Quine later in life).

Introduction

With economic growth accompanied by the rise of affluent middle classes and entrepreneurs, art in India has taken on new meaning. Just as importantly, contemporary art in the new India is globally interlinked. The creativity of Indian artists in India and abroad is now more visible, with galleries and exhibitions and commercial exchange through international auction houses such as Sotheby's and Christie's. Art in new India is rife with tensions. The recent growth and institutionalization of the contemporary Indian art scene tries to balance traditional local craft, international conceptualism and commerce. The popular perception of art in India centres on traditional handicrafts, often promoted by the state, and temple art, which most Indians are exposed to on an everyday basis. From a wider societal view, contemporary art appears to be an enclave form of artistic and commercial activity, while within the art market itself, contemporary fine art as understood in the West is still an emergent development. This is partly due to the different definitions associated with art. The modern Western notion of art results from social transformations in Europe during the eighteenth century and like many other things that emerged during the Enlightenment, this specific, historic idea of fine art as something different from popular art or craft was – and in many cases still is – believed to be universal. The idea of fine art centres around autonomy and democracy and its institutional development has been closely linked to the birth of nationstates.

Introduction

The society and economy in India present a picture of great contrasts. India is the second fastest growing economy of the world and prides itself on its globally competent firms and professionals. Yet, vast sections of small peasants and rural and urban labourers in India continue to survive under conditions of extreme deprivation. Truly, the old India coexists uneasily with a new, emergent India. The aim of this chapter is to understand such coexistence in two important sectors of the Indian economy: industry and services.

India has a young population, the source of its ‘demographic dividend’. In 2004, the proportion of population below 15 years of age was 32.5 per cent in India, compared to only 22 per cent in China (UNDP 2006, 297–300). India has a large English-speaking population. Approximately 10 million students were enrolled for tertiary education in India in 2000–1. With respect to the numbers of students enrolled for tertiary technical education, India is ahead of the United States (UNCTAD 2005, 162).

However, the other side of the coin is that India has low work participation rates, especially of women, low literacy rates and a relatively high incidence of poverty and undernourishment. In 2005, the urban labour force participation rate was only 53.8 per cent in India compared to 77.2 per cent in China (OECD 2007). The literacy rate among adults above the age of 15 in 2000–4 was only 61 per cent in India compared to 91 per cent in China (World Bank 2007).

Many economists, bankers and policy-makers like to think of financial innovation as something like the innovation that occurs in engineering, consumer goods, or public services: an endless process of improving the quality or decreasing the cost of the goods and services that we enjoy. However, the financial crisis has cast a shadow over recent financial innovations, in particular those that claim to eliminate risk. The apparent failure of innovations such as credit default swaps, or credit insurance, has put into doubt the usefulness of financial innovations. The development of new financial instruments, in particular financial derivatives, was such a notable feature of the long financial boom from the end of the 1970s that financial innovation came to be associated with financial expansion, just as it is now associated with opaque credit devices of dubious value. Well-known figures in the world of finance, such as George Soros and Warren Buffett, have denounced financial derivatives. As the policy debate turns to the reregulation of the financial markets, the functions and social use-value of financial novelty is under scrutiny.

In their hey-day, the purveyors of financial innovations liked to advertise themselves as engineers, namely highly educated practical men (for they were almost universally men) who could design better machines or constructions. In fact, machines usually have a useful function, whereas financial innovations have negligible or no intrinsic use-value to anyone outside the financial markets.

At the end of the twentieth century, while financial economists satisfied their intellectual pretensions to useful knowledge by conjuring up visions of a world peopled with materialistic consumer-investors optimising rationally in accordance with their willingness to hazard their wealth, the propertied classes succumbed to new delusions created by the financial markets. The reasoned response of propertied individuals to their experience of finance has created a new political culture with important consequences for the political economy of capitalism. The propertied classes of the past were a combination of landowners and rentiers, that is, owners of financial securities. The former were oppressed in most progressive countries by death duties and were made even more insecure by the declining real value of rents, that is, the value of rents in relation to the rising cost of maintaining the style and accommodation appropriate to a landowner. In their turn, rentiers had been made insecure by the financial crises and inflation that punctuated the progress of finance from the latter half of the nineteenth century and culminated in the 1929 Crash.

From the 1970s, the growing prosperity of the middle classes in the ‘financially advanced’ countries, such as the United States and Britain, was associated with a switch in their asset holdings, from modest holdings of residential property and direct ownership of stocks and shares, to residential property that was increasing in value and indirect ownership of stocks and shares in the form of funded pension entitlements and insurance policies.

Over 60 years of its existence as a free nation, the Indian republic has an unflattering record in its progress as a modern, progressive and democratic nation. The standards of living of people remain extremely backward. A large section of the rural population is landless and asset-poor. Illiteracy, lack of schooling, poor conditions of health and sanitation and malnourishment continue to be important problems in rural India. Nearly half of the members of agricultural labour households are below the official income-poverty line. Informal credit is the dominant source of credit in rural India. There is no credible social security system to help the rural poor tide over crises of livelihood.

The roots of India's abysmal record in removing poverty and deprivation lie in the historic failure of the state to resolve the agrarian question. By agrarian question, I refer to the task of ending the extreme concentration of land ownership, weakening the factors that foster disincentives in investment and technology adoption, and overhauling the structure that ties workers to a social system with many pre-modern features that compress purchasing power. The nature of the agrarian question has largely shaped the pattern of India's post-independence agricultural growth. It was in this context that a set of Washington Consensus-type reforms1 began to be implemented in India in 1991. In India's backward agrarian economy, these reforms have had acute adverse effects on people's livelihoods. In the process, they have introduced new dimensions to the contradictions of the post-independence regime.

This essay discusses the instruments available to central banks for stabilising nancial systems in the face of international capital mobility. These instruments are control of the money supply and credit availability, the short-term rate of interest, and open market operations. None of these instruments can be more than temporarily effective and, with nancial innovation and inflation, they are less capable of independent use. The essay explains that these instruments are powerless against nancial instability because world nancial systems are divided into two mutually incompatible monetary systems: those based on a government bond standard; and those based on a foreign currency reserve standard.

Introduction

Emerging market crises since the 1990s have highlighted the role of international capital movements as mechanisms bringing about nancial inflation and then, by the withdrawal of that capital, triggering the collapse of vulnerable markets. At the root of all this is a distribution of productive capital around the world that does not match the distribution of expenditure. Therefore the national units or currency areas, across which cross-border expenditure or capital flows take place, rarely have balanced cross-border expenditures or capital flows but tend to suffer from chronic de cits or surpluses.1 In the Bretton Woods era before 1971, limited nancing of de cits was available through the of ces of the International Monetary Fund.

At the heart of financial instability and crisis are processes of inflation and deflation in credit or financial markets. This is one of the least understood aspects of finance, and it is usually wholly ignored in financial economics. Yet it is impossible to understand the seemingly permanent state of fluctuation in financial markets, or to conduct monetary policy effectively, without some insight into these processes.

Financial inflation is best described as the rise in the value of the financial sector of the economy (banking and finance) in relation to the value of the rest of the economy. For example, at the end of the twentieth century, the value of all financial assets in the United States was equal to more than three times the Gross National Product of the United States. In the middle of that century, the value of all financial assets in the US was around double that country's GNP. Since Gross National Product is a flow, and the value of financial assets is a stock, we should, strictly speaking, compare the value of financial assets against the value of some other assets (for example, the capital stock of the economy). But there are problems with measuring such stocks accurately. Financial inflation may nevertheless be observed when credit expands more rapidly than output, or when prices of financial securities rise more rapidly that prices of real output (consumption or investment goods) or wages.

What a Credit Crunch Means

The financial crisis is referred to as a ‘credit crunch’ so widely now that many people associate the term with any bank collapse. In fact, the term ‘credit crunch’ has a very specific technical meaning. A credit crunch arises when banks or financial institutions have lent money due for repayment in the distant future, but are financing those loans with short-term borrowing which cannot be rolled over (i.e., repaid out of new short-term borrowing). There are various reasons why banks may wish to finance longterm lending with short-term borrowing. One of these might be that the interest rate on short-term borrowing is much lower than the rate on long-term lending. But the common reason for this kind of financing in the two years before the crisis has been the difficulty that banks have had in selling off their long-term loans packaged up as bonds (see securitisation below). Under the current system of bank regulation (the so-called Basle Accord), banks with long term loans on their balance sheets are required to hold additional bank capital in case the loans go bad. Banks that could not sell off loans packaged up as bonds were transferring those loans into off-balance sheet subsidiaries called ‘special purpose vehicles’ financed by short-term borrowing. When the inter-bank money markets stopped lending in the summer of 2007, banks with special purpose vehicles found themselves with large amounts of short term borrowing due to be repaid, but without the ability to re-borrow in order to pay off that borrowing.

The economies of most countries in the world are dominated by international businesses. Even though they may only employ a minority of the labour force, multinational companies dominate foreign trade. Crucially, their investments determine the pace and direction of business investment in most countries. In turn this investment determines the economic dynamics (rates of growth of output and employment) and the rate at which an economy acquires new technology and modernizes its economic infrastructure. In the present economic crisis, multinational companies are therefore a key institutional mechanism by which the financial crisis becomes a generalised economic crisis. But the way in which these mechanisms work has also been affected by changes in the financial system.

Generalisation about how the current financial crisis will affect international business, or multinational companies, is nevertheless a perilous undertaking. Multinational companies tend to specialize in particular industries. All of these industries are subject to cyclical fluctuations that tend to be peculiar to each industry, although we are now about to see these cycles coincide as particular economies and regions succumb to generalized economic depression. Furthermore, multinational companies do not all operate equally across the whole world. Their operations are usually concentrated in particular regions with links to particular financial centres. While many of these financial centres are more or less affected by the financial crisis, not all regions in the world are affected by that crisis.

The Argument

Any form of Knowing has to negotiate the unanticipatable. By definition, the act of knowing has to know what is already not available to knowledge. To make known what already is known does not involve the process of knowing; it is the act of repeating the already-known.

There are two basic ways to approach the unanticipatable. One is to make it derivable from what is already-known. The other is to respect the fact that it is underivable from the present. As we will see later, these two ways may not be mutually exclusive.

To derive the unknown from the existing corpus of the known is not a homogeneous process. Some of the attempts that follow this process can also acknowledge that there are elements of indecision and uncertainty in the realm of the not-yet-known. This process tries to formulate a calculus of that uncertainty. Thus the range of indecision may be calculated. This calls for a new gloss on the notion of calculation.

To treat the unknown as underivable from the present is not to deny the necessity of calculating the ways of reaching out towards the unknown. This calculus always has incalculable remains. The decision to know the unknown in a specific way is the decision to leap across an ineffable gulf toward a remainder not amenable to the calculations of the commensurable.