Financial Markets and the Real Economy

The globalisation of financial markets has created new and severe problems for economic policy, epitomised by the spectacle of policy makers of the G-7 apparently helpless in the face of ‘irrational’ exchange rate and interest rate movements. In the case of most less-developed countries, foreign exchange and money markets are more rudimentary, but the abandonment of effective financial controls in the 1980s and 1990s has opened them, too, to the effects of capital flows driven wholly by private calculation and expectations irrespective of their rationality. For many years political economy’s analysis of the effects of international finance was dominated by perspectives derived from the classical analyses of imperialism; the problems dominating discussion were the export of capital and the transfer of surplus in either direction between advanced capitalist countries and less-developed countries. That perspective implies a particular conception of financial transactions, a correspondence between financial and real flows, which is inadequate for understanding today’s financial markets. While financial flows corresponding to flows of real capital remain one component of today’s world, relating to new forms of economic imperialism, the striking growth of international financial markets has been based upon the growth of new types of ‘fictitious capital’.