A Monetary and Financial Theory of Distribution

We extend the distributive closure of the Sraffian price system known as the «Monetary Theory of Distribution», originally introduced by the Italian scholars Massimo Pivetti and Carlo Panico in the 1980s, to give account for the role of financial conditions in modern capitalist economies. A novel analytical framework is built that combines several features of Panico’s contribution, which explicitly discusses the role played by finance in  production, with Pivetti’s price equations, which despite their consistency, are too general to satisfactorily account for the role of monetary and financial factors beyond the level of the policy interest rate set by the Central Bank. By doing so, we manage to explore, for instance, the impact on normal profitability of financial innovations, changes in financial regulation or in the degree of concentration of the loan market.

Moreover, the model is compatible with several empirical regularities that have been object of intense debate in the literature. First, it provides an explanation for the «Gibson Paradox» (namely, the positive correlation between nominal interest rates and the general price level) based exclusively on production costs, and therefore, without any reference to unobservable magnitudes (i.e. the existence of a natural interest rate). Second, it offers an alternative interpretation for the observed trends in income distribution in developed countries since the 1980s. As is well known (see cf. Pivetti, 2013, Stirati, 2013), a gradual but steady decrease in money (and real) interest rates have taken place, which have not been accompanied by opposite movements in the level of real wages; which on the contrary have remained stagnant in a context of growing labour productivity. These stylized facts could be rationalized with the aid of our formal framework if we consider that, due to its greater monopoly power, the banking sector could have accrued a higher share of the social surplus. Under these conditions registered in the current “era of financialization”, a decrease in the policy rate could be accompanied by a rise in the banking sector’s mark-up, without necessarily affecting neither the level of real wages nor the net profit rate of the industrial sector.