The DIMITRA plan and the financial
and political alchemies of G. Varoufakis
S.Mavroudeas * & Th. Chatzirafailidis **
*Professor of Political Economy, Department of Social Policy, Panteion University
** PhD candidate , Department of Economics, UoA
1. Verbal ‘saviors’ in times of crisis
It is common, in times of crisis, the appearance of ‘saviors’ promising to suffering popular masses salvation through imaginative plans that will reform the system and improve their bad living standards. Behind the vociferous ‘anti -systemic’ cries of these ‘saviors’ hide more or less obvious compromises with the system. They mix radical with conservative notions, science with imagination and invent various ‘magical’ solutions that are unrealistic and, at the same time, do not offend the core of the capitalist system. They usually rally middle-bourgeois and petty-bourgeois strata who fear their proletarianization by capital but also tremble at clashing with it. At the same time they seek to dominate the working class and prevent it from moving towards more radical and left directions. If they succeed in this, then they redeem it with capital in exchange for avoiding their proletarianization.
A classic example from the history of Marxism is the clash of K.Marx and F.Engels with the anarcho-liberal palinades of P.Proudhon . Unsurprisingly, the latter proposed unrealistic scenarios for public banks and credit unions with zero interest rates. The issue of the financial system is almost always prominent in such big-mouthed pseudo-anti-systemic schemes. The strata of small entrepreneurship always fear and envy – especially in times of crisis – the privileged relationship and access of big capital to the financial system, which translates into their own weakness. That is why the denunciation of ‘bankers’ (along with convenient racist definitions) is almost always a basic tool of proto -fascist formations. At the same time, the exploitation of labor by capital remains unassailable since small entrepreneurship exploits labor* and in fact often more savagely than the big capital. On the other hand, the denunciation of the ‘bankers blends nicely also with the reform plan of Keynesianism, The latter calls for a constraint on financial rentiers for the benefit of the industrial capitalists. Of course, in this case as well, the exploitation of labor by capital remains unchallenged and a ‘human’ capitalism is simply sought.
G.Varoufakis and his personal political party is a typical example of a modern pseudo-anti-systemic savior. In fact, during the current election period, he managed to place himself at the center of the generally boring mainstream debate with his infamous DIMITRA project. In this, of course, he was helped by the systemic mass media themselves, who, while burying in silence the truly subversive political and economic views, took care to give him the best ‘negative’ advertisement.
The DIMITRA plan itself is a collection of proposals without any substantial coherence, an electoral firework to garner votes only. But, despite this, it is worth analyzing its political-economic dimensions for two reasons. Firstly, because they are rather repetitive axes of supposedly ‘radical’ ‘savior’ plans. And, secondly, because Marxists delve in depth even on the most ridiculous proposals in order to unmask them in front of the toiling masses. Their goal, of course, is not to participate in the mainstream debates where systemic charlatans trivialize every essential issue. The goal of Marxists is to generate a meaningful discussion with the ‘underworld’ of workers, intellectuals and youth who are thirsty for real answers to burning problems.
In this vein, this paper will analyze (a) the theoretical pillars of the Varoufakis’ proposals and (b) the practical dimension of the DIMITRA project.
2. Here the pea, there is the pea, where is the pea …
or the search for theory in Varoufakis’ shell game
Prima vista it is indeed difficult to identify a coherent analytical basis behind the various Varoufakian pronouncements. They are always publicity fireworks with small nuggets of scientific concepts which are usually sloppy. In general, a Keynesian perspective pervades all of them, which, however, is often mixed with very diverse arguments.
Regarding the DIMITRA project, an idea of any theoretical determinants is given by the Varoufakis’ article «Let the Banks Burn» first published on Project Syndicate. In this text, Varoufakis blamed regulators for the recent banking turmoil, in contrast to Keynesian views criticizing the deregulation of the financial system. In fact, he accuses them of ‘poisoning the money of the West’ (sic!). It is worth mentioning in passim that the most hardline Neoliberal views support something similar by demanding – as early as the 2007/8 crisis – that the banks be allowed to fail (that is to bankrupt).
Varoufakis begins his article by maintaining that today’s banking crisis is different from the one that took place in 2007/8 onwards. While the latter was a result of the greed of banks and rating agencies that profiteered and failed to comply with regulations, the former was due to the two-speed pro-banker government policy implemented from 2008 onwards, which on the one hand provided cheap money to bankers, while with the other hand it imposed harsh austerity on the rest of the economy. As a solution, he proposes to ‘shake up’ the current exploitative banking system and replace it with a healthy one, in which the Central Bank will have a dominant role.
Three main issues emerge from this analysis (?).
First, Varoufakis argues that the current turmoil in the financial system is a purely monetary phenomenon and has nothing to do with real accumulation. This is a frivolous point of view that is explicitly in line with the fallacious theory of financialization . The latter argues that there is now a new capitalism dominated by money capital, while the old one was dominated by industrial capital. In this new capitalism money capital does not only derive its profits through the redistribution of surplus value (which expropriates industrial capital from labour). But, additionally and more importantly, the money capital usuriously exploits society as a whole (that is, both labor and the other fractions of capital). Therefore, as a process of exploitation, the misappropriation of surplus value takes second place and the first role is assumed by usury. Based on this incorrect theory of financialization the main problem in the ‘new’ capitalism is not the exploitation of labor by capital but the exploitation of ‘us all’ (!!!) – according to Varoufakis’ recent fellow traveler C.Lapavitsa – from the financial system.
Second, in this analysis the ‘new’ capitalism consists of three classes (bankers, industrialists, workers) instead of two (capitalists, workers). This implicit class analysis coincides with Keynes’ latent class analysis and is of course dramatically removed from both Marxism and capitalist reality. For Keynes, capitalism is at risk from the strengthening of the bankers who do not make productive investments and moreover deprive industrialists of resources. The best the workers can do is to help the industrialists constrain the bankers. Only in this way can they hope for better wages. Characteristically, G.Varoufakis argues that the class of ‘creditors and banks’ tightens the noose around the neck of society as a whole.
Third, Varoufakis touches – en passant as usual – the question of the theory of interest. He argues that central banks with their policies ‘have now made it impossible for a single nominal equilibrium interest rate to prevail that would ensure the balance between the demand and supply of money and prevent bank failures’.
The first two issues have already been addressed in a previous article («Destroying creative ambiguity so we can change the world» – BEFORE 8-4-2023 ). Below we will deal with the third issue (i.e. the theory of the interest rate) and we will show the analytical alchemies of Varoufakis .
Theories of interest
There are three main approaches in economic thought as far as the determination of the interest rate is concerned. First, we shall analyze the two and most important bourgeois theories of interest rate, and then we will separately present the relevant theory of Marx. As it will be argued below, this distinction is made not only for reasons of presentation, but most importantly for reasons of scientific substance.
The first bourgeois theory of interest is the Neoclassical Loanable Funds Theory (LFT). Its central idea spins around the existence of a natural rate of interest. This means that the market rate tends to approach the former in the long run. Thus, the burden of adjustment ‘falls’ on the market rate whenever savings diverge from investments. In more detail, when investments exceed savings and the market interest rate is lower than the natural, the former increases until it equals the latter, in order to bring the equalization of savings with investments. The inverse adjustment mechanism takes place when investment falls short of saving, so that in the end the economy always ends up in a state of equilibrium.
But what determines the natural rate of interest in LFT? Neoclassical economics define the rate of interest as the reward for abstaining from consumption and analyze it as a real variable. Simultaneously, in the neoclassical framework, interest rate is perceived as a rate of return, which does not differ in any way from the rest of the market rates. It follows that the natural interest rate is determined by the real forces of the economy and specifically by the neoclassical Marginal Efficiency of Capital (MEC). Additionally, the former is equated with the latter, according to the Neoclassical theory of perfect competition, in which all the rates of return in the market are assumed to be equal. Some versions of neoclassical economics argue that this equation is only achieved in the long run (Walras’ Law), while some more dogmatic versions of it argue that it takes place regardless of the time horizon (Say’s Law).
The second bourgeois theory of interest rate was formulated by Keynes, who defined the latter as the reward for individuals’ abstinence from liquidity (rather than consumption). Keynes claimed that the rate of interest is a monetary variable and not a real one, which is determined in the money market through the interaction of the supply of and the demand for money. Although there are various objections regarding the exogeneity of money in Keynesian theory, the prevailing opinion in literature up to this date, is that in the ‘Liquidity Preference Theory (LPT)’, money supply is exogenously determined by the Central Bank, whilst money demand depends positively on income and negatively on the nominal interest rate.
Therefore, in contrast to the neoclassical LFT, Keynes gave emphasis to the nominal rather than the real rate of interest. Although the ‘General Theory’ refers to the concept of the natural rate that is prevailing under conditions of full employment, Keynes underlined that the equilibrium between the supply of and the demand for money, is more likely to be the exception rather than the rule in the capitalist system and that it can be achieved only through active state intervention. In the Keynesian framework, this is relevant for all markets.
Hence, Keynes believed that free markets cannot guarantee the automatic equilibration of the MEC with the nominal interest rate. It is worth noting that one of Keynes’ most important arguments in the ‘General Theory’, was that it is the MEC that depends on the nominal rate of interest and not the other way around. Therefore, even if we accept that MEC is the Keynesian version of the rate of profit (something that we will discuss further below), Keynes reversed the neoclassical arrow of causality by placing the monetary sector at the starting point of his scheme rather than the real economy.
The third main theory of interest rate determination was developed by Marx in the third volume of Capital. One of the fundamental differences between Marxist Political Economy and Economics is that only the former uses the Labor Theory of Value (LTV) as its main analytical and theoretical tool. Although superficially the LTV seems to be concerned only with the determination of commodity prices in the sphere of production, the truth is that it is the basis upon which the Marxist monetary analysis is based as a whole.
In recent years there has been an intense debate among Marxist economists about the existence (or not) of a natural rate of interest in Marx’s analysis. On the one hand, Shaikh argues that the rate of interest is the price of production of the banking sector and that it is equated with the general rate of profit in a cross-industry level, while on the other hand, Fine claims that the concept of the natural rate of interest is nowhere to be found in the analysis of Marx and that the banking rate of profit tends to diverge from the general one, mainly due to certain peculiarities of the banking sector, such as its barriers of entry.
Although such a complex issue cannot be solved only in one paragraph, it seems that both approaches are right, although only partially. To begin with, Fine seems to be right about the following: in the Marxian analysis, the rate of interest depends solely on the supply of and the demand for Loanable Money Capital (LMC). Accordingly, since the LMC is not a commodity, it follows logically that the natural interest rate is not compatible with the Marxian Theory. However, this does not necessarily mean that the banking rate of profit is systematically diverging from the general profit rate. Especially if this is grounded on the banking’s sector barriers of entry, it is probably a weak argument, as it seems that similar (and perhaps even stronger) barriers of entry can be found in other sectors too. Primarily, it is problematic to set a natural price for an economic category that is determined purely by the forces of competition and not by the hours of socially necessary abstract labor.
Finally, Marx considered that the arrow of causality begins from the real economy and ends up with money, and not the other way around. In Marxist Political Economy, interest is a part of the total surplus value. The latter is created in the sphere of production. Hence, the upper limit of the rate of interest is given by the upper limit of the surplus value, namely, by the general rate of profit. Regarding its lowest point, and while theoretically it equals to zero, most of the times it is a positive number that depends on the power relations within the capitalist class and the institutional context.
The differences between Marxian and bourgeois theories of interest
The crucial difference between Marx’s analysis and the bourgeois theories of interest is that Marx did not accept the concept of the natural interest rate. Essentially, the only real disagreement between Keynes and the Neoclassical school of thought, is that while the latter perceives equilibrium as the natural state of the economy, the former claimed that it is only a possibility that rarely becomes a reality without an active government intervention, due to the inherent instability of markets. Thus, the concept of the natural rate of interest also exists in the ‘General Theory’, but it prevails only as an exception rather than the rule.
At first sight, Marx’s approach appears to have something in common with LFT, as both correctly identified that the arrow of causality begins in the real economy and ends up with money. However, at a closer look, one would spot the following difference between them: neoclassical money is a veil that functions simply as a medium of exchange. Thus, in the neoclassical scheme, monetary variables are passively adjusted to the real ones, without having the slightest effect on them. For Marx this was not the case, as money, especially since it functions as capital, cannot be neutral. Even though Marx recognized money’s certain degrees of freedom, at the same time he did not change his opinion about the primacy of the sphere of production within a capitalist economy. If someone omits that, he could easily fall into the theory of financialization.
However, the main discrepancy between the LFT and the Marxist theory of interest rate, is that in the former, the source of loanable capital derives from the economy’s stock of savings. On the contrary, Marx believed that loanable money capital consists of idle money that is consciously hoarded in the productive circuit by the capitalists (for various reasons), and it is channeled subsequently to the banks, or to the stock market. Whilst savings are expressing real wealth, idle money is just money stock that is not being used in the circuit of capital.
The essence behind this seemingly insignificant difference is that only Marx recognized that hoarding is one of the main functions of money. Additionally, he argued that it may be responsible for the mismatch between total sales and purchases and, as a result, for the breakdown of Say’s law. As opposed to that, neoclassical economics choose not to deal with hoarding. This makes perfect sense, considering that the neoclassical school (as well as Classical Political Economy) accepts Say’s Law, staying loyal to its dogmatic perception about the self-regulating markets. Obviously, hoarding as well as any other source of instability have no place in a theoretical scheme in which equilibrium is equally important as is the Koran for Muslims and the Bible for Christians.
Regarding the differences between Marx and Keynes, as it has already been stated, the latter believed that the arrow of causality starts from the monetary sector and ends up with the real economy. Furthermore, even if we accept that MEC is the most representative Keynesian indicator of profitability, it does not depend upon fundamentals, i.e., on the structural costs, the total surplus value and productivity (as the Marxian rate of profit argues), but it is based on the expectations about future demand. It is therefore a qualitatively different variable related to the Marxian rate of profit.
If we logically extend Keynes’ abovementioned argument, it will drive us to the conclusion that a capitalist economy could permanently operate in conditions of high profitability, as long as the regulatory authorities prevent the demand from falling through a low interest rate. This perception is problematic both theoretically and empirically. In the aspect of theory, it is problematic because if the solution was so obvious, the authorities would have already implemented it, in order to avoid the periodical and systematic crises of profitability. As far as the facts are concerned, it is equally problematic because in the recent crisis of 2007-08 the demand was quite high and so the basic problem was not there.
The argument that the monetary sector determines the rate of accumulation, although it reappeared in Keynes in a more disguised form, had already made its first appearance in Marx’s era. Specifically, Marx criticized this view in Capital and defined it as ‘The Fetichism of Money’. This idea has revived recently, this time as the theory of financialization. However, the injection of extra money in a fundamentally weak economy is untenable, as much as DEPON is for a patient who suffers from cerebral insufficiency. In the same way that DEPON cannot solve but simply shifts the patient’s problem, the money is not able to cure a structurally unhealthy economy. Even if the authorities would decrease the interest rate, or even if they would print a vast amount of money, the investments will not recover when the profitability of the system is low. Besides, the authorities had already tried both solutions and the results were not satisfying. The most recent example was the quantitative easing. In fact, a few months ago, Varoufakis – amidst his incredible palinades – was quick to characterize quantitative easing as the new progressive monetary policy par excellence (https://mera25.gr/gianis-varoufakis-mia-nomismatiki-politiki-pou-tha-anakoufize-tin-pleiopsifia-edo-kai-tora/ ). Today, he is actually denouncing it again as it is one of the basic elements of the policy ‘that poisoned the money of the West’.
Finally, in contrast to Keynes who argued that the interest rate is determined by the supply of and the demand for money, Marx claimed that it is determined by the supply of and the demand for LMC. At this point, two completely different theories of money collide. Although both Marxist theory of money and LPT accept that banks manage and lend money, the money primarily functions as capital only for Marx. This is the reason why Marx perceived banks as authentic capitalist enterprises which are mainly involved in lending processes to make profits, while Keynes was unable to transcend the neoclassical view of banks as passive intermediaries that simply provide cash to individuals. Even the Keynesian demand for money for speculative reasons differs significantly from the Marxian function of money as capital.
The theory of interest in the article ‘Let the Banks Burn’
Since the necessary theoretical framework has been set, it is now possible to answer our initial question.
According to the analysis of the previous section, the view that an equilibrium interest rate exists in the money market has Keynesian origins. We recall here that for Keynes, the rate of interest is a monetary variable which is determined in the money market by the interaction of the supply of and the demand for liquidity. However, there is the following subtle difference: while Keynes believed that the disequilibrium in money market is almost the norm due to the inherent volatility of the system, in the article, today’s banking panic is due to the policies of governments and central banks after the 2007-08 crisis, i.e., some distortions of the well-functioning market. The same applies to the crisis of 2007-08, which is also presented as the result of a distortion, which simply differed in form.
The argument that crises are exogenous is restated a bit more elegantly later in the article. Specifically, Varoufakis states that the private banking system was designed to be unsafe and that it is inherently unable to comply with the otherwise ‘orderly markets’. So, while for Keynes (who is nowadays no longer considered as one of the most left-wing economists in the history of economic thought) the markets do not function properly, in the article, the problem are not the markets, but the institutions and in this matter, the banks. The explanation of an economic crisis with causes outside the system itself has always been one of the key features of neoclassical economic analysis.
The assumptions of equilibrium and efficiency in the money and capital markets and their implications for the equilibrium interest rate have been questioned even by the most eminent bourgeois economists. Two of the most influential works in this field were the papers of the Nobel Prize winners in economics J. Stiglitz and R. Shiller on Asymmetric Information and Volatility in Securities Prices that cannot be explained by Efficient Market Hypothesis (EFH). Therefore, the following question reasonably arises: at a time when even the leading theorists of the system are forced to admit that money market imbalances and banking crises are not mere distortions of the otherwise orderly markets, how leftist and radical is to claim the opposite?
If we go back to 2008 and suppose that post-crisis regulators would start to ‘tighten the reins’ on private banks instead of continually subsidizing and allowing them to implement their flimsy business models. Would this be enough to prevent what followed, as well as to maintain the equilibrium interest rate?
No one disputes that Central Banks have enough power to significantly influence the market interest rates, primarily through the determination of its base rate. However, this designation is not arbitrary. On the contrary, each Central Bank, as the regulator of the entire banking system, must conform to the changing conditions of the markets, because if it does not, this will put the private banks at risk. It is enough here to think what the effects on the economy and the banks would be if the Central Bank decided not to ‘cut’ cheap money to prevent a total collapse in crisis and correspondingly, if it did not raise interest rates in periods of high demand for loans and securities, in order to keep the size of financial ‘bubble’ within some relatively manageable limits.
Therefore, it seems that the Central Bank’s base rate depends on the supply of and the demand for loanable capital which, in turn, depends on the average profitability of the economy. For example, if the profit rate is low, this will cause a decrease in the demand for loans (these are mainly loans that finance productive investments) along with an increase in the supply of loanable capital, as an increasingly larger part of money will remain idle in the absence of profitable investment plans. Therefore, the idle money will flow into the banking system in search of higher returns. In such a condition, the Central Bank is obliged to reduce its base rate. The opposite will happen in periods of boom-high profitability.
Thus, although Central Banks have an important institutional role, they cannot completely control the movement of interest rates. Hence, the interest rates that prevailed after 2008, were not the result of the Central Bank’s special sympathy for private banks, but they were in fact shaped by the low profitability of the global economy. After all, if one looks at the empirical evidence, they will find that after every major crisis of the system (and not only after the crisis of 2007-08) interest rates follow a decreasing trend, and fragile banking models are deliberately created to restore investments.
Finally, the view that there is one and only interest rate in the markets is an oversimplification. In such an uncertain economic environment where asset yields, stock and derivative prices, credit ratings, loan and bond spreads are shifting almost every hour, the only constant is the change. Thus, the qualitatively different yields of the markets tend to diverge further and further. Besides, even Tobin, a laureate economist who could hardly be called a radical leftist had the same opinion, as he built an economic model with many financial assets and their corresponding returns.
2. The DIMITRA project or the wizard of Oz in new adventures
Based on his ‘well-versed’ theoretical analysis, Varoufakis proceeds to his main specialty: submitting policy proposals that move in the realm of science fiction. The DIMITRA project is his typical most recent. creation.
Always with ‘creative ambiguity’ (i.e. analytical chaos and political adventurism) it oscillates between (a) a public debt settlement system and (b) a digital PPP (public-private partnership) financial system.
The DIMITRA plan proposes the creation of a digital wallet (i.e., a deposit account) for everyone at the Central Bank. The latter will be something like a free bank account that will allow every citizen to save and transact at no cost (i.e., without the fees etc. of private banks).
To the extent that this system is limited to the settlement of debts, then automatic offsets can be made for transactions with the State. Two issues arise here. First, the automated offsetting of debts and payments with the State can be done simply by the Greek tax office with a better than its current pitiful system. But secondly, and most importantly, the Varoufakian science fiction transforms the Central Bank from a banker of the state into a commercial bank (as it takes deposits from the citizens). It is a fictional scheme under capitalism, similar to the Proudonian daydreams of a ‘public bank’. The Central Bank (whether privately or publicly owned) in capitalism has a balance sheet (i.e., costs and revenues) and also makes a profit. It deals with the transactions of the state (although in the last decades many of them have been relegated to the private banks) . Commercial banks (private or public) undertake all transactions between citizens. Essentially, however, they undertake – of course for a fee – to collect unused liquid assets and channel them into capitalist business activities. This ‘division of labor’ is fundamental to the functioning of the capitalist system. It cannot be undone because otherwise the third of the basic fractions of capital (productive, commercial, monetary) is effectively abolished. There is no capitalism without these three basic categories.
These contradictions and fictions can be seen even more clearly in the case of Varoufakis’ digital financial PPP. In this second case, citizens’ deposit accounts are in digital currency. Varoufakis mixes it inordinately – simply to spice it a bit – with cryptocurrency. This is incredible nonsense: digital currency is a government currency as opposed to cryptocurrencies which are private ‘currencies’ (i.e. tools of speculation and fraud). Indeed, many Central Banks are preparing digital currencies. But they do not intend to take deposits from the public, i.e., to put the commercial banks out of business. Instead, the Varoufakian science fiction proposes to do it so that with this ‘wallet’ of digital currencies in the Central Bank, citizens will be able to make transactions. Varoufakis falsely claims that this will have no cost. The Central Bank has costs and should have revenues to cover them. Furthermore, in the Varoufakian fiction, revenue is needed for the Central Bank to buy (and distribute for free!!!!) public goods. Where can this income come from? One possible solution is either from a fee or from the income gained by paying a lower interest rate than inflation (i.e., citizens paying a cost to guarantee deposits).
This is where the partnership with the private sector comes in. If citizens want higher yields, then they can go to private banks where, however, there will probably not be a guarantee of even a part of the deposits (as currently provided for commercial banks). Here Varoufakis sheds his Keynesian lion-coat and dons the tailcoat of the Austrian Neoliberal. Essentially, the private banks of his fiction are like investment banks (those that his Keynesian friends denounced as the main culprits of the 2007-08 crisis).
The first thing that one notices about this proposal is its limited radicalism, as it suggests the mere replacement of the current private and exploitative banking system by a new and fairer one, in which the private banks will continue their normal operation, while the Central Bank will have the first word. The article does not even dare to propose the complete nationalization of banks, even within the capitalist system; let alone their socialization under socialism. It is worth mentioning that even the idea of the dissolution of private banks is not entirely new and innovative. Its main supporters were the Austrian economists who, could be declared as radicals by no one.
More importantly, the above proposal misses the following point. In capitalism, banking is just another profitable business that, like all the others, aims at profit and does not care about the satisfaction of human needs. This is true whether we refer to the private banks or to the Central Bank. The purpose of the banking system is to reduce the various costs of the production circuit and to contribute to the expansion of accumulation, through the concentration and subsequently the conversion of a considerable part of money into money capital. For the useful services that banks provide to the system, they are (often generously) remunerated with a significant portion of the surplus value. In short, the banking system in capitalism facilitates and serves the expanded reproduction of capital in any of its forms.
As a natural consequence, since the Central Bank is the key player in such a system, it could not be significantly different from it. The central banks were created after the private banking, and as it is the case for the latter, they were not imposed by metaphysical forces outside the system, nor they were ‘invented’ out of nowhere by some geniuses, but they were a product of an economic necessity. This necessity lies in the vital importance of the existence of a big bank that centrally manages and controls the entire private banking system, ensuring its smooth functioning. The latter is inextricably linked to the maximization of banking profits.
In this context, the idea of using Central Bank’s revenues for the purposes of buying public goods ‘collapses’, even if the former could generate enough income from its activities. Besides, historical experience has already shown that not even the most egalitarian bourgeois state (let alone a capitalist Central Bank) has ever used its revenues exclusively for such purposes.
Suppose now that we omit all the above along with the use of the term ‘citizens’, with which the distinction of society into classes disappears and we assume that the economic regime which is proposed in the article would begin to apply in our economy starting from tomorrow. How exactly is the basic capital-labor opposition (rich and poor if someone prefers) expected to be resolved? Simply, the money which is stemming from the exploitation of the ‘poor’ and earned by the ‘rich’ would no longer be hoarded in private banks and would not change hands through the mediation of the latter, but it would be kept in the book accounts of a Central Bank and would circulate through its own mediation. Furthermore, if the costs of transactions would be reduced, the most likely to happen is that the mass of profits would be increased more than the income of the poor.
Moreover, as long as the ‘wealthy citizens’ can still choose what to do with their idle money, they would almost certainly look for alternative sources of profitable investments, even if that money is secured on some government ledgers. One of these sources could be the private banks. In any case, since the wealthy ‘citizens’ would have the opportunity to invest in private financial institutions and make a considerable gain, it is quite difficult (if not impossible) for them to choose hoarding instead and to remain satisfied with a near-zero rate of return. Thus, the private banks will rebuild themselves before they can even collapse.
The DIMITRA project is characterized by a contradiction of typical logic. While theoretically it is defined as a simple tool that will reduce the costs of transactions, when it comes to the field of practice, it introduces through the back door a mechanism of autonomous money creation at the national level. The latter is clearly seen in the following passage:
With DIMITRA, the State will be able, with the push of a few buttons, to credit the LPD accounts of specific social groups, e.g., disabled people, low pensioners, unemployed, etc., overcoming fiscal strangulation, and therefore recovering degrees of fiscal freedom.
So, through DIMITRA, money will not simply be transferred from one account to another without costs, but it will provide the right to Greece to exercise its own economic policy.
It is a well-known fact that the second option is unachievable (at least today), since as a member of the Eurozone, Greece does not have the slightest scope to exercise an independent fiscal or monetary policy. The European Central Bank is in complete control of the funds that are provided to Greece (which have been frozen for several years due to the memoranda signed by Varoufakis himself) and at the same time, it supervises Greece’s domestic private banking system through various regulatory rules.
Hence, if we acquire the right to print our own money, this will automatically cause our exit from the Eurozone. So, the following should be clarified. Does the text finally support the exit of Greece from the Eurozone or it is argued that Greece must stay inside the Euro system but with less transaction costs and simultaneously without having its own currency?
Varoufakis should finally make clear to the Greek people without any spins, and pseudo-scientific terminology if DIMITRA means an exit from the Eurozone or if it is simply a small modification to our domestic banking system which does not require the adoption of a national currency. It is not possible to support two theses that contradict each other.
In the second case (i.e., the creation of a payment system within the Eurozone) additional issues arise.
If we suppose that DIMITRA really is ‘an electronic platform for doing transactions instead of paying the banks. It is a trading platform, not a currency! We are not planning to leave the euro, but we are ready to legislate all that is needed to put society and the country back on its feet.’
Then, as long as Greece is still inside Eurozone, lending as well as deposit rates in its domestic banking system would be determined by EURIBOR just as it is happening today, which means that even if the Central Bank of Greece wanted to set an exogenous deposit rate by its own discretion (directly or indirectly), it would not be able to do so, unless the Eurozone allows it.
A little further on, a new, equally important contradiction arises in the article, which concerns the economic components of DIMITRA in the context of a national currency. The text states that:
‘DIMITRA ensures you tax exemptions that are equivalent to a higher interest rate than what your bank offers you.’
At the same time, in the article ‘Let the Banks Burn’, there is the following extract:
‘The central bank could also use modern digital cloud-based technology to provide free digital transactions and savings to all, with its net proceeds paying for essential public goods‘
If both proposals are true, this means that the central bank would collect its income from citizens’ deposits, allowing them to withdraw a significantly higher amount of money whenever they want. At the same time, the state would have considerable expenses, since it would buy public goods, in order to provide them to the people.
Without special knowledge of economics, one can easily understand that such a business model is not sustainable in the capitalist system, whether it is implemented by state-owned or private enterprises. To put it simply, imagine a company that raises capital solely from its shareholders, to whom it pays a sufficiently high dividend, without even doing business itself to support the spread between the total dividend and its initial placement of capital. It is obvious that such a business would shut down before it actually starts operating.
But let’s skip this contradiction and assume that the above model is economically viable. According to the text:
‘Thus, the partial transfer of money to DIMITRA will incentivize banks to reduce their fees, raise deposit rates and, in general, stop exploiting their small depositor customers.’
Namely, due to the more appealing rates of return of DIMITRA, the central bank will take the customers of private banks and gain a larger market share. Thus, private banks would be obliged to raise their deposit rates and lower their fees. In this way, however, the banking rate of profit will fall below the average profit rate of the economy.
However, as long as capitalistic competition exists, capital is constantly being transferred from industries with the lowest to those with the highest profitability, in search of greater returns. Thus, in this case, a massive disinvestment from the banking sector will take place. As a result, deposit rates will return (and indeed quite soon) to their initial level.
The bottom line is that in the free market, there is no sector that consistently extract a higher or lower rate of profit than the average. Although the state affects competition, the rule is that in the long run, the profit rates of all individual sectors are moving towards equality.
3. Conclusions
Most of the time, mainstream public debate is conducted with shouting, slogans, insults and appeals to emotion. In an environment full of politicians and careerists building names and fortunes at the expense of the people, scientific arguments and constructive disagreements are rare.
The main conclusion of the above text is that from a scientific point of view, the opinions expressed in the article ‘Let the Banks Burn’, as well as the corresponding economic policy proposals, are a mixture of bourgeois-systemic theories, dominated by the New Keynesian concept (right-wing Keynesianism), but also with strong elements of both Neoclassical and Austrian economic thought, especially in individual points. The general spirit of the article is that orderly markets can exist in capitalism, as long as they are not hindered by various distortions, such as class-biased regulators, or greedy and corrupt private banks. To avoid these obstacles, it is proposed to create a so-called pro-people banking system with the backbone of the Central Bank, which will coexist harmoniously with private financial institutions.
In contrast to the above, we support the following: orderly markets with winners for both classes of society do not existed and never will. In the existing socio-economic system, banks will always be profit-driven capitalist enterprises, while the Central Bank will contribute to the achievement of their objectives. Therefore, the main dilemma is not to choose the optimal form of banking management within capitalism, but to choose whether there should be private ownership in banks or whether the latter should be under social control, which of course presupposes the revolutionary change of society.
But the latter is not a case concerning systemic ‘saviors’ like Varoufakis nor his politically hungry pseudo -leftist fellow travelers. This is a task for the working class and the revolutionar Left (that is, the only Left worth its name).
Instituto Marxista de Economía
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