Ecological Money and Finance: Exploring Sustainable Monetary and Financial Systems

Preface
The Underlying Hypotheses of This Textbook
How to Use the Textbook
Contents
List of Contributors
List of Figures
List of Tables
List of Boxes
Part I: Exploring Sustainable Monetary Systems
Chapter 1: Reality, the Economy, and Economics
1 The Economy Is a Part of a Whole
1.1 The Earth System
1.2 Situating the Economy
1.3 Situating Monetary and Financial Systems
2 A Historical Perspective on the Economy
2.1 New Forms of Crises
2.2 The Emergence of Capitalism
2.3 The New Context: The Anthropocene
2.4 Is Growth Always Economic?
3 The Role of Economic Thinking in the Twenty-First Century
3.1 The Purpose of Economics
3.2 Monism and Pluralism in Economics
3.3 Recognizing the Role of Values in Economic Theory
3.4 Recognizing the Role of Economics in Shaping Society
References
Chapter 2: Capitalism, Markets and Organizations
1 Capitalism, Markets and Competition
1.1 Capitalism and Fictitious Commodities
1.2 The Mirage of ‘Pure and Perfect Competition’
2 Apprehending Economic Diversity
2.1 Introducing the Corporation
2.2 Financing the Corporation
2.3 Pricing Mechanisms
2.4 Apprehending Organizational Diversity Principle
2.5 Apprehending Exchange Diversity
2.6 Preserving Diversity: The Contribution of Elinor Oström
3 A Focus on the Third Sector
3.1 The Social and Solidarity Economy
3.2 Case Study: The Coop Sector
3.3 Issues in Coop Governance
Chapter 3: What Is Money?
1 The Economic and Social Status of Money
1.1 Money Is a Common Good
1.2 Debunking The Myth of Commodity Money
1.3 In the Beginning: Debt and Credit
1.4 Money is a Unit of Account
1.5 Money and Political Sovereignty
1.6 The Notion of Monetary Sovereignty
2 Monetary Pluralism: A Historical Fact
2.1 The Emergence of the Medium of Exchange Function
2.2 An Example: The Construction of the US Dollar
2.3 Seigniorage and Political Power
2.4 The Ethics of Monetary Mutations
2.5 Contestations of the State’s Monetary Monopoly
3 Understanding Modern Money
3.1 The Fundamental Role of the State
4 Conclusion
Chapter 4: Exploring Monetary Systems
1 Money Creation and the Payment System
1.1 Modern Money is a Banking Debt
1.2 Credit and the Creation of Banking Deposits
1.3 Limits to Banks’ Power to Create Money
1.4 Modern Payment Systems and the Central Bank
1.5 Characteristics of a Modern Monetary System
1.6 The Pyramidal Hierarchy of Payments
2 Monetary Contestations in the Twenty-First Century
2.1 Cryptocurrencies: The Case of Bitcoin
2.2 Some Recent Controversies…Around Bitcoin
2.3 Some Recent Controversies… Around Crypto-Assets
2.4 The Complementary Local Currency Movement
2.5 The Evolution of Complementary Local Currencies
2.6 Illustration: Third-Generation Social Currencies
2.7 Cryptocurrencies and Local Currencies: Friends or Foes?
3 Conclusion
References
Chapter 5: Endogenous Money, Liquidity Preference and Interest Rates
1 Understanding Interest Rates
1.1 The Preference for Liquidity
1.2 Impact on Financial Decision-Making
1.3 The Yield to Maturity
1.4 The Yield Curve
1.5 Explaining the Yield Curve: Preferred Habitat Theory
2 The Central Bank and Its Instruments
2.1 Mechanisms for Obtaining Reserves
Borrowing from the Central Bank
The Interbank Market
Open Market Operations
2.2 Monetary Policy Instruments
Central Bank’s Defensive Interventions in the Open Market
3 Interest Rates, Banks and Money Creation
3.1 The Demand for Bank Deposits
3.2 The Supply of Loans
3.3 The Full View of the Monetary System
4 Conclusions
References
Chapter 6: The Macroeconomy and the  Monetary Circuit
1 The Economy as an Accounting System
1.1 What Is a Balance Sheet?
1.2 Principles of Double-Entry Accounting
1.3 Illustration: A Bond Issue
2 From Individual Balance Sheets to Macroeconomic Analysis
2.1 The Major Macroeconomic Paradoxes
The Savings Paradox
The Debt Paradox
The Cost Paradox
The Public Deficit Paradox
3 Introducing The Monetary Circuit
3.1 The Monetary Influx Phase
3.2 The Monetary Reflux Phase
3.3 A Circular Flow Diagram of the Economy
3.4 The Paradox of Debt Recovered
4 Mechanisms of Public Debt
4.1 Illustration of the Concept of Internal Wealth
4.2 External Wealth Issuance: Treasury Bills
4.3 Continuation (and End) of Financial Operations
4.4 Has the Government Borrowed from the Private Sector?
4.5 Is There a Sustainable Level of Public Deficit?
4.6 Some Policy Implications
5 Social Welfare and to Monetary Accumulation
6 Conclusion
References
Chapter 7: A Simple Ecological Monetary Macroeconomic Model
1 The Necessity and Limitations of Modeling in Economics
1.1 Modeling: A Useful Fiction
1.2 Modeling and Subjectivity
2 Introducing the SIM-E Model
2.1 Purpose and Scope of the Model
2.2 Methodological Principles of Stock-Flow Consistent (SFC) Modeling
2.3 The Assumptions of SIM-E
3 Analyzing the SIM-E Model
3.1 The Economy’s Balance Sheet
3.2 The Transaction Flows Matrix
3.3 Introducing Economic Behavior
3.4 Climate Equations
4 Simulations with SIM-E
4.1 Macroeconomic Dynamics
4.2 Energy Consumption, Energy Mix and Climate Change
5 Concluding Remarks and Conclusions
Appendix: Calculating of the Steady State in SIM-E
Calculation of Steady-State GDP
Calculation of Steady-State Disposable Income and Consumption
Calculation of the Steady-State Monetary Wealth
References
Chapter 8: Trade, Capital Flows and the Balance of Payments
1 Introducing the Open Economy
1.1 The Balance of Payments: A Major Economic Advance
1.2 Reading the Balance of Payments
1.3 Accounting for International Transactions
1.4 Trade and Financial Interdependence
1.5 The Limits of the Balance of Payments
2 Trade and Financial Imbalances
2.1 Reading the Balance of Payments
2.2 The Determinants of a Country’s External Debt
2.3 Some Implications for Economic Analysis
2.4 The Mirage of Trade Surpluses?
3 Economic Controversies Surrounding Free Trade
3.1 The Theory of Comparative Advantage
3.2 The Terms of Trade Issue
3.3 International Trade as a Business of Multinational Corporations
3.4 International Trade and the Ecological Crisis
3.5 A Case Study: The Smartphone Market
In the Beginning: The ‘Visible Hand’ of the State
The Smartphone’s Global Value Chain
Unaccounted for Social and Ecological Costs
3.6 Free Trade and Welfare: A Mixed Picture
4 Conclusions
Appendix: Accounting Entries in the Balance of Payments
Rule A: The Distinction Between Autonomous Transactions and Financing Transactions
Rule B: The Principle of Variation in the Wealth of National Residents
References
Chapter 9: Global Imbalances and the International Financial Architecture
1 The International Macroeconomic Equilibrium
1.1 Demonstration Through National Accounting
1.2 The Identity Between Internal and External Imbalances
1.3 Some Examples
2 Global Macroeconomic and Financial Imbalances Since 1950
2.1 The ‘Global Plan’ (1950–1971)
2.2 The End of the Bretton Woods System
2.3 The Rise of US Twin Deficits
2.4 The ‘Global Minotaur’ (1980–2008)
2.5 Rising Vulnerabilities
2.6 The 2008 Financial Crisis
2.7 ‘Too Big to Fail’: The Macroeconomic Policy Response to the Crisis
2.8 The European Sovereign Debt Crisis
Naked CDS Strategies
Short-Selling Strategies
3 Mutations of the International Financial Architecture
3.1 The Gold Standard System (1890–1914)
3.2 ‘Barbarous Relic’: The Interwar International Monetary System
3.3 The Construction of the European Monetary Area
3.4 What International Financial Architecture for the 21st Century?
4 Conclusions
Chapter 10: Exchange Rates and International Finance
1 The Basics of the Foreign Exchange Market
1.1 Exchange Rates, Arbitrage and Cross-Parity Rule
Reading Exchange Rates
The Arbitrage Process
The Cross-Parity Rule
Some Economic Implications
1.2 The Structure of the Foreign Exchange Market
1.3 Effective Exchange Rates
1.4 A Fundamental Relationship: Covered Interest Rate Parity (CIRP)
Portfolio Selection
The Adjustment on the Forex
The Covered Interest Parity Over Multiple Periods
2 The Macroeconomic Impact of Exchange Rate Fluctuations
2.1 An Example: The Electric Guitar Trade
2.2 A Macroeconomic Indicator: The Real Exchange Rate
2.3 Real Exchange Rates and the Balance of Payments
The Critical Elasticities Theorem
The J-curve and Its Empirical Verification
3 Determining the Exchange Rate
3.1 Investor Behavior
The Failure of the Rational Expectations Model
The Heterogeneous Agent Model
Mimicry and Behavioral Bias
3.2 Central Bank Interventions
An anti-appreciation Intervention
An anti-depreciation Intervention
The Limits to Central Bank Intervention
4 Conclusions
Chapter 11: Understanding Financial Markets
1 What Is Finance?
1.1 Financing Channels
1.2 Market-Based Finance
2 Equity Markets
2.1 The Listing of Shares
2.2 Market Liquidity and Stock Valuation
3 Bond Markets
3.1 The Market Quotation of Bonds
3.2 Bond Yields
3.3 Rating, Default Risk and Valuation of Bonds
4 The Aporias of Financial Theory
4.1 Profitability and Risk: The Diabolic Couple of Finance
4.2 Shareholder Value Creation: A Critical Analysis
5 The Theory of Efficient Markets
5.1 The Assumptions
5.2 Radical Uncertainty and Price Formation
6 A ‘Convention Theory’ Perspective
6.1 Stabilizing Self-Referentiality
6.2 From Stabilizing Self-Referentiality…to Crashing
7 The Issue of Financial Bubbles
7.1 A New Understanding of Financial Bubbles
7.2 Collective Emotions and Bubble Dynamics
8 And Sustainable Finance Will (Not) Save the World…
8.1 The Advanced Degree of Financialization of Nature
8.2 Green, Social or Sustainable? Her Name Is Bond!
8.3 The Challenge of Integrating Non-financial Criteria into Valuation Models
The Challenge of Integrating Non-financial Criteria into Valuation Models
Sustainable Finance and Asset Management
9 Conclusion
Chapter 12: The Finance-Climate Nexus
1 The Financial System and the Climate Challenge
1.1 Finance and Climate: A Vicious Circle
1.2 Reallocation of Financial Flows
1.3 The Four Financial Climate Risks
Physical Risk
Transition Risk
The Risk of Liability
The Risk of Major Disruption to the Economy
2 How the Climate Crisis Reveals the Limits of Conventional Finance
2.1 The Thorny Issue of Returns
2.2 The Free-Rider Issue
2.3 Inadequate Risk Assessment
3 New Monetary and Prudential Policy Tools
3.1 Towards a Greener Monetary Policy?
What Levers for a Green Monetary Policy?
3.2 Towards a Macroprudential Climate Policy?
Which Instruments for a Macroprudential Climate Policy?
4 Conclusion
References
Chapter 13: Finance Through a Social Science Lens
1 Deconstructing the Normative Vision of Finance
1.1 Characterizing a Financial Asset
1.2 The Social Science Approach to Finance
2 A Social and Political History of Finance
2.1 Who Is at the Origin of Financial Contracts: Merchants, Capitalists, States?
2.2 The Adaptation of Society to the Financial Logic
2.3 The Long History of Financial Markets
Amsterdam, the Financial Centre of Market Capitalism
London, the Leading Global Financial Centre
3 Opening the Black Box of Twenty-First Century Finance
3.1 The Social and Political Construction of Financial Markets
Max Weber: The Market as a Community
The Process of Marketing
3.2 The Structure of Financial Systems in the Twenty-First Century
The Organizations Involved in Asset Management
Organizations Implied in Financial Decisions
3.3 Financial Prices as Conventions
Keynes’s Contribution
Financial Convention in Social Studies of Finance
4 Towards a More Respectful Financial Innovation
5 Conclusions
Activities
Mini-Case
References
Part II: Exploring Sustainable Financial Systems
Chapter 14: Corporate Governance: Shareholders, Employees, and Stakeholders
1 Corporate Governance Issues
2 The Limitations of Shareholder Governance in the Context of Sustainability
2.1 Agency Theory: The Foundation of Shareholder Governance
2.2 What Are the Arguments for Shareholder Dominance?
2.3 Reconsidering the Foundations of Shareholder Governance
3 Partnership and Alternative Governance for the Pursuit of the SDGs
3.1 Different Economic Models Based on Different Theoretical Approaches
3.2 Extended Governance: Employee Participation in Governance, Capital, and Profits
3.3 Alternative Governance by Nature: Cooperatives
4 Conclusion
Activities
Questions for Discussion
True or False?
Mini-Case: Danone and Sodiaal: Governance Models in the Production and Sale of Dairy Products
Questions
References
Chapter 15: Responsibility, Ownership, and the Role of Shareholders
1 Thinking About the Relationship Between Shareholders and Companies
1.1 What Is a Shareholder?
1.2 Shareholders in Corporate Governance Theories
1.3 Shareholder Transformation, Short-Termism, and Hedge Fund Activism
Financial Intermediation
Short-Termism and Activism
2 The Defense of Shareholder Empowerment
2.1 Accountability Through Commitment
2.2 Responsible Shareholder Models
Democratic Shareholders
Universal Ownership
Responsible Shareholding in the Case of the French “Société à Mission”
3 Conclusion
References
Chapter 16: Financialization, the Private Equity Industry and LBOs
1 The Private Equity Industry: Its Origins and Functioning
1.1 An Industry Emblematic of the Phenomenon of Financialization
1.2 An Industry that Took Off in the United States in the 1970s
1.3 An International Development that Has Benefited from Many Favorable Winds
1.4 An Investment Scheme Involving Many Economic Players
2 The Implementation of LBO Packages: A Tangle of Contracts and Risk Transfer on the Company and on Society
2.1 Once Upon a Time …
2.2 An Arrangement Structured Around Debt
2.3 Quarterly Planning of the Performance to be Achieved by the Company
2.4 A Singular Codification of the Relationship Between the Private Equity Fund and the Managers Who Have Become Shareholders of the Company
2.5 A Company Under Significant Pressure for Five Years
2.6 Pressure that Often Continues Beyond
3 A Short Summary of the Economic and Social Consequences of the Private Equity Industry from a Sustainable Development Perspective
3.1 Against Financial Stability
3.2 Against Inclusive Growth
4 Summary and Conclusion
Appendix 1: Background Information on the Acquisition by the Private Equity Fund
Appendix 2 Realization—forecast end of 2024
Bibliography
For artists
Chapter 17: Crowdsourcing: Citizen Participation in Finance
1 Learning Objectives
2 Crowdfunding in Finance
2.1 The Notion of Crowdsourcing in Finance
2.2 Putting Citizens in Perspective
3 What theoretical issues in the financing of sustainability?
3.1 The Financial Theory of the Firm
3.2 Financial Instruments
3.3 Citizen Involvement
4 Understanding Citizen Involvement in Financial Organizations
4.1 Is Finance Harmful to Humanity?
4.2 Citizens’ Expressions in Finance
Ethical Finance
Solidarity-Based Finance
Participatory Finance
5 How to Use Crowdsourcing in Financial Organizations?
5.1 Various Types of Crowdsourcing
5.2 The Debate Surrounding Crowdsourcing as a Concept
5.3 Rich Forms of Citizen Interaction
5.4 Crowdsourcing as a Vehicle for Financial Sustainability?
6 Conclusion
Glossary
Bibliography
Chapter 18: The Promise of Crowdlending in Financing Agenda 2030
1 Learning Objectives
2 Crowdfunding: Definition and raison d’être
3 Resolving the Problem of Banks’ Relationship to Risk Through Principles of Trust and Collective Intelligence
4 Recycling Bank Money Creation into Impact Investments
5 The French Case: Three Coexisting Business Models of Crowdlending
5.1 The Lendopolis Case: Disrupting Banking Intermediation by Organizing the Expression of Collective Intelligence
5.2 The Lendix Case: Extending Traditional Finance by Combining Debt Funds with an Investment Fund
5.3 The Unilend Case: Toward a ‘Euronext’ Market Place for Private Debt
6 Toward Embedding Crowdlending in Traditional Finance in Order to Achieve the Goals of the 2030 Agenda
7 Summary and Conclusion
References
Chapter 19: Social Investment Bonds
1 Purpose and Societal Utility of Financial Markets
2 Bonds as a Public Offering Vehicle
2.1 Bonds to Finance the Dimensions of Sustainable Development
2.2 Financial Responsibility and Sustainability
2.3 Review of Sustainable Bonds
Environmental Bonds
Sustainability Bonds
Social Bonds
Social Bonds Framework
3 Impact Investing: A Concept Between Private Equity and Philanthropy
3.1 Social Impact Bonds: An Instrument for Impact Investment
3.2 Social Impact Contracts: Example of France
4 Social Impact Measurement
5 Financialization of Social Services: Example of Private-Public Partnership
6 Summary and Concluding Remarks
References
Chapter 20: The Mutual Bank Model and Sustainability
1 Mutual Banks: A Model for a Paradigm Shift
1.1 The Mutual Bank Model
2 Banks and Corporate Social Responsibility (CSR)
2.1 CSR and SDGs
The Need to Align Corporate Social Responsibility with the SDGs
Defining CSR
The Stakeholder Approach
2.2 Banks and CSR
CSR Criteria in Banking
Bank Stakeholders
Meeting Stakeholder Expectations: Integrating CSR into Banks’ Strategies
3 How Do Mutual Banks Respond to SDG 17?
3.1 Hybrid Models: Values Betrayed?
3.2 Toward a Risk of “Trivialization”?
4 Summary and Conclusion
References
Chapter 21: Asset Management and Sustainability: Industries and Regulatory Issues
1 The Structure of the Financial Sector and the Behavior of Agents
1.1 What Are the Differences Between a Financial System and a Financial Sector?
1.2 Competition in Asset Management Favors Short-Termism
A Sector Organized Around the Search for Yields
The Consequences of Financial Sector Concentration and Business Diversification: Too Big to Fail Players
The Effects of Sector Structure on Sustainable Finance
2 The Sustainable Finance Ecosystem
2.1 Key Sustainable Finance ‘Concepts’: CSR, ESG and SRI
2.2 Industrial Strategies Supporting the SRI Fund Offer
2.3 The Influence of External Stakeholders
3 Is Financial Regulation Conducive to Sustainable Development?
3.1 Financial Stability Versus Transition
3.2 Capital Requirements Are Based on a Short-Term Approach
3.3 A Non-binding Regulatory Framework
3.4 Political Strategies as a Brake on Regulatory Change
4 Conclusion
References
Glossary
Chapter 22: Asset Management and Sustainability. Critical Perspectives and Reform Issues
1 A Financialized Core Market, Anchored in Financial Materiality
2 The Causes of a Material ESG View
2.1 The Incompatibility Between Traditional Asset (or Portfolio) Management and Financing the SDGs
A Look at the Theoretical Foundations of Portfolio Management Practices
Probabilizing the Future
Find the Minimum Risk for Each Level of Profitability
Situating Oneself on the ‘Efficiency Frontier’
Let the Market Set the Return on Risk
Believing in the Efficiency of Markets
Determining the Profitability of an Asset Through Future Income Flows
The Limits of the Usual Tools for Financing the SDGs
Is the Quest for Financial Returns Compatible with Achieving the SDGs?
Conditions for the Effectiveness of a Green Bond
Green Bond Pricing
2.2 A Concentrated and Investor-Focused ESG Data Market
2.3 The Explosion of ESG/Green Labels
2.4 The Benchmarking Reflexes
3 Proposals for Sustainable Asset Management
3.1 Speaking a Language of Strong Sustainability
3.2 Internalizing ESG R & D
3.3 Putting a Micro ESG Perspective Back into a Macro ESG World
3.4 Engage in a Comprehensive Impact Process (Intentionality, Uniqueness, Commitment, Measurement)
3.5 Implementing Ecosystem-Based Financial Reform
4 Conclusion
References
Chapter 23: Rules and Regulation: A Critique of Neoclassical Theory
1 The Institutional Emergence of Contemporary Financial Regulation
2 Regulation as a Problem? What Neoclassical Financial Theory Cannot See
3 An Inadequate Epistemic Framework
4 Three Specific Problems
5 A Perspectivist Alternative
6 Conclusion
Glossary
References
Chapter 24: Ethics, Risks, and Sustainability: A Theological Perspective
1 The Risk-Free Asset
1.1 The Relationship Between Risk and Profit
1.2 Genesis of the Risk-Free Asset
1.3 Trusted Third Parties and Conflicts of Interest
1.4 Theoretical Implications of Risk-Free Assets
1.5 Toward an Ethic of “Risk Denial”
2 The Remedies of Ancient Traditions for the Chimera of Zero Risk
2.1 The Just Compensation of the Scholastics
2.2 The Contributions of the Islamic Tradition
A Socially Embedded Economy
An Ethic of Risk Reward
3 Focus on a Financial Instrument: The Sukuk
3.1 Main Features of Sukuk
3.2 Are Sukuk Risk-Free Assets?
3.3 Integrating Environmental Risks in Sukuk?
3.4 Sukuk and Sustainable Development: What Prospects?
4 Summary and Conclusion
References
Books
Articles
Index