With the end of demonetisation in sight, and partial remonetisation underway, it may be a good time to reassess the much-maligned economics of demonetisation.

Over this 50-day period, several economists have denounced demonetisation as poor economics, so much so that reading them has made us feel like we were experiencing mass famine. This, despite the fact that even the hard, early days were nearly-incident-free in spite of the enormity of the scale of operations.

These traditional, orthodox economists argue in the same breath that, while

demonetisation would hardly yield any effect on black economy, it would destroy the white economy. Somewhere, this doesn’t add up. But this is not their fault; after all, traditional economics teaches the existence of "money neutrality" -- money is critical for an economy to function, but has no other major effect on the real economy. So they selectively use the "critical" classification for white economy (hence destruction) and "not important" classification to black economy (hence saved).

But economists practising this kind of economics have been proved wrong, and often; unfortunately, the world has paid for some of their mistakes.

But enough about economics that doesn't work. Let’s talk about that which works.

One set of theories that has gained value after the 2008 crisis is the Minsky financial-economic theories. Writing in 1976, Hyman Minsky, an American economist and a distinguished scholar at Levy Economics Institute, came up with a model of capitalism called financial instability hypotheses. It was an extension of the original works of John Maynard Keynes, and is markedly accurate in predicting financial economic cycles, booms and busts. So accurate that Paul McCulley, former managing director of PIMCO, christened such an occurrence as the Minsky moment. The 2008 crisis was the biggest Minsky moment of them all.

One of the key aspects of Minsky's theory is money endogeneity. Unlike traditional economics, which treats currency notes as the total money in an economy, endogenous money says credit is also money and, hence, the total money in economy is the number of currency notes plus the new credit in the economy.

Credit is money. That is why companies don't need to carry cash everywhere for purchases. Most purchases happen in the form of credit settled through a business process. Even you can buy whatever you can in cash or credit (e.g., credit card, your khata at the kirana store or a village vendor extending credit).

This total money is not assumed to be neutral, as by traditional economists, but has a direct impact on prices and economic production. More new credit generated leads to more demand for goods in the economy and more economic growth and employment -- a well-established fact.

This should really not be that surprising given how historians and anthropologists, like David Graeber of the London School of Economics, have found that money originated in the form of a "credit tablet" -- similar to bank drafts -- rather than through barter as taught in Economics 101.

But what has this endogenous money/credit got to do with demonetisation? Actually, everything.

Credit is financial money that differentiates black economy from a white/cash white economy. Black economies have very low credit. When was the last time you paid bribe in credit? Or paid dowry in credit? Or bought drugs on credit? You may have bought some regular ration on and off on credit, though.

The illegality of black economy ensures that credit can't thrive in it. On the other hand, credit thrives in a white economy and is the main reason why economic growth occurs through companies’ borrowings.

Currency notes are important as well, being the last-mile consumer purchase system, but they are significantly malleable with credit, and for the short term, credit can expand and cover currency loss. That is why you see different countries with varying currency circulation, from ~4 per cent of GDP in Brazil to ~12 per cent of GDP in India, depending on credit proliferation.

This difference is what makes taking cash out akin to sucking the blood out of a black economy. With no or hardly any credit to cushion this sudden loss of currency, black economy GDP goes almost to zero. The old, accumulated assets of black marketers and bribe-takers still remain, but no new assets are being generated because the blood in the form of cash required has been sucked out.

The ubiquitous nature of Rs 500 and Rs 1,000 notes had ensured that hawala operators and currency providers of black economy had amassed massive amounts of cash to supply as and when required (for e.g., paying crores of rupees of bribe tomorrow).