New Directions in Modern Economics series
Edited by Riccardo Bellofiore and Giovanna Vertova
Chapter 5: Conventions and disruptions
The Keynesian concept of ‘convention,’ which appears for the first time in Chapter 12 of The General Theory, is a major contribution to the analysis of the functioning of financial capitalism in recent years. Along with the theory of regulation, the economics of convention, which has been developed in France since the 1980s thanks to the work of, among others, Aglietta and Orlean (1982), allows an interpretation of the formation of financial bubbles starting from the issue, central in finance theory, of uncertainty. Given that knowledge of the future cannot be objective, but is irreducibly subjective, it follows that the opinion of the multiplicity of traders plays a key role in determining the prices of securities. Consequently, the concept of the bubble, itself defined as a persistent gap between the value of the security and the price observed, loses its meaning. The theory of convention considers the financial market as a ‘cognitive machine,’ whose function is to produce a reference opinion, perceived by all operators as an expression of ‘what the market thinks.’ This is because of the self-referential nature of speculation, where each individual makes up his mind according to what he anticipates the majority opinion to be (the famous ‘beauty contest model’ used by Keynes 1936). The market price, as the expression of a salient opinion which imposes itself on agents, can therefore be considered as a convention.
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