Theories of Financial Disturbance

Theories of Financial Disturbance

An Examination of Critical Theories of Finance from Adam Smith to the Present Day

Jan Toporowski

Theories of Financial Disturbance examines how the operations of market-driven finance may initiate and transmit disturbances to the economy at large, by looking in detail at how various economists envisaged such disturbances occurring.

Chapter 3: Thorstein Veblen and Those ‘Captains of Finance’

Jan Toporowski

Subjects: economics and finance, financial economics and regulation, post-keynesian economics

Extract

Because his work marks the first break with classical political economy over finance, Veblen may be regarded as the first theorist of modern finance. Finance was crucial to his vision of how the modern capitalist economy operates. He dismissed the neo-classical version of economics not only because it was ahistorical, but also because it derived its so-called ‘laws’ from axioms about barter. It was not only the ‘neo-classicals’ who were guilty of this. The Swedish monetary economist and near contemporary of Veblen, Knut Wicksell, derived his notion of a ‘natural’ rate of interest explicitly from considerations of exchange and capital productivity in a barter economy.1 The earlier classical political economy was less relevant, in Veblen’s view, because its monetary analysis was based on commodity money. Yet the critical feature of the modern capitalist economy is the predominance of credit. Credit, in Veblen’s view, infuses virtually every transaction in the capitalist economy with a different meaning and different consequences to those which such transactions may have in the barter economy that is the staple of classical and neo-classical economics.2 In this respect, Veblen was arguably the first Post-Keynesian. He criticised Tugan-Baranovsky for arguing that money was a negligible factor in economic crises. ‘He thereby commits himself to the position that these crises are phenomena of the material processes of economic life (production and consumption), not of business traffic … Substantially the same is true of Marx, whom Tugan follows, though with large reservations.’3 1. CRITICAL FINANCE IN THE THEORY OF BUSINESS ENTERPRISE...

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