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 7: John Maynard Keynes’s Financial Theory of Under-Investment I: Towards Doubt

Jan Toporowski

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


As an exponent of critical finance John Maynard Keynes requires a degree of reinterpretation. Hyman P. Minsky recognised that Keynes’s analysis of how finance disturbs the capitalist economy needs to be retrieved from the neoclassical makeover of his views that appears in economics textbooks. (For example, in the Hicks–Hansen IS/LM system, finance is reduced to the money markets of an economy.) On closer examination, it turns out that his views may not have been evolving in quite the direction which Minsky perceived in them.1 The interpretation given in this and the following chapter is perhaps more consistent with that of Keynes’s contemporaries, most notably his friend, rival and correspondent on monetary and policy issues, Ralph Hawtrey.2 Keynes’s purpose, as he made clear in the closing paragraphs of his General Theory, beginning with the question ‘is the fulfilment of these ideas a visionary hope?’ (and continuing ‘the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas … it is ideas, not vested interests, which are dangerous for good or evil’3), was to change the ideas of policy-makers, academics, and the educated public. This rhetorical, ad hominem aspect of his exposition accounts for much of the incoherence which his critics observed, and continue to find, in his analysis. His style, his championing at various times of ideas which were not necessarily consistent with each other, and his own notorious apostasy from views previously advocated, make Keynesian exegesis a particularly fruitful, if treacherous, endeavour and afford a...

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