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 8: John Maynard Keynes’s Financial Theory of Under-Investment II: Towards Uncertainty

Jan Toporowski

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


In the General Theory Keynes abandoned the view expounded in the Treatise on Money of the capitalist economy made unstable by credit cycles and re-cast his analysis as an explanation of under-employment equilibrium, reflecting the stagnationist trend in the capitalist economies during the 1930s. This emphasis on equilibrium was to challenge those economists who expected an imminent return to full employment. But it also placed an ambiguity at the heart of his work, inviting, on the one hand, a search for the market ‘rigidity’ (‘sticky real wages’) that was preventing the realisation of a full employment equilibrium, while retaining, on the other, the elements of his critique of a capitalism made wayward by its financial system.1 The General Theory also contains, alongside the analysis of an under-employment equilibrium created by the financial system described below, a theory of a capitalist economy brought to underemployment by its use of money. This latter theory became the staple of later Keynesian explanations of economic disturbance and stagnation. Expounding a monetary theory of economic disturbance in the context of a financial one increased the scope for the interpretative ambiguity that has dogged Keynes’s economic thought. On his way to a more generalised theory that would incorporate factors capable of producing the ‘abnormal’ under-investment not amenable to financial or monetary policy, Keynes advanced a theory of ‘own’ rates of interest. This is distinctive in being peculiar to the General Theory, although Keynes refers to Sraffa as having originated it.2 It advanced a monetary explanation of...

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