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 13: The East Coast Historians: John Kenneth Galbraith, Charles P. Kindleberger and Robert Shiller

Jan Toporowski

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

Extract

Apart from being near contemporaries writing on finance in the second half of the twentieth century, John Kenneth Galbraith and Charles P. Kindleberger represent a common historiographic approach to the analysis of financial instability in modern capitalism. Their inductive approach was echoed at the end of the century by Robert Shiller, a professor of economics at Yale University. The latter suggests a geographical as well as intellectual proximity, and a personal influence on the younger by the two older historians, Charles Kindleberger (at the Massachusetts Institute of Technology in Boston) and John Galbraith (at Harvard University in the Cambridge suburb of Boston). 1. KINDLEBERGER AND GALBRAITH Galbraith’s The Great Crash 1929 and Kindleberger’s Manias, Panics and Crashes are essentially descriptions of the events preceding and accompanying particular financial crises. Sentiments of greed, euphoria, frustrated expectations and panic move financial markets, set off by any change in the economy that arouses heightened expectations of return, leading to excess, fraud and collapse. Kindleberger cites Minsky’s theoretical analysis.1 But his and Galbraith’s analyses are really studies in mass psychology (as is suggested by the title of Kindleberger’s book). The terms of Kindleberger’s analysis are really a taxonomy of the phases of financial crashes, which he sees as characterising all kinds of financial cycles, whether they be an over-extension of bank credit, or a ‘bull’ market in securities. If there is a common origin to financial cycles, it lies in monetary incontinence at some initial stage of the credit boom. A ‘displacement’ in the...

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