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Chapter 25: Financial Bubbles
Mark Hayes* The a priori assumptions of rational markets and consequently the impossibility of destabilising speculation are diﬃcult to sustain with any extensive reading of economic history. The pages of history are strewn with language, admittedly imprecise and possibly hyperbolic, that allows no other interpretation than occasional irrational markets and destabilising speculation. Here are some phrases culled from the literature: manias . . . insane land speculation . . . ﬁnancial orgies . . . frenzies . . . feverish speculation . . . epidemic desire to become rich quick . . . wishful thinking . . . intoxicated investors . . . turning a blind eye . . . people without ears to hear or eyes to see . . . investors living in a fool’s paradise . . . easy credibility . . . overconﬁdence . . . overspeculation . . . overtrading . . . a raging appetite . . . a craze . . . a mad rush to expand. (Kindleberger, 2000: 24–5, original emphasis) Before economists relegate a speculative event to the inexplicable or bubble category, we must exhaust all reasonable economic explanations . . . the business of economists is to ﬁnd clever fundamental market explanations for events; and our methodology should always require that we search intensively for market fundamental explanations before clutching the ‘bubble’ last resort . . . from our current perspective, [the] irrational speculation [of 1719–20] probably looked a lot like a normal day in a pit of the Board of Trade. (Garber, 1990: 35) 1. Introduction This chapter advances a post-Keynesian perspective on ‘ﬁnancial bubbles’, a topic of considerable research interest and policy relevance. This can be seen as supporting Kindleberger against Garber in their contrasting views of the nature and signiﬁcance of bubbles, set out in the above quotations. The...
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