Alternative Theories of Money and Finance
New Directions in Modern Economics series
Chapter 5: Towards a theory of endogenous financial instability and debt-deflation
5. Towards a theory of endogenous financial instability and debtdeflation Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlwind of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. Keynes (1936, p. 159) Those involved with the speculation are experiencing an increase in wealth – getting richer or being further enriched. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. The very increase in values thus captures the thoughts and minds of those being rewarded. Speculation buys up, in a very practical way, the intelligence of those involved. Galbraith (1990, p. 5) INTRODUCTION Post-Keynesian and heterodox critiques have challenged the Monetarist assumptions of an exogenous money supply and the doctrine of monetary neutrality in the long run. Within these heterodox currents, there has emerged a widespread consensus that the money supply is endogenous – governed by the demand for credit and by the Keynesian notion of liquidity preferences. These heterodox theories also reinstate the original insights by Keynes over the critical issue of uncertainty in the behaviour of investors, which contradicts the assumptions of rational expectations. Indeed, Minsky once remarked that Keynes without the notion of uncertainty was akin to performing the personae of Hamlet without the Prince. The original Keynesian prescription...
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