Thorstein Veblen’s Financial Macroeconomics

Abstract:

The purpose of this article is to provide an exposition of Thorstein Veblen’s contribution to financial macroeconomics. I argue that Veblen conceptualizes and contextualizes how the financial structure of effective demand is predisposed to endogenous non-sustainable leverage processes, manipulation, and speculation. I stress that Veblen advances a cultural-financial theory of investment and brings forward the role that pecuniary and emulation instincts play in institutionalizing predatory and fraudulent activities which destabilize the macroevolution of monetary production economies. I underline that Veblen patterns financial macroeconomic fragility and instability within the institutions of the business enterprise system.

Keywords::

• deficient demand
• financial macroeconomics
• institutions
• leverage
• manipulation
• Veblen

JEL Classification Codes::

• B52
• E2
• E5
• G1

Notes

¹ Hyman Minsky’s perception of financial fragility and instability is a result of his attempt to integrate Joseph Schumpeter’s evolutionary concept of innovation and John Maynard Keynes’s macroeconomic insights about how economic policy can create possibilities for a more stable capitalist system (see Minsky 1986, 1990).

² Dudley Dillard (1987) and L. Randall Wray (2007) observe that Veblen is among the first to describe the internal logic of the monetary production economies, which revolves around the expected and the realized profits.

³ Malcolm Rutherford (1980, 439) argues that “no firm can survive in the credit economy of the New Order that fails to fully extend its credit; and so become dependent on the banker.”

⁴ Similarly, Minsky emphasizes leverage, deleverage, and uncertainty as the principal causes of creative-destruction financial processes that induce fragility and instability in financial markets. Minsky also recognizes, in Schumpeterian fashion, the evolutionary nature of financial markets.

⁵ John Kenneth Galbraith (1988, 1994) develops an institutionalist model to analyze the great stock market booms and crashes. At the core of this model are the presence of a speculative mood of euphoria and market manipulation, as well as innovations in financial structures that allow speculators to extensively use borrowed funds, resulting in speculative manias, highly leveraged markets, and ultimately in speculative bubbles and financial crisis.

⁶ William Ganley (2004, 398) stresses that goodwill is likely to reveal the “potential for growth the firm could create for itself as a business entity.”

⁷ Arguably, Veblen endorses an endogenous theory of money supply, as he envisages it to be a process that depends on the functioning of the banking system, the success or failure of businessmen to make profits to fulfil debt commitments, and the changes in the perceptions of goodwill and business conditions. Veblen’s endogenous process of money creation supposes significant linkages that revolve around the causal relation between manipulation and financial macroeconomic instability. Guglielmo Forges Davanzati and Ricardo Realfonzo (2009) also argue for an endogenous demand-driven money supply process in Veblen’s economics.

⁸ For instance, Jan Kregel (2012) argues that the Libor scandal made apparent that a large majority of financial institutions engage in fraudulent manipulation that is driven by the greed of individual traders to ensure higher profits, but also by responses to the collapse of short-term money markets. Kregel points out the possibility that Barclay’s rate submissions were constantly higher than those of other banks in order to improve profitability and to misinform the financial market participants and regulatory authorities about funding difficulties. Adil Mouhammed (2003, 268) claims that “Veblen believes that the interest rate and the money supply are used to control the economy of the vested interests,” while James Cornehls (2004) emphasizes that businessmen use their price-setting power to manipulate profit expectations in order to get new credit and expand the size of their firms.

⁹ The discrepancies between the market valuation of corporations, especially in stock market booms, and the replacement costs of the underlying assets form an investment theory, known as Q theory (see, for example, Tobin and Brainard 1977).

¹⁰ In Veblen’s system, decreases in effective demand or increases in wages are also factors that are likely to eliminate expected profits, inducing processes of deleveraging.

¹¹ Joel Dirlam (1958) states that Veblen would have been skeptical of any financial reform targeted at dealing with financial abuses and the restoration of confidence in financial markets, because he believes that the financial abuses are the essence of the business enterprise system.

¹² Minsky proposes a system of institutional ceilings and floors to contain euphoric expectations and improve the credibility of borrowers and lenders. Nevertheless, institutional constraints change behaviors, thereby inducing new financial innovations, unsustainable leverage processes, and low margins of safety in the banking system.

¹³ Th is is a fundamental departure of Veblen’s financial macroeconomics from the preconceptions and illusions created by the “efficient market hypothesis” and the conventional financial theory and macrotheory, as well as from the neoliberal ethics derived by the doctrine of self-regulated capitalism.

¹⁴ John Hall, Iciar Dominguer-Lacasa, and Jutta Gunther (2012) point out a predator-induced cause of the “Great Crisis,” arguing that Veblen discloses predators’ role as the driving force in the transition from the era dominated by a machine process to an era dominated by a financial process. They argue that this transition creates fragile processes that have increased financial instability.

Additional information

Notes on contributors

Giorgos Argitis

Giorgos Argitis is an associate professor in the Department of Economics at the National and Kapodistrian University of Athens (Greece). The author would like to thank two anonymous referees and Dimitris Milonakis for their useful comments and suggestions. The responsibility for any remaining errors rests with the author alone.