Review of Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day.

Author:Wray, L. Randall
Position:Book review
 
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Review of Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day, by Jan Toporowski. Cheltenham, U.K., and Northampton, Mass.: Edward Elgar. 2005. Cloth, ISBN 1843764776, $80.00. 195 pages.

Jan Toporowski begins by distinguishing among three approaches to finance: equilibrium finance (Walrasian general equilibrium, of which James Tobin's "q" theory is a representative); reflective finance (a line running from Joseph Schumpeter through to the modern efficient markets approach); and critical finance (from Adam Smith to Thorstein Veblen and J. M. Keynes, and later to Hyman Minsky and other Post Keynesians). The first sees the "relationship between the real economy and the financial system [as] a state of static, mutually determined equilibrium" (p. 2). According to the second approach, finance plays a rather passive role, with "conditions in the financial markets ... determined by circumstances in the real economy" (p. 2). The book is mostly concerned with the third, heterodox, view, according to which "finance may systematically disturb the functioning of the modern capitalist economy and aggravate fluctuations in the real economy" (p. 3). While a chapter is devoted to Smith, with asides to others including Aristotle, Karl Marx, and John Stuart Mill, most of the book is devoted to twentieth century heterodox economists: Veblen, Rosa Luxemburg, Ralph Hawtrey, Irving Fisher, Keynes, Marek Breit, Michal Kalecki, Josef Steindl, John Kenneth Galbraith, Charles Kindleberger, and Minsky. There are also shorter discussions of "younger" practitioners of critical finance, such as Robert Shiller, Martin Wolfson, and Jan Kregel.

The large number of economists covered is one of the strengths of the book, but also its greatest weakness--given that the text runs to barely 160 pages, the exposition afforded to all but Kalecki and Keynes is necessarily brief. However, Toporowski offers clear and concise summaries that provide a good basis to guide readers to the original contributions of the most important advocates of critical finance. The chapters devoted to the ideas of Hawtrey, Keynes, Kalecki, and Steindl are particularly useful. As such, I highly recommend the book as a text for advanced undergraduates and graduate students. It would make an excellent companion to Wolfson's (1994) text--which looks at recent historical episodes of financial crises but summarizes the theories of only a handful...

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