Eric Barthalon applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. Barthalon recasts Allais's work as a general theory of "expectations" under uncertainty, narrowing the gap between economic theory and investors' behavior. Barthalon extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, Barthalon exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Kindleberger's model of financial crises. He ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. He concludes with the policy implications for governments and regulators. Balanced and coherent, this book will be invaluable to researchers working in macreconomics, financial economics, behavioral finance, decision theory, and the history of economic thought.
Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.
Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge. Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises. Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank's performance over time and comparing it to its peer group. - Explains that bank liquidity creation is a more comprehensive measure of a bank's output than traditional measures and can also be used to measure bank liquidity - Describes how high levels of bank liquidity creation may cause or predict future financial crises - Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions - Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts
ÔThis book advances the re-unification of the Institutionalist and Keynesian traditions, now unstoppable, which when last combined eighty years ago proved the power of progressive and pragmatic thought. Let the spirit of Keynes and Commons inspire our new era Ð and perhaps this time a coherent, enduring and useful academic economics may also result.Õ Ð James K. Galbraith, President, Association for Evolutionary Economics (2012) ÔFinancial Instability and Economic Security after the Great Recession is a welcomed volume for a variety of reasons. The book does a good job of: 1) surveying the foundations of Post-Keynesian Institutionalism (PKI); 2) unfolding new ways of understanding and appreciating the economic and institutional insights of Hyman Minsky (which are many); and 3) providing new economic analysis into the recent financial crisis both in the United States and globally. . . How uncertainty affects institutions and individual behavior is something that needs more exploration, and this volume contributes to a much-needed discussion on how both institutionalists and Post-Keynesians can work together on this. . . a very interesting and stimulating book that provides some new insights in the development of both Institutionalist and Post-Keynesian thought.Õ Ð Heterodox Economics Newsletter ÔThis important and fascinating book confirms that policymakers would do well to brush up on their reading of Hyman Minsky as they wrestle with the ongoing effects of the global financial crisis. It makes a compelling case for understanding the current situation as a crisis of capitalism Ð a system that veers between stability and instability Ð and for managing and regulating economies on the basis of MinskyÕs insight that stability breeds instability. MinskyÕs insight was psychological, not merely economic, and this volume furthers the argument for including disciplines such as psychology and philosophy in understanding markets. It also helps us recognize the truth that, in the end, economies are human constructs and it will require strong doses of humanism to successfully manage our economic future.Õ Ð Michael E. Lewitt, Harch Capital Management and author of The Death of Capital: How Creative Policy Can Restore Stability ÔThe volume offers an intriguing economic frame that vastly broadens the possibilities for economic research and shifts the focus of economists from markets to people. . . This volume makes a coherent and articulate case for a new interpretation of existing economic theories with long traditions that could help inform both research and policy in the future.Õ Ð Christian Weller, Perspectives on Work ÔA failing orthodoxy calls out for powerful alternatives. Neoclassical economics is that failed orthodoxy; Whalen and his contributors are the critical alternative. In this finely orchestrated edited volume, the contributors take turns wielding a sledgehammer to demolish the weakened edifice of neoclassical theory. Then, each adds a brick to a new theoretical foundation as they work together to expand upon the Post-Keynesian Institutionalist approach, especially the ideas laid down by Hyman Minsky. Their critique is clear and the alternative theory and policies they present are critical for anyone trying to understand the nature and operation of market-based economies.Õ Ð Dorene Isenberg, University of Redlands, US ÔA convergence of Post Keynesian and Institutional economics, which have much in common, offers a sound and practical way forward after the Great Recession. By drawing inspiration from Hyman Minsky and tracing similarities in the economics of Veblen, Commons and Keynes, this book pursues such a convergence in an original and thought-provoking manner. The result is a new way of thinking about economics, one based on serious economic theory and rooted firmly in economic reality.Õ Ð Philip Arestis, University of Cambridge, UK ÔFinancial Instability and Economic Security after the Great Recession explores the close relationship between Institutional and Post Keynesian economics, thereby contributing greatly to our understanding of the recent Ð indeed, still ongoing Ð crisis in the U.S. economy and global financial markets. Together these two schools of thought provide coherent diagnoses and prescriptions that are wholly lacking in orthodox neoclassical theory. We are reminded that institutions matter, unregulated financial markets are not self-correcting, economies stall at equilibriums far below potential, and activist government is the only path to rebuilding a stable and balanced economy. This book will help greatly in the important task of rethinking economics and pointing us in the direction of reform and recovery.Õ Ð Timothy A. Canova, Chapman University School of Law, US ÔFor those who take the work of Hyman Minsky seriously, this collection of essays provides a most welcome and refreshing examination of modern economic reality. It also demonstrates just how fruitful a conjoining of Post Keynesian and Institutionalist theory can be. Whalen has chosen his authors wisely, and, taken as a whole, their contributions provide an illuminating inquiry into what Minsky called Òmoney-manager capitalismÓ. The authors continue in the Minsky tradition, complementing his theoretical work and driving it forward. I highly recommend this book to not only economists who consider themselves Post Keynesian or Institutionalist, but to all who are looking for a way out of the theoretical impasse posed by conventional economics.Õ Ð John Henry, University of Missouri-Kansas City, US ÔIn the 1930s, economic theory and policy underwent dramatic change; such a shift occurs rarely and only in times of great calamity. We are in a similar period today, and this book enlightens economic policy and contributes to change that is ongoing in the mainstream of economic thinking. Economists and policymakers alike will benefit from this book.Õ Ð Ronnie J. Phillips, Colorado State University, US ÔCharles Whalen has been the torch-bearer for Post-Keynesian Institutionalism for many years. The fruit of his thought and time is reaped in the publication of this valuable work that should be of interest to all economists, particularly those concerned with the macroeconomic workings of the real economy. While there are multiple authors, Whalen wrote or co-authored half of the chapters, giving the book coherence not usually found in a collection of essays; a first-rate book.Õ Ð Charles K. Wilber, University of Notre Dame, US ÔThe end of the Great Moderation (a period characterized by modest business cycles) and the demise of its intellectual underpinnings, such as the efficient market hypothesis, opens the door to fresh thinking about the evolution of the US and world economies. This volume responds with a compendium of insights that grow out of Post-Keynesian Institutionalism. Central constructs in the analysis Ð essential to understanding the new Great Instability and to generating constructive policy responses Ð include money-manager capitalism, financial regulation, and economic evolution. The book provides a persuasive basis for reconstructing macroeconomics and for finding sets of policies that could lead to greater world prosperity. This is an important contribution, since much of the intellectual and policy response to the current crisis has challenged the status quo very little and has not inoculated the global economy from further instability.Õ Ð Kenneth P. Jameson, University of Utah, US ÔThis book makes a major contribution toward developing an economic framework to address the policy failures that precipitated the 2007Ð2009 financial crisis and slowed recovery from the Great Recession. It begins that process with wonderfully clear analyses of the influence of earlier non-classical economic thinkers on Keynes and Minsky and then uses their insights and hypotheses to critique the economic thinking that failed to anticipate the crisis. But, unlike many other excellent analyses of recent events, it also identifies policy options capable of preventing future crises and ensuring a more rapid recovery. The authors have laid a strong foundation for the theoretical perspective required to secure the broadly shared prosperity that many view as the overriding objective of an economic system.Õ Ð Jane DÕArista, University of Massachusetts at Amherst, US ÔInstitutionalists and Post Keynesians have a great deal in common, so much so that it is surprising how little cooperation there has been between them. This innovative and engaging volume will help to put this right. Several of the contributors identify the ideas of Hyman Minsky as providing a bridge between the two traditions (in much the same way as Micha Kalecki connects Post Keynesian and Marxian thought), suggesting important ways these camps can profit from each otherÕs insights. Across the volume, the crucial concepts of ÔfuturityÕ, expectations and fundamental uncertainty shape the authorsÕ approach to economic theory, while an insistence on the need for a Ômore wisely managed capitalismÕ unites their policy discussions. This book deserves to be widely read; it will have important consequences.Õ Ð John E. King, La Trobe University, Australia This timely book rethinks economic theory and policy by addressing the problem of economic instability and the need to secure broadly shared prosperity. It stresses that advancing economics in the wake of the Great Recession requires an evolutionary standpoint, greater attention to uncertainty and expectations, and the integration of finance into macroeconomics. The result is a broader array of policy options Ð and challenges Ð than conventional economics presents. Building on the pioneering work of Thorstein Veblen, John R. Commons and John Maynard Keynes, the authors synthesize key insights from Institutional and Post Keynesian economics into Post-Keynesian Institutionalism. Then they use that framework to explore an array of economic problems confronting the United States and the world. Inspired by the work of Hyman Minsky, the authors place financial relations at the center of their analysis of how economies operate and change over time. Students and scholars of macroeconomics and public policy will find this book of interest, as will a wider audience of financial analysts, policymakers and citizens interested in understanding economic booms and downturns.
How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending. This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.
Uncertain Futures considers how economic actors visualize the future and decide how to act in conditions of radical uncertainty. It starts from the premise that dynamic capitalist economies are characterized by relentless innovation and novelty and hence exhibit an indeterminacy that cannot be reduced to measurable risk. The organizing question then becomes how economic actors form expectations and make decisions despite the uncertainty they face. This edited volume lays the foundations for a new model of economic reasoning by showing how, in conditions of uncertainty, economic actors combine calculation with imaginaries and narratives to form fictional expectations that coordinate action and provide the confidence to act. It draws on groundbreaking research in economic sociology, economics, anthropology, and psychology to present theoretically grounded empirical case studies. These demonstrate how grand narratives, central bank forward guidance, economic forecasts, finance models, business plans, visions of technological futures, and new era stories influence behaviour and become instruments of power in markets and societies. The market impact of shared calculative devices, social narratives, and contingent imaginaries underlines the rationale for a new form of narrative economics.
Tuckett argues that most economists' explanations of the financial crisis miss its essence; they ignore critical components of human psychology. He offers a deeper understanding of financial market behaviour and investment processes by recognizing the role played by unconscious needs and fears in all investment activity.
In a capitalist system, consumers, investors, and corporations orient their activities toward a future that contains opportunities and risks. How actors assess uncertainty is a problem that economists have tried to solve through general equilibrium and rational expectations theory. Powerful as these analytical tools are, they underestimate the future’s unknowability by assuming that markets, in the aggregate, correctly forecast what is to come. Jens Beckert adds a new chapter to the theory of capitalism by demonstrating how fictional expectations drive modern economies—or throw them into crisis when the imagined futures fail to materialize. Collectively held images of how the future will unfold are critical because they free economic actors from paralyzing doubt, enabling them to commit resources and coordinate decisions even if those expectations prove inaccurate. Beckert distinguishes fictional expectations from performativity theory, which holds that predictions tend to become self-fulfilling prophecies. Economic forecasts are important not because they produce the futures they envision but because they create the expectations that generate economic activity in the first place. Actors pursue money, investments, innovations, and consumption only if they believe the objects obtained through market exchanges will retain value. We accept money because we believe in its future purchasing power. We accept the risk of capital investments and innovation because we expect profit. And we purchase consumer goods based on dreams of satisfaction. As Imagined Futures shows, those who ignore the role of real uncertainty and fictional expectations in market dynamics misunderstand the nature of capitalism.
The need to understand the theories and applications of economic and finance risk has been clear to everyone since the financial crisis, and this collection of original essays proffers broad, high-level explanations of risk and uncertainty. The economics of risk and uncertainty is unlike most branches of economics in spanning from the individual decision-maker to the market (and indeed, social decisions), and ranging from purely theoretical analysis through individual experimentation, empirical analysis, and applied and policy decisions. It also has close and sometimes conflicting relationships with theoretical and applied statistics, and psychology. The aim of this volume is to provide an overview of diverse aspects of this field, ranging from classical and foundational work through current developments. - Presents coherent summaries of risk and uncertainty that inform major areas in economics and finance - Divides coverage between theoretical, empirical, and experimental findings - Makes the economics of risk and uncertainty accessible to scholars in fields outside economics
How investor expectations move markets and the economy The collapse of Lehman Brothers in September 2008 caught markets and regulators by surprise. Although the government rushed to rescue other financial institutions from a similar fate after Lehman, it could not prevent the deepest recession in postwar history. A Crisis of Beliefs makes us rethink the financial crisis and the nature of economic risk. In this authoritative and comprehensive book, two of today’s most insightful economists reveal how our beliefs shape financial markets, lead to expansions of credit and leverage, and expose the economy to major risks. Nicola Gennaioli and Andrei Shleifer carefully walk readers through the unraveling of Lehman Brothers and the ensuing meltdown of the US financial system, and then present new evidence to illustrate the destabilizing role played by the beliefs of home buyers, investors, and regulators. Using the latest research in psychology and behavioral economics, they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many people—and how financial and economic instability persist. A must-read for anyone seeking insights into financial markets, A Crisis of Beliefs shows how even the smartest market participants and regulators did not fully appreciate the extent of economic risk, and offers a new framework for understanding today’s unpredictable financial waters.
