Thorstein Veblen on credit and economic crises

Guglielmo Forges Davanzati and Andrea Pacella

Cambridge Journal of Economics, 2014, vol. 38, issue 5, 1043-1061

Abstract: The aim of this paper is to provide an interpretation of Veblen’s theory of economic crises, based on the view that banking policy is a major factor in generating crises. It will be shown that, in Veblen’s thought, crises may emerge due to the banking system’s non-accommodating behaviour according to the following sequence: as firms are not homogeneous, the credit system spontaneously tends to help bigger firms increase in size, due to the increase in their capital turnover, which allows them to produce and sell before their competitors. This produces two effects: (i) the reduction in profits of the smaller firms (or their bankruptcy) generates a decline of employment and output while, at the same time, (ii) the increase in the industrial concentration ratio produces a rise in prices and a consequent drop in real wages. This in turn reduces total demand for consumption goods, thus worsening entrepreneurs’ expectations and having an adverse effect on production and investment by firms.

Date: 2014
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