The Financial Crisis Viewed from the Perspective of the 'Social Costs' Theory

Levy Economics Institute, Working Papers Series

26 Pages Posted: 3 Apr 2011

See all articles by L. Randall Wray

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Date Written: March 31, 2011

Abstract

This paper examines the causes and consequences of the current global financial crisis. It largely relies on the work of Hyman Minsky, although analyses by John Kenneth Galbraith and Thorstein Veblen of the causes of the 1930s collapse are used to show similarities between the two crises. K.W. Kapp’s “social costs” theory is contrasted with the recently dominant "efficient markets" hypothesis to provide the context for analyzing the functioning of financial institutions. The paper argues that, rather than operating "efficiently," the financial sector has been imposing huge costs on the economy - costs that no one can deny in the aftermath of the economy’s collapse. While orthodox approaches lead to the conclusion that money and finance should not matter much, the - alternative tradition from Veblen and Keynes to Galbraith and Minsky - provides the basis for developing an approach that puts money and finance front and center. Including the theory of social costs also generates policy recommendations more appropriate to an economy in which finance matters.

Keywords: Hyman Minsky, Kapp, Galbraith, Veblen, Coase, Theory of Social Costs, Efficient Markets Hypothesis, Money, Finance, Social Efficiency, Social Provisioning, Shadow Banks, Financial Innovation, Casino Capitalism, Securitization, Deregulation, Self-Supervision

JEL Classification: B14, B15, B22, B52, E3, E12, E40, E42, E50, E51, E52, G14, G21

Suggested Citation

Wray, L. Randall, The Financial Crisis Viewed from the Perspective of the 'Social Costs' Theory (March 31, 2011). Levy Economics Institute, Working Papers Series, Available at SSRN: https://ssrn.com/abstract=1800226 or http://dx.doi.org/10.2139/ssrn.1800226

L. Randall Wray (Contact Author)

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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