------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (November 2005)  
  
Jan Toporowski, _Theories of Financial Disturbance: An Examination of   
Critical Theories of Finance from Adam Smith to the Present Day_.   
Cheltenham, UK: Edward Elgar, 2005. viii + 195 pp. $90 (cloth), ISBN:   
1-84376-477-6.  
  
Reviewed for EH.NET by Gerald P. O'Driscoll, Jr., Cato Institute.  
  
  
Jan Toporowski presents us with an eclectic treatment of heterodox   
theories of financial disturbance, beginning with Adam Smith and   
ending with Hyman Minsky. In between, a diverse cast of characters   
appears on stage, including, among others, Rosa Luxembourg, Ralph   
Hawtrey, Irving Fisher, and, in a leading role, John Maynard Keynes.   
Toporowski himself stays mainly in the background, but is very much   
in charge.  
  
The economists have been selected for their contributions to the   
tradition of "critical finance," a view that sees finance as a force   
"systematically" disturbing "the functioning of the modern capitalist   
economy" and aggravating economic fluctuations (p. 3). Toporowski   
observes that critical finance is defined more by contrast with   
"_reflective_ finance," which views "financial markets as being   
determined by circumstances in the real economy, that is, outside the   
financial sector" (p. 2). He identifies Joseph Schumpeter as an early   
exponent of reflective finance in his _Theory of Economic   
Development_.  
  
More generally, the efficient market hypothesis and like-minded stock   
pricing models are the modern-day examples of the reflective approach   
to finance. In Toporowski's view, they all maintain that any   
instability in financial markets is temporary and affirm that a new   
equilibrium will be established, one reflecting underlying changes in   
the real economy (p.3). He does not view modern finance as being   
Walrasian, that is, a theory of mutual determination of markets, real   
and financial. Indeed, he contrasts reflective theory with such a   
view (p. 2).  
  
Readers will search in vain for any formal modeling in this book. It   
is a book that relies on the insights of (mostly) dead economists and   
historical examples to make its points. That approach will delight   
some readers as it frustrates others. The book will likely appeal to   
practitioners of critical finance, who want better to understand its   
history. The book may also serve as an overview of a subset of   
heterodox theories of finance for those wanting a basic understanding   
of them. Mainstream theorists of finance are unlikely to be convinced   
by the arguments against orthodoxy presented in the book.  
  
The book is not history: the author treats historical episodes   
anecdotally rather than systematically. Nor is the book history of   
thought. What can one make of an author who admits that he has "not   
done full justice to the totality of the ideas of many of the writers   
discussed here"; and who acknowledges "my willful distortion of the   
works of these great writers [which is] compounded by several   
omissions" (p. 5)? That is both a shame and unnecessary. Toporowski   
evidences a keen understanding of the central ideas of many of the   
writers he discusses. In that regard, I particularly commend his   
chapter on Ralph Hawtrey (pp. 61-74). One can only wish he had been   
more systematic in his treatment of both ideas and facts. Instead, he   
is tendentious in both his selection and presentation of them.  
  
Many readers will wonder at Toporowski's decision to begin with Adam   
Smith. That choice was sensible, however, given his plot for the   
book. Smith's case against usury has always seemed a strange lapse in   
his general case for prices and markets. Smith argued that those   
willing to pay higher rates of interest would crowd out borrowers   
unable to do so. For Smith, that would mean that capital would flow   
to "prodigals and projectors," rather than to "sober people" (quoted   
at p. 16).  
  
In Toporowski's financial topography, Smith becomes a precursor of   
modern theories of the inherent instability of finance. It is not   
clear, however, that Smith's views fit neatly into a macroeconomic   
theory of financial instability. They likely reflect Smith's   
distinction between productive and unproductive labor. Nonetheless,   
Toporowski gets the reader's attention by linking his ideas to the   
father of classical economics. And that was probably his goal.  
  
As one gets closer to the present, the more familiar the ground gets.   
The treatment of Keynes is good. Toporowski quite correctly   
identifies the "ambiguity at the heart of his work," the tension   
between a disequilibrium theory presented in equilibrium terms (p.   
88). Toporowski introduces the reader to some unrecognized Polish   
theorists of the interwar years. And he focuses on the importance of   
Michael Kalecki in the evolution of Post-Keynesian thought.  
  
As noted above, Toporowski is highly selective in his choice of   
economists to highlight and in his choice of what part of their ideas   
to present to the reader. That results in distorted view of the   
evolution of both orthodox and heterodox theory. Consider the   
following observation, made after a lengthy quotation from Minsky.   
"The reference to time and expectations here is clear evidence of   
Minsky's studies of the works of Keynes and Shackle" (p. 145). If   
emphasis on time and expectations is a defining characteristic, then   
there are an embarrassingly large number of antecedents. They would   
include, among others, the Austrians (Mises, Hayek, et al.); the   
Swedes (Wicksell, Myrdal, et al.); and a diverse group of   
individuals, among whom Frank Knight would be notable.  
  
Just about every interwar theorist worth his salt was focused on the   
issues of time and expectations. The interesting question is why some   
were led to theories of endogenous financial instability and others,   
like Hayek, identified policy not institutions as the source of   
economic fluctuations. Answering that question would have been a   
genuine contribution.  
  
The issues in this book are truly important and the discussion of   
them often interesting. The heterodox views presented are generally   
worthy of presentation. One can only wish that issues, discussions,   
and ideas had been presented more systematically. The great failing   
of the book is in what it could have been but is not.  
  
  
Gerald P. O'Driscoll, Jr. is a senior fellow at the Cato Institute   
and recently authored a review essay on "The Puzzle of Hayek" for   
_The Independent Review_ (Fall 2004): 271-81.  
  
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