------ EH.NET BOOK REVIEW ------
Title: Debt, Innovations, and Deflation: The Theories of Veblen, Fisher,
Schumpeter, and Minsky

Published by EH.NET (September 2010)

J. Patrick Raines and Charles G. Leathers, /Debt, Innovations, and Deflation:
The Theories of Veblen, Fisher, Schumpeter, and Minsky/. Cheltenham, UK:
Edward Elgar, 2008. xiii + 191 pp. $100 (hardcover), ISBN: 978-1-84542-785-6.

Reviewed for EH.NET by Fadhel Kaboub, Department of Economics, Denison
University

J. Patrick Raines and Charles G. Leathers have produced a remarkable book on
a very timely subject, namely the interplay between debt, innovations, and
deflation. The authors recognize that little is being said about the causes
of deflationary pressure in today’s economy. Therefore, they set out to
provide a fresh critical assessment of the deflation theories of Thorstein
Veblen, Irving Fisher, Joseph Schumpeter, and Hyman Minsky in light of the
growing concern about deflation in the early 2000s in the United States.

For this purpose, the authors focus on three fundamental questions. First,
Raines and Leathers determine the four economists’ explanations of the
causes of deflation and how those explanations relate to the historical
context of their writings on deflation. Second, they establish the extent to
which those four theories have common points and complementarities. Third,
the authors lay out the analytical and policy lessons to be taken from this
study to analyze the concerns about deflation in 2002-2003.

The book is organized in six main sections in addition to the introduction
and a concluding section. Chapter 2 underscores the importance of the
research question that Raines and Leathers are undertaking in this book. The
authors provide a very concise analytical overview of the emergence of
deflation as a monetary policy issue in the 2003-2004 period. They argue that
the 1940-2000 period was dominated by concerns over inflation. Raines and
Leathers point out that Alan Greenspan, however, began referring to
deflationary tendencies as early as 1998, initially as an academic issue, and
later as a matter of concern to policymakers. His main conclusion was that
deflation is a monetary phenomenon in the long run. The authors highlight
that in the brief period of concern over disinflation and deflation, neither
Greenspan nor Ben Bernanke addressed the causes of deflation but merely
focused on its likelihood and its consequences.

In chapter 3, Raines and Leathers review the mainstream theory of deflation
based on the classical interpretation of the quantity theory of money. In
addition to Fisher’s interpretation of the quantity theory, the authors
assess the “deflation” theories put forward by Adam Smith, John Stuart
Mill, and Thomas Tooke. The chapter ends with an overview of the monetary
theories of business cycles of R.G. Hawtrey and Friedrich von Hayek.

Chapters 4, 5, 6, and 7 respectively dissect the theories of Veblen, Fisher,
Schumpeter, and Minsky. These chapters are excellent stand-alone readings for
an advanced undergraduate or a graduate course on the four economists in
question. Their scholarship is succinctly laid out, and the literature is
thoroughly and critically reviewed. The strength of these chapters is the
historical contextualization of the deflation theories developed by Veblen,
Fisher, Schumpeter, and Minsky. Chapter 8 is where the entire book comes
together in a meaningful way. It provides a comparative summary of the
analysis made in chapters 4 through 7. This is by far the most interesting
chapter of the book. Here, Raines and Leathers identify two main categories
accounting for the differences among the four economists. First, there are
evolutionary changes in the institutional structure of the economy that must
be accounted for; and second, there are differences in methodologies and
normative perspectives that cannot be reconciled. Veblen and Schumpeter are
identified as the two extremes on the spectrum of the book, despite sharing
an evolutionary analysis of the role of technological innovation in the
development of capitalism; what sets them apart is the way they treat
business values and institutions. Fisher and Minsky are placed somewhat in
between, with Fisher’s descriptive theory of deflation closer to
Schumpeter; and Minsky’s financial instability hypothesis closer to
Veblen’s evolutionary analysis. The authors conclude that when taking all
four theories together, we could have a better understanding of the causes of
deflation and be able to develop the appropriate policies to deal with it.
This is especially important in an era in which (technological and financial)
innovation and debt play an increasing role in the structure of the U.S.
economy.

The shortcomings of the book are mentioned here in the spirit of unsatisfied
curiosity. First, the choice of Veblen, Fisher, Schumpeter, and Minsky
remains somewhat unexplained. Why not Keynes or Marx? Second, the book is
exclusively focused on the U.S. experience with deflation; one would have
liked a discussion of Japan’s experience with deflation in the 1990s, for
instance. Third, the focus on the Fed’s treatment of deflation seems to be
the initial motivation for writing the book, but somehow it remains as an
add-on theme, albeit an interesting one, that only appears in the beginning
and at the very end of the book. This makes the thesis of the book a bit too
broad, and suggests that there are perhaps two competing book ideas -- one on
the deflation theories of Veblen, Fisher, Schumpeter, and Minsky; and another
on the Fed’s treatment of deflation concerns. In sum, the book is a
valuable contribution to the literature on the causes of deflation, and how
it has been treated by the Fed.

Fadhel Kaboub is an Assistant Professor of Economics at Denison University,
and a Research Associate at the Levy Economics Institute, the Center for Full
Employment and Price Stability, and the International Economic Policy
Institute. His research focuses on the political economy of full employment
policies, monetary theory and policy, and economic development.

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Geographic Location: General, International, or Comparative
Subject: History of Economic Thought; Methodology
Time: 20th Century: Pre WWII, 20th Century: WWII and post-WWII