I interpret PatGunning’s comments to mean that he does
not accept the Reinhart and Rogoff contention that "this
time its different" is a false assessment of recurring expansions
and contractions with accompanying bubbles. Reinhart and
Rogoff contend that substantially the same process is taking
place in each recurrence, and Pat disagrees.
To show that the underlying process is the same in each
case, and that only the technological and institutional
details are different, will take more time than the average
person will want to give it in one reading. The question
arises with respect to recurring bubbles; not just recurring
expansions and contractions, even though the two are closely
related and, given the capitalist market system, inevitably
will be joined. So to begin with, a crucial aspect of the nature
of bubbles must be brought to light in an appropriate way,
and doing that will be enough for this note.
Bubbles are characterized by a disconnect between prices
and productivity. They are an instance of what Veblen was
referring to when he wrote of the disconnect between the
engineer and the price system. It is a disconnect between
the material supply and demand for a good, and the price
system by which supply and demand are brought into contact
with each other. Of course, Veblen decried this disconnect
on account of the possibilities that it offers both for the
generation of income without productive activity and for
the block it places in front of productivity in general; just
as we justifiably may lament the disconnect that has
characterized recent recurring bubbles in the market for gasoline.
In a capitalist market system experiencing a Walrasian competitive,
general equilibrium there would be no Veblenian disconnect.
All factors would receive only their transfer prices in an endlessly
recurring circular flow. Prices would reflect the productivity
assigned by material supply and demand in the market. To be
sure, the property rights structure would be that of a capitalist
market system, but, in fact, the system would be customary,
featuring a changeless repetition of activities. "Engineers" would
be involved in maintenance and replacement only. All prices \
would be in stable equilibrium. The risk faced by bankers would
be solely those associated with personal morality and incompetence.
Any break from this circular flow entails enterprise in an area
in which values are unknown. New activities, the production of
goods untried in the market place, has to be given provisional
value or there would be no capital to fund their production.
It is the function of capitalist financial institutions is to supply a
price disconnected in this way from ongoing supply and demand.
In short, the disconnect between material production and
consumption decried by Veblen, is a necessary condition for the
Very Long Run success of the capitalist market system with
respect to advances in technology and institutions.
What remains to be shown is the inevitable connection between the
functional disconnect between prices and productivity that
makes possible the process of technical and institutional advance
in a capitalist market system, on the one hand, and the specific
pernicious disconnect between prices production in the bubbles
that have accompanied the advance. This will entail appropriately
bringing to light a second crucial aspect of the nature of bubbles.

Robin Neill
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