Abstract

IOURNAL OF ECONOMIC ISSUES Vol. XXVI No.2 111M 1992 Ii Financial Innovations and Veblen's Theory of Financial Markets J. Patrick Raines and Charles G. Leathers The financial system in the 1980s was shaken by a wave of speculative finance facilitated by a massive accumulation of debt, a stock market crash, crises in the banking/thrifts sector, and episodes of price manipulation. These developments comported closely with Veblen's theory of financial markets presented in The Theory of Business Enterprise [1904]. But have repeated episodes of financial instability invalidated Veblen's later assessment in Absentee Ownership [1923] that the financial system had become virtually self-insured against crises? In this paper, we propose an interpretation of Veblen's theory of financial markets which incorporates both a tendency toward collusive stability and resurgent periods of financial instability. Within that context, we focus on the role of financial innovations. The current instability traces to a financial restructuring process often linked to a wave of financial innovations. Carter [1989, 781-786] explained how financial innovations generate an increasingly fragile financial structure. Lawson and Lawson [1990] argued that the standard view of financial innovations-as encouraged by regulations and high interest/inflation rates and The authors are Associate Professor of Economics, University