Financial Keynesianism and Market Instability

Financial Keynesianism and Market Instability

The Economic Legacy of Hyman Minsky, Volume I

Edited by Riccardo Bellofiore and Piero Ferri

During his lifetime Hyman Minsky made a seminal contribution to the development of financial Keynesianism. In this book, leading academics celebrate his work and explore his economic legacy. Special attention is paid to his work on contemporary economic method, the Great Depression, the European single currency and the global financial system and recent banking and financial crises – in particular the crisis in Asia. An attempt is made to categorise Minsky’s brand of post Keynesianism and to compare his work with the Keynesian and Marxian traditions.

Introduction

Edited by Riccardo Bellofiore and Piero Ferri

Subjects: economics and finance, economic psychology, financial economics and regulation, history of economic thought, post-keynesian economics

Extract

: ‘Things fall apart, the centre cannot hold’ Riccardo Bellofiore and Piero Ferri Hyman P. Minsky’s economic writings are centred around three interrelated topics: 1. An interpretation of Keynes, stressing the most innovative and revolutionary features of his monetary thought: the essential role of financial markets, the non-neutrality of money, the systematic uncertainty and bounded rationality surrounding decision-making, the cyclical nature of the capitalist process due to the fluctuation in private investment. Minsky extends Keynes, putting together an investment theory of the business cycle with a financial theory of investment. The ‘two-price’ model and Minsky’s reference to Kalecki’s view about the determination of profits belong here. The financial instability hypothesis, according to which, after a period of ‘tranquil’ growth and ‘robust’ finance, firms’ and banks’ liability structures spontaneously shift towards fragility. The economic system is prone to financial crises, which actually break out as a consequence of the normal functioning of a capitalist economy. Minsky’s view is that each state of the economy is transitory: internal financial developments compel a transition to the next state. Capitalist cyclical evolution – from expansion to boom, financial collapse and the risk of debt deflation, possibly leading to great depression – is, once again, the necessary outcome of the monetary nature of the capitalist process at the heart of Keynes’s approach. What is lacking in the General Theory is a clear understanding of why stability is destabilizing: for Minsky, capitalist evolution is endogenous, and is driven by the behaviour of financial variables. This is...