Financial Fragility and Investment in the Capitalist Economy

Financial Fragility and Investment in the Capitalist Economy

The Economic Legacy of Hyman Minsky, Volume II

Edited by Riccardo Bellofiore and Piero Ferri

Hyman Minsky is renowned for his theoretical and empirical investigation of the capitalist economy. In this book, a distinguished group of contributors provides an authoritative account of his contribution to the analysis of capitalism and, more particularly, to the fields of monetary and post Keynesian economics.

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...