Induced Investment and Business Cycles

Induced Investment and Business Cycles

Hyman P. Minsky

Edited by Dimitri B. Papadimitriou

This unique volume presents, for the first time in publication, the original Ph.D. thesis of Hyman P. Minsky, one of the most innovative thinkers on financial markets. Dimitri B. Papadimitriou’s introduction places the thesis in a modern context, and explains its relevance today. The thesis explores the relationship between induced investment, the constraints of financing investment, market structure, and the determinants of aggregate demand and business cycle performance. Forming the basis of his subsequent development of financial Keynesianism and his ‘Wall Street’ paradigm, Hyman Minsky investigates the relevance of the accelerator-multiplier models of investment to individual firm behaviour in undertaking investment dependent on cost structure. Uncertainty, the coexistence of other market structures, and the behaviour of the monetary system are also explored.


Dimitri B. Papadimitriou

Subjects: economics and finance, financial economics and regulation


: The Financial Fragility Hypothesis: the offspring of ‘Induced Investment and Business Cycles’ Dimitri B. Papadimitriou For more than four decades Hyman Minsky had painstakingly worked in the areas of economics and finance and in his many writings tried with vision and clarity to find a rational way to link the two. His research program has provided a definitive analysis of the linkage. As most students of his work would argue, he began with Keynes’ concern with the volatility of investments, and then recognized how serious the uncertainty of cash flows from investments was since it could lead to serious repercussions on the balance sheets of firms. This, in turn, requires the government to intervene to reduce the systemic risks this process engenders by changing its fiscal and/or monetary stance to prevent a debt deflation. ‘[T]o Minsky a sequence of booms, government intervention to prevent debt contraction, and new booms entails a progressive build-up of new debt, eventually leaving the economy much more fragile financially’ (Kaufman 1992, p. vii). ‘Cash flow’ to a firm, the buzzword in almost all his writings – but nowhere to be found in the neoclassical paradigm, was nevertheless crucially important in performing many functions including (1) signaling whether investments undertaken were based on sound decisions, (2) providing the funds needed by the firm to fulfill payments when due and (3) assisting in the decision-making process for future investment financial conditions (Minsky 1982, p. xvii). An analysis of cash flows documents a firm’s...