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Chapter 10: Minsky on Financial Instability
10 Minsky on ﬁnancial instability Elisabetta De Antoni 1. Introduction In Money, Interest and Prices (1956), Patinkin showed that the market mechanism produces a coherent – if not optimal – result. In this way the neoclassical synthesis came to maturity, reabsorbing the Keynesian revolution and restoring a trust in the market mechanisms that new classical macroeconomics and real business cycle theory would later reaﬃrm. From his ﬁrst writings (again in the mid-1950s) and all his life, Minsky questioned the omnipotence of the market. According to Minsky, the synthesis succeeded in incorporating The General Theory into neoclassical theory since it had amputated the most innovative and revolutionary aspects of Keynes’s thought. In Minsky’s 1975 rereading, a Keynes without uncertainty (as interpreted by the synthesis) is like a Hamlet without its Prince (p. 57). Uncertainty mainly hits ﬁnancial markets and the expected returns on capital assets. Instead of the Smithian paradigm of the ‘village fair’, Keynes adopted the paradigm of ‘Wall Street’ (p. 58). Subjective evaluations ruling ﬁnancial markets and expected returns on real assets are changeable and consequently investment is volatile. The equilibrium continuously changes with the passing of time and the system never succeeds in reaching it. ‘Keynesian economics . . . is the economics of permanent disequilibrium’ (p. 68). Starting from these presuppositions, Minsky resolved to ‘recover the revolutionary thrust of The General Theory’ (p. v). To this end, he focused on ﬁnancial relations in an advanced capitalist economy, on investments under conditions of uncertainty, on the destabilizing processes and the instability characterizing...
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