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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.
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Chapter 8: Minsky, modern finance and the case of Long Term Capital Management

Perry Mehrling


8. Minsky, modern finance and the case of Long Term Capital Management Perry Mehrling This chapter is motivated by a paradox. Writing in 1967, Minsky summarized the core idea around which all his mature theories were developed: ‘Capitalism is essentially a financial system, and the peculiar behavioral attributes of a capitalist economy center around the impact of finance upon system behavior’ (Minsky, 1967, p. 33, my emphasis). At the time these words were written, probably few economists would have agreed with them, and fewer still members of the general public. Today, by contrast, the same statement would arguably command general assent, and perhaps even more so among the general public than among economists, but that doesn’t mean we are all Minskians now. The finance that has become the dominant world-view is not the finance of Hyman Minsky but rather the finance of Nobel prize winners Robert Merton, Myron Scholes and their associates. Although they purport to be about the same financial system, the theory of Minsky and that of modern finance are about as orthogonal as any two theories can possibly be. So different are they that Minsky, never shy about criticizing views with which he disagreed, never even mentioned modern finance in his published writings, and the disregard appears to have been mutual. The starting-point of the present chapter is the premise that Minsky and modern finance each have part of the story, but only part, so that communication between the two approaches is critically important for future intellectual...

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