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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.
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Chapter 4: The Theory of the Firm in Relation to Business Cycle Theory

Hyman P. Minsky


4. The theory of the firm in relation to business cycle theory If non-linear accelerator type models are to be used in business cycle theory, it is necessary to understand the process by which a change in income induces investment and whether or not the effect of a change in income upon investment varies systematically over the business cycle. We will examine the hypothesis that the effect upon investment of a change in income depends upon the relation between investment decisions of individual firms and (1) the structure of the product markets in which the firm is operating and (2) the financing conditions which confront the firm. This leads us to a study of the investment behavior of business firms. Market structures determine two relations for a firm: (1) the relation between the particular demand curve confronting the firm and the market demand curve and (2) the way in which a firm behaves toward its particular demand curve. Market structure is the manner in which the market for a product is organized. Organization is really an improper description of the concept as no formal organization of producers or consumers need exist. Aside from the generalization of cost curves to allow for financing conditions, we do not need anything more than the traditional analysis of competitive and monopolistic markets.1 Oligopoly, the region between competition and monopoly, does cause us concern, and we will have to set up a working model of such markets. Financing conditions include the effects...

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