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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 8: The Effect of Market Structure Upon Induced Investment

Hyman P. Minsky


8. The effect of market structure upon induced investment 1. INTRODUCTION ‘Direct’1 induced investment by the firms in an industry is the result of an upward shift in the demand curve for the product. Such induced investment can take the form of either a change in stocks, a change in ‘work in progress’, or a change in plant and equipment. With a fixed plant the level of stocks and work in progress are determined by the level of output. This stock-flow relation has been put into the form of difference equations.2 There is little doubt of the validity and wellnigh automatic nature of this relation. The questionable relation is between changes in output and changes in plant and equipment. The inventory cycle can follow an accelerator pattern without investment in plant and equipment conforming to the pattern. Major business cycles can be imputed to variations in plant and equipment investment. Hence, if models based upon induced investment are to be the core of business cycle theory, the accelerator must refer to changes in plant and equipment. Such investment can take one of two forms: either existing firms expand or new firms enter the industry. The expansion of existing firms can be identified as the change in the short run marginal cost curve along a planning curve. For all firms the planning curves have to contain the effects of both the financing conditions and the evaluation of risk associated with debt financing. For existing firms the...

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