Theories of Financial Disturbance
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Theories of Financial Disturbance

An Examination of Critical Theories of Finance from Adam Smith to the Present Day

Jan Toporowski

Theories of Financial Disturbance examines how the operations of market-driven finance may initiate and transmit disturbances to the economy at large, by looking in detail at how various economists envisaged such disturbances occurring.
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Chapter 14: Hyman P. Minsky’s Financial Instability Hypothesis

Jan Toporowski


Hyman P. Minsky, together with his contemporaries Galbraith and Kindleberger, spent much of the second half of the century reflecting on ‘Can “It” Happen Again?’ (the title of a collection of his essays, 1982a). ‘It’ was the kind of economic depression induced by a financial crash that had occurred after 1929. With his aphorism describing how modern capitalism works, ‘investment determines output; finance determines investment’, Minsky may be said to have started where Keynes left off, with the flow of finance to investment. Thus Minsky developed a balance sheet approach to the relationship between the financial markets and business that extended Keynes’s analysis.1 1. MINSKY FROM KEYNES Minsky’s fundamental criticism of Keynes was that Keynes did not take into account the price of capital assets in determining the demand for them. Minsky suggested that this should be done by calculating the present value future expected yields, or cash flows, using the current money market rate of interest to discount future incomes and costs. This, Minsky argued, ‘is a more natural format for the introduction of uncertainty and risk preference of asset holders into the determination of investment than is the marginal efficiency schedule, which has been too casually linked by both Keynes and his interpreters to the productivity-based investment functions of the older, standard theory’.2 Minsky here was repeating the standard neo-classical (marginal capital productivity) interpretation of Keynes’s theory of investment, rather than the theory of investment based on expected returns that may be found in the General Theory....

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