Keynes and Macroeconomics After 70 Years
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Keynes and Macroeconomics After 70 Years Critical Assessments of The General Theory

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.
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Chapter 3: Minsky and Keynes on Investment Volatility: Was There an Overstatement?

André Lourenço

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3. Minsky and Keynes on investment volatility: was there an overstatement? André Lourenço* INTRODUCTION The subject of this chapter is the financial theory of investment developed by Hyman Minsky, taking into special account his books John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986). Following the ‘two-price model’ of investment determination developed there, the pace of this fundamental macroeconomic variable would be directly linked with the ratio between the price of capital assets in secondary markets and the flowsupply price of these goods. The problem identified in this subject is, from our perspective, that such a theory overstates in a significant way the volatility1 of investment2 in capitalist economies. As we shall argue, perhaps the main reason for this is the direct link postulated between investment determination and the price of capital goods in secondary markets (usually represented by an index of share prices). Explicitly aiming to render compatible the relative empirical stability of investment with the degree of volatility foreseen in his theory, Minsky (1982) proposed that the twin operation of ‘big government’ as a fiscal thwarting device of effective demand fluctuations (and hence profits), and of ‘big banks’ (monetary authorities) as lenders of last resort, reduces empirical volatility as compared to the theoretical one, for example, the one that would exist if government and/or monetary authorities refused to operate as such dampeners – in other words, if laissez-faire were predominant. However, institutional changes and financial innovations that have taken place since the Bretton...

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