Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
Chapter 3: Minsky and Keynes on Investment Volatility: Was There an Overstatement?
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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