Skip to main content
SpringerLink
Log in

Schumpeter, Minsky and the financial instability hypothesis

  • Regular Article
  • Published:
Journal of Evolutionary Economics Aims and scope Submit manuscript

Abstract

Hyman Minsky pioneered the idea of the financial instability hypothesis to explain how swings between robustness and fragility in financial markets generate business cycles in the economic system. Yet few economists have recognized that this elemental idea originates not only from the financial theory of investment and investment theory of business cycles put forward by John Maynard Keynes, but also in the credit view of money and finance advocated by Joseph Schumpeter. Nevertheless, Minsky described Schumpeter’s business cycle theory as ‘banal’ because it relied on the real economy as Walras represents. The reason was that money was endogenous in Schumpeter’s earlier view, as it emerged out of the credit system, which allowed for a discussion of the relationship between production and finance. This essay will focus on how Minsky related some ideas from Schumpeter’s Theory of Economic Development with those in Keynes’ General Theory Money and finance provide a link between Keynes’ view of the investment decision as a determinant of output and employment with Schumpeter’s view of the investment decision as a determinant of innovation and economic growth.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Böhm-Bawerk ([1884]1890, [1889]1959) introduced the idea intertemporal equilibrium, in which production became a process whereby capital goods are produced and then used to produce the desired consumer goods.

  2. Schumpeter began writing on a book on money in the late 1920s originally entitled Geld und Wahrung (Money and Currency). The main goal was to develop a new theory of money based on the credit view of money in the Theory of Economic Development. According to Swedberg (1991), he attempted to rewrite parts of the book in the ladder years of his life, but never completed it. It is doubtful that Minsky had seen the manuscript.

  3. Bank credit was the driving force of cyclical growth in Schumpeter ([1912]1934). His argument followed the standard loanable-funds approach insofar as he derived the existence of interest rates from temporary different monopoly rents on innovations, a disequilibrium phenomenon.

  4. Lavoie (1997) maintains that Minsky’s (1957b) idea that an endogenous rise in interest rates is linked to a lack-of-saving approach. During the expansion, euphoria takes over and the acceptable degree of leverage increases, so much that banks encourage under-levered firms to go into debt and conform to the emerging more relaxed standards (Minsky 1980b: 517).

  5. Expectations also appear arbitrary in the Treatise on Money

  6. The difference between finance capital and production capital resembles the difference between the entrepreneur and financier as two independent agents that drive the innovation process. Both co-exist, but dominate over each other during different periods of the long wave.

References

  • Akerlof GA, Shiller RJ (2009) Animal spirits: how human psychology drives the economy, and why it matters for global capitalism. Princeton University Press, Princeton

    Google Scholar 

  • Binswanger M (1996) Money creation, profits and growth: monetary aspects of economic evolution. In: Helmstädter E, Perlman M (eds) Technological progress and economic dynamics: studies in schumpeterian economics. University of Michigan Press, Ann Arbor

    Google Scholar 

  • Carpenter DH, Murphy MM (2010) Permissible securities activities of commercial banks under the Glass-Steagall Act (GSA) and the Gramm-Leach-Bliley Act (GLBA). Congressional Research Service Report (R41181)

  • Currie M, Steedman I (1990) Wrestling with time: problems in economic theory. University of Michigan Press, Ann Arbor

    Google Scholar 

  • Delli Gatti D, Gallegati M, Minsky HP (1996) Financial institutions, economic policy and the dynamic behaviour of the economy. In: Helmstädter E, Perlman M (eds) Technological progress and economic dynamics: studies in schumpeterian economics. University of Michigan Press, Ann Arbor

    Google Scholar 

  • Dow S (1995) Uncertainty about uncertainty. In: Dow S, Hillard J (eds) Keynes, knowledge and uncertainty. Edward Elgar, Aldershot

    Google Scholar 

  • Freeman C, Louçã F (2001) As time goes by. From the industrial revolution to the information revolution. Oxford University Press, Oxford

    Google Scholar 

  • Freeman C, Perez C (1988) Structural crisis of adjustment, business cycles and investment behaviour. In: Dosi G, Freeman C, Nelson R, Silverberg G, Soete L (eds) Technical change and economic theory. Pinter, London

    Google Scholar 

  • Galbraith JK (1955) The great crash: 1929. Houghton Miffl Harcourt, New York

    Google Scholar 

  • Juglar C (1862) Des crises commerciales et de leur retour périodique en France, en Angleterre et aux États-Unis. Guillaumin et Cie, Paris

    Google Scholar 

  • Keynes JM (1930[1971]) A Treatise on Money, in two volumes, Volumes 5 and 6 of The Collected Works of John Maynard Keynes. Macmillan, London

    Google Scholar 

  • Keynes JM (1931[2008]) Economic possibilities for our grandchildren. In: Pecchi L, Piga G (eds) Revisiting Keynes. Cambridge University Press, Cambridge

    Google Scholar 

  • Keynes JM (1936[1973]) The general theory of employment, interest and money. Volume 7 of the collected works of John Maynard Keynes. Macmillan, London

    Google Scholar 

  • Keynes JM (1937) The general theory of employment. Q J Econ 51:209–223

    Article  Google Scholar 

  • Keynes JM (1973) The general theory and after: Part I defence and development. Volume 13 of the collected works of John Maynard Keynes. Macmillan, London

    Google Scholar 

  • Knell M (2012) Was Schumpeter Walrasian? In: Gehrke C, Salvadori N, Steedman I, Sturn R (eds) Classical economics versus modern theories. Essays in Honour of Heinz D. Kurz, vol 2. Routledge, London

    Google Scholar 

  • Kregel J (2009) Financial experimentation, technological paradigm revolutions and financial crises. In: Drechsler W, Kattel R, Reinert ES (eds) Techo-Economic paradigms: essays in honor of Carlota Perez. Anthem Press, London, pp 203–220

    Google Scholar 

  • Kuhn TS (1962) The structure of scientific revolutions. University of Chicago Press, Chicago

    Google Scholar 

  • Lavoie M (1997) Loanable funds, endogenous money, and Minsky’s financial fragility hypothesis. In: Cohen AJ, Hagemann H, Smithin J (eds) Money, financial institutions, and macroeconomics. Kluwer Nijhoff, Boston

    Google Scholar 

  • Leathers CG, Raines JP (2004) The Schumpeterian role of financial innovations in the New Economy’s business cycle. Camb J Econ 28:667–681

    Article  Google Scholar 

  • Legrand MD-P, Hagemann H (2007) Business cycles in Juglar and Schumpeter. Hist Econ Thought 49:1–18

    Google Scholar 

  • Lipsey RG, Carlaw KI, Bekar CT (2005) Economic transformations: general purpose technologies and long term economic growth. Oxford University Press, Oxford

    Google Scholar 

  • Marget AW (1931) Léon Walras and the “Cash-Balance Approach” to the problem of the value of money. J Polit Econ 39:569–600

    Article  Google Scholar 

  • Marshall A (1890[1961]) In: Guillebaud CW (ed) Principles of economics, 9th Variorum edn. Macmillan, London

  • Messori M (2004) Credit and money in Schumpeter’s theory. In: Arena R, Salvadori N (eds) Money, credit and the role of the state: essays in honor of Augusto Graziani. Edward Elgar, Cheltenham, pp 173–198

    Google Scholar 

  • Minsky HP (1954 [2004]) In: Papadimitriou DB (ed) Induced investment and business cycles. Edward Elgar, Cheltenham

  • Minsky HP (1957a) Central banking and money market changes. Q J Econ 71:171–187

    Article  Google Scholar 

  • Minsky HP (1957b) Monetary systems and accelerator models. Am Econ Rev 97:860–883

    Google Scholar 

  • Minsky HP (1964) Longer waves in financial relations: financial factors in the more severe depressions. Am Econ Rev 54(3).Papers and proceedings of the seventy-sixth annual meeting of the american economic association, pp 324–335

  • Minsky HP (1975) John Maynard Keynes. Columbia University Press, New York

    Google Scholar 

  • Minsky HP (1978) The financial instability hypothesis: a restatement. Thames Papers in Policial Economy, reprinted in Minsky (1982)

  • Minsky HP (1980a) Capitalist financial processes and the instability of capitalism. J Econ Issues 14:505–23

    Google Scholar 

  • Minsky HP (1980b) Finance and profits: the changing nature of American business cycles. In: The business cycle and public policy. U.S. Government Printing Office, Washington D.C., pp 209–244. [also in Minsky, 1982]

  • Minsky HP (1982) Inflation, recession and economic policy. Wheatsheaf, Sussex

    Google Scholar 

  • Minsky HP (1986a) Stabilizing an unstable economy. Yale Univ. Press, New Haven

    Google Scholar 

  • Minsky HP (1986b) Money and crisis in Schumpeter and Keynes. In: Wagener HJ, Drukker JW (eds) The economic law of motion of modern society: a Marx-Keynes-Schumpeter Centennial. Cambridge University Press, Cambridge

    Google Scholar 

  • Minsky HP (1986c) The evolution of financial institutions and the performance of the economy. J Econ Issues 20:345–353

    Google Scholar 

  • Minsky HP (1990) Schumpeter: finance and evolution. In: Heertje A, Perlman M (eds) Evolving technology and market structure: studies in schumpeterian economics. University of Michigan Press, Ann Arbor

    Google Scholar 

  • Minsky HP (1992a) The financial instability hypothesis, Working paper No. 74, The Jerome Levy Economics Institute of Bard College, New York. In: Arestis P, Sawyer M (eds) Handbook of radical political economy. Edward Elgar, Cheltenham. 1993

    Google Scholar 

  • Minsky HP (1992b) The capital development of the economy and the structure of financial institutions, Working paper No. 72. The Jerome Levy Economics Institute of Bard College, New York

    Google Scholar 

  • Minsky HP (1992c) Hyman P. Minsky. In: Arestis P, Sawyer M (eds) A biographical dictionary of dissenting economists. Edward Elgar, Cheltenham

    Google Scholar 

  • Minsky HP (1993) Schumpeter and finance. In: Biasco S, Roncaglia A, Salvati M (eds) Market and institutions in economic development: essays in honour of Paulo Sylos Labini. St. Martin’s Press, New York, pp 103–115

    Google Scholar 

  • Minsky HP, Whalen CJ (1997) Economic insecurity and the institutional prerequisites for successful capitalism. J Post-Keynesian Econ 19:155–170

    Google Scholar 

  • Papadimitriou DB, Wray LR (1998) The economic contributions of Hyman Minsky: varieties of capitalism and institutional reform. Rev Polit Econ 10:199–225

    Article  Google Scholar 

  • Perez C (2002) Technological revolutions and finance capital: the dynamics of bubbles and golden ages. Edward Elgar, Cheltenham

    Book  Google Scholar 

  • Perez C (2009) The double bubble at the turn of the century: technological roots and structural implications. Camb J Econ 33:779–805

    Article  Google Scholar 

  • Schumpeter JA. ([1912]1934) Theorie der wirtschaftlichen Entwicklung, Leipzig, Verlag von Duncker & Humblot. Third edition translated by R. Opie as The Theory of Economic Development. Harvard University Press, Cambridge

  • Schumpeter JA ([1914]1954) Economic doctrine and method. Oxford University Press, New York. Translated by R. Aris. Original edition, Epochen der Dogmen und Methodengeschichte, Mohr, Tübingen

  • Schumpeter JA (1928) The instability of capitalism. Econ J 38:361–386

    Article  Google Scholar 

  • Schumpeter JA (1936) Review of Keynes’s general theory. J Am Stat Assoc 31:791–795

    Article  Google Scholar 

  • Schumpeter JA (1939) Business cycles: a theoretical, historical, and statistical analysis of the capitalist process. McGraw-Hill, New York

    Google Scholar 

  • Schumpeter JA (1942) Capitalism, socialism and democracy. Harper and Brothers, New York

    Google Scholar 

  • Schumpeter JA (1946) John Maynard Keynes 1883–1946. A Econ Rev 36:495–518

    Google Scholar 

  • Schumpeter JA (1954) In: Boody E (ed) History of economic analysis. Oxford University Press, New York

  • Seccareccia M (2004) Aspects of a new conceptual integration of Keynes’s Treatise on money and the general theory: logical time units and macroeconomic price formation. In: Aréna R, Salvadori N (eds) Money, credit and the role of the state: essays in honour of Augusto Graziani. Ashgate Publishing, Aldershot

    Google Scholar 

  • Swedberg R (1991) Introduction to Joseph A. Schumpeter, money and currency. Soc Res 58:1

  • Toporowski J (2008) Minsky’s ‘induced investment and business cycles. Camb J Econ 32:725–737

    Article  Google Scholar 

  • Walras L ([1874]1954) Éléments d’Économie Pure, Corbaz, Lausanne, definitive edition 1926. Translated as Elements of Economics. George Allen and Unwin, London

  • Whalen CJ (2001) Integrating Schumpeter and Keynes: Hyman Minsky’s theory of capitalist development. J Econ Issues 35:805–823

    Google Scholar 

  • Whalen CJ (2009) A Minsky perspective on the global recession of 2009. Research on Money and Finance Discussion Paper No. 12, Department of Economics, SOAS

  • von Böhm-Bawerk E ([1884]1890) Capital and interest: a critical history of economic theory, trans. W.A. Smart. Macmillan, London

    Google Scholar 

  • von Böhm-Bawerk E ([1889]1959) Capital and interest: volume II - positive theory of capital. Macmillan, London

    Google Scholar 

  • von Wieser F ([1889]1893) Der natürliche Werth, Hölder, Vienna. Translated as Natural Value. Macmillan, London

Download references

Author information

Authors and Affiliations

  1. NIFU Nordic Institute for Studies in Innovation, Research and Education NIFU, Wergelandsveien 7, 0167, Oslo, Norway

    Mark Knell

Authors
  1. Mark Knell
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mark Knell.

Additional information

The author wishes to thank those participating in Kurt’s monthly Kreis-Diskussion in Vienna, especially Kurt Dopfer, Michael Peneder and Jerry Silverberg. The usual caveats apply.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Knell, M. Schumpeter, Minsky and the financial instability hypothesis. J Evol Econ 25, 293–310 (2015). https://doi.org/10.1007/s00191-014-0370-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00191-014-0370-8

Keywords

JEL Classification

Search

Navigation