Loanable Funds, Endogenous Money and Minsky’s Financial Fragility Hypothesis

Abstract

In a previous survey of the endogenous money approach, I wrote that Minsky’s (1982: 124) belief that the “financing needs of the investment boom raise interest rates” did not fit well with Post Keynesian theory and Keynes’s view of the trade-cycle, and that it even bordered on the lack-of-savings thesis (Lavoie 1985: 77). Despite being somewhat provocative, the remark sparked no fury, and was only picked up by Randall Wray, who initially commented that “Lavoie’s rejection of the importance of stocks probably accounts for his critique of Minsky’s financial instability hypothesis, which he argues borders on a loanable funds approach” (Wray 1990: 152). He later concluded that I (Lavoie) “clearly would not even include Minsky within the endogenous money approach” (Wray 1992: 176). One of the objectives of the present paper is to show that while Minsky is clearly part of the endogenous money approach, some aspects of his financial fragility hypothesis arise from his past endorsement of the loanable funds approach.

This paper was written while I was Visiting Professor at Curtin University, in Perth, Western Australia. I would like to thank Riccardo Bellofiore, and Phil O’Hara for their comments.