Abstract
In this chapter we will present a theory of the financing of investment in a modern capitalist economy. Our exposition will closely follow the approach developed by Hyman Minsky, arguably the most important contributor to our understanding of this topic. While Minsky began his research in the 1950s and continued to refine his theory until his death in 1996, his ideas are largely absent from undergraduate textbooks. In addition, his approach has been largely ignored by the mainstream of the profession even though the inclusion of some of his ideas in models similar to the New Consensus provides relevant insights (Lavoie, 2008; Weise and Barbera, 2008). This does not mean that his work was unknown, as it was long embraced by Post Keynesian economists and by Wall Street practitioners who recognized the real-world relevance of Minsky’s arguments. Indeed, a few conventional economists — including some Nobel laureates (some of whom were personal friends of Minsky) — were influenced by his ideas. Still, as we prepare this chapter, there is little doubt that interest in his theory is at an all-time peak (e.g. Lahart, 2007; Chancellor, 2007; McCully, 2007). Indeed, the current financial crisis that began with a collapse of the sub-prime mortgage market in the US in 2007 provides a compelling reason to show how his approach provides students with a grounding in the workings of financial capitalism. Even if the spreading global financial crisis is successfully contained this time around, it is likely that analyses will incorporate a substantial dose of Minsky’s ideas for many years to come.
Keywords
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
References
Adelson, M. (2006), ’MBS basics’, Nomura Securities International Inc., Research Paper, March 31.
Chancellor, E. (2007), ‘Ponzi Nation’, Institutional Investor, 7 February.
Fama, E.F. (1970), ‘Efficient capital markets: A review of theory and empirical work’, Journal of Finance, 25 (2), 383–417.
Friedman, M. (1969), ‘The optimum quantity of money’, in M. Friedman (ed.), The Optimum Quantity of Money and Other Essays, 1–50, Chicago: Aldine.
Galbraith, J.K. (1961), The Great Crash, 3rd edn, Cambridge, MA: Riverside Press.
Gertler, M. (1988), ‘Financial structure and aggregate economic activity: An overview’, Journal of Money, Credit and Banking, 20 (3), Part 2, 559–88.
Goodhart, C.A.E. and Tsomocos, D.P. (2007), ‘Analysis of financial stability’, seminar paper presented at the Fondation Banque de France, 20 February, 2008.
Kalecki, M. (1971), ‘The determinants of profits’, in Kalecki, M. (ed.), Selected Essays on the Dynamics of the Capitalist Economy, Cambridge: Cambridge University Press, 78–92.
Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan
Kregel, J.A. (1976), ‘Economic methodology in the face of uncertainty: The modelling methods of Keynes and the Post-Keynesians’, Economic Journal, 86 (342), 209–25.
Kregel, J.A. (1986), ‘Conceptions of equilibrium: The logic of choice and the logic of production’, in Kirzner, I. (ed.), Subjectivism, Intelligibility, and Economic Understanding, 157–70, New York: New York University Press; reprinted in P. Boettke and
D. Prychitko (eds) (1998), Market Process Theories, vol. 2, 89–102, Northampton: Edward Elgar.
Kregel, J.A. (1997), ‘Margins of safety and weight of the argument in generating financial crisis’, Journal of Economic Issues, 31 (2), 543–8.
Kregel, J.A. (2008), ‘Minsky’s cushions of safety: Systemic risk and the crisis in the U.S. subprime mortgage market’, Levy Economics Institute, Public Policy Brief no. 93/2008.
Lahart, J. (2007), ‘In time of tumult, obscure economist gain currency’, Wall Street Journal, 18 August, page A1.
Lavoie, M. (2008), ‘Taming the New Consensus: Hysteresis and some other Post-Keynesian amendments’, in this volume.
McCulley, P. (2007), ‘The plankton theory meets Minsky’, Global Central Bank Focus, PIMCO Bonds, March 2007, www.pimco.com/leftnav/featured+market+commentary/FF... (accessed 3/8/2007).
Minsky, H.P. (1963), ‘Discussion’, American Economic Review, 53 (2), 401–12.
Minsky, H.P. (1981), ‘Financial markets and economic instability, 1965–1980’, Nebraska Journal of Economics and Business, 20 (4), 5–16.
Minsky, H.P. (1986), Stabilizing an Unstable Economy, New Heaven: Yale University Press.
Minsky, H.P. (2008), ‘Securitization’, Levy Economics Institute, Policy Note no. 2008/2.
Orléan, A. (1999), Le Pouvoir de la Finance, Paris: Odile Jacob.
Tobin, J. (1958), ‘Liquidity preference as behavior towards risk’, Review of Economic Studies, 25 (2), 65–86.
Tobin, J. (1969), ‘A general equilibrium approach to monetary theory’, Journal of Money Credit and Banking, 1(1), 15–29.
Weise, C.L. and Barbera, R.J. (2008), ‘Minsky meets Wicksell: Using the Wicksellian model to understand the twenty-first century business cycle’, in this volume.
Whalen, C.J. (2008), ‘Understanding the credit crunch as a Minsky moment’, Challenge, 51 (1), 91–109.
Wray, L.R. (1992), ‘Alternative theories of the rate of interest’, Cambridge Journal of Economics, 16 (1), 69–89.
Wray, L.R. (2008), ‘Lessons from the subprime meltdown’, Challenge, 51 (2), 40–68.
Editor information
Editors and Affiliations
Copyright information
© 2009 L. Randall Wray and Eric Tymoigne
About this chapter
Cite this chapter
Wray, L.R., Tymoigne, E. (2009). Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment. In: Fontana, G., Setterfield, M. (eds) Macroeconomic Theory and Macroeconomic Pedagogy. Palgrave Macmillan, London. https://doi.org/10.1007/978-0-230-29166-9_13
Download citation
DOI: https://doi.org/10.1007/978-0-230-29166-9_13
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-230-27763-2
Online ISBN: 978-0-230-29166-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)