Skip to main content

Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment

  • Chapter

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

  • Asset Price
  • Hedge Fund
  • Capital Asset
  • Supply Price
  • Demand Price

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.

This is a preview of subscription content, access via your institution.

Buying options

Chapter
USD   29.95
Price excludes VAT (USA)
  • DOI: 10.1007/978-0-230-29166-9_13
  • Chapter length: 18 pages
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
eBook
USD   64.99
Price excludes VAT (USA)
  • ISBN: 978-0-230-29166-9
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
Softcover Book
USD   84.99
Price excludes VAT (USA)
Hardcover Book
USD   130.00
Price excludes VAT (USA)

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Adelson, M. (2006), ’MBS basics’, Nomura Securities International Inc., Research Paper, March 31.

    Google Scholar 

  • Chancellor, E. (2007), ‘Ponzi Nation’, Institutional Investor, 7 February.

    Google Scholar 

  • Fama, E.F. (1970), ‘Efficient capital markets: A review of theory and empirical work’, Journal of Finance, 25 (2), 383–417.

    CrossRef  Google Scholar 

  • Friedman, M. (1969), ‘The optimum quantity of money’, in M. Friedman (ed.), The Optimum Quantity of Money and Other Essays, 1–50, Chicago: Aldine.

    Google Scholar 

  • Galbraith, J.K. (1961), The Great Crash, 3rd edn, Cambridge, MA: Riverside Press.

    Google Scholar 

  • Gertler, M. (1988), ‘Financial structure and aggregate economic activity: An overview’, Journal of Money, Credit and Banking, 20 (3), Part 2, 559–88.

    CrossRef  Google Scholar 

  • 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.

    Google Scholar 

  • 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.

    Google Scholar 

  • Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan

    Google Scholar 

  • 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.

    CrossRef  Google Scholar 

  • 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

    CrossRef  Google Scholar 

  • D. Prychitko (eds) (1998), Market Process Theories, vol. 2, 89–102, Northampton: Edward Elgar.

    Google Scholar 

  • Kregel, J.A. (1997), ‘Margins of safety and weight of the argument in generating financial crisis’, Journal of Economic Issues, 31 (2), 543–8.

    CrossRef  Google Scholar 

  • 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.

    Google Scholar 

  • Lahart, J. (2007), ‘In time of tumult, obscure economist gain currency’, Wall Street Journal, 18 August, page A1.

    Google Scholar 

  • Lavoie, M. (2008), ‘Taming the New Consensus: Hysteresis and some other Post-Keynesian amendments’, in this volume.

    Google Scholar 

  • 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).

    Google Scholar 

  • Minsky, H.P. (1963), ‘Discussion’, American Economic Review, 53 (2), 401–12.

    Google Scholar 

  • Minsky, H.P. (1981), ‘Financial markets and economic instability, 1965–1980’, Nebraska Journal of Economics and Business, 20 (4), 5–16.

    Google Scholar 

  • Minsky, H.P. (1986), Stabilizing an Unstable Economy, New Heaven: Yale University Press.

    Google Scholar 

  • Minsky, H.P. (2008), ‘Securitization’, Levy Economics Institute, Policy Note no. 2008/2.

    Google Scholar 

  • Orléan, A. (1999), Le Pouvoir de la Finance, Paris: Odile Jacob.

    Google Scholar 

  • Tobin, J. (1958), ‘Liquidity preference as behavior towards risk’, Review of Economic Studies, 25 (2), 65–86.

    CrossRef  Google Scholar 

  • Tobin, J. (1969), ‘A general equilibrium approach to monetary theory’, Journal of Money Credit and Banking, 1(1), 15–29.

    CrossRef  Google Scholar 

  • 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.

    Google Scholar 

  • Whalen, C.J. (2008), ‘Understanding the credit crunch as a Minsky moment’, Challenge, 51 (1), 91–109.

    CrossRef  Google Scholar 

  • Wray, L.R. (1992), ‘Alternative theories of the rate of interest’, Cambridge Journal of Economics, 16 (1), 69–89.

    Google Scholar 

  • Wray, L.R. (2008), ‘Lessons from the subprime meltdown’, Challenge, 51 (2), 40–68.

    CrossRef  Google Scholar 

Download references

Authors

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