According to this work, the ‘financial instability hypothesis’ is not an interpretation of The General Theory as Minsky (1975, 1986) thought. Keynes and Minsky undoubtedly have much in common. Specifically, both of them recognize the limits of individual and collective rationality. Minsky, however, introduced an upward instability that seems totally foreign to The General Theory. Living in different historical periods, the two authors focused on different realities. Keynes looked at a depressed economy that, as a consequence of its low profit expectations, is dominated by the downswings (by the excess of saving over investment). Minsky looked at a vibrant economy that, as a consequence of its high profit expectations, is dominated by the upswings (by the excess of investment over saving). As a consequence, while a stagnant economy à la Keynes tends to chronic underinvestment and to high and long-lasting unemployment, a vibrant economy à la Minsky is naturally inclined to over-investment and over-indebtedness. In the last decades, useful examples might be the European economy on the one hand and the U.S.A. and U.K. economies on the other. Under this perspective, Minsky might be considered as an author who has extended the economics of Keynes to a vibrant economy, making it more general and modern. The recent sub prime crisis confirms the validity of Minsky’s insights.
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Find related papers by JEL classification: B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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