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

In: Macroeconomic Theory and Macroeconomic Pedagogy

Author

Listed:
  • L. Randall Wray
  • Eric Tymoigne

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.

Suggested Citation

  • L. Randall Wray & Eric Tymoigne, 2009. "Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 12, pages 234-251, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-0-230-29166-9_13
    DOI: 10.1007/978-0-230-29166-9_13
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    Cited by:

    1. Ognjen Radonjić & Miodrag Zec, 2010. "Subprime Crisis and Instability of Global Financial Markets," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 209-224, June.
    2. Eugenio Caverzasi & Daniele Tori, 2018. "The Financial Innovation Hypothesis: Schumpeter, Minsky and the sub-prime mortgage crisis," Working Papers PKWP1815, Post Keynesian Economics Society (PKES).
    3. Bill Lucarelli, 2011. "The Economics of Financial Turbulence," Books, Edward Elgar Publishing, number 14252.
    4. Marco Passarella, 2012. "Systemic financial fragility and the monetary circuit: a stock-flow consistent Minskian approach," Working Papers (-2012) 1202, University of Bergamo, Department of Economics.
    5. Edgardo Bucciarelli & Marcello Silvestri, 2013. "Hyman P. Minsky's unorthodox approach: recent advances in simulation techniques to develop his theoretical assumptions," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(2), pages 299-324.
    6. Chiarella, Carl & Di Guilmi, Corrado, 2011. "The financial instability hypothesis: A stochastic microfoundation framework," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1151-1171, August.
    7. Beshenov, Sergey & Rozmainsky, Ivan, 2015. "Hyman Minsky's financial instability hypothesis and the Greek debt crisis," Russian Journal of Economics, Elsevier, vol. 1(4), pages 419-438.
    8. Passarella, Marco, 2012. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 570-582.
    9. Marco, Passarella, 2011. "Systemic financial fragility and the monetary circuit: a stock-flow consistent approach," MPRA Paper 28498, University Library of Munich, Germany.
    10. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Society (PKES).
    11. Summa, Ricardo de Figueiredo, 2022. "Alternative uses of functional finance: Lerner, MMT and the Sraffiansh," IPE Working Papers 175/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    12. Leszek Kąsek & Marek Lubiński, 2010. "Hyman Minsky – wczoraj i dziś," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 4(1), March.
    13. Reissl, Severin, 2020. "Minsky from the bottom up – Formalising the two-price model of investment in a simple agent-based framework," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 109-142.
    14. Daniel Detzer, 2012. "New instruments for banking regulation and monetary policy after the crisis," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 9(2), pages 233-254.
    15. Sheila Dow, 2009. "History of Thought and Methodology in Pluralist Economics Education," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(2), pages 41-57.
    16. Sunanda Sen, 2011. "The Global Crisis and the Remedial Actions: A Nonmainstream Perspective," Economics Working Paper Archive wp_677, Levy Economics Institute.
    17. Marco Carreras, 2023. "Fostering Innovation Activities with the Support of a Development Bank: Evidence from Brazil 2003–2011," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 35(3), pages 545-578, June.

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