Financial Instability

7 Pages Posted: 29 Jan 2014

See all articles by L. Randall Wray

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Date Written: July 1, 2001

Abstract

There are various explanations for the economic fluctuations that occur in all capitalist economies. Sometimes the cause is an irrational mania, a speculative scheme, or (according to Monetarists) an "exogenous shock" precipitated by the central bank. Others—Marx, for example—attribute causation to internal factors, such as the "anarchy of production" in an unplanned economy.

This paper examines the thinking about the causes of economic fluctuations. It reviews the approaches of Marx, Fisher, Keynes, and Minsky, who was arguably the foremost twentieth-century theorist on the topic of financial instability, Minsky first developed what he labeled "a financial theory of investment and an investment theory of the cycle," attempting to join the approaches of the "financial factors" and the "real factors" camps by noting that the two are joined in a firm's balance sheet. His second contribution was the financial instability hypothesis: Over time, the economy naturally evolves from one with a "robust" financial structure, in which hedge positions dominate, toward a "fragile" financial structure, dominated by speculative and even Ponzi positions.

Keywords: financial instability, causes of economic instability, Marx, Fisher, Keynes, Mynsky, financial theory of investment, investment theory of the cycle

Suggested Citation

Wray, L. Randall, Financial Instability (July 1, 2001). Available at SSRN: https://ssrn.com/abstract=1010176 or http://dx.doi.org/10.2139/ssrn.1010176

L. Randall Wray (Contact Author)

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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