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

Levy Economics Institute Working Paper No. 543

24 Pages Posted: 3 Sep 2008  

L. Randall Wray

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

Eric Tymoigne

Lewis & Clark College

Date Written: September 2, 2008

Abstract

In this paper we present a theory of the financing of investment in a modern capitalist economy, following the approach developed by Hyman P. Minsky. We argue that the current financial crisis that began with the collapse of the subprime mortgage market in the United States in 2007 provides a compelling reason to show how his approach offers us 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. What we present is an alternative to the standard approach that was developed beginning in the early 1970s, based on the efficient markets hypothesis that relegates money and finance to the sidelines. Minsky vehemently denied the relevance of such a theory, at least for a modern capitalist economy with complex, expensive, and long-lived capital assets. In our kind of economy, the method used to finance positions in assets is of critical importance, both for theory and for real-world outcomes. In the first section we present the investment theory of the business cycle developed by John Maynard Keynes, and then examine Minsky's extension that added a financial theory of investment. This allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility - what is well known as Minsky's financial instability hypothesis. In the subsequent section, we update Minsky's approach to finance with a more detailed examination of asset pricing and of the evolution of the banking sector. In the final section we briefly review the insights that such an approach can provide for analysis of the current global financial crisis.

Keywords: Hyman P. Minsky, John Maynard Keynes, financial instability hypothesis, debt deflation, investment finance, asset prices

JEL Classification: E12, E22, E32, E44, G11, G12

Suggested Citation

Wray, L. Randall and Tymoigne, Eric, Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment (September 2, 2008). Levy Economics Institute Working Paper No. 543. Available at SSRN: https://ssrn.com/abstract=1262296 or http://dx.doi.org/10.2139/ssrn.1262296

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

Eric Tymoigne

Lewis & Clark College ( email )

0615 SW Palatine Hill Road
Portland, OR 97204
United States

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