The Investment Decision of the Post-Keynesian Firm: A Suggested Microfoundation for Minsky's Investment Instability Thesis

Levy Economics Institute Working Paper No. 79

46 Pages Posted: 19 Jul 1999

See all articles by James Crotty

James Crotty

University of Massachusetts Amherst

Jonathan Goldstein

Bowdoin College; Bard College - The Levy Economics Institute

Date Written: September 1992


In this paper, Crotty and Goldstein undertake the formulation of a model of enterprise investment decision that can provide a microeconomic foundation for the Keynes-Minsky macromodels developed by Delli Gatti & Gallegati, Jarsulic, Semmler and others. The authors address the difficulties inherent in the formulation of an investment theory in which the future is unknowable, and investment substantially irreversible.

Where Minsky accepts a variation of the Tobin-q theory--in which owners and managers are assumed to be identical economic agents--Crotty and Goldstein look to Keynes' insistence on their qualitative difference. Financial commitments to creditors are certain, while expected profits are not. Thus, the interests of stockholders and other creditors represent a potential threat to the autonomy management needs to ensure the security of the enterprise itself.

The authors derive the comparative static properties of the optimal investment decision, the essence of which they show to be the growth-safety tradeoff whereby management must sacrifice financial security to obtain growth and vice-versa. The model is shown to be able to generate both the "waiting to invest" result of the irreversible investment literature, and the major theoretical relation empirically tested and confirmed by Fazzari, Hubbard and Peterson (1988). This model explains a demand side effect rather than a supply side influence.

The many subjective and financial variables in the model reflect: i) managerial attitudes, ii) management's confidence in its ability to forecast meaningfully, iii) the financial status of the firm, and iv) the profit markup. This theory is too complex to find incorporation in a formal, mathematical business cycle model. However, using the example of the end-of-expansion, onset-of-crisis phase of a Minsky cycle, the authors show that their results can be used to model the characteristics of post-war business cycles in a manner consistent with Minsky's work.

JEL Classification: E22

Suggested Citation

Crotty, James R. and Goldstein, Jonathan P., The Investment Decision of the Post-Keynesian Firm: A Suggested Microfoundation for Minsky's Investment Instability Thesis (September 1992). Levy Economics Institute Working Paper No. 79, Available at SSRN: or

James R. Crotty (Contact Author)

University of Massachusetts Amherst ( email )

Department of Operations and Information Managemen
Amherst, MA 01003
United States
413-545-2768 (Phone)

Jonathan P. Goldstein

Bowdoin College ( email )

Brunswick, ME 04011
United States

Bard College - The Levy Economics Institute

Annandale-on-Hudson, NY 12504
United States

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