Minsky’s Financial Instability Hypothesis and Modern Economics

Minsky’s 1954 PhD thesis “Induced investment and business cycles” represents his attempt to insert his concerns about finance into the then-standard Hansen-Samuelson accelerator-multiplier model, which has no finance in it. Viewed in retrospect, the more fundamental contribution Minsky made in his thesis was to conceive of ordinary business firms a

In the end, Minsky came to think of his own financial instability hypothesis as a completion of Keynes’ work by filling in the details of the financial system, the “logical hole” (p. 63) that Keynes left out in his own academic formulations.

Unfortunately, the return of instability coincided also with the ascendancy of a new interventionist orthodoxy in economic theory which, extrapolating from the entirely unusual circumstances of the immediate postwar, attributed business fluctuations not to changing financial structures but rather simply to fluctuations in aggregate demand. Accordin

Hyman Philip Minsky (b. 23 September 1919, d. 24 October 1996) was best known for his Financial Instability Hypothesis of the business cycle, which emphasized the dynamics of business investment finance as a recurring cause of macroeconomic instability (Minsky 1972, 1980). During a boom, the expansion of debt-financed investment spending causes ini

A central reason for policy intervention in this boom-bust process, Minsky emphasized, is the ever-present danger that the contraction will get out of control and spread into a system-wide debt-deflation. In this way, a normal business recession can become instead a deep and long-lasting depression, such as happened in 1929-1933 when debt deflation

Henry Simons was the source of Minsky’s lifelong interest in finance, as well as the idea that the fundamental flaw of modern capitalism stemmed from its banking and financial structure. Minsky took the lesson that capitalism could be stable if, first, large-scale capital investment were owned and financed publically rather than privately and, seco

In the short run, this policy orthodoxy achieved its stated goal, but in the longer run it acted to block the natural process of restoring robust finance, with the consequence that an increasingly fragile financial structure served as an increasing obstacle to capital investment and hence also to robust economic performance. Because of government i

What followed after Volcker was a new kind of institutional arrangement that Minsky called “money manager capitalism”, driven by a new breed of institutional investors in pension funds, insurance companies, and mutual funds. Unlike the immediate postwar, long-term capital development of the nation was off the table, replaced instead by the pursuit

At the very center of Minsky’s conception of what makes a financial structure robust or fragile is the relationship between the time pattern of cash commitments and the time pattern of expected cash flows. A firm with cash flows greater than cash commitments for every future period is said to be engaged in “hedge” finance, because the unit can meet