Abstract
Hyman Minsky pioneered the idea of the financial instability hypothesis to explain how swings between robustness and fragility in financial markets generate business cycles in the economic system. Yet few economists have recognized that this elemental idea originates not only from the financial theory of investment and investment theory of business cycles put forward by John Maynard Keynes, but also in the credit view of money and finance advocated by Joseph Schumpeter. Nevertheless, Minsky described Schumpeter’s business cycle theory as ‘banal’ because it relied on the real economy as Walras represents. The reason was that money was endogenous in Schumpeter’s earlier view, as it emerged out of the credit system, which allowed for a discussion of the relationship between production and finance. This essay will focus on how Minsky related some ideas from Schumpeter’s Theory of Economic Development with those in Keynes’ General Theory Money and finance provide a link between Keynes’ view of the investment decision as a determinant of output and employment with Schumpeter’s view of the investment decision as a determinant of innovation and economic growth.
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Notes
Böhm-Bawerk ([1884]1890, [1889]1959) introduced the idea intertemporal equilibrium, in which production became a process whereby capital goods are produced and then used to produce the desired consumer goods.
Schumpeter began writing on a book on money in the late 1920s originally entitled Geld und Wahrung (Money and Currency). The main goal was to develop a new theory of money based on the credit view of money in the Theory of Economic Development. According to Swedberg (1991), he attempted to rewrite parts of the book in the ladder years of his life, but never completed it. It is doubtful that Minsky had seen the manuscript.
Bank credit was the driving force of cyclical growth in Schumpeter ([1912]1934). His argument followed the standard loanable-funds approach insofar as he derived the existence of interest rates from temporary different monopoly rents on innovations, a disequilibrium phenomenon.
Lavoie (1997) maintains that Minsky’s (1957b) idea that an endogenous rise in interest rates is linked to a lack-of-saving approach. During the expansion, euphoria takes over and the acceptable degree of leverage increases, so much that banks encourage under-levered firms to go into debt and conform to the emerging more relaxed standards (Minsky 1980b: 517).
Expectations also appear arbitrary in the Treatise on Money
The difference between finance capital and production capital resembles the difference between the entrepreneur and financier as two independent agents that drive the innovation process. Both co-exist, but dominate over each other during different periods of the long wave.
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The author wishes to thank those participating in Kurt’s monthly Kreis-Diskussion in Vienna, especially Kurt Dopfer, Michael Peneder and Jerry Silverberg. The usual caveats apply.
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Knell, M. Schumpeter, Minsky and the financial instability hypothesis. J Evol Econ 25, 293–310 (2015). https://doi.org/10.1007/s00191-014-0370-8
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DOI: https://doi.org/10.1007/s00191-014-0370-8
Keywords
- Economic evolution
- Financial instability
- Business cycles
- Technological revolutions
- Innovation
- Effective demand
- Joseph Schumpeter
- John Maynard Keynes
- Hyman Minsky