Induced Investment and Business Cycles
Hyman P. Minsky
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This unique volume presents, for the first time in publication, the original Ph.D. thesis of Hyman P. Minsky, one of the most innovative thinkers on financial markets. Dimitri B. Papadimitriou's introduction places the thesis in a modern context, and explains its relevance today. The thesis explores the relationship between induced investment, the constraints of financing investment, market structure, and the determinants of aggregate demand and business cycle performance. Forming the basis of his subsequent development of financial Keynesianism and his 'Wall Street' paradigm, Hyman Minsky investigates the relevance of the accelerator-multiplier models of investment to individual firm behaviour in undertaking investment dependent on cost structure. Uncertainty, the coexistence of other market structures, and the behaviour of the monetary system are also explored. In assessing the assumptions underlying the structure and coefficient values of the accelerator models frequently used, the book addresses their limitations and inapplicability to real world situations where the effect of financing conditions on the balance sheet structures of individual firms plays a crucial and determining role for further investment. Finally, Hyman Minsky discusses his findings on business cycle theory and economic policy. This book will greatly appeal to advanced undergraduate and graduate students in economics, as well as to policymakers and researchers. In addition, it will prove to be valuable supplementary reading for those with an interest in advanced microeconomics.
capital for example. We therefore would have that ϭ K(PL, PK )Y. If the price ratios of the factors change so that capital becomes relatively more expensive, the quantity of capital desired to produce a given income decreases, whereas if capital becomes relatively cheaper, the desired capital stock increases. Such a relation between the accelerator coeﬃcient and the relative prices of the factors could be utilized to integrate money market phenomena with the accelerator-multiplier type model.
fallibility of humans and of the measuring instruments combine to yield observations which do not, in detail, conform to the real world values. The Haavelmo approach leads to the formulation of economic problems in the light of statistical testing techniques. This is an appropriate transformation of economic models where the problem is to apply such tests to economic data. However, it is not the appropriate approach to the construction of a ‘stochastic model’.42 4.2 Stochastic Variables As an
deteriorate’ (p. 118). All three constraints listed explicitly state that balance sheet positions matter. Moreover, if firms during the course of the business cycle use their retained earnings to expand capacity (build a new plant), then this leads to a higher equity and lowered debt position, an improvement in the balance sheets positions aﬀecting the accelerator coeﬃcient positively. If, on the other hand, firms use their earnings to pay down their debt, this decreases their equity position and
average total cost curve of a firm is the loci of those prices and quantities of the product which result in the value of expected returns, discounted at the market rate of interest being equal to the cost of the capital goods. Such an interpretation of the average cost curve means that the essential discounting element in the analysis of investment behavior is incorporated into the average cost curve. It follows that qualitative analysis of the investment behavior of business firms can be
is a measure of the risk that the borrower carries. We assume that for each such increase in risk there is a Costs LRMC LRMCr LRAC q1 Figure 6.9 0 LRACr0 Output 149 The survival of firms minimum gain which the entrepreneur will have to expect in order to take this risk, this minimum gain increasing with the risk. This minimum gain can be transformed into a positive return on the owners’ equity. Therefore, the planning long run average cost curve which allows for risk involves, for each