Understanding Financial Instability: Minsky Versus the Austrians

Ludwig Van Den Hauwe

MPRA Paper from University Library of Munich, Germany

Abstract: In the wake of the Financial Crisis and the subsequent Great Recession several commentators have suggested that the analysis of financial instability provided by various strands of heterodox economics got it "right" and that mainstream economics got it "wrong". In this paper two variants of heterodox views about financial instability are compared critically: the views of the late Hyman P. Minsky on the one hand, and the theses of the Austrian School on the other. Indeed there seem to exist a number of prima facie similarities and analogies between Minsky’s approach to the study of financial instability and that of the Austrian School. In particular attention can be drawn to such elements as, among others, the following: (a) both theories are theories of the upper turning point; (b) both theories give due attention to institutional factors, in particular the role of banks and financial institutions; (c) both approaches reject mainstream static equilibrium theorizing; (d) both approaches adhere to a monetary theory of the business cycle and explain, in their respective ways, the non-neutrality and the endogeneity of money; (e) in both approaches the role of Knightian uncertainty is appreciated; (f) in both approaches an attempt is made to provide the theory of the business cycle with adequate micro-foundations as well as with price-theoretic foundations. At the same time it can be seen that these similarities and analogies are quite superficial. The most important differences between both approaches relate to (a) the fundamental causal analysis of business cycles and the role of the interest-rate mechanism; (b) the identification of the relevant institutional context; (b) the role of capital and capital theory; (c) the quite different appreciation of the role of liquidity and liquidity preference; (d) the link between uncertainty and institutional context and (e) the quite different remedies that are proposed by the two approaches. It is concluded that the apparent similarities between both approaches are superficial, while the divergences are profound and fundamental.

Keywords: Financial Instability; Business Cycle; Minsky; Austrian School (search for similar items in EconPapers)
JEL-codes: B50 B53 B59 E3 E30 E32 (search for similar items in EconPapers)
Date: 2014-12-24
New Economics Papers: this item is included in nep-his, nep-hme, nep-hpe, nep-mac, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Understanding Financial Instability: Minsky Versus the Austrians (2016)
Working Paper: Understanding Financial Instability: Minsky Versus the Austrians (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:61838

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