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Hyman P. Minsky and the
Austrian School of Economics
A comparison of the financial
instability hypothesis and the
Austrian business cycle theory
1st presentation
Markus Haspinger
Advisors: Dr. Michael Landesmann, Mag. Bernhard Schütz
Introduction I
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Major Schools of Economics
Source: http://socialdemocracy21stcentury.blogspot.co.at/2011/01/overview-of-major-schools-of-economics.html
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Introduction II
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Post-Keynesian Economics
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Importance of (historical) time
Emphasizes risk/uncertainty, irrationality of economic
actors and inherent instability of financial sector
Favors fiscal policy
Austrian School of Economics
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Highlights the self-organizing power of markets
Methodological individualism, disdain for mathematical
modeling and econometrics
Rejects government intervention
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Motivation
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Two monetary overinvestment theories of ideologically
opposite schools of thought
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Financial Instability Hypothesis (Hyman P. Minsky)
Austrian Business Cycle Theory (Ludwig Mises, Friedrich Hayek)
Both (re)gained attention during the financial crisis of 2008
Source: Google Trends
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Financial Instability Hypothesis
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Theory about debt accumulation and credit-driven cycles
Stability is destabilizing: „The tendency to transform doing well
into a speculative investment boom is the basic instability in a
capitalist economy.” –Minsky (1977), p.13
Over prolonged periods of stability, investors take on more
and more risk until lending exceeds what borrowers can pay
off from their future cashflows
To meet repayment demands, over-indebted investors have to
sell even less-speculative positions
As a result, asset prices spiral downwards and a severe
demand for cash comes about
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Austrian Business Cycle Theory
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Focus on investment and interest rate
Two kinds of interest rates:
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Natural rate of interest (reflects return on investment)
Market rate of interest (reflects borrowing costs by banks)
Low interest rates encourage borrowing from banking system
An unsustainable credit-fueled investment boom comes about
Boom causes misallocation of capital resources through
widespread overinvestment
When credit creation cannot be sustained (market rate
increases or natural rate falls), boom turns into bust
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Research Questions I
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In which respects are the financial instability
hypothesis and the Austrian business cycle theory
similar? How do they differ?
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Emphasize role of banking and financial markets
Boom-bust cycle driven by credit market and expectations
Major differences especially in the understanding of the
role of government
…
Are there any common roots?
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Schumpeter
Wicksell – Keynes
…
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Research Questions II
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How much explanatory power have these
theories with regard to the financial crisis of
2008 (USA)?
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Investigating the FED‘s monetary policy
Development of money supply, credit and debt
Change of inflation and saving rates
Trends in capital good prices (housing) and stock prices
Changes in the structure of production
…
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Empirical Approach I
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Natural rate of interest
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Long-term rate: 10Y US government bond interest rate
Market rate of interest
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Effective Federal Funds rate
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Empirical Approach II
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Lengthening of production structure
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Empirical Approach III
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Prices of capital goods increase
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Structure
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Description and critical appraisal of both theories
and exploration of their intellectual roots
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Application on the financial crisis of 2008 (USA)
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Comparing them both theoretically and before the
background of the financial crisis of 2008
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Conclusion
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Basic literature
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Hayek, Friedrich A. (1976), Geldtheorie und Konjunkturtheorie, Wolfgang
Neugebauer: Salzburg.
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Minsky, Hyman P. (1977), The Financial Instability Hypothesis: an
Interpretation of Keynes and Alternative to “Standard” Theory, Nebraska
Journal of Economics and Business, Vol. 16, No 1, pp. 5-16.
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Minsky, Hyman P. (1992), The Financial Instability Hypothesis, The Jerome
Levy Economics Institute of Bard College, Working Paper No. 74.
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Mises, Ludwig (1924), Theorie des Geldes und der Umlaufsmittel, Duncker &
Humblot: München.
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