Entrepreneurship, knowledge and employment

Minsky and Tobin on investment decision and financial instability

Abdelkader Slifi, University of Paris Dauphine

In his review of James Tobin’s Asset Accumulation and Economic Activity, Hyman Minsky (1981) pointed some distinctive elements of Tobin’s theory of investment decision compared to his own view of the cause of financial instability. As pointed by Bateman, Hirai and Marcuzzo (2010), Minsky dismissed Tobin “as being a neoclassical rather than Keynesian at heart” and Tobin protested that Minsky accuses him of being “a misguided Keynesian embracing the Patinkin-Pigou real balance effect”. Although Crotty (1990) contrasts Minsky’s Keynesianism with Tobin’s, Dimand (2014) underlines the compatibility between their approaches. In this paper, we present a model of investment decision and put together this two views. We argue that Minsky’s view does not appear as a special case of Tobin’s view, but is defined by the independency of the price capital goods, linked with the valuation of assets stocks. In Tobin’s view, financial instability appears as a result of the assumption about the elasticity of expectations. Nevertheless, Tobin’s Nobel Lecture, that puts forward a stock-flow consistent approach. We finally study in which extent this change makes Tobin’s view compatible with Minsky’s.

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Keywords: Investment decision, uncertainty, finance, Keynesian macroeconomics, Tobin, Minsky

Paper file