Development and Underdevelopment in the History of Economic Thought

The Holistic Approach : Institutions, Investment and Finance and the Unemployment in the Financial Instability Hypothesis

Cihanli Barkin, The Levy Institute at Bard College

The framework of Financial Instability Hypothesis consist of a holistic approach to the changes within the capitalist economy of the United States and the evolution of the financial structure of the economy. Hyman Minsky always emphasized the importance of finance in the capitalist system and described the finance as a constantly-evolving mechanism that creates inherent stability for the economy. Minsky also proposed policy solutions to mitigate the instability caused by the financial innovation and evolution. He considered the institutions within the capitalist system as the most fundamental elements in regards to providing stability to the innately unstable system. However, what is the source of the inherent instability in the capitalist market economy? What are the roles and responsibilities of the institutions in a market economy? What is the relationship between the evolutionary process of the finance and the evolutionary process of institutions in a market economy? This paper will attempt to address these research questions by analyzing and evaluating the Financial Instability Hypothesis in regards to the instability and the institutions. This paper will also address the policy solutions proposed by Minsky in regards to the restructuring and the reform of the public and private institutions within the system. In light of Minsky’s proposals, the goal of this paper is to argue that the Financial Instability Hypothesis is a holistic approach, which include the role of and changes in the institutions of the system together with the theory of investment, finance and unemployment, to the analysis of the capitalist economy of the United States. The reformation and the restructuring of the institutions need to take into the role of and modifications in institutions and the theory of investment, finance and the unemployment into account for the purpose of the attainment and the maintenance of full employment so as to mitigate the instability of the system.

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Keywords: Minsky, Financial Instability Hypothesis, Institutions, Capitalism, Finance

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