Introduction : ‘ Things fall apart , the centre cannot hold ’

Hyman P. Minsky's economic writings are centred around three interrelated topics: 1. An interpretation of Keynes, stressing the most innovative and revolutionary features of his monetary thought: the essential role of financial markets, the non-neutrality of money, the systematic uncertainty and bounded rationality surrounding decision-making, the cyclical nature of the capitalist process due to the fluctuation in private investment. Minsky extends Keynes, putting together an investment theory of the business cycle with a financial theory of investment. The 'two-price' model and Minsky's reference to Kalecki's view about the determination of profits belong here. 2. The financial instability hypothesis, according to which, after a period of 'tranquil' growth and 'robust' finance, firms' and banks' liability structures spontaneously shift towards fragility. The economic system is prone to financial crises, which actually break out as a consequence of the normal functioning of a capitalist economy. Minsky's view is that each state of the economy is transitory: internal financial developments compel a transition to the next state. Capitalist cyclical evolution – from expansion to boom, financial collapse and the risk of debt deflation, possibly leading to great depression – is, once again, the necessary outcome of the monetary nature of the capitalist process at the heart of Keynes's approach. What is lacking in the General Theory is a clear understanding of why stability is destabilizing: for Minsky, capitalist evolution is endogenous, and is driven by the behaviour of financial variables. This is probably the most original side of Minsky's legacy. 3. The policy implication is that discretionary intervention from the government and the central bank can mitigate capitalist instability, creating ceilings and floors constraining the dynamic behaviour of the system. Government budget deficits and the central bank, both as lender of last resort and as regulator of financial practices, help monitor the develop-2 Financial fragility and investment in the capitalist economy ment of liability structures in the economy, and may stop a downward trend in money profits, which are the key variable for debt validation and for capital asset prices. Economic policy can do better than simply make systemic fragility less pronounced. A change in the nature of big government may encourage resource creation and the expansion of output, and may attain the goal of full employment in a system of decentralized decisions and in a non-inflationary environment. Minsky's answer to the flaws marring both the capitalism of the 1920s and 1930s, which ended …