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Understanding Financial Instability: Minsky Versus the Austrians

Van den Hauwe, Ludwig (2014): Understanding Financial Instability: Minsky Versus the Austrians.

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Although Minsky’s interpretation of Keynes’s macroeconomics and essential message clashes with authoritative alternative interpretations, it has become increasingly influential in the years following the GFC and further research along the lines suggested by Minsky can be expected to be forthcoming in coming years. Some of the analogies and/or similarities of his theoretical analysis with the analysis provided by the Austrian School suggest a more than merely superficial affinity between both theoretical approaches and some scope for cross-fertilization between and even partial theoretical integration of both research traditions can be found that may be further evidenced by forthcoming work relating to business cycle theory and to the role of financial innovation and regulation. Nevertheless, both in terms of fundamental causality and in terms of policy conclusions and prescriptions, both approaches remain incompatible at a fundamental level and difficult if not impossible to reconcile. Much of the disagreement on policy issues between post-Keynesians and Austrians hinges on the answer to the underlying question of whether the actions and interventions of Big Players in mixed economies are stabilizing or destabilizing. Post-Keynesians believe they can and, if conducted appropriately, often will indeed be stabilizing; Austrians to the contrary believe that mostly they will tend to be destabilizing. Minsky’s policy conclusions manifest a lack of familiarity with the conclusions of the Austrian analysis of the problems of central planning by Big Players such as Big Bank and Big Government. Even if the two theoretical frameworks do not directly contradict each other since they are actually non-commensurable, the Austro-Wicksellian paradigm arguably provides superior insights that can complement and correct Minskyan analyses of the historical experience of the GFC and Great Recession.

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