Does investment call the tune? Empirical evidence and endogenous theories of the business cycle

doi:10.1108/S0161-7230(2013)0000028009

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Does investment call the tune? Empirical evidence and endogenous theories of the business cycle

Book Chapter•DOI•

Does investment call the tune? Empirical evidence and endogenous theories of the business cycle

José A. Tapia Granados¹•Institutions (1)

University of Michigan¹

01 Dec 2012-Vol. 28, pp 229-259

TL;DR: The role of investment in the business cycle can be classified into two main groups, exogenous and endogenous, according to the way they explain economic fluctuations as discussed by the authors, either as responses of the economy to factors that are external (exogenous shocks) or as upturns and downturns of the economic system internally generated (by endogenous factors).

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Abstract: Theories of the business cycle can be classified into two main groups, exogenous and endogenous, according to the way they explain economic fluctuations – either as responses of the economy to factors that are external (exogenous shocks) or as upturns and downturns of the economic system internally generated (by endogenous factors). In endogenous theories, investment is generally a key variable to explain the dynamic status of the economy. This essay examines the role of investment in endogenous theories. Two contrasting views on how changes in investment and profitability push the economy towards expansion or contraction are represented by the insights of Kalecki, Keynes, Matthews and Minsky versus those of Marx and Mitchell. Hyman Minsky claimed that investment ‘calls the tune’ to indicate that investment is the only variable not determined by other variables, so that future profits, investment and the dynamic status of the economy are determined by current investment and investment in the near past. However, this hypothesis does not appear to be supported by available empirical data for 251 quarters of the US economy. Statistical evidence rather supports the hypothesis of causality in the direction of profits determining investment and, in this way, leading the economy towards boom or bust.

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Journal Article•DOI•

The long roots of the present crisis: keynesians, austerians, and marx's law

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Guglielmo Carchedi, Michael Roberts

01 Mar 2013-World Review of Political Economy

TL;DR: The authors argue that it was not competitive devaluation that restored growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital, and that the same holds for the policies of "austerity", which are designed to reduce debt and raise profitability.

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Abstract: The ultimate cause of crises in capitalism is lack of profitability. The Keynesian and Austerians (the supporters of austerity measures), deny this. So their solutions to crises do not work. Keynesian state-induced stimulus programs (redistributive, monetary, and fiscal) cannot overcome the underlying tendency for profitability to fall. The same holds for the policies of "austerity," which are designed to reduce debt and raise profitability. These conclusions are particularly relevant for the weaker Eurozone economies in the midst of the euro crisis. In a case study of Argentina, we argue that it was not competitive devaluation that restored growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital.

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25 citations

Progressive structural reforms. Proposals for European reforms to reduce inequalities and promote jobs, growth and social investment

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C. Reuter, R. Bazillier, Giovanni Cozzi, Amandine Crespy, F. De Ville, A. Wigger, M. Claassens, Bregt Saenen, E.M. Schneider - Show less +5 more

01 Jan 2015

TL;DR: SOLIDAR as mentioned in this paper is a European network of membership based Civil Society Organisations who gather several millions of citizens throughout Europe and worldwide, and voices the values of its member or ganisations to the EU and international institutions across the three main policy sectors; social affairs, lifelong learning and international cooperation.

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Abstract: This publication has been produced with the fi nancial support of the European Union. The information contained in this publication does not necessarily refl ect the position or opinion of the European Commission. SOLIDAR is a European network of membership based Civil Society Organisations who gather several millions of citizens throughout Europe and worldwide. SOLIDAR voices the values of its member or ganisations to the EU and international institutions across the three main policy sectors; social affairs, lifelong learning and international cooperation.

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13 citations

Book Chapter•DOI•

Neoliberalization through Housing Finance, the Displacement of Risk, and Canadian Housing Policy: Challenging Minsky’s Financial Instability Hypothesis

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Alan Walks, Dylan Simone

19 Oct 2016

TL;DR: In this article, the authors examine and challenge the Financial Instability Hypothesis (FIH) developed by Hyman Minsky and his adherents, and propose an alternate perspective on financial instability and risk, in light of the history of risk management within Canada's housing finance sector.

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Abstract: The precise relationships between neoliberalization, financialization, and rising risk are still being debated in the literature. This paper examines, and challenges, the Financial Instability Hypothesis (FIH) developed by Hyman Minsky and his adherents. In this perspective, the level of financial risk builds over time as participants orient their behavior in relation to assessments of past levels of risk performance, leading them to overly optimistic valuation estimates and increasingly risky behavior with each subsequent cycle. However, there are problems with this approach, and many questions remain, including how participants modify their exposure to risk over time, how risk is scaled, and who benefits from changes in exposure to risk. This paper examines such questions and proposes an alternate perspective on financial instability and risk, in light of the history of risk management within Canada’s housing finance sector. The rise of financialization in Canada has been accompanied by shifts in the sectoral and scalar locus of risk within the housing sector, from the federal state, to lower levels of government, third-sector organizations, and finally, private households. In each case, the transfer of risk has occurred as participants in each stage sought to reduce their own risk exposure in light of realistic and even pessimistic (not optimistic) expectations deriving from past exposure, contradicting basic assumptions of Minsky’s FIH. This is the process that has driven the neoliberalization of housing finance in Canada, characterized by the socialization of lender risk while households increasingly take on the financial and social risks relating to shelter.

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6 citations

Journal Article•DOI•

Marx after Minsky: Capital Surplus and the Current Crisis

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Jim Kincaid

27 Sep 2016-Historical Materialism

TL;DR: Minsky's theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008 as mentioned in this paper, and the combination of instability and stagnation which results from an excess supply of loanable capital.

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Abstract: Minsky’s theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008. The advanced economies currently have high realised profits in the productive sector and lagging rates of investment. Shareholder pressures encourage corporate strategies which focus on stock-market ratings and MA low interest rates; recurrent boom and bust in asset markets; the fuelling of huge increases in household and government debt; and the combination of instability and stagnation which results from an excess supply of loanable capital.

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3 citations

Posted Content•

Social Scientist and Social Counselor

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Alvin H. Hansen

01 Jan 1952-Research Papers in Economics

2 citations

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Journal Article•DOI•

Collected Works of Michal Kalecki, Volume II: Capitalism: Economic Dynamics.

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Geoff Harcourt, Jerxy Oisatynski

01 Sep 1992-The Economic Journal

19 citations

Book Chapter•DOI•

Profits and Investment: A Kaleckian Approach

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A. Asimakopulos¹•Institutions (1)

McGill University¹

01 Jan 1977

TL;DR: Kalecki's theories of effective demand and distribution are macroeconomic, but their development is very much affected by his views of the microeconomic arrangements in the economy as discussed by the authors, where changes in prices are characterised as being "cost-determined" where "cost" includes some provision for profits that depends on the degree of imperfection of competition or degree of monopoly.

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Abstract: Kalecki’s theories of effective demand and distribution are macroeconomic, but their development is very much affected by his views of the microeconomic arrangements in the economy. The economy to which these theories are applicable is a capitalist economy. A relatively small group of individuals (the ‘capitalists’) own the means of production, and they derive income from this ownership and from organising production. A much larger group of individuals (the ‘workers’) must sell their labour power to obtain an income. Kalecki‘s analysis of industrial production is based on the assumption that markets for manufactured goods are imperfectly competitive. In these markets changes in prices are characterised as being ‘cost-determined’, where ‘cost’ includes some provision for profits that depends on the degree of imperfection of competition or ‘degree of monopoly’. Markets for manufactured goods are contrasted with those for primary products, which are generally competitive, and where changes in prices are ‘demand determined’. This difference in microeconomic arrangements is an integral part of Kalecki’s approach to the development of capitalist economies.

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18 citations

Journal Article•DOI•

Business Cycles--Endogenous or Stochastic?

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Irma Adelman

01 Dec 1960-The Economic Journal

16 citations

"Does investment call the tune? Empi..." refers background in this paper

...In the words of Ira Adelman (1960), she and her husband had not "proved that business cycles are stochastic in origin" though they had presented evidence creating "a strong presumption in favour of this hypothesis" which would be "especially significant in view of the absence (to date) of a…...
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...In the words of Ira Adelman (1960), she and her husband had not "proved that business cycles are stochastic in origin" though they had presented evidence creating "a strong presumption in favour of this hypothesis" which would be "especially significant in view of the absence (to date) of a completely satisfactory endogenous theory of business cycles."...
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...Following Slutzky's idea, Ragnar Frisch (1933) was the first in proposing that the fluctuations of the level of activity in modern industrial economies may be due to the effects of erratic, uncorrelated shocks upon an otherwise interrelated system (Adelman, 1960)....
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...In the words of Ira Adelman (1960), she and her husband had not "proved that business cycles are stochastic in origin" though they had presented evidence creating "a strong presumption in favour of this hypothesis" which would be "especially significant in view of the absence (to date) of a completely satisfactory endogenous theory of business cycles....
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...In the words of Ira Adelman (1960), she and her husband had not "proved that business cycles are stochastic in origin" though they had presented evidence creating "a strong presumption in favour of this hypothesis" which would be "especially significant in view of the absence (to date) of a completely satisfactory endogenous theory of business cycles." The view that business cycles are exogenously determined by random shocks strongly influenced economics in the 1960s and 1970s. Indeed, disputes between Keynesian and monetarist authors during the period of decline of Keynesian economics can be seen as arguments about which parts of the propagation mechanism are either actually working, or the most important for the dynamics of the economy. These disputes were later superseded by rational expectations and assumptions about the intertemporal substitution of leisure for labor. We arrive to the views of late 20th century macroeconomists supporting the realbusiness-cycle (RBC) theory who conceptualize business cycles as the consequence of a self-equilibrating economy responding to random events affecting aggregate supply. They often mention, in the tradition of Schumpeter and Hayek, technological innovations or “shocks” as causes of economic fluctuations. Other exogenous factors such as demographic changes, political influences, or variations in relative prices have been also proposed. This type of “supply shocks” is often referred to without specifying its nature, though for instance James Hamilton (1988, 1994) proposed changes in oil prices as a key determinant of recessions. Nowadays, however, economists supporting a theory of business cycles determined by exogenous factors—Austrians, monetarists, RBC theorists— are probably a minority compared to economists who view the fluctuations of the market economy as mainly determined by endogenous factors—Samuelsonians, Keynesians, new-Keynesians, postKeynesians, institutionalists and socialist economists.2 At any rate, as Thomas E. Hall put it twenty years ago, it is important to keep in mind the distinction between endogenous and exogenous theories, “because they imply a very different behavior for an economy.” Those supporting exogenous factors as causes of the business cycle tend “to view economies as being inherently stable but shocked by outside forces” while endogenous theorists “generally consider economies as being inherently unstable and subject to selfgenerating cycles. This distinction in macroeconomics is very old and exists today between the monetarists (primarily exogenous) and Keynesians (primarily endogenous)” (Hall, 1990:10). Wages are a key variable explaining recessions for many economists. However, authors agreeing with this claim adhere to quite different schools of thought and have proposed diverse, indeed opposite mechanisms to explain why changes in wages would cause economic downturns. Both too high or too low wages have been viewed as causes of recession. In the view of Arthur Pigou (1927) presented recently for example by Lee Ohaniann (2008), a qualified representative of the RBC school, it is too high wages that cause too high costs for business, with the consequent decay in economic activity leading to a downturn....
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