Does investment call the tune? Empirical evidence and endogenous theories of the business cycle
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).
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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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.
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.
25 citations
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.
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.
13 citations
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.
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.
6 citations
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.
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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TL;DR: In this paper, the theory of interest was restated and the output of capital goods and of consumption was analyzed in terms of uncertainty and fluctuations of investment, and demand and supply for output as a whole.
Abstract: I. Comments on the four discussions in the previous issue of points in the General Theory, 209. — II. Certain definite points on which the writer diverges from previous theories, 212. — The theory of interest restated, 215. — Uncertainties and fluctuations of investment, 217. — III. Demand and Supply for output as a whole, 219. — The output of capital goods and of consumption, 221.
5,476 citations
"Does investment call the tune? Empi..." refers background in this paper
...Keynes was explaining his theory this way “not because this is the only factor on which aggregate output depends, but because it is usual in a complex system to regard as the causa causans that factor which is most prone to sudden and wide fluctuation” (Keynes, 1937)....
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Book•
01 Jan 1954
TL;DR: The History of Economic Analysis as discussed by the authors provides a complete history of economic theory from Ancient Greece to the end of the second world war, including the major economists from Adam Smith to Maynard Keynes.
Abstract: At the time of his death in 1950, Joseph Schumpeter was working on his monumental History of Economic Analysis. Unprecedented in scope, the book was to provide a complete history of economic theory from Ancient Greece to the end of the second world war. A major contribution to the history of ideas as well as to economics, History of Economic Analysis rapidly gained a reputation as a unique and classic work.
As well being an economist, Schumpeter was a gifted mathematician, historian, philosopher and psychologist and this is reflected in the multi-disciplinary nature of his great endeavour. Topics addressed include the techniques of economic analysis, contemporaneous developments in other sciences and the sociology of economics. This inclusiveness extends to the periods and individuals who figure in the book. As well as dealing with all of the major economists from Adam Smith to Maynard Keynes, the book considers the economic writings of Plato and Aristotle, of the Medieval Scholastics and of the major European economists. Throughout, Schumpeter perceived economics as a human science and this is reflected in a volume which is lucid and insightful throughout.
4,107 citations
"Does investment call the tune? Empi..." refers background in this paper
...The years between 1870 and the start of World War I saw major developments in economics, where the “cycle” displaced “crises” from economists’ minds and crises theories were displaced by business-cycle theories (Besomi, 2005; Schumpeter, 1954:1123)....
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...Marx’s analysis of the business cycle has been considered an unwritten chapter and “no coherent picture of it has emerged, or is likely to emerge, that would command the approval of all Marxologists” (Schumpeter, 1954:747)....
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Posted Content•
1,403 citations
TL;DR: Using the Keynesian theory of effective demand, the authors demonstrates how particular models such as that of "cooperative capitalism" enunciated by the left Keynesian social democrats, the Marxian model of "profit squeeze" emphasizing distributive conflict, and even the conservative model relying on "supply side" stimulus fit in as particular variants of a more general theoretical scheme through a reconstruction of the familiar IS schedule.
Abstract: Using the Keynesian theory of effective demand, this paper demonstrates how particular models, such as that of "cooperative capitalism" enunciated by the left Keynesian social democrats, the Marxian model of "profit squeeze" emphasizing distributive conflict, and even the conservative model relying on "supply side" stimulus, fit in as particular variants of a more general theoretical scheme through a reconstruction of the familiar IS schedule. The argument is weaved around the theme of the relations between unemployment and real wage in the context of both a closed and an open economy to explain the common macroeconomic basis of contesting ideologies. Copyright 1990 by Oxford University Press.
1,118 citations
"Does investment call the tune? Empi..." refers background in this paper
...…also seem to hold underconsumptionist views, since they deemphasize the role of investment in business cycles by claiming that, with a “relatively weak response of investment to profitability (...), consumption necessarily assumes the dominant role in effective demand” (Bhaduri and Marglin, 1990)....
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...A different perspective is offered by those who from a variety of theoretical positions support the so-called profitsqueeze hypothesis (Boddy and Crotty, 1975; Boldrin and Horvath, 1995; Bhaduri and Marglin, 1990) in which high wages lead to recession through the demand side....
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