Thursday, March 16, 2017

Andrew Lainton — Getting Sober on Wicksell’s Wine Lake – The Financial Instability Hypothesis and the Pool of Funding

A very simple proposition.
The financial instability hypothesis as set out by Minsky and elaborated by Kindelberger, Keen and others is by far the best economic framework to explain business cycles, and especially the major instabilities that come about in ‘balance sheet recessions’ (Koo) and debt deflationary spirals (Fisher/Hoyt).
However the hypothesis is purely monetary. It depends on Ponzi investors speculating on assets beyond their fundamental value.
This is unsatisfactory as it leaves unexplained the ‘fundamental value’ of goods and assets, and so is a partial rather than a general theory and so not yet up to the wholesale replacement of lame-stream DGSE/NK models.
Let us focus on one moment a potential ‘tipping point’ at the top of the business cycle.
Consider one flawed theory of what causes that tipping, very wrong but in a very interesting way.
That being the ‘subsistence fund/pool of funding’ explanation deriving from classical economics (the Wages Fund) and developed by Bohm-Bawerk, Wicksell and Strigl. This became one strand in Austrian business cycle theory but by the late 30s had become completely taken over by the even more flawed monetary Austrian explanation whereby central banks create the business cycle...

3 comments:

Andrew Anderson said...

This became one strand in Austrian business cycle theory but by the late 30s had become completely taken over by the even more flawed monetary Austrian explanation whereby central banks create the business cycle... Tom Hickey

Then how were business cycles created before 1913 in the US?

The more likely reason is the failure of monetary sovereigns to provide inherently risk-free accounting and transaction services in their fiat to/for all citizens - thus leaving citizens to the tender mercies of private banks and their mere private liabilities for fiat or else to be limited to unsafe, inconvenient physical fiat.

The consequence is that the economy runs largely on bank credit which is lent into existence (boom) and which ceases to exist when repaid* (bust).

*Not to mention the problem of where the interest is to come from except as more private debt. Hence the need for deficit spending by the monetary sovereign - to provide that interest.

Tom Hickey said...

Clarification: That quote is from Andrew Lainton, the author of the post that I linked to, not me. That is what the convention of indenting and italics indicates on this blog.

Andrew Anderson said...

My apologies, Tom, for my mis-attribution.