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Friday, November 24, 2017
 welcome page » economy  » work, money, capital, production & prices  » money & financial markets 

The Austrian-post-Keynesian synthesis

Alternative monetary institutional policies of H. P. Minsky and F. A. Hayek

"Hochschulschriften"  · volume 151

366 pages ·  44.80 EUR (incl. VAT and Free shipping)
ISBN 978-3-7316-1202-5 (April 2016 )

 
 

This book is inspired by the financial crisis of 2008 and concentrates on two alternative theories, which both assume an inherent financial instability in a capitalistic economy. On the one hand there is the financial instability hypothesis by Hyman P. Minsky and on the other hand there is the business cycle theory by Friedrich A. Hayek. The reason to choose these two theories is a based on the insight that the financial crisis was caused by two monetary phenomena, which are on the one hand the liquidity preference and on the other hand the misallocation of resources through a disturbance in relative prices.

The consideration of both theories is based on their respective theoretical foundations in the history of economic thought. Regarding Minsky these foundations are to be seen in the works of John Maynard Keynes in reference to the role of expectations in combination with liquidity, of Joseph Schumpeter in its importance for the role of innovation and of Irving Fisher's debt deflation. Minsky's theory is seen as result of these foundations in the history of economic thought in conjunction with the analysis of financial market realities. Regarding the foundations in the history of economic thought the chapter on Hayek's theory includes the capital theory of Böhm-Bawerk, the natural rate of interest by Knut Wicksell and the first version of an Austrian business cycle theory by Ludwig von Mises. The business cycle theory of Hayek is described in its development over time, which emphasises the fact that it is a theory that has emancipated itself profoundly from the older Mises version. Comparing the two theories of Minsky and Hayek shows that firstly as well as with Minsky and Hayek monopolistic competition plays a role, that secondly it very much depends on the exhaustion of financial means or respectively resources whether the interest rate is a definite equilibrium rate of interest and thirdly that uncertainty is of importance in both theories regarding problems of convergence in expectations. Whereas the strength of Minsky is the insight into the workings of financial markets and thereby the importance of liquidity preference, the strength of Hayek rests with the understanding of the misallocation of resources. It is shown that the improvements in Hayek's theory which were induced through post-Keynesian critique are the ones which render an Austrian-post-Keynesian synthesis to be possible. The Austrian-post-Keynesian synthesis thereby uses the strengths of the two respective theories to compensate their respective weaknesses. This synthesis therefore incorporates expectations through the expected internal rate of interest as well as liquidity preference from the Minsky world. Furthermore it adopts from Minsky's theory the crucial element of innovation. Hayek's world on the other hand contributes the fact that capital is heterogeneous as well as the roundaboutness of production and with it the importance of an inter-temporal scarcity of resources.

In this context it is shown that not every credit money creation, which induces investment that exceeds prior saving, may lead automatically to a crisis, but that this very much depends upon the force of innovation that this investment is able to unleash. It therefore depends on the quality of the investment to instantly increase the productivity of an economy by amending its production function. For choosing an adequate financial architecture this would mean that credit money creation should not be condemned completely as also its force of innovation may thereby be discarded with it. However, excesses should be prevented through currency competition in the sense of a fractional reserve free-banking system. In order to ensure a stable payment system this would, however, also require a central bank, because a fractional reserve free-banking system on its own cannot be entirely free from the risk of causing a liquidity crisis.

Yet the possibility of establishing such a free-banking system is seen as relatively improbable due to political reasons. The pro-active and macro-prudential supervisory body situated with the central bank, as envisioned by Minsky, may therefore, at least currently, be the only feasible second best solution. Even though this will, unlike a free-market approach, always be encroached upon by moral hazard problems as well as undue resource allocation influence exercised by the central bank. To counter at least some of these deficiencies the compromise solution could be a reformed Taylor rule by which monetary policy is to be guided, where the natural rate of interest is actively calculated and which thereby ensures that during the upturn of the business cycle a more restrictive monetary policy is put in place in order to reduce the magnitude of the excesses.


the author
Dr. Frank Felgendreher
Frank Felgendreher Diplom-Handelslehrer, wurde im Jahr 2015 am Fachbereich Volkswirtschaftslehre der Universität Hamburg bei Prof. Dr. Elisabeth Allgoewer als Erstprüferin und Prof. Dr. Harald Hagemann (Universität Hohenheim) als Zweitprüfer zum Dr. rer. pol. promoviert. Im Hochschulbereich ist er seit mehreren Jahren regelmäßig als Lehrbeauftragter am Fachbereich Volkswirtschaftslehre der Universität Hamburg sowie seit kürzerem auch an der Hamburg School of Business Administration (HSBA) tätig.
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