Background and Tools for Understanding and Dealing with Recurrent Financial Crises
The events since 1970 make it clear that current-day mainstream macroeconomics does not provide an adequate framework for dealing with the financial crises that are increasingly part and parcel of free-market economies. As noted by Skidelsky (as well as others), the financial collapse of 2007–2009 reflects in great part “the intellectual failure of mainstream economics.” Neither of what are now the two standard textbook macroeconomic frameworks, the New Keynesian and New Classical Models, even admit of the possibility for financial crises to emerge, let alone offer provision for their alleviation. The problem is that neither framework allows for money to play its truly unique real-world role, namely, that of a risk-free store of value in the face of uncertainty. Missing, as well, is any notion in either model of a theory of production in which investment is determined not only by present-value considerations, but also by the availability and terms of finance. The purpose of this chapter is to develop a framework, based in substantial part on the long overlooked Chaps. 12 and 17 of the General Theory (and the equally overlooked work of the late Hyman Minsky), in which money and finance, on the contrary, are center-stage in determining the level and pace of economic activity. Our point of departure will be a revisit of uncertainty and liquidity preference as described and discussed by Keynes in Chap. 17 of the General Theory and in his 1937 rebuttal of Viner in the Quarterly Journal of Economics.
KeywordsCash Flow Mutual Fund Commercial Bank Hedge Fund Asset Market
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