Minsky, Keynes and the Structural Instability of a Sophisticated Monetary Economy

This paper argues that both Keynes and Minsky held a concept of financial instability which may be properly understood only in terms of structural instability, and not –as is usual-in terms of the traditional concept of economic instability, i.e. dynamic instability. Keynes is quite explicit in denying that the dynamic instability of a monetary economy is a particularly serious problem; on the contrary, he claims that the crucial troubles are induced by discontinuous and unpredictable shifts of the two crucial financial functions of his heuristic model (the liquidity preference and the marginal efficiency of capital curves) which cannot be satisfactorily interpreted in terms of dynamic instability but only in terms of structural instability. Analogously the Minsky's crucial concept of financial fragility which plays a crucial role in his theory of economic cycles has to be interpreted in terms of structural instability. The endogenous shifts of the degree of financial fragility which explain many basic features of economic cycles are best interpreted as fluctuations in the degree of structural instability of a sophisticated monetary economy. The shift of emphasis from the usual concept of dynamic instability to the innovative one of structural instability has far-reaching implications for economic theory and policy which are briefly analysed in the paper.