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  1. Ed Matluck says:

    Minsky’s work shows the failure of economics to deal with what is relevant. All macro economic models are endogenous systems which are stable and return to EQUILIBRIUM when shocked from the outside. For example, a recession created by an inverting yield curve resulting from Fed. policy. If the models were not stable the profession wouldn’t accept them based on the idea that they don’t reflect reality.

    In fact the truth is just the opposite. When everything is stable all the assumptions of conventional economics appear to hold because nothing is going wrong. during these times of stability we don’t need these models (they are useful for analyzing tax policy and budgets but only when we assume the economy grows smoothly at some EQUILIBRIUM rate).

    what Minsky argued was that human behavior responds to stability by increasing the preference for risk. This leads to over leveraging and this makes the economy unstable. The instability is not VIABLE until the economy topples and until then POLITICIANS can ignore warnings because there is no actual proof that something is about to happen.

    Tradiditional economics assumes that man is reational but all that means to them is that one will prefer more of something they like rather than less and that the higher the price the less they will purchase. I can be perfectly rational for a human being to add more risk if recent evidence suggests that the consequences are minimal.

    another economic theory based on ideas outside of conventional economics was proposed by Knight and Schumpeter, They felt that the prospect of profit would lead economic actors to innovate, invest and create growth. they were probably correct but no economist has built a model that uses these ideas other than the standard idea that all economic entities act so as to maximize profit.

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