A simplified stock-flow consistent dynamic model of the systemic financial fragility in the 'New Capitalism'

In the last few years, many financial analysts and heterodox economists (but even some ‘dissenters’ among orthodox economists) have referred to the contribution of Hyman P. Minsky as fundamental reading for understanding the current crisis. However, it is well-known that the traditional formulation of Minsky’s ‘financial instability hypothesis’ is affected by serious internal logical problems. Furthermore, Minsky’s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to address these theoretical and empirical issues, this paper, first, introduces the reader to the ‘mechanics’ of the financial instability theory, according to the formulation of the traditional Minskian literature (section 2). Second, it shows that Minsky’s theory, in this formulation, cannot be regarded as a general theory of the business cycle (section 3). Third, the paper attempts to supply a consistent, although simplified, updating of Minsky’s theory by inter-breeding it with inputs coming from the ‘New Cambridge’ theories and the current ‘formal Minskian literature’. The aim of this is to analyze the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the non-financial business sector (sections 4-7). Some concluding remarks are provided in the last part of the paper (section 8).