nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2008‒01‒12
four papers chosen by
Karl Petrick
University of the West Indies

  1. "Minsky’s Cushions of Safety Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market" By Jan Kregel
  2. Political Economy Origins of Financial Markets in Europe and Asia By Svetlana Andrianova; Panicos Demetriades; Chenggang Xu
  3. Keynes and the cotton industry: a reappraisal By Higgins, David; Toms, Steven; Filatotchev, Igor
  4. A New Unified Theory of Sociobehavioral Forces By Guillermina Jasso

  1. By: Jan Kregel
    Abstract: The current crisis in the financial systems of developed countries is often explained in terms of Hyman P. Minsky’s financial fragility hypothesis. Minsky was an economist at the Levy Institute and the foremost expert on credit crunches. His hypothesis was that the structure of a capitalist economy becomes more fragile over a period of prosperity; that is, endogenous processes breed financial and economic instability. In this brief, Senior Scholar Jan Kregel explains how the current crisis differs from the traditional Minsky hypothesis. He reviews Minsky’s concept of a margin or “cushion” of safety, financial fragility, and debt deflation. He concludes that, while the current subprime mortgage crisis involves both Ponzi financing and declining margins of safety, these conditions are not the result of endogenous processes. Rather, the crisis is the result of insufficient margins of safety based on how credit worthiness is assessed (the undervaluation and mispricing of risk) in the new “originate and distribute” financial system.
    Date: 2008–01
  2. By: Svetlana Andrianova; Panicos Demetriades; Chenggang Xu
    Abstract: This paper contributes to the finance-growth literature by examining the political economy origins of some of the most successful financial markets in Europe and Asia. It provides historical evidence from London, Amsterdam and Hong Kong that highlights the essential role played by the government sector in kick-starting financial development. We show that the emergence of financial systems did not occur through laissez-faire approaches and that secure property rights alone were not sufficient for financial development. In the cases of London and Amsterdam, governments created large trade monopolies which were responsible for all the major financial innovations of the time. In the case of Hong Kong, where the financial developmentmodel was bank-based, large banking monopolies with close links to the state were created. We argue that the three examples are not special cases and the role of government in the early stages of financial development has been widespread world-wide.
    Keywords: Monopoly; politics; institutions; finance
    JEL: G18 N20 O16
    Date: 2008–01
  3. By: Higgins, David; Toms, Steven; Filatotchev, Igor
    Abstract: The paper reinterprets Keynes’s analysis of the crisis in the Lancashire cotton industry in the 1920s. It presents empirical evidence showing that syndicates of local shareholders, but not the banks, were an important brake on firms exiting, at a time when exit barriers were otherwise unproblematic in this competitive industry. Moreover, syndicates milked firms of any profits through dividends, thereby limiting reinvestment and re-equipment possibilities. The case shows that where laissez-faire fails in response to a crisis, the associated response may need to assess both ownership structure and its relationship to competitive industry structure.
    Date: 2007
  4. By: Guillermina Jasso (New York University and IZA)
    Abstract: This paper proposes a new unified theory of sociobehavioral forces. The goal of the new theory is to integrate theories describing five sociobehavioral processes - comparison (including justice and self-esteem), status, power, identity, and happiness - bringing under a single theoretical umbrella diverse mechanisms together with their effects across disparate domains and for both individuals and societies. The integration is made possible by the remarkable similarity of the internal core of the theories, a core comprised of three elements: personal quantitative characteristics, personal qualitative characteristics, and primordial sociobehavioral outcomes. The unified theory posits the operation of three sociobehavioral forces - comparison, status, and power - each associated with a distinctive mechanism, in particular, a distinctive rate of change of the outcome with respect to the quantitative characteristic. Each combination of elements - e.g., status-wealth-city - generates a distinctive identity and a distinctive magnitude of happiness. Thus, the theory enables systematic and parsimonious analysis of both individuals and societies via the distinctive configurations of elements. To illustrate the unified theory, we analyze the three-way contest between loyalty to self, subgroup, and group in a two-subgroup society, deriving many new testable predictions, for example, that the bottom subgroup will have difficulty mobilizing itself, that the ablest individuals in a society will not make good leaders as their first loyalty is to self, and that the proportions loyal to self, subgroup, and group differ sharply, depending on the sociobehavioral forces, valued goods, and subgroup size. Finally, the theory provides a foundation for making explicit connections among the most important themes and insights of contemporary social science, including inequality, oppositional culture, group boundary permeability, social inclusion and exclusion, segregation and integration, social distance and polarization, and bonding and bridging.
    Keywords: justice, comparison, status, power, identity, happiness, inequality, personal quantitative characteristics, personal qualitative characteristics, individualism and collectivism, lognormal distribution, Pareto distribution, power-function distribution, rectangular distribution, exponential distribution, normal distribution
    JEL: C02 C16 D1 D31 D6 I3
    Date: 2007–12

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