Are Hayek’s and Minsky’s explanations for economic downturns (Past as Prologue 22-3)
competing or complementary? If they are in some way complementary, does this imply that
Hayek and Minsky agree on how best to prevent or correct recession? Explain.
According to Friedrich Hayek, the explanation for economic downturns is due to the culmination
of the simultaneous and erroneous errors of entrepreneurs in the same direction that lead to
economic losses across the economy. Hayek suggests a plausible reason for these simultaneous
mistakes: excessively low interest rate set by the central bank wrongfully encourage businesses
to overinvest in capital goods. This premature economic “boom” in results in excess productive
capacity, making the economy susceptible to a “bust” when production slows.
According to Hyman Minsky, the explanation for economic downturns is due to financial
instability caused by “speculative bubbles” in business cycle fluctuations. These business cycle
fluctuations are caused by an opposing mix of borrowers. During prosperous times, capitalist
economies shift from a predominantly hedge financed economy to one in which there is a greater
population of speculative and Ponzi borrowers. This excess of speculative and Ponzi borrowers
results in an economy characterized by investors that are overburdened by debt and forced to sell
assets to repay loans, causing a drop in asset prices. This swift decline in asset price force more
Ponzi borrowers to withdraw their investments, generating a financial system lacking liquidity.
Thus, it can be stated that these explanations for economic downturn are not entirely competing,
but rather complementary. Both Hayek and Minsky proposed...