The Financial Instability Hypothesis posits that capitalist economies inherently generate endogenous financial instability due to a structural reversal where subjective preferences determine money supply while objective profitability determines demand for funds, leading inevitably from stability to fragility over time. Building upon Irving Fisher's disequilibrium debt-deflation theory and John Kenneth Galbraith's critique of neoclassical wage-cut policies, the hypothesis rejects equilibrium assumptions in favor of analyzing how accumulated leverage triggers cascading defaults when nominal interest rates fail to adjust sufficiently during deflationary episodes to offset rising real debt burdens. This theoretical framework belongs to monetary economics and macro-financial theory, providing a dynamic mechanism for depression generation that supersedes static supply-demand models by emphasizing the critical role of credit cycles in determining aggregate economic states.
The Financial Instability Hypothesis posits that capitalist economies inherently generate endogenous financial instability due to a structural reversal where subjective preferences determine money su…