Venture Capitalist Financing: Contemporary Foundations for Minsky’s "Wall Street" Perspective
Hyman Minsky's (1975, 1982) analysis of the predisposition of capitalistic economies like the United States to periods of hyperactivity and fragility in their financial markets is relatively straightforward. The point of departure is to note that while mainstream theory attributes macroeconomic fluctuations to exogenous disturbances that impact on decentralized markets, for Minsky instability is attributable to endogenous events of capitalist finance. Minsky's thinking drew heavily on John Maynard Keynes's probability theory (1973), G. L. S. Shackle's uncertainty (1955, 1972), and the logic of Irving Fisher's (1933) debt deflation hypothesis, in which excessive private debt and falling price levels were viewed as key factors in precipitating financial crises as the aftermath of great opportunities for business profits.1 Fisher was writing against the background of the energy revolution initiated by the internal combustion engine, which generated high profit opportunities in the early 1900s, encouraging confidence about new debt to finance capital acquisition in the transportation industries. Minsky established the principle that real debt levels do not become a problem for businesses unless the present value of a firm's cash flow becomes insufficient to meet debt obligations, as is the case if interest rates rise. "Financial fragility" arises from a need to acquire cash by selling capital assets when their value has fallen below their purchase prices, and/or below the costs of acquiring similar investments.