The Financial Instability Hypothesis, by Hyman P. Minsky, is a theory that explains how capitalist economies can experience financial instability. It has both empirical and theoretical aspects. Empirically, it is evident that capitalist economies sometimes experience inflations and debt deflations that can spiral out of control. Theoretically, it is an interpretation of Keynes's "General Theory," placing it in historical context. The hypothesis argues that the economy is not always in equilibrium, as implied by classical economists like Smith and Walras. The hypothesis is based on the idea that the economy is a capitalist system with expensive capital assets and a complex financial system. The economic problem is the "capital development of the economy," not the allocation of given resources. The hypothesis focuses on an accumulating capitalist economy that moves through real time. The financial instability hypothesis incorporates the Kalecki-Levy view of profits, where aggregate demand determines profits. It also emphasizes the role of expectations of profits in determining investment and financial behavior. The hypothesis suggests that the level of profits is the key determinant of system behavior. The hypothesis identifies three distinct income-debt relations for economic units: hedge, speculative, and Ponzi finance. Hedge finance units can fulfill their payment obligations through cash flows, while speculative units can meet their obligations on income account but not through income cash flows. Ponzi units cannot fulfill their obligations through cash flows and must sell assets or borrow. The financial instability hypothesis argues that the economy can be stable or unstable depending on the financing regimes. Over prolonged periods of prosperity, the economy tends to move from a structure dominated by hedge finance to one with more speculative and Ponzi finance. This can lead to financial instability, as seen in historical crises. The hypothesis suggests that business cycles are not caused by exogenous shocks but by internal dynamics and regulatory interventions.The Financial Instability Hypothesis, by Hyman P. Minsky, is a theory that explains how capitalist economies can experience financial instability. It has both empirical and theoretical aspects. Empirically, it is evident that capitalist economies sometimes experience inflations and debt deflations that can spiral out of control. Theoretically, it is an interpretation of Keynes's "General Theory," placing it in historical context. The hypothesis argues that the economy is not always in equilibrium, as implied by classical economists like Smith and Walras. The hypothesis is based on the idea that the economy is a capitalist system with expensive capital assets and a complex financial system. The economic problem is the "capital development of the economy," not the allocation of given resources. The hypothesis focuses on an accumulating capitalist economy that moves through real time. The financial instability hypothesis incorporates the Kalecki-Levy view of profits, where aggregate demand determines profits. It also emphasizes the role of expectations of profits in determining investment and financial behavior. The hypothesis suggests that the level of profits is the key determinant of system behavior. The hypothesis identifies three distinct income-debt relations for economic units: hedge, speculative, and Ponzi finance. Hedge finance units can fulfill their payment obligations through cash flows, while speculative units can meet their obligations on income account but not through income cash flows. Ponzi units cannot fulfill their obligations through cash flows and must sell assets or borrow. The financial instability hypothesis argues that the economy can be stable or unstable depending on the financing regimes. Over prolonged periods of prosperity, the economy tends to move from a structure dominated by hedge finance to one with more speculative and Ponzi finance. This can lead to financial instability, as seen in historical crises. The hypothesis suggests that business cycles are not caused by exogenous shocks but by internal dynamics and regulatory interventions.