ABSTRACT
The connection between Keynes and the financial instability hypothesis is emphasized because the author's version of the financial instability hypothesis did arise out of an attempt to understand Keynes in light of the crunches and other financial disturbances of the past decade. In the General Theory Keynes developed a theory of the capitalist process which was able to explain financial and output instability as the result of market behavior in the face of uncertainty. Construction of standard economic theory, the neoclassical synthesis starts by examining bartering, such as might take place at a village fair, and proceeds by adding production, capital assets, money, and financial assets to the basic model. The first twenty years after World War II were characterized by financial tranquility. No serious threat of a financial crisis or a debt-deflation process took place. The first post-World War II threat of a financial crisis that required Federal Reserve special intervention was the so-called 'credit crunch' of 1966.
