Stabilizing an Unstable Economy

This is and has really re-emerged as a classic and prophetic book on the endogenous factors that drive instability. Again, the book is referred to a little too late and undoubtedly the same will happen in whatever next bubble next pops. To give a quick overview, most people study economic growth as as function of the economy's factors of production (including human capital) and their dynamics (modern economists are updating methods and ideas but people are still taught the solow growth model as foundational). The "trajectory" of an economy is usually smooth and the stochastic growth drivers/detractors are technology and exogenous shocks, where exogenous are not known from a substance or timing perspective a priori. Minsky explores a form of instability that is not discussed in most growth models, he discusses the instability that is embedded in our economies resulting from the use of currency its fluctuation from being scarce to abundant. To me his insights as to the dynamics of what drives asset bubbles, in particular, banks propensity to lend as well as agents propensity to borrow against assets as a function of recent history was so spot on it makes you smile were it not so sad that it just happened. Minsky has identified a particularly dangerous form of the animal spirits that Keynes and more recently Schiller have written about, especially in a fiat currency environment in which we are separated from the pricing of money mechanism that the central bank is empowered to control. This book is worth reading for a multitude of reasons. Not only does it make one think about the worlds inherent instability, for which no obvious solution exists, it reminds us that we need to work on policy that tries to generate negative feedback to counteract the positive feedback to take us from hedge finance, to speculative finance, to ponzi finance. After reading this book, one is not an expert able to give a solution to endogenous money and asset price shock risks, but one can understand the problem much more deeply. Given the dynamics driving the instability isnt stationary and central bank measures often take a long time to filter through (obviousy example being raising rates yet continuation of property speculation) more time needs to be spent on what policy might induce counterbalancing feedback. After reading Minsky one can read policy recommendations and get a more complete sense of the influence and the merit in things like bank capital cushions being used to dampen multiyear volatility. This has always been a must read, but the recent and ongoing crisis is another re-affirmation to add this to ones cart.

I just finished reading this book and I have to say that my understanding of the crisis and in the general workings of the economy are vastly improved. The math isn't too hard and Minsky's prose is pretty good. A lot of ground is covered and important points are repeated so understanding of the material is more easily retained. This material should find its way into Introductory Macroeconomics textbooks to replace all the right wing trash. Read this book and you will see for yourself.

This classic work of political economy, first published in 1986, has valuable lessons for us today. Minsky studies the recessions of 1975 and 1982, economic theory, institutions, particularly banks, and finally presents an agenda for reform. Financial traumas have led to ever-worse recessions, in 1970, 1975, 1979-80, 1982, 1987, 2002 and the present. As he notes, "the normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment, and poverty in the midst of what could be virtually universal affluence - in short, .. financially complex capitalism is inherently flawed." Yet he believes, "the collapse of aggregate demand and profits, such as occasionally occurred and often threatened to occur in pre-1933 small government capitalism, is never a clear and present danger in a Big Government capitalism such as has ruled since World War Two." Life is disproving this hope. What causes these recessions? Minsky writes, "the Wall Streets of the world are important; they generate destabilizing forces. ... This instability is not due to external shocks or to the incompetence or ignorance of policy makers. Instability is due to the internal processes of our type of economy. The dynamics of a capitalist economy which has complex, sophisticated, and evolving financial structures leads to the development of conditions conducive to incoherence - to runaway inflations or deep depressions." Strangely, capitalism can't handle capital: "capitalism is flawed precisely because it cannot readily assimilate productive processes that use large-scale capital assets." What is to be done? He warns, "Meaningful reforms cannot be put over by an advisory and administrative elite that is itself the architect of the existing situation." Then he stresses, "The emphasis on investment and `economic growth' rather than on employment as a policy objective is a mistake. A full-employment economy is bound to expand, whereas an economy that aims at accelerating growth through devices that induce capital-intensive private investment not only may not grow, but may be increasingly inequitable in its income distribution, inefficient in its choices of techniques and unstable in its overall performance." But, as Minsky acknowledges, capitalism cannot deliver full employment: "Capitalist market mechanisms cannot lead to a sustained, stable-price, full-employment equilibrium." He proposes, "Public control, if not out-and-out public ownership, of large-scale capital-intensive production units is essential." He suggests nationalising the railroads and the nuclear power industry, as private enterprise runs both so poorly. He also notes capitalism's other failures: "the market mechanism ... cannot and should not be relied upon for important, big matters such as the distribution of income, the maintenance of economic stability, the capital development of the economy, and the education and training of the young." It seems we can't rely on

I have been trying to understand the roots of the current financial crisis. I have found a number of fairly good journalistic descriptions of the particulars of this crisis. What I have found lacking, by and large, is any book of economic theory, which explains what just happened and why. One of the few good books, with more of an academic foundation is Kindleberger's book, Manias, Panics and Crashes. That is the classic book on the business cycle. In the end, however, Kindleberger basically just describes the cycle; he does not really give a good theory of it. Kindleberger, however, referred me to Minsky. Minksy's book is not recent. It was written back in the 1980s. Despite its age, Minsky's book explains what just happened better than the new books. He is the only economist I have ever read, who takes seriously the actual mechanics of our actual economy. His basic idea is that our modern post-New Deal economy is both more and less stable than the economy that came before. It is more stable, he believes, because massive government spending and major Federal Reserve interventions tend to prevent depressions and classical meltdowns. It is less stable, however, because there is nothing in our economy which constrains the tendency of the financial structure to create ever wilder speculative bubbles. On the contrary, our present system makes far worse the perennial capitalist problem of creating speculative bubbles by bailing out the system when it gets itself into trouble. In essence, the system rewards financial types with all of the upside from bubbles, but then protects from the downside when the bubbles burst. Not surprisingly, we get more and more bubbles. Minksy really understands this stuff. Usually, when I read an academic economist I always have this feeling of a greater or lesser disconnection between theory and reality. Economists, as a whole, love their theories and do not have much use for the grittier aspects of reality. Minsky is a very, very welcome alternative to this. This book is simply indispensable; it is only book of economic theory to deal with the present crisis. Which is not to say that I love every aspect of the book. I do not. I like books to be written in standard English, not jargon. Minsky writes in jargon. I like books to be fun to read and to flow well. This book was a bitch to read, and a really hard slog to get through. This book is no day at the beach; it is very, very technical. I have two major reservations about the substance of the book. First, Minsky is a big fan of Keynes. Minksy is persuaded that no one but Minsky understands Keynes; he says many times that if the rest of us dolts ever caught on to Keynes, economics would be revolutionized. I am not persuaded. What I find compelling about Minsky is his analysis of the POST New Deal economy. In this book, he does not really argue for the Keynesian explanation of the Great Depression; instead, he just assumes that you buy of

I The main theme is that our economic system, corporate capitalism, is essentially unstable because of the existence of the financial industry necessary for financing investment. It is very clear explaining the neoliberal synthesis and demonstrating that is useless to use it as a guide for our economy. It builds and explains which kind of economic theory will fit the real world we are living in. It explains very well how we arrived at this desperate situation but Hyman Minsky could never imagine how to get out of today's catastrophic disaster when all the possible economic remedies have been used (interest rates near 0, gigantic liquidity injections, without even asking about the existing total debts of the financial institutions,...) because what is lacking is trust in the market and between the market players. In brief liquidity preferences are huge compared with investment ones. I recommend it to everybody interested to know what to do now and what to avoid in the future.