Minsky

Daniel H. Neilson

• Publisher: Polity
• Year: 2019
• ISBN:
  9781509528530
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

No economist has written more incisively and provocatively on financial crisis than Hyman Minsky. Minsky is best known for his claim that "stability is destabilizing" – that the seeds of the bust are sown in the boom. This financial instability hypothesis received renewed attention – and substantial confirmation – in the global financial crisis of 2008.

Minsky's insights are not limited to moments of crisis; they grow out of a comprehensive and critical theory of financial capitalism. This book provides a systematic overview of Minsky's thought, covering his entire body of work. It shows how financial crises arise not as exceptions, but out of the normal operation of a financial capitalist system. It explains why Minsky's theories sit uncomfortably with economics and what efforts have been made to integrate them, and shows how Minsky's work can be incorporated into other fields of social thought.

This book will be of interest to students and scholars in economics, political economy, finance, politics, and social theory, as well as to anyone with an interest in the financial system and its tendency toward crisis.

1
Introduction

Theory, history, discipline

In writing this text, I have sought to reconcile my commitment to two sometimes conflicting aims. On the one hand, it is meant to be a concise outline of Minsky’s work, consistent with the aims of Polity’s Key Contemporary Thinkers series, in which this book appears. Indeed, there is an interesting challenge to the task of somehow representing in a single text the entire work of a scholar; nor will I object if whatever attention might come to the book comes first and foremost in search of an understanding of who Hyman Minsky was.

On the other hand, in celebrating and exploring the work of a single person, it is easy to fall into the trap of hagiography – to make the erroneous leap from “Minsky said it” to “it is true.” Minsky said many things, to many different audiences, that responded to the events and debates of his time, many of which are already fading into history. If one’s only aim is to know what Minsky said, one might therefore simply re-read his many publications, as I have done in the preparation of this book. One finds there a lively and synthetic thinker who has perceived something important and who tries many avenues to get it across.

With this book I have sought, instead, to create something that adds to Minsky’s intellectual bequest. In sorting through that wealth, I have accepted the assessment of my teacher Perry Mehrling that the value of Minsky’s contribution lies not in any particular investigation, but in “his way of looking at the world, his underlying vision” (Mehrling 1999, 139). I have also followed this recommendation of Minsky’s:

The main issue in the controversy about what Keynes really meant is not the discovery of the true meaning of the “Master’s” text. The main issue is how to construct a theory that enables us to understand the behavior of a capitalist economy. (1978d, 6f.; also 1990c)

As Minsky approached Keynes, so I approach Minsky. I share the goal of understanding capitalism, and in particular the role and status of finance in that system. I share with Mehrling and many other observers the belief that Minsky offered us a valuable vision through which to do so. In taking on the events and debates of his time – in academic writing, in commentary, and in engagements with his fellow economists – he put that vision to use, and in the process left us a legacy: the trace of an underlying, never fully spelled out theory. That theory, as I will show, though it is certainly present in Minsky’s published work, does not stand perfectly well on its own in its original form.

This book is not history of thought, nor is it biography. It is a concise outline of Minsky’s thought, but that outline is the consequence of my own synthesis and consolidation. I have tried everywhere to represent Minsky’s intention unambiguously, but at the same time I have avoided supposing that what Minsky said is, by that fact, necessarily true. Rather I have assumed that Minsky’s work may be valuable in the worthwhile but incomplete task of understanding capitalism; I have tried to convey something of that value, and to suggest what use might be made of Minsky’s work by another generation of students of society.

In doing so, I have developed three main threads over the course of the book. The first thread is financial theory. Minsky offered a theory of how financial capitalism works, which has the virtue of also giving insight into how it fails. He perceived, in my view, enduring patterns of the financial system and of market society, and it has been my goal to organize these – in a way that Minsky never did but with which I think he would agree – into a theory of capitalist finance. This is done in the main text of chapters 2, 3, 5, and 6, and is what I would consider to be the main contribution of the book.

Dealing with Minsky’s theoretical contributions has required, to some extent, a factoring out of financial history, the story of the crises that motivated Minsky and provided him with an ongoing source of inspiration, examples, and evidence. Minsky’s own writing is less accessible, some decades on, for its being tied to circumstances that have changed. One begins to resent ninety-five pages on the crisis of 1975 in Stabilizing an Unstable Economy! The reader who wishes to catch up on the history of the financial crises of the latter half of the last century is directed to Wolfson (1986), for his systematic presentation of each of the relevant episodes; what discussion I have included here of this history is largely confined to brief illustrations that are relatively self-contained and do not presume much in the way of prior knowledge.

At the same time I have felt it important to say a bit about the global financial crisis of 2008. This comes, first, in the form of a narrative in the last section of this chapter. Second, I have made extensive use of the report of the Financial Crisis Inquiry Commission (FCIC), created by the US legislature to investigate the causes of the crisis. The report is based on extensive interviews, and so in many cases it allows a direct view into the motivations and perceptions of those actually involved in how the events played out. I have taken from that study numerous illustrations of what Minsky understood to be parts of the general pattern of financial crisis. For a more analytical look at the 2008 crisis I recommend the characteristically efficient and insightful analysis of Mehrling (2010).

Minsky offers not only a theory but also a way of being an economist, which is the subject of the second thread of this book. In sections set in differentiated type, this thread proceeds in parallel with the first. Unlike the theoretical development, which is organized to present the theory coherently, this thread is organized chronologically. It considers, in order, Minsky’s major works (his dissertation, two books, a major research study, an edited volume, and an important series of papers), and in doing so illustrates how Minsky came to know what he knew. This second thread ends with a consideration of contemporary interpretations of Minsky.

The third and final thread takes up the relationship between Minsky’s work and the economics literature. Minsky was a stern critic of many of the main currents of economic and financial theory. He objected to the assumptions that underlie the IS–LM model, in Minsky’s time a major framework for economic analysis and still the main teaching model in undergraduate macroeconomics. Minsky felt that IS–LM lacked a role for realistic financial relationships, which were for him the driving force in an understanding of economic activity. Neither was this critique directed only toward IS–LM: at many turns, Minsky’s focus on finance was the basis for divergence from existing theory.

As a consequence of these objections, Minsky worked at the margins of the economics profession, a topic that runs through his writing from the beginning right to the end. He addressed his colleagues with engagement, despite his frustrations with the trends in assumptions and methodologies of economics that came and went during his time. Rather than rejecting economics entirely, he took refuge among others on the margins. He found allies and an audience there, but they were not spared his criticism either. I have tried to make a constructive contribution without rehashing well-known debates about what is wrong with economics. Minsky, I argue, was trying to express something that is very difficult to express in the language of economics, and this is so for interesting reasons. In chapter 4, I try to be precise about the points of divergence, those specific aspects of Minsky’s financial capitalism that are incompatible with economic theory and practice. I come back to this in chapter 7, where I ask what work has come out of this incompatibility.

In the next section, I introduce the themes of the book in a skeletal form. The section that follows illustrates the disciplinary context in which Minsky worked, for those who might be unfamiliar with economics. The final section of this chapter is a brief reading of the global financial crisis of 2008.

Time, uncertainty, capitalism

Hyman P. Minsky (September 23, 1919–October 24, 1996) began his career as an economist with the completion of his doctoral dissertation at Harvard University in 1954. The experience of the stock market crash of 1929 and the subsequent Great Depression led Minsky, like many of his profession, to the question of whether another large financial disturbance could occur – whether “it” could happen again. Unlike most of his colleagues, he felt compelled to study at first hand the detailed workings of the financial system, the infrastructure of capitalism. This took the form of a study early in his career of the Federal Funds market from a seat in a New York money-market broker, and from 1967 as a consultant to Mark Twain Bank (1957a; Mehrling 1999).¹ Minsky concluded that not only could instability recur, but in fact it would necessarily do so, and that such instability was indeed to be expected as a normal part of the functioning of US capitalism.

The crises of the 1960s and 1970s seemed to be powerful evidence in favor of this hypothesis. Much of Minsky’s work on the financial system is written in response to the financial disturbances he observed. His narrative evolves in response to these, but to a significant degree it is the same story each time. The crises that attracted Minsky’s notice were these: the Kennedy Slide of 1962 (1962; 1963a); the 1966 Credit Crunch (1965c; 1968b; 1968c; 1969a; 1969b); the Penn Central liquidity squeeze of 1969–70 (1970a; 1971; 1974a; 1974e); the international monetary crisis of August 1971 (1972a; 1973a); the Franklin National crisis of 1974–5 (1974d; 1976; 1978a; 1978e; 1986e); the 1978 intervention in the exchange value of the dollar (1978f); the silver crisis of 1980 (1980a; 1981b; 1982a; 1983a); the Continental Illinois crisis of 1984 (1984d); and the 1987 financial crisis (1988a; 1988c; 1988d; 1989b; 1992a; 1993a; 1995b). Crisis did, indeed, seem to be normal.

Minsky drew a stark conclusion from these crises, one that was to define his thinking, his career, and his legacy: “[I]n the early 1960s the mode of behavior of the financial system underwent significant changes and … these changes tended to accelerate the trend toward fragile finance” (1975b, 10; also 1995a). Following a stable period between the end of the Depression and the mid-1960s, crisis had become, if not predictable, at least unsurprising. These crises were costly, in terms of unemployment and bankruptcies, and instability seemed to be getting worse, so an investigation was warranted; Minsky’s first-hand observations in financial institutions suggested that that investigation should begin from the financial mechanics.

The acute nature of crisis – headline-making defaults and institutional failures – points to the importance of time in understanding them. Each crisis has a before, in which financial patterns are established and elaborated; a during, when those patterns seem to unravel chaotically and damagingly; and an after, characterized by retrenchment and stability. The cyclicality of crisis, however, seemed also to demonstrate that each post-crisis period becomes, imperceptibly, a pre-crisis period. Minsky saw this temporality embedded in the financial system. “As a result of their debt structure, firms operate today with cash-payment commitments inherited from the past. Furthermore, current investment and ownership of capital assets require financing, which sets up payment commitments for the future” (1982d, 19). Instability, that is, emerges in the present, as promises made in the past are reconciled against an ever-unfolding future.

The unstable present stands between a past that can no longer be changed and a future that cannot yet be fully known. Business ventures into this uncertain future, with entrepreneurs making promises now, to be fulfilled with the eventual proceeds that follow from today’s efforts. It is in the financial system that the success of these ventures will ultimately be tested, when debts made today come due in the future. Time and uncertainty create the possibility for innovation, for the setting in motion of business activity on which capitalism is based. They also, Minsky saw, create the possibility for failure; not just for the failure of a single firm, but for widespread failure due to systemic phenomena. Because the financial system is where past and present meet, it is the locus for crisis.

Minsky thus took as his object of study the capitalist system, with the financial system at its center (1967a). Pervasive uncertainty meant that finance, and thus capitalism, would be constantly subjected to the possibility of crisis. The series of crises over the course of Minsky’s career seemed to provide clear evidence that the US financial system was indeed unstable, and that that instability even arose out of the normal operation of the system. He went so far as to call financial capitalism “inherently flawed” (1969a, 224): “The flaw in American capitalism centers around the financial system, and the financial system is an essential attribute of the economy” (1968a, 578).

The ramifications of time and uncertainty are written into the financial system; the resulting instability of capitalism constitutes its inherent flaw (1996). The investigation of this problem set Minsky in motion, and sustained his entire career. There seemed to be plenty to talk about, and one might suppose that Minsky’s contributions would have found an attentive audience among his fellow economists.

* * *

To know Minsky’s economics, we must also know Minsky as economist. Viewed in its entirety, Minsky’s published work follows the contexts, events, and debates of his time; he draws on texts, conversations, and experience and incorporates each into a worldview, a theory that is constantly refined, updated to add what is new and subtract what is no longer true or no longer needed. In each of Minsky’s publications we can see not only knowledge but also a way of knowing. In learning from Minsky we must study both: not only what he knew but how he knew it. For the events and debates of our time are not those of Minsky’s time; his ideas cannot be taken up unaltered. They must be interpreted, given meaning in our own context. Minsky’s way of knowing will lead us to our own. Thinking back to his days as a student, the septuagenarian Minsky wrote:

[T]here is never a true reading of a text. The reader is not a mere passive recipient, but an active creator of interpretation. The reader brings priors to the text, priors that can be more or less restricting or binding. In economics, there is another difficulty: history unfolds and institutions evolve. As the world moves through time, each reader has to interpret (extract meaning from) events and institutional changes and integrate the reading of what happened and what is into an interpretation, into a maintained theory. This means that, to a serious scholar, the lessons learned from a text are subject to change. (1992b, 365)

Minsky’s scholarship began with the completion of his doctoral dissertation at Harvard in 1954. His subject was business cycles, a problem of unquestionable importance, in light of the experience of 1929 and the Great Depression that had been the economi...

Table of contents

• Contents
• Key Contemporary Thinkers Series includes:
• Title page
• Copyright page
• Dedication
• Acknowledgments
• 1 Introduction
• 2 Financial capitalism
• 3 A payments theory of finance
• 4 The inadequacy of economics
• 5 Making the market
• 6 Last resort
• 7 The resilience of economics
• 8 Minsky for all moments
• Bibliography
• Index
• End User License Agreement