I was one of the many economists who had barely heard of Hyman Minsky, still less read any of his work, before the financial crisis. One of the many who, seeking to understand, quickly devoured his Stabilizing an Unstable Economy. And found it pretty sensible. Macro isn’t my field, but there didn’t seem to be anything in that book a sensible mainstream macro person should have objected to. Should being the operative word. Because of course everyday, mainstream DSGE models in use in 2008 ruled out the very possibility of a crisis, whereas Minsky believed in their inevitability in some shape.
Stabilizing an Unstable Economy
This week I’ve been reading Randall Wray’s Why Minsky Matters, which is a useful and accessible overview of both what Minsky said and – as the title puts it – why it matters. I recommend the book (perhaps particularly to mainstream macro people!).
Why Minsky Matters: An Introduction to the Work of a Maverick Economist
The first chapter gives an overview of Minsky’s arguments. The second chapter was to me the most interesting. It’s called ‘The Road Not taken’ and sets out the broad mainstream approach against which Minsky developed his arguments. This is the neoclassical synthesis, whose foundations were laid by John Hicks and Alvin ‘Secular Stagnation’ Hansen in the early years after Keynes’s death, then by both ‘Keynesians’ like Patinkin and Tobin and ‘Monetarists’ such as Friedman. Wray argues that these camps disagreed largely over parameter values, and that they essentially bowdlerised Keynes by ignoring his emphasis on investment, finance and uncertainty.
Debates about what Keynes ‘really’ meant in The General Theory are not all that interesting – and by the by a good reason for emphasising the importance of maths as well as words in economics. The mathematical notation is a way of enforcing logical consistency and expressing arguments with precision; the words can then explain more clearly, and introduce reality while keeping it rooted in logica and clarity. Anyway, what’s interesting about the chapter is its brief account of how finance vanished from macro, to our great cost.
The General Theory of Employment, Interest, and Money (Classic John Maynard Keynes)
The later chapters of Wray’s primer set out Minsky’s views on specific issues, starting with his now-famous financial instability hypothesis: that market forces must be constrained in finance to prevent instability, but the consequent stability is itself destabilizing. The final chapter ends with some thoughts about how to proceed in the face of this paradox – in Wray’s view, tougher regulation especially of the shadow banking sector, and a smaller financial sector overall focusing on industrial investment. I agree, not least because the contribution of the sector to GDP is overstated (as Sir Charles Bean also pointed out in his recent interim report on economic statistics), and its contribution to economic welfare might well be a net negative.
This seems like common sense. I don’t entirely understand the unwillingness of the political classes to address the finance problem (despite the lobbying and campaign contributions) – will it really take another crisis? The reluctance of people who did pre-2008 macro to ditch their human capital is entirely understandable, and I’m constantly told that anyway there has nevertheless been a lot of change in macroeconomics. Still (and to repeat, this is not my field) I’d be interested to know what proper macroeconomists think about Minsky now. If Minsky is still, as the book jacket claims, a maverick shunned by the mainstream – why?