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Why Minsky Matters: An Introduction to the Work of a Maverick Economist

Why Minsky matters: An Introduction to the Work of a Maverick Economist, by L.
Randall Wray, Princeton, NJ, and Oxford, Princeton University Press, 2016, xii + 273
pp., $27.95/₤19.95 (cloth).
Hyman P. Minsky shot to fame in the aftermath of the 2008 financial crisis – 12 years
after his death. He was seen as one of the very few who had prophesised the disaster, and
had done so a long time before anyone else had. L. Randall Wray, who worked with
Minsky as both his student and fellow faculty member, has produced an accessible guide
to Minsky’s thought and policy suggestions. The book rounds out the work of a man
remembered largely for one outrageous suggestion: that the very stability of the financial
system in the recession-free “Goldilocks” years—when everything was just right—would
inevitably lead to instability and problems. Or, to put it more succinctly, “Stability is
destabilizing” (141, 221).
But Minsky’s work was more than just a comment on what he saw as the inherent
instability of the financial system: Minsky’s more basic argument was that
macroeconomic equilibrium, the Holy Grail sought by economists everywhere, was really
an illusion. For many, this meant categorizing Minsky as a Keynesian, as someone who
believed that Government action was necessary to prevent cycles of booms and
depressions—but an awkward and non-mainstream Keynesian, who appeared to be
arguing for much tighter regulation of the economy.
Minsky’s written style is often convoluted, and his arguments hard to follow, which
increased the chances of his being misunderstood (Wray demonstrates that the Nobel
Prize winner and prolific Keynesian writer Paul Krugman falls into this group), and no
doubt contributed to his being ignored by most people. Wray’s book presents us with the
real Minsky in readable form; the man’s ideas and arguments, and locates him within the
currents of economic thought. A (Keynesian) maverick, yes; but much more than just a
one-trick Keynesian pony.
Minsky’s work on banking and his deep understanding of how the business of banking
actually worked informed his thinking. A bank is not some institution with internally-
developed rules and procedures that are somehow different from other organizations
operating in the economy, but, like all businesses, is profit-seeking. The more banks lend,
the greater their profits—providing, of course, that the borrowers can pay back what they
owe. Therefore, if there are ways of outsourcing the risks of lending (through explicit or
implicit guarantees of government bail-outs, for example), there is little to prevent
bankers increasing the quantity of loans. This will work well while the economy is
growing and lenders are happy to roll over maturing loans; if something causes
uneasiness among lenders – the fear that loans will not be repaid, for example – then it is
possible that the whole credit system will freeze up. (This happened in the autumn of
2007, a year before the onset of the financial crisis.) Then, if the central bank (the Federal
Reserve in the US) provides credit to the banks, the illusion of stability can be restored,
and the game goes on. Unfortunately, the effect of this action is that the next crisis will be
even bigger, and eventually some later crisis will be too big for the Government and
Central Bank to deal with.
Minsky’s solution was greater regulation which needed to evolve over time to adjust to
and try to counteract the forces of instability. This view, of course, meant that he was
swimming against the current of the neoliberal (and seemingly successful) free market
consensus of the last 15 years of his life, which is why he could be easily brushed aside.
Rather than making the system more resilient, restraints on bank activity would merely
serve to slow the economy down, reducing the rate of growth of living standards. After
all, with a Fed standing by to solve any and all problems, what could possibly go wrong?
Minsky’s deep understanding of the nature of banking led him to propose a new story of
the development of capitalism (or free market economies), majoring on the long-term
transformation of the relationship between the financial system and what gets called the
real economy (jobs, output, trade, etc.). In the first stage of the transformation,
commercial capitalism, new kinds of banks, investment banks, appeared. Previously,
firms had largely used retained profits as the source of funds for investment, but in the
late nineteenth century they began to turn to external sources of funds – either provided
directly by banks, or orchestrated by them through the issue of debt instruments (bonds)
and equity (shares) on behalf of borrowers. Investment banks would underwrite these
instruments – guaranteeing to buy any that were not bought by other institutions. Over
time, the growth in the size of projects and the gradual globalization of the market for
debt and shares changed the nature of capitalism towards finance as the driving force:
investment banks themselves would buy the financial assets they had created, or would
extend loans to other people to buy them – a policy that came to grief in the 1929 crash.
The Government response to this led to what Minsky saw as managerial welfare state
capitalism – a Big Bank and Big Government took over the running of more of the
economy. This, initially at least, produced a greater degree of stability; but Minsky
rightly realized that this stability was built on an illusion rather than eternal truths. As the
system withstood various shocks, the belief grew that it could withstand any shock – a
view that was shown to be false by the events of 2008. The long period of stability itself
contained the seeds of instability. Capitalism was morphing into what Minsky called
money manager capitalism – where professional managers of money had huge sums of
money under their control, and were intent on beating the market. Of course, this is
impossible for everyone: if some are above the average, others must be below it. To
attempt to increase returns, financial institutions took on ever greater risks – as long as
the successful gambles paid more than the unsuccessful ones lost, the system could
continue. And the implicit guarantee of the Bank and Government to alleviate any losses
by financial help of various kinds (the so-called “Greenspan put”) meant that beliefs in
their own infallibility began to affect bankers.
The problem for Minsky, though, is the question: if stability is in itself destabilizing, how
is it possible to achieve an economic paradise of continuing growth in output with only
small fluctuations in the rate of economic growth? Is the cost of any set of policy
prescriptions that attempt to do so their ultimate failure? If so, is it better to engineer
periodic mild-ish recessions to avoid the next Big Financial Crisis? For the rich countries
of the world, managerial welfare state capitalism served well, and it is not immediately
apparent that a different policy would have produced a better outcome over time. Wray
considers some of the US reforms that followed the 2008 crisis, and speculates on what
Minsky might have thought of them. Wray’s Minsky would have approved of the
massive deficit financing by the government—with the benefit of hindsight, it is fairly
easy to argue for the claim that without it, things would have been a whole lot worse. But
he would also have criticized the Federal Reserve for being slow to act to provide the
necessary liquidity to markets, and perhaps he would also have been concerned that the
bail-out went to insolvent institutions, rather than just to illiquid ones. In his concluding
chapter, Wray considers other policies that Minsky might recommend, based on papers
that he wrote in the last few years of his life. Several of these dealt with the consequences
of the collapse of the Soviet Union. Minsky thought that the critical problem facing the
newly-independent Eastern European states was to produce a monetary and financial
system to ensure development, democracy and international integration (199). Wray’s
Minsky would have recommended these prescriptions for other countries as well, to
produce a non-destabilizing stability.
Some of Minsky’s other ideas now seem outdated. For example, at present there is much
academic work looking at alternatives to welfare: the idea of replacing welfare systems
with a “cleaner” system of a guaranteed minimum income for all is seen by people on
both the left and right of the political spectrum as an idea worth investigating. Minsky
was enough of an orthodox economist to worry about the disincentive effect of such a
policy on the able-bodied, who would choose not to work; he therefore advocated instead
that Government should play the role of employer of last resort. Anyone who was
unemployed would be offered a minimum-wage job on a government-funded scheme.
This, too was anathema in both the US and the UK. A recession meant that there was a
shortage of “genuine jobs” (as Margaret Thatcher phrased it); make-work schemes would
just slow down transition and the necessary structural changes the economy needed.
Another reason, if one were needed, for ignoring Minsky.
To his supporters and disciples, such as Wray, Minsky’s was the voice of one crying in
the wilderness. Had his prophetic message been heeded, some of the pain of the Great
Recession could have been avoided. To those who failed to take the trouble to understand
what he was saying, Minsky is already in danger of being returned to obscurity. His brief
posthumous appearance in the limelight a few years ago has now passed, and he can
safely be returned to obscurity. At least, that is, until the next time.
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