Stabilizing an Unstable Economy [Hardcover]

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 capitalism for anything.

One hundred and forty three reviews for Jo Nesbo's The Redbreast but just three for Minsky. We live in a world where economic forces are our first order of concern but people cannot be bothered to read about it. But they read asinine propaganda in their daily newspapers and on television and come away thinking macroeconomics is just like home economics. And politicians, who perhaps don't understand any better and anyway who have their mouths stuffed with bribery/campaign money, have a field day hoodwinking the electorate.

You need to come to Minsky after having read orthodox macroeconomic texts. The ones that start with Adam Smith ("the invisible hand" and all that malarkey), then move on to the American Depression of the 1930s (so we can understand why economics is important) before leading readers like sheep to the altar towards those ubiquitous demand and supply diagrams. In this world, constructed and presided over by our priests the neoclassical economists, prices are democratic and competition is perfect. Regulators always act quickly to set to rights any market inefficiencies and oligomonopolies are well behaved because they always sell where marginal cost equals marginal price.

What Minsky does is come in through the side door and upend this lie. Because, when we look at the real world (not the parallel universe imagined by neoclassical economists) things don't work as we've been brainwashed to believe. Minsky starts off explaining that profits can only be made when people are paid less than they produce. Those profits must be reinvested on investment or in higher wages. Add in government deficits and the human impulse to profit (leading to over-investment or excessive credit) and you get a virtuous cycle that leads to the boom before the bust. I paraphrase and you will need to read Minsky to get the full story. It's a damn good story and your understanding will deepen and then be elevated. The conclusion, expansions and contractions are inbred in capitalistic systems. They are not exogenous shocks as we've been previously told. In short, capitalistic systems are inherently unstable. Once we make this leap to seeing the world as it is and not as we would like it to be, we can move on to developing tools, techniques and institutions that help attenuate, but never eliminate, capitalistic business cycles. That is the best we can hope for.

Minsky rules.

The late professor Hyman P. Minsky wrote this study of economic volatility in 1986, as an era of frequent economic crises was shaking investors' confidence. His treatise remains relevant today. Minsky doesn't mention dot-com bubbles or subprime mortgages, yet he manages to nail contemporary economic reality. As the economist who lent his name to "the Minsky Moment," that point in time when markets tip from prosperity to crisis, he often repeats his concerns about income inequality, seeming to predict the current debate about ever-increasing concentrations of wealth. But in case you consider labeling Minsky as just a tax-and-spend liberal, consider that he frowns on welfare and long-term unemployment benefits. He's no master stylist as a writer, but Minsky's prose is generally clear enough to reward readers who seek his insight. getAbstract recommends this classic analysis to readers seeking a skeptical perspective on free markets.