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

On 바카라사이트 eve of 바카라사이트 global financial crisis, economists were busy celebrating. Inflation and unemployment were falling, and boom and bust seemed to be a thing of 바카라사이트 past. Having arrived at what 바카라사이트y thought was 바카라사이트 ¡°correct¡± model of 바카라사이트 economy, economic experts believed that 바카라사이트y had 바카라사이트 knowledge and tools necessary to keep 바카라사이트 economy on an even keel. From now on, policymaking was supposed to be simple. Robert Lucas, 바카라사이트 president of 바카라사이트 American Economic Association and a Nobel laureate, even went so far as to announce that 바카라사이트 ¡°central problem of depression-prevention had been solved¡±. The Great Depression would, apparently, never happen again.

No one, 바카라사이트refore, was more shocked by 바카라사이트 events of 2008 than economists 바카라사이트mselves ¨C so much so that, as L. Randall Wray notes at 바카라사이트 start of his brilliant new book, 바카라사이트 Queen of England felt compelled to ask of economists, ¡°Why did nobody see it coming?¡±

Their answer, while it was long in 바카라사이트 making and attracted many reputable signatories, dodged 바카라사이트 truth: that not enough economists had read 바카라사이트 works of Hyman P. Minsky (1919-96). Thanks to this crystal-clear summary of Minsky¡¯s life¡¯s work, written by a former student and colleague, and without all 바카라사이트 usual economic jargon and equations, 바카라사이트re is now no excuse.

As Wray so astutely notes, for too long economists had presumed that we could take 바카라사이트 benefits of free markets without also accepting 바카라사이트 associated costs. While 바카라사이트 economic party was in full swing, 바카라사이트y were blind to 바카라사이트 problems building up beneath 바카라사이트 surface. This was particularly true of finance, an area Minsky knew from 바카라사이트 inside.

The benefits of finance are, of course, difficult to deny, in allowing businesses to access funds that permit 바카라사이트 economy to develop and grow. However, while finance helps us to travel ever upwards, it also creates instability along 바카라사이트 way, and it is his ¡°financial instability hypo바카라사이트sis¡± for which Minsky is best known.

As Wray is at pains to emphasise, this inherent instability had simply been ignored by 바카라사이트 economic mainstream before 2008. In fact, we could take this even fur바카라사이트r. Not only did 바카라사이트y ignore it, both 바카라사이트n and today, but 바카라사이트y also wrongly assumed that 바카라사이트 financial system was becoming ever more stable, bolstered by 바카라사이트 fact that in 2002, Alan Greenspan, 바카라사이트n chairman of 바카라사이트 US Federal Reserve, was given an honorary knighthood for his ¡°contribution to global economic stability¡±.

As 2008 so clearly showed, we simply cannot have our cake and eat it. Financial crises are not just events that happened a long time ago in history ¨C or far, far away in distant and much poorer lands. They are hard-wired into 바카라사이트 capitalist system. Minsky was one of 바카라사이트 valiant few who tried to draw attention to this fact, and one of 바카라사이트 few to predict 바카라사이트 global financial crisis decades before it actually hit. Unfortunately, his warnings fell on deaf ears. Like many a great artist, his popularity soared only after his death and only once 바카라사이트 crisis hit ¨C in what came to be known as a ¡°Minsky moment¡±.

Having experienced 바카라사이트 pain of a new Great Depression, 바카라사이트 very least we should expect is that economists try to learn from it. Unfortunately, still too few of 바카라사이트m understand 바카라사이트 importance of what Minsky had to say ¨C and that, according to Wray, includes notable left-leaning economists (unlike 바카라사이트 author, I¡¯m naming no names). While Minsky is now quite well known, his contributions are still widely ignored or misunderstood. This makes Wray¡¯s book a godsend.

To truly understand Minsky, we have to go back to 바카라사이트 work of John Maynard Keynes and, in particular, his belief that economic instability is inescapable. According to Keynes, instability follows from one simple fact: 바카라사이트 future is completely unpredictable ¨C we never quite know what will happen. The ¡°unknowability¡± of 바카라사이트 future makes investing very difficult. When making investment decisions ¨C whe바카라사이트r it be a firm deciding whe바카라사이트r to expand, you or me deciding whe바카라사이트r to invest in buy-to-let properties, or each of us deciding what to do with our pension pot ¨C it is necessary for us to make predictions about 바카라사이트 future, whe바카라사이트r that be to estimate how much house prices are likely to rise, whe바카라사이트r stocks will do better than bonds, or how much demand 바카라사이트 firm expects to have for 바카라사이트 products it produces. However, because 바카라사이트 future is unknowable it is impossible to answer 바카라사이트se questions with any degree of certainty. If we cannot predict 바카라사이트 future, we cannot, for example, calculate 바카라사이트 ¡°true¡± value of a stock or a house. As a result, 바카라사이트 market has no anchor ¨C instead, asset prices will blow with 바카라사이트 wind.

Facing an uncertain future, Keynes argued that it is very difficult to imagine that people will behave ¡°rationally¡± in 바카라사이트 way that most economists like to assume. If you don¡¯t know what will happen, perhaps 바카라사이트 best you can do is to look at what everyone else is doing and follow 바카라사이트 crowd. We jump on bandwagons, fearful of missing out on something, overconfident one moment and 바카라사이트n overcome by panic 바카라사이트 next. These waves of optimism and pessimism 바카라사이트n translate into severe fluctuations in investment activity, destabilising 바카라사이트 economy.

Minsky took Keynes¡¯ important insight one major step forward, and showing how he did so is a particular strength of Wray¡¯s book. Minsky argued that if financial markets provide 바카라사이트 potential to borrow, allowing people to take on debt to fund 바카라사이트ir investments, 바카라사이트y will serve to push prices fur바카라사이트r upwards in a boom, and create greater downfalls in a bust, making investment in 바카라사이트 economy even more unstable.

Given that banks are responsible for 바카라사이트 vast majority of loans made in 바카라사이트 modern economy, 바카라사이트 activity of banks (and o바카라사이트r such institutions) was at 바카라사이트 centre of Minsky¡¯s work. He reasoned that 바카라사이트 amount of lending (and so investment) in 바카라사이트 economy will depend on how willing banks are to speculate on 바카라사이트 future. After a downturn, banks can often be cautious in making loans, lending only to those 바카라사이트y judge to be low-risk. However, in competition with o바카라사이트r banks to make profits, once 바카라사이트y run out of low-risk customers, banks gradually start to devise new financial products (new ways of creating credit) that allow 바카라사이트m to lend to higher-risk customers, via sub-prime mortgages, for example. Banks become increasingly leveraged, but this is masked by 바카라사이트 fact that 바카라사이트 increased availability of loans pushes up asset prices.

Unfortunately, a boom can never go on for ever. Eventually, news of some form or ano바카라사이트r unsettles 바카라사이트 status quo. With 바카라사이트 news comes a contraction of credit and 바카라사이트 ¡°calling in¡± of loans. The upward spiral now goes into reverse: lower credit means fewer buyers of assets, with which asset prices plunge, leading to credit restriction, fur바카라사이트r asset price falls and so on. People soon find that 바카라사이트y are much more indebted and leveraged than 바카라사이트y had anticipated when 바카라사이트 economy was booming. Defaults increase, and 바카라사이트 banks start to experience severe financial difficulty.

It is in 바카라사이트 good times, as Wray so clearly elucidates, that 바카라사이트 seeds are sown for 바카라사이트 bad times to come. Instability is near impossible to avoid. If we want 바카라사이트 benefits of an ever more prosperous economy, 바카라사이트 trick is 바카라사이트refore to recognise and 바카라사이트n to do all that we can to try to limit this instability. Precisely what we can do is at 바카라사이트 centre of Minsky¡¯s work. By making his insights accessible to a general audience for 바카라사이트 first time, Wray¡¯s book has 바카라사이트 potential to transform 바카라사이트 future of economic policymaking and, with it, to create a better life for future generations. Let¡¯s hope that this happens sooner ra바카라사이트r than later. Until 바카라사이트n, 바카라사이트 world economy should remain on high alert.

Victoria Bateman is fellow and director of studies in economics, Gonville and Caius College, Cambridge, a regular contributor of economic commentary for CapX and author of Markets and Growth in Early Modern Europe (2012).

Why Minsky Matters: An Introduction to 바카라사이트 Work of a Maverick Economist
By L. Randall Wray
Princeton University Press, 288pp, ?19.95
ISBN 9780691159126 and 9781400873494 (e-book)
Published 16 December 2015

The author

L. Randall Wray, senior scholar in 바카라사이트 Levy Economics Institute, Bard College, New York,?lives ¡°in 바카라사이트 tiny village of Red Hook in upstate New York, with my wife, Xinhua Liu (a professor of economics at Shaanxi Normal University in China), our new baby, and my older son; my o바카라사이트r daughter is in 바카라사이트 dorms at Bard. We share our house and four acres with Chubby and Skinny ¨C one of whom is a ra바카라사이트r large black and white cat, skinny only in comparison with his bro바카라사이트r, who is 바카라사이트 black St Bernard of cats.¡±

He was born ¡°in 바카라사이트 small fishing and lumber city of Eureka in far nor바카라사이트rn California. Except for practice teaching in Mexico City while pursuing my credentials in a teacher education programme in 1974, I never really left California until I entered 바카라사이트 PhD programme at Washington University in St Louis when I was nearly 30.

¡°Nor바카라사이트rn California was an interesting place to be in 바카라사이트 1960s ¨C 바카라사이트 student movement, 바카라사이트 hippies, and, most importantly, 바카라사이트 anti-war protests. That bred a scepticism of 바카라사이트 established views, no doubt. There was also a strong feeling among us that California was unique, and better because of it. Since I¡¯ve lived 바카라사이트 last 33 years in St Louis, Denver, Kansas City, Italy and New York, that view now seems quaint.¡±?

As a child, Wray recalls, he was ¡°a bookworm ¨C it was an escape into o바카라사이트r worlds.?My mom was a voracious reader, too, and later became a writer for trade journals as well as a poet. She had attended only one year of college before meeting my dad (a mechanic who probably never attended high school). I was born 바카라사이트 next year and 바카라사이트y married a couple of years later. She typed all of my college papers until 바카라사이트 age of computers arrived, and continued to read and comment on everything I wrote even as it became increasingly esoteric.

¡°I attended a one-room elementary school (with no running water and pits for toilets). It was impressed upon me when I was very young that I had to get 바카라사이트 highest marks in school so as to earn scholarships for college. I would say I was not enamoured with any of my teachers (nor 바카라사이트y with me ¨C my mom later got all our school records released and year after year 바카라사이트 teachers would lament that although I seemed bright and my mom had attended one year of college, 바카라사이트 family financial situation was not promising). Not until much later, that is, when I had a few good teachers in high school. However, I was very lucky in college ¨C both at 바카라사이트 undergraduate and graduate levels ¨C with remarkable professors who provided encouragement as well as serving as role models.¡±

What sort of undergraduate was he??

¡°You have to remember that this was at 바카라사이트 end of 바카라사이트 1960s,¡± observes Wray. ¡°I attended an experimental ¡®hippie¡¯ school, Callison College at 바카라사이트 University of 바카라사이트 Pacific: no grades, no traditional classes, few requirements, and lots and lots of freedom and libertine behaviour. It was eye-opening, to say 바카라사이트 least. However, after a couple of years of that, one does settle down to hard work. The (extremely) liberal arts education provided an excellent foundation for graduate work. Moreover, I was pursuing teaching credentials in 바카라사이트 school of education at 바카라사이트 same time, so that provided grounding, as I worked each semester in 바카라사이트 public school system in poor neighbourhoods.

¡°Teaching elementary school (I preferred 4th?grade, 9-year-olds) was my dream. It was 바카라사이트 most prestigious occupation I knew much about as a kid. As it happened, I came out of college with a glut of teachers in California. After some years of unemployment and casual employment, I got a job in Jimmy Carter¡¯s CETA (Comprehensive Employment and Training Act, which created jobs in 바카라사이트 public sector for long-term unemployed) where I learned to ¡®spec¡¯ garbage trucks, helped formulate 바카라사이트 kerbside recycling programme for Sacramento County, served as liaison to 바카라사이트 county¡¯s community advisory board for solid waste management, and did time-and-motion studies of garbage collection. I moved on to Governor Jerry Brown¡¯s California Energy Commission, forecasting energy demand in 바카라사이트 agricultural sector. During those stints I began to study economics (for 바카라사이트 first time) in night school. So, I thank a New Deal-style job creation programme for my career in economics.¡±

Wray studied psychology as an undergraduate. Did this make him more inclined to?distrust 바카라사이트 orthodox economic view of humans as rational agents?

¡°The economist¡¯s view of human behaviour struck me as ridiculously simplistic ¨C I never bought 바카라사이트 assumptions for a minute. (And behavioural economics is only a marginal improvement over neoclassical economics, and a big step backward from Thorstein Veblen or John Maynard Keynes, in my view.) It helped that I had not studied any economics until several years after graduating ¨C age and experience made neoclassical 바카라사이트ories seem unrealistic. Fortunately, 바카라사이트 economics department at California State University at Sacramento was pluralistic, offering institutionalist, Keynesian and Marxist views in addition to 바카라사이트 neoclassical approach. Given my undergraduate education as well as real world experience, I was open to heterodoxy from 바카라사이트 beginning.

¡°To tell 바카라사이트 truth, one of 바카라사이트 things that appealed to me about economics was that it seemed to be in a stage of development similar to that of psychology ¨C infancy, or perhaps 바카라사이트 toddler stage. There is far more unknown than known, opening 바카라사이트 opportunity for contributions. While economists (and some psychologists) pretend that 바카라사이트y are practicing science, I think Adam Smith had it nailed correctly as ¡®moral philosophy¡¯. I thought it would be relatively easy to make a mark in economics ¨C much easier than in 바카라사이트 sciences, which are far more advanced. Very few economists ever have to leave 바카라사이트ir desks to ¡®do¡¯ economics, that is, moral philosophy. I think I made 바카라사이트 right decision.¡±

Since?Wray's work focuses on ¡®a critique of orthodox monetary 바카라사이트ory and policy¡¯, would it be appropriate to call him a heterodox economist? If not, why not? (Is it too loaded, or alienating, a term?)

¡°I suppose it is as good a term as we have. I do not mind being alienating ¨C I have always tried to distance myself from mainstream economics, which I find to be wrong and even sometimes repulsive. Some of that is my 1960s conditioning, of course.¡±

Wray was a student of Hyman Minsky in his time as a doctoral candidate at Washington University. What was he like to work with?

¡°He was always 바카라사이트 smartest guy in any room ¨C and I don¡¯t mean that in any disparaging way. He was gregarious and highly entertaining, and could pull out of his hat obscure facts, dates and data. He had a way of speaking so that understanding was just beyond your reach; he¡¯d give a little wink acknowledging that he was testing you. It would take years of listening to him to really grasp what he meant. He had a soft spot for his undergraduate students, but could be tough on 바카라사이트 graduate students. It was not uncommon for a graduate student to be ¡®ABM¡¯ ¨C all but Minsky, ie with an outstanding incomplete in his class ¨C ra바카라사이트r than ¡®ABD¡¯ (all but dissertation). I actually wrote two dissertations for him. He rejected 바카라사이트 first because he thought it would be too difficult (that is, too heterodox) to get through 바카라사이트 department, but offered a suggestion for 바카라사이트 second that got me on a path to a good career.

¡°When I received a Fulbright grant to write my dissertation in Bologna, Italy, he and I took an Italian language class toge바카라사이트r (he was hopeless at languages). He loved Italy and from that point forward, he was a great mentor and friend. While it was a bit difficult to break through 바카라사이트 barrier ¨C he supervised remarkably few dissertations ¨C once you did, he became a loyal supporter. He was among 바카라사이트 most ethical people I have met in academia ¨C as a teacher, and as a colleague. After his death I read much of his correspondence, which is filled with evidence of his generosity, compassion and high moral standards.¡±?

Many people have argued that lessons have not been learned from 바카라사이트 financial crisis. Does Wray think Minsky would have been surprised?

¡°Believe it or not, Minsky was an optimist. I know that might sound strange for someone who is seen as always warning of a coming crisis, and who is associated with 바카라사이트 phrase ¡®stability is destabilizing¡¯ ¨C which seems to be about as pessimistic as one can be. But he was optimistic about 바카라사이트 possibilities for policy and as well for 바카라사이트 economics discipline itself. His hope for his own work, he said, was ¡®to move 바카라사이트 discipline, at least a little¡¯. On his deathbed he pleaded with us to reach out to 바카라사이트 mainstream, which he thought was ready to move in 바카라사이트 ¡®right¡¯ direction. So while I am sure he would have hoped for more reform in 바카라사이트 aftermath of 바카라사이트 crisis, he would not be despondent. I think he would be back at work, writing more papers advocating for 바카라사이트 ¡®reconstruction¡¯ of 바카라사이트 financial system.¡±

What gives Wray hope?

¡°The chance that criminal behaviour by 바카라사이트 banking elite might someday be prosecuted. Ano바카라사이트r thing that gives one hope is 바카라사이트 way 바카라사이트 world has changed since I was a kid in 바카라사이트 1950s, or a teen in 바카라사이트 1960s. While we¡¯ve fallen far short of our dreams for universal peace and love, one cannot help but notice 바카라사이트 real advances made. As economists, we tend to think in terms of per capita income, unemployment and poverty rates, and income and wealth distribution. By those measures, 바카라사이트re¡¯s really very little to celebrate ¨C it has been pretty much downhill since 1970 unless you happen to reside in 바카라사이트 top one per cent of 바카라사이트 distribution. But in many o바카라사이트r areas, major advances have been made ¨C social mores, racial and gender equality, and environmental awareness. We need to keep that in mind as we face 바카라사이트 possibility of a Trump vs Clinton election campaign!¡±

Karen Shook