Stabilizing an Unstable Economy
Thursday, December 8th, 2011 at
3:51 pm
Stabilizing an Unstable Economic climate
“Mr. Minsky extended argued markets had been crisis susceptible. His 'moment' has arrived.” -The Wall Street Journal In his seminal perform, Minsky presents his groundbreaking fiscal theory of investment, 1 that is startlingly pertinent today. He explains why the American economy has seasoned periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers: The natura
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Tags: unstable, william podmore, solutions for unstable economy, stabilizing, economy
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has always been and likely will always be a must read,
This is and has really re-emerged as a classic and prophetic book on the endogenous factors that drive instability. Again, the book is referred to a little too late and undoubtedly the same will happen in whatever next bubble next pops. To give a quick overview, most people study economic growth as as function of the economy's factors of production (including human capital) and their dynamics (modern economists are updating methods and ideas but people are still taught the solow growth model as foundational). The "trajectory" of an economy is usually smooth and the stochastic growth drivers/detractors are technology and exogenous shocks, where exogenous are not known from a substance or timing perspective a priori. Minsky explores a form of instability that is not discussed in most growth models, he discusses the instability that is embedded in our economies resulting from the use of currency its fluctuation from being scarce to abundant.
To me his insights as to the dynamics of what drives asset bubbles, in particular, banks propensity to lend as well as agents propensity to borrow against assets as a function of recent history was so spot on it makes you smile were it not so sad that it just happened. Minsky has identified a particularly dangerous form of the animal spirits that Keynes and more recently Schiller have written about, especially in a fiat currency environment in which we are separated from the pricing of money mechanism that the central bank is empowered to control. This book is worth reading for a multitude of reasons. Not only does it make one think about the worlds inherent instability, for which no obvious solution exists, it reminds us that we need to work on policy that tries to generate negative feedback to counteract the positive feedback to take us from hedge finance, to speculative finance, to ponzi finance.
After reading this book, one is not an expert able to give a solution to endogenous money and asset price shock risks, but one can understand the problem much more deeply. Given the dynamics driving the instability isnt stationary and central bank measures often take a long time to filter through (obviousy example being raising rates yet continuation of property speculation) more time needs to be spent on what policy might induce counterbalancing feedback. After reading Minsky one can read policy recommendations and get a more complete sense of the influence and the merit in things like bank capital cushions being used to dampen multiyear volatility. This has always been a must read, but the recent and ongoing crisis is another re-affirmation to add this to ones cart.
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|Brilliant study of a failed system,
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.
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