Hyman Minsky

American economist

Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky is sometimes described as a post Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets, opposed some of the financial deregulation of the 1980s, stressed the importance of the Federal Reserve as a lender of last resort and argued against the over accumulation of private debt in the financial markets. Minsky's economic theories were largely ignored for decades, until the subprime mortgage crisis of 2008 caused a renewed interest in them.

A native of Chicago, Illinois, Minsky was born into a Jewish family of Menshevik emigrants from Belarus. His mother, Dora Zakon, was active in the nascent trade union movement. His father, Sam Minsky, was active in the Jewish section of the Socialist party of Chicago. In 1937, Minsky graduated from George Washington High School in New York City. In 1941, Minsky received his B. S. in mathematics from the University of Chicago and went on to earn an M. P. A. and a Ph. D. in economics from Harvard University, where he studied under Joseph Schumpeter and Wassily Leontief.

Minsky taught at Brown University from 1949 to 1958, and from 1957 to 1965 was an associate professor of economics at the University of California, Berkeley. In 1965 he became Professor of Economics of Washington University in St. Louis and retired from there in 1990. At the time of his death he was a Distinguished Scholar at the Levy Economics Institute of Bard College. He was a consultant to the Commission on Money and Credit (1957–1961) while at Berkeley.

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky stated that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts. This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work. "He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said Henry Kaufman, a Wall Street money manager and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the Federal Reserve as a lender of last resort." Minsky's model of the credit system, which he dubbed the "financial instability hypothesis" (FIH), incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher. "A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles." Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a so called free market economy – unless government steps in to control them, through regulation, central bank action and other tools. Such mechanisms did in fact come into existence in response to crises such as the Panic of 1907 and the Great Depression. Minsky opposed the deregulation that characterized the 1980s. It was at the University of California, Berkeley, that seminars attended by Bank of America executives helped him to develop his theories about lending and economic activity, views he laid out in two books, John Maynard Keynes (1975), a classic study of the economist and his contributions, and Stabilizing an Unstable Economy (1986), and more than a hundred professional articles.

Minsky's theories have enjoyed some popularity, but have had little influence in mainstream economics or in central bank policy. Minsky stated his theories verbally, and did not build mathematical models based on them. Minsky preferred to use interlocking balance sheets rather than mathematical equations to model economies: "The alternative to beginning one's theorizing about capitalist economies by positing utility functions over the reals and production functions with something labeled K (called capital) is to begin with the interlocking balance sheets of the economy." Consequently, his theories have not been incorporated into mainstream economic models, which do not include private debt as a factor. Minsky's theories, which emphasize the macroeconomic dangers of speculative bubbles in asset prices, have also not been incorporated into central bank policy. However, in the wake of the financial crisis of 2007–2010 there has been increased interest in policy implications of his theories, with some central bankers advocating that central bank policy include a Minsky factor.

Though Minsky's research in the 1980s depended on Keynesian analysis, he thought that changes in the structure of the US economy by then required new analysis, and for this he turned to Schumpeter. Both Schumpeter (and Keynes), Minsky argued, believed that finance was the engine of investment in capitalist economies, so the evolution of financial systems, motivated by profit seeking, could explain the shifting nature of capitalism across time. From this, Minsky split capitalism into four stages: Commercial, Financial, Managerial and Money Manager. Each is characterized by what is being financed and who is doing the financing.

Minsky's first period correlated to Merchant Capitalism. In this period, banks use their privileged knowledge of distant banks and local merchants to gain a profit. They issued bills for commodities, essentially creating credit for the merchants and a corresponding liability to themselves, so in the case of unexpected losses they guaranteed to pay. When a credit contract was fulfilled, the credit was destroyed. Banks financed the inventories of merchant, but not capital stock ––this means that the primary source of profit was through trade, and not expanding production as in later periods. As Minsky explained, "commercial capitalism might well be taken to correspond to the structure of finance when production is by labor and tools, rather than by machinery and labor."

The industrial revolution put more importance on employing machinery in production, and the non labor costs that came with it. This required 'durable assets' and so brought about the corporation as an entity, with limited liability for investors. The main source of financing shifted from commercial banks to investment banks, especially with the proliferation of stocks and bonds in security markets. As competition between firms could lead to a decline in prices, threatening their ability to fulfill existing financial commitments, investment banks started promoting a consolidation of capital by facilitating trusts, mergers and acquisition. The Stock Market Crash of 1929 ended their dominance of the economy.

Relying on the profit theory of Michal Kalecki, Minsky argues that level of investment determines aggregate demand and thus the flow of profits (i. e. investment finances itself.) According to Minsky, the Keynesian deficit spending of post depression economies guaranteed the flow of profits, and allowed for the return of firms financing themselves out of profits (something that hadn't been widespread since the first period of capitalism.) Management in firms became more independent on the investment banker and the shareholder, leading to longer time horizons in business decisions, which Minsky believed was potentially beneficial. He offsets this, however, by pointing out that firms became bureaucratized, lacking the dynamic efficiency of earlier capitalism, such that they became "prisoners of tradition." Government spending decisions shifting to underwriting consumption rather than the development of capital assets also contributed to stagnation, although stable aggregate demand meant there was an absence of depressions or recessions.

In his book John Maynard Keynes (1975), Minsky criticized the neoclassical synthesis' interpretation of The General Theory of Employment, Interest and Money. He also put forth his own interpretation of the General Theory, one which emphasized aspects that were de emphasized or ignored by the neoclassical synthesis, like Knightian uncertainty.

(2013) Ending Poverty: Jobs, Not Welfare. Levy Economic Institute, New York. (2008) [1st. Pub. 1975]. John Maynard Keynes. McGraw Hill Professional, New York. (2008) [1st. Pub. 1986]. Stabilizing an Unstable Economy. McGraw Hill Professional, New York. (1982) Can "It" Happen Again?. M. E. Sharpe, Armonk. (Winter 1981–82) "The breakdown of the 1960s policy synthesis". New York: Telos Press. Archived at Hyman P. Minsky Archive. 166.