Posted by: Dirk | February 6, 2017

Hyman Minsky on the aim of policy

I am currently writing up an article on what Minsky added to Keynes an onwards to whether this is an up to date theoretical framework ready for use in the 21st century. In a nutshell, Keynes explained that output, inflation and unemployment are driven by changes in investment, which is itself driven by changes in interest rates and expected yields. Minsky adds a financial structure – the liability side – to this part of Keynes’s theory.

Both have in common the idea that economics is not a discipline free of value judgments that are mostly prior to theorizing. Keynes thought unemployment a “bad”, and especially mass unemployment. His idea was to add social stability to society by keeping everybody willing to work employed. The modern welfare state developed, financed and run by big government and with the support of a big central bank that ensured the government does not run out of money. Then came neoliberalism and all of this was declared to be bonkers and the cause for inflation, unemployment and low economic growth. After enduring three decades and a half of neoliberal policies one has to conclude that we now have even lower economic growth rates, problems of deflation and not inflation, and a skewed labour market with lots of unemployment, low-paid and part-time jobs and historically high levels of inequality.

In order to return to the decades of social peace that Western societies enjoyed in the 1950s up until the 70s, it is useful to reread some of that periods thinker. Among the greatest in economics is Hyman Minsky. This excerpt is from the last paper published by Hyman Minsky (link):

The aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exists. If amplified, uncertainty and extremes in income maldistribution and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions have to be constrained. If it is necessary to give up a bit on market efficiency or aggregate income, in order to contain democracy threatening uncertainty, then, so be it. In particular, there is a need to supplement private incomes with socially provided incomes, so that civility and civic responsibility are promoted.

If we want to go forward, then we have to change course. Both in the real world, where policy makers, press and the lay public have to understand the recent history as one of decline and not progress. Of course it is up to some to persuade the others that we have to reinterpret our recent past, and that will take time. However, letting things continue without implementing change on a larger scale will not lead to any improvement in economic or social terms.

One issue where what Minsky wrote in the paragraph applies is the euro zone. How can people expect Greeks or Spanish or Irish or other people to behave decently if they have sky-high unemployment, low-paid jobs (after having had much better-paid ones), a lack of power in their relation to employers, etc.? The euro zone is socially unstable, and it needs to be fixed. Whether it is still possible to do so the future might show.



  1. “Keynes explained that output, inflation and unemployment are driven by changes in investment, which is itself driven by changes in interest rates and expected yields.”

    Keynes also said this?

    “Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.”

    • Thank you for bringing this up. Let me expand a bit. First of all, ch. 24 is titled “Concluding Notes on the Social Philosophy towards which the General Theory might Lead”. This clearly is about the future. So, yes, Keynes said that the rate of interest will not by itself determine an optimum rate of investment. However, I never doubted that. Keynes explained in his General Theory that investment is driving the economy, and in the 1930s during the Great Depression this is mostly private investment. The Great Crash of 1929 and what followed was the biggest real estate and stock market crash that the US had ever seen. Unemployment resulted because the production of capital goods was decreased quite a lot, creating unemployment, deflation and loss of output.

      Why did investment slump? Well, expected yields were well below interest rates as asset prices were believed to collapse further in the process of debt-deflation that was also described by Fisher (1933) and Minsky’s famous saying of “making position by selling out position”. So, if only expected yields would be higher than investment would go up and we’d leave the slump, Keynes argued. An increase in aggregate demand would help, because expected yields would be shifted up as potential profits would increase. The only way to bring this about if private sector spending did not increase was to increase government spending (including public investment).

      Keynes wrote about the business cycle and the slump with a lack of investment that needed to be cured. In chapter 24 he thought about the future and whether we would not run out of opportunities for investment, at least for the private sector. In that context your quote makes perfect sense. Keynes thinks about a permanent increase in public investment (and consumption), whereas in the context of the 1930s situation he probably think of a temporary solution.

  2. […] via Hyman Minsky on the aim of policy — econoblog101 […]

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