This book is not history of thought, nor is it biography. It is a concise outline of Minsky’s thought, but that outline is the consequence of my own synthesis and consolidation. I have tried everywhere to represent Minsky’s intention unambiguously, but at the same time I have avoided supposing that what Minsky said is, by that fact, necessarily true. Rather I have assumed that Minsky’s work may be valuable in the worthwhile but incomplete task of understanding capitalism; I have tried to convey something of that value, and to suggest what use might be made of Minsky’s work by another generation of students of society.
In doing so, I have developed three main threads over the course of the book. The first thread is financial theory. Minsky offered a theory of how financial capitalism works, which has the virtue of also giving insight into how it fails. He perceived, in my view, enduring patterns of the financial system and of market society, and it has been my goal to organize these – in a way that Minsky never did but with which I think he would agree – into a theory of capitalist finance. This is done in the main text of chapters 2, 3, 5, and 6, and is what I would consider to be the main contribution of the book.
Dealing with Minsky’s theoretical contributions has required, to some extent, a factoring out of financial history, the story of the crises that motivated Minsky and provided him with an ongoing source of inspiration, examples, and evidence. Minsky’s own writing is less accessible, some decades on, for its being tied to circumstances that have changed. One begins to resent ninety-five pages on the crisis of 1975 in Stabilizing an Unstable Economy! The reader who wishes to catch up on the history of the financial crises of the latter half of the last century is directed to Wolfson (1986), for his systematic presentation of each of the relevant episodes; what discussion I have included here of this history is largely confined to brief illustrations that are relatively self-contained and do not presume much in the way of prior knowledge.
At the same time I have felt it important to say a bit about the global financial crisis of 2008. This comes, first, in the form of a narrative in the last section of this chapter. Second, I have made extensive use of the report of the Financial Crisis Inquiry Commission (FCIC), created by the US legislature to investigate the causes of the crisis. The report is based on extensive interviews, and so in many cases it allows a direct view into the motivations and perceptions of those actually involved in how the events played out. I have taken from that study numerous illustrations of what Minsky understood to be parts of the general pattern of financial crisis. For a more analytical look at the 2008 crisis I recommend the characteristically efficient and insightful analysis of Mehrling (2010).
Minsky offers not only a theory but also a way of being an economist, which is the subject of the second thread of this book. In sections set in differentiated type, this thread proceeds in parallel with the first. Unlike the theoretical development, which is organized to present the theory coherently, this thread is organized chronologically. It considers, in order, Minsky’s major works (his dissertation, two books, a major research study, an edited volume, and an important series of papers), and in doing so illustrates how Minsky came to know what he knew. This second thread ends with a consideration of contemporary interpretations of Minsky.
The third and final thread takes up the relationship between Minsky’s work and the economics literature. Minsky was a stern critic of many of the main currents of economic and financial theory. He objected to the assumptions that underlie the IS–LM model, in Minsky’s time a major framework for economic analysis and still the main teaching model in undergraduate macroeconomics. Minsky felt that IS–LM lacked a role for realistic financial relationships, which were for him the driving force in an understanding of economic activity. Neither was this critique directed only toward IS–LM: at many turns, Minsky’s focus on finance was the basis for divergence from existing theory.
As a consequence of these objections, Minsky worked at the margins of the economics profession, a topic that runs through his writing from the beginning right to the end. He addressed his colleagues with engagement, despite his frustrations with the trends in assumptions and methodologies of economics that came and went during his time. Rather than rejecting economics entirely, he took refuge among others on the margins. He found allies and an audience there, but they were not spared his criticism either. I have tried to make a constructive contribution without rehashing well-known debates about what is wrong with economics. Minsky, I argue, was trying to express something that is very difficult to express in the language of economics, and this is so for interesting reasons. In chapter 4, I try to be precise about the points of divergence, those specific aspects of Minsky’s financial capitalism that are incompatible with economic theory and practice. I come back to this in chapter 7, where I ask what work has come out of this incompatibility.
In the next section, I introduce the themes of the book in a skeletal form. The section that follows illustrates the disciplinary context in which Minsky worked, for those who might be unfamiliar with economics. The final section of this chapter is a brief reading of the global financial crisis of 2008.
Time, uncertainty, capitalism
Hyman P. Minsky (September 23, 1919–October 24, 1996) began his career as an economist with the completion of his doctoral dissertation at Harvard University in 1954. The experience of the stock market crash of 1929 and the subsequent Great Depression led Minsky, like many of his profession, to the question of whether another large financial disturbance could occur – whether “it” could happen again. Unlike most of his colleagues, he felt compelled to study at first hand the detailed workings of the financial system, the infrastructure of capitalism. This took the form of a study early in his career of the Federal Funds market from a seat in a New York money-market broker, and from 1967 as a consultant to Mark Twain Bank (1957a; Mehrling 1999).1 Minsky concluded that not only could instability recur, but in fact it would necessarily do so, and that such instability was indeed to be expected as a normal part of the functioning of US capitalism.
The crises of the 1960s and 1970s seemed to be powerful evidence in favor of this hypothesis. Much of Minsky’s work on the financial system is written in response to the financial disturbances he observed. His narrative evolves in response to these, but to a significant degree it is the same story each time. The crises that attracted Minsky’s notice were these: the Kennedy Slide of 1962 (1962; 1963a); the 1966 Credit Crunch (1965c; 1968b; 1968c; 1969a; 1969b); the Penn Central liquidity squeeze of 1969–70 (1970a; 1971; 1974a; 1974e); the international monetary crisis of August 1971 (1972a; 1973a); the Franklin National crisis of 1974–5 (1974d; 1976; 1978a; 1978e; 1986e); the 1978 intervention in the exchange value of the dollar (1978f); the silver crisis of 1980 (1980a; 1981b; 1982a; 1983a); the Continental Illinois crisis of 1984 (1984d); and the 1987 financial crisis (1988a; 1988c; 1988d; 1989b; 1992a; 1993a; 1995b). Crisis did, indeed, seem to be normal.
Minsky drew a stark conclusion from these crises, one that was to define his thinking, his career, and his legacy: “[I]n the early 1960s the mode of behavior of the financial system underwent significant changes and … these changes tended to accelerate the trend toward fragile finance” (1975b, 10; also 1995a). Following a stable period between the end of the Depression and the mid-1960s, crisis had become, if not predictable, at least