This book presents a convincing case that important aspects of Keynes' thinking has been neglected or omitted from the neoclassical synthesis. During an atypical period of financial stability in the post WWII decades, when: "The banking system came out of the war with a portfolio heavily weighted with government debt" (p127) and when memories of the 1929 crash held a stabilizing influence over finance in western countries, the neoclassical synthesis assumed away Keynes' focus on the destabilising role of investment sentiment and leveraged finance. Minsky effectively argues that Keynes' focus on uncertainty and the inherent instability caused by runaway 'animal spirits' was neglected by the so called Keynesian's. "Thus The General Theory is a theory of investment and why it is so prone to fluctuate. The glib assumption made by Professor Hicks in his exposition of Keynes' contribution ... is a caricature of Keynes' theory of investment" p92. "Keynes without uncertainty is something like Hamlet without the Prince" p55.
Most of us remember from Keynes that his key focus was on aggregate demand in maintaining economic activity and growth. Of the components of this aggregate demand, consumption is a factor which is influenced in a self referencing way by the level of economic activity itself (endogenous in economics speak). As Keynes emphasises and Minsky re-emphasises, it is the cyclical swing in speculative appetites for risk and leverage found in the investment component of aggregate demand, which best explain booms and slumps. Booms provide the conditions for the formation of financial crisis by increasing the toleration and necessity for leverage and risk, partly in order to maintain profit levels. Once the system has predictably engorged itself full of leverage and risk during the good times, after a while any potential 'shock' or bad news can trigger the deleveraging crisis stage. Each stage causes the next, while the triggers or economic shocks are often incidental:
"A boom once started lives a precarious life. It depends upon realization of optimistic expectations about yields, ..."p112. "Thus an increase in confidence and in the state of credit is equivalent in its effect upon the potential for debt-financing of investment to an improvement in current yield. Even if operating firms do not react to such changed views about the appropriate liability structure, an increase in leveraging can take place. Owners and prospective owners of shares can view the debt-financing of share ownership as an alternative to the debt-financing by the owning organisation, ... Thus with a fixed supply of shares, the market prices of shares increase." p119. "in a boom the ingenuity of bankers is directed at turning every possible source of temporarily idle cash into a source of financing for either real operations or financial position making."p140.
The solution which Keynes arrived at all those years ago was the 'socialisation of investment'. In other words, government controlling a main portion of the unstable investment function in the economy:
"To do better it is first necessary to constrain the liability structures of business firms. Debt-financing of investment and of positions in the stock of capital will have to be regulated, especially for large-scale organisations."p165. "As socialization of the towering heights is fully compatible with a large, growing, and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure."p164.
This later point seems an outdated solution, and opposite to the direction in which economies and economics have been travelling since this book was written. But even if the proposed answer here is questionable, that does not take away from the impressive predictive power contained within his analysis of the problem.
As other reviews have noted, this is a technical book including much algebra etc., so not for everyone. But I skipped past all the algebra pages and still got a lot from it, and also found it to be a good partial guide to Keynes' 'The General Theory', which is arguably even more technical and impenetrable in places. The comments made by Minsky regarding the weak points or unfinished business of 'The General Theory' seem very valid to me. I sympathise with his opinion that events (1937 heart attack, WWII, early death) prevented Keynes from adequately fine tuning and directing the shape and course of Keynesian thought. Many economists and theories have attempted to be acknowledged as continuing the furrow which the brilliance of Keynes started, but Minsky seems to me to have taken over the mantle most sincerely in the right spirit.
Although this book was written in 1975, as the extracts above illustrate, it feels very very modern in places, and its message certainly rings very loud and true since 2007. The many allusions Minsky makes to speculation, refinancing and "experimentation with liability structures" seem to explain the sub-prime securitisation crisis in a nutshell, and shine a critical light on the growth of derivatives markets etc. It also provides a convincing narrative for the inflation and other problems of the 1970's which I had not heard before.
As the popular 'Minsky moment' term illustrates, the all important judgement of history accords a great deal of credibility to Minsky's analysis regarding the instability of capitalism. A credibility which free market thinkers have conclusively lost. All in all not an easy read, but well worth the effort for a book which is only going to grow in recognition.
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James F. Mueller
A Book on Financial Instability
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Michael K. Fox
Worth some hard work
Reviewed in the United States on 26 February 2020
Amazon Customer
Very good explanation of the cyclical nature of the capitalist
Reviewed in the United States on 22 April 2010
