Table Of ContentCan “It” Happen Again?
“Today, his views are reverberating from New York to Hong Kong as economists and traders try
to understand what’s happening in the markets … Indeed, the Minsky moment has become a
fashionable catch phrase on Wall Street.”
Wall Street Journal
In the winter of 1933, the American financial and economic system collapsed. Since then economists,
policy makers and financial analysts throughout the world have been haunted by the question of
whether “It” can happen again. In 2008 “It” very nearly happened again as banks and mortgage
lenders in the USA and beyond collapsed. The disaster sent economists, bankers and policy makers
back to the ideas of Hyman Minsky – whose celebrated “Financial Instability Hypothesis” is widely
regarded as predicting the crash of 2008 – and led Wall Street and beyond to dub it as the “Minsky
Moment.”
In this book Minsky presents some of his most important economic theories. He defines “It,”
determines whether or not “It” can happen again, and attempts to understand why, at the time of
writing in the early 1980s, “It” had not happened again. He deals with microeconomic theory, the
evolution of monetary institutions, and Federal Reserve policy. Minsky argues that any economic
theory which separates what economists call the “real” economy from the financial system is bound
to fail. Whilst the processes that cause financial instability are an inescapable part of the capitalist
economy, Minsky also argues that financial instability need not lead to a great depression.
With a new foreword by Jan Toporowski.
Hyman P. Minsky (1919–1996) was Professor of Economics at Washington University St Louis and a
distinguished scholar at the Levy Economics Institute of Bard College, USA. 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 taught at Brown University, the
University of California, Berkeley and in 1965 he became Professor of Economics of Washington
University in St Louis and retired from there in 1990.
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Hyman
Minsky
Can “It” Happen Again?
Essays on Instability and Finance
With a new foreword by Jan Toporowski
First published in Routledge Classics 2016
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© Hyman P. Minsky 1982, 2016
Foreword © 2016 Jan Toporowski
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First published by M.E. Sharpe 1982
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CONTENTS
FOREWORD TO THE ROUTLEDGE CLASSICS EDITION
PREFACE
INTRODUCTION: CAN “IT” HAPPEN AGAIN?: A REPRISE
1 Can “It” Happen Again?
2 Finance and Profits: The Changing Nature of American Business Cycles
3 The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to “Standard”
Theory
4 Capitalist Financial Processes and the Instability of Capitalism
5 The Financial Instability Hypothesis: A Restatement
6 Financial Instability Revisited: The Economics of Disaster
7 Central Banking and Money Market Changes
8 The New Uses of Monetary Powers
9 The Federal Reserve: Between a Rock and a Hard Place
10 An Exposition of a Keynesian Theory of Investment
11 Monetary Systems and Accelerator Models
12 The Integration of Simple Growth and Cycle Models
13 Private Sector Assets Management and the Effectiveness of Monetary Policy: Theory and Practice
INDEX
FOREWORD TO THE ROUTLEDGE CLASSICS EDITION
This volume of essays represents the early thinking of Hyman P. Minsky, one of the most original
economists to have come out of the United States in the twentieth century. The essays reveal the
themes that emerged from his graduate studies at Harvard University and, as the title of the volume
indicates, his abiding preoccupation with the financial crisis that gripped the United States at the start
of the 1930s. Nearly a century later we commonly think of that crisis as being the 1929 Crash.
However, as Minsky’s title essay indicates, the crisis that was to haunt him through to his intellectual
maturity and beyond was the 1932–3 financial crisis, rather than the crash in the stock market that
preceded it by more than three years. The difference is important: in 1929, the stock market crashed;
in 1932–3, in response to Herbert Hoover’s attempts to balance the United States Federal budget, the
stock market and the banking system started to fail, to be rescued only by Franklin Roosevelt’s
extended bank holiday, new financial regulations, including the Glass–Steagall Act and the extension
of deposit insurance, and the New Deal. As these essays make clear, for Minsky avoiding “It” was not
just a matter of supporting the stock market and refinancing banks. It had to involve fiscal stimulus to
prevent a fall in aggregate demand, but also to provide the financial system with government
securities whose value was stable.
At the time of the crisis Minsky was entering his teenage years. He had been born in 1919 to parents
who were Menshevik refugees from Russia. They engaged with socialist politics and the trade union
movement in Chicago. Minsky was bright and entered Chicago University to study mathematics.
There he met the Polish Marxist Oskar Lange, who encouraged Minsky to study economics. After
military service, at the end of World War II, Minsky spent some months working for a finance
company in New York, before proceeding to Harvard to research for a PhD under the supervision of
Joseph Schumpeter and, after Schumpeter’s death in 1950, Wassily Leontief. His PhD thesis was a
critique of the accelerator principle that had become a key element of business cycle theory, in the
version put forward by Paul Samuelson. Minsky criticized not only the accelerator principle, but also
the absence of financial factors in business cycle theory.1
After graduating from Harvard, Minsky taught at Brown University, and then the University of
California in Berkeley, before being appointed in 1965 to a professorship at Washington University
in St. Louis. After his retirement in 1990, he was appointed a Senior Scholar at the Levy Economics
Institute of Bard College, where he worked until he died in 1996.
The essays in this volume include his first published works (“Central Banking and Money Market
Changes” and “Monetary Systems and Accelerator Models”) which clearly came out of his doctoral
researches. By the 1960s, reinforced by his work as a consultant to the Commission on Money and
Credit, Minsky was concerned with showing how an accommodating policy of the Federal Reserve
and countercyclical fiscal policy were essential to avoid financial instability. This appears in his title
essay “Can ‘It’ Happen Again?” A credit squeeze in 1966, headed off by the provision of liquidity by
the Federal Reserve, confirmed for Minsky that the dangers of financial instability remained ever
imminent. But the lessons were not learnt, and subsequent credit crunches became full-scale
recessions of increasing magnitude, culminating in the 1979 Reagan recession (“Finance and Profits:
The Changing Nature of American Business Cycles”).
After Henry Simons, the Chicago critic of liberal banking policies, Minsky was perhaps most
influenced in his financial theories by Irving Fisher’s views on debt deflation. His earliest attempts to
analyze financial crisis take the form of examining responses to what would nowadays be called
“shocks,” affecting expectations of profit from investment. Such shocks would then induce increases,
or decreases, in investment and the financing required for such undertakings. Changes in investment
were almost universally regarded as the active expenditure variable in the business cycle. Credit
conditions were the crucial circumstances that determined the financing of investment and often
investment itself.
In 1969–70, Minsky spent a year as a visiting scholar in St. John’s College, Cambridge, UK. He
took the opportunity to extend his knowledge of Keynes’s work. The outcome of this research was
Minsky’s book John Maynard Keynes, published in 1975. Here, Minsky endorsed Keynes’s view that
regulating aggregate demand and the return on investment would be sufficient to reach full
employment. It was only after the publication of that book that Minsky seems to have absorbed some
of the work of Michał Kalecki, whose investment-based theory of the business cycle gave Minsky a
way of making investment instability endogenous to capitalist production and investment processes.
This approach to the business cycle gave Minsky a theory of financial instability in which credit
failure arises within the system, rather than being the result of a shock, or lack of accommodation by
the monetary authorities. The new theory appears in this volume as “The Financial Instability
Hypothesis: A Restatement.”
This collection of essays was originally published in 1982. It contains the essentials of Minsky’s
unique theory of capitalist economic and financial processes, as well as the steps by which that theory
emerged. Minsky was to bring his analysis together in one last book, his Stabilizing an Unstable
Economy, published in 1986. But the essentials of that volume may be found in Minsky’s essays that
follow this Foreword.
Perhaps inevitably, Minsky was influenced in his analysis by the policy disputes of his time and the
debates among Keynesians as to the precise meaning of Keynes’s work. The policy disputes were
reflected in the ideological wars between Keynesians and monetarists over what to do in the face of
rising unemployment and inflation in the 1970s and 1980s. The Keynesians favoured old-fashioned
fiscal stimulus, the Monetarists preferred deflation. In that argument Minsky was certainly with the
Keynesians. However, in the matter of interpreting Keynes’s General Theory, Minsky was one of the
first economists to mount a critique of the “neoclassical synthesis,” the general equilibrium version
of Keynes’s theory that commanded the economics textbooks until the 1970s. The dispute is perhaps
of historical interest, now that the synthesis has been replaced by New Classical macroeconomics,
New Keynesian macroeconomics and most recently Dynamic Stochastic General Equilibrium models.
Minsky’s comments on the synthesis may therefore seem redundant. But it should be remembered that
it was through his critique of that synthesis that Minsky came to refine his own views on general
equilibrium theory.
It is also worth noting that the theories that replaced the synthesis in economics textbooks (up to
and including the recent “New NeoClassical Synthesis” of New Classical and New Keynesian
macroeconomics) would have been even more alien to Minsky. If there has been any progress in
macroeconomic theorizing since the 1970s it has been systematically to reduce and exclude any part
that is played by firms, or by banks and financial institutions in macroeconomic models. Minsky was
later to observe repeatedly that this exclusion deprives the models of precisely those institutions that
give capitalism its distinctive character. The notion underlying today’s “micro-founded”
macroeconomics, that the key decisions of production and investment are made by households, may
be plausible to an unworldly public or academic audience. But it represents an imaginary world rather
than modern capitalism. His emphasis on analyzing the functioning of those institutions also
distinguishes Minsky’s work from that of many post-Keynesians, with whom he is commonly
associated today. Indeed, he frequently called himself a “Financial Keynesian,” before he was adopted
by post-Keynesianism.
Along with the elimination of firms and finance from macroeconomics has also come a growing
faith in the powers of central banks to control inflation and economic activity. Paradoxically the
claims made for the economic influence of monetary policy have reached new heights since the
financial crisis which began in 2007, the “Minsky Moment” of our times. As these essays indicate,
Minsky was skeptical about the powers of central banks over the economy. Since the nineteenth
century the assumption of economic sovereignty by monetary policy has usually been the prelude to
financial crisis. For Minsky, the crucial central bank function was the lender of last resort (LOLR)
facility that the central bank may offer to banks facing liquidity shortages. Following Keynes, Minsky
believed that the regulation of the business cycle was best done by fiscal policy. In this light, the
claims made during and after the recent crisis, for central bank influence over the economy, to some
extent obscure the failure of central banks, in the period up to that crisis, to provide effectively that
lender of last resort facility that, in Minsky’s view, is the one function that central banks can
successfully perform.
As these reflections show, Minsky thought in a complex way about the complex financing
mechanisms of the modern capitalist economy. His analysis stands out in modern macroeconomics
for his refusal to reduce financing and financial relations to homespun portfolio decisions abstracted
from the institutional structure of the modern capitalist economy. Perhaps unconsciously, Minsky
looked back to the Banking School of the nineteenth century. But the financial predicaments of the
twenty-first century give these essays renewed currency today.
Jan Toporowski
NOTE
1 Minsky’s thesis was published after his death under the title Induced Investment and Business Cycles by Edward Elgar in 2004. An
excellent summary of Minsky’s work and ideas may be found in the scholarly editors’ introduction to R. Bellofiore and P. Ferri (eds)
Financial Keynesianism and Market Instability: The Economic Legacy of Hyman Minsky Volume 1 (Cheltenham: Edward Elgar 2001).
Riccardo Bellofiore and Piero Ferri are professors in the Hyman P. Minsky Department of Economics at the University of Bergamo, Italy.
Description:economy, Minsky also argues that financial instability need not lead to a great depression. With a new foreword by Jan Toporowski. Hyman P. Minsky
