Keen – The Financial instability Hypothesis

Here Steve Keen distinguishes between the neoclassical representation of economies as being stable and tending to be in equilibrium and Minsky’s approach which incorporates possible instabilities.

The extract is from pp.326-327 of Keen, S. (2011). Debunking economics : the naked emperor dethroned? (Rev. and expanded ed.). London; New York: Zed Books Ltd. The quotes are from Minsky H (1982) Inflation, Recession and Economic Policy, Brighton: Wheatsheaf

Minsky’s starting point was that, since the Great Depression had occurred, and since similar if smaller crises were a recurrent feature of the nineteenth century, before ‘Big Government’ became the norm in market economies, an economic model had to be able to generate a depression as one of its possible outcomes:

‘Can “It” – a Great Depression — happen again? And if “It” can happen, why didn’t “It” occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself’ (Minsky 1982: 5 emphasis added).

For this reason, Minsky explicitly rejected neoclassical economics:

The abstract model of the neoclassical synthesis cannot generate instability. When the neoclassical synthesis is constructed, capital assets, financing arrangements that center around banks and money creation, constraints imposed by liabilities, and the problems associated with knowledge about uncertain futures are all assumed away. For economists and policy-makers to do better we have to abandon the neoclassical synthesis. (Ibid.: xiii)

In place of the non-monetary, equilibrium-fixated, uncertainty-free, institutionally barren and hyper—rational individual-based reductionist neoclassical model, Minsky’s vision of capitalism was strictly monetary, inherently cyclical, embedded in time with a fundamentally unknowable future, institution-rich and holistic, and considered the interactions of its four defining social entities: industrial capitalists, bankers, workers and the government.

Commentary added 15th October 2014