Stabilizing an Unstable Economy

“Economic theory is the product of creative imagination; its concepts and constructs are the result of human thought”

That quote is from the first page of Hyman Minsky’s Stabilizing an Unstable Economy. Picture Jeffrey Lebowski looking at the entirety of mainstream economics and saying “Yeah, well, that's just like, your opinion, man”, except if Jeffrey Lebowski was a veteran economist. Minsky made it clear from the start that he would show no deference to consensus views. Economists had not, and still have not, solved all the questions of economics.

Yet Minsky is hardly the only writer to make that point, so why consider this book in particular? Because Hyman Minsky wrote something that is much more than a critique, and because he did it as someone fully versed in contemporary economic theory. The book—rightfully regarded as the defining legacy of Minsky’s long and accomplished economics career—is broad, covering relevant economic history, the emergence and standing of economic thought, Minsky’s alternative economic framework, and Minsky’s beliefs on how we should restructure policy and the economy.^[1] It’s Minsky collecting his entire understanding of the economic world into one ambitious and detailed narrative. Writing a broad tome so exhaustively and candidly, building on data and equations while extrapolating far past them into the realm of policy opinions, creates some vulnerability. This is not the type of thing that many modern economists would attempt. Understanding Minsky’s informed and thoughtful worldview can help the rest of us polish our own economic and policy opinions.

Minsky saw the economy of his time as fundamentally unstable, as each recession and subsequent government response only led to worse incentives, higher leverage, and greater instability. While mainstream economic methods have not incorporated even this subset of Minsky’s views, there was a surge in Minsky’s topicality when the Great Moderation came to a sudden end with the Great Recession. While many cited that financial and macroeconomic crisis as a “Minsky moment”, few have taken the time to read Minsky’s work and understand the rest of his intellectual framework beyond his juicy soundbites.

A Minskyan history^[2]

Stabilizing an Unstable Economy—henceforth, SUE—was published in 1986. While much has happened in the four decades since, that is still recent enough that the economic foundations of Minsky’s world have stayed relevant. SUE incorporates ideas from Minsky’s career as far back as at least the 1950’s, and while Minsky would keep writing until his death, this book preceded that death by only a decade and presents a comprehensive picture of Minsky’s views.^[3]

The 1986 date is important not only to explain how SUE summarizes the worldview that Minsky built over the course of his life, but it’s also crucial because of the world events that led up to the book. Minsky was writing following a series of recessions and financial crises from the late 1960s through early ‘80s, after economic stability from 1945-65. In Minsky’s view the economy became increasingly unstable after 1965, with each recession’s recovery setting the stage for a subsequent deeper crisis. The early parts of SUE are an impressive economic history, as Minsky recounts those times in precise detail.

The 1973-75 US recession looms large in SUE and illustrates Minsky’s key points. This book is a reminder of just how severe that recession was, that it should be far from an afterthought in our economic history. Through the Great Recession of the late 2000s and the slow growth years after, the world gave us no shortage of visuals and statistics that showed the Great Recession as being the most severe since the Great Depression. The podium of that hundred years has the Great Depression for gold, the Great Recession for silver, and then nobody named to the bronze. Yet that shallow viewpoint understates the severity of the mid-1970s recession.

Minsky describes it as almost two recessions in one: first there was an oil shock recession in 1973, followed by a larger and more substantial financial crisis across 1974 and 1975. A depression was only averted through action by the government, as federal spending ballooned to 23.8% of Gross National Product (GNP) by 1975, the Federal Reserve financed several bailouts, and the FDIC fully protected all deposits at the insolvent Franklin National Bank. The government is capable of preventing depressions since “increased government spending and tax cuts, if carried far enough, will halt a precipitous decline of the economy” (p. 24).^[4] In a recession the government will spend more on employment insurance and other transfer payments, tax revenue will decrease with lower incomes, and the government provides financial liquidity through selling safe government debt and often by buying assets or lending to fraught firms under generous conditions. Yet this type and scale of intervention becomes expected for the future and relied upon, and “the success achieved by the authorities in preventing a financial crisis from fully developing is not a free good”. In the 1970s “Federal Reserve protection was explicitly extended to all overseas deposits at US.-chartered member banks”, making the Federal Reserve more generous than before but without giving it any new oversight powers to balance that out. “The responsibilities of the Federal Reserve were increased, but its power was not” (p. 72).

This extension of responsibility affects expectations, leading to new risky financial activity that ultimately leads to the next crisis. The US had another sharp recession in 1980, followed again by an even larger one in 1981-82. “Every time the Federal Reserve protects a financial instrument it legitimizes the use of this instrument to finance activity. This means that not only does Federal Reserve action abort an incipient crisis, but it sets the stage for a resumption in the process of increasing indebtedness—and makes possible the introduction of new instruments. In effect, the Federal Reserve prepares the way for a restoration of the type of financing that is a necessary, but not a sufficient condition, for an investment boom that is brought to a halt by financial crises.” (p. 106). Like the 1974-75 crisis, Minsky sees 1981-82 as another potential depression only averted by massive government action.

Minsky’s narrative of the 70s and 80s was one of endogenous and increasing instability. “What we seem to have is a system that sustains instability even as it prevents the deep depressions of the past. Instead of a financial crisis and a deep depression being separated by decades, threats of crisis and deep depression occur every few years; instead of a realized deep depression, we now have chronic inflation.” (p. 106). That is the history Minsky looked back on as he wrote in the mid-1980s, following those harsh recessions and in the midst of instability at contemporary financial institutions (the Savings & Loans Crisis).

Minsky on Economics

Minsky reviewed contemporary mainstream economics, and he wasn’t shy about his displeasure with it. He is ever colourful, throwing out quotes like “if there is a road to full employment by way of the Patinkin real-balance effect, it may well go by way of hell” (p. 198).

With a finance-centric view of economics, Minsky decided that the absence of finance in mainstream models meant that “modern orthodox economics is not and cannot be a basis for a serious approach to economic policy” (p. 193). Finance is not just banks and trading, it’s the entire structure of debt relationships that connect businesses of all types to enable short-term operations and long-term investment. Finance isn’t contained to bankers, it involves all of us, as “banks, other financial institutions, businesses, and households are always seeking new ways to finance activities” (p. 220). The intricacies of our debt relationships are not represented in leading macro models. Every model has to simplify something about our complex world so that other relationships can be emphasized and examined; at the heart of Minsky’s disagreement with other economists is whether finance should be the one of the complexities cut away from how we represent the world.

Minsky’s economics had little time for equilibrium analysis, except to critique why equilibrium is a misplaced emphasis for other economists. Since he believed that “a capitalist economy is inherently flawed because its investment and financing processes introduce endogenous destabilizing forces” (p. 320), mainstream models were less useful because their emphasis was on “the interactions that make for equilibrium and not upon endogenous disequilibrating processes” (p. 115). Furthermore, those models lacked a consistent view of economic movements across time, “as the neoclassical synthesis mainly compares positions of equilibrium, the economy it models does not exist in historic time but in a timeless vacuum”, leading such models to “explain the existence of persistent disequilibrium by processes that block the workings of the equilibrating mechanisms within the system” (p. 155).

Minsky was an ardent believer in John Maynard Keynes’s economics, but he wasn’t what we call a “Keynesian”, vehemently disagreeing with how others had interpreted Keynes’s work. Keynes, and particularly his 1936 tome, The General Theory of Employment, Interest and Money, loomed large over the field of economics. Keynes, his theories, and their interpretation by economists was so important to Minsky that his only other book, written previously in 1975, is on the topic and is simply titled John Maynard Keynes.^[5][6] Keynes shows up very early in SUE, as Minsky claims that “the economy is now behaving in the way that Keynes’s theory holds that a capitalist economy with a fragile structure and big government is expected to behave. The error is in current economic theory, which grossly misinterprets Keynes’s work” (p. 5).

An aside on Keynes

I was a little taken aback by how seriously Minsky took Keynes, and how important it was to him that we interpret Keynes correctly. Not that I expect anyone to disregard Keynes, but now he seems like something from a far enough past that we reference him historically, rather than seeing him as having relevant opinions over the present. When reading other background material about Minsky I found this comment from Paul Krugman—himself an illustrative example of a modern influential economist—about both Minsky and Keynes: “My basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care. I mean, intellectual history is a fine endeavor. But for working economists the reason to read old books is for insight, not authority”.^[7]

It makes sense that Keynes was more present to Minsky than to Krugman. Keynes died in 1946, before Krugman was even born, yet Minsky was already a graduate student and researcher in the US army during Keynes’s later (and still active) years. Thus Keynes and Minsky slightly overlapped, while Keynes is only something of the past to Krugman and other current theorists. Furthermore, Minsky’s early decades as an economist overlapped with other economists who proposed Keynes-inspired mathematical and graphical frameworks of the economy. If those economists used Keynes to justify their models, then it could have been important to Minsky to point out errors or subjectivity in those interpretations.

Now in Krugman’s time we have the benefit of many decades more of newer economic theories, and of gathering data and observing the world through all that time. We can look back on Keynes and evaluate him against our more accurate and polished modern thinking. Keynes is a predecessor, not an authority, to us.

Yet I’ve also come to wonder: Do we, living in the present, have a bit of hubris? It is not lost on me that I read a book from 40 years ago, and that book still seemed very relevant to me and not at all obsolete in its general themes or most of its details. Maybe we should not presume that the great thinkers of our time need little from the great thinkers that preceded them. Consider the times that Keynes lived through and even affected: the incredible economic volatility of the late 19th century, WWI, the roaring twenties, the Great Depression, and WWII. There were incredible economic changes through that time. Minsky, shifted several decades, similarly lived through the Great Depression and WWII, followed by the economic growth, restructuring, and calamities of the next five decades. Maybe there is something particularly valuable from experience that affects our judgment and creativity when interpreting the world, that should make us want to understand exactly what those thinkers of the past really meant.

Let’s get back to Minsky and his economic views.

Minsky’s economics: The financial economy

The financial structures that underlie an economic system are of first-order importance to Minsky. They are what made the US economy fundamentally different at different periods of US history. He even goes so far as to say “any possible impact of accumulation or the technical productivity of capital assets is of secondary importance” (p. 189). These structures had changed through US history, with financial activity growing in complexity and importance by the time of Minsky’s writing. The economy became heavily leveraged, with real economic activity financed by debt.

In contrast to the equilibrium conditions emphasized in mainstream economics, prices exceed marginal and average cost, because firms have other costs including servicing their debts. “For output to be produced over a succession of periods, prices must exceed the per-unit costs of those inputs that directly vary with production” (p. 161). This unit profit gives firms agency to use money for “taxes, retained earnings, dividends, interest, rents, the purchase or hire of overhead services, and executive compensation” (p. 173). Firms invest such that they can profit in the future, and—with dubious temporal causality—they have to invest again in the future to sustain the financing conditions of their past. While Minsky is usually skeptical of claims that an economic property must be true to create consistency, such as equilibrium or rational expectations, this future profitability as validation of the past and present is one claim where he breaks with that pattern.

Minsky creates a taxonomy of financing: hedge, speculative, and Ponzi. If cash from an investment can pay off both interest and principal, then the financing is hedge; if only interest can be paid off, then it is speculative; and if it is insufficient (even if only in the near-term) to pay off even its interest, then it is Ponzi. All three can exist rationally; “a regime in which capital gains are being earned and are expected is a favorable environment for engaging in speculative and Ponzi finance” (p. 234).

Financing is driven by profit, and agents are not clairvoyant, in particular about financial assets. “The appropriate liability structure for holding any type of capital asset cannot be known in the same sense as the appropriate technology for manufacturing. [...] Uncertainty is largely a matter of dealing today with a future that by its very nature is highly conjectural” (p. 207). Economic participants create expectations based on their experience. “Current views about financing reflect the opinions bankers and businessmen hold about the uncertainties they must face. These current views reflect the past and, in particular, the recent past, and how experience is transformed into expectations. A history of success will tend to diminish the margin of safety that business and bankers require and will thus tend to be associated with increased investment; a history of failure will do the opposite” (p. 209). While “in the aftermath of a financial crisis, bankers and businessmen who have been burned shy away from speculative and Ponzi financing” (p. 234), “as a previous financial crisis recedes in time, it is quite natural for central bankers, government officials, bankers, businessmen, and even economists to believe that a new era has arrived” (p. 237). The economy can build up leverage and innovative financing methods during good times with a self-fulfilling optimism as improving equity valuations make debt more serviceable, leading to even more debt.

Debt, by its very nature of creating payment commitments across time, has a long-term impact on businesses. “The payment commitments come due and are discharged as the economy moves through time, and the behavior and particularly the stability of the economy change as the relation of payment commitments to the funds available for payments changes and the complexity of financial arrangements evolve. [...] The financing of activity results in a residue of financial commitments. Investment not only affects aggregate output, income distribution, and production capacity, but in a capitalist economy it also leaves a residue in the financial structure.” (p. 219). This financialization of the economy has large real effects. Since money is created by the extension of credit, it is “endogenously determined” and not “mechanically controlled by the Federal Reserve” (p. 253).

Given the importance of finance and financial assets in Minsky’s model, he identified a two price system with prices of capital (or investment) goods and of current goods. Debt commitments are specified in dollars, and paying those debts is of the utmost importance. Some amount of money must be kept as insurance against “unfavorable contingencies” (p. 201). With the debt commitments and insurance capital holding primary importance, “the price of a unit of money is always a dollar, so that the price paid for the protection a dollar yields cannot vary. However, the value of the protection that a dollar yields can change. When this happens, the price of alternatives to holding money—that is, the price of other assets—must change.” (p. 201). Asset values and other prices can change massively and rapidly in response to financial instability.

Applying that to a relatively modern example, consider the late 1990s in financial markets. After a series of financial crises in Asian countries in 1997 and the Russian government defaulting on debt in 1998, there was a widespread flight to safety as financial institutions tried to reduce exposure to risky assets and to generally deleverage. As these firms exited similar positions simultaneously, their selling pulled down the prices of previously valuable assets. This debt-deflation of prices of all except the safest assets ultimately led to the downfall of Long-Term Capital Management (LTCM), requiring a coordinated bailout from 14 of the largest banks who had to act in their own best interests to prevent further contagion as counterparties to LTCM.

Minsky saw the world of the 1970s-80s as one with extensive and increasing debt financing of economic activity, by economic actors who formed and acted on expectations based on recent history. Financial activity can grow and even become self-fulfilling, as “rising profits that are the mirror image of an investment boom increase the apparent debt-carrying capacity of profit-earning firms. Once a shift toward increased external and speculative financing develops, market reactions validate the decision to engage in such financing.” (p. 237). The flip side of that coin is that bad economic times can reduce asset prices and require a broad unwinding of debts, creating a debt-deflation and a crisis.

Crisis and government

Minsky believed that the government has a duty to prevent depressions. He believed this even with his emphasis on bad incentives and accelerating instability. Such was Minsky’s respect for the negative consequences of severe recessions, and how much he cared for the wellbeing of everyone in the economy.

To prevent depressions, we have to prevent debt-deflation cycles where firms unwind their debt commitments, and to prevent debt-deflation we need to sustain the profits of private firms. “A major function of the pricing mechanism is to generate realized and expected gross profits large enough to keep investment on track. Investment or its equivalent in government deficits is necessary to sustain profits so that the inherited debt structure and historical capital-asset prices are validated” (p. 189). Sustaining profits can happen through direct government intervention with troubled firms (as well-documented by Minsky for the 1970s-80s period) or through deficit-funded aggregate demand: “by sustaining aggregate demand, [the deficits of Big Government] sustain corporate profits and feed secure assets into portfolios.” (p. 106).

It’s worth briefly explaining the national income accounting that underlies Minsky’s analysis here. For the economy as a whole, if we look at all participants, the total amount of money gained in the economy is zero. That doesn’t mean there isn’t economic activity, but rather that for each seller (with an inflow of money) there is a buyer (with an outflow of money), and for each borrower (with an inflow of money but with a corresponding debt) there is a lender (with an outflow of money but owning a corresponding loan). It nets out by definition. National income accounting is when we form groups of these economic actors and their transactions. The (domestic) private sector is all the people and companies in the country. If you borrow money from a bank, that has no net effect on the private sector because both you and the bank are within the private sector: you’re only moving assets around within the group. The only way the private sector can have a surplus of money is if it gains a surplus from their dealings with the other two groups, the government and the foreign sector. All groups combined again have a net surplus (or deficit) of zero.

In the circumstance of a severe recession, where private companies are in precarious financial positions, it would be helpful if they could have a surplus so their financial positions could improve and economic activity could continue as usual. But if we hold foreign trade approximately constant, the only source for that private sector surplus is a corresponding government deficit. Which is exactly what happens. Relative to the strong economic period beforehand, in a recession the government takes less money (through taxes) and gives out more money (through transfers like employment insurance). This matters both for taxes/transfers of companies and of individuals; improving the financial standing of individual taxpayers still provides money that they can use to spend or lend.

Also, the government (often through the Federal Reserve) can buy illiquid (and typically “toxic”) assets from firms. Minsky would be unsurprised that bailouts have continued and even grown in scale since the ones he wrote about. Consider how in the Great Recession the US government purchased toxic assets through the Troubled Asset Relief Program (TARP), and then for years sustained the prices of mortgage-backed securities (MBS) and other assets through its larger Quantitative Easing (QE) programs. The Federal Reserve went back to this playbook in 2020 during the Covid pandemic, and then again in 2023 through a new Bank Term Funding Program in the immediate aftermath of the collapse of Silicon Valley Bank.

Net zero transfers does not imply that transactions in the private economy don’t matter. They do, particularly in Minsky’s model. Loans can be net neutral on money movement, but they still expand the balance sheet of both parties and create a financial implication between them. The institutions on the winning side of trades still bear the risk that their counterparty might default. Leverage is real, and it is this growth of leverage and interconnected debts that create the precarious financial settings of Minsky’s era. It’s exactly for this reason that the government should then transfer money into the private sector when needed, which can give companies the profit and liquidity to manage their debts, retreat from precarious positions without having to sell assets at low values, and thus be worth more than they would be otherwise. This process is what Minsky means by “sustaining profits”.

In Minsky’s view, government is capable of, and obligated to, spend as necessary to prevent a severe recession. This isn’t without cost. “The economic relations that make a debt deflation and a long-lasting deep depression like that of the 1930s unlikely in a Big Government economy can lead to chronic and, at times, accelerating inflation. In effect, inflation may be the price we pay for depression-proofing our economy” (p. 165). Not only is inflation a possibly necessary outcome, it can also be a tool; “Inflation, which increases nominal cash flows, can become a policy instrument to validate debt” (p. 190). Minsky has many theories of how inflation can occur, but emphasized government spending in crises most predominantly, as “inflation resulted from the way depressions were contained” (p. 295). While he didn’t view every method of government intervention as inflationary, he thought they typically are, explaining how government spending and deficits “are responsible for at least part of the acceleration of inflation” in that era (p. 332). We should contain the inflationary impact of the government. “If Big Government is not to be conducive to inflation, the budget structure must be such that profits are constrained by surpluses when inflation rules” (p. 325).

Minsky believed that the economy was increasingly unstable and believed that government intervention would only grow through each new bad incentive, causing inflation and laying the seeds for the next recession, yet he felt that it was all necessarily and optimal. Until we can restructure the economy to be fundamentally more stable, that is. Now we get into the promise of the book’s title, with policy ideas to stabilize an unstable economy.

Policy: Restructuring the economy

Minsky saw US history as going through a number of different forms of capitalism, with these structural aspects having prominence on economic outcomes. He saw public society as having agency to create a new one. Minsky was inherently activist, writing extensively on policy recommendations through his life and in SUE. He believed in a broad public debate, with no automatic deference to more credentialed authority figures. Thus, “if economics is too important to be left to the economists, it is certainly too important to be left to economist-courtiers. Economic issues must become a serious public matter and the subject of debate if new directions are to be undertaken.” Not only is this viewpoint due to distrust of economists and well-connected public influencers, but also because “unless the public understands the reason for change they will not accept its cost; understanding is the foundation of legitimacy for reform” (p. 321).

We have to understand Minsky’s values to reason with his policy proposals. Which is a challenge, because Minsky doesn’t wrestle with those values explicitly in his book. He clearly believed in alleviating poverty, so he emphasized helping people in precarious unemployment and those in the bottom parts of the wealth distribution. A notable gap in his explanations is how he summarily dismissed economic growth as a goal. I quoted earlier how productivity was only a secondary outcome in his mind. Later on he explicitly critiqued growth as an emphasis, on the hand-waving justification that full-employment will also cause growth. ‘The emphasis on investment and “economic growth” rather than on employment as a policy objective is a mistake. A full-employment economy is bound to expand’ (p. 325). As far as he saw it, “the primary aim is a humane economy as a first step toward a human society.” (p. 326). Growth isn’t even listed in the book’s index, where it would fit nicely between “Gross national product (GNP)” and “Hahn, Frank H.”.

This is one of the areas where modern macroeconomics is most at odds with Minsky’s approach. Economic growth can improve the living standards of the entire income distribution. While being poor in the US now is awful, it’s not nearly as awful as being poor almost anywhere in the world at almost any prior point in human history. Minsky hardly addressed growth, and instead much of his formal model used single-period variables.^[8] A Minskyan agent looks at the now and decides how to act to immediately alleviate a crisis, while also considering how to change institutions to prevent future crises.

Since the government is compelled to take action to prevent depressions, and will mainly act through spending increases, the government has to be correspondingly large.^[9] “Big Government capitalism is more stable than small government capitalism: this is shown by both the experience of the past century and by an economic theory that allows for financial institutions. This greater stability is because of the impact of government deficits as a contracyclical phenomenon in stabilizing profits” (p. 325). With the structure of government programs at the time, Minsky estimated its budget would have to be “at least 16 percent” and “as high as 20 percent” of gross national product (GNP) in good times.

Minsky started his policy approach by determining this government size, and then restructured government spending with that constraint. He believed that jobs are the appropriate mechanism for helping people, more so than cash transfers. Partially this fits with his stability-oriented perspective, and he stated that “a too extensive and expensive system of transfer payments is socially destabilizing, tends to reduce real national income, and introduces an inflationary bias into the economy” (p. 326). Yet he also at times justified jobs as an end to itself. Either way, “the humane objective of stabilization policy is to achieve a close approximation to full employment” (p. 343). So he wanted to eliminate many transfers, particularly those with disincentives to work, and replace them with an employer-of-last-resort jobs program. He advocated for a program where “the demand for labor must be infinitely elastic over a wide range of labor types”, at wages low enough that they “do not place upward pressure on private wages” (p. 345). Naturally, this “effectively sets a minimum wage” (p. 345) and eliminates the need for any other mandatory minimum wage.

There is quite a lot to like about the employer-of-last-resort concept, with it incentivizing work, plausibly increasing production, and targeting the people most affected by economic downturns. Yet surely this idea, while advocated by Minsky since the 60s, was far from the economic or public policy mainstream when SUE was published during the Reagan administration. Expansive government growth during the preceding decades led to a backlash and growing support for small government (in rhetoric at least, if not quite consistently in practice). We might expect the expanded government to cause some “crowding out” of productive businesses that could do some of the same work. Intriguingly the program would likely create an alternative to some non-wage activity in the economy too.

The jobs program, if successful, would necessarily be massive. Part of the package was that it would accept people as they are and where they are, to effectively help economically marginalized people. I suspect it would be hard to find that scale of productive work, across the country, that can be easily scaled up and down with economic conditions. I also shudder to think of the misdirected spending and pure grift that would surely accompany such a program. There may be some high trust and low selfishness societies in this world, but America is in the larger bucket of ones where I would be worried about program abuse. Yet we shouldn’t dismiss an idea too quickly just because its fair and full administration is beyond this reader’s imagination; we have built new and great extensions to government before, which are not undone by small amounts of fraud if the scale of fraud is suitably contained.^[10]

In the financial industry, Minsky wished for public policy that is “structured to foster and encourage the growth and prosperity of independent, small banks” (p. 355) so they could exist alongside larger banks. He wanted a more activist Federal Reserve that could “regulate the amount and the rate of increase of bank assets” (p. 356) and would shift from open-market operations to the discount window where they would “have a right to look over the shoulder and comment on the adequacy of a bank’s practices” (p. 363). Minsky did not purely want smaller and weaker banks in every way; he also wanted to reduce barriers to entry and to loosen some restrictions on banks (presumably repealing the Glass–Steagall restrictions that separated commercial and investment banking) so they could offer a wider range of services—albeit still with an emphasis on small local banks.

Humility and adaptability

We’ve seen Minsky’s large program of economic restructuring, which incorporates changes to central banking, to financial regulation, and to fiscal policy. Minsky would create a large employer-of-last-resort government jobs program, paying lower than what would otherwise be minimum wages, such that anyone who loses employment in the private economy can fall back on a low wage public job. This is mainly guided by humanitarian principles, but Minsky also believed this change would lead to more production, less inflation, and more economic stability.

While not consistently humble through the book (especially in his critiques of other economic models), Minsky was humble about policy. He believed that reforms need to be a package, which is a problem because policy is usually passed in piecemeal fashion by congress and the executive branch, through “sequential decisions that did not consider interactions among the programs and the institutions” (p. 322). “Standing by themselves, unaccompanied by the requisite companion measures, the individual parts of an integrated reform program might be futile” (p. 326).

Not only is passing coherent policy a challenge, but policy needs to be ever-changing. “There is no magic economic bullet; no single program or particular reform will set things right forever” (p. 326). Minsky saw financial innovation as continually escaping rules through their edge cases or jurisdictional boundaries; the continual growth of activity that we now call “shadow banking” was discussed at length in SUE. Minsky’s restructuring would “enjoy only transitory success. After an initial interval, the basic disequilibrating tendencies of capitalist finance will once again push the financial structure to the brink of fragility. When that occurs, a new era of reform will be needed. There is no possibility that we can ever set things right once and for all; instability, put to rest by one set of reforms will, after time, emerge in a new guise” (p. 370).

Why Why Minsky Matters Matters

We’ve come to the end of SUE, yet before I wrap up, I have a small detour: a smaller book review contained within this lengthy one.

After finishing SUE, I wanted to read more, to get a more complete picture and validate or refute my understanding of the book. I found a book titled Why Minsky Matters, which has solid reviews and was written by an economist and student of Minsky’s, L. Randall Wray.^[11]

The book is good, giving a very readable walkthrough of much of Minsky’s views, putting them in a deeper context with the timeline of Minsky’s career, and connecting all of it together with the Great Recession. As I can now attest, it’s impossible to give a full treatment of Minsky’s work without writing a SUE-length summary, but Wray mostly pulls it off in a short and clear book.^[12]

Yet I started to wonder quite early about whether Wray is a reliable narrator.

Why Minsky Matters is not exactly (or, perhaps, “only”) a biography of Minsky. It is not only an interpretation, but also an extension or adaptation. Wray mixes in many opinions which the reader may falsely assume came more directly from Minsky. I found myself in the middle of a Modern Monetary Theory (MMT) narrative, in a framing built as an extension of Minsky’s work and leveraging Minsky’s recent popularity.

I knew MMT mostly as a meme, through its detractors. MMT became very topical in 2019, mostly as a debate about the size and persistence of US government deficits. The most reductive interpretation of MMT’s policy pitch is that the federal government can indefinitely sustain large deficits, since it can always create money to pay off its debts. That entire pitch is off-putting to mainstream economists (such as N. Gregory Mankiw, who described alternating between “languid concession and vehement opposition”).^[13] Economists typically believe that the government has an intertemporal budget constraint such that persistent debt monetization will ultimately lead to inflation and perhaps hyperinflation or default, as has played out in places such as Argentina, Russia, Turkey, and Venezuela.

I now realize there is quite a lot more depth to the MMT viewpoint than is visible in its most memetic claims, at least the version of MMT explained by Wray in Why Minsky Matters. He doesn’t dispute that inflation is a result of government spending and thus a constraint, so it's not that MMT doesn’t believe in the inflationary consequences of unbound deficits. Despite the controversy over MMT, quite a lot of the meat of it is shared with mainstream economics (a point made, again, in Mankiw’s critique), but with sharply different framing and using descriptive models much more than mathematical models. If that sounds much like Minsky’s work too, it indeed should, and that isn’t a coincidence since so much of MMT is clearly Minskyan.^[14]

Yet there are elements of MMT that differ in important ways from Minsky, and those differences are not always clear from Wray’s book. While Wray defends price controls (a MMT policy tool) by citing Minsky from 1972 saying “effective profit and price constraints would have to accompany tight full employment” (Wray, p. 128), by 1986 price controls were not a part of Minsky’s policy package.

More so, while Minsky and Wray agree that budget deficits fund financial surpluses in the private sector, Minsky did not advocate for the persistent deficits that Wray defends. These government deficits have a specific purpose for Minsky, which is to prevent asset prices from dropping in a debt deflation where companies have to deleverage (and reduce economic activity) suddenly, all ultimately in the purpose of preventing the unemployment and suffering of regular people. The accounting identities behind those claims say nothing about intertemporal effects on the real economy, such as whether total production will be higher or lower in subsequent periods depending on the role of government. Wray doesn’t qualify or contain the use of deficits as narrowly as Minsky, writing that “we understand that the budget deficit needs to be larger than the current account deficit to allow the domestic private sector to run a surplus; this approach contributes to financial stability” (Wray, p. 206). Consider some quotes from Minsky that show much more hesitancy to use continual deficits:

• “If Big Government is not to be conducive to inflation, the budget structure must be such that profits are constrained by surpluses when inflation rules” (p. 325).
• “Because the budget structure of Big Government must have the built-in capacity to generate surpluses when inflation appears, the tax revenues have to be a large proportion of GNP” (p. 325)
• “Debts embody payment commitments, promises to make payments. For these promises to have any value any debtor has to be able to generate a positive cash flow in its favor” (p. 336)
• “There is nothing special about government debt, and a flight from government debt can occur” [...] “for a domestic debt the flight can lead to inflation” (p. 336)

Minsky wanted large deficits during recessions or financial crises, and surpluses otherwise. In this sense he was quite mainstream. His economic foundations were the same as MMT’s, and mainstream economics isn’t too far off, yet where Minsky wanted to use deficits when they can prevent severe recessions, MMT goes a step further and asks just how far we can go to have deficits as often and as large as possible. Wray’s opinion is that “the inflation constraint is much less of a concern in today’s global economy” (Wray, p. 128). It’s a difference of degree more than a difference of kind, and affected by the different inflation and financing settings of Minsky’s time compared to Wray’s. In some ways, the US seems to have implicitly accepted the MMT view, considering how the federal government has had uninterrupted and growing deficits for the last two decades.

If MMT’s popularity reached high water as the world observed how the large deficits in the 2010s did not lead to inflation, now it is at low tide when even larger deficits during Covid lockdowns were followed by substantial inflation. I expect the proper status is somewhere in the middle; by raising the profile of alternative economic frameworks while asking creative questions and broadening the space of policy options, MMT has the potential to push mainstream economics to review and better resolve its own deficiencies. Much like Minsky, and again not coincidentally.

Minsky in hindsight

History turned almost immediately against Minsky. When he published his book, the cycle of escalating broad economic crises stopped. While other countries experienced financial crises, inflation, and defaults, within the US the tight connection of increased leverage, bad incentives, asset booms, inflation, and debt crises did not materialize into a sooner and larger recession and financial crisis again in the 1980s.^[15] Sure, there were still recessions, in 1990 and 2001. But not only were these far apart, but the first was short and moderate, and the latter was nearly too moderate to even qualify as a recession. Minsky was right about escalating financial complexity and intertwining in ways escaping traditional regulation, as exemplified by the leveraged boom and subsequent collapse of Long-Term Financial Management (LCTM) in 1998. Yet that crisis was contained without big effects on the real economy and without needing a public bailout. One could argue that the financial risks were still there but broader economic risk was managed by better monetary policy, as famously claimed by Ben Bernanke in his 2004 “Great Moderation” speech. If anything this development would imply that Minsky’s financial focus was an overemphasis and finance need not be centrally represented in our macroeconomic models, and furthermore that government size and spending need not be optimized around ensuring full employment.

Yet then the tides of history changed direction again, and the Great Recession came in 2007. Not only was it, indeed, a “Great Recession”, it was also a “Global Financial Crisis”. The term “Minsky moment” entered the public lexicon in a big way. That moment had every element of a good Minsky story, from rising debt-financed business activity, to a financial sector that had innovated with and around regulations to increase leverage with expanded debt relationships, to contagion that vindicated Minsky’s insistence on deep balance sheet inspection, to a rapid debt deflation of financial assets and a run to safety, to massive government deficits and bailouts to prevent a depression. This crisis has massive effects not only on the financial industry, but throughout every layer of the real economy, ultimately causing lower production and incomes with higher unemployment in the US and in many countries around the world. Minsky wrote the story before it happened, leading many to worry that the bad incentives from the bailouts and the potential for inflation from massive deficits would lead to a renewal of Minskyan cycles of crises.

Tides have a way of turning yet again. The Great Recession was followed by another long moderation, which was only broken—and only temporarily—by a very un-Minskyan pandemic recession. This was not only an entirely exogenous cause of reduced economic activity, but despite its incredible halting of economic activity it didn’t trigger a massive unwinding. The perverse incentives resulting from the Great Recession didn’t lead to an unhealthier financial structure causing another severe recession. At least within our time horizon so far.

I wonder how much the Great Recession changed academic perceptions of Minsky. Surely we didn’t need to actually endure a financial recession to know that such events occurred and could occur again. There were so many throughout US history, and at a minimum financial crises were a substantial part of the largest recessions in the 20th century. Additionally, there were many severe financial crises in other countries, somewhat continually.^[16] Experiencing one more such crisis adds another data point, and that could rightfully increase awareness of Minsky, but this should not drastically change the priors of many people. Minsky’s insights were credible before the Great Recession.

On the other hand, there had also been moderation in between large recessions. When Minsky wrote of cycles of boom-and-bust financial gyrations, he never indicated that the crises could be so far apart. At the time he published, the US financial system should have been more unstable than ever before. The Great Recession was large, and it was financial, yet it was still over 20 years after Minsky wrote his tome.

Any overarching theory of recessions will fail sooner or later, because the world is not so simple to only have one pattern of economic failure. Our models have to be approximations, and as such they must choose which elements to include. Minsky includes financial activity first and foremost, while other models might exclude it entirely. Minsky makes a successful case that finance matters, that financial crisis-induced recessions are notable enough in their recurrence and severity that their causes should be represented in our models. He had a nuanced theory of inherent instability caused by debt relationships and the recency bias of economic actors.

While Minsky did use many equations to ground parts of his framework, they were only starting points while the bulk of his framework was explained with prose. Minsky himself stated that “a mere presentation of accounting identities is not a theory and does not lead to any causal inference” (p. 34). Much like in the work of his idol, John Maynard Keynes, prose is liberating in that its expressiveness allows for a wealth of unconstrained ideas. The downside is that it lacks the precision of a mathematical approach; in particular, I would like Minsky’s work to have explicit intertemporal equations such that its sensitivity to productivity, growth, crowding out, and other effects could be quantified and tested.^[17] Minsky’s economic models are largely carried on—with the jobs program and all, although changed in many important aspects—by others under the Post-Keynesian and Modern Monetary Theory umbrellas, where they have limited influence on mainstream macroeconomics. Minsky’s animosity towards the entirety of existing mathematical models went a step too far; there did exist models that could have been modified to fit much of Minsky’s framing which would make his work stronger and possibly more influential.

Minsky’s emphasis on resolving downturns at all cost, regardless of any implications on subsequent growth, connected with his moral foundations and his support for a large government jobs program. It’s not clear which element is causal on the rest of his views, or if they were all intertwined; while a jobs program could be an output from Minsky’s reasoning about financial instability, it’s also plausible that his preference for big government was formed from growing up during the Great Depression and becoming an economist during the peak of Keynes’s influence. While Minsky produced substantial work on financial theory starting in the late 1950s and before his advocacy for the jobs program during the mid/late 1960s, the financial instability that he cites during SUE occurred later, through the 1970s and 80s.

Minsky was a complex and nuanced thinker. His bluntness, authenticity, and humanitarianism make him easy to root for. Altogether, Stabilizing an Unstable Economy is an incredible work, ambitious in its breadth of topics and its detail. In it Minsky shared a complete picture of the economy and a serious and full proposal for public policy.

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