Stabilizing an Unstable Economy | Hyman P. Minsky

Summary of: Stabilizing an Unstable Economy: A Twentieth Century Fund Report
By: Hyman P. Minsky

Introduction

In ‘Stabilizing an Unstable Economy’, Hyman P. Minsky examines the financial turbulence of capitalism and questions prevalent economic theories. Through a historic lens, Minsky analyzes financial crises, the inherent instability of modern capitalism, and the role of ‘Big Government’ in preventing depressions at the cost of inflation. The book further explores the limitations of neoclassical economics and advocates for incorporating Keynesian theory to achieve stability. Minsky emphasizes the importance of full employment, economic security, and the potential benefits of reintroducing New Deal-type programs.

The Instability of Capitalism

Capitalism is prone to booms and busts, yet the 20-year post-World War II economic boom led to overly optimistic and mathematically-focused economic theories. Financial crises in the 1960s and 1970s showed that sophisticated financial institutions create instability. While free markets are useful for basic economic needs, financial meltdowns in capitalism lead to income inequality and disincentivize welfare programs. The economy must offer basic security and personal worth to all through the availability of jobs to manage the risks of financial crises.

The Role of Big Government in Modern Capitalism

John Maynard Keynes argued that striving to achieve “economic efficiency, social justice, and individual liberty” should be the ultimate goal of any economy, even if it requires sacrificing some productivity. However, welfare or transfer payments are not the solution to eradicate poverty and unemployment. A sustainable economy requires everyone to earn their own living, and New Deal-type employment programs could help achieve this goal in the US. The fragility of the modern financial system, caused by cumulative changes in financial relations and institutions in the post-WWII years, has led to a business cycle dominated by inflation rather than deep and wide troughs of depression. The combination of government spending and central bank backstops has made economic recessions milder, but they generate inflation. Furthermore, fiscal instability has increased speculation as short-term swings in asset prices present attractive investment opportunities. However, in an increasingly unstable economy, Big Government spending and lending can prevent depressions and stabilize the economy, but they also have serious side effects. The federal government’s large deficits have helped soften downturns by boosting incomes and allowing borrowers to meet their obligations, while the Federal Reserve’s role as a lender of last resort has supported insolvency-stricken borrowers.

The Paradox of Big Government Spending

The US government spends heavily on various sectors, such as wages for bureaucrats and soldiers, entitlement programs, and even private contracts. However, it generally avoids the ownership of the means of production. While such spending can prevent deep economic depressions, it can also create inflationary pressures, flatten volatility, and encourage short-term booms and busts. The Federal Reserve’s lender-of-last-resort role is crucial in preventing rare crashes, but it can also foster risky investments and perception of government guarantees. The paradox lies in that government spending helps sustain instability while preventing deep depressions of the past.

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