Stabilizing an Unstable Economy | Hyman P. Minsky

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

Introduction

Embark on an exploration of the inherent instability of capitalist economies in Hyman P. Minsky’s book ‘Stabilizing an Unstable Economy: A Twentieth Century Fund Report’. This summary will put a spotlight on the factors that contribute to economic instability, the role of government in preventing widespread depressions, and potentially rejuvenating job policies. Minsky argues that while free markets are effective for meeting basic economic needs, sophisticated financial institutions and large-scale capital flows naturally cause instability. Additionally, the book delves into the pros and cons of ‘Big Government’, highlighting the conflict between averting economic depression and generating inflation.

The Inherent Instability of Capitalism

Capitalism is prone to bubbles, booms, and busts, and its inherent instability has been evident in financial crises throughout history. Despite this, the period of prosperity after World War II led to the development of economic theories that downplay risk and uncertainty. However, financial meltdowns have become a common part of the economic landscape, and free markets and sophisticated financial institutions tend to create instability. Income inequality and a lack of economic security also arise as downsides of modern capitalism. Many economists wrongly conclude that these crises demonstrate the superiority of classical microeconomic thinking over macroeconomic theories. In reality, a combination of free markets and intelligent regulation is necessary for a well-functioning economy. The economy must also provide job security and a sense of personal worth for all, which can help manage social problems.

Keynes’ Economic Principles

Keynes advocated for economic efficiency, social justice, and individual liberty in a nation. However, welfare alone cannot solve poverty and unemployment, as it is demeaning and harmful to the social fabric. Keynes proposed employment programs instead. In modern capitalism, the combination of government spending and central bank backstops has led to a stable yet inflationary economy. Moreover, fiscal instability caused speculation and bank failures, but Big Government spending and lending prevented a depression. The Federal Reserve’s lender-of-last-resort powers carry serious consequences, but they provided a quick solution to borrowers’ financial obligations.

In his economic principles, Keynes contended that a nation must strive to achieve economic efficiency, social justice, and individual liberty. He believed that in a rich economy like the United States, sacrificing some productivity to attain justice and liberty is a fair exchange. However, welfare programs in the form of transfer payments could not fully eliminate poverty and unemployment, as it diminishes the recipient’s self-worth and destructs the social fabric. Keynes stressed that a healthy economy requires all members to earn their own living, and the solution to this problem is employment programs akin to the New Deal era.

Modern capitalism has become unstable, as evidenced by the economic instability since the late 1960s. The financial system that resulted from the cumulative changes in financial relations and institutions after World War II has contributed to this instability. Even so, the United States avoided another Great Depression because of the crucial role of Big Government. The combination of government spending and central bank backstops prevented economic downturns from becoming depressions, though it led to inflation. This inflation serves as the cost of a functioning economy. Inflation replaced the deep and wide trough of depressions in business cycles.

Fiscal instability also leads to speculation, with short-term swings in asset prices presenting attractive investment opportunities. In 1975, the first example of a slump followed by inflation occurred, resulting in bank failures and the collapse of the $20 billion real estate investment trust sector. Unlike in previous decades, Big Government spending and lending prevented a depression. The Federal Reserve’s “lender-of-last-resort” powers provide a powerful remedy that may come at a steep price. On the spending side, the federal government ran up large deficits to soften the downturn by increasing incomes and enabling borrowers to meet their obligations. On the lending front, the Federal Reserve stepped in to finance the obligations of borrowers teetering on the edge of insolvency.

The Role of Big Government in the US economy

The US Government spends heavily, but generally avoids ownership of “the means of production”. Uncle Sam is a big spender, paying for everything from wages to entitlement programs and contracts. This spending has helped to avert depression and soften economic blows during downturns. However, it also sets the stage for inflation, which can create instability. Big Government funding works to prevent volatility by propping up asset values and charging the Federal Reserve with managing the money supply and intervening during crises. The lender-of-last-resort role of the Fed is important, but it can also encourage risk-taking. Overall, Big Government plays a significant role in the US economy, but it comes with challenges and unintended consequences.

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