Minsky, Hyman 1919-1996
A dissenter from mainstream macroeconomics, Hyman (“Hy”) Minsky became intellectually prepared from the University of Chicago’s undergraduate teachings of Oscar Lange, Paul Douglas, Jacob Viner, Frank Knight, and Henry Simmons rather than the Harvard Keynesians. Minsky was born in Chicago in 1919 and attended public schools in Lima, Ohio, Chicago, and New York City before entering the University of Chicago in 1937 to study mathematics. He was drawn to economics, his BS degree in mathematics notwithstanding, after attending the integrated social science sequence course and the seminars taught by Lange, Knight, and Simmons at Chicago. Strongly influenced by his working-class family with its active involvement in the American socialist movement and his close relationship with Gerhard Meyer at Chicago, he decided to pursue graduate studies in economics. His graduate work at Harvard, where he was awarded the MPA (1947) and PhD (1954), was interrupted by a number of years in the U.S. Army with assignments in New York City and overseas during the mid-1940s. The interrelationships between market structure, financing investment, survival of firms, aggregate demand, and business cycles, advanced in his PhD dissertation in 1954 (published in 2005), were further sharpened and became the focus of his lifelong research agenda (Papadimitriou 1992).
After an initial appointment to the faculty at Brown University (1949–1955), Minsky moved to the University of California at Berkeley (1956–1965) and then to Washington University in St. Louis, where he remained until his retirement in 1990. He was then appointed Distinguished Scholar at the Levy Economics Institute of Bard College, a post he held until his death in 1996.
Minsky’s earliest writings centered on the endogeneity of financial innovation that was dependent on profit-seeking behavior, the institutional prerequisites of ceilings and floors to the multiplier-accelerator model, and the importance of the initial conditions of financial positions that would determine the future of the economy—whether stable or unstable—beginning with robust balance sheets that over time would become fragile, resulting in economic conditions that might make a debt deflation such as that of the 1930s happen again (Minsky 1957a; 1957b; 1959). Addressing endogenous money, financial innovation that “stretched liquidity,” behavioral changes induced by government policy, lender-of-last-resort activity, and market-driven, instability-enhancing behavior over the course of the business cycle, Minsky broke away from conventional macroeconomic canons (Papadimitriou and Wray 1998). These were all issues that occupied his research program during the 1960s. These issues helped him develop his financial instability hypothesis and focus on the examination of the workings of financial markets and institutions.
Minsky’s main contribution in John Maynard Keynes (1975) is the “financial theory of investment” arising from the realization that in an advanced capitalist economy, there are two price levels determined from different relations and variables—one for “current output,” the second for “financial and real assets.” The price level of current output—dependent mainly on labor costs and a markup—ensures that production and distribution take place and that costs are recovered. The price level of “capital assets” is based on demand price—integrating uncertainty and prospective returns from ownership, and supply price—relating to production and finance costs of capital goods. In Minsky’s words, expected returns “present views about the future, and therefore are prone to change as views about the future change” (Minsky 1975, p. 95). Thus, for investment to take place the demand price must exceed the supply price. Using Keynes’s concepts of “borrower’s risk” and “lender’s risk,” Minsky built into his model of “Financial Keynesianism” the concept that the demand price is downwardly adjusted to reflect the risk to the borrower of exceeding internal funds (borrower’s risk) while the supply price is upwardly adjusted to account for the increased risk to the lender (lender’s risk) as the borrower assumes greater debt. When expectations are high, the demand price is also high in relation to the supply price, engendering investment and generating growth. Undertaking investment, in turn, is the main determinant of aggregate profit flows that at the end validate the optimistic expectations. Euphoria then sets in, decreasing lenders’ and borrowers’ risks, bringing about the lowering of margins of safety until expectations are revised or fall short. When aggregate investment falls, so do profit flows, thus invalidating past investment decisions. “A fundamental characteristic of our economy,” Minsky wrote in 1975, “is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.”
Minsky’s Stabilizing an Unstable Economy (1986) suggested a framework within which policy interventions could ameliorate this inherent instability. His agenda for policy reform addressed four areas—“big government (size, spending, and taxing), an employment strategy (employment of last resort), financial reform, and market power”(Minsky 1986, p. 295).
Hyman Minsky was an independent thinker, a realworld economist, and a persuasive policy advocate.
SEE ALSO Bubbles;Business Cycles, Empirical Literature;Business Cycles, Political;Business Cycles, Real;Business Cycles, Theories;Casino Capitalism;Economic Crises;Economics, Post Keynesian;Financial Instability Hypothesis;Financial Markets;Keynes, John Maynard;Loan Pushing;Ponzi Scheme
Minsky, Hyman P. 1957a. Central Banking and Money Market Changes. The Quarterly Journal of Economics 71: 171–187.
Minsky, Hyman P. 1957b. Monetary Systems and Accelerator Models. American Economic Review 47: 859–883.
Minsky, Hyman P. 1959. A Linear Model of Cyclical Growth. Review of Economics and Statistics 41: 133–145.
Minsky, Hyman P. 1963. Can “It” Happen Again? In Banking and Monetary Studies, ed. Dean Carson. Homewood, IL: Richard D. Irwin.
Minsky, Hyman P. 1965. The Role of Employment Policy. In Poverty in America, ed. Margaret S. Gordon. San Francisco: Chandler.
Minsky, Hyman P. 1969. Private Sector Asset Management and the Effectiveness of Monetary Policy: Theory and Practice.Journal of Finance 24: 223–238.
Minsky, Hyman P. 1972. Financial Instability Revisited: The Economics of Disaster. In Reappraisal of the Federal Reserve Discount Mechanism, Board of Governors, Federal Reserve System.
Minsky, Hyman P. 1975. John Maynard Keynes. New York: Columbia University Press.
Minsky, Hyman P. 1986. Stabilizing an Unstable Economy.Connecticut: Yale University Press.
Minsky, Hyman P. 2005. Induced Investment and Business Cycles, ed. Dimitri B. Papadimitriou. United Kingdom: Edward Elgar.
Papadimitriou, Dimitri B. 1992. Minsky on Himself. In Financial Conditions and Macroeconomic Performance: Essays in Honor of Hyman P. Minsky, eds. Steven Fazzari and Dimitri B. Papadimitriou. New York: M.E. Sharpe.
Papadimitriou, Dimitri B., and L. Randall Wray. 1998. The Economic Contributions of Hyman P. Minsky: Varieties of Capitalism and Institutional Reform. Review of Political Economy 10 (2): 199–225.
Dimitri B. Papadimitriou