Terrific piece in the Boston Globe by professor Stephen Mihm on Hyman Minsky:

“Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a “Minsky moment,” and a growing number of insiders began to warn of a coming “Minsky meltdown.”

“Minsky” was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.

In recent months Minsky’s star has only risen. Nobel Prize-winning economists talk about incorporating his insights, and copies of his books are back in print and selling well. He’s gone from being a nearly forgotten figure to a key player in the debate over how to fix the financial system.”

Its a very straight forward history of an up-until-recently under appreciated economist.  (I enjoyed reading it a great deal).

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Source:
Why Capitalism Fails
Stephen Mihm
Boston Globe, September 13, 2009

http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Why capitalism fails”

  1. Onlooker from Troy says:

    You mean we shouldn’t just basically ignore the effects of debt on the financial system and the economy?

    Huh, go figure.

    (a simplification, I know, but all too true re: the economic models that have gotten things terribly wrong, although I’m not an expert, but then the experts haven’t been too helpful either)

  2. Trainwreck says:

    Minsky moments….
    How we frequently have them in life. They are culture shock, and a shock to a way of thinking. Anyone know of a Minsky etf I can invest in?

  3. meanwhile, other Economists have long appreciated Minsky..

    http://search.mises.org/search?q=minsky&site=default_collection

    Peep should remember that JMK’s ‘works’ belong to the field of PoliSci..

  4. aitrader says:

    “Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government – or what he liked to call “Big Government” – should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage.”

    Not sure it will work, but I sure do prefer it to the trillion dollar bailouts of all of those poor Wall Street lemmings working in their “meritocracy”. You remember, the one the poor and middle class are soon going to be asked to pay for. I think you wrote a book about it if memory serves.

  5. Dogfish says:

    Thanks for posting this BR!

  6. HarryWanger says:

    Bernanke is doing exactly what Minsky believed would get the economy going again, stepping in as a lender of last resort. So he was right in a radical prediction/idea and his solution is now in place thanks to the efforts of Bernanke.

    Great article – it supports my belief that Bernanke did a great job and our economy is indeed on the right path once again.

  7. Transor Z says:

    Greenspan and other influential figures have known full well about inherent instability in the form of occasional speculative bubbles. Minsky’s “socialist”/Keynesian government full-employment was intended as an adjunct to capitalism.

    The difference is that Greenspan and the ideologues in Chicago couldn’t give a shit less about the poor. Reading Minsky won’t change that. If your ideology is Ayn Rand’s Social Darwinism, Minsky seems like just another voice burdening Atlas.

    Quite right, MEH. We’re in the realm of political philosphy here, not science.

  8. Transor Z says:

    Greenspan and other influential figures have known full well about inherent instability in the form of occasional speculative bubbles. Minsky’s “soc1alist”/Keynesian government full-employment was intended as an adjunct to capitalism.

    The difference is that Greenspan and the ideologues in Chicago couldn’t give a shit less about the poor. Reading Minsky won’t change that. If your ideology is Ayn Rand’s Social Darwinism, Minsky seems like just another voice burdening Atlas.

    Quite right, MEH. We’re in the realm of political philosphy here, not science.

  9. franklin411 says:

    @Barry
    Thanks for this, which I never would have found on my own! Wonderful read!

    @MEH
    I read a few of those Mises Institute posts, and I would hardly call them “appreciative” of Minksy. It would be more accurate to say that they recognize the threat to their faith in free market fundamentalism and they’re trying to neutralize it.

  10. Dogfish says:

    aitrader, I have much more faith in bubble-up approaches than trickle-down ones. Especially when the issue is a crashing economy in a country whose GDP is 70% driven by consumer goods, and isn’t moving because the bottom 99% of consumers can’t really afford to buy anything. Yes, a large part of that is due to debt binge hangover, but then the debt was brought about because of a need to replace purchasing power in the absence of any gains in actual wages relative to inflation.

    Mass wealth depends upon mass production depends upon mass consumption depends upon… people actually getting paid enough. The economic health of our country should be judged more against average wages and less against the stock market.

  11. Dogfish says:

    “The difference is that Greenspan and the ideologues in Chicago couldn’t give a shit less about the poor. Reading Minsky won’t change that. If your ideology is Ayn Rand’s Social Darwinism, Minsky seems like just another voice burdening Atlas.”

    +10000

    They’ll learn the lesson eventually… their ivory palaces stand because they are built on the backs of the majority. When the majority crumbles, so will they.

    Reminds me of Colbert’s take on trickle-down economics… you build the second story of the house first, prop it up on a bunch of homeless people, and then the rest of the house will trickle down.

  12. f411,

    appreciate this: 1. To recognize the quality, significance, or magnitude of: appreciated their freedom.

    2. to be aware of and understand: I can fully appreciate how desperate you must feel

    http://www.thefreedictionary.com/appreciate

    as a reminder, it never hurts to 2x-check..

  13. flipspiceland says:

    No discussion or Capitalism is complete without recognizing that Capitalism hasn’t been practiced since at least 1913.

    You cannot describe the goings on of the last year, wherein Hank Paulson “Socialized” a trillion dollars of taxpayer money to supposed Capitalists at Goldman Sucks, AIG, and all the other leeches and another several trillions forthcoming by The Bamster and CONgress, and the 500 trillion of derivatives, global unfunded liabilities and all the other rot could not be further from Capitalist principles.

    Socializing costs and Capitalizing profits is an abomination.

    Capitalism has inherent in it the ‘privilege’ to fail, the mechanism that tells us what does not work, and the information from that is to be used to go on to find out what does by allocating resources to better, smarter, luckier architects.

    What we have now in finance is an exact duplicate of what we have in human terms. That is, we keep the least productive among us going, to keep reproducing even more of the weakest among us. The eventual outcome of that trajectory is mutual self-destruction. (seev Darfur, et al ) It may be humane and in first world countries at least impossible to do less. But copying that same principle to finance and markets can only have one galactically disastrous outcome.

  14. torrie-amos says:

    let’s see, everyone owes the gubment 100k for the glory of the last few years, ws is saved, and we each owe a 100k, minsky might a had something there……………taleb in Black Swan stated similar issues, bottom line though, profits pays down debt, when youse owe to much, the piper don’t get paid, and wallah………..another high five for geitner, rewrite accounting rules for reits and banks, wow they are saved, now no one wants to rent, but they are saved

  15. leftback says:

    Agreed with flip 100% – especially since last September.

  16. The Curmudgeon says:

    Minsky was humble. He, seemingly alone amongst the economics profession, recognized that there is no easy answer. Devising and managing and economic system which necessarily encompasses the whole range of human activities necessary to life’s existential struggles is no simple matter.

    Yet he had prescriptions for when it inevitably failed that were as ineffectual as the initial design. Believing that problems in the foundation of such a system revealed by a “Minsky moment” can be resolved by the simple expedient of printing money is naive in the extreme. It may alleviate for a time the panic that caused the speculators and Ponzi borrowers to fail (except when they were too big), but the foundation still founders. Minsky’s implicit remedy is to restart the cycle from zero, i.e., let it all fail such that reality creeps back into risk assessment. That hasn’t yet happened, but it will.

  17. Curm,

    nice points..

    additionally, “Thus we are told that spending builds wealth and saving is folly. A little inflation is a good thing. Government must step in to order what individual men and women choose not to do. And, naturally, they say, ignoring the advice of these pundits and planners on how to repair the “failures of capitalism” in this way risks turning the current recession into a 1930s-style depression.
    You have only to consider your own individual circumstances to see that all of this is a clear affront to common sense.
    If you suffer a loss of income, does it make sense to live frugally, or to push your credit card to its limit, temporarily maintaining a standard of living you can’t really justify?
    Worse: rather than being self-denying while you retrain for more lucrative employment, should you put the contents of your workshop in hock and live it up at the nearest Ritz-Carlton?
    Finally, if the mix of goods and services on offer and the prices paid to both the workers and owners who produce them is sufficiently out of line that there is variously a glut of existing capacity, inventories, or labor, what should we do? Should we ask those wise, paternal shepherds in government (few of whom have ever held down a decent job and fewer still have ever run a genuine entrepreneurial business) to make up for our supposed folly through price supports, tariffs, welfare, recruitment and sequestration?

    Of course not. But somehow we must believe that there is a reverse quantum threshold in economics in which when you proceed from the micro world to the macro, common sense no longer rules and you enter instead into a shadowy realm populated by paradoxes and counter-intuitive phenomena.

    Let’s deal first of all with the idea that spending creates jobs whereas saving destroys them.

    Now, we know that the Austrian School economists are often accused by their critics of taking one set of logical consequences and magnifying them into inescapable necessities. But, honestly, this whole concept offered by our opponents requires a confluence of such bizarre and improbable circumstances to occur, that only an addle-headed, statist dilettante could put such a scenario of mass asceticism before us with a straight face…”
    http://mises.org/story/1213

    also, the Author of this piece, Sean Corrigan, is, out of many to be found @mises.org, a really good one..
    http://mises.org/articles.aspx?AuthorId=502

  18. jr says:

    “I read a few of those Mises Institute posts, and I would hardly call them “appreciative” of Minksy. It would be more accurate to say that they recognize the threat to their faith in free market fundamentalism and they’re trying to neutralize it.”

    huh? Minsky and the Austrian school both believe that monetary phenomenon are responsible for the cyclical behavior of modern financial economies.

    Minsky believes capitalism includes a central bank manipulating interest rates, and thus these cycles are endogenous to capitalism.

    Austrians believe central banking is a destructive form of central planning that is not inherent to a market economy, thus they see these cycles as exogenous to capitalism.

  19. The Curmudgeon says:

    “But somehow we must believe that there is a reverse quantum threshold in economics in which when you proceed from the micro world to the macro, common sense no longer rules and you enter instead into a shadowy realm populated by paradoxes and counter-intuitive phenomena.”

    That was good.

    Perhaps spending more in the face of lower income is an emergent (biologically speaking) quality of collectivism. In other words, that which is stupid for the individual cell actually benefits the body. If that’s the case, however, we’ll have to figure out for which entity the system operates–the individual or the collective. Seems I remember that all of the documents (const., bill of rights, dec of ind) we collectively embrace hold that the individual bears the rights, and the collective bears the burden when infringing them.

  20. call me ahab says:

    from NC-

    “Team Obama has taken to trumpeting the idea that the recession is over. As Ed Harrison likes to point out, the fact that we will see inventory restocking will produce a statistical recovery, at least in reported GDP. But the US in 1931 and Japan after its bubbles burst both featured a period in which the economy stabilized, and pundits for the most part concluded the worst was over. And in both cases, the economy resumed its slide.”

    and then we have this- Quotes from 1929 to 1931- eerily similar to what we are hearing today-

    http://www.chartingstocks.net/2009/02/great-depression-quotes-1929-vs-2008-have-we-learned-anything/

    I think 2010 could be ugly

  21. bergsten says:

    OK. You REALLY want to know why Capitalism (and for that matter Communism, Socialism, and all the other ism’s) fail? You don’t need fancy economic theory, or even have to know much about human nature (though this helps somewhat).

    No, all of the financial crises, money valuation issues, insurance cost issues, tax and regulation issues can be ENTIRELY explained by two words:

    UNPRODUCTIVE MIDDLEMEN

    Any time someone (or a whole line of someones) takes a cut out of the middle of someone else’s deal, and provides virtually no beneficial service causes loss of value to each party.

    The problem is that at first these middlemen DO provide a service — but it their quest for higher income and lower cost, eventually they glue themselves into a place where they can force themselves to be paid and provide no service whatsoever. And the funny thing is, if you asked them what they do, they’d say they were part of the “service industry.”

    The only solution is to ELIMINATE them (like a cancer, you cannot keep them contained).

  22. bergsten says:

    I just posted what’s wrong with everything and how to fix it in two paragraphs and it got lost/quarantined.

    Douglas Adams was right.

  23. Curmudgeon,

    while I appreciate ‘soft ledes’, w/this: “Perhaps spending more in the face of lower income is an emergent (biologically speaking) quality of collectivism…”, of Course it is.

    Government Budget Deficits, presume the Primacy of The State v. the Individual. For, instead of the Intent of the documents you enumerate, it puts The State ahead, in Primary position, from that Day forward..

    see: “…and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

    “… we must not let our rulers load us with perpetual debt…If we run into such debts as that we must be taxed in our meat and in our drink, in our necessities and comforts, in our labors and in our amusements, for our callings and our creeds…our people…must come to labor 16 hours in the 24, give the earnings of 15 of these to the government for their debts and daily expenses; and the 16th being insufficient to afford us bread,…We have no time to think, no means of calling the mis-managers to account; but be glad to obtain subsistence by hiring ourselves, to rivet their chains on the necks of our fellow sufferers. Our land holders, too…retaining indeed the title and stewardship of estates called theirs, but held really in trust for the treasury,. . .this is the tendency of all human governments. A departure from principle becomes a precedent for a second; that second for a third; and so on, till the bulk of society is reduced to mere automatons of misery, to have no sensibilities left but for sinning and suffering…And the fore horse of this frightful team is public debt. Taxation follows that, and in it’s train, wretchedness and oppression.”
    http://whistleblowers.freehosting.net/quotes.htm

    “We have the greatest opportunity the world has ever seen, as long as we remain honest — which will be as long as we can keep the attention of our people alive. If they once become inattentive to public affairs, you and I, and Congress and Assemblies, judges and governors would all become wolves.”
    http://quotes.liberty-tree.ca/quote_blog/Thomas.Jefferson.Quote.B372

    LSS: a Major reason why JMK is the State’s favorite, masqueraded as an ‘Economist’..
    http://www.thefreedictionary.com/masqueraded
    def.s #2

  24. Seattle Chill says:

    “UNPRODUCTIVE MIDDLEMEN”

    I used to own a two-volume encyclopedia published sometime in the 1950s. Because this version was printed for use in American public schools, the section on Communism was missing. Not torn out or redacted, just physically missing: the page numbers inexplicably skipped ahead a bit, right where the entry for “Communism” should have been. This was at a time in history when American intellectuals were very keen on pointing out Soviet manipulations of official history.

    The point being that I’m seeing a lot of Americans performing what appears to be a reinvention Marx from the ground up. It seems to me that even if our goal were only to prevent the spread of communism, we should at least seek to know our enemy better. Realizing that our schoolmasters didn’t believe we could be trusted with that information should give us pause.

  25. Gil_Yinnon says:

    Another market economist who is a fan of Minsky is Paul McCulley of PIMCO.

  26. Doc at the Radar Station says:

    Steve Keen does a good job summarizing Minsky:

    http://www.debtdeflation.com/blogs/2009/09/15/it%e2%80%99s-hard-being-a-bear-part-four-good-economic-theory/

    According to Minsky’s theory:

    * Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality—in the form of the Global Financial Crisis—slapped them in the face last year);
    * These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;
    * These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;
    * When they burst, asset prices collapse but the debt remains;
    * The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;
    * If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
    * Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.

  27. FrancoisT says:

    The article, as well as Steve Keen’s take on Minsky point in the same direction; those who can modify the intensity of the flux of debt into a society must be considered a constant potential menace to the collectivity at large.

    IMO, that can mean only one thing: the head of the FSA was right when he said the global financial sector MUST shrink. I’d go further and state that banks and any institution with the power to lend on any significant scale should be treated as a utility and regulated as such.

    Finally, the concept of financial innovation deserves to be treated with the same deference intelligent people would grant to DUI repeat offenders, members of Congress, used car salesmen or reichwing nuts radio talk show hosts.

    Anyone who has read about the history of medicine knows how innovative the first sellers of medicinal remedies were. They didn’t acquired the “snake oil salesmen” label by benefiting their customers.

  28. Marvel says:

    Perhaps capitalism has already failed in Canada. See below

    http://marketdepth.typepad.com/marketdepth/2009/09/welcome-to-kanada.html

  29. [...] esagera affatto Barry Ritzholtz definendo in Why capitalism fails, fantastico il pezzo del professor Stephen Mihm apparso sul Boston Globe [...]