Great Recession and Macroeconomic Theory: A Useless Crisis?

ABSTRACT

The global financial crisis of 2007–08 and the subsequent Great Recession have pushed many economists to acknowledge a fundamental limit in the theoretical models elaborated after the monetarist counter-revolution: these models disregard the financial system. The years following the Great Recession have thus been marked by the development of what can be called the ‘Financial Frictions Approach’, a theoretical approach based on the addition of the financial system to the New Keynesian DSGE model. The results of this line of research are beginning to appear also in macroeconomics textbooks. Significant examples are the publication of the seventh edition of Blanchard’s textbook, and the publication of the third edition of the textbook co-authored by Blanchard, Amighini and Giavazzi. The objective of this work is twofold: (i) to show that the new model presented by Blanchard, Amighini and Giavazzi, which reflects the results of the ‘Financial Frictions Approach’, does not allow to elaborate a coherent explanation of the Great Recession and (ii) to present the pillars of an alternative theoretical model based on the lessons of Keynes, Schumpeter and Minsky.     

Is China Living a Minsky Moment? Between the “Lender of Last Resort” and the Chinese Shadow Financial System

After Lehman Brothers bankruptcy in 2008, the Central Bank of China (PBOC) created a big 1.8 trillion dollars package to boost the Chinese economy. It was a necessary key measure not only to prop up the economy, but also to try to preserve the two-digit growth of the GDP that existed before the Great Recession. The financial instability of international financial circuits made necessary the involvement of the central bank. Ten years later, China’s debt explosion went up during the financial crisis, from six to twenty-eight trillion dollars between 2007 and 2016. In other words, it went up from 148 to 260 percent of GDP during the same period. The goal of this article is to analyze whether China is living a “Minsky moment” or not, and what its implications are for international financial markets.     

“明斯基时刻”之考辨

最近这场信贷危机和经济衰退之后,“明斯基时刻”作为标语在金融媒体、时事评论和学术出版物当中广泛传播。对该术语考辨后发现,源自后人发明的“明斯基时刻”尽管具有“危机拐点”和“危机过程或阶段”这两种不同含义,但它们却均是对明斯基思想的贬低乃至歪曲。该标语将明斯基的“金融不稳定性假说”简化以及曲解为单纯的“时刻”、“时段”、“融资分类法”或“非理性疯狂”,结果是,每个时期的金融危机,无论其特征如何,都可以冠之以“明斯基时刻”,而该假说所描述的动态机理却被忽视了。明斯基为我们所做出的最为重要且鼓舞人心的贡献在于“明斯基动态”,即他对现代金融化经济变得如此不稳定的内生动态机制的理解,而这种洞见如今却依然游离于主流思想之外,饱受忽视甚至压制。     

Toward ‘Wisely Managed’ Capitalism: Post-Keynesian Institutionalism and the Creative State

Post-Keynesian Institutionalism (PKI), a synthesis of post Keynesian and institutional economics, emerged in the USA as a strand of evolutionary economics in the early 1980s and has attracted increasing attention in recent years. This article examines milestones in the development of PKI, devoting particular attention to the tradition’s conception of the role of the state. The first section identifies antecedents to PKI in the writings of John R. Commons and John Maynard Keynes. The second describes how PKI emerged against the backdrop of increasing dissatisfaction with neoclassical Keynesianism in the era of stagflation. The third summarizes the subsequent contributions of Hyman P. Minsky, whose work was a model of PKI in the 1980s and 1990s. The final two sections outline PKI’s contemporary characteristics and identify elements of an agenda for future research. PKI has always been about achieving a more humane form of capitalism, which requires the state to play a creative role in shaping economic life.

The Stories That Economists Tell: Mainstream,Hyman Minsky,and Institutional Views of Consumer Behavior

The financial crisis of 2008 provided an informal test of mainstream and institutional views of consumer behavior. The test posed by the financial crisis assumes the form of a “story.” A successful story provides a reasonably coherent explanation of events, confirming our beliefs and justifying our policies. First, the article examines the failure of mainstream economics to present a coherent story of consumer behavior. Ignoring the relevance of assumptions, as Milton Friedman advocated, leads economists to hypostasize the model, filtering information central to the crisis. Second, Minsky’s discussion of consumer behavior and its effect on cash inflows to businesses represents an institutional explanation regarding why John Maynard Keynes’s long-run vision did not occur. The third section expands on some of the themes addressed by Minsky, which are found among the contributions of institutional economists, focusing on efforts to mold institutions to increase cash inflows to corporations and protect those inflows.     

Macrodynamics of debt-financed investment-led growth with interest rate rules

This article demonstrates the diverse dynamic possibilities arising out of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, and growth cycles around it as well as various complex dynamics. We investigate whether, given this framework, the financial sector can provide endogenous bounds to an otherwise unstable system. The effectiveness of monetary policy in the form of an interest rate rule targeting capacity utilization is examined under this context.     

Minsky Goes to Buffalo—and Takes on the Economics Establishment

This essay is based on remarks presented by the author at The Fourth Bi-Annual Cross-Border Post Keynesian Conference, Buffalo State College, on October 9, 2009. It addresses the economic challenges facing Buffalo, New York, and countless other American cities, especially in the Northeast and Midwest; draws on the writings of Hyman Minsky to offer an interpretation of what many now call the Great Recession, which began in late 2007; and challenges the image of Minsky presented by mainstream economists and journalists, with special attention to a recent lecture by Paul Krugman. The essay closes by returning to Buffalo, where—as Minsky anticipated in the 1990s—the economic fate of working families depends largely on the outcome of a national struggle over the shape of future U.S. economic transformation.     

The Evolution of the Veblenian Dichotomy: Veblen,Hamilton, Ayres,and Foster

One of the most troubling developments in recent years has been widening income inequality in the United States and elsewhere. We argue Post Keynesian Institutionalism (PKI) provides insight into the causes of increasing income inequality and our contribution is threefold. First, we compare PKI to the “financialization” literature, noting key similarities and differences. Second, we examine changes in financial structure and income inequality for a sample of developed nations, showing that financialization has increased in nearly all the countries sampled and that this increase has generally been accompanied by a rise in income inequality. Third, we demonstrate that the development of modern financial structures does not preclude an expansive welfare state and egalitarian public policies. Our finding is congruent with Hyman Minsky's conception of PKI, which stressed both that “economic systems are not natural systems” and that capitalism comes in as many varieties as Heinz has of pickles.     

Banking on ELR: How Hyman Minsky’s Ideas Can Help Tackle Unemployment

This article suggests a way of building a comprehensive program that can effectively eliminate unemployment using the employer-of-last-resort (ELR) scheme, which comes from the Minskyan tradition. According to this scheme, the state offers a job to everyone who is willing to work. In response to the many critiques the ELR program has received, we show that it is the best alternative to eliminating unemployment, instituting sound public finance, ensuring social and financial stability, and achieving long-term growth and international economic balances. We also make suggestions with a view of ensuring the efficiency of the ELR institutional design. In this context, we highlight the accountability issue that is largely ignored in the relevant literature, but that is paramount given the state of public finances after the 2008 crisis. We argue that accountability and efficiency should be taken as the core of the ELR project if it is to be politically viable, and they can be addressed alongside the analogy of lending of last resort. In particular, ELR projects should be supervised by a state bank that is set up to ensure the cost-effectiveness of the scheme, along with controls from below. We conduct a simulation of how much such an ELR program would cost for Italy, showing that its gross cost would be less than 2.0 percent of Italian GDP and its net cost would be negative.     

明斯基与主流经济学：渊源和分化*

在其学术生涯中,明斯基从最初主流经济学范式的追随者,逐渐转变为如今为人所知的主流经济学的批判者,因而长期以来被主流经济学所边缘化。2008年这场“大衰退”令主流经济学界“重新发现”明斯基。然而,由于明斯基所构想的经济图景或世界观、所遵循的方法论和相应的模型化表述方式以及所主张的政策含义都与主流经济学格格不入,因而纵使主流经济学研究呈现出向明斯基洞见靠拢的趋向,也注定了明斯基的思想无法被主流经济学所真正理解和吸收,以至于依旧徘徊在主流思想的边缘。