A Primer on Minsky

My paper “Instability in Financial Markets: Sources and Remedies” for the INET conference “Paradigm Lost: Rethinking Economics and Politics“, to be held in Berlin on April 12-14, is now available via the INET website.

If you’d like to download it, you can get it either from my INET page, or from a link on the conference program. For copyright reasons I can’t reproduce it here, but I can provide a quick synopsis and some excerpts, so here goes.

A Primer on Minsky

The paper starts with a synopsis on Minsky, since his “Financial Instability Hypothesis” is one of the key foundations of my approach to economics. He has come into vogue these days of course, but to people who’ve known his work for several decades rather than ever since the “Minsky Moment” of late 2007, a better expression would be that he’s “come into vague”. I read papers like Krugman’s “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach”, and for the life of me, I can’t see Minsky there. As I note in my paper:

Now, after the crisis that his theory anticipated, neoclassical economists are paying some attention to his hypothesis, and there has been at least one attempt to build a New Keynesian model of a key phenomenon in Minsky’s hypothesis, a debt-deflation (Krugman and Eggertsson 2010). However, to those of us who are not new to Minsky, it is hard to recognise any vestige of the Financial Instability Hypothesis in Krugman’s work.

My good friend and long term fellow rebel in economics Professor Rod O’Donnell once remarked that neoclassical economists are incapable of reading Keynes: they look at his words and then spout Walras instead. A similar phenomenon applies here: neoclassicals like Krugman read Minsky, and then proceed to build equilibrium models without banks, and think they’re modelling Minsky.

No they’re not: they’re creating an equilibrium-obsessed Walrasian hand puppet and calling it Minsky—just as they did to Keynes with DSGE modelling.


I used the word “equilibrium” twice above, because one clear methodological aspect of Minsky’s thinking is that macroeconomics is about disequilibrium. Neoclassical economists have the world precisely (to use an evocative piece of Australian slang) arse about tit. They believe that if it’s not an equilibrium model it’s not economics.

Nonsense! The precise opposite is the case: if it isn’t disequilbrium, then it isn’t economics.

There’s nothing “radical” about this, which is often the way that neoclassical economists react when I press this point: “assume disequilibrium? How dare you!?”. I dare because “disequilibrium” is so common in real sciences that they don’t even call it that: they call it dynamics. Any dynamic model of a process must start away from its equilibrium, because if you start it in its equilibrium, nothing happens. It’s about time that economists woke up to the need to model the economy dynamically—and to give Krugman his due here, he does admit at the end of his paper that his dynamics are dreadful, and need to be improved:

The major limitation of this analysis, as we see it, is its reliance on strategically crude dynamics. To simplify the analysis, we think of all the action as taking place within a single, aggregated short run, with debt paid down to sustainable levels and prices returned to full ex ante flexibility by the time the next period begins. This sidesteps the important question of just how fast debtors are required to deleverage; it also rules out any consideration of the effects of changes in inflation expectations during the period when the zero lower bound remains binding, a major theme of recent work by Eggertsson (2010a), Christiano et. al. (2009), and others. In future work we hope to get more realistic about the dynamics.

Hurry up Paul: you’re already eight decades behind Irving Fisher, who put the case for dynamics even for those who assume that equilibrium is stable:

‘We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But … New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

Theoretically there may be—in fact, at most times there must be—over-or under-production, over- or under-consumption, over- or under-spending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.’ (Fisher 1933, p. 339)

Endogenous Money

One key component of Minsky’s thought is the capacity for the banking sector to create spending power “out of nothing”—to quote Schumpeter. As well as explaining endogenous money, I show that Minsky’s analysis leads to the conclusion that aggregate demand is greater than aggregate supply arising from the sale of goods and services alone—and therefore that rising debt plays a crucial role in a capitalist economy:

If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963; Minsky 1982) (Minsky 1982, p. 6)

This aggregate demand is spent not just on goods and services, but also on buying financial assets—hence economics and finance are inextricably linked, in opposition to the failed neoclassical attempt to keep them separate in two hermetically sealed jars. This in turn transcends Walras’ Law to give us what I call the Walras-Schumpeter-Minsky Law:

Aggregate demand is income plus the change in debt, and this is expended on both goods and services and financial assets. Therefore in a credit-based economy, there are three sources of aggregate demand, and three ways in which this demand is expended:

1. Demand from income earned by selling goods and services, which primarily finances consumption of goods and services;

2. Demand from rising entrepreneurial debt, which primarily finances investment; and

3. Demand from rising Ponzi debt, which primarily finances the purchase of existing assets.

Neoclassical Misinterpretations of Fisher, Minsky & Banking

“How do you misinterpret me? Let me count the ways…”

There are so many ways in which neoclassical economists misinterpret non-neoclassical thinkers like Fisher and Minsky that I could write a book on the topic. This section focuses on just one facet of how they get it wrong: by ignoring banks, and treating loans as transfers from “savers” to “spenders” with no bank in between.

This is precisely how Krugman models debt in his recent paper:

In what follows, we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending… (Krugman and Eggertsson 2010, p. 3)

This is debt without banks—and without the endogenous creation of money—and it explains why neoclassical economists don’t think that the level of private debt matters.

With that vision of debt, a change in the level of debt isn’t important, because the borrower’s increase in spending power is counteracted by the lender’s fall in spending power. Here’s the lending process as neoclassicals like Krugman see it:

Assets Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

Krugman therefore reassures his blog readers that there’s nothing to worry about when private debt levels rise or fall:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. (Krugman 2011)

That would be reassuring if true, since we could then ignore data like this:

Unfortunately, real lending is better described by the next table:

Bank Assets Bank Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

In the real world, a bank loan increases “Impatient”‘s spending power without reducing “Patient”‘s, so that the level of private debt does matter.

Applying Minsky to Macroeconomic Data

In particular, the rate of change of debt matters because that tells us how much of demand is debt financed. When you add the change in debt to GDP, you get total aggregate demand, and that makes it exceedingly clear why the economic crisis occurred: the growth of debt collapsed, and took the economy with it:

Since change in debt is part of aggregate demand, the acceleration of debt—the rate of change of its rate of change—affects change in aggregate demand. This in turn has impacts on the change in employment.

It also impacts on change in asset prices. The relationship between accelerating debt and rising asset prices is clear even in the very volatile world of the stock market:

It is undeniable in the property market:


Since asset market volatility is driven by the acceleration of private debt, the Minskian solution to instability in finance markets is to somehow sever the link between debt and asset prices. I put forward two ideas.

Jubilee Shares

Currently, shares last for the life of the issuing company, and 99% of the trade on the stock market is in the secondary market. The Jubilee Shares proposal would allow shares to last forever as now when purchased on the primary issue market, but would have them switch to a defined life of (say) 50 years after a limited number of sales on the secondary market (say 7 sales). This would encourage primary share purchases, and also make it highly unlikely that anyone would use borrow money to buy Jubilee shares on the secondary market.

Property Income Limited Leverage

Currently lending to buy property is allegedly based on the income of the borrower—which gives borrowers an incentive to actually want higher leverage over time. “The PILL” would limit the amount that can be lent to some multiple (say 10 times) of the income generating capacity of the property itself.

End of Synopsis

There’s much more detail in the paper itself, and when the conference is held my talk on it will also be available on the INET website.

This post first appeared at Steve Keen’s DebtWatch

34 Responses to "A Primer on Minsky"

  1. Sergio   March 26, 2012 at 11:10 pm

    This is great. Very useful summary.

    • webcam idi   February 4, 2013 at 4:13 pm

      You are right.

  2. Tobin   March 27, 2012 at 2:59 am

    Very interesting article. Excellent job from Keen!

  3. Eclectic Obsvr   March 27, 2012 at 11:53 am

    Strikes me that you are picking an argument with Krugman that you don't need to have. Also sounds to me that while there might be a correlation between debt delevaging and a collapse in demand, that it's still about a collapse in demand at the end when it comes to explaining the current problem with the economy in gdp & employment.

    Best of luck with your analysis, though.

    • Erik   March 27, 2012 at 4:20 pm

      The argument is most certainly needed. The coincidence that Krugman et al are largely pulling in the same political direction for the moment is no reason to let anyone get away with outright falsehoods.

      Those same falsehoods are also reproduced in the textbooks given to econ students — so again, the argument is not only needed, it is vital.

  4. Majorajam   March 27, 2012 at 4:37 pm

    It's refreshing to see someone who actually reads Minsky advocate his ideas. Krugman is a brilliant guy, and far more clued in than the monetarists whose obtuseness is unbounded, but he doesn't grasp Minsky in the least.

    Saying all that, your proposals seem quite out of the box to me, as differing from Minsky's which were far more traditional. I wonder what your reaction would be to Norman Gall's proposals that come at the end of this bit of vintage (and highly prescient) analysis. The whole piece, written in 1998, is a brilliant read.

  5. Robert Waldmann   March 28, 2012 at 12:07 am

    The quote of Minsky contains an ellision at a very key point "For real aggregate demand to be increasing, . . . it is necessary " What was replaced by "…" ? Why was it so necessary to save those pixels ?

    The partial quotation is a mathematically incorrect statement. Without a qualification (elided) "it is necessary" is a very strong claim. It is not just the claim that growth has been accompanied by increasing debt, but that it must be. It is possible to imagine worlds with growth and without debt. The passage as written isn't a claim about economic history "it is necessary" and "it follows" are mathematical concepts.

    Frankly, I don't see how to interpret the quoted passage from Minsky as other than a math mistake.

  6. Anjon Roy   March 28, 2012 at 1:06 am

    Great stuff.

    I'm fascinated by the idea of "jubilee shares". This seems to allign with Keynes's view of "investing for prospective yield" vs "investing for expectations in the share price" – the latter being speculation, which unfortunately dominates stock market behavior. I wonder what potential adverse impacts this proposal could have? For instance, would it substantially raise the cost of equity capital, due to investors now having less lucrative exit oppurtunities ? My guess is that the critics would argue this point.

    • Zugswang   March 28, 2012 at 9:58 am

      I'm interested in this idea, as well, but I'd be curious how the number of trades, and the lifespan of individual shares, would be tracked, especially when the shares are repackaged into various pooled securities, which, I would imagine, could make implementation of such a proposal extremely difficult in practice. And wouldn't this also carry an inherent risk of people trying to unload expired shares on less well-informed investors?

      • Anjon Roy   March 31, 2012 at 12:03 am

        those are great questions. I wonder if there are any in-depth studies or thoughts out there just on this one topic of jubilee shares, or shares with expiration of some sort? Would very much appreciate any thoughts on this

  7. Wraithlin   March 28, 2012 at 4:03 am

    Your points dont actually argue against PK.
    PK says that when borrowers start to repay their loans AD will fall unless savers spend more to offset this. A reduction in credit is EXACTLY an increase in savings with no offsetting increase in borrowings – i.e. someone saving more without an offsetting increase in consumption.

    The two are functionally equivalent:
    Transfers of savings to borrowers will show up as loans (credit) on bank balance sheets.
    As borrowers save, then bank loan books (credit) must shrink unless there are new borrowers to offset this.

    Fighting over the minutiate is to miss the point – both sides agree there is a lack of aggregate demand, i.e. the economy needs stimulating.

    • Hepionkeppi   April 6, 2012 at 6:51 am

      "A reduction in credit is EXACTLY an increase in savings with no offsetting increase in borrowings – i.e. someone saving more without an offsetting increase in consumption."

      A reduction of credit is reduction in circulating medium of exchange in the economy. Credit is money and all money is credit. Government's money can be tought as a tax credit that government has spend but not yet taxed. Bank credit act as money too.

      A reduction in credit is not increase in savings, but decrease in indebtedness. After all, ones debt is credit to the counterparty. When both get written off, there is no net change in the amount of savings because loss in assets (credit) is exatly equal to loss in liabilities (debt).

      But, because we use these credits as money, and their amounts decrease, there can be a "general shortage of money" as a result of this process. Not enough money to go around – spending – to faciliate full use of productive capasity and low unemployment.

  8. Jim Dandy   March 28, 2012 at 4:28 am

    Feed Your Head: http://www.zombinomics.com

  9. Schofield   March 28, 2012 at 1:09 pm

    Good article. Could be said that thanks to articles like this we are beginning to move out of the the age of Neo-Liberalism into the age of Equi-Liberialism (or Equi-Liberalism take your pick) – the attempt to put some balance as best we can into the real world of economic disequilibrium.

  10. BT (London)   March 28, 2012 at 3:08 pm

    So here’s how the argument plays out:

    Krugman assumes that people need to save in order for others to borrow.

    Keen points out that they don’t.

    Krugman explains that Keen is wrong by … assuming that people need to save in order for others to borrow.

  11. Schofield   March 28, 2012 at 3:51 pm

    If the Chinese government has spent the last thirty odd years rolling over or cancelling non-performing bank loans but still averaged 10% average annual GDP growth have they found a way through using Modern Monetary Theory to successfully tackle Minsky's Financial Instability Hypothesis?

  12. zzz05   March 31, 2012 at 4:21 pm

    Please forgive a beginner; I can't correlate the drop in public debt in your second figure with any drop in the first figure, the way private debt has correlating drops?

  13. Per Kurowski   April 2, 2012 at 9:37 pm

    When analyzing instability in financial markets it would be to analyze that under the two scenarios of with or without regulatory interference.

    I say so because the current instability resulted primarily from the fact that bank regulators played dirty and without really informing anyone changed the ground zero of the financial markets, by setting different capital/equity requirements for the banks based on the perceived risks of default, mostly as perceived by the credit rating agencies.

    Since the banks and the markets already cleared for these perceptions of risk by means of interest rates, amount at exposure and other term, the market overdosed on perceived risks. And now we are in a crisis because of obese exposures to what was or is officially perceived as absolutely not risky, like triple-A rated or infallible sovereigns, and anorexic exposures to what is officially perceived as risky, like small businesses and entrepreneurs. http://bit.ly/dFRiMs

  14. Zoe Lindesay   April 5, 2012 at 2:20 pm

    Thank you for your talk at Cambridge last term – I took your recommendation and read Graziani's Theory of Monetary Production and I can say for certain that it was the most illuminating book I have ever read in my life, although it did take me about six weeks to work through all the concepts. One point I would like to raise is that the Brazilian finance minister has recently commented on the detrimental impacts of excess liquidity on developing countries, which has historically has particularly been a problem in Latin America, especially due to IMF structural reform programmes that were based on Shaw's model of liberalizing financial systems at the international level (as compared to McKinnon's model of liberalizing at the domestic level) – I think this is something that is very important not to be over looked in this debate. Best of luck.

  15. MartínC   April 9, 2012 at 9:57 pm

    Thus, the excess liquidity in the world is over but it has take as a common fact and not as a determinat crises because the crises are created by us after the excess of stock of debt. The absence of regulation in the domestic and global financial system is the main cause that the volatily of liquidity would turn in the great crises. The results came from the endogenous dinamics but it is influenced by the political economy.

  16. drocto   June 1, 2012 at 12:28 pm

    Just an FYI from the hard sciences. Many equilibriums are dynamic. Yes, "dynamic equilibrium". In these equilibrium states things do happen, but they happen in large numbers at a very small scale and net to zero over meaningful time scales.

    For those who are interested this page provides a simple description of dynamic and static equilibrium (in the context of a nominal chemical reaction): http://chemwiki.ucdavis.edu/Physical_Chemistry/Ch

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