authors open with complaints: “The combination of a critical attitude towards Arrow–Debreu and a positive view of Keynes led this reader to expect that an effort to develop an ‘alternative construction’ would follow… Alas, my high hopes were not validated” (1984c, 450; also 1981c). The reviews that follow are embedded in what are clearly rehearsals of Minsky’s own views; it is not hard to see how these jabs could be ignored by their targets.
Fellow dissidents received much the same treatment: Minsky’s review of Davidson’s Money and the Real World suggests that the author “should go back to the drawing board and produce a more succinct and a better focused presentation of the important things he has to say” (1974b, 17), and the review makes clear that the ideal model for such a presentation would be Minsky’s own. Writing of Leijonhufvud’s Information and Coordination, similarly, Minsky says that it “works to the literature, not to institutions and their evolution. This was valuable when criticising established doctrine was the task; it is a serious flaw when the task is the building of viable theory” (1982e, 977).
Minsky’s objections extend to the methodologies that sustain the language of economists. He dismissed as irrelevant to practical concerns highly mathematical theoretical and statistical models: “Economic policy is not made for a mathematical or statistical abstraction” (1977g, 3; also 1969c; 1980d). Statistical analyses were “printouts”: “As the doubters of permanent prosperity did not have printouts to prove the validity of their views, it was quite proper to ignore the arguments drawn from theory, history, and institutional analysis” (1977b, 146). Such modeling efforts were not just idle; the standards of mainstream economics meant that other valuable perspectives – principally, again, Minsky’s own – were ignored. Evidently the failure to communicate was a sore point; evidently Minsky’s tone did little to win converts to his perspective among his colleagues.
This book seeks to understand Minsky’s work; the opinions of the mainstream of the economics profession are well documented elsewhere, as are those of its heterodox critics. I have therefore limited myself, in what follows, to the critical aspect of the relationship between Minsky and the economics profession: what are the points on which communication failed, and why? Minsky returned time and again to the same set of ideas about finance and capitalism, trying to articulate them to other economists, but economics did not really have the vocabulary to accommodate those ideas. As Shackle observed, “Money, as something which can introduce a time-interval between selling one thing and deciding what to have in exchange for it, can evidently have no place in a system whose logic requires all its choices to be comprehensively simultaneous in order that they may be pre-reconciled and thus fully informed” (Shackle 1972, 164).
The real barrier to communication, I propose, was that the themes Minsky dealt with – uncertainty, liquidity, money – find no easy expression in the language of economics as it currently is; the very words had different meanings to his colleagues. The more one is socialized into the discipline, the harder it becomes to talk about these ideas. I return to these translation difficulties later, especially in chapters 4 and 7.
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Minsky’s intellectual vision and appetite for the grand challenges of the theory of business cycles made Schumpeter a natural mentor. The author of a thousand-page book on business cycles illustrated by example a way of knowing, a way of being a scholar and an economist, that Minsky admired and sought to emulate. But Schumpeter’s approach was out of sync with the priorities of the post-World War II generation of graduate students. The ambition that Minsky shared with Schumpeter was the exception among his cohort of PhD students:
[I]n the Harvard of 1946–49, the graduate students, largely but not exclusively veterans of either the service or of Washington, did not take Schumpeter seriously. This was not because the students were in the forefront of the emerging mathematical economics and therefore had surpassed Schumpeter. It was because the main thrust in economics at Harvard was applied: the simplified Keynesian economics of Prof. Alvin Hansen and the quite mechanical application of monopolistic competition theory to problems of industrial organization as set out by Prof. Edward Mason ruled the roost. The representative student was not intellectually engaged with the big issues of the scope and nature of economics and the lessons for a vision of society that were to be extracted from the dismal history of the previous two decades. The prevailing ethos was careerist. The working postulate among the graduate students was not only that big thinking was in the past, but, in truth, it was not worth doing. Their task was to get the Ph.D. and go forth to teach or to serve a government bureau. In the prevailing view, economics was now a normal science, not a grand adventure, and therefore Schumpeter was irrelevant. (1992b, 363 n. 2)
Minsky had no interest in the mechanical application of theory; he wanted the grand adventure. This meant that he was immediately confronted with the contradictions of economic theory. This led to, for example, challenging the distinction made by economics between monetary phenomena, reckoned in quantities of money, and “real” phenomena, reckoned in quantities of goods, from the first paragraph of his dissertation (the substance of which distinction we will take up again in chapter 4). Schumpeter had also rejected the distinction:
Economic action cannot, at least in capitalist society, be explained without taking account of money, and practically all economic propositions are relative to the modus operandi of a given monetary system. In this sense any theory of, say, wages or unemployment or foreign trade or monopoly must be a “monetary” theory, even if the phenomena under study can be defined in non-monetary terms. (Schumpeter 1939, 548)
It was not only in studying money that Minsky felt the need to reject the methodological assumptions of the economics discipline:
Much of present day price theory tends to identify price theory with marginal analysis. Marginal analysis is far from being a primitive concept; it is derived in the analysis of perfect competition. Marginal analysis is derived from profit maximization … the carrying over of profit maximization behavior to non-competitive markets has been the typical approach as far as price theory is concerned. Economists can be accused of being parrots who say that marginal x equals marginal y, and the position so determined is where the firm will operate.
Observed behavior of firms, any casual observation of the behavior of certain non-competitive firms during an inflationary period, can be interpreted to indicate that firms either lack the knowledge or the desire to behave as the marginal analysis indicates a firm should behave. The use of unmodified profit maximization as the sole basis for the analysis of firm behavior is a carry-over by the economist from the analysis of competitive markets. ([1954] 2000, 90f.)
Minsky did not hesitate to object to these two weaknesses of economic theory – leaving no room for money, and adherence to marginalism against the evidence: “The usual economic theory ignores financing problems and assumes a unique behavior principle for all firms (profit maximization, leaving only the trivial problem of the choice of the product to be produced to the firm” ([1954] 2000, 89). By relegating finance to the margins, by supposing that money is to be distinguished from what is “real,” by assuming a single mode of economic action, economists had assumed away the possibility for crisis. Without an understanding of finance, what could they say about the crash of 1929, or the closure of the banking system in 1933?
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The crisis of 2008
In writing about financial crisis, a perennial topic and the one that oriented Minsky’s career, two points in time inevitably loom large: the next crisis and the last. Knowing that they come about, if not cyclically, at least repeatedly, it is hard to resist the temptation to imagine what will be the next crisis. Minsky’s work, as we shall
