John Maynard Keynes by Hyman P. Minsky
John Maynard Keynes was a slog, and I wouldn’t recommend it to most of my friends. I loved it. John Maynard Keynes is not a biography - instead, it’s heterodox economist Hyman Minsky’s reinterpretation of Keynes’s work with a heavy emphasis on uncertainty, finance, and the inherent instability of a capitalist economy.
Minsky on consumerism
Contrary to Keynes's prediction, people did not seek culture and philosophy with wealth. The rich turned to capital-intensive consumption instead, and this example filtered down to the not as rich. (This sounds a lot like Lasch's work.) "Thus a variety of conspicuous consumption became generalized, and this conspicuous consumption has led to a continuing capital shortage."
"[A]ffluence has not brought a demand for the quiet pleasures; but rather has been associated with proliferation of demands for goods that require capital assets."
The strategy of the mid 70s had "the economy on a treadmill of ever-higher discretionary consumption, without any apparent tendency toward satiation. The joylessness of American affluence may be due to the lack of a goal, the acceptance of a standard in which "more" is really not worth the effort."
"It rather seems to put all - the affluent, the poor, and those in between - on a fruitless inflationary treadmill, accompanied by what is taken to be deterioration in the biological and social environment."
The General Theory as an alternative to Marxist and orthodox economists
"[O]ut of an understanding that the Left had the questions but not the answers, The General Theory was born." It came from a union of rationality of economics and the sentiment that something better than what exists is attainable. Keynes provided alternative to Marxist and orthodox economists who basically believed the same (pessimistic) things but had different normative claims about them.
Economics should not be ignorant of finance
"The relevant paradigm for the analysis of a capitalist economy is not a barter economy; the relevant paradigm is a system with a City or a Wall Street where asset holdings as well as current transactions are financed by debts."
The economy is cyclical
"[S]uccess breeds daring, and over time the memory of past disaster is eroded. Stability - even of an expansion - is destabilizing in that more adventuresome financing of investment pays off to the leaders, and others follow. Thus an expansion will, at an accelerating rate, feed into the boom."
"As a recovery approaches full employment the current generation of economic soothsayers will proclaim that the business cycle has been banished from the land and a new era of permanent prosperity has been inaugurated." (This passage is incredibly prescient – Minsky is describing the "great moderation" to a tee and Robert Lucas's 2003 statement that the economy was a solved problem.)
Not booms, not deflation, not stagnation, nor recovery can continue indefinitely. "Each state nurtures forces that lead to its own destruction."
So "the normal path of a capitalist economy is cyclical."
The deflationary spiral
Deflation triggers the realization that speculative gains can be made by holding money. This causes velocity to decline which brings on more deflation. The cycle continues.
Keynes on self-interest
"It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened, more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these."
On the Cold War arms race
The Cold War arms race equivalent to war in terms of destruction of wealth. The rapid capital intensive weapons were rapidly obsoleted.
"The succession of weapons systems has been equivalent to pillage and bombings in its destruction of the fruits of prior accumulation."
Cash as insurance
"The possession of money - and of financial assets that are near monies, i.e., savings accounts, certificates of deposits, etc. - acts as "insurance" against the economy, or particular markets, behaving in an inappropriate way"
Minsky on modern econometric analysis
"By their very nature, such studies, based as they are upon erroneous premises, cannot determine relevant investment relations. As many things happen together and as econometricians are skilled in massaging data, even such poorly conceived studies may satisfy merely statistical tests of adequacy."
The neoclassical view of labor markets is flawed
Classical economics assume equilibrium will be achieved. "In the classical economics it is blithely assumed that there exists processes in markets which assure that this [equilibrium] real wage and employment will be achieved."
Keynes pointed out that disequilibrium in one market can cause a reaction and disequilibrium in other markets. The classical view says that the labor market is like smaller markets that won't have other effects, but in reality disequilibrium in the labor market does spill over.
Neoclassical economists said wage rigidities caused unemployment. "This pointing at labor-market sluggishness or rigidity with respect to money wages as the villain of the piece contrasts with Keynes's view that wage flexibility, if it occurred, might very well make things worse."
Keynes and equilibrium
"Every reference by Keynes to an equilibrium is best interpreted as a reference to a transitory set of system variables toward which the economy is trending ... Thus the behavior of the economy is characterized by equilibrating tendencies rather than by any achieved equilibrium. Keynesian economics as the economics of disequilibrium is the economics of permanent disequilibrium."
Minsky on the resurgence of neoclassical economics
"With this victory by the classical theory, academic economics has recaptured much of the sterility and irrelevance ... which characterized the discipline prior to the appearance of The General Theory"