“Most of what we have been doing in macro for the past 30 years has been spectacularly useless,” pronounced The Professor in his third and final lecture at the LSE last night, entitled: “The Night they Reread Minsky.” “If you’ve got a model where everyone is rational it would be hard to get the abrupt collapse of the world financial system,” he admitted.
Economics, everyone but economists knows, is bunk. The dominant neoclassical synthesis begins with absurd axioms (we are utterly rational, all knowing of past, present, and future, obsessively utility maximising) and from that derives a vision of the world that naturally has little to do with the one you and I make our livings in every day. Glory—and tenure—no longer goes to the economist who best explains the actual workings of our economy but rather to the one who derives the most elegant mathematical models from those inaccurate axioms. No wonder economists missed the plot.
Not all economists. Hyman Minsky never won a Nobel prize, didn’t teach at Princeton, wasn’t a big name in the profession. He was a bit of a cult figure (if Krugman is Springsteen, then Minsky is Iggy Pop) but when he died 13 years ago, few outside the post-Keynesian subculture knew his name. No more. Now he is quoted everywhere from Financial Times columns to Goldman Sachs reports to the “Talk of the Town” section of the New Yorker. The reason: even though he is dead, he, more than anyone, predicted our financial disaster.
Minsky was a devout Keynesian, convinced that most other economists who considered themselves Keynesians were heretics bowdlerising the great man’s thought. For Minsky, Keynes’s key insight was the role of uncertainty. Unlike neoclassical agents who are all knowing as well as rational, Minsky’s men have no clue what the price of copper will be in five years. Uncertainty about the profitability of investment allows a role for emotion, for irrational exuberance, and makes booms and busts inevitable. In the mathematised world of rational agents that has dominated academic economics, business cycles can only be created outside the system, through technological change. For Minsky, they are endogenous, the instability of capitalism built into its very nature.
In good times, Minsky’s men are optimistic:…