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Thomas I. Palley sent John Bellamy Foster the following article in October 2009 for
publication in Monthly Review, accompanied by this note: Im hoping it might provoke
some discussion and also generate some dialogue and consensus between Marxists (like
yourself) and structural Keynesians (like myself). Palleys piece addressed (along with much
else) the article Monopoly-Finance Capital and the Paradox of Accumulation by John
Bellamy Foster and Robert W. McChesney in the October 2009 issue of Monthly Review. In
the same spirit of promoting dialogue between Marxists and Keynesians on the present crisis,
we agreed to publish his contribution, together with a response by Foster and McChesney, in
this issue of MR.The Editors.
M i n s ky s Moment
The Night They Reread Minsky, which was also the title of his third
Lionel Robbins lecture at the London School of Economics.2
D o e s M inskys Theory Really E xplain the Crisis?
Recognition of Minskys intellectual contribution is welcome and
deserved. Minsky was a deeply insightful theorist about the procliv-
ity of capitalist economies to experience financially driven booms and
busts, and the crisis has confirmed many of his insights. That said,
the current article argues that his theory only provides a partial and
incomplete account of the current crisis.
In making the argument, I will focus on competing explanations of
the crisis by progressive economists. On one side, Levy Institute econ-
omists Jan Kregel, Charles Whalen, and L. Randall Wray have argued
the economic crisis is in the spirit of a classic Minsky crisis, being
a purely financial crisis that is fully explained by Minskys financial
instability hypothesis.3 On the other side are the new Marxist view
of Foster and McChesney, the social structure of accumulation (SSA)
view of Kotz, and the structural Keynesian view of Palley.4 These latter
views interpret the crisis fundamentally differently, tracing its ulti-
mate roots back to developments within the real economy.
The new Marxist, SSA, and structural Keynesian views trace the roots
of the crisis back to the adoption of the neoliberal growth model in the
late 1970s and early 1980s when the post-Second World War Treaty of
Detroit growth model was abandoned.5 The essence of the argument
is that the post-1980 neoliberal growth model relied on rising debt and
asset price inflation to fill the hole in aggregate demand created by wage
stagnation and widened income inequality. Minskys financial instabil-
ity hypothesis explains how financial markets filled this hole and filled
it for far longer than might reasonably have been expected.
Viewed from this perspective, the mechanisms identified in Minskys
financial instability hypothesis are critical to understanding the neolib-
eral era, but they are part of a broader narrative. The neoliberal model
was always unsustainable and would have ground to a halt of its own
accord. The role of Minskys financial instability hypothesis is to explain
why the neoliberal model kept going far longer than anticipated.
By giving free rein to the Minsky mechanisms of financial innova-
tion, financial deregulation, regulatory escape, and increased appetite
for financial risk, policymakers (like former Federal Reserve Chairman
Alan Greenspan) extended the life of the neoliberal model. The sting
in the tail was that this made the crisis deeper and more abrupt when
30 MONTHLY R EVIE W / ap ri l 2010
There is another critical element to the neoliberal model that was ini-
tially entirely over-looked by SSA theorists. That element is debt and
financial boom.15 In contrast to SSA theorists, new Marxists recognized
the significance of debt but they failed to recognize the ability of the
financial system to keep expanding the supply of credit, which is why
they were perplexed by neoliberalisms longevity. This is where Minskys
thinking becomes so important, as it explains the ability to expand
credit. It also adds financial instability into the brew of stagnation.
Debt provides consumers with a means of maintaining consumption
despite stagnant wages and widened income inequality, while finan-
cial boom provides consumers and firms with collateral to support
further debt-financed spending. These critical roles of debt and finan-
cial boom in turn provide the avenue for embedding Minskys financial
instability hypothesis within the new Marxist, SSA, and structural
Keynesian narratives.
The neoliberal growth model has a logic that begins with redirect-
ing income from workers to upper-income management and profits.
Workers then maintain consumption despite stagnant wage income by
borrowing, while the nonfinancial corporate sector promotes financial
boom via stock buy-backs and leveraged buyouts. Not only does that
raise stock prices; it also transfers funds to households. These prac-
tices explain rising household and corporate indebtedness, measured
respectively as debt-to-income and debt-to-equity ratios, and increased
indebtedness explains the shift of profits toward the financial sector.
Borrowing is facilitated and expanded by financial innovation and
financial deregulation, which become essential to keeping the sys-
tem going. Thus, not only does neoliberalism ideologically support
financial deregulation; it also needs it, functionally. Together, finan-
cial innovation and deregulation ensure a steady flow of new products
that allow increased leverage and widen the range of assets that can be
collateralized. Such products include home equity loans, exotic mort-
gages such as zero-downs, and the shift to 401(k) pension plans that
can be borrowed against.
House price inflation plays an especially important role since higher
home values provide collateral that can be borrowed against. That
makes financial innovations and deregulation that increases the avail-
ability of housing finance especially important, because increased
supply of housing finance increases house prices. It also explains why
M INS K Y ' S H Y P O T HESIS 37
Notes
1. Ferri, Piero and Hyman P. Minsky, 91; Hyman P. Minsky, The Financial 2. Justin Lahart, In Time of Tumult,
Market Processes and Thwarting Instability Hypothesis, Working Paper Obscure Economist Gains Currency,
Systems, Strucural Change and no. 74, Levy Economics Institute of Bard Wall Street Journal, August 18, 2008;
Economic Dynamics 3 (1992), 79- College, http://levy.org. Charles W. Calomiris, Not (Yet) a Minsky
M INS K Y ' S H Y P O T HESIS 43
Moment, VoxEU, November 23, 2007, big-three automakers in 1950. That con- the foreseeable future, lack of demand
http://voxeu.org; Martin Wolf, The End tract symbolized a new era of wage-set- will be the major constraint on out-
of Lightly Regulated Finance Has Come ting in the U.S. economy led by unions, put and employment in the American
Closer, FT.com, September 16, 2008; in which wages were effectively tied to economy, http://whitehouse.gov.
Paul Krugman, The Night They Read productivity growth. Harvard Professor and former IMF Chief
Minsky, http://krugman.blogs.nytimes. 6. Thomas I. Palley, Financialization: Economist, Ken Rogoff has written about
com, May 17, 2009. What It Is and Why It Matters, in Eckhard the new normal for growth being a
3. Jan Kregal, The Natural Instability Hein, et al., eds., Finance-Led Capitalism? notably lower average growth rate than
of Financial Markets, Levy Economics (Marburg, Germany: Metropolis-Verlag, they enjoyed before the crisis. Rogoff,
Institute of Bard College, Working Paper 2008), 29-60. The New Normal Growth, http://project-
no. 523 (December 2007), http://levy. syndicate.org. And Paul Krugman has
7. Summers: Obama Policies Averted
org, Minskys Cushions of Safety, Levy written, [T]he job market will remain
Economic Abyss, New York Times, terrible for years to come. Krugman,
Economics Institute, Public Policy Brief October 12, 2009.
no. 93 (January 2008), http://levy.org, Mission Not Accomplished, New York
8. Ben Benanke, The Great Times, October 2, 2009.
and Changes in the U.S. Financial
System and the Subprime Crisis, Levy Moderation, Remarks at the Meetings 18. Palley, Americas Exhausted
Economics Institute, Working Paper no. of the Eastern Economic Association, Paradigm.
530 (April 2008), http://levy.org; Charles Washington, D.C., February 20, 2004,
http://federalreserve.gov. 19. Kate Bronfenbrenner and Stephanie
Whalen, The US Credit Crunch of Luce, Uneasy Terrain, Report, United
2007, Levy Economics Institute, Public 9. Ferri and Minsky, Market Processes
States Trade Deficit Review Commission,
Policy Brief no. 92 (2007), http://levy. and Thwarting Systems. Washington, D.C., September 2000,
org; L. Randall Wray, Lessons from the 10. See citations in endnote 3 above. and The Changing Nature of Corporate
Subprime Meltdown, Levy Economics 11. See citations in endnote 4 above. Global Resturcturing, Report, U.S.-
Institute, Working Paper 522 (December China Economic and Security Review
2007), http://levy.org, Financial Markets 12. See Paul A. Baran and Paul M.
Sweezy, Monopoly Capital (New York: Comission, Washington, D.C, October
Meltdown, Levy Economics Institute, 2004.
Public Policy Brief no. 94 (2008), Monthly Review Press, 1966).
20. See, for instance, Thomas I. Palley,
http://levy.org, and Money Manager 13. Mishel, et al., 2008. Not Included in
Capitalism and the Global Financial Original References. Plenty of Nothing: The Downsizing of
Crisis, Levy Economics Institute, Working the American Dream and the Case for
14. Thomas I. Palley, The Structural Keynesianism (Princeton:
Paper no. 578 (September 2009), http:// Institutionalization of Deflationary Policy
levy.org. Princeton University Press, 1998), chap-
Bias, in H. Hagerman and A. Cohen, ter 12.
4. John Bellamy Foster and Robert W. eds., Advances in Monetary Theory
21. Simon Johnson and James Kwak,
McChesney, Monopoly-Finance Capital (Boston: Kluwer Academic Publishers,
and the Paradox of Accumulation, 1997), 157-73. Its Crunch Time, Washington Post,
Monthly Review 61, no. 5 (October September 29, 2009; Simon Johnson,
15. Samuel Bowles, David M. Gordon, The Quiet Coup, The Atlantic Monthly,
2009), 1-20; David M. Kotz, The and Thomas E. Weisskopf, Beyond the
Financial and Economic Crisis of 2008, May 2009.
Wasteland (Garden City, New Jersey:
Review of Radical Political Economics 41, 22. See citations in endnote 11.
Anchor Press/Doubleday, 1983); David
no. 3 (2009), 305-17; Thomas I. Palley, M. Gordon, Fat and Mean (New York: 23. See Paul Sweezy, Crisis Within
Americas Exhausted Growth Paradigm, Free Press, 1996). the Crisis, Monthly Review 30, no. 7
Chronicle of Higher Education, April (December 1978), 7-10; and Harry
16. Palley, America.
11, 2008; and Americas Exhausted Magdoff and Paul M. Sweezy, Debt and
Paradigm: Macroeconomic Causes of the 17. Many leading mainstream econo- the Business Cycle, Monthly Review 30,
Financial Crisis and the Great Recession, mists are now predicting an extended no. 2 (June 1978), 1-11both reprinted
New America Foundation (July 22, period of stagnation. Lawrence Summers in Harry Magdoff and Paul M. Sweezy,
2009), http://newamerica.net. declared in a speech on the Principles The Deepening Crisis of U.S. Capitalism
5. The treaty of Detroit refers to the five-
of Economic Recovery and Renewal to (New York: Monthly Review Press, 1981),
year wage contract negotiated by the the National Association for Business 70-80, 90-93.
United Autoworkers Union with Detroits Economics on October 12, 2009: For
MONTHLY REVIEW F i f t y Ye a r s A g o
In the days of innocence, when social thinkers followed wherever their
logic led, John Stuart Mill reasoned that no society could be explained
without understanding the society out of which it had grown, since the
preceding state was in a sense the cause of the one that followed. The
fundamental problem, therefore, of the social science, he concluded, is to
find the laws according to which any state of society produces the state which
succeeds it and takes its place.
Harry Braverman, The Momentum of History, Monthly Review, April 1960
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