My paper for INET’s Berlin 2012 Con­fer­ence

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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.

Attending the conference

The con­fer­ence itself has only 300 invi­tees, and INET had over­whelm­ing demand from stu­dents for the 25 places they reserved for them. Rather than let­ting the over 500 other appli­cants miss out, these other appli­cants can watch the con­fer­ence live from a spe­cial live video broad­cast room at the Adlon Hotel, right next to the con­fer­ence venue itself in Berlin. Click here for details if you’re one of those 563 appli­cants.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • RJ

    Krug­mans com­ments are spot on and I’m unsure why Steve con­tin­ues to crit­i­cise them

    Unless he still does not under­stand the mas­sive dif­fer­ence between PRIVATE debt and mon­e­tary sov­er­eign GOVT debt (MSGD). Most econ­o­mists don’t so this is likely.

    Espe­cially when the MSGD is backed by GOVT BONDS rather than money.I know banks buy­ing Govt bonds means the addi­tional money is not drained but 

    money = debt
    Money = a finan­cial asset
    Debt = money or a finan­cial asset like Govt bonds 

    We need more Govt debt (a lot more) to be able to save enough for our retire­ment. Until Krugman’s very sound logic is under­stood more fully (and econ­o­mists like Steve do harm by crit­i­cis­ing these com­ments) we risk screw­ing the econ­omy com­pletely (even worse than at present) due to igno­rance about debt and MSGD.

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

    There’s a tran­scrip­tion error in that sen­tence. Sec­ond ‘impa­tient’ should be ‘patient’.

  • Cas­sander

    Steve, the ‘US Aggre­gate Demand 1980–2012’ graph in this post appears to be miss­ing the RHS scale, i.e. the one for change in private/public debt. This is also true of Fig­ure 3 in the PDF of the full paper.

    Also, the font size for the hor­i­zon­tal (year) scale of Figs 3 & 4 needs to be reduced — the text is run­ning together.

  • In a nut­shell you’ve iden­ti­fied why I reject MMT RJ. No endoge­nous money cre­ation by the pri­vate sec­tor eh?

  • Thanks Neil, I’ll fix it.

  • In a nut­shell you’ve iden­ti­fied why I reject MMT RJ. No endoge­nous money cre­ation by the pri­vate sec­tor eh?”

    To be fair Steve MMT doesn’t say that either. Their hor­i­zon­tal cir­cuit is pretty much the same as yours. Plenty of endoge­nous money cre­ation going on in the pri­vate cir­cuit caus­ing all sorts of Min­skian fun and games. 

    RJ’s inter­pre­ta­tion is not accu­rate.

  • Cas­sander

    Whoops, sorry, I didn’t see the “+” sign in the “+Change in Pri­vate Debt” and “+Change in Pub­lic Debt” cap­tions on the ‘US Aggre­gate Demand 1980–2012? graph! Time to get some new read­ing glasses… No need for a dif­fer­ent scale on the RHS ver­ti­cal axis then.

    How­ever, unless there’s some­thing wrong with the fonts for my Adobe Reader instal­la­tion then the font size for the hor­i­zon­tal (year) scales of Figs 3 & 4 in the PDF does need to be reduced. The copy of the Fig 3 ‘US Aggre­gate Demand 1980–2012? graph in the post looks OK though, so maybe I do have a font prob­lem — does any­one else see a prob­lem with the text on the hor­i­zon­tal scales for Figs 3 & 4 in the PDF?

  • The prob­lem with your “Reme­dies” sec­tion is that it is irrel­e­vant as such; there is no short­age of tech­ni­cal means.

    The biggest point to make is that some coun­tries have had wild Min­sky style booms and some haven’t.

    The dif­fer­ence is not that some coun­tries use dif­fer­ent and bet­ter tech­niques, it is a dif­fer­ence in polit­i­cal will: some coun­tries, notably most “anglo” coun­tries, have expressed a very strong polit­i­cal goal of dri­ving up tax-free cap­i­tal gains and dri­ving down often heav­ily taxed work­ing incomes.

    Min­sky booms are con­se­quence of poli­cies aim­ing to redis­trib­ute incomes via infla­tion, in par­tic­u­lar asset price infla­tion.

    Infla­tion is always and every­where a polit­i­cal phe­nom­e­non, and has been for thou­sands of years.

  • cen­ter­line

    RJ — you seem to ignore the fact that gov debt is not sover­iegn. It is cre­ated by pri­vate enti­ties (cen­tral banks) for profit.

  • It is cre­ated by pri­vate enti­ties (cen­tral banks) for profit.”


  • cen­ter­line

    NeilW —

    Do you know any­thing about the Fed­eral Reserve in the US? What it is and who owns it? Do you think this arrange­ment is any dif­fer­ent else­where?


  • cen­ter­line

    Blixxex — great points. I agree that much of the mechan­ics are polit­i­cally dri­ven, and the cul­ture of a nation plays a piv­otal role in the out­come. Other fac­tors are human in nature — greed and power mainly. This is part of what I believe gets missed in so much of the aca­d­e­mic, dou­ble-entry, mostly lin­ear, etc. study of clas­si­cal ecomon­ics. I enjoy read­ing Steve’s work because he does not appear to be trapped inside this box like so many oth­ers.

  • ” What it is and who owns it?”

    Yes. I also know about de facto and de jure. And I know who gets the div­i­dend.

    The sep­a­ra­tion of cen­tral bank and gov­ern­ment is a fairy tale of the sort designed to frighten small chil­dren. It shouldn’t fool those of a ratio­nal mind.

  • «Do you know any­thing about the Fed­eral Reserve in the US? What it is and who owns it?»

    Most peo­ple who write things like these don’t know much about the Fed­eral Reserve, and in par­tic­u­lar as a rule are wholly igno­rant of the impor­tant dis­tinc­tion between the Fed­eral Reserve Sys­tem and the Fed­eral Reserve Board, who are two really dif­fer­ent things,

  • RJ

    RJ’s inter­pre­ta­tion is not accu­rate”.

    Unsure what you mean by this. But my point above is accu­rate. Steve crit­i­cises Krug­man when he was refer­ring to US Govt debt (that is com­pletely and utterly dif­fer­ent to non Govt debt). 

    And re MMT (from the Mosler site)

    Gov­ern­ment $deficit = non gov­ern­ment $sur­plus (net finan­cial assets)

    There are arti­cles on this site explain­ing this that you should read.

  • RJ

    In a nut­shell you’ve iden­ti­fied why I reject MMT RJ. No endoge­nous money cre­ation by the pri­vate sec­tor eh?”

    To be fair Steve MMT doesn’t say that either. 

    Of course MMT doesn’t. I’m unsure where Steve gets his MMT views from.

  • cen­ter­line

    While the cur­rent sys­tem relies on both to func­tion, the seper­a­tion is real as pri­vate inter­ests are vested in the cre­ation of gov­ern­ment debt and shape pol­icy. Pri­vate hands profit from the cre­ation of pub­lic debt — and this is a direct con­flict of inter­est. Many more profit due to prox­im­ity to the debt cre­ation through numer­ous mech­a­nisms that are based in the pri­vate, not pub­lic, sec­tor.

    While no sys­tem is per­fect, the cur­rent sys­tem is built by bankers for bankers. Hence, our cur­rency is not sover­iegn.

    Is a cer­tainty that politi­cians would make poor stew­ards of a nations cur­rency, but unless the field of mod­ern eco­nom­ics embraces some of the “human” real­i­ties of how the sys­tem is built, it will fail soci­ety at this crit­i­cal junc­ture. Might be rel­e­gated to the dust­bin of his­tory (aking to alchemy in place of another sci­ence if it does not change course soon enough. 

    I would love to hear how any­one sees this as any dif­fer­ent.

  • RJ

    The sep­a­ra­tion of cen­tral bank and gov­ern­ment is a fairy tale of the sort designed to frighten small chil­dren. It shouldn’t fool those of a ratio­nal mind.”

    Agree. CL has read too many con­fused web sites (or watched videos like for exam­ple the money mas­ters) . There are a good num­ber about.

  • cen­ter­line

    Blis­sex — are you really using a tech­ni­cal­ity in my post (clar­i­fi­ca­tion in word­ing — thanks) to white­wash over the real­ity of how the sys­tem is con­structed? How pri­vate inter­ests profit from the cre­ation of pub­lic debt? Please clar­ify your posi­tion rather than turn to silly attacks. Please enlighten us.

  • RJ

    While the cur­rent sys­tem relies on both to func­tion, the seper­a­tion is real as pri­vate inter­ests are vested in the cre­ation of gov­ern­ment debt and shape pol­icy. Pri­vate hands profit from the cre­ation of pub­lic debt ”

    The peo­ple are the main ben­e­fi­cia­ries from Govt debt as they pay less tax. Less tax equals more money in their back pocket. (more money to either save or spend. And the west cur­rently needs more of both)

    And where does this Govt debt (and finan­cial asset) come from (for mon­e­tary sov­er­eign Govts). From a sim­ple jour­nal entry. The money does NOT HAVE TO BE BORROWED as many believe.

  • You haven’t read Krug­man prop­erly then RJ. He was crit­i­cis­ing peo­ple wor­ry­ing about any form of debt, includ­ing pri­vate.

  • RJ

    How pri­vate inter­ests profit from the cre­ation of pub­lic debt?

    Why don’t you back this com­ment up. At present we have too much pri­vate debt and too lit­tle Govt debt. So every­one but for bankers and financiers would ben­e­fit from more Govt debt

  • RJ


    As I under­stand Krug­man he was not­ing the two sided nature of debt

    One side being a finan­cial asset and the other a finan­cial lia­bil­ity. Many (or most) focus on the lia­bil­ity side but com­pletely and utterly ignore the asset side.

    This is key with US Govt debt. The jour­nal entry cre­ated Govt debt lia­bil­ity is almost irrel­e­vant to the Govt. But is crit­i­cally impor­tant to cre­ate a asset for pen­sion fund sav­ing.

    Either Govts run deficits. Or we all can not all save. And will return to a few hold­ing all the money. And the rest being no bet­ter than debt slaves

  • cen­ter­line

    You guys are sim­ply dodg­ing the issue here. Pri­vate par­ties profit from the cre­ation of gov­ern­ment debt. It is not a free lunch — and pol­icy guided in this man­ner is not always in the best inter­est of the peo­ple. As a result, the wealth within such economies will become con­cen­trated at the top over time. 

    Higher gov­ern­ment debts being used to counter oth­er­wise higher taxes is also a func­tion of gov­ern­ments rou­tinely spend­ing beyond thier means. Politi­cians dont get re-elected by cut­ting ser­vices, pen­sions, etc. (see what I said above about politi­cians not mak­ing good stew­ards). The pres­sure to behave in a pru­dent man­ner sim­ply is not there. And dont think for a moment that this is some­thing new! This is his­tory repeat­ing itself over and over… expo­nen­tial growth in a world of finite resources is not some­thing that can con­tinue for­ever. Social com­plex­ity and under­stand­ing are also real lim­its. This time though, the prob­lem is global. Solu­tions are not closed sys­tem when you have to con­sider the effects on other economies — espe­cially when talk­ing about a reserve cur­rency backed by a strong mil­i­tary. Is a clas­si­cal recipe for war.

  • RJ

    As a result, the wealth within such economies will become con­cen­trated at the top over time”

    This is almost guar­an­teed with­out Govt debt. (Which is what the out­come of the Euro will be).