Minsky, Keynes, and Financial Instability

Minsky was not the faithful interpreter of The General Theory that he supposed himself to be: he applied Keynes's economics to a system with upward instability, intrinsically prone to overindebtedness and overinvestment. From this perspective, Minsky had the indisputable merit of questioning the myth of growth, which in his view (instead of converging to a uniform and constant rate) endogenously evolves into financial fragility, financial crises, debt deflations, and deep depressions. At the same time, however, Minsky banished important issues raised in The General Theory, primarily the tendency of capitalism toward the exhaustion of investment opportunities and stagnation. The recent subprime crisis has been generally interpreted as a "Minsky moment" followed by a "Minsky meltdown." In the 2000s, however, overindebtedness was the source, rather than the by-product, of growth. If this is true, the recent experience does not fit with the core of Minsky's "financial instability hypothesis," according to which overindebtedness is the endogenous result of capitalism's proclivity to growth. What has recently happened would seem to be a Keynesian, rather than Minskian, phenomenon. After all—despite support from technological innovation in the 1990s and from the Federal Reserve in the 2000s—the U.S. economy has failed to avoid a new depression. From Keynes's stagnationist perspective, however, Hyman P. Minsky had the great merit of highlighting the central role of finance and of showing that finance itself can sustain and prolong growth but not prevent (indeed, it even accentuates) the collapse.