Victoria Bateman on L. Randall Wray's new book on Hyman Minsky in Times Higher Education:
Financial crises are not just events that happened a long time ago in history – or far, far away in distant and much poorer lands. They are hard-wired into the capitalist system. Minsky was one of the valiant few who tried to draw attention to this fact, and one of the few to predict the global financial crisis decades before it actually hit. Unfortunately, his warnings fell on deaf ears. Like many a great artist, his popularity soared only after his death and only once the crisis hit – in what came to be known as a “Minsky moment”.
Having experienced the pain of a new Great Depression, the very least we should expect is that economists try to learn from it. Unfortunately, still too few of them understand the importance of what Minsky had to say – and that, according to Wray, includes notable left-leaning economists (unlike the author, I’m naming no names). While Minsky is now quite well known, his contributions are still widely ignored or misunderstood. This makes Wray’s book a godsend.
To truly understand Minsky, we have to go back to the work of John Maynard Keynes and, in particular, his belief that economic instability is inescapable. According to Keynes, instability follows from one simple fact: the future is completely unpredictable – we never quite know what will happen. The “unknowability” of the future makes investing very difficult. When making investment decisions – whether it be a firm deciding whether to expand, you or me deciding whether to invest in buy-to-let properties, or each of us deciding what to do with our pension pot – it is necessary for us to make predictions about the future, whether that be to estimate how much house prices are likely to rise, whether stocks will do better than bonds, or how much demand the firm expects to have for the products it produces. However, because the future is unknowable it is impossible to answer these questions with any degree of certainty. If we cannot predict the future, we cannot, for example, calculate the “true” value of a stock or a house. As a result, the market has no anchor – instead, asset prices will blow with the wind.