The Minsky view of Keynes

I just finished the book John Maynard Keynes by Hyman Minsky. It is a fresh look (circa 1975) at the revolutionary ideas from Keynes' major works, including but not limited to The General Theory.

Minsky believes that the work of Keynes was watered down and absorbed into the classical economic mainstream and the revolutionary ideas were mostly ignored. He thinks a heart attack shortly after The General Theory was published prevented Keynes from defending his work as vigilantly as he would have otherwise.

One of the big ideas in the book is an examination of how Keynes viewed investment decision making in times of uncertainty, and direct relationship between investment, growth, and employment. In A Treatise on Probability, Keynes stressed the difference between risk, which can calculated and assigned a numerical value, and uncertainty, which is incalculable. Uncertainty leads to money hoarding, leading to lower investment and employment.

Minsky fleshed out the ideas in Keynes' work related to lending, interest rates, financial investment and speculation, looking at the psychology that develops in various stages of the business cycle. Combined with the effect of increasing debts and rising asset prices, Minsky was able to tell a story about disequilibrium. The seeds of the destruction of each phase of the business cycle can be explained in terms of the psychology of financial investment and speculation, leading to the Financial Instability Hypothesis.

The book ends with an interesting discussion of Keynes' social philosophy and political aspirations. For Keynes, the trick was to achieve three goals:

• economic efficiency


• social justice


• individual liberty

He believed he had found a way to balance these goals with policy modifications of government action, without going the way of Socialism or Communism. I have great empathy for these goals, though the implementation of the policy prescriptions have not proven to work as Keynes expected.

An epiphany for me was the connection between the work of Minsky and Keynes, and the Kondratiev long wave theory. Kondratiev had described long waves in Capitalism, but did not define the mechanism -- how or why long waves occurred. Minsky's Financial Instability Hypothesis, described how long waves between boom and bust could happen in a system of financial Capitalism. Rational and irrational actors play their parts, with banks, speculators, and workers interacting in fundamental ways. I need to spend some time assembling all the steps into a more coherent whole, but that connection hit me like a sledgehammer.