Reading 7 – Market processes and thwarting systems – Piero Ferri + Hyman P. Minsky
2 main views on business cycles:
- Endogenous stability + exogenous disturbances
- Endogenous instability + institutional containing/thwarting systems
ARGUMENT: supports view on endogenous instability + anti-laissez faire theorem (=anti-
deregulation/pro regulations) + limitation upon performance theorem.
INTRODUCTION
Capitalist economy = result of interaction between:
1. system’s endogenous dynamics which if unconstrained can lead to: apparent growth + business
cycles + economic instability.
2. institutional interventions (= “thwarting systems”) constraining the outcomes of capitalist
market processes in favor of viable/acceptable outcomes.
Orthodox economic theory (neoclassical theory): “Any economic model is going to have as its center
a collection of hypothetical consumers whose decisions, together with the technology and market
structure, determine the operating characteristics of the system . . .” (Lucas)
Minsky: core decision makers = profit seeking businessmen + bankers their actions = forward
looking BUT constrained by the past in the form of:
- Capital assets
- Financial commitments
- + they know they act within an ever-changing institutional structure
Their actions = determine ‘tomorrow’s’ capital assets + institutional structure
Present + Past = present today: HOW? through agent’s expectations today about the future
each day contracts are entered on the basis of: one’s expectations + beliefs about the future BUT
based on imprecise + asymmetric information + conditions of uncertainty (mainly on profit = cash
flows because bankers + businessmen have liabilities).
= this is a Keynesian argument: agents use to form expectations: a model of the economy (which
is affected by the performance of the economy).
Intertemporal linkages + financing + endogenously determined model used by agents in forming
expectations = complex + time-dependent mathematical formulation of economy leading to
proposition that:
capitalist economies should from time to time exhibit economic instability.
Dynamic instability = the irregular pattern + the persistence in time of the most common
macroeconomic diseases (such as unemployment + inflation) + this instability can give rise to
runaway situations (such as deep depressions or hyperinflation phenomena).
BUT instability rarely becomes explosive!! WHY? because institutions constrain and stop
endogenous processes that generate within the market + breed instability HOW? by starting the
economy again with non-market determined values as initial conditions
observed behavior of the economy = not result of market mechanism in isolation
, BUT = result of a combination of market mechanism + institutional constraints + policy
interventions + conventions to contain + dominate endogenous market processes
that would otherwise breed instability.
(ie: central banks act as lenders-of-last-resort + affect money market conditions)
NB: different views of business cycles (=dynamics of capitalist economy) = different policy
implications
TWO VIEWS ON DYNAMICS
2 views of business cycles:
(1) Endogenous processes of the economy lead to an equilibrium: that may be static (but now it is
considered a “growth equilibrium”)
Slutsky + Frisch + Friedman + Lucas: economy = mechanism that transforms exogenous
shocks into business cycles (shocks = either random or unanticipated policy interventions)
Friedman + Lucas: environmental (structural) changes = initiated by money supply
changes
(2) Endogenous processes of the economy lead to business cycles + instability = consequence of
self-interest motivated behavior in complex economies with complex financial institutions
Mitchell, Marx, Schumpeter, Kalecki, Keynes
Keynesian endogenous explanation of business cycle mathematically formularized:
Samuelson-type accelerator-multiplier interaction ameliorated by Hicks who added
ceilings + floors to constrain the economy to acceptable paths.
then: Minsky ameliorated this one again:
- motivating ceilings + floors by referring to: behavior of monetary + financing relations
- interpreting ceilings + floors = as imposition of new initial conditions (new policies)
endogenous dynamics = so that: unsatisfactory performance = generated by
unconstrained economy even as constrained behavior is acceptable
in Minsky: policy = imposition of new initial condition so policy can play a positive role
After 1950s: interest in endogenous models of business cycles decreased (as strong business cycles
did not appear + steady growth)
More recently: breakdown of Bretton Woods system + serious recessions + chilling episodes in
financial markets doubt on endogenous stability of capitalist economies!!
ECONOMIC THEORY AND LAISSEZ FAIRE
Adam Smith: “invisible hand” conjecture (= each agent intends only his own gain) = foundation of
exogenous shocks models of business cycles.
- Smithian conjecture transformed in theorem: competitive equilibrium = a Pareto
optimum.
Demonstration of part of the research program of “general equilibrium theory” given in
1950s by Arrow + Debreu model + McKenzie = proof of the existence of competitive
equilibrium
(BUT NOT of its uniqueness + of its stability + the proof abstracts from: (1) innovations in
technology (2) institutions (3) policy interventions + financing of investment not considered)
2 main views on business cycles:
- Endogenous stability + exogenous disturbances
- Endogenous instability + institutional containing/thwarting systems
ARGUMENT: supports view on endogenous instability + anti-laissez faire theorem (=anti-
deregulation/pro regulations) + limitation upon performance theorem.
INTRODUCTION
Capitalist economy = result of interaction between:
1. system’s endogenous dynamics which if unconstrained can lead to: apparent growth + business
cycles + economic instability.
2. institutional interventions (= “thwarting systems”) constraining the outcomes of capitalist
market processes in favor of viable/acceptable outcomes.
Orthodox economic theory (neoclassical theory): “Any economic model is going to have as its center
a collection of hypothetical consumers whose decisions, together with the technology and market
structure, determine the operating characteristics of the system . . .” (Lucas)
Minsky: core decision makers = profit seeking businessmen + bankers their actions = forward
looking BUT constrained by the past in the form of:
- Capital assets
- Financial commitments
- + they know they act within an ever-changing institutional structure
Their actions = determine ‘tomorrow’s’ capital assets + institutional structure
Present + Past = present today: HOW? through agent’s expectations today about the future
each day contracts are entered on the basis of: one’s expectations + beliefs about the future BUT
based on imprecise + asymmetric information + conditions of uncertainty (mainly on profit = cash
flows because bankers + businessmen have liabilities).
= this is a Keynesian argument: agents use to form expectations: a model of the economy (which
is affected by the performance of the economy).
Intertemporal linkages + financing + endogenously determined model used by agents in forming
expectations = complex + time-dependent mathematical formulation of economy leading to
proposition that:
capitalist economies should from time to time exhibit economic instability.
Dynamic instability = the irregular pattern + the persistence in time of the most common
macroeconomic diseases (such as unemployment + inflation) + this instability can give rise to
runaway situations (such as deep depressions or hyperinflation phenomena).
BUT instability rarely becomes explosive!! WHY? because institutions constrain and stop
endogenous processes that generate within the market + breed instability HOW? by starting the
economy again with non-market determined values as initial conditions
observed behavior of the economy = not result of market mechanism in isolation
, BUT = result of a combination of market mechanism + institutional constraints + policy
interventions + conventions to contain + dominate endogenous market processes
that would otherwise breed instability.
(ie: central banks act as lenders-of-last-resort + affect money market conditions)
NB: different views of business cycles (=dynamics of capitalist economy) = different policy
implications
TWO VIEWS ON DYNAMICS
2 views of business cycles:
(1) Endogenous processes of the economy lead to an equilibrium: that may be static (but now it is
considered a “growth equilibrium”)
Slutsky + Frisch + Friedman + Lucas: economy = mechanism that transforms exogenous
shocks into business cycles (shocks = either random or unanticipated policy interventions)
Friedman + Lucas: environmental (structural) changes = initiated by money supply
changes
(2) Endogenous processes of the economy lead to business cycles + instability = consequence of
self-interest motivated behavior in complex economies with complex financial institutions
Mitchell, Marx, Schumpeter, Kalecki, Keynes
Keynesian endogenous explanation of business cycle mathematically formularized:
Samuelson-type accelerator-multiplier interaction ameliorated by Hicks who added
ceilings + floors to constrain the economy to acceptable paths.
then: Minsky ameliorated this one again:
- motivating ceilings + floors by referring to: behavior of monetary + financing relations
- interpreting ceilings + floors = as imposition of new initial conditions (new policies)
endogenous dynamics = so that: unsatisfactory performance = generated by
unconstrained economy even as constrained behavior is acceptable
in Minsky: policy = imposition of new initial condition so policy can play a positive role
After 1950s: interest in endogenous models of business cycles decreased (as strong business cycles
did not appear + steady growth)
More recently: breakdown of Bretton Woods system + serious recessions + chilling episodes in
financial markets doubt on endogenous stability of capitalist economies!!
ECONOMIC THEORY AND LAISSEZ FAIRE
Adam Smith: “invisible hand” conjecture (= each agent intends only his own gain) = foundation of
exogenous shocks models of business cycles.
- Smithian conjecture transformed in theorem: competitive equilibrium = a Pareto
optimum.
Demonstration of part of the research program of “general equilibrium theory” given in
1950s by Arrow + Debreu model + McKenzie = proof of the existence of competitive
equilibrium
(BUT NOT of its uniqueness + of its stability + the proof abstracts from: (1) innovations in
technology (2) institutions (3) policy interventions + financing of investment not considered)
