Are these books mainly an overview of the school of thought? Those would be useful and I'll probably read them, but mainly I'm looking for fundamental canonical works in the field
Paul Davidson, Money and the Real World
Basil Moore, Horitzontalists and Verticalists (loopy)
Hyman Minsky, John Maynard Keynes
Can "It" Happen Again?
Stabilizing an Unstable Economy
I find Davidson mostly a pointless snooze, bu some people revere it; Moore fairly loopy and also mostly pointless; and Minsky, really really good. All these books are fairly old, ranging from the early 1970s through the late 1980s; I don't know what's been done more recently.
I also have some stuff in Wall Street looking at this gang. Here's a bit.
Doug
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posties
Though I've mentioned post-Keynesian economics several times in this chapter, I've barely fleshed out the mentions. But two matters deserve closer attention - theories of monetary endogeneity, and the work of Hyman Minsky. Both are barely acknowledged, much less known, in the mainstream.
money emerges from within
In conventional economics, of both the monetarist and the eclectically mainstream varieties, the money supply (not always precisely defined) is determined from "outside" the system of private exchange by the central bank; these are exogenous theories of money. The Fed or any of its siblings around the world injects money into the system, and banks, households, and firms do their business accordingly. Adherents to endogenous theories of money argue instead that the money supply is a function of the demand for credit, which is itself a function of the level of economic activity. The banking system, along with the central bank, creates as much money as people need, though there are disagreements on just how elastic this process is.17
Robert Pollin (1991; 1993) usefully divided the two major schools of post-Keynesian endogenists into the accommodative and the structural. Accommodative endogeneity holds that the central bank has no choice but to validate private credit demand by providing whatever reserves the banking system needs to accommodate the loans that it has already made; that means there is no effective constraint on credit. Leading proponents of this school include Nicholas Kaldor and Basil Moore. Structural endogeneity - the branch that appeals to both Pollin and me - holds that central bank attempts to constrain the growth of credit are frequently evaded through creative finance.
Moore (1988a, p. 139), the leading living accommodationist, takes a good idea way too far, as he did in this surreal passage:
The process of monetary accommodation, the validation of money wage increases which the data reveal, is mistakenly viewed, by both monetarists and post-Keynesians alike, as the result of a process of active policy intervention by the central bank. The notion appears to be that the monetary authorities keep their eyes focused on the state of the economy in general, and on the level of unemployment in particular.
Instead, Moore argues, the central bank passively validates decisions made by private creditors.
In fact, the Fed scrutinizes the real economy closely. Take, for example, the minutes of the December 22, 1992 meeting of the Federal Open Market Committee (Federal Open Market Committee 1993, p. 323)
The information reviewed at this meeting suggested that economic activity was rising appreciably in the fourth quarter. Consumer spending, in association with an apparent upturn in wage income and a surge in confidence, had improved considerably; sizable gains were being registered in the sales and starts of single-family homes; and business spending for capital equipment remained strong. There also had been solid advances in industrial output, and private payroll employment had turned up. Data on wages and prices had been slightly less favorable recently [that is, wages have been rising, always a danger - D.H.], and on balance they raised the possibility that the trend toward lower inflation might be slowing a little.
The minutes went on to report detailed observations regarding employment, the average workweek, industrial production, retail sales, business invesment, construction, and the trade picture. (To give a measure of how detailed: "sales of heavy trucks rose sharply, and business purchases likely accounted for some of the recent sizable increase in sales of light trucks; on the other hand, shipments of complete aircraft were weak.") All this discussion of the real economy preceded discussion of financial and monetary affairs, and far exceeded it in volume as well. The central bank runs a huge economic data generation and analysis apparatus, which confidently second-guesses official statistics, and, a Fed economist once told me, frequently prompts corrections that are buried in routine monthly revisions in Commerce and Labor Department data. Every twitch in the statistics is noted and mused over to death.
And those conclusions are based on public releases of the Fed's minutes. According to Drew University economist Edwin Dickens (personal communication), who's read the full transcripts - which are released only 20 years after the fact, and read by almost no one - policymakers are exceedingly obsessed with wage increases and the state of labor militancy. They're not only concerned with the state of the macroeconomy, conventionally defined, they're also concerned with the state of the class struggle, to use the old-fashioned language.
When things look too bubbly for the Fed's satisfaction, it tightens policy, by lowering its targets for money supply growth and raising its target for the fed funds rate. In doing so, it hopes to slow down the economy, but there's often many a slip between tightening and slowdown. The reason for this gap was explored nearly 40 years ago by Hyman Minsky (1957) in a classic paper modestly titled "Central Bank and Money Market Changes." Minsky pointed to two innovations of that relatively sleepy time, the federal funds market, which allows aggressive banks to transcend the limits of their own reserves by borrowing from surplus banks, and the growing presence of nonfinancial corporations, eager to make money on spare cash, as providers as well as users of credit. Both were responses to rising short-term interest rates, which, as Minsky wrote, pushed actors "to find new ways to finance operations and new substitutes for cash assets." Market innovations, Minsky stressed, would complicate the work of central bankers, since tight policy could be partly offset with new instruments. Innovations, as Minsky (1975, p. 76) later pointed out, allow capital asset prices to continue rising (and economies to continue expanding) against the dampening influence of rising interest rates.
Over time, with the proliferation of financial innovations, the "compounded changes will result in an inherently unstable money market so that a slight reversal of prosperity can trigger a financial crisis," wrote Minsky 40 years ago. This would require an extension of the central bank safety net to the entire financial matrix, not merely the commercial banks that were its legal charges. Fighting inflation might entail a terrible financial cost, and so the Fed would be forced to err on the side of indulgence whenever the credit system looked rocky.
Perhaps Minsky was a little early - the first financial crisis of the post-1945 period was the credit crunch of 1966 - but he described the mechanism perfectly: first the rising inflation of the 1960s and 1970s, followed by the Volcker clampdown, which was lifted when it looked like Mexico's default would bring the world banking system down. But the Volcker clampdown required driving interest rates far higher, and for a longer period of time, than anyone would have expected, to shut the economy down, so creative are the innovators at evading central bank restraints. In the 1980s and 1990s, innovations proliferated, as interest rates remained high by historical standards (despite their declining trend). Capital was mobilized as it hadn't been in 60 years, as it became clear that while the poor could expect no indulgence from the new economic order, the rentier class, some notorious bad apples aside, could count on a blank check.
Of course, Minskian innovations can't evade the tightening hand of the central bank forever. Perhaps the most sensible view of the whole matter was that expressed by a central banker, Alan Holmes (1969, p. 73), then a senior vice president at the New York Fed, speaking at a time when the monetarist challenge was marginal but on the rise: "In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt." This is a refreshing antidote both to the mechanistic nostrums of the monetarists and to the vision of limitless elasticity of the extreme endogeneists like Moore. The Fed, like all central banks, is mighty, but it is not almighty.
Why does this matter beyond the world of scholarship? If the endogenous money theorists are right - and they are - then money and commerce are inseparable; neutrality is a fantasy. That has several implications. It locates tendencies towards financial instability and crisis at the heart of the system, rather than outside it, as Friedman and other state-blamers would have it. It makes conventional monetary policy more difficult to manage, since "money" becomes a very slippery thing. And it makes radical reforms more difficult than many populists would like, since policies aimed at finance aim at a moving target, and one not easily separable from production, or from ownership.
Marx (1973, p. 126; 1981, p. 674; see also de Brunhoff 1976, pp. 80, 98) anticipated modern Keynesian endogenists, arguing (against Ricardo and the classical quantity theorists) that the quantity of money in circulation is determined by economic activity, and not the other way around. Not the least of the reasons for this influence is that the extension of credit is such a short step from simple exchange for money; an IOU can be exchanged between any agreeable partners, and it's only a small matter to bring in a bank to formalize the transaction. This was true even under a gold standard; these spontaneous contracts make the line between money and credit a porous one, and that explains why the modern money supply is so flexible. Of course, in Marx's view, these extensions of credit become worthless in a crisis, as everyone scrambles for gold; this kind of crisis hasn't been seen in this century, as central banks have learned how to contain crisis and make short-term government paper seem as good as gold.
Minsky
Of all the modern theorists in the Keynesian tradition, one of the most interesting is Hyman Minsky, who devoted his career to exploring the relations between finance and the real world.18 We've already looked at his contribution to theories of monetary endogeneity; the rest of his work deserves a few more pages.
Following the lead of Keynes's Treatise, with its separate industrial and financial spheres, Minsky developed a two-sphere theory of a modern capitalist economy, one of current output and one for capital assets, which jointly determine the level of economic activity. Expectations about the short term determine how much of existing capacity will be used; expectations about the long term determine decisions about whether to expand capacity. Decisions of the latter sort have consequences over time; managers who make bad investments, and especially those who borrow money to make them, will suffer losses. If such losses are sustained and widespread, the system faces the risk of deflationary collapse. This analysis is familiar to a reader of Keynes's General Theory, but it got lost when Keynes was domesticated for textbooks and politicians.
A serious problem with Minsky's analysis, at least when applied to the modern U.S. economy, is that rather little real investment is financed by borrowed money. So while borrowing and investment decisions have long-term consequences, they're not simply two sides of the same coin. In the U.S. and most other First World economies, investments are overwhelmingly financed internally, through profits. Corporate managers have shown great reluctance in recent years to commit themselves to long-term investment, for fear of being stuck with useless capacity in a recession; investment has increasingly been skewed to short-lived, quick-payoff equipment.
But during the 1980s, managers were not shy about borrowing; here another portion of Minsky's analysis is illuminating. In a taxonomy that can be applied to individual units, like firms or households, or whole economies, Minsky (1978; 1986, pp. 207-209) divided financial structures into three types, hedged, speculative, and Ponzi. A unit with a "hedged" structure is one that can comfortably service all its debts, interest and principal, out of current income; a "speculative" unit can meet its interest payments, but must raise new funds, either through the sale of assets or the extension of new loans, to pay off principal; and a "Ponzi" unit can't make its interest payments, much less pay off principal, without finding fresh cash.19
Economies traverse the hedge-speculative-Ponzi sequence, until a bad financial accident scares players into prudence, and the cycle starts over again. In recent American experience, the late 1920s were a time when the border was crossed from speculative to Ponzi, until the great crash and subsequent Depression brought the scheme to a disastrous end. That bout made nearly everyone very debt shy, and the largely excellent performance of the U.S. economy in the 30 years after World War II meant that firms and households had little need for outside finance. But, Minsky argued, that kind of Golden Age makes people more complacent, reducing their fear of indebtedness: "stability is destabilizing," a formulation sometimes called the Minsky paradox. For a while, this new imprudence fuels a boom, but with few signs of general financial strain; individual units, and the whole economy, cross from hedged to speculative financial structures, as debts are rolled over. The margin of error narrows. While hedged financial structures are vulnerable to real-world shocks - firms might face new competition, or households face a period of unemployment - they're largely immune to financial disturbances. But speculative units are not only more vulnerable to real-world shocks, they're vulnerable to financial market troubles as well, since they need new credits to pay off old principal. If interest rates spike upwards, or credit gets hard to come by, a speculative unit is in trouble.
While it would be hard to draw a fine historical line, it seems that the U.S. economy entered the speculative realm sometime in the 1970s, as financial crises became more prominent features of the business cycle (Wojnilower 1980; Wolfson 1986). But in every case, the Federal Reserve stepped in to prevent the financial crisis from becoming generalized; individual institutions might be allowed to go under, but the authorities would never allow this localized crisis to spread into a broad deflationary collapse. Further, Big Government and its deficit spending put a floor under the economy, preventing a true cascade of failure from developing. But "validating threatened financial usages," in Minsky's (1986, p. 251) phrase, only emboldens players for further adventures in leverage on the next up cycle. And so the indulgence of the 1970s laid the groundwork for the even more exuberant 1980s, when the U.S. economy unquestionably entered a Ponzi phase. Corporate takeovers were frequently done with the open admission that the debt could never be comfortably serviced, and that only with asset sales or divine intervention could bankruptcy be avoided. Households, too, engaged in similar practices, as balloon mortgages were arranged - that final balloon payment could only be made by taking out another mortgage as the first one matured.
What does Minsky's model say about recent history? While the slump of the early 1990s was clearly the result of a Ponzi structure going sour, the authorities moved to contain the crisis. Between 1989 and early 1994, the Fed drove down interest rates hard and kept them there. At the same time, the U.S. government bailed out the savings and loan industry through the Resolution Trust Corp., spending $200 billion in public funds. These moves kept the financial system from utter collapse, but unlike the 1930s, debts were not written off. Thanks to lower interest rates, debts were easier to service, but the stock of debt - principal - tells a different story. The best way to measure this is by comparing the level of debts outstanding with the incomes that support them. For nonfinancial corporations, total indebtedness in 1995 was nearly 11 times after-tax profits - an improvement from the over 22 times level of 1986, but still twice the levels of the 1950s and 1960s. For households, the figures show no such improvement: in 1995, consumer debts were equal to 91% of after-tax income, the highest level since the Fed started collecting such data in 1945, and well above 1980s levels, which were themselves well above 1970s levels.
To use Minsky's language, the business sector seems to have settled back from Ponzi to speculative, but households continue to explore fresh Ponzi territory, with no signs of temperance. One message of these numbers is that the U.S. economy remains very vulnerable to higher interest rates. "At high enough short term interest rates speculative units become Ponzi units" (Minsky 1978), and Ponzi units explode.
Minsky emphasized financial factors in causing instability, with the real mentioned almost as an afterthought. A more balanced interpretation would say that financial structures are central to the propagation of a general economic crisis. Any shock to a highly leveraged structure - a business, household, or national economy - makes it impossible to service debts that seemed tolerable when they were contracted. For a system-wide crisis, the shocks are generally of a broad sort - a normal business cycle recession, capital flight, or a political crisis. For forward-thinking connoisseurs of crisis, one could imagine some ecological crisis causing crop failures or disastrous climate changes, which cause a spike in prices and/or a collapse in output. Regardless of the cause, a hedged financial structure might be able to cope with such threats, but a Ponzi couldn't.