Tag Archives: hyman minsky

Marc Lavoie — Was Hyman Minsky A Post-Keynesian?

A good lecture by Marc Lavoie on whether Hyman Minsky was a Post-Keynesian. The answer is in the end and I won’t give out the answer!

One of the points Marc discusses when discussing the financial instability hypothesis is that Minsky’s analysis avoids discussing dynamic effects: a rise in production of firms leads to a rise in demand for their products because of incomes generated and will hence generate profits for firms. Hence firms’ debt ratios needn’t worsen necessarily. Minsky’s narrative makes it look like it is always worsening. Also Minsky assumes that the rise in supply of debts will raise interest rates, which has a sound of the loanable funds model to it.

Which is no to say that the hypothesis is irrelevant but just that a better articulation is required.

Marc Lavoie at Poznan Summer School 2018

The video was live at the Review Of Political Economy‘s page on Facebook but still available.

Some background papers on this:

  1. Minsky’s Financial Fragility Hypothesis: A Missing Macroeconomic Link?, Marc Lavoie and Mario Seccareccia, 2001.
  2. Loanable Funds, Endogenous Money and Minsky’s Financial Fragility Hypothesis, Marc Lavoie, 1997.

There’s now a paper, Was Hyman Minsky A Post-Keynesian Economist?, at Review Of Evolutionary Political Economy.

Another Admission

A few days back I posted a link to a paper written by a top advisor the US government admitting that economists in general got fiscal policy quite wrong before the crisis.

Now another admission, but this time from a non-orthodox economist.

In a recent blog post, Bill Mitchell writes (on reforming the international institutional framework):

2. Macroeconomic stabilisation – support for national currencies in the face of problematic balance of payments.

This function recognises that all nations should maintain sovereign currencies and float them on international markets but at the same time recognising that capital flows may be problematic at certain times and that some nations require more or less permanent assistance due to their export capacities and domestic resource bases.

The trouble with Neochartalism (Mitchell and his colleagues’ theory, also called “modern monetary theory” by themselves) is that what is correct is not original and what is original is incorrect. Despite repeated arguments of other non-orthodox economists, Neochartalists have continued to deny the existence of the balance-of-payments constraint. Still a long way to go from understanding the supreme importance of balance of payments on growth, but this is a good positive step.

It’s ironic that Neochartalists are followers of Hyman Minsky who talked of financial crises. While Neochartalists emphasize that crises can happen in financial markets, they have till now completely denied that it can happen in foreign exchange markets.

Neochartalists emphasize fiscal policy, as if problems start and end there. But the problems of this world can be solved not just by fiscal policy but also by industrial policy and in the international sphere via diplomacy.

Link

What Post-Keynesian Economics Has Brought To An Understanding Of The Global Financial Crisis

I came across a nice Marc Lavoie paper from July 2015 from which I borrowed the titled of this post. Marc Lavoie discusses the importance of PKE monetary economics, stressing flow-of-funds modelling such as as done by Wynne Godley and his prescient analysis of the fate of the US economy and the rest of the world.

(the post title is the link)

Robert Blecker has a great article from the same conference (annual conference of the Canadian Economics Association) discussing similar things: heteredox understanding of the crisis. He discusseses Wynne Godley’s Seven Unsustainable Processes. He also talks of Hyman Minsky and neo-Kaleckian models of how income distribution effects aggregate demand. His paper titled Finance Distribution And The Role Of Government: Heterodox Foundations For Understanding The Crisis is here.

Balance Of Payments: Part 2 – Double Versus Quadruple Entry Bookkeeping

Some time back I had started with the first part of a series of posts on this topic: see Balance Of Payments: Part 1. From the same post, here’s from the Australian Bureau of Statistics’ manual Balance of Payments and International Investment Position, Australia, Concepts, Sources and Methods, 1998

(click to enlarge)

So we have the current account, the financial and the international investment position at the beginning and end of each accounting period. In addition we have, revaluations on assets and liabilities. These arise due to change in the value of assets (such as rise in stock markets) and due to movement of the exchange rate or both.

Also, textbooks use a slightly different language than official statistics and manuals. Textbooks simply use the phrase capital account when they mean the financial account.

I aim to go into each of this and the behaviour of institutions who are involved in the whole process and how it leads to changes in assets and liabilities of all sectors and the consequences. We will see how endemic current account deficits act as a hemorrhage in the circular flow of national income as Wynne Godley would put it and decides the fate of nations as Anthony Thirlwall may have it.

To really appreciate, one needs to have a strong methodology for studying this. One way is to use G&L’s transactions flow matrix but it can get complicated in case of two nations. Needless to say, from a modeling perspective, it is more useful than the usual way of studying balance of payments. However, for appreciating G&L methodology one needs to first understand the usual way of studying this.

Double Entry Versus Quadruple Entry Bookkeeping

In contrast to national accounts, Balance of Payments is based on double entry bookkeeping. Here’s from the IMF’s Balance of Payments And International Investment Position Manual (BPM6), pg 9:

The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a period. It consists of the goods and services account, the primary income account, the secondary income account, the capital account, and the financial account. Under the double-entry accounting system that underlies the balance of payments, each transaction is recorded as consisting of two entries and the sum of the credit entries and the sum of the debit entries is the same.

In contrast, national accounts as per SNA2008 or G&L’s way of doing it uses quadruple entry bookkeeping who point out in their book Monetary Economics that:

… Copeland pointed out that, ‘because moneyflows transactions involve two transactors, the social accounting approach to moneyflows rests not on a double-entry system but on a quadruple-entry system’. Knowing that each of the columns and each of the rows must sum to zero at all times, it follows that any alteration in one cell of the matrix must imply a modification to at least three other cells. The transactions matrix used here provides us with an exhibit which allows to report each financial flow both as an inflow to a given sector and as an outflow to the other sector involved in the transaction.

G&L point out that even Hyman Minsky was aware of this. Here’s from the article The Essential Characteristics of Post-Keynesian Economics (page 20):

The structure of an economic model that is relevant for a capitalist economy needs to include the interrelated balance sheets and income statements of the units of the economy. The principle of double entry book keeping, where financial assets are liabilities on another balance sheet and where every entry on   balance sheet has a dual in another entry on the same balance sheet, means that every transaction in assets requires four entries.

The System of National Accounts 2008 (2008 SNA) says (page 21):

In principle, the recording of the consequences of an action as it affects all units and all sectors is based on a principle of quadruple entry accounting, because most transactions involve two institutional units. Each transaction of this type must be recorded twice by each of the two transactors involved. For example, a social benefit in cash paid by a government unit to a household is recorded in the accounts of government as a use under the relevant type of transfers and a negative acquisition of assets under currency and deposits; in the accounts of the household sector, it is recorded as a resource under transfers and an acquisition of assets under currency and deposits. The principle of quadruple entry accounting applies even when the detailed from-whom-to-whom relations between sectors are not shown in the accounts. Correctly recording the four transactions involved ensures full consistency in the accounts.

Simple example: your and my favourite: loans make deposits. The following is a transaction where a household has borrowed some funds from the banking sector:

 

Introduction To Current Transactions

I mentioned that in recording transactions between residents and nonresidents and presenting it as balance of payments, national accountants use double entry bookkeeping (as opposed to quadruple), so any transaction in the current account necessarily involves another entry in the financial account (ignoring barter and accidental cancellations). However, the opposite is not the case: a transaction on the financial account will lead to another entry in the financial account and not directly in the current account. A purchase of US equities by a UK resident cannot be said to cause or increase the US current account deficit.

One example: if you are are US citizen travelling to the UK and have pay for coffee at the London airport by paying in Federal Reserve notes, it will give rise to an entry in the current account (credit from the perspective of the UK balance of payments) and a debit (increase in assets of UK residents: change in currency notes). This is just transaction among thousands and the question is how is all this to be recorded and more importantly (later) what does it tell us.

Here’s how a standard balance of payments table looks like (note: this does not include international investment position)

(source: UK Pink Book 2011; click to enlarge)

We will go over details in the next post in this series. For now let us see how this looks for the example presented earlier: A US traveller pays $10 for coffee at the London Heathrow airport with Federal Reserve currency notes. Assuming the current exchange rate, the following (double) entries need to be included in the UK balance of payments:


 

£ CreditsDebits
Current Account
Goods and Services6.328
Financial Account
Bank Deposits, Foreign Currency Assets6.328

 


 

This is a simple example – hardly needing so much background and information but in the next post in this series, we will look at complicated examples where intuitions can easily go wrong. If the above were the only transaction between UK and US residents in the accounting period (quarter/year), this will also change the US indebtedness to the UK by £6.328 or $10 and this will be shown in the international investment positions of the UK and the US. If the exchange rate had moved from the start of the period, revaluations would need to be done to record the closing stocks of assets and liabilities.

Happy New Year


Happy New Year 2012 and it is a nice opportunity for me to thank you much for visiting my blog.

(Card courtesy: Hallmark)

Hyman Minsky and Money

Did Hyman Minsky truly understand the endogenous nature of money?

The Levy Institute is one my favourite places in the world, but have been there only once :(. Here’s a picture of the nice garden at the institute I took.

Brings me to the main point of my post. The Institute has made an archive of Minsky’s works and you can reach the page by clicking the link below:

I came across a discussion on whether Minsky was really stuck with the loanable funds model of credit. I found an article he had written titled “Financial Institutions, Economic Policy and the Dynamic Behavior of the Economy” with two co-authors in 1994.

On page 10 (i.e., page 12 of the pdf document) the authors have this to say:

Further on page 12 (page 14 of the pdf):

Decide for yourself on the question posted earlier.

Update 22 January 2012: Withdrew a statement made on Sir Dennis Robertson