Hyman Minsky explains his financial instability hypothesis

In this rare video, Hyman Minsky explains his financial instability hypothesis. The video dates from 1987, but Minsky was prescient in originating a theory that characterises capitalist economies with developed financial systems as inherently unstable and requiring the intervention of ‘Big Government’ (counter-cyclical fiscal policy) and a ‘Big Bank’ (the central bank acting as lender of last resort). His FIH has become much more widely known since the advent of the 2008 financial crisis.

Minsky was influenced by his teacher at Harvard, Joseph Schumpeter, as well as by John Maynard Keynes and Michal Kalecki. His work falls under the post-Keynesian tradition, emphasising the role of finance and the importance of effective demand in the economy, with the former a major cause of instability in the form of booms and busts. His thinking also incorporated ideas on institutions such as households, firms, banks, and governments, and explored how their balance sheets of assets and liabilities evolve over business cycles.

4 thoughts on “Hyman Minsky explains his financial instability hypothesis

  1. Wow, what a fine curiosity. Thanks for making it available to us, Nick.

    By the way, had you asked me for a nutshell account of Minsky’s instability hypothesis, I would have explained it in psychological terms, which angle is missing in Minsky’s video presentation.

    I think, I get this psychological account of the instability-theory from his student Randy Wray: when people experience long periods of stability, the point comes where they become more adventurous, more risk-loving.

    There is almost always some risk involved, even in stable times of cautious risk-taking and gradually people begin to think: let’s just increase the level of risk a little bit; ah, and that went fine, so let’s go for still more risk etc.

    Hence, stability encourages people to engage in actions that are ultimately destabilising/reducing the level of stability.

    I have adapted Minsky’s thesis to the world of politics. Stable government creates destabilising government.

    In Germany, government was reasonably good and stable well into the late 1970s; people had grown accustomed to responsible politics, reduced their political vigilance, increasingly becoming uncritical political consumers — today the country is in the grip of political forces entrenched in the deep state that are destroying democracy, the economy and the stability of civil society.

    • Thanks for your comment. I can see the importance of the psychological and its obvious presence in booms and busts, but I think we mustn’t lose sight of its interaction with the economic and the material. I think you put this well when you say “when people experience long periods of stability…” One must look at the causes of this stability in economic, social and political terms.

      Perhaps neither the economic nor the psychological is prior or determining, and they feed off each other over periods of cycles. And of course, there are ways of looking at behaviour that stress either the individual or emergent social factors. So for example, successful institutions and policies, which are larger than simple analyses of individuals, could be part of the reason for a period of stability and economic success, leading to increasing risk-taking, leading to financial fragility and eventually the instability that Minsky’s FIH describes well.

      • Too few take your differentiating view.

        Excellent stuff, bears repeating:

        “Perhaps neither the economic nor the psychological is prior or determining, and they feed off each other over periods of cycles. And of course, there are ways of looking at behaviour that stress either the individual or emergent social factors.”

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