Contemporary economics, rather than being a dismal science, has made the discipline a dismal subject. The numbers are dense and elaborate with equations that are almost unfathomable. Invariably, one has to wonder why, despite all the mathematical focus, economists the world over could still get the 2008 global financial crisis wrong.Some USD 26 trillion were lost, as some banks folded, and companies were literally killed off due to being over-leveraged.
J.Randall Wray argued that Minsky had predicted the global financial crisis long before it happened in 2008 based on the theory of “stable instability.” There are three critical components to this theory. One, markets do not necessarily reach equilibrium on their own. If anything, the path to the “much beloved equilibrium,” is filled with frictions.
Workers, for example, do not necessarily want to work, even when the economy is good. They voluntarily stay out of work to make themselves unavailable to the economy unless the economy first rewards them handsomely. Voluntary unemployment alone is enough to render an economy unable to return to some form of equilibrium.
Second, frictions also come in the form of imperfect or ignorant government policy, which makes for a return to normal economy all but impossible on most days of the year. When government policy begins to misfire, the likelihood of the market returning to normalcy is all but impossible.
Third, the classic liberal economy is imbued with unfairness and crony capitalists who will also prevent the market from returning to equilibrium. Such distortions are most obvious in the prevention of efficiency gains. Capital is not allocated efficient sectors of the economy, even when efficiency gains are the bread and butter of all productive economies.
Minsky, in this sense, is a towering giant of an economist. He understands the differences between mere theories and actual operations at work. But too many people in Wall Street have ignored his advice. In light of the global recession crisis, it is now the right time for the world to rediscover his lessons.
Perhaps the place to begin is to understand the structural limitations of any economy–national or global. Each economy will have their own distortions and problems, making them impossible to reach a perfect state, imbued withefficiency gains.
What is more exceptional about Minsky is the focus on micro and macro political actors, especially their agency. Together, they influence the whole contour and trajectory of the economy. Indeed, any economy is only as strong as its weakest link. In 2008, the weakest link, depending on your lense, was over-leveraged investment banks. But it could well have been the many economists and business strategists who did not understand the full implication of “stable instability.” Their collective insouciance and indifference made for a variety of bubbles, such as asset inflation, private debt and housing mortgages; all of which originally put a patina of activities on the economy, when the latter was slipping into a major crisis.