Bill Gates has called for a more creative form of Capitalism. The work of Hyman Minsky is being reappraised as relevant after the 2008 financial crisis
Minsky’s ideas were taken up by Paul Krugman, and later by other influential figures such as Janet Yellen, now head of the US Federal Reserve bank. They offer an explanation for the irrationalities of economic boom and bust, though inherent instabilities rather than temporary distortions. As such it relates to the Animal Spirits of John Maynard Keynes.
What is creative capitalism
Some posts ago I asked what is the nature of creative capitalism. The question arose after Bill Gates called for it, without exactly joining up the dots. My best shot was a suggestion that thinkers about capitalism were rewriting the map to deal with the uncertainties of the global economic climate. Under such uncertainties, creativity in thought and action becomes important. Mr Gates suggested that Capitalism needs to refocus its energy on social issues including the environment. Minsky suggests how this might come about.
Minsky’s destabilization hypothesis
An interesting article on the BBC website [March 2014] and a subsequent Radio Four broadcast outline why Minsky’s ideas might be relevant.
It seems that the relatively unknown Minsky has attracted attention recently for his theory of inherent instabilities of financial markets. Stock Market bubbles are inevitable as turbulent flow of water from a high pressure hose or water boiling in a saucepan on a hob through induction heating.
Minsky’s three stages
Minsky describes three stages within the process. The hedge is the stage in which the innate caution of professional investors dominates. The hedge offers possibilities for more risky gains, and the famous animal spirits kick in. In Wall Street jargon, the animal spirits move from those of cautious bears to those of Raging Bulls.
The ghost of Ponzi
Conventional wisdom is that bears and bulls eventually damp down irrational blips in the market. Minsky argues that after the speculative stage comes a fraudulent stage he termed the Ponzi stage. This honours or maybe I should say dishonours the schemes of Charles Ponzi, [1882-1949] the infamous modern inventor of a huge pyramid-selling scam.
To be continued
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