The Generalized Minsky Moment By James Galbraith

Abstract (Via Jame Galbraith @UTexas)

The cornerstone of Hyman Minsky’s work is the concept of systemic instability. His work showed how systemic dynamics inherent to capitalism bread systemic fragility and crisis, as stability spurs risky behavior. Like Minsky himself succinctly articulated, “stability is destabilizing” (Minsky 1985). Moreover, this key notion is not only based on a clear and detailed analysis of modern financial capitalism, but is also essentially rooted on human psychology and behavior. As such, it is astonishing how little has been done to expand Minsky’s basic conceptual framework to other fields of study of social science. This paper represents an effort to fill this vacuum, as it attempts to expand Minsky’s theory of financial fragility to the realm of international relations. The objective of this project is to analyze the cycles of international relations in the light of a modified version of Minsky’s famous analysis of hedge, speculative and Ponzi finance.

Introduction (Via James Galbraith @ Utexas)

Whether the current financial crisis is a bona fide “Minsky moment” is a matter for debate. Davidson (2008) firmly disputes that subprime mortgages constitute “Ponzi finance” in the technical sense that Hyman Minsky intended. We don’t disagree. Yet the fact that current events have again raised the profile of Minsky’s contribution is still a good thing, and we propose here to take advantage of it. In this paper, we suggest that Minsky’s taxonomy of financial behavior can be generalized far beyond its original sphere of application. Thus we offer a “generalized Minsky moment”.

The concept of systemic instability is the cornerstone of Hyman Minsky’s work. Minsky argued that system dynamics inherent to capitalism breed fragility and crisis, as stability spurs risky behavior, and risky behavior leads to crisis. As he put it, most succinctly: “stability is destabilizing” (Minsky 1985). This key notion is based on a clear and detailed analysis of modern financial capitalism, but it is also rooted on human psychology and behavior. There is nothing that restricts the application of Minsky’s insight to the pecuniary realm. It is therefore astonishing how little has been done to extend the basic conceptual framework to other areas of social science.

This paper is a first effort: we attempt here to take Minsky’s theory of financial fragility into the realm of international relations. Our modest objective is to sketch an analytical framework that may help describe the economical, political and military interactions of nation states, in the light of Minsky’s famous analytical distinction between hedge, speculative and Ponzi finance.

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27. November 2009 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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