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Financial Conditions and Macroeconomic Performance: Essays in Honor of Hyman P. Minsky.

P. Minsky

Seldom does a tribute volume actually do justice to the scholar it purports to honor. Regrettably, most attempts fail to provide any fresh insights into the scholar's work and are relegated to the task of offering sweeping generalities. This is especially prevalent when the honoree is one whose academic latitude spans several of the current research paradigms. I was delighted to find that the editors of Financial Conditions and Macroeconomic Performance: Essays in Honor of Hyman P. Minsky have succeeded where so many have failed. Steven Fazzari and Dimitri B. Papadimitriou, the editors, have assembled an exceptional representation of papers from contributors of the highest caliber. Each of the ten essays reflects the immense variety and intellectual richness of Hyman Minsky's scholastic vision.

Steven Fazzari opens the volume with a unique introductory essay which: ". . . attempts to draw together the diverse ideas expressed in the individual chapters, relating them to the view of economic activity that Minsky conveys at a personal level". With such an arrangement, Fazzari is able to furnish a precis of the volume while offering the reader a brief glimpse into Minsky's personality. Dimitri B. Papadimitriou continues the personal view of Minsky in the second essay entitled "Minsky on Himself." Papadimitriou provides a concise history of Minsky's life from the rare perspective of long time friend and colleague.

Next, Gary Dymski and Robert Pollin investigate Minsky's "Wall Street" paradigm. The authors summarize the fundamentals of the Minsky model by showing: "Its major thrust . . . has been |in~ developing a macroeconomic model corresponding to what he |Minsky~ saw as Keynes' revolutionary message; that, 'stability is destabilizing' under capitalism because of uncertainty and the centrality of financial relations". In other words, the model sees capitalist economies as inherently unstable. Full employment equilibriums are fleeting moments within the temporal dynamics of the system.

Benjamin Friedman's contribution emphasizes Minsky's concept of financial fragility. Friedman points to the current debt structure of U.S. corporations as a source of this macroeconomic fragility. As a result of the recent merger and acquisition boom, U.S. companies have borrowed to pay down equity in either their firm or the firm they are taking over. They have borrowed so much that it now takes nearly sixty cents out of every dollar just to pay the interest bill. Friedman echoes Minsky's concern: What does this do to the potency of traditional monetary policy? Friedman states: "If the rise in business indebtedness has rendered the U.S. too fragile . . . to withstand any but short and shallow recessions . . . the most likely consequence of that fragility will be to render U.S. monetary policy increasingly impotent either to reduce inflation from the current level, or to resist a renewed acceleration of prices should it occur". The presence of increased debt in U.S. corporations has highlighted the interdependence between business and banks. Minsky sees the interaction between the banker and entrepreneur as a critical element in his work. Charles P. Kindleberger takes a historical view of this relationship in his paper on banks as financial intermediaries. Kindleberger traces the economic theory of intermediation from Amsterdam of the 1500s to the global economy of today.

Jan A. Kregel returns to the "financial fragility hypothesis" in a paper which sketches the relationship between financial fragility and Minsky's "Two Price" theory. For Minsky, the two prices are: (1) the price of current output, and (2) the price of capital goods. According to Kregel, the source of financial fragility is the relationship between the expectations of entrepreneurs (of future profits and reflected in current prices) and their bankers' views of future debt service payments (which is reflected in price of capital assets.) L. Randall Wray extends the analysis of instability with a paper that looks at Minsky's theory of endogenous money. The paper follows two major strands of thought within endogenous monetary theory. The first having interest rates that are determined endogenously and the second having exogenously determined interest rates.

The fluctuations of the business cycle is the central theme for two of the papers in the book. Piero Ferri presents a review of several of Minsky's earlier tools for business cycle modeling. Ferri shows how Minsky's dynamic modeling technique of "ceilings" and "floors" could be useful in representing institutional structures which stabilize a model of a potentially unstable world. Ferri states that this technique "stands Lucas on his head". Domenico Delli Gatti and Mauro Gallegati continue the cycle theory discussion with a paper which analyzes the structure and dynamic behavior of a model with asymmetric information and imperfect competition. Gatti and Gallegati believe that the nature of business fluctuations is determined by the interaction between retained earnings and debt commitments. The asymmetric information in financial markets leads to fluctuations in capital investment. This financial influence is picked up in Steven Fazzari's paper on Keynesian theories of investment.

Fazzari compares the investment theories advanced by the traditional post-Keynesians with a number of the "neo-Keynesian" schools. In particular he questions: "Have the developments in "New Keynesian" economics advanced the post-Keynesian approach, or is the mainstream just rediscovering in a limited way what the post-Keynesians have known all along?". The post-Keynesians have maintained that instability in financial relations could cause volatility in investment and therefore in the macroeconomy. Fazzari shows that the "New-Keynesian" approach rests on optimizing models which are devoid of the true Keynesian linkage between finance and investment. The rise of the "New-Keynesian" school can be traced to the failure of the new classical school. The new classicals' failure to explain empirical reality has lead to a resurrection of a Keynesian approach.

Hyman Minsky's "Financial Keynesianism" is well represented by every essay in this book. The editors have done an excellent job in providing a variety of views around this central theme. Minsky's model is more relevant today than ever before, therefore, this book should be required reading for those who want (or need) to expand their understanding of the macroeconomic activity of our times.

Michael C. Carroll Colorado State University
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Author:Carroll, Michael C.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jan 1, 1994
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