Minsky as the Glue of an Austrian-Keynesian Synthesis?

Washington is buzzing about financial reform, and so Hyman Minsky has been on the table (well, the 19th Annual Minsky Conference helped with that too). Minsky was a Keynesian economist (usually classified as "post-Keynesian" because of his hostility to the neoclassical synthesis) that taught at Brown, Berkley, and the Washington University in St. Louis. His primary contribution was the idea of "financial fragility" - the fundamental instability of financial markets. He attributed this fragility to the division of borrowers into three groups: hedge borrowers (who can pay off principal and interest out of the cash flow from their investments), speculative borrowers (who can pay off the interest of the debt out of cash flow but must roll over the debt), and Ponzi borrowers (who can only pay off the debt from capital gains, not cash flow). Credit grows the economy, and as the economy grows more Ponzi borrowers are attracted to the market (they see asset values appreciating, which is essential to their strategy for paying debt). If asset values stop appreciating, Ponzi borrowers default and credit is restricted for hedge and speculative borrowers. If the shock is large enough, the Ponzi borrowers can bring down the system. It's a familair sort of story - it sounds a lot like animal spirits, accelerator-multiplier stories, and lots of other Keynesian dynamics. This one just depends on asset values and debt financing strategies.

And I had always associated it with Keynesians until this morning when I saw a post by Arnold Kling (a libertarian economist blogging at Econlog) that seemed to be suggesting that Krugman (in a post lauding Minsky, no less) positioned himself against Minsky. I think Kling's concern was that Krugman suggested that regulation might help fix the "financial fragility" problem. It's an odd thing for Kling to juxtapose with Minsky, since Minsky thought essentially the same thing!

But it did make me think about Minsky's relationship with more libertarian economists. There's actually quite a bit of common ground with Austrian credit cycles. Frank Shostak blogged on Minsky at the Mises Institute blog in 2007. His response was typical of Austrian answers to this sort of question - he argued that Minsky "described" the crisis but did not provide an explanation for why it started. What Shostak really means, of course, is that Minsky didn't provide the explanation that Shostak wanted him to provide. Minsky's system works on its own. Simple intertemporal choice theory gives us the reason for why debt financing emerges. Once you have debt financing, all you need is borrowers with different motivations and repayment strategies (Minsky's hedge, speculative, and Ponzi borrowers), and the system runs on its own: boom and bust, boom and bust. Debt and agent heterogeneity is all it takes. I'm not sure why Shostak can't see this, but regardless - he wanted Minsky to say that central banking was the source of the crisis, which Minsky did not say.

I'm starting to stray outside of territory that I'm familiar with, but it seems to me that a more Rothbardian take on the credit cycle is much more easily reconciled with Minsky. Rothbard recognized that it was the credit system itself, and not central banking in particular (although he of course had major critiques of central banking too) that introduced the business cycle. Rothbard of course took this more or less reasonable concern and went off the deep end with it. He alternatively advocated full reserve banking (!!!!!), and free banking (where banks would issue their own currency, and there would be no bank regulation or central banking). I can't imagine the cognitive dissonance that came with advocating both of those courses of action - one of the most restrictive forms of bank regulation one could think of on the one hand, and complete deregulation on the other. But they do seem to come from a common source for Rothbard: the acknowledgement of a fundamental cyclicality of the credit market.

So can Minsky - with his Keynesian explanation of credit cycles - offer an opportunity for the Austrian-Keynesian synthesis that I've written about in previous posts? My previous thinking on the issue has focused on: (1.) general framing: the shared concern about uncertainty, decentralized knowledge, and time, and (2.) the macroeconomy: a "Garrison-Modigiliani" synthesis of sorts.

But Minsky may offer another point of connection. I've previously remarked that Brad DeLong offers an important olive branch when he highlights the relevance of Austrian theory to pre-Depression business cycles. Of course, Austrian economists are often the type of people that simply don't know how to take a compliment. Because DeLong also critiqued a few of their points, they've generally interpreted his olive branch as a hostile attack! But Minsky goes beyond what Brad DeLong has conceded, and offers the possibility that Austrian (or at least Rothbardian) ideas on the credit cycle may be relevant after the Depression as well as before.

I think there's a lot that needs to be reevaluated before any of this happens - not the least of which being the Austrian's central bank fetish. That, of course, is a problem. Many Austrians think that their critique of central banking is what Austrian economics is. I actually disagree, and I think that's really selling the Austrian school short. The value added from Austrian economics, in my opinion, is the combination of the credit cycle with the temporalized capital structure, and the dynamics that that introduces. Their views on central banking, epistemology, and methodology (not to mention their views on Keynesianism) hinder the Austrian project.

I know this is still all very general, just like my last post on this sort of synthesis. I don't know what to say except for (1.) I have more specific ideas in my head that I am more hesistant to post explicitly, and (2.) I do intend to write them up at some point - but perhaps in the somewhat more distant future.

In closing, I found several interesting Minsky links:

- First, the Levy Economics Institute at Bard College is ground zero for Minskyesque economics today, and it offers a lot of interesting post-Keynesian perspectives.

- They have recently made Minsky's papers available online

- The New Yorker has an interesting piece on Minsky here.

- The Economist describes the proceedings of the Minsky conference (including a lot of what Krugman had to say) here.

- The Economist also describes the Fed's (probably somewhat self-serving) advocacy of Minsky here.