It seems to me that they are two sides of the same coin - one seeing inherent instability in the propensity of suppliers of credit to overextend themselves and one seeing inherent instability in the propensity of demanders of credit to overextend themselves. Minsky, I think, was on much firmer grounds I think in that he didn't go as far as Rothbard. He recognized that the optimal level of risk associated with leverage is not zero and never called for 100 percent reserves.
But the structure of their concerns are actually quite similar, just on opposite sides of the market (and of course Minsky is thinking more broadly than Rothbard about finance in general rather than just money).
This is just a musing by a guy that hasn't read that much of either of them so I'm curious what you think.
Wednesday, May 29, 2013
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I think Vikram Mansharamani wrote a book showing compatibility between the ABCT and Minksy "moments"
ReplyDeleteAnd there's really a lot of overlap between Austrian and Post-Keynesian thought in general.
I had a similar thought recently about fractional reserve banking. Not just Minsky, but virtually all economists are united with Rothbard in one way: they all believe that FRB is inherently unstable. Rothbard would ban it (by declaring it fraudulent), while others would stabilize its ups and downs (via a central bank and some combination of monetary/fiscal policy). But all agree that free-standing FRB causes massive upheavals.
ReplyDeleteIt seems that only Free Bankers believe that fractional reserve banking is not inherently unstable.
"And there's really a lot of overlap between Austrian and Post-Keynesian thought in general."
Seems to be. Look forward to someone writing a synthesis. I need more time to digest this paper, but Eichengreen has looked at parallels btw Austrian and Post-Keynesian views on credit cycles.
"The Great Depression as a Credit Boom Gone Wrong"
http://elsa.berkeley.edu/~eichengr/research/bisconferencerevision5jul30-03.pdf
Who else thinks that? Or maybe I should ask what you mean by that.
DeleteCertainly a lot of people think that you can have bubbles - that I would agree with. What I think is notable about Rothbard and Minsky is that they think that the nature of finance and/or banking itself causes that instability. Usually when other people talk about financial instability they're thinking of behavioral psychology or something like that that destabilizes those sectors. I think most people think finance is inherently stable to the extent that any market is, but also like any market it can experience instabilities.
"Or maybe I should ask what you mean by that."
DeleteSorry, not quite sure what you mean by "that." Can you quote a sentence from my comment?
That fractional reserve banking is inherently unstable. I'm not sure I agree with that but you may be meaning something different.
DeleteI think most people agree finance can experience instabilities. I don't think most people agree with Rothbard and Minsky that there are inherent properties of finance that cause instability.
I think nearly everyone accepts the Diamond-Dybvig model that FRB is prone to runs, and govt. backed deposit insurance is needed to stabilize the system. Here's John Cochrane, who believes Diamond-Dybvig should have won the Nobel prize:
Delete"I regard what we went through as not something special or new. We’ve had regular banking panics since at least about 1720. The Diamond and Dybvig paper—(“Bank Runs, Deposit Insurance, and Liquidity,” the Journal of Political Economy, 1983)—which Doug and Phil should have got the Nobel Prize for already, described the fragility of assets where you can run. I don’t think we have systemically dangerous institutions. I think we have systemically dangerous contracts, and bank deposits are one of them, as Doug described."
http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-john-cochrane.html
Pretty much everyone believes deposit insurance and lender of last resort is necessary. Free Bankers like Larry White do not (Selgin basically thinks Diamond-Dybvig is hogwash). This doesn't make White & Selgin right, of course, but it does draw an interesting line btw the (tiny) side that thinks Free Banking can work, and those who believe it must be modified somehow (which includes Rothbard).
Aha, OK. Yes, I guess that's really a function of the nature of finance itself and not just a behavioral argument.
DeleteI agree with John S here to an extent. The mainstream view is the FRB is inherently unstable, Rothbard and Minsky only emphasis this more. The real difference is that Rothbard and Minsky make it a key part of the business cycle and other economists don't.
DeleteI recommend reading Selgin's criticisms of Diamond-Dybig.
Most treatments of PK/Austrian commonality that I've seen just run through a litany of agreement about the usual heterodox complaints about mainstream economics, and as regular readers know I find a lot of this litany unconvincing.
ReplyDeleteWhat I think is notable here is that the discussion of a much more specific problem is similar - it's just that Minsky is on the demand side of things and Rothbard on the supply side.
That, I think at least, is more interesting than the fact that both PKs and Austrians gripe about mainstream economists using constrained optimization of utility functions.
I agree that most of this "laundry list" approach isn't very interesting (e.g. I really could care less about ordinal vs. cardinal, etc).
DeleteYou're right, I overstated the overlap btw PKs and Austrians--it's pretty much limited to credit cycle stuff. I don't think I'll ever make any sense of PK micro as long as they insist on rejecting concepts like the Law of Demand (giving the finger to supply & demand--gotta hand it to them, that's heterodox, alright!)
When I'm thinking of overlap, I'm of a similar mind as Jon Catalan:
"I think you can see a number of similarities between the Minskyite theory of instability presented by Keen and Austrian theory. There are, of course, important differences: such as the Post-Keynesian emphasis on the importance of effective (aggregate) demand, for one, and price theory. But, it goes to show that Post-Keynesian economics warrant a very close look."
PKs are like Austrians in that there are a lot of divisions. I don't know what you have in mind in talking about the law of demand - what I know that bears a resemblance to that is limited to the people around Paul Davidson and is not something a lot of other PKs buy into. And even Davidson is talking about the general equilibrium effects of the labor market (that there's no bargaining over real wages - only over nominal wages - and that reductions in the nominal wage rate don't necessarily lead to an increase in the demand for labor because of what it may do to aggregate demand). So it's not really denying the law of demand in a microeconomic sense.
DeleteBut again, maybe you have something else in mind. I've still got a lot to learn about Post-Keynesianism.
I'm thinking of this:
Delete"Is the Law of Demand really Universal? The short answer is 'no'."
http://socialdemocracy21stcentury.blogspot.kr/2013/01/is-law-of-demand-really-universal.html
(If my comments in this thread seem a little testy, it's b/c the commenters over there can be rather aggravating at times.)
Oh wow - there are a lot of problems with this post by LK. The price expectations he's getting at quite obviously don't violate the law of demand, and some of the other issues he gets into about status goods and that sort of thing get into quite different issues (the whole point is that the product itself is considered different - it's considered a better product - in that case).
DeleteDaniel Kuehn, you're not the only person to have noticed this uncanny parallel between Post-Keynesian economics and Austrian Business Cycle Theory.
ReplyDeleteLast March, there was an article on CNBC that put forward the notion that Hyman Minsky was an Austrian in a clever disguise, comparing Hyman Minsky's Financial Instability Hypothesis with Friedrich von Hayek's formulation of ABCT.
http://www.cnbc.com/id/46896156
That stated, you wrote a post nearly three years ago exploring the idea that Hyman Minsky could be the "glue of an Austrian-Keynesian synthesis".
http://factsandotherstubbornthings.blogspot.com/2010/04/minsky-as-glue-of-austrian-keynesian.html
The credit cycle view of financial markets and the economy as a whole is actually much older than any formulation of ABCT and Hyman Minsky's Financial Instability Hypothesis.
As a matter of fact, one thing that I've noticed is that the Post-Keynesian formulations of "endogenous money" might have an uncanny resemblance to the "Real Bills Doctrine" (see the 19th century Banking School vs. Currency School controversy in Great Britain). Thomas Tooke, a leading figure of the Banking School, is in fact cited by Post-Keynesian economists as an early advocate of "endogenous money" long before Nicholas Kaldor and Basil Moore came around.
Perhaps there is room for a history of economic thought article exploring the connection between the RBD and Post-Keynesian formulations of "endogenous money"...
I agree with you about a lot of that.
DeleteI don't think that Post Keynesians really understand that 19th century debate. Both the Banking School and the Currency school believed that money is endogenous. As far as I know neither suggested that a precise multiplier exists, that came later with Monetarists.
Current: I actually haven't read the primary source literature on the Banking School and Currency School controversy in 19th century Great Britain. I've only heard secondhand accounts filtered through other figures who wrote on the matter. What I wrote earlier on in this comment thread was merely the expression of a vague hunch that was based on inferences from reading the secondhand accounts I and looking at the references provided by the secondhand accounts. Have you read the primary source literature on the Banking School v. Currency School debates and the Real Bills Doctrine thoroughly, or no?
DeleteI have read some of the primary source literature, though not much.
DeleteThe object of debate between the "Currency" and "Banking" schools was when and how banks overissue. Both agreed that banks can create banknotes. The Currency school argued that fractional-reserve banks are intrinsically prone to overissue them, rather as Rothbard argues. The Banking school said that only the writing of poor loans by banks caused this problem. The Currency school identified the problem with "external drain", which is a theory about how redemption and the price-level move in a world with many countries on convertible gold-standards.
It's true that the Currency school didn't think that balances in bank accounts were like banknotes.
Concerning the connection between "external drains" and consequent crises and centralized banking (or "one-reserve") currency systems see Bagehot's Lombard Street. He insists that England would have had no need for a LOLR policy deal with external drains had it not been for the Bank of England's privileged status.
ReplyDeleteCurrent and George Selgin: I see. That stated, why haven't either of you gotten around to reviewing The Scourge of Monetarism by the late Baron Nicholas Kaldor or Horizontalists and Verticalists: The Macroeconomics of Credit Money by Basil J. Moore? Why *HAVEN'T* any of the leading Free Banking economists (or for that matter, any leading intellectual historian sympathetic to the market-friendly wing of the classical school and the Quantity Theory of Money and critical of the Real Bills Doctrine) gotten around to criticizing the Post-Keynesian formulations of "endogenous money" in an article for intellectual history? It looks like it would be an endeavour worth writing, even if it may generate a lot of controversy and difficulty in getting it peer-reviewed and published...
ReplyDeleteThat's quite a good idea actually.
DeleteDon't mention it Current. The reason I'm pointing this out is because I'm surprised no one has written an article about the Real Bills Doctrine and Post-Keynesian formulations of "Endogenous Money" yet. Another reason would be because I'm not in a prime position (i.e., undergoing the process of a doctoral programme in economics) to write an article on this matter for peer-review and publication. Are you going through a Ph.D. in Economics programme as we speak Current, or no?
Delete"Why *HAVEN'T* any of the leading Free Banking economists (or for that matter, any leading intellectual historian sympathetic to the market-friendly wing of the classical school and the Quantity Theory of Money and critical of the Real Bills Doctrine) gotten around to criticizing the Post-Keynesian formulations of "endogenous money" in an article for intellectual history? It looks like it would be an endeavour worth writing, even if it may generate a lot of controversy and difficulty in getting it peer-reviewed and published..."
DeleteSounds like a task for George Selgin, cough cough.
Blue Aurora,
DeleteI'm not in a PhD program at present. I'm an economics amateur, I have a full time job in another area.
There have been quite a few Austrian writings about particular Post Keynesian topics, such as uncertainty, methodology and macro. Mises criticised the early 20th century Chartalists. But you're right that there hasn't been anything specifically on their endogenous money theories. Thanks for the idea.
TBH, I don't even think that one needs to be a historian of economic thought either sympathetic to the Austrian School or an Austrian himself/herself to make that observation. Notice that I later said, "The reason I'm pointing this out is because I'm surprised no one has written an article about the Real Bills Doctrine and Post-Keynesian formulations of "Endogenous Money" yet."
DeleteKey words - "no one".
That stated, don't mention it. I frankly am surprised that it hasn't been done by now, and it shouldn't take a genius to make that insight.
You can certainly see your enthusiasm in the article you write.
ReplyDeleteThe world hopes for more passionate writers such as you who aren't afraid to mention how they believe. At all times go after your heart.
Feel free to visit my site; crash diets that work
"Most treatments of PK/Austrian commonality that I've seen just run through a litany of agreement about the usual heterodox complaints about mainstream economics, and as regular readers know I find a lot of this litany unconvincing."
ReplyDeleteI am different in most Austrians in that I reject the loanable funds theory, and thus I am one of the few that agrees with the PKs criticism on it. Have you read these criticisms? Which reminds me, you helped me gather some of the Greg Hill/Steve Horwitz debate articles which a big subject on the debate is on the loanable funds theory, have you read the debate, it is a decent one with Hill making a clear case that loanable funds theory is questionable.
"I am different in most Austrians..."
DeleteI meant to write,"I am different than most Austrians
I know about the criticism of loanable funds theory - I have only read bits of the Hill/Horwitz exchange - never bothered to read it all.
DeleteHave you taken a look at Bob Murphy's work on liquidity preference and Hayek on interest rates? It's really fascinating stuff and related. If you have trouble finding it on his website let me know (or him).
See this is a stance around heterodox schools that I LIKE to see discussed: loanable funds theory. That's meat and potatoes stuff. That's real structural stuff.
DeleteI hate all the back and forth about "subjectivism" and "realism" and all that.
The really innovative stuff in PK are things like the distribution curve. The really innovative stuff in Austrian economics is the capital structure. Those ideas really matter. Much more interesting than vague denunciations of the mainstream on uncertainty or subjectivism or rationality that either misrepresent the mainstream or are too vague to do anything with.
Not that I think subjectivism isn't important - I know you write a lot about it. It's very important and deserves attention. I'm just saying I don't think decrying that mainstream economists have abandoned it makes much sense or does a whole lot. The heterodox v. mainstream arguments should revolve around more substantive, actual differences.
DeleteCurrent, do you have a link to Selgin's criticisms?
ReplyDeleteSee http://www.terry.uga.edu/~selgin/files/cj9n2_9.pdf . Also "In Defense of Bank Suspension," in the Journal of Financial Services Research.
Delete