This is one of a series of posts that will ask what the most pertinent question raised by a prominent influencer of political economy might have been, and what the relevance of that question might be today. There is a list of all posts in the series at the end of each entry. The origin of this series is noted here.
After the first two posts in this series, the topics have been chosen by me, and this is one of those. This series has been produced using what I describe as directed AI searches to establish positions with which I agree, followed by final editing before publication.
This post refers to one of my economic heroes, Hyman Minsky, whose warnings remain as relevant now as ever as we face the near inevitability of another financial crash. His work also seems particularly pertinent to my discussion of quantum economics and a new theory of work, published here this morning.
Hyman Minsky was one of the most prophetic economists of the twentieth century. For decades, he laboured in obscurity, ignored by the mainstream because he violated its most comforting assumption: that markets tend naturally toward equilibrium. Minsky insisted the opposite —that capitalism is a system hard-wired for instability —and that the financial sector is its most dangerous engine, as I believe it is once again.
In his now-famous 'Financial Instability Hypothesis,' Minsky argued that periods of calm are precisely when risk builds up. When the memory of crisis fades, lenders, investors, and policymakers all grow complacent. They take on more debt, extend more credit, and inflate asset prices until the system collapses under its own weight.
Crashes are not caused by shocks from outside. They are generated from within. Stability itself is destabilising.
That insight leads directly to The Minsky Question: if stability in finance breeds the very instability that destroys it, why do we keep designing systems that pretend risk can be eliminated rather than managed?
From hedge to speculative to Ponzi
Minsky's model of financial evolution was brutally simple. After every crisis, he argued that regulators tighten controls and firms act cautiously. Over time, confidence returns, memories fade, and financial behaviour shifts through three stages:
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The hedge finance stage, when borrowers can meet both interest and principal repayments from income.
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The speculative finance stage, when borrowers can meet interest, but must roll over principal.
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The Ponzi finance stage, when borrowers rely on rising asset prices to refinance both.
Eventually, the system is dominated by speculative and Ponzi finance and debt sustained by optimism rather than income. When prices stop rising (as they always do), defaults cascade, and the whole structure collapses.
Stability breeds complacency
Minsky suggested that every long boom contains the seeds of its own destruction. Periods of apparent stability convince both lenders and regulators that the system is safe. Leverage rises. Lending standards weaken. Innovations, whether they be junk bonds or derivatives and now crypto, promise new ways to make old risks disappear, but they don't in reality.
Minsky saw this clearly in the 1960s and 1970s, when deregulation and financial innovation were taking root. The longer the boom, the greater the eventual bust. The pattern has repeated ever since.
The crisis of 2008 — Minsky vindicated
When the global financial crisis erupted in 2008, Minsky's analysis was suddenly in the news. Mortgage lenders had built an edifice of speculative and Ponzi finance, sustained only by rising house prices and faith in perpetual appreciation.
When prices fell, the system imploded. Central banks bailed it out, but Minsky had warned that without structural reform, crises would recur. A financial system built on leverage and speculation will always return to instability precisely because its stability depends on forgetting.
The blindness of orthodoxy
Mainstream economics ignored Minsky because his world was messy. He rejected the idea of rational expectations and equilibrium. He saw finance as dynamic, behavioural, and emotional, shaped by euphoria and fear. That did not fit the mathematical models of the neoliberal academy.
Worse, Minsky's insight threatened the ideology of self-regulating markets. If markets generate their own crises, they cannot be trusted to police themselves. State intervention becomes essential. For economists and politicians wedded to neoliberalism, that was heresy.
The moral hazard myth
Each crisis, Minsky warned, would provoke demands for rescue, and each rescue, unless accompanied by reform, would sow the seeds of the next crisis. Central banks have become perpetual fire-fighters. They save the system, but in doing so, they validate reckless behaviour.
This is the Minsky Paradox in policy form: saving the system each time makes the system more fragile next time. We socialise losses but privatise gains. The moral hazard belongs not to the poor but to the powerful.
The political economy of instability
For Minsky, finance was not merely a technical sector. It was the beating heart of capitalism. Credit creation determines who invests, who works, and who prospers. When finance is geared toward speculation rather than production, the economy becomes a casino.
The political consequences are enormous. Speculative booms inflate asset prices, enriching the wealthy. Crashes wipe out the savings of the poor. Austerity follows to “restore confidence,” deepening inequality. Financial instability is not just economic turbulence; it is a mechanism of class power.
What a Minskyan system would require
To answer the Minsky Question, we must abandon the illusion of perfect control and accept that instability is endemic — but manageable with the right institutions. That means:
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Active fiscal policy. Use government spending to stabilise employment and demand when private finance falters.
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Public control of credit. Guide lending toward productive, sustainable uses — green infrastructure, care, housing — not speculation.
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Counter-cyclical regulation. Tighten credit in booms, loosen in busts.
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Financial buffers. Require banks and shadow banks to hold capital sufficient to absorb losses without socialising them.
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Redistribution. Prevent asset bubbles by taxing windfall gains and wealth.
Above all, it means understanding that stability is a public good, not a private commodity.
Inference
The Minsky Question is as much moral as it is technical. If stability breeds instability, then our task is not to eliminate risk but to build systems resilient to it. That means rejecting the fantasy of self-regulating markets and confronting the interests that profit from fragility.
Every generation rediscovers Minsky the hard way, after the crash. Yet each time, we rebuild the same fragile edifice. We promise prudence, deregulate, inflate, and collapse again.
Minsky's warning remains unheeded: the crisis can, he said, happen again, and it will, until we design economies that serve society, not speculation. It is a warning most especially pertinent at this moment.
The real instability, Minsky argued, lies not in markets themselves, but in our refusal to learn. Will we ever do so?
Previous posts in this series
- The economic questions
- Economic questions: The Henry Ford Question
- Economic questions: The Mark Carney Question
- Economics questions: The Keynes question
- Economics questions: The Karl Marx question
- Economics questions: the Milton Friedman question
- Economic questions: The Hayek question
- Economic questions: The James Buchanan question
- Economic questions: The J K Galbraith question
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This is beautifully written. It tells us that human beings have great frailty because of their inability to seek and hold onto the full context that should determine their actions. They appear highly prone to seek out “equilibrium myths” to minimise the effort they need to put in to maintain economic and ecological stability. Such myths have now reached the heights of flat out denial by many ruling elites! Their “myth making” propaganda as ever needs to be countered!
I confess AI helps with these. I set the prompts and the direction of travel, fairly precisely. It is not chance that the elements you highlight are there. Then I hone the output, often quite a lot. But I should acknowledge the use of AI in these ones as well. My guide to AI is developing. This shows what can be done.
[…] extreme leverage, and systemic fragilities in both the crypto sector and broader markets. Minsky was, of course, right about such things. Now we need to know if all he predicted comes true. If it does, we could be in for a very rough […]
Thanks for another interesting post. 🙂
Perhaps Minsky cycles are another product of neoliberalism, rather than being unavoidable.
Neoliberalism says that governments can only spend what they tax and borrow. This is inherent in, for example, EU treaties and successive British, and other governments, have said the same thing.
If governments do not create the money required to offset inflation and support growth then that role is left to the private sector, i.e. to the markets. But private sector banks do not, in my view, create money. Instead they create liquidity. The money they lend is offset by equal amounts of debt, net creation is zero. Furthermore the liquidity is temporary; loans have to be paid back.
As more and more liquidity is created, in lieu of government created money (which is what should happen), the system becomes unstable just as Minsky describes.
However, if governments did what they should and created the money that is required, this unstable, ever increasing, mountain of liquidity from banks would not be needed.
Perhaps economic cycles cannot be avoided but, if we didn’t rely on banks to provide liquidity, then perhaps the cycles would be less extreme. I conclude that neoliberalism at least amplifies Minsky cycles and that this is unnecessary
Tim
This is interesting.
Your thinking is developing, I can see, and is more interesting as a result. I like that.
Thanks
Richard
Tim says “The money they lend is offset by equal amounts of debt, net creation is zero. ”
When I’ve thought about this it seems to me that while created bank money is negated by repayment of the ‘loan’ banks take additional money out of the economy by charging interest. If we depended only on bank created money the extra that they take in interest would diminish the supply of available money. Only state created money can permanently increase the money supply because it never recovers all the money it creates.
Tim Kent thinks that commercial banks create liquidity not money. The reality is that their “liquidity” creation credits their borrowers with a deposit which has the same status as deposits of money into banks – cash and cheques – that people and firms make themselves. Deposits from both sources are guaranteed by the government up to £85,0000.
The money (liquidity) banks create by lending is destroyed when the borrower pays back the bank loan. In fact, there is a net destruction of money because the interest payment destroys money too. But commercial banks have created money, and correspondingly private debt, to the extent that there are bank loans outstanding.
Tim Kent comes close to advocating Sovereign Money, whereby commercial banks can lend only to the extent that they have 100 percent reserve backing. That would indeed mean that banks ceased to create money by lending. They would be mere intermediaries between savers and borrowers. The result would be that mortgage lending and credit card lending, etc. would be severely constrained.
The lending of commercial banks does indeed need to be constrained but there are numerous practical measures that can and should be adopted by progressive governments to make commercial banks operate in the public interest.
The Bank of England’s lending to the government to finance all its spending is different insofar as its loans do not bear interest and do not need to be repaid in full. Moreover, a government deficit – the excess of spending over tax receipts – is generally virtuous, provided it does not lead to excessive inflation, because it is necessarily counterparted by a private sector surplus, and that can be used in part to pay off private debt.
The extra government spending facilitated by an ongoing judicious deficit, approximating to 3 percent of GDP, but whose size depends on the actual state of the economy, can facilitate extra productive and socially beneficial spending, including transfer payments, over and above that spending matched by tax receipts.
Interesting comment.
But is there a point here of reconciliation when it comes to risk? I agree with you, banks should be licenced to create credit, but could we reduce risk in the system with more state created money?
Are we right to be so dependent on banks doing this? I am asking the question in good faith.
‘The real instability, Minsky argued……..but in our refusal to learn. Will we ever do so?’
At the risk of being seen as a pedant, I just need to pick up on the use of ‘we’ above (the post by the way is excellent, Minsky knew about human frailty).
As you say yourself, politics touches everything. So what is ‘the political’? Well, it’s what you say it is Richard, a constant battle, debate, compromises where possible over differences (adversarialism) in the pursuit of vigilance against complacency. Chantal Mouffe would say the same.
The ‘we’ does not do anything for me. It is wrong. Because what it proposes to me is that somehow I have decided and colluded with this toxic world we live in when I know I have not. That is wrong. I do not think people have somehow gone along with polices that have made their lives worse. It’s been done to them, not by them, but by others – politicians, think tanks, shady funders from vested interests – corruption and lying.
So really, the use of ‘we’ depoliticises the debate about what sort of economics and fiscal policies we have. It’s almost the language of Giddens – devoid of the ‘other’, apolitical and if capital has been socialising their losses, is it acceptable to socialise/collectivise the causes? It is the vague language of the market – not democracy.
Politics points the finger and confronts. You know this yourself as an effective campaigner. The use of ‘we’ does not do that. The fellow human beings bringing about this misery need to be identified and called out and confronted are not ‘we’. It’s ‘they’. They have huge resources to lie and mislead us; they have bought the people and the processes we relied on for fairness and to live a reasonable life. That is not democracy.
So, if we are to bring democracy to them, we need to be exact. So what we have in reality – and not for the first time – is ‘Them’ and ‘Us’. It’s no ‘we’. The situation we have is an over powerful section of the species propelling the rest of it towards death. To say that ‘we’ all agreed to that and are all empowered to stop isn’t not correct.
Whenever I see “we” I ask which “we” is being talked about. In so many large-scale organisations, govts, there is no “we”, And yet we need some sort of minimal identification with a group, a country, the world.
Yet another AI generated post
Your comment is as stupid as that of the person who accuses a cook of using a mixer.
Steve Keen’s macroeconomic system dynamics software Minsky / Ravel takes into account the work of Minsky and can model the calm, called by the mainstream The Great Moderation, before the storm that they did not want to see, blows up the bubble. It can be used to model the economy to give indications as to what action should be taken. See https://sourceforge.net/projects/minsky/
Agreed
I didn’t come across Hyman Minsky until the mid nineties. His work immediately struck a chord and reminded me of when, studying A-Level Economics in 1970, the teacher asked why I didn’t think people were rational. To which I clearly remember responding by saying “just look out of the window”. The whole class laughed and luckily so did he.
Prior to coming across Hyman Minsky in the 90’s I read a bit of the work of Marvin Minsky, along Piaget and Chomsky. Interesting, I think, that Marvin Minsky was a pioneer of AI and one of the cofounders of the MIT Artificial Intelligence Laboratory.