Heading for "financial sustainability": the signficance of Minsky's ELR then and now
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Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Heading for «financial
sustainability»: the signficance of
Minsky’s ELR then and now
Anna Maria Variato
Università degli Studi di Bergamo - DSAEMQ
25 ottobre 2019
The Financial Instability Hypothesis and the concept of
Employer of Last Resort are independent pieces of
macroeconomic theory? This paper addresses the issue from
two perspectives. First it goes back to the original work of
Hyman Minsky and to his definitions. Then it focuses on the
theoretical link of the two ideas. Taking as a privileged focus ELR
(which is less popular than FIH), the thesis suggested in the
paper is that FIH and ELR are not independent, being in contrast
the pillars of a coherent and comprehensive macroeconomic
Abstract paradigm; this is valid both in Hyman Minsky and from the
purely theoretical point of view. Furthermore the underlying
methodological vision is holistic and (at the very least implicitly)
compatible with the understanding of capitalistic systems as
complex and adaptive. While addressing the corollary question
of intrinsic coherence of Minksy’s research programme, the
paper attempts to show why this reflection matters to the
solution of nowadays capitalism crisis, qualifying the emergent
economic paradigm as a «paradigm of financial sustainability».
© Prof. AnnaMariaVariato – Fall 2019 1Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Premise:
About sudden Minsky’s Question 1: FIH and ELR are
posthumous popularity independent research topics
in Minsky?
Question 2: Which are the
relevant interdependencies (on Question 3: The significance
theoretical independence of ELR then and now: just a
between ELR and FIH? minor issue in Minsky or the
key toward a new paradigm
of «financial sustainability»?
Conceptual map of the presentation
and suggested theses
Premise
© Prof. AnnaMariaVariato – Fall 2019 2Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Minsky's contribution was not significantly
appreciated while the author was alive, but
after 2007 he suddenly became "popular"
The first channel of popularity was
determined by the fact that many became
supporters of the Financial Instability
Hypothesis
Is it possible to state that finally the idea
finance permanently affects real
macroeconomic variables has become a
Premise standard?
The second channel of popularity came later,
as a result of the persistence of the crisis.
Then the proponents of "job creation plans"
have also appeared (often without attributing
adequate paternity to the concept)
Is there any real tension towards the goal of
tight full employment?
In dealing with the subject of the State as Employer
of the Last Instance (Employer of Last Restort: ELR)
some selective choices are made:
A) reference only to Minsky's contributions (which
does not imply denying the importance of
subsequent interpretations)
Methodological
B) prevalent use of Minsky's contributions contained
premise in the collection of posthumous essays "Ending
Poverty, Job not Welfare" (2013) because:
B1) contain all the essential topics useful to the
characterization of the concept
B2) cover an interesting historical period which can
be subdivided into three phases (crucial for the
argumentation that will follow
© Prof. AnnaMariaVariato – Fall 2019 3Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Minsky time and its relevance for our times
Phase 3:
Neoclassical
Mainstream
Phase 2: Keynesian
Mainstream Crisis • AS and MP dominant,
flexible exchange ratesi,
• AS led inflation, crisis of unrestricted finance
keynesian model, increasing • Minsky 1994
criticism (from monetarism to
Lucas), towards fixed
exchange rates
Phase 1: Keynesian abandonment, restricted
Mainstream finance
• AD eFP dominant, AD led inflation • Minsky 1972, 1975
(if any), prevailing fixed exchange
ratesi, restricted finance
• Minsky 1965, 1968, 1969, 1969bis
Reference papers
Phase 3:
• Minsky (1994) Full
employment and growth
Phase 2: as targets of economic
• Minsky (1972) Where policy. Reflections on the
economists and american limits of capitalism
economy went wrong
• (1975) The poverty of
economic policy
Phase 1:
• Minsky (1965) The role of
employment policies
• (1968) Effects of changes in AD A question we will try to give an answer:
upon income distribution
• (1969) Policy and poverty the historical phases of the evolution of
• (1969bis) Macroeconomics of a Minsky thought are synchronized with
negative income tax the evolution of macroecnomic thoery?
© Prof. AnnaMariaVariato – Fall 2019 4Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
The connection
between Employer of
Last Resort and
Financial Instability
Hypothesis
(Have they been indpendent issues in Minsky’s
research program?)
According to Minsky the nature of capitalist systems
is:
dynamic, incoherent, unstable;
instability is the endogenous effect of the economic
dynamics that involves complex (non-neutral)
The Nature interactions between real and financial economics;
micro dimension and macro dimension; institutions
of capitalistic that act by changing the rules of the game;
Systems instability is generated in conditions of stability
(the seed of instability lies inside stability)
(Minsky’s
Minsky's instability is represented through stratified
vision) balance-sheet networks, giving rise to relationships
of different nature/ solidity in terms of the ability to
generate income and liquidity (i.e. the agents
behave like banks, and are characterized in three
types as covered units, speculative and Ponzi)
© Prof. AnnaMariaVariato – Fall 2019 5Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
The fallacy comes as the effect of two fundamental
limits:
Inability to maintain full employment permanently
over time (contrary to what is assumed by the
mainstream)
Why is Tendency of the financial component to trigger debt
capitalism (deflationary) crises
intrinsically
unstable and These are limits that cannot be "eradicated" because
fallacious? capitalism is an organizational mode of society
involving the assumption of liabilities (payment
commitments due for sure) in advance with respect to
the income flows (just expected) that (likely would)
validate them in other words, as long as capitalism is
“financial” in nature there is no way to make the problem
disappear
Capitalism is not a social organization always
the same as itself: it evolves with increasing
complexity (i.e. it cannot be understood
Why is except in dynamic terms)
capitalism Instability and inequalities are inherent in
intrinsically capitalism because capitalism is a society
unstable and organization that cannot disregard finance ...
fallacious? ... which is very different from stating that
finance is a useful support for improving the
opportunities of an economic system
© Prof. AnnaMariaVariato – Fall 2019 6Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Moreover ... mainstream macroeconomic approach and (not only)
implies the emergence of some dichotomies, fundamental to the
representation and characterization of the system dynamics:
Dichotomies openly Dichotomies openly
refused by Financial refused by Employer of Last
Instability Hypothesis Resort
Neutralities
Aggregate Demand
and Aggregate Demand vs. Aggregate Supply
reductions: vs. Aggregate Supply
Resource Allocation
Real side of the
dangerous economy vs.
(efficiency) vs.
Distribution
synthesis Monetary side (equality)
(further sub-case
money vs. finance) Employment vs.
Poverty
Cycle vs. Growth
Therefore Minsky's position requires the adoption of
a holistic perspective, which denying
simultaneously all the commonly accepted
dichotomies by standard macroeconomic theory,
leads first of all to the methodological impossibility
Evidence of to face the issue of financial stability separately
the link from that of full employment
between in other words, the dichotomies mentioned in the
previous slide do not represent sets of real features
FIH & ELR giving rise to the dynamics of existing economies;
they can only occur in the abstract and under
peculiar conditions (supposedly known by trained
Economists)
© Prof. AnnaMariaVariato – Fall 2019 7Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Relevant
interdependencies
implied by the
Employer of Last Resort
Aggregate Demand-Aggregate Supply
• Opportunity to reduce unemployment and increase
employment through fiscal and monetary policies
(this is a structural reduction, not a temporary one)
Direct
Employment-Poverty
consequences
of the • Possibility of reducing poverty through increased
employment (this is a social effect, not purely
rejection of individual; in fact we are not talking about reducing
unemployment)
standard
dichotomies Allocation – Distribution
• Possibility to pursue at the same time efficient
allocation and equalization of income distribution
(starting from the objective of equalization of
income, therefore from distribution)
© Prof. AnnaMariaVariato – Fall 2019 8Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Are these possibilities easy to implement?
Is it enough to recognize that the model is
different and have a good intuition to be almost
certain of the success of the policies?
On the Is any occupational objective sufficient to
generate the triggering of the virtuous
possibility to mechanisms mentioned above?
reach the policy
goals implied by According to Minsky the answer is negative to
all the above questions!
the holistic
model Not only must the policies be well structured,
timely and well received (a more restrictive
condition than credibility)
The objective on which to focus is tight full
employment (which implies the identification of
an "narrow band" evolutionary path)
What happens if any economic policy
authority does not commit to the goal of tight
full employment?
Evidence of Not only, evidently, he risks not generating the
conditions for full employment stable over time
the link
between For sure he loses the possibility of solving the
problem of poverty (both relative and absolute)
ELR and
«war on
poverty» Thesis 1. According to Minsky, the failure
of conventional policies to achieve the
objective of defeating poverty is due to the
lack of consideration of the close link
between poverty and full employment
© Prof. AnnaMariaVariato – Fall 2019 9Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
1. What is the Employer of Last
Resort?
2. Is the ELR still relevant to
Questions present days?
raised by ELR 3. How does it work?
4. What kind of intellectual
implications does come from
the idea of ELR?
Paradoxically, the fight against poverty is
often pursued through three types of
intervention:
O Monetary transfers
Reasons of the O Training and re-training courses
ineffectiveness O Attempts to stimulate AD through tax
of policies reductions which are considered effective
targeted at instruments in stimulating I or modifying the
“war on distribution of income
poverty” Thesis 2. According to Minsky ALL these
measures are doomed to failure.
The correct strategy would instead be to
engage in the pursuit of tight full
employment.
© Prof. AnnaMariaVariato – Fall 2019 10Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
What is the Employer of Last
Resort?
In order to be able to define what (kind of
institution) is the employer of last resort, we
must first reflect on the ability of a capitalist
system to achieve full employment
«Last
Clearly, the very notion of employer of last
Resort» resort involves an elementary certainty: if the
Institutions intervention of an institution of "last resort" is
and «market necessary, it means that the market has not
been able to generate coherence between
clearing» supply and demand;
specifically in the labor market, this is shows
up through unemployment (which in a
Keynesian perspective has an involuntary
nature)
© Prof. AnnaMariaVariato – Fall 2019 11Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
To eliminate unemployment:
Wage flexibility and automatic adjustment
[evergreen mainstream]
Qualitative/quantitative adjustment: supply
side policies: training of workers (mismatch
heterogeneity). Institutions spend today to
Strategies make workers employable tomorrow [current
meant at full mainstream]
employment "Targeted" quantitative adjustment:
employer of last resort (heterogeneous
workers because of intrinsic qualities). The
employer of last resort hires the unemployed
immediately; spends today to occupy them
today with the skills/ competences they have
[heterodox].
Thesis 3. The market is not able to reach
tight full employment. Public intervention is
needed in the form of direct job creation (the
The role of examples, being historically specific, recall
ELR the policies pursued in the New Deal)
the problem: defining the concept of
tight full employment (and indicating the
unemployment rate consistent with it).
© Prof. AnnaMariaVariato – Fall 2019 12Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Wheredo we want to go?
That is
A particular kind of macroeconomic
equilibrium:
«The single most important step toward ending
poverty in America would be the achieving and
Definition of «Tight sustaining of tight full employment. Tight full
Full Employment» employment exists when over a broad cross-
section of occupation, industries, and locations,
employers at going wages and salaries, would
prefer to employ more workers than they in fact
do».
(Minsky, original 1965, 2013 p. 3)
Is the ELR still relevant to present
days?
© Prof. AnnaMariaVariato – Fall 2019 13Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Minsky recalls Roosevelt policies:
a) WPA (Work Progress Administration)
b) CCC (Civilian Conservative Corps)
c) NYA (National Youth Administration)
ELR and Should we consider the same kind of programs
New Deal even today?
It would be quite anachronistic…
What does still survive, anyway?
The idea that the intervention on job creation is neither
generic or slavish, rather it is an articulated program of
interventions addressed to specific sectors or segments of
the labor market ...
Timeliness of the Employer of Last Resort
Pros Cons
Moreover, in the 1960s at least the "war on poverty" was discussed as an explicit goal
of economic policy. Today it is not (at most a talk about absolute and “extreme” poverty)
© Prof. AnnaMariaVariato – Fall 2019 14Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Thesis 4. Income from work is a
fundamental pillar of individual
Who is going dignity
to benefit
from the
presence of
the ELR? Thesis 5. The ELR is also a
channel through which public
legitimacy is strengthened
Benefits coming from direct job creation
The Reducing the
distribution of emphasis on
income investment More degrees
Elimination of Relevance of
naturally would of freedom for
poverty due to the concept of
moves contribute to economic
unemployment family income
towards the reduction policy makers
lower of financial
inequality fragility
© Prof. AnnaMariaVariato – Fall 2019 15Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Inflation risk
Expected
Objections
Public Debt BP
Sustainability Sustainability
How does the ELR work?
© Prof. AnnaMariaVariato – Fall 2019 16Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
• No because of
Active labour
«gestation time» too
policies?
long
Mister NO…
Monetary • Do not solve the
Minsky and Transfers problem of social
“conventional” policies? marginality
labor policies
Policy addressed • Articulated explanation
towards high tech of the negative attitude
investment? towards this measure
Indeed they implicitly consider:
Work as homogeneous and fluid (whereas it
is not easy to train a worker, given that the
Explanation: process is expensive both in economic and
Criticism towards temporal terms)
active labour Moreover they imagine high degree of
policies (and substitution between different workers and
structuralists) between inputs (or production techniques),
but obviously these possibilities of
substitution are limited.
© Prof. AnnaMariaVariato – Fall 2019 17Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Close to full employment the two levers are
substantially similar, but not far from full
employment (especially if part of the
residual unemployment derives from
structural change);
Explanation:
What kind of fiscal
policy? While generalized tax cuts have limited
Higher G or lower power to target specific occupations, public
TA spending can be targeted (as demonstrated
historically by the Roosvelt’s work plans)
High technology investment support policies? No
because:
1. Tax incentives exacerbate the inequality of workers
and savers
Explanation: 2. Investment income encourages opulent consumption
Criticism against and imitative behavior from poorer f people (demand
policies targeted led inflation risk)
towards high tech I 3. The inequality between workers is accentuated
(as a measure for (because the incentives are sectorial)
full employment)
4. Financial fragility increase (as the policy implies a
natural incentive to decrease safety margins the
tax cut increases the confidence of entrepreneurs,
but also the confidence of external lenders who rely
on the persistence of fiscal policy)
© Prof. AnnaMariaVariato – Fall 2019 18Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
What kind of intellectual
implications come from the idea of
ELR?
Which target unemployment rate: like atrazine in
the water? (Minsky, 1965)
Challenges of First focusing on poor workers then dealing with re-
phase 1: training (1965)
Income from work: essential social dimension
mainly definitions (individual identity and inclusion of the worker’s
of targets and family) (1965)
phenomena Relative poverty is more ambiguous concept than
absolute poverty (a question leading to the
also evidence of recognition of the issue of impoverishment) (1969)
an impicit vision Economic policy cannot be improvised and need
where pragmatism: good intentions are not enough
interdependencies (1969)
matter
Explicit characterization of the dynamic link
between poverty, financial instability and economic
policy (1969)
© Prof. AnnaMariaVariato – Fall 2019 19Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
The economic crisis is reflected in the crisis of the
theoretical macroeconomic paradigm (1972)
The paradigm shift occurs when simultaneously the
weakness of the existing model is combined with a
real problem (but there is a "valid" alternative)
(1972)
Challeges of The most important limitation that characterizes
phase 2: macroeconomists is the failure to recognize the
substantial role of finance in capitalist dynamics
(1972)
what happens
during crisis Power and distribution should be the key words of
the macroeconomist game (1972)
Attention to distribution leads to an increased
attention towards «green» and «cooperation»
(1975)
Concentrations and oligopolies are harmful and this
obviously applies to banking concentrations too
(1975)
Resonance between 1933 and 1993: Clinton as
Phase 3 Roosevelt? (1994)
challenges: Modern capitalism enters a crisis more easily than
in the past, not surprisingly (1994)
a new model for The target of tight full employment is not
capitalism? implemented substantially due to lack of political
will (sloth, ignorance, individualism) ... and in so
doing we lose a possibility of endogenous
a battle lost stabilization
already or a
Capitalism transformed itself (not in the direction
match still to desired, also because the policy choices that were
engage with? made went in the opposite direction suggested by
Minsky) (1994)
© Prof. AnnaMariaVariato – Fall 2019 20Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
In order to be successful, economic policy
design should provide simultaneous
In order to pursue coordination among three levers:
macroeconomic Direct job creation (ELR)
stabilization (as far
Proper AD management (Big Government)
as possible)
Financial Regulation (LLR)
1. Commitment to tight full employment (just to
simplify, pay attention to the issue of work) [long
term]
2. Implementation of adequate policies to address
aggregate demand (fiscal policy, with a
The design preference for public spending over taxation and
and the transfer) [medium term]
sequence of 3. Implementation of stabilization policy in the
financial sector, through the presence of a lender
economic of last resort (which legitimates supervision and
policy regulation monetary policy extensively
understood) [medium term]
4. Monetary policy (in strict sense) comes last and
is consistent with previous steps [short term]
© Prof. AnnaMariaVariato – Fall 2019 21Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Minsky time and his intellectual coherence
Phase 3:
Neoclassical
Mainstream
Phase 2: Keynesian
Mainstream Crisis • Capitalism as a
complex adaptive
Phase 1: Keynesian • There is an economic system, always poised
crisis, but it is above all between stability and
Mainstream on the intellectual instability, but
• "Golden" era: the most crisis that Minsky endowed with a
favorable context for focuses this phase of resilience that
the reception of his research historically other
Minskian ideas • He understands that systems have not
• Minsky plays on the the most serious demonstrated
definition of the limitation is the lack of • This is why it is
primary objective of an idea of substantial worthwhile to face the
PE, on its finance and he begins challenge of amending
implementation to concentrate mostly capitalism
methods and on the on the Financial
link with income Instability Hypothesis
distribution
«Long ago Abba Lerner summed up the view put
here arguing that success brings into play market
developments that breed failure. The problem of
discovering and putting in place institutions of a
successful capitalism cannot be solved once and
for all. Success is transitory. Future generations
Conclusion will have to confront later version of the
problem we now face: to turn a failing
capitalism into a succesful capitalism».
Hyman Minsky (2013 p. 177-178, original paper 1994)
© Prof. AnnaMariaVariato – Fall 2019 22Macroeconomics Applications Università degli Studi di Bergamo a.a. 2019-2020
Minsky believed that the war that an
economist should fight was the war on
poverty ...
... the poverty of which he spoke was
evidently that of material and moral
deprivation
Conclusion And this is a battle that not all economists
are able to face directly, while sharing its
relevance
… However as an intellectual he has
tirelessly fought a war no less important,
the one against the poverty of ideas. He
left us a fruitful legacy and this attests to
his personal and lasting victory.
© Prof. AnnaMariaVariato – Fall 2019 23You can also read
