john-maynard-keynes-minsky-1975.md

title	author	year	isbn
John Maynard Keynes	Hyman P. Minsky	1975	9780071593014

the following are my notes on john maynard keynes. this is not a summary. instead, these are ideas that caught my eye.

preface

• ix - leveraged wagers mean small disappointments cause big consequences

introduction

• xiv - policies adopted by self-identified keynesians hurt credibility of keynes's general theory, led to neoclassical econ

TODO: return if introduction points not covered later on

chapter 1. the general theory and its interpretation

• 2 - "Keynes attacked with gusto and obvious relish the logical and empirical foundations of traditional economics"
• 4 - "With this victory by the classical theory, academic economics has recaptured much of the sterility and irrelevance ... which characterized the discipline prior to the appearance of The General Theory"
• 5 - henry simons: bank weakness + human error caused depression -> "As it is always possible after the event of a crash or a crisis to impute what went wrong to some human error or institutional flaw, the Simons position is essentially irrefutable" - it's also the idolatry critique!
• 7 - "out of an understanding that the Left had the questions but not the answers, The General Theory was born" - union of rationality of econ + sentiment that something better than what exists is attainable
• 7 - keynes provided alternative to marxists and orthodox econ who basically believed the same pessimistic things
• 9 - on modern literature + econometric analysis: "By their very nature, such studies, based as they are upon erroneous premises, cannot determine relevant investment relations. As many things happen together and as econometricians are skilled in massaging data, even such poorly conceived studies may satisfy merely statistical tests of adequacy."
• 15 - when things are stable for a while, people doubt that crisis happens -> "That is, the view arises that the disturbing problem that established a need for a new theory 'never' really occurred."
• 15 - "It turns out that the accomplishments of pure theory during the 1950s and 1960s are more apparent than real"

chapter 2. the conventional wisdom: the standard intrepretation of keynes

• 20 - keynesians changed keynes's work by making labor market set stage for all others - "not only thoroughly violates the spirit of The General Theory but it also returns the argument to the world of the "classical economy""
• 20 - neoclassical synthesis adds rigidities / institutioonal flaws to explain unemployment
• 20 - "These models become the rationale for an activist, managed approach to economic policy in a capitalist economy and for the view that fundamental reforms are not necessary."
• 21 - most keynesian policy discussion based on consumption function, exclude models w/ monetary + investment interactions
• 22 - "in Keynes's scheme the rate of interest is not homogenous of degree zero with respect to the quantity of money; in the orthodox scheme of things this heroic assumption is crucial to the argument."
• 23 - gt uses consumption function to get determined component of aggregate demand, not the heart of macroeconomics
• 26 - when consumption externally financed (like consumer credit), neoclassical consumption smoothing assumptions don't apply bc units have cyclical + uncertain view of income over time -> consumption behaves procyclically
• 31 - econometrics bad at estimating investment, need to rely on surveys
• 31 - "The failure, or success, of the financially naïve econometric forecasting models does not constitute a test of the validity of Keynes's theory."
• 32 - hicks is-lm model similar to viner's understanding of gt, keynes wrote extended repudiation of viner's interpretation, so hicks also wrong
• 35 - is-lm vioaltes complexity of investment process laid out by keynes
• 37 - hicks-hansen model better than simple consumption-function models, but "was an unfair and naïve representation of Keynes's subtle and sophisticated views."
• 39 - keynes: increase in quantity of money will affect prices bc it first affects labor market, so labor market is conduit for monetary change to price change -> classical view that money supply determines price not reliable / precise
• 40 - system performance determines real terms of contract struck in monetary / nominal terms -> introduces uncertainty beyond control of individuals
• 41 - equations have equilibrium between wage and employment -> "In the classsical economics it is blithely assumed that there exists processes in markets which assure that this real wage and employment will be achieved."
• 47 - keynes: reaction to disequilibrium in one market can cause disequilibrium in other markets
• 47 - many smaller markets might have price declines, won't effect other markets; classical view treats labor market this way -> in reality likely to spill over into other markets
• 51 - neoclassicals said wage rigidities caused unemployment -> "This pointing at labor-market sluggishness or rigidity with respect to money wages as the villain of the piece contrasts with Keynes's view that wage flexibility, if it occurred, might very well make things worse."

chapter 3. fundamental perspectives

• 55 - joan robinson: "Keynes' argument was not the one that has been foisted on him by the bastard Keynesians - that money-wage rates are rigid for institutional reasons. It was that if wages could be cut, in a slump, it would make the situation worse..."
• 59 - "Every reference by Keynes to an equilibrium is best interpreted as a reference to a transitory set of system variables toward which the economy is trending"
• 59 - "Not only is stability and unattainable goal; whenever something approaching stability is achieved, destabilizing processes are set off."
• 62 - sometimes decisions need to be made but cannot be quantified bc lack of knowledge - call these subjective probabilities -> subject to sudden, violent changes
• 65 - keynes has theory of cycle based in investment, consumption is passive amplifier
• 66 - "Thus the behavior of the economy is characterized by equilibrating tendencies rather than by any achieved equilibrium. Keynesian economics as the economics of didequilibrium is the economics of permanent disequilibrium."

chapter 4. capitalist finance and the pricing of capital assets

• 68 - two main decisions for units: which assets to hold, how to finance acquisition
• 69 - ordinary businesses need production output + labor markets to work but also financial markets to work so can borrow, sell assets, float shares
• 70 - "In a world with private debts denominated in money, money is a safe asset for meeting such commitments."
• 70 - money invariant in value only wrt contracts / commitments denominated in money
• 70 - "The relevant paradigm for the analysis of a capitalist economy is not a barter economy; the relevant paradigm is a system with a City or a Wall Street where asset holdings as well as current transactions are financed by debts."
• 70 - liabilities are what buys capital assets - holder of bank deposit indirectly financing position in capital assets
• 71 - "The possession of money - and of financial assets that are near monies, i.e., savings accounts, certificates of deposits, etc. - acts as "insurance" against the economy, or particular markets, behaving in an inappropriate way"
• 71 - cash is insurance against fall in cash from default on contracts or malfunctioning of markets
• 74 - interest rate determined by interplay of public demand to borrow, bank willingness to lend
• 74 - keynes: speculative demand for money tied to interest rates + asset prices
• 75 - "In a world with uncertainty, portfolios are of necessity speculative" -> demand for money as insurance
• 79 - rate of return on asset inversely related w/ quality of market for asset, time to maturity, ease / certainty of sale price (liquidity)
• 83 - organization w/ high volume of short liabilities is refinancing its position every time short debt comes due (this is banking - borrow short, lend long)
• 85 - to buy expensive assets, debt needed - safest way is to emit debt w/ cash-flow commitments synchronized w/ expected cash receipts - minsky calls this "hedge financing"
• 87 - keynes: "When the capital development of acountry becomes a by-product of the activities of a casino, the job is likely to be ill-done."
• 87 - firm does successful speculation -> firm value increases -> firm can issue more debt bc debt-to-valuation ratio down
• 87 - increase in quantity of money relative to assets + debts decreases liquidity premium on money -> increase money price of debts, capital assets
• 88 - prospective yields and liquidity premiums reflect view about future, subject to sudden + violent changes

chatper 5. the theory of investment

• 91 - keynes: "it is those which determien the rate of investment which are most unreliable, since it is they which are influenced by our views of the future about which we know so little"
• 93 - prospective yields Qs "embody present views about the future," subject to change
• 94 - Qs are quasi-rents, not marginal productivity of capital, result of scarcity of capital
• 101 - if capital assets less liquid than debts, if value of liquidity decreases, price of capital assets rise relative to money + debts
• 101 - interest rate on money loans can get so low tht increase in money supply will not effectively lower rate of interest
• 102 - finite max price of capital asset that can be achieved by increasing money supply
• 103 - slippages between quantity of money and amount of investment, "an erratic tune caller for investment."
• 107 - borrowers see debt cash flows certain, prospective yeilds uncertain, so more debt finance means less margin of security
• 107 - "Borrower's risk is subjective; it never appears on signed contracts. It is a focal point for the "quivers and quavers" of uncertainty and the "surprise" of high animal spirits."
• 108 - as contractual debt rises, all debt issued by unit will need to conform to marginal contract upon refinancing
• 108 - fundamental fact about borrower / lender risk is they reflect subjective valuations
• 109 - existence of borrower / lender risk means successful operation means capital appreciation
• 109 - "The Shakespearean dictum "Neither a borrower nor lender be" fails to take into account the capital gains both parties can enjoy."
• 109 - less risk aversion means more leverage - "capital appreciation uncovers borrowing power"
• 110 - households more likely to borrow to buy shares, banks more willing to finance margin purchases, increase in share prices
• 110 - in a boom, ratio of debt-financing to investment increases, borne out by empirical data on corporate debt
• 112 - boom depends on realizing optimistic expectations on yields
• 112 - many causes for need for liquidity: wage / production cost increases, interest rates, cost of previous debt -> when a lot of units need to sell assets to make position by selling, asset prices fall badly unless there's a standby market supporter
• 116 - "This ability to generate cash flows by selling an asset without large price concessions measures the asset's liquidity."
• 116 - anyone other than actual operator of wealth will put premium on ability to disengage: sell out or redeploy wealth
• 119 - banking inherently speculative about possibility of refinancing - "Banking as it is practiced could not exist without well-developed loan and security markets among banks."
• 120 - "the effective quantity of money is endogenously determined" bc banks can do interbank transactions in reserves
• 120 - increase in external finance increases money supply, decreases idle cash balances
• 121 - early in boom, financing terms don't change much even with expansion of debt; "To the extent that earlier deals were financed with short-term borrowings, such increases in financing charges can feed back upon and adversely affect the value of earlier deals as they are refinanced."
• 121 - boom has firms w/ heavier debt finance, households with less liquid-asset holdings relative to debt, banks increase loans at expense of securities
• 121 - in boom, speculative demand for money down
• 122 - as boom develops, units forced to take more precarious positions
• 125 - "success breeds daring, and over time the memory of past disaster is eroded. Stability - even of an expansion - is destabilizing in that more adventuresom financing of investment pays off to the leaders, and others follow. Thus an expansion will, at an accelerating rate, feed into the boom."
• 126 - "As a recovery approaches full employment the current generation of economic soothsayers will proclaim that the business cycle has been banished from the land and a new era of permanent prosperity has been inaugurated." - just incredibly prescient, foresaw great moderation, robert lucas's 2003 statement that the economy was solved
• 126 - not boom, deflation, stagnation, recovery can continue indefinitely - "Each state nurtures forces that lead to its own destruction."
• 127 - keynes didn't talk about finance, which was weird. why didn't successors? bc from GT to mid 60s, finance was healthy - "It was a unique period in which finance mattered relatively little; at least, finance did not interpose its destabilizing ways."
• 127 - govt was large part of economy - "changed the shape, though not the essential character, of capitalist business cycles."
• 127 - GT wasn't followed bc analytical econmists didn't have experience in finance like keynes - "those knowledgeable about finance did not have the skeptical, aloof attitude toward capitalist enterprise necessary to understand and appreciate the basically critical attitude that permeated Keynes's work."

chapter 7. some implications of the alternative interpretation

• 129 - "the normal path of a capitalist economy is cyclical"
• 129 - "capitalist finance affects the valuation of items in teh stock of capital assets and thus affects the pace of investment" - opposed to neoclassical static-production function, invariant-preference-system -> keynes's work was distorted in synthesis
• 129 - capital assets peculiar bc thin resale market and yields they earn depend on performance of firm in defined market and upon cyclic behavior of economy
• 134 - world depends on past (inherited financial commitments) and future (currently created commitments), so wage deflations + inflations are destabilizing; wage deflation "will tend to make unemployment worse, not better"
• 136 - "Pure rent results when a capital asset is scarce."
• 136 - "Whereas capital services not used today will be available some other day, labor services not used are lost forever."
• 136 - burden of debt increases during deflation; willingness to go into debt decreases -> purchases of investment goods declines
• 137 - deflation -> realization that speculative gains can be made by holding money -> velocity declines
• 137 - wage deflation leads to fall in real investment below level at which initial excess of supply existed -> "Downward wage flexibility, in a situation with unemployment, will make things worse."
• 138 - inflation needed for full employment financed by private investment - "both bankers and businessmen will go along with the increased ratio of debt to internal financing of investment only if they are reasonably confident that the quasi-rents will grow, i.e., if they believe inflation will take place."
• 139 - "an inflationary push in the investment-goods industries willl need to be generalized into an economy-wide inflation"
• 139 - "In an economy with strong trade unions in the production of investment goods (construction) and a policy commitment to maintain the output of investment goods, the effective determinant of price-level changes is of course the money wages in the investment-goods industries. Thus, any effective antiinflationary policy in such an economy will require institutional controls on money-wage changes in this key sector."
• 140 - units become more and more dependent on financial, product, factor markets as leverage goes up
• 140 - model needs to be "explicitly cyclical and overtly financial" to diagnose problems of capitalism

chapter 8. social philosophy and economic policy

• 147 - keynes: "It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public itnerest. Nor is it true that self-interest generally is enlightened, more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these."
• 148 - keynes: some inequality ok, but too much today (1936); arguments don't apply to inequality of inheritances
• 149 - keynes: "dangerious human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for money-making and private wealth" - not necessary that these games have such high stakes
• 149 - taxation of income + inheritance desirable - "and fortunately, as if by some invisible hand, such a modification of income distribution would also make the attainment and the sustaining of full employment easier." - lmao this dude's funny
• 151 - keynes thought once absolute needs satisfied, capital would be abundant, rentier euthanized - did not anticipate even more capital used for relative goods than absolute - prediction was "based upon a genearlization of his own preferences."
• 152 - rich turned to capital-intensive consumption rather than culture + philosophy -> example filtered down to not as rich -> "Thus a variety of conspicuous consumption became generalized, and this conspicuous consumption has led to a continuing capital shortage."
• 152 - "In order to achieve the euthanasia of the rentier, it may be necessary to first achieve the income distribution that Keynes argued would exist after the euthanasia was achieved."
• 152 - advertising might be to blame, "affluence has not brought a demand for the quiet pleasures; but rather has been associated with proliferation of demands for goods that require capital assets."
• 152 - policy maintained income weighted toward capital-consuming military needs
• 152 - possible route: euthanasia of rentier <- constraints on growth of relative needs <- income distribution w/ low / no income from capital ownership, i.e., prior euthanasia of rentier
• 153 - cold war arms race equivalent to war - rapid obsolescence of capital investment weapons - "The succession of weapons systems has been equivalent to pillage and bombings in its destruction of the fruits of prior accumulation."
• 156 - big govt induces investment by increasing profitability w/o regard for consumption / income distribution - "Full-employment policy has taken on a conservative coloration; what has been achieved might properly be called socialism for the rich."
• 156 - tax schemes create treadmill where ever greater profits + subsidies needed to sustain full employment
• 158 - "When conservatives are Keynesians, then tax and spending policies may well be used to give life to rentiers rather than to abet their euthanasia."

chapter 9. policy implications of the alternative interpretation

• 161 - accelerating wages (especailly in investment goods production) + money will be lent + fed needs to prevent crisis + govt sets high floor to unemployment -> inflation
• 161 - "Whenever substantial unemployment for trade-union members is not a creditable possibility, traded unions become more powerful; and whenever past wage increases have been validated by subsequent price increases, employers become less resistant to futher increases." -> combo of general prosperity + low tolerance for unemployment + fragile financial system conducive to accelerated inflation
• 161 - inflation especially likely if full-employment strategy is investment-led
• 162 - without crisis, "upward bias to prices and ever-higher financial layering are induced."
• 162 - advertising + defense spending -> shortage of capital
• 163 - "the high-investment strategy has the economy on a treadmill of ever-higher discretionary consumption, without any apparent tendency toward satiation. The joylessness of American affluence may be due to the lack of a goal, the acceptance of a standard in which "more" is really not worth the effort."
• 163 - stability + robustness of finance in 50s + 60s an ccident of history, "due to the financial residue of World War II following fast upon a great depression."
• 164 - forced back to normative question; full employemnt is dominant goal, "the scheme of perpetual waste and want has to date succeeded." - no incrementally useful capital, war preparations, consumption fads have kept full employment - no "corresponding increase in felt well-being"
• 164 - "It rather seems to put all - the affluent, the poor, and those in between - on a fruitless inflationary treadmill, accompanied by what is taken to be deterioration in the biological and social environment."
• 164 - full employment through private investment is destabilizing: better strategy is to decrease dependence on private investment, increase avg private propensity to consume
• 164 - "this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure"
• 165 - shouldn't have strategy where wealth trickles down to poor, "the income of the poor is sustained and increased directly, and the affluent take their chances."
• 166 - "It will remain true that we live out our lives in transition; there is not final solution to the problems of organizing economic life."
• general - reading this about the same duration after time between gt publication and its publication - realize now that why minsky matters is similar

things to look up

• 16 - joan robinson on bastard keynesianism