Monday, December 21, 2015


L. Randall Wray in Business Standard HERE 
An Introduction to the Work of a Maverick Economist by L. Randall Wray
At the core of Minsky's alternate view is the belief that "stability is destabilising". Neo-classical economists believe that even in the event of shocks to the system, market forces will operate to move the economy back to equilibrium. But Minsky disagreed with conventional economic wisdom that market forces are fundamentally stabilising. He discarded Adam Smith's notion of the invisible hand guiding the market economy. In his view, "the internal dynamics of the modern economy are not equilibrium seeking". That's radical stuff, by any standard.
Minsky argued that during periods of tranquillity, market participants change their behaviour. They believe that the good times will last and, thus, begin to take on even riskier bets. Moreover, "a stable economy makes it more difficult to find profitable business opportunities." This encourages risk-taking. Economic stability also promotes financial deregulation on the grounds that the system is more stable. These policies encourage even more risk-taking. In doing so, the seeds of the next crisis are sown. A case in point: Alan Greenspan's "Great Moderation", during which market participants took on more risks and discounted the likelihood of Nassim Taleb's Black Swan events. In some sense, Minsky's analysis, rooted in the behaviour of market participants, draws on psychology rather than economics."
The crux of this paper is based on the error that associates Adam Smith, inevitably, given modern lack of attention to detail, including the wrash error of not reading Smith’s Wealth of Nations and his Moral Sentiments closely, added to which most believers in the myth of Adam Smith and the metaphor of “an invisible hand” have not read his “Lectures on Rhetoric and Belles Lettres”, in which he describes the role of metaphor in rhetoric.
If they, including regrettably various Nobel Prize Winners, had done so they could not possibly believe that “Adam Smith's notion of the invisible hand guiding the market economy” was a valid representation of his thoughts on his use of the now famous metaphor.
His use of the metaphor did not relate to ‘market equilibrium’ at all. In WN he referred to the arithmetic addition of a merchant’s capital to what we would call GDP, if his felt insecurity about sending it abroad led him to invest domestically. That is all. The unintentional consequences of his investing locally were to increase “domestic industry and employment” neither of which were his original intention. In TMS the landowner hired labourers to work in his fields for their subsistence and the unintended consequence of his actions were to enable the “propagation of the species”. Neither of these outcomes added anything to “equilibrium”.

L. Randall Wray has contributed mainly to theories of money and he is worth reading. I am less familiar with Minsky. They both appear to share the modern myth of Smith’s invisible hand metaphor. I shall find out more about Minsky in due course.


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