Hyman Minsky. Ending Poverty

Ending Poverty: Jobs, Not Welfare (Hyman P. Minsky)

– Subrayado Pos. 2713-25 | Añadido el domingo 14 de septiembre de 2014 19H13′ GMT

In the Walras-Pareto theory each household is assigned some initial endowment. Trading takes place. Each household is assumed to trade only if the trade makes it better off, or at least no worse off. Some of the trades will result in furnishing services (labor) to production units; some will be exchanges of commodities. From these preference systems, production functions, and initial endowments, supply and demand curves for labor and outputs of various kinds are derived. Equilibrium exists when supply equals demand for every variety of labor and output. Trading processes are defined so that such an equilibrium will be achieved and the shapes of preference and production functions are specified so that this equilibrium will be stable. This equilibrium will be at full employment—or at a natural rate of unemployment. It is now usual to set the model up so that it will generate a growing economy. This framework leads to a mathematical, rigorous proof that under restrictive conditions, the equivalent of Adam Smith’s invisible hand proposition—that each by serving his own interest serves the social good—is true: efficiency is served by avarice. The conditions required for this formal proof are sufficiently restrictive so that this result can be interpreted as showing that the model is or that it is not relevant to our economy.

 

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– Subrayado Pos. 2752-60 | Añadido el domingo 14 de septiembre de 2014 19H15′ GMT

For a model New-New Economist, dominant during [the early Nixon era], instability is due to economic policy, especially the inept management of money by the Federal Reserve. Some economists, for example Professor Friedman of Chicago, argue that the foundation of a correct economic policy is stability in the rate of growth of the money supply. Once this is achieved, market forces can be depended upon to yield full employment. If past errors lead to deviations from full employment demand, then the appropriate current policy is to set and sustain the required stable monetary growth. The ways by which money works its “magic” are so complex, subtle, and powerful that attempts to react to current deviations of income or employment from target can only aggravate the situation by either too much stimulus or too much constraint. In other words, the establishment of a stable monetary environment is the best tack for policy. Within such an environment, after any disturbance the system will move toward equilibrium quickly and vigorously. Attempts to speed this process will lead to overshooting the target.

 

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– Subrayado Pos. 2829-36 | Añadido el domingo 14 de septiembre de 2014 19H20′ GMT

The Paretian view that welfare is maximized by exchanges among goods allows no place for free and nonappropriated goods. Thus the deterioration of the quality of air was not considered a major factor in economic analysis until thrust upon the economist by the environmentalist. The paradox that an hour’s drive to work tends to increase GNP, whereas a 20-minute walk does not, is evidence that GNP does not in any meaningful sense measure economic welfare. The neoclassical way of looking at choice induces a bias, so that economists tend to value private consumption out of private disposable income highly and to discount the value of the consumption of public goods. The costs and benefits of alternative social organizations are not examined.

 

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– Subrayado Pos. 2841-47 | Añadido el domingo 14 de septiembre de 2014 19H25′ GMT

The output of the public sector is part of GNP and the satisfaction-producing system of an economy. Nevertheless, Professor Tobin described choices made while he was advising Kennedy by remarking that “while we sympathized with the stress which J. K. Galbraith and other liberals placed upon the importance of expanding the public sector, we did not agree that total output and growth of output had ceased to be socially important” (Tobin 1966, 22). Of course, Tobin really knows that a growth of public output is a growth of output; nevertheless, the meaning of his assertion seems to be that resources used to provide parks, public hospitals, public schools, and the safety of persons are resources wasted. Throughout the ‘60s and into the ‘70s, aside from the military, the preferred instrument for generating expansion has been a tax cut or loophole, i.e., the shifting of command over resources to private hands.

 

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– Subrayado Pos. 2861-69 | Añadido el domingo 14 de septiembre de 2014 19H28′ GMT

This bias introduced by using GNP, which includes military expenditures as an index of welfare and of success for economic policy, shows up in foreign aid as well as in domestic economic policy. Need I recall that as little as four years ago Pakistan was hailed by house intellectuals as a great success of the foreign aid program? Today we know better: the result of our help was the forging of the army that carried out the great massacre of Bengal. The bias introduced by modern economic theory leads to a neglect of all but GNP as an indicator of aggregate economic welfare. Concern with the shape of GNP is needed as an antidote to the current practice: military expenditures, while using resources, do not in general contribute to “welfare” as measured by private and public consumption; other dimensions of public expenditure, such as parks and schools, do. Unless an economic theory makes this distinction it cannot be useful as a guide to redirecting priorities.

 

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– Subrayado Pos. 2877-80 | Añadido el domingo 14 de septiembre de 2014 19H31′ GMT

If technique determines income distribution, then the lot of the poor and near poor can be improved only if growth of output per person takes place. The iron constraint of techniques implies that a meaningful increase in the proportion of income going to the poor cannot be achieved. This theory will make a man of goodwill an almost devout believer in the virtue of economic growth.

 

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– Subrayado Pos. 2905-8 | Añadido el domingo 14 de septiembre de 2014 19H33′ GMT

Furthermore, the combination of private consumption demand, private investment demand, and increased military spending leads to a decline of real resources allocated to providing public consumption goods. The anti–public sector bias of the economist is reinforced by the way in which resources are made available for investment and military spending by an inflationary process in a full employment economy. Public consumption goods diminish in supply.

 

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– Subrayado Pos. 2910-17 | Añadido el domingo 14 de septiembre de 2014 19H33′ GMT

Given the facts of American political life, we can posit the following: the rich get relatively little of their consumption from public services; the poor almost always get inferior public goods. Once again, it is those in the middle who get a meaningful amount of their consumption through publicly supplied goods and services. A deterioration here hits them hard. Thus the distributional impact of the policies adopted has been slow or no growth in middle-level private real income combined with a sharp deterioration in the quality and quantity of public goods. It is no wonder that Wallace [‡‡‡‡‡] gains a following; that safety in the streets (the most important public good) and the quality of schools—including busing—are such potent political issues.

 

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– Subrayado Pos. 2964-74 | Añadido el domingo 14 de septiembre de 2014 20H20′ GMT

The 1975 projected consumption in the president’s Economic Report is $769 billion. A modest change in national priorities, which reflects the view that it really is not important for the private consumption standards of the representative rich man to increase, that a modest rate of growth of private consumption of the broad middle group is feasible and desirable, and that sustaining the rate of growth of the poor’s private consumption is important, will free $71 billion for social consumption. This means that the federal government budget could be well-nigh twice as large in 1975 as projected—or state and local government budgets could be some 50 percent greater than projected. It is evident that the major potential for reordering national priorities lies in redistributing income and directing the distribution of the benefits of growth. A significant redistribution of income requires a decrease in the share of profits in income. This means that taxes on high incomes from all sources be raised. It also implies that the ratio of private investment to GNP decreases. This in turn means that the productive capacity of the private sectors will not grow as fast as projected. But this does not mean that true capacity does not increase as projected.

 

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– Subrayado Pos. 3014-18 | Añadido el domingo 14 de septiembre de 2014 20H29′ GMT

That speculative considerations centering around financial markets can dominate production function characteristics in determining economic system behavior is a fundamental theorem of the Keynesian model. This is foreign to the neoclassical synthesis. The Keynesian view is that a capitalist economy generates a cyclical, dynamical process in which the evolving financial environment determines the system state. The Walrasian view is a “barter” paradigm, where activities which result in steady growth are carried on as if goods were traded for goods.

 

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– Subrayado Pos. 3051-61 | Añadido el domingo 14 de septiembre de 2014 20H33′ GMT

One of the articles of faith of the Kennedy economists was that “a steadily growing fully employed economy is both desirable and attainable” (Tobin 1966, 2). Furthermore, this objective could be achieved by manipulating a limited number of monetary and fiscal policy instruments. This view was derived by manipulating models of a stagnant or slowly growing capitalist economy. But, and this is the essential contradiction, success in achieving a growing, fully employed economy will lead to a euphoric, bullish, speculative mode of behavior of the economy. In the euphoric mode, as long as the fundamentals of capitalist finance are unchanged, monetary and fiscal constraint will not be effective unless expectations are affected. The ruling expectations of the euphoric mode are such that monetary or fiscal constraints will be offset. Such offsets will cease only after expectations are affected. This typically will result from a financial crisis, crash, crunch, or squeeze, which reveals the essential fragility of capitalist financial institutions. Such a change ushers in a stagnant phase—either a deep stagnation of the Great Depression or a more modest stagnation consistent with the large and activist government of today.

 

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– Subrayado Pos. 3080-85 | Añadido el domingo 14 de septiembre de 2014 20H35′ GMT

The fundamental flaw of capitalism centers around its financial system, which is inherently unstable. The financial system is also the instrument by which the social surplus is appropriated to private business. Because of this, managers of large aggregations of capital are fundamentally public servants and owners of large accumulations of wealth are fundamentally trustees for the public. The civil management and social use of capital aggregations becomes a major thrust of reform. The name of the game of reform will be power and income distribution. But to undertake this adventure we first have to discard the neoclassical synthesis as a guide to public policy. The economics that is in the current generation of text-or principles books will not do.

 

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– Subrayado Pos. 3742-46 | Añadido el martes 16 de septiembre de 2014 15H16′ GMT

Between 1933 and 1938, by a process of trial and error, the Roosevelt administration responded to the failure of the virtually laissez-faire capitalism of the first third of the twentieth century by creating an interventionist capitalism characterized by a thoroughly revised financial system, a greatly expanded government, and increased regulation of the labor and product markets. The reconstructed financial system aimed to constrain speculation and induce a focus on resource creation. Government spending increased the ratio of utilized to available labor and financed resource creation. The regulation of labor and industry aimed to improve the distribution of income and contain private oligopoly power.

 

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– Subrayado Pos. 3794-3802 | Añadido el martes 16 de septiembre de 2014 15H23′ GMT

The bank holiday was a preemptive strike—it moved the resolution of the problem of illiquid and insolvent banks and other financial institutions from the financial community to the federal government. The United States bank holiday was the climactic event of a great contraction of the American economy that began in October 1929 and lasted until March 1933—some 42 months of well-nigh monotonic decline. The decline was both long and deep. In the United States—and the United States was by no means the worst case—output fell by about 33 percent, prices fell by about 33 percent, and the indices of stock prices (the Dow Jones and the Standard & Poor’s) fell by some 85 percent. 10 In the winter of 1932–33, unemployment affected at least 25 percent of the labor force: this in a country where one-third of the labor force was in agriculture.

 

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– Subrayado Pos. 3837-43 | Añadido el martes 16 de septiembre de 2014 15H33′ GMT

The financial structure was reconstituted with special financial organizations for specified functions: for housing, for agriculture, for imports and exports, for commercial banking, for investment banking, and for deposit insurance. The operations of the publicly traded corporations and the markets in which the trading took place were to be transparent. In addition, the Federal Reserve was reorganized so that the gold standard rules of central bank behavior no longer forced it to be deflationary when prices were dropping drastically and unemployment was high. A government investment bank, the Reconstruction Finance Corporation, was part of the control and support mechanism for the financial structure and for the financing of resource creation: it operated by infusing government equity into transportation, industry, and finance.

 

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– Subrayado Pos. 3887-3906 | Añadido el martes 16 de septiembre de 2014 16H16′ GMT

Reagan and Thatcher tried to overthrow the big-government interventionist capitalisms that they inherited. In the United States the major substantive economic changes of the Reagan years were: (a) the destruction of the revenue system; (b) the emergence of an economy that was structurally dependent upon the government’s deficit financing of a budget that was mainly devoted to transfer payments (including interest on the government’s debt) and military spending; (c) a high-consumption economy due to the increases in the inequality of income distribution and in entitlements; (d) the fall in the real wage of a large portion of the labor force; (e) a fragile financial system; and (f) a rising tide of un- and underemployment. After a spurious prosperity, largely based upon (a) an unproductive government deficit, (b) an enormous expansion of the financial services industry, and (c) financing schemes that left the country with an excess supply of office structures, highly indebted firms, and nonperforming assets, the economy of the United States has virtually stagnated for some five years. Furthermore, government spending became even more inefficient as an instrument to create resources, because the high interest rates that were a long-lasting legacy of the experiment in practical monetarism of the Volcker era and the great expansion of the government debt resulted in a huge item in the budget called “interest on the debt.”

 

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– Subrayado Pos. 3984-94 | Añadido el martes 16 de septiembre de 2014 16H22′ GMT

Of these profit-seeking, private-agenda financial organizations, one set plays an exceptionally delicate role in capitalist economies. This set consists of the investment or merchant bankers who either as brokers—who bring buyers and sellers together—or dealers—who take financial liabilities into their own accounts—act as midwives to company startups and the financing of continuing operations. Essentially, these operators have superior knowledge about their customers who need financing (those who have a need for funds) and their customers who need outlets in which money can be placed. They turn this private knowledge—of the conditions under which funds are desired and the conditions under which funds are available—to their own advantage, even as they perform the social function of selecting the investments that the economy makes. These financial intermediaries are of critical importance in determining the values attached to capital assets as collected infirms.

 

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– Subrayado Pos. 4027-31 | Añadido el martes 16 de septiembre de 2014 16H24′ GMT

Although the obvious flaw in capitalism centers around its inability to maintain a close approximation to full employment, its deeper flaw centers around the way the financial system affects the prices of and demands for outputs and assets, so that from time to time debts and debt servicing rise relative to incomes and conditions conducive to financial crises are endogenously generated. Once such a crisis is triggered, a collapse of investment followed by a long-lasting depression accompanied by mass unemployment will take place, unless a combination of lender-of-last-resort interventions by the central bank, which sustain asset prices, and enlarged government deficits, which sustain profits, takes place.

 

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– Subrayado Pos. 4170-79 | Añadido el martes 16 de septiembre de 2014 16H40′ GMT

Capitalism succeeded because it is a system that can take many forms, whereas the Soviet model of communism was unable to change its forms. Once a “new” new model of capitalism that is successful is put in place, we can be sure that the success will be transitory. For any model of capitalism that succeeds for a time will have features that constrain short-sighted myopic behavior which is to the apparent benefit of some economic agents. As a result, the efficacy of a particular structure of institutions and usages to bring about a successful economy will diminish. Long ago Abba Lerner summed up the view put here as arguing that success brings into play market developments that breed failure. The problem of discovering and putting in place the institutions of a successful capitalism cannot be solved once and for all. Success is transitory. Future generations will have to confront a later version of the problem we now face: to turn a failing capitalism into a successful capitalism.

 

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