Hyman Minsky Was a Powerful Critic of Capitalism

Minsky studied with Joseph Schumpeter at Harvard. He read the work of John Maynard Keynes as a theorist of a monetary production economy and was indirectly influenced by Karl Marx.

Minsky characterized Schumpeter and Keynes as Marxist economists who were conservative and pro-capitalist. They were the “great dissenters”: economists who understood that capitalism cannot first be analyzed in “real” terms and only afterward supplied with money. Money is there from the beginning. More than that: money is not merely the most important thing; it is the only thing.

Marx’s circuit of capital starts with money advanced as finance to production in order to buy labor power and means of production. Schumpeter made the monetary point even sharper: bank credit creates purchasing power and gives entrepreneurs command over resources before the results of their decisions are known. Keynes showed how investment depends on expectations concerning an unknowable future.ex nihilo

Minsky brought these insights together by focusing on the interlocking balance sheets that connect money today to uncertain money tomorrow. Marx helps identify something Minsky leaves relatively underdeveloped. Finance for production gives firms command not simply over “resources” but over living labor power, i.e., human beings just regarded by capital as bearers of the capacity to work.

The valorization process is a monetary process, a process of money bearing more money as abstract wealth. Monetary theory is not a theory of a separate financial sphere: it is a theory of capitalist production as a whole. Finance does not become important only after value has been produced. It helps determine in advance who gets to organize production, which technologies are adopted, how labor is organized, and which futures become economically possible.

Capitalism is a monetary economy built on promises about an uncertain future. Firms invest today because they expect future cash flows. To do so, they incur debts carrying contractual payments, whether or not those expectations are realized. The same logic applies, in different forms, to households and financial institutions.

A financially robust unit can meet interest and principal out of its expected cash receipts. Minsky called this hedge finance. A speculative unit can pay interest but must refinance to cover the principal. A Ponzi unit cannot even meet current financial charges without further borrowing, capital gains, or refinancing.

The crucial point is that fragility is produced inside the expansion itself. After a crisis, lenders and borrowers are cautious. As prosperity continues, yesterday’s risks are validated. Practices once regarded as dangerous appear safe, and financial institutions compete by inventing ways around existing constraints.

Prolonged tranquility, or a technological wave generating exceptional expected returns, endogenously reduces the margins of safety previously regarded as prudent. This is what Minsky meant when he remarked that stability is destabilizing. His theory is not simply one of irrational exuberance. Successful financial practices change the institutions and conventions through which finance operates.

The canonical version of the argument has a problem. Minsky often described the boom as one in which nonfinancial firms progressively increase their leverage to finance investment. That makes sense for an individual firm. But it cannot simply be generalized to firms as a whole.

Here Minsky’s own debt to becomes important. Investment expenditure generates profits. When one firm borrows and spends, another firm receives revenue. The attempt by individual firms to increase debt does not therefore imply that the corporate sector as a whole must become increasingly indebted.Michał Kalecki

This is not a reason to discard Minsky. It is a reason to read his Financial Instability Hypothesis as a tendency, one which is quite often overcome by countertendencies (as in the case of Marx’s law of the falling rate of profit). The pressure toward fragility can be displaced.

That is exactly what happened in the decades before 2007. Nonfinancial corporations were not always the most fragile part of the system. Leverage migrated toward financial intermediaries and households. Household debt, especially mortgage debt, became central to the expansion.

The subprime mortgage market was almost a textbook Ponzi position: its viability depended on continuously rising house prices and the ability to refinance. The “Minsky moment” of 2007 was therefore not simply the end of a speculative episode. It was the breakdown of a stage of capitalism.

There is another side of Kalecki that matters. His 1943 on the political barriers to full employment can be read as a labor theory of value in disguise. Permanent full employment changes the balance of power inside production: workers become less afraid of dismissal, workplace discipline weakens, wage claims strengthen, and capital begins to resist policies that may remain perfectly compatible with aggregate profitability.argument

Kalecki thus brings the conflict over the extraction and distribution of surplus value back inside the macroeconomic theory of effective demand. In doing so, he anticipates what happened at the end of the 1960s and the beginning of the 1970s: a crisis of the capital-labor relation.

Minsky developed a theory of capitalism unfolding in stages that distinguished between commercial, industrial, financial, managerial, and finally money manager capitalism. Each form of capitalism develops its own financial institutions, relations of power, and characteristic sources of instability. As in Marx and Schumpeter, the destabilization of one stage gives rise to the next.

Capitalism is an evolutionary system that continually transforms the institutional conditions of its own reproduction. In commercial capitalism, finance was connected with trade and working capital. Industrial capitalism greatly expanded the need to finance long-lived fixed investment and, with it, the importance of investment banks and securities markets. Financial capitalism concentrated power in financiers, large shareholders, and increasingly large corporations.

In 1929, the set off a collapse of capitalism that was not overcome until World War II. Afterward, in the stage of managerial capitalism, private balance sheets were relatively strong. Big government deficits supported aggregate profits and employment. Large corporations could rely heavily on internal finance, and managers acquired considerable autonomy from shareholders and bankers.Great Crash

The institutions that at first stabilized managerial capitalism ultimately transformed but also destabilized it. Professional money managers at pension funds, mutual funds, and other institutional investors came to control corporate securities. The criterion of success was the appreciation of the managed assets. The result was money manager capitalism.

This was not merely a question of finance having a bigger role in the economy. Finance changed production itself. Corporate management became increasingly sensitive to stock-market valuation, and leveraged buyouts, mergers, outsourcing, downsizing, and cost compression reorganized firms. Vertically integrated corporations gave way to networks and supply chains, while employment became less secure and more precarious.

I have dubbed this phase the “real subsumption of labor to finance”: any resemblance to Marxian terminology is not purely coincidental. So-called financialization should not be imagined as a parasitic sphere sitting above a separate “real economy.” Financial criteria enter production, as required returns are transmitted into the labor process through processes of restructuring, outsourcing, work intensification, and employment insecurity.

The process may also be a push to accelerate innovation and raise the productive power of labor. This regime simultaneously produces traumatized workers, manic-depressive savers embedded in financial markets through pensions and property, and indebted consumers.

The connection between the latter two runs through a loop linking monetary policy to capital-asset inflation. The rising apparent value of past savings favors a decline in saving out of current income, which may become negative. Rising asset prices could partially compensate, for a while, for weak wage growth, because households borrowed against housing and financial wealth.

This configuration amounted to a form of privatized Keynesianism. Instead of the state directly sustaining demand through public expenditure, private debt and asset inflation did much of the work. Central banks supported the mechanism by repeatedly providing liquidity and protecting financial markets from collapse, increasingly acting as lenders of first resort.

The result could be dynamic for a time. Finance itself became a countertendency to stagnation. This was neither a stagnationist nor a laissez-faire form of capitalism: it was a very politically driven capitalism. But it generated dynamism by once again creating the conditions for a larger transformation and crisis.

The apparent stability of the Great Moderation allowed leverage to rise elsewhere in the system. Cushions of safety appeared to improve because collateral values kept rising. When house prices stopped rising, the entire structure reversed. That is why calling 2007 a “Minsky moment” misses the point. It was the culmination of what L. Randall Wray and Eric Tymoigne have a Minsky half-century.called

What is generally referred to as the “2008 crisis,” associated with Lehman Brothers, actually began the previous year with the subprime crash. It had been anticipated by the dot-com collapse at the beginning of the decade. For a few months, “neoliberalism” appeared to be dead: and it was, in that form. Banks were rescued, deficits exploded, and central banks abandoned any pretense that financial markets could be left to themselves.

But what followed was not a new progressive settlement. It was a zombie interlude: the private financial structure was rescued while austerity was imposed on much of the population. Meanwhile the ecological crisis increasingly clouded the horizon. The pandemic and the health crisis finally broke the political-economic pattern inherited from the post-2007 interregnum.

After 2020, active fiscal policy returned on a scale that had been ruled out for decades. Governments ran enormous deficits, and states provided guarantees, subsidies, industrial policy, infrastructure spending, and support for green and digital investment. Calling this the “return of the state” is, however, misleading, since the state never left. What changed was the form of intervention.

I would describe the regime that actually materialized as a second generation of privatized Keynesianism. The first generation, between roughly 1987 and 2007, supported demand through private debt, asset inflation, and central bank guarantees. The second supports demand much more directly through public deficits and the state balance sheet.

However, the crucial asymmetry remains: demand is publicly supported, while the criteria governing allocation, production, and the labor market remain private and oriented toward hit-and-run profitability. Risk is socialized while returns remain private.

Industrial policy subsidizes strategic corporations, digital platforms, military-industrial complexes, and reorganized supply chains without any true public and democratic control. Employment can rise without undoing fragmented and precarious labor relations. Public money increasingly guarantees the future profitability of private investment.

The most surprising Minsky is, however, the political Minsky. He was a Keynesian, but he did not believe postwar Keynesianism had fulfilled Keynes’s radical potential. His starting point was Keynes’s famous call for a “somewhat comprehensive socialisation of investment.” Keynes concluded that monetary policy alone could not guarantee enough private investment to secure full employment.

But he immediately limited the argument. The fundamental defect of capitalism, he maintained, concerned the volume rather than the direction of employment. Once resources were fully employed, even the Keynes who supported the socialization of investment wrote that the market allocated them reasonably well and that neoclassical theory retained a local validity.

Minsky, like Joan Robinson before him, asked a much sharper question: Full employment for what? Once Keynesian policy had shown that full employment was politically possible, the composition of employment and production could no longer be treated as a secondary issue. The question was not merely whether everybody could be put to work, but what they would be producing, under what conditions, and for whom.

The same problem runs through the later critique of military Keynesianism, organized waste, and induced private consumption (here Minsky is on the same page as Paul Baran and Paul Sweezy). Big Government and Big Finance could prevent another great collapse. But they could do so while stabilizing a conservative form of capitalism based on high profits, large corporations, military expenditure, induced private investment, and ever-expanding private consumption.

Minsky’s answer was not simply “more Keynes.” He returned instead to Franklin Delano Roosevelt and the New Deal, in a kind of left idealization of it. While the New Deal might have lacked Keynes’s theory of effective demand, it had something postwar Keynesianism had lost, structural reform — a banner that is suicidal to leave to the Right. It reformed finance, created institutions against debt deflation, and provided direct employment to fulfill social needs.

Minsky wanted to combine Keynesian effective demand with New Deal structural reform. That is why his employer-of-last-resort proposal should not be reduced to a technical job guarantee mechanism. He wanted full employment, but he also wanted public employment to produce goods and services outside the immediate criterion of private profitability. He wanted expenditure to be targeted.

The point is that the composition of output itself must become a political question. At points, Minsky went very far. He argued that control over the finance committees of large corporations could open a route toward decentralized socialism, or toward guided interventionist capitalism.

This is where Minsky’s work remains unfinished. If finance determines which firms obtain purchasing power before production begins, finance already exercises a kind of private social planning (Schumpeter’s point). It gives some actors the possibility of hiring labor power, mobilizing productive resources, introducing technologies, and determining the material shape of a future that has not yet arrived.

Wealth, in capitalism, is not merely the possibility of consuming more. It is power over the direction of the future (Keynes’s point). That is why the socialization of investment eventually raises a larger question: the socialization of the use of productive capacity. If you wish, there is a hint directing us toward an economy of social production.

This does not mean a bureaucratic command economy. It means refusing to treat private profitability as the only mechanism that can decide what is produced, how it is produced, and for whom. And it means taking the organization of labor seriously. A democratic decision over what to produce is incomplete if workers remain subordinated inside production itself.

The ecological crisis drives home the same point still more sharply. Financial claims can be refinanced, and balance sheets can be restructured, but a destroyed ecosystem cannot be rolled over. Nor can we restore living labor power that has already been consumed and damaged. The material irreversibility of the use of workers and nature cannot be abolished by rearranging monetary claims.

The Minsky recurrently made fashionable at each new crisis gave his name to a financial panic. The more radical Minsky understood that financial instability — and the unsustainability of capitalist processes more broadly, even when they are temporarily stable — is generated by capitalism’s always changing forms. Stabilizing capitalism without changing its structure may simply pave the way for the next crisis.