by Dirk Ehnts, Econoblog101
Last week The New York Times carried an article on the Australian economist Steve Keen and Ben Bernanke, indirectly mentioning Minsky and Kindleberger as well. After the article on MMT earlier this month this article has been written by an author who is more, well, focused (Floyd Norris). Here is an excerpt:
When I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.”
They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.”
In a footnote, he added,
“I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”
This is a crucial point. Economic research outside of the paradigm of the rationality postulate was made impossible by academic institutions – journals, central banks, etc. It is a great vindication for Hyman Minsky’s idea that (financial) stability creates instability. Jan Toporowski in his timely 2005 book Theories of Financial Disturbance hits the nail on its head with his idea of classifying these theories as reflective finance (p. 2):
Reflective finance regards the conditions in the financial markets as being determined by circumstances in the real economy, that is, outside the financial sector.
Therefore, finance is not an actor but just a passive mirror image of the real economy and hence it can do no wrong. This type of idea is encapsulated in Bernanke’s statement about pushing the rationality postulate. The financial system is stable – period. Actors are rational so they wouldn’t endanger their institutions, would they? Indeed they would and they did, as we know with hindsight. The type of theories that opposes this view of finance as benign Toporowski calls critical finance. It is about time that this paradigm gets some serious funding from academia. So far the financial lobby was able to shoot down all critical parts of regulation as a result of which the too-big-to-fail banks have gotten even bigger.