Customer Reviews

John Maynard Keynes

5 star:		(5)
4 star:		(1)
3 star:		(0)
2 star:		(1)
1 star:		(0)

 

 

This is a great book. But it is a book about the views of Minsky, and not really on Keynes. The first chapter examines the way in which Keynes' 1936 book was received and interpreted, and Minsky's explanation is for the most part correct, namely, that Keynes' work represents more a revolution than an extension of "classical" economics. However, as is argued throughout Minsky's book, The General Theory contained only "the seeds for a deep intellectual revolution in economics and in the economists' view of society." According to Minsky, the Keynesian revolution was aborted and the seeds were prevented from reaching their full fruition due to the "bastardization" of Keynes' seminal message. Minsky sets himself the task in this book to bring these ideas back to life.

Chapter two explores the more orthodox (conventional) view of Keynesian economics. Chapter three is very good, as it spells out the concepts that are to be used later in Minsky's analysis of capitalism: the recurrence of the business cycle, uncertainty, and investment and disequilibrium.

Chapters 4 - 7 develop Minsky's theory of capitalism. Minsky argues that booms are inevitably followed by crises and debt deflation not because of certain institutional weaknesses, but because of the fundamental nature of capitalism. In other words, "Keynes visualized [the imperfections of the financial system] as systemic rather than accidental or perhaps incidental attributes of capitalism." Minsky explores the way investments are made, and examines how they are financed. Central to Minsky's analysis is the importance of uncertainty. Financing and liability structures cannot insulate themselves from danger (excessive risk) precisely because the future is uncertain. Another important element in Minsky's book is the importance of money, which he describes as as "insurance policy." This is consistent with Keynes' definition of liquidity. In the event that sales proceeds cannot meet existing liabilities, the possession of money becomes essential due to the frequent revaluations of capital assets making their quick sale at certain prices nearly impossible.

I really enjoy Minsky's work, but this book gives me the impression that Minsky was more concerned with fitting Keynes in his (minsky's) own analysis than in explicating very clearly and honestly Keynes' own economic views. This can best be seen in the last two chapters on social policy. Nevertheless, Minsky is the most important expositor of the "Financial Instability Hypothesis" and this book is a great place to begin.

This excellent book examines John Maynard Keynes' key work, The General Theory of Employment, Interest, and Money, published in 1936, seven years into the Great Depression, when one in seven US workers was still out of work.

Keynes' thinking largely broke free of the conventional wisdom, that wrecking the trade unions would make the market work again. But he didn't leave behind all conventional free trade thinking.

Minsky writes, "the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context." Minsky shows that private investment is the constant source of speculation, instability, slumps and mass unemployment.

Minsky shows the conflict at the centre of capitalism: "the boom is critical; it builds an ever-more-demanding liability structure on the base of a cash-flow foundation consisting of the prospective yields of capital assets, which are, because of technology and the limited ability to squeeze workers' real wages, at best constrained ultimately to grow at a steady rate in real terms. The debt base, which grows at an accelerating rate during a boom, is not so constrained. Thus, debts require increased servicing as they grow and as financing charges increase."

He observes, "In Keynes' own view his theory implied that the existing order should be replaced by a much more egalitarian economy, based upon a dominance of social control over investment. As the private, profit-motivated decisions to invest cannot guarantee a reasonable approximation to full employment, `a somewhat comprehensive socialization of investment' (GT, p. 378) will prove necessary." But Keynes breezed over the politics needed to do this. How could we socialise investment without taking power from the capitalist class?

Minsky notes, "Keynes also believed that `if nations can learn to provide themselves with full employment by their domestic policy ... there need be no important economic forces calculated to set the interest of one country against that of its neighbours.'" But if capitalism could do this, it wouldn't be capitalism. Capitalist economies are basically flawed - unstable and unequal, unworkable and unjust.

The author makes a statement that conventional intepretation of Keynes's ideas loses the true meaning and spirit of the real theory of JMK. He offers an alternative interpretation, that connect the debt financing in economy that is always speculative in nature (for the author's opinion) and cyclical behavior of the capitalism. During booms debt financing increases that leads to instability and crises (to make it very simple). Author is very persuasive both in explanation why his interpretation is much closer to real Keynes's views and in explanation of the real cyclical path of capitalism. I recommend this book to all who are interested in macroeconomics, business cycles, financial crises.

Dr. Hyman Minsky has written a very interesting, pertinent, and generally very readable interpretation and exposition of the economics of John Maynard Keynes. Dr. Minsky's exposition is also very well based upon the actual Keynesian economic theory developed in the books and articles by John Keynes. Minsky begins by rejected much of the conventional interpretation of Keynes. Minsky states that too often the conventional Keynesian theory is general equilibrium analysis in effect, where all markets - product, labor, and financial - trend toward an equilibrium.

Dr. Minsky disagrees. He writes that the Keynesian aggregate demand is driven by investment. The consumption function is basically a residual proportion of the aggregate national income or product. A large determination of investment is the price of capital goods (price of investment goods). And the price of capital goods is based upon the quantity of money and the expected annual monetary net returns, or net incomes (revenue less costs), to a unit of investment made by business people and financiers. The annual expected net incomes in particular are subject to changing expectations of would be investors. Thus the price of capital goods and desired investment spending is subject to abrupt changes and does not trend to a market equilibrium. Needless to say Dr. Minsky rejects the near full employment equilibrium market of investment and savings based on the interest rate.

In one major chapter Dr. Minsky develops a cyclic model of the demand for capital assets versus the demand for liquidity (money or near money). In times of boom the demand for new investments and long term capital assets are high. Thus the demand for liquidity is low. Businesses and households go into debt and draw down monetary balances to obtain long term investment assets. Eventually confidence is lost in the long term investments and a contraction begins. Demand for liquidity grows. Long term assets are sold at a loss. The demand for liquidity remains relatively high until the next boom or period of confidence begins. Dr. Minsky's analysis greatly parallels that found in Wesley C. Michell's book Business cycles.

All this interesting analysis should be definitely considered by economists and anyone else interested in economic stabilization and growth.

There is one point, however, I definitely do not agree with Dr. Minsky. Minsky, on the basis of a minor hypothesis of Keynes, divides consumer demand into absolute and relative. Absolute demand is consumer demand based on the consumer demand for items desired without regard to the goods of other consumers such as food, clothing, and shelter. Relative demand is demand for status symbols and other items desired to keep up with other consumers. Dr. Minsky assumes absolute demand remains constant and diminishes proportionally over time as national product increases.

I can not agree. Most Americans would consider air conditioning to be a necessity these days, even though this product was not available in Edwardian England. Most people want air conditioning no matter what their neighbors possess. And air conditioning is increasingly imperative as population density increases and sky scrapers are built in often warm areas. Similar argument can be made in the case of flat screen television sets, cell phones, and other products. And what about the complex medical technology that saves elderly and other lives? What is regarded as necessary changes over time.

I still highly recommend this book for its very informative interpretation of Keynesian economics.

This book contains an excellent summary of what Keynes emphasized in the GT -the impact of uncertainty on long run investment spending,on the rate of interest(liquidity preference and the speculative demand for money),and the subsequent dominating role that various forms of speculation,based on margin account financing and leveraging,would obtain periodically in financial markets both in the USA and the world.Minsky clearly understood the connection between the uncertainty of the GT and the concept of the weight of the evidence analysis from chapter 6 of the TP specified and discussed by Minsky on pp.62-65 of his book.I will append a additional exposition at the end of my review detailing what Minsky missed when he overlooked Keynes's technical analysis of weight ,w,in chpter 26 of the TP .
The main criticism of the book is that Minsky had absolutely no idea about the technical analysis that Keynes presented in the GT in chapters 19(appendix to chapter 19),20 and 21 in the form of elasticities which demonstrated the special case nature of neoclassical economics.Keynes integrated his concept of the weight of the evidence into his elasticities e and ed subscript on pp.304-306 of hte GT.Uncertainty occurs if either e or ed subscript are < 1.The neoclassical risk based approach requires that e and ed subscript equal 1 at all times.There elasticities are linear and additive,always summing to 1.However,this criticism applies to practically all economists,historians,etc.None can follow Keynes's mathematical analysis,although Meade came very close to duplicating Keynes's results in 1937.



I append Keynes's 1921 A Treatise on Probability(TP) form of the analysis below for the interested reader.This is what Minsky missed .It can be found in sections 6-8 of chapter 26 of the TP.The technical details can be found on p.315 and in footnote 2 on p.315 .Keynes presented a very precise analysis demonstrating that an analysis of uncertainty introduced non additivity and non linearity into the formal representation of decision making. The subjectivist, Bayesian approach regards probability as another name for the purely mathematical laws of the probability calculus that requires additivity and linearity. The Subjectivist approach makes the crucial error of conflating probability theory with decision theory.Keynes realized that ,due to the impact of the weight of the evidence (confidence)on decision makers ,as well as the optimism-pessimism of the decision maker,decision theory would have to be able to take into account the importance of non linearity and non additivity. The concept of expected value or utility is crucial to the Ramsey-De Finetti approach.Keynes demonstrated that expected value or expected utility can ,at best,be a special case only of a much more general theory . This is why Keynes's GT is general.It is based directly on a general theory of decision making that covers risk,uncertainty and ignorance.


The Ramsey-De Finetti approach is the mathematical translation of Jeremy Benthem's Benthamite Utilitarian approach.Bentham's approach was that the whole can not be anything more than the sum of the individual ,atomic parts. However, this requires the assumptions of additivity and linearity.Bentham assumed also that all decision makers can calculate the odds.Keynes showed that this was not the case. Keynes's demonstration ,taken from chapter 26 of his A Treatise on Probability(1921;TP),of the special case nature of any expected value(utility) approach ,based on the purely mathematical laws of the probability calculus,shows this to be a very special case when w=1. Bentham claimed that all individuals have the capability to calculate the odds and outcomes and act on the expected utility (the probability times the utility of the outcome) in a rational way.This can be expressed by the following ,where p is the probability of success,q is the probability of failure, and A is the outcome:

Maximize pA.

The modern version of this is to Maximize pU(A),where p is a subjective probability that is additive,linear,precise,and exact and U(A) is a Von Neumann-Morgenstern Utility function. The goal is to

Maximize pU(A).




The modern name for Benthamite Utilitarianism in neoclassical economics is SEU theory(Subjective Expected Utility). Therefore,a microeconomic foundation based on Utility Maximization is just Benthamite Utilitarianism updated with modern mathematical probability techniques.Modern macroeconomics is all disguised SEU theory.

Keynes rejected Benthamite Utilitarianism as a very special case that would only hold under the special assumptions of the subjectivist, Bayesian model-that all probabilities were additive,linear,precise,single number answers that obeyed the purely mathematical laws of the probability calculus.

Keynes specifies his conventional coefficient of risk and weight,c, model in chapter 26 of the TP on p.314 and footnote 2 on p.314,as a counter weight to the Benthamite Utilitarian approach of Ramsey.

Essentially, Keynes's generalized model is given by



c=2pw/(1+q)(1+w),

where w is Keynes's weight of the evidence variable that measures the completeness of the relevant, available evidence upon which the probabilities p and q are calculated.(Benthamite Utilitarians always assume that the value of w is always 1.)w is an index defined on the unit interval between 0 and 1,p is the probability of success,and q is the probability of failure.p+q sum to 1 if they are additive.This requires that w=1.Keynes's c coefficient can be rewritten as

c=p [1/(1+q)][2w/(1+w)].

Now multiply the above by A or U(A).One obtains

cA =p[1/(1+q) ][2w/(1+w)] A or


cU(A)= p[1/(1+q)][2w/(1+w)]U(A).

The goal is to maximuze cA or cU(A).The weight 1/(1+q) deals with non linearity of probability preferences.The weight 2w/(1+w) deals with non additivity.Modern Macroeconomics amounts to nothing more than the claim that c=p or cA [cU(A])= pA [pU(A)] .



It is now straightforward to see that the neoclassical microfoundations of macroeconomics assumes that all probabilities are additive and linear.This is nothing but a special case of Keynes's generalized decision rule to maximize cA,or cU(A),as opposed to the Benthamite Utilitarian rule to maximize pA or pU(A). Economists today have only a very vague,hazy,cloudy understanding of Keynes 's distinction between risk and uncertainty. It is this distinction that has to be grasped first before any economist can have any hope of understanding what Keynes meant in the GT.



The conclusion is very straightforward. SEU theorists use the rule to Maximize pU(A).Keynes used the rule to maximize cU(A).Keynes's rule is of the same kind or type of rule used by the overwhelmingly ambiguity averse decision makers that populated the real world in the past as well as in the present.Keynes's analysis of uncertainty is clearly related to non additivity and non linearity.It is only an anomaly in a neoclassical world of linearity and additivity that exists for Benthamite Utilitarians.

"But if capitalism is to be controlled so that the basic triad of efficiency, justice, and liberty is achieved, then the design of the controls will have to be enlightened by an awareness of what was obvious to Keynes--that with regard to both the stability of employment and the distribution of income, capitalism is flawed" -- Hyman P. Minsky

Hyman Minsky's 'John Maynard Keynes' is comprised of three parts. The first part, CH 1-3, deals with Keynes' General Theory, it's historical situation, and Keynes' later comments on the meaning of the GT. The second part of the book, CH 4-6, deals with Minsky's elaboration on crucial parts of the GT and revisions regarding some of Keynes' contradictory logic. The last section, CH 7-9, is Minsky's policy regarding what should be done to fulfill the aborted Keynesian Revolution.

'John Maynard Keynes' is a renunciation of the neoclassical synthesis. From the ashes rises a new theory of investment and business cycles. A perpetual series of booms and busts occur followed by a deflationary spiral. Eventually, after an unduly long period, the economy bounces back into an inflationary boom. Each time society thinks the cycle no longer exists: each time they are mistaken. The monetary and fiscal policy of the neoclassical synthesis is a poor prescription for this cycle and is becoming less effective at dealing with crisis's.

What is needed is government policy to reduce inequality and the complete socialization of investment. With less inequality investment will play a smaller role in aggregate demand. With the complete socialization of investment aggregate demand and employment can be controlled and maintained at potential. Ironically, it is only after investment has been socialized that the markets will act according to classical theory. So far Keynes' policy prescriptions have been perverted into 'socialism for the rich'. Keynes' advice needs to be implemented to create a more efficient, just, and liberal society.

With that said: This book is very limited in subject matter. It is a book primarily concerned with investment and its effect on the business cycle. For a more comprehensive macroeconomic analysis read Hyman Minsky's magnum opus 'Stabilizing an Unstable Economy'. JMK can be seen as a rough draft of Minsky's Financial Instability Hypothesis. I recommend Minsky to anyone willing to challenge economic dogma and learn how the economy actually works.

I am not trained in economics, but I have been trying to educate myself. I read Mr Keynes 1935 book, The General Theory...and didn't understand much of it. So I bought Mr Minsky's book, and alas, the results were not much better. There must be a reason they call it, the dismal science.