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Why capitalism fails

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    Why capitalism fails

    The man who saw the meltdown coming had another troubling insight: it will happen again

    By Stephen Mihm, Globe Correspondent | September 13, 2009

    Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own. Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

    Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a “Minsky moment,” and a growing number of insiders began to warn of a coming “Minsky meltdown.”

    “Minsky” was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.

    In recent months Minsky’s star has only risen. Nobel Prize-winning economists talk about incorporating his insights, and copies of his books are back in print and selling well. He’s gone from being a nearly forgotten figure to a key player in the debate over how to fix the financial system.

    But if Minsky was as right as he seems to have been, the news is not exactly encouraging. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

    In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

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  • #2
    Re: Why capitalism fails

    Originally posted by ThePythonicCow View Post
    Why capitalism fails

    The man who saw the meltdown coming had another troubling insight: it will happen again
    Steve Keen has been banging on about Minsky for a while and I believe much of his own work has some what of a basis in Minskys' work.

    Time to read some Minsky

    Published in March 10th, 2008
    Posted by Steve Keen in Uncategorized
    The current turmoil on the Stock Market—and especially the sudden collapse of many once high-flyers—has taken a lot of people by surprise.
    One person who, were he alive today, wouldn’t be the least bit surprised, is Hyman Minsky, who predicted that events like this would be a regular feature of a deregulated financial system.
    He developed what he called “The Financial Instability Hypothesis”, and anyone who wants to understand today’s events needs to know about it.
    The following is an extract from an article by Minsky in Challenge in 1977—well before even the 1987 Stock Market Crash—that provides a nutshell-sized precis of his theory.

    Although he argues that an economist called Sraffa is of more importance to economics because his theory undermined the edifice of Micro economics and hence Macro economics - supply and demand theory , international trade theory etc. etc.., in other words he (Keen) is saying the foundation of economics is built on sand, and it has been known and proved for many years but was ignored.

    is the division of mainstream economists into effective 'castes' with only a tiny but exalted subset of the profession undertaking the detailed mathematical work needed to discover the weakness in the theory. The vast majority of economists believe that this high caste, the mathematical economists, did their work properly and prove that the theory is internally consistent. The caste has indeed done its work properly but it has proven precisely the opposite.

    Sraffa's call in 1926, by showing that the superficially robust edifice of the microeconomics of production is in fact devoid of content. Its canonical model, of perfect competition, is untenable, while its canonical insight, that equating marginal cost and marginal revenue maximizes profit, is invalid in a dynamic setting.[1] What then should economics do? We would argue that microeconomics has to become an empirical discipline. Rather than trying to prove results about firms and market structures from a priori reasoning

    Geez, all that time and effort, they could have just asked Joe Blogs, who would have told them economics is a load of bollocks, and saved them the pain :-P
    Last edited by Diarmuid; 09-14-09, 07:50 AM.
    "that each simple substance has relations which express all the others"