MINSKY AND MODERN MONEY THEORY: Was Minsky a “forefather”?

By L. Randall Wray

A few weeks ago, a video of a lecture that Hyman Minsky gave at Westminster College on Oct 30, 1991 was made available. Although the Levy Institute has some audio of Minsky, this is the only video I know of. The audio of this one is not great, but you will get some flavor of his style. In truth, it was always a bit hard to follow his presentations as he had a tendency to lower his voice and mumble near the end of sentences as his mind raced ahead to the next point. He usually did not script his talks (he walked into many of his university lectures with nothing more than a copy of the Wall Street Journal), but he would read some brief sections of papers—while riffing the rest–and it appears that this is what he was doing that evening.

During the period 1991-93, Minsky was preparing a new book manuscript. He had started to heavily revise his 1986 Stabilizing an Unstable Economy book, but shifted gears and instead was revamping more recent Levy working papers as chapters for an entirely new book. I suspect that this speech was based on one or more of those papers. At the Levy Institute we have been editing his manuscript for (I hope) eventual publication.

After viewing Minsky’s talk, some have concluded that Minsky’s views are not consistent with MMT—and have even argued that Minsky was not a forefather.

I would argue that that cannot be correct for the following (I think indisputable) reason: UMKC has played a major role in the creation and dissemination of MMT. Minsky’s influence on all of those at UMKC who contributed to MMT was significant, indeed, critical. I got my macroeconomics from Minsky. While I had read (and appreciated) Keynes before I went to study with Minsky, in truth I didn’t really like macro much and probably would have studied political economy and labor economics if I had not studied with him. It was Minsky who helped me to form my approach to macroeconomics.

And it was Minsky who inoculated me with the main components underlying the approach that we call Modern Money Theory: government cannot go broke in its own currency, taxes create a demand for that currency, the sectoral balances approach, the Kalecki profits equation, the employer of last resort proposal, the benefits of floating exchange rates, the private benefits of government deficits and debt, and—yes—the financial instability hypothesis. While it is true that Minsky did not assemble them in the same way that MMT has done, without Minsky, it is highly unlikely that I would have been open to these fundamental building blocks when I later met Warren Mosler and Bill Mitchell. I do not want to speak for the others associated with the “Kansas City Approach”, but almost all of them were my students either formally or informally. To deny Minsky is also to deny the role played by UMKC in the development of MMT.

Now, to the specific complaint that Minsky appears to abandon functional finance and adopt the deficit-dove (or even deficit-hawk) approach, I do admit that Minsky says some puzzling things in the video. Indeed, some of his post-Reaganomics writing has puzzled me and my students every time I teach a course on Minsky (first at Denver, then at UMKC, and now at Levy and Bard). It appears that his views shifted and he took a harder line against big deficits. It is hard to reconcile this later writing with his earlier writing—which was very clear on the topic. I was never able to give a good answer when students brought it up in class.

So, I decided to tackle this—first for a presentation I am giving at the Eastern Economic Association meetings this week in NYC and then in a paper. The powerpoint is finished and I’ve accumulated a huge quantity of quotes from Minsky’s writings since the 1950s through to 1994 that shed light on his views. While there was some transformation over the period, there was no radical change, nor any significant repudiation of his early views.

As is always the case, one can obtain a better understanding of the views of another by looking carefully and the writing, rather than from a speech. A speaker in front of an audience needs to simplify and entertain. Sometimes one says things that one did not mean to say, and even that one later regrets. While there might be a few ill-phrased comments in the Minsky speech, if we put the speech in the context of his writings during this period, it becomes clear that he was no Krugman lite, no deficit dove.

So far as I recall, it was Mat Forstater who brought Lerner’s functional finance to MMT. Coincidentally, Lerner had been at UMKC (actually, at the private college that became UMKC later) in the 1940s when he wrote one of his famous papers; he was also at the New School where Mat studied. As all the readers know, Lerner’s contributions include the two principles of functional finance, the metaphor of the government guiding the economy with a steering wheel, and Lerner’s version of Knapp’s “state money”.

One claim is that Minsky abandoned Lerner’s functional finance approach and violated “Lerner’s Law”, hence, Minsky cannot be claimed as a forefather. I’ll examine that claim in my talk and my paper. The answer is YES. And NO.

I do not recall Minsky ever discussing functional finance inside or outside the classroom. I’ve only found one mention of it—in a 1960 paper. On one hand, this seems strange—given Minsky’s views on deficits and debts as well as his close relationship to Lerner (who he always claimed as one of his major influences). On the other hand—as I’ll argue—Minsky must have seen both the functional finance approach as well as Lerner’s “steering wheel” arguments (mentioned in the video) as too mechanistic. I think he would have rejected simplified versions of both of these in the same way that he rejected Alvin Hansen’s interpretation of Keynes—as devoid of institutional realities. (While Minsky was Hansen’s teaching assistant, he told me he chose not to work with him because of his “mechanical” approach to Keynes—Minsky chose Schumpeter instead.) From the early 1960s, Minsky had a more nuanced version.

Finally, I will note that Lerner also abandoned his simpler functional finance approach, and repudiated “Lerner’s Law” in his later work—I think for much the same reason that Minsky had a decade earlier.

Lerner came to see that it ignored institutional realities, formulating policy aimed exclusively at a macro level while ignoring what he saw as micro or market analysis. Minsky had been trained in the Chicago version of institutionalism and so would not adopt a simplistic approach to macro—so he was quicker to realize the problem with taking functional finance too literally.

Lerner’s rejection of his earlier views is explained in a 1977 article where he argues that demand management should be left to monetary policy and placed under the control of the central bank. Fiscal policy should be directed to improving economic efficiency and income distribution. He argues that any increased government spending needs to be offset by a reduction of spending elsewhere—this could be reduction of some other government spending but he advocates instead a tax increase that would reduce private spending. Ironically, Lerner replaces functional finance with a sound finance approach—not because government would run out of money, but because he worried about the inflationary impact. He goes even further than the deficit dove position, for he no longer would have the deficit expand in recession—on the argument that monetary policy alone could “steer” the economy.

This is somewhat in line with what Minsky was arguing, although Minsky’s views (as always) were better grounded in institutional reality—and he never adopted the Monetarist line that the Fed should be responsible for “demand management”. Why did both of them abandon the simple version of functional finance? I think that it is in part because those who lived through the accelerating inflation of the 1960s to the 1980s were traumatized by the experience. Lerner replaced functional finance with a combination of a certain kind of wage and price controls (marketed “permits” allowing wage or price hikes) plus Monetarism.

Minsky instead argued for targeted rather than general government spending, and, especially, use of the employer of last resort program to achieve full employment without inflation and also greater wage and income equality.

I believe that it is Minsky, not Lerner, who is far more relevant to the development of MMT.

My powerpoint is below, so you can get a preview of my arguments. Obviously, I had to limit the number and length of quotes, and I cannot provide a lot of textual explanation. So you’ll have to wait for the paper to get all the details but this might whet your appetite.