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.

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

  1. I think Lerner’s “Flation” is suggestive of his struggle to retain the functional finance approach while accounting for institutional difficulties. I found his thinking there rather interesting and it’s unfortunate he later abandoned it for the monetarist line.

  2. Aren’t we back to the warning from Keynes:

    “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

    It’s important to learn from history of course, but just because somebody changed path in the past, doesn’t mean they were right on that or that what they said before was wrong. The idea has to be re-assessed on its merits in the now by somebody working today.

    There are underlying philosophical axioms here – beliefs – about the way institutions work. Do they defend labour against capital. Do they oppress labour on behalf of capital. I can understand the trepidation of the liberals who want it all to work ‘naturally’ like magic. The problem is that without magic it won’t work on its own. So we have to have some people making decisions on behalf of others whatever we might ideally prefer.

    There is a clear philosophical divide between the technocrats – who think politicians are essentially stupid and unable to think beyond next week – and the democrats – who think politicians probably are a bit short term in their thinking but are allowed to make a hash of things because the people gave them the power to do so.

    The Monetarist argument is essentially that discretion should be removed from the politicians and given to a technocratic cabal of the elite who know about these things. Unlike Lerner we now know how that story ends – with a massive financial crash along the lines Minsky predicted.

    Contrast this with the MMT approach, which is to get rid of the technocrats *and* the democrats and rely on the auto-stabilisers – enhanced with a country wide Job Guarantee scheme. The Job Guarantee is faster responding than jiggling interest rates, more precise, more effective and more productive than borrowing money from banks. Banks whose primary skill is in discounting collateral, not assessing the long term viability of business plans.

    Every time I see an assessment of the interest rate approach it is always contrasted with *discretionary* public spending – never *automatic* public spending via a Job Guarantee and *automatic* tax cuts via income/spending progressive taxation.

    We know auto stabilisers work and work well. We just need to make them acceptable to the public and able to pick up the productive slack if need be.

    Within this framework the public purpose then gets split in two.

    First you have needed public goods that are best provided publicly – like healthcare and education, infrastructure investment, and the military. Those are required whatever the economic weather and should be paid for on a balanced budget basis. The state has first call on the resources of the nation and bars the private sector from using those resources via taxation and other state power mechanisms.

    Then the private sector gets to play markets with the remaining resources.

    And after the private sector has finished playing, the state hoovers up what is unused and unrequired to provide the ‘nice to have’ public goods – largely via the Job Guarantee and progressive taxation, based on social value not market value. This will unbalance the budget as required to offset whatever the private sector is up to at that point in time.

    Lerner and Minsky gave us a great deal and we stand on the shoulders of giants. But we have learned more. We understand chaotic systems better. We have better tools. And that’s why the MMT proposal has evolved to where it is today.

  3. This looks to me like it is going to be a very important piece of work! Like many, I was very grateful to see the Minsky lecture when it was put out a few months ago on the internet, but also, as you acknowledge, somewhat puzzled. My main takeaway from your slides, as it was from the lecture originally, is the importance of the ‘validity’ of debt. I don’t see this as opposition to the MMT progressive programme, but rather as an important development. Even if quantity of public debt is not per se an issue, yes quality of debt matters. This takes the argument even deeper to the conservatives, who after-all are the principal architects of public debt expansion since the 1980s, not progressives. Deficit spending for transfers and military (the conservative agenda) is not good enough. There must be productive resource creation to validate public debt. MMT has not ignited the progressive agenda, as I had expected it to. It has been too easy for George Osborne (as a prominent example) to dismiss MMT with a catch-phrase (there is no ‘Magic Money Tree’). The political case for ‘validating’ public debt is already well set out (if only the politicians were listening) in “Rethinking Capitalism” edited by Mariana Mazzucato and Mark Jacobs, but much work remains to ‘change the weather’.

  4. Wow. Thanks much for this Professor Wray.

  5. Slides not working?

  6. madcapMongoose

    Hi Randy,

    Interesting history in your post, thanks for sharing.

    Didn’t anyone from Levy Institute/UMKC ever get an opportunity to discuss Minsky’s post-Reagan writings with him to get clarification?

    Also, I find it surprising that Lerner and, to a lesser extent, Minsky would have modified their views on Functional Finance during the 70s because of inflationary concerns if the inflation was largely due to oil price shocks and not excessive government spending. Am I missing something? In the face of a supply shock does government necessarily have to raise taxes/cut spending or is there some other more appropriate response from monetary policy side of things?


    • Lerner explicitly argued spending cuts in response to the type of inflation affecting the country would increase unemployment without inhibiting further rise of the price level. Turns out he was right but it seems self-doubt obscured this from his vision.

    • I have wondered if raising taxes on oil during the 70s might have rushed the switch to alternative energy and also have confined the inflation to the oil sector while protecting some other sectors from the induced inflation. I don’t think I have the skills or the time to fully analyze this conjecture. As you can see in my post below, if it is approved, LBJ didn’t help by triggering this all with his guns and butter policy during the Vietnam war. That was the beginning of too much government and private spending for the resources and supply to keep up.

  7. “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.”

    This is exactly why I think it important for MMT proponents to analyze what happened in the 60s to 80s in light of the new understanding represented by MMT.

    What I see written in this post gives me the feeling that Minsky and Lerner fell victim to not understanding that Keynes explanation of both boom and bust were right. You cannot learn eternal truths that always apply when you only look at one of those two. What is appropriate in a boom (high inflation) is not going to be appropriate in a bust (depression). I think MMT is bringing this understanding back into our collective memories. Having learned my economics in the early 60s, I don’t seem to ever have lost sight of recognizing two extremes of the economy require quite different approaches.

    Having lived through the inflationary period, the way I remember the history is that LBJ refused to raise the taxes to pull the money out of private hands, so that the government could use that money to tie up the resources necessary to fight the Vietnam war. While we were blowing up resources in Vietnam and tying up 1 million people in the military, there just could not be enough supply to meet the demand. As I recall, this incipient inflation is what drove OPEC to drastically raising oil prices. In both parts of the period, our government and the economies reactions just prolonged the agony until Ronald Reagan cut odd the demand for oil by putting us into a very steep recession.

    I would hope that an analysis of this history in the light of MMT would come up with solutions that could have been used to bring about a less painful adjustment than what we have endured over the last 50 years.

    Is there a MMT expert that wants to take up to the challenge? Perhaps a PhD student could take this up as a topic of her or his dissertation.

    • Steve, it is highly unlikely that a foreign power would decide to create hollywood-level disaster to so many in a short period of time outside of some potentially more insidious financial weapon. No hacks required. No explosions, just subtle carnage, that can be controlled and diminshed, like the financial crisis (act of terror). We can’t, however, rule out the usefullness of a not so foreign power pulling a stunt or two with an actual utility to solidify control of “hearts and minds”.

      The fictional, unsubstantiated nonsense of an external phantasm is a purposefully contrived fear that markets and sustains billion dollar industries. MMT doesn’t seem to go there, so let’s shift gears and try a pedestrian criticism of what is lacking in MMT or Minsky. (and wait for moderation)

      How about a war on poverty where we don’t lose? “Everyone who is willing and able to work” is nearly meaningless but has been touted as a foundational belief by Minksy and his fans. As there are people who prefer, out of patriotism, out of a sense of duty, or out of some intrinsic belief, or concept of morality that people “must be working for their own good” we’ll need to oblidge an empty definition, but we can’t allow the toxic effects of these beliefs to influence policy – which inevitably shields draconian authoritarianism, and ceaselessly continues to damage any number of people at any given time.

      Minsky needs to be celebrated, but also criticized (as does MMT), but my quick post does neither. But this blog doesn’t seem to have a substantially deep visitor element. Why?

      For those who lived during the time – to say that the War on Poverty was a complete failure is just intolerable cyncism – Minsky’s familiar condenmnation, which comes across as an arrogant conservative artifice, is astoundingly depressing. The popularity of such wrath is further evidence the country is regressing. “Let’s run to Minksy because financial crisis.” God help us!

  8. Cut off demand, not cut odd demand.

  9. You know, my comments that are still awaiting moderation are not just academic exercises. You can brush of the inflation of the 70s as just an aberation caused by a supply disruption from an external force (OPEC), but what would MMT and sovereign money suggest if we had another such supply disruption. That is what caused all other known hyper inflations, supply disruption. There is no telling what will be the cause of the next supply disruption, but it wouldn’t hurt to think ahead as to what we might do.

    Here are some possible supply disruptions that could happen.

    1. A foreign power could take down our computer controlled utility grid.
    2. Global climate change could raise the sea levels enough to take out all manufacturing that is located
    near a coastline.
    3. Let your minds run wild as to what surprises could be in store for us.
    4. China could decide no more lithium for us and our lithium batteries.

    • “That is what caused all other known hyper inflations, supply disruption.” ????

      The German war reparation hyperinflation was caused by – foreign exchange market effect. Printed money to buy foreign exchange to buy gold. => Massive import inflation. Hyperinflation is an FX market phenomenon. Institutional control of FX, not supply disruption. (Expecting arguments/dispute about this.) There are other types of inflation. But hyperinflation is FX.

  10. Great to see Minsky on video. “US is not resource constrained. US economy is politically constrained.” Bravo.

    Public infrastructure as resource creation.

    Minsky the myth killer.