Post-Keynesian Economics

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

Hyman Minsky spent most of his career, at Berkeley, Washington University in St. Louis and finally the Levy Economics Institute, arguing a claim mainstream macroeconomics of his era had no real place for: that financial crises are not external shocks that hit an otherwise stable economy, but the predictable, endogenous product of stability itself. His financial instability hypothesis, developed across the 1970s and 1980s and collected in his 1986 book Stabilizing an Unstable Economy, described three stages of borrower financing. Hedge finance covers both principal and interest from current income. Speculative finance covers interest but must roll over principal. Ponzi finance covers neither and depends on the asset's price continuing to rise.

Minsky's argument was that a long period of economic calm does not simply continue; it changes behavior. Success breeds confidence, confidence breeds leverage, and an economy that starts a boom dominated by cautious hedge financing drifts, borrower by borrower and lender by lender, toward speculative and eventually Ponzi financing, until some ordinary disturbance triggers what came to be called, decades later, a Minsky moment: a sudden collapse of confidence in which asset prices fall, lenders refuse to roll over debt, and borrowers who depended on rising prices to service their loans are forced to sell, pushing prices down further.

Minsky's work was marginal to mainstream macroeconomics for most of his lifetime; he died in 1996, more than a decade before the 2008 financial crisis made his description of subprime mortgage lending's slide from hedge to Ponzi financing look less like a heterodox curiosity and more like a field guide. Central bankers and financial commentators who had never read him began invoking his name within weeks of the crisis, a rare case of a school this atlas records as debated moving, briefly, close to consensus.

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

Post-Keynesian economics takes its name from a claim that sounds strange until its history is explained: that the 'Keynesian economics' taught in most universities after the Second World War, the neoclassical synthesis built by John Hicks, Paul Samuelson and others into a tidy IS-LM model of temporary market frictions, was not really what John Maynard Keynes had argued in his 1936 General Theory. Joan Robinson, who worked alongside Keynes at Cambridge in the 1930s and helped shape the General Theory before its publication, spent much of her later career arguing exactly this, calling the synthesis 'bastard Keynesianism.'

Robinson and the economists who gathered around her at Cambridge held that Keynes's real insight was not a temporary wage-and-price rigidity that better policy could eventually smooth away, but a permanent condition: an economy operating under fundamental uncertainty, where the future cannot be reduced to a known probability distribution, will not reliably find full employment on its own, in good times or bad. Michal Kalecki, working independently in Poland, had reached strikingly similar conclusions about effective demand and income distribution before Keynes published, giving the post-Keynesian tradition an alternative founding figure alongside Keynes himself.

Hyman Minsky's financial instability hypothesis, extending this uncertainty-centered reading of Keynes into a theory of how financial systems generate their own crises, became post-Keynesian economics' best-known twentieth-century contribution. But the field's founding argument remained Robinson's: that mainstream economics had domesticated Keynes into a special case of the equilibrium theory he had written the General Theory to overturn.