Hyman P. Minsky: Finance and Stability: The Limits of Capitalism

Hyman P. Minsky discusses Finance and Stability: The Limits of Capitalism.

One reason capitalism won and the Soviet version of socialism lost was that the Lenin-Stalin version of socialism allowed for only one form, the highly centralized linear command model, whereas, as the call for this conference recognizes, capitalism comes in many forms. The successful capitalisms of the 1950's through the 1970's were not the same as the capitalisms that failed in the 1930's. In general a system which we can characterize as a small government gold standard constrained laissez-faire capitalism was replaced by a big government flexible central bank interventionist capitalism. As Kalecki and Jerome Levy pointed out, a government deficit is the equivalent of investment as far as the maintaining of the profits of enterprise is concerned. The big government capitalism put in place in the 1930's and after World War II were and still are protected from a severe fall in aggregate profits, such as occurred in the great contraction of 1929-33.

Emphasis Mine. pp.5-6

This was certainly the problem with Socialism after the 1917 revolution and the formation of the USSR. Given that a Socialist country had just survived a near-death experiences in the Russian Civil War and the Great Patriotic War. In both cases, the USSR was able to emerge stronger and defeat its enemies.

Unfortunately, the means that the USSR used to achieve their victories proved not to be appropriate in the post-war years. The USSR went through several phases:

• War Communism (1918-1921)
• New Economic Policy (1921-1928)
• Great Break (USSR) (1928-1929)
• Five-year plans of the Soviet Union (1928-1991)

Except for the period of the New Economic Policy, all of the other phases relied on centralised control of the economy. The great advantage of this was the rapid development of the productive forces which was necessary because Russia was primarily an agricultural country (indeed, a peasant-based economy).

Minksy did not realised that Capitalism has been Finance Capitalism since the early 20th century:

As a result of the security market reforms of the Roosevelt era the law caught up with the fact that modern capitalism is corporate capitalism.

Emphasis Mine. p.13

Minksy admits that Marx's thesis that the long-term trend of decreasing rates of profit without acknowledging the source:

Once current profits fall by enough, or the carrying costs of debts increases by enough, so that the cash flows earned by operations or from financial assets by highly indebted operations are insufficient to meet commitments on liabilities then the pressure of the need to validate debts (and to meet withdrawals by depository institutions) leads to a proliferation of attempts to make positions by selling out positions. The result can be a sharp fall in asset values. A downward spiral is a possibility in which investment ceases and profits evaporate: the end result of over indebtedness can be a great or a serious depression. Although the obvious flaw in capitalism centers around its inability to maintain a close approximation to full employment, its deeper flaw centers around the way the financial system affects the prices and demands of outputs and assets, so that from time to time debts and debt servicing rise relative to incomes so that conditions conducive to financial crises are endogenously generated. Such a crisis, if not contained by a combination of Central Bank lender of last resort interventions, which sustain asset prices, and government deficits, which sustain profits, leads first to a collapse of investment and then to a long lasting depression accompanied by mass unemployment. This financial flaw cannot be eradicated from the corporate form of market capitalism, in which liabilities exist that are prior commitments of the gross nominal profit flows of corporations. Reforms which constrain the possibility of using excessive debts for specified purposes were part of the new model capitalism of the 1930's. Many aspects of these constraints were relaxed by the 1980's, especially critical constraints upon the assets eligible for the portfolios of the Savings and Loan Associations were relaxed. The result was a series of crises of financial institutions and corporate indebtedness. A big depression did not happen in the early 1990's because the government validated the debts of the financial institutions that became insolvent and the huge government deficits sustained profits.

Emphasis Mine. pp.18-19

This is a succinct prescription of the current Capitalist crisis.