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Capitalism worsens income gap and fosters instability
By Wan Lixin |
January 21, 2012, Saturday
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Print Edition
Print Edition
THE late professor Hyman P. Minsky's "Stabilizing an Unstable Economy" explains why capitalism is inherently unstable and how government responses affect the economy.
The work was first published in 1986, well before the 2008 financial meltdown in the United States, and the latest crisis actually makes the book more relevant.
As the economist who lent his name to "the Minsky Moment," that point in time when markets tip from prosperity to crisis, Minsky's concern about income inequality correctly identifies a condition that is at once the cause and consequence of the unbridled competition that has come to define the modern capitalist economy.
While acknowledging free markets to be the most efficient way to deliver goods and services to meet demand, Minsky also points out that free markets fail to foster stability, and drastically worsen income disparity.
In other words, while markets can efficiently manage daily supply and demand, they cannot properly handle such important issues as distribution, development and education.
And these issues have since been eclipsed by another life-or-death issue: our increasingly victimized environment.
Minsky predicts that if left unchecked, capitalism can create unseemly concentrations of wealth while overgenerous government transfer payments create social instability and inflation.
Such analysis suggests that in a capitalist economy, the bubbles, booms and busts that often provoke surprises of euphoria or groans are actually innate parts of capitalism.
The reasons why the US has not experienced another Great Depression is a result of "Big Government," he writes.
Thanks to the governmental role, capitalists no longer need to pay the full measure for their greed, as when ruined businessmen flung themselves from buildings during the early hours of the Great Depression.
Now all society pays for the excesses of capitalists with inflation.
The government attempts at bailouts encourage investors to take more risks in the future, setting stage for more booms and busts.
"The interventions ... to protect financial institutions from the life-threatening effects of their behavior have led to an economy that fluctuates ... between financial crises and accelerating inflations," Minsky writes.
Minsky's analysis largely dovetails with Marxist theories.
In Marxist terms, the economic crises are crises of overproduction and "immiseration" (or impoverishment) of the workers.
As the capitalists steadily raise the rate of surplus value by pushing down labor wages, the capitalist economy is confronted with overproduction and under-consumption, or inadequate aggregate demand.
The subsequent proletariat revolution Marx predicted did not happen because governments began to resort to deficits and stimulus to shore up corporate profits, thanks to macroeconomic policies conceived by economists like John Maynard Keynes, or neoclassical economists.
According to neoclassical theory, markets will self-adjust to reach new equilibrium, while the instability is just a minor inconvenience.
Minsky believes "the neoclassical model is a weak intellectual and logical reed to lean on in explaining the behavior of and in formulating policy for our economy."
The book is written in view of the US conditions, but can also shed light on Chinese problems.
After three decades of markets reforms, China has to slow down, if just to take stock of the costs of its heady growth.
In the case of China, the market has certainly unleashed powerful forces. The challenge now is how to tame these forces.
The work was first published in 1986, well before the 2008 financial meltdown in the United States, and the latest crisis actually makes the book more relevant.
As the economist who lent his name to "the Minsky Moment," that point in time when markets tip from prosperity to crisis, Minsky's concern about income inequality correctly identifies a condition that is at once the cause and consequence of the unbridled competition that has come to define the modern capitalist economy.
While acknowledging free markets to be the most efficient way to deliver goods and services to meet demand, Minsky also points out that free markets fail to foster stability, and drastically worsen income disparity.
In other words, while markets can efficiently manage daily supply and demand, they cannot properly handle such important issues as distribution, development and education.
And these issues have since been eclipsed by another life-or-death issue: our increasingly victimized environment.
Minsky predicts that if left unchecked, capitalism can create unseemly concentrations of wealth while overgenerous government transfer payments create social instability and inflation.
Such analysis suggests that in a capitalist economy, the bubbles, booms and busts that often provoke surprises of euphoria or groans are actually innate parts of capitalism.
The reasons why the US has not experienced another Great Depression is a result of "Big Government," he writes.
Thanks to the governmental role, capitalists no longer need to pay the full measure for their greed, as when ruined businessmen flung themselves from buildings during the early hours of the Great Depression.
Now all society pays for the excesses of capitalists with inflation.
The government attempts at bailouts encourage investors to take more risks in the future, setting stage for more booms and busts.
"The interventions ... to protect financial institutions from the life-threatening effects of their behavior have led to an economy that fluctuates ... between financial crises and accelerating inflations," Minsky writes.
Minsky's analysis largely dovetails with Marxist theories.
In Marxist terms, the economic crises are crises of overproduction and "immiseration" (or impoverishment) of the workers.
As the capitalists steadily raise the rate of surplus value by pushing down labor wages, the capitalist economy is confronted with overproduction and under-consumption, or inadequate aggregate demand.
The subsequent proletariat revolution Marx predicted did not happen because governments began to resort to deficits and stimulus to shore up corporate profits, thanks to macroeconomic policies conceived by economists like John Maynard Keynes, or neoclassical economists.
According to neoclassical theory, markets will self-adjust to reach new equilibrium, while the instability is just a minor inconvenience.
Minsky believes "the neoclassical model is a weak intellectual and logical reed to lean on in explaining the behavior of and in formulating policy for our economy."
The book is written in view of the US conditions, but can also shed light on Chinese problems.
After three decades of markets reforms, China has to slow down, if just to take stock of the costs of its heady growth.
In the case of China, the market has certainly unleashed powerful forces. The challenge now is how to tame these forces.
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