Published by Levy Economics Institute of Bard College

As always with a Galbraith at the keyboard, this is a delight. Taken almost verbatim from the lecture mentioned below:

Twenty-five years ago, on a brilliant winter day at Alta, I skied off the top of the Sugarloaf lift and heard a familiar voice asking for directions. It was William F. Buckley Jr. I pulled off my hat and went over to say hello.  Buckley greeted me, then turned to a small man at his side wrapped in a quilted green parka topped with a matching forest green stocking cap and wraparound sunglasses in the punk style. “Of course,” Buckley said, “you know Milton Friedman.”

Last fall, when I received an invitation to deliver the 25th Annual Milton Friedman Distinguished Lecture at Marietta College, my first act was to notify Buckley, already then quite ill. I warned that he couldn’t publish on it or the invitation might be revoked. The e-mail came back instantly, full of exclamation points, block caps, and misspellings. “Congratulations! What a wonderful opportunity to REPENT!”

The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that challenge the classic precepts of Smith and Walras, who implied that the economy can be best understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The theoretical argument of the FIH emerges from the characterization of the economy as a capitalist economy with extensive capital assets and a sophisticated financial system.

In spite of the complexity of financial relations, the key determinant of system behavior remains the level of profits: the FIH incorporates a view in which aggregate demand determines profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The FIH, therefore, considers the impact of debt on system behavior and also includes the manner in which debt is validated.

Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying" system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a capitalist economy that does not rely on exogenous shocks to generate business cycles of varying severity: business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.

We already have the financial wherewithal needed to afford whatever is technologically possible. We do not need to go hat-in-hand to rich folks to get them to pay for it. We do not have to beggar our grandkids to pay for it. We do not have to borrow from China to pay for it. We do not have to get the Fed to “print money” to pay for it. All we need to do is to remove the self-imposed constraints, the myths, and the misplaced morality; then budget for it, approve the budget, and spend. No new spending process is required. Follow the normal procedures that the Fed and Treasury have developed. That is how you pay for it.

As the great J. Fagg Foster (1981) said, “Whatever is technologically possible is financially feasible.” There is really no other reason to have a financial system. If you know how to build houses but your financial system cannot find a way to make them affordable, then you must replace that system with one that will.

It is possible that we will need to constrain domestic consumption in order to release resources for the GND effort in a noninflationary manner. The problem is not that we cannot financially afford the GND—government can always bid resources away from private use by paying higher prices—but spending on the GND will generate private income that can support higher bids in competition with the government for scarce resources. This is the real reason that tax hikes might be desirable: to reduce private income and thereby remove competition for resources.