The Economic Legacy of Hyman Minsky, Volume I
Edited by Riccardo Bellofiore and Piero Ferri
Chapter 8: Minsky, modern finance and the case of Long Term Capital Management
8. Minsky, modern ﬁnance and the case of Long Term Capital Management Perry Mehrling This chapter is motivated by a paradox. Writing in 1967, Minsky summarized the core idea around which all his mature theories were developed: ‘Capitalism is essentially a ﬁnancial system, and the peculiar behavioral attributes of a capitalist economy center around the impact of ﬁnance upon system behavior’ (Minsky, 1967, p. 33, my emphasis). At the time these words were written, probably few economists would have agreed with them, and fewer still members of the general public. Today, by contrast, the same statement would arguably command general assent, and perhaps even more so among the general public than among economists, but that doesn’t mean we are all Minskians now. The ﬁnance that has become the dominant world-view is not the ﬁnance of Hyman Minsky but rather the ﬁnance of Nobel prize winners Robert Merton, Myron Scholes and their associates. Although they purport to be about the same ﬁnancial system, the theory of Minsky and that of modern ﬁnance are about as orthogonal as any two theories can possibly be. So different are they that Minsky, never shy about criticizing views with which he disagreed, never even mentioned modern ﬁnance in his published writings, and the disregard appears to have been mutual. The starting-point of the present chapter is the premise that Minsky and modern ﬁnance each have part of the story, but only part, so that communication between the two approaches is critically important for future intellectual...
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