Blinder on Minsky on the efficient market hypothesis

[Hyman] Minsky, who died in 1996, may have had the highest ratio of importance to influence of any economist in the twentieth century. He argued for years that financial fragility and recurring cycles of boom and bust (rather than equilibrium) should be the central concepts in theorizing about financial markets and the macroeconomy. Instead of assuming that markets are efficient and expectations are rational, he wrote, economists should assume that markets regularly go to extremes and that people forget. When the profession was being swept by the efficient-market tide, this was deeply contrarian thinking, but I think he was basically correct.

The financial world envisioned by Minsky is different in every respect from the one posited by the efficient-market hypothesis. As long as the good times roll, people lose sight of the bitter lessons of the past, claiming that “this time is different.” Financial excesses grow more severe as bubbles progress, creating greater vulnerability to shocks and more damage when the bubbles finally burst. The crashes themselves always seem to come as surprises, after which sentiment swings radically in the other direction: people shun risk, pessimism rules, and the economy struggles. This all sounds like an accurate description of what happened in the United States and elsewhere between, say, 2000 and 2010. But Minsky is barely mentioned in this volume.?

Alan S. Blinder, “Can Economists Learn? The Right Lessons From the Financial Crisis“, Foreign Affairs (March/April 2015), pp. 154-159 (ungated).

Princeton economist Alan Blinder (born 1945) is reviewing 30 essays presented at an April 2013 IMF conference and published a year later with the title What Have We Learned?: Macroeconomic Policy after the Crisis, edited by George A. Akerlof, Olivier J. Blanchard, David Romer and Joseph E. Stiglitz (MIT Press, 2014).

He has much more to say, mixing faint praise with abundant criticism. He begins with this brief overview:

Is it acceptable for a reviewer to complain about a book’s title? I hope so, because this one is pretty misleading. ….

[R]eaders expecting the insights of 31 prominent authors on what economists should have learned from the crisis may come away disappointed. For example, the book’s index does not even contain the words “bubble,” “subprime,” “Lehman,” or “AIG,” and there is only one reference to derivatives. Still, readers looking for wisdom on how to rethink monetary, fiscal, macroprudential, and other policies will be richly rewarded, for this fine volume is bristling with it.


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