19 April 2010

Shleifer and Vishny on the Financial Crisis

Nicola Gennaioli, Andrei Shleifer, and Robert Vishny have added a little “mathematical masturbation” to Hyman Minsky’s theory of financial innovation and financial fragility.

Minsky was from a strange breed, somewhere between Keynes and Marx, but he had a theory that fits the recent crisis rather well. The demands of capitalism for profit lead to increasing financial innovation, and as the good times continue, overconfidence, and a move towards more risky investments, increasing systemic financial fragility. Which is pretty much what has just happened, and what GSV describe in their paper.

Still though, when ideas get written in maths, they get taken seriously by modern economists. Krugman pretty much got the Nobel Prize for writing old ideas in maths. And not necessarily without reason – when ideas are written in maths they are written with clarity. With no scope for fuzzy thinking or rhetorical flourishes, the logic has to be sound.

Its just a shame Minsky doesn’t even get a reference. So here it is:

Hyman P. Minsky, Stabilizing an Unstable Economy (1986).


(I learnt about Minsky through Jan Toporowski’s wonderful banking and finance lectures and his Theories of Financial Disturbance (2005). Jan’s lectures somehow managed to double as a history of the sex lives of the great economists).

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