Debt and Business Cycles

Article excerpt

Although a major depression has not occurred in the period since World War II, financial instability has increased. However, this threat to the economy is not considered in either most current theories or econometric models of the economy. Thus far, Big Government and The Big Bank have prevented an economic collapse. Given our current precarious financial structure, a useful economic theory must address the implications of financial fragility and indicate how to contain financial crises. The Post-Keynesian vision of the economy is more relevant for the 1990s, both as economic theory and as a guide to economic policy, than the available alternatives, because it integrates the real economy with the financial world in a meaningful way.

HAT DO WE know about business cycles W now, at midyear of the first year of the last decade of the twentieth century? This question may seem curious in 1990 because no serious depression has occurred for more than fifty years. Granted, the United States' economy has endured minor, short-lived recessions and rolling adjustments during which particular regions or industries suffered harshly; nevertheless, no deep, long-lasting decline in overall economic activity on the order of magnitude of the 1930s has taken place. * Hyman P. Minsky is Professor of Economics and Mark D. Vaughan teaches in the Department of Economics, Washington University, St. Louis, MO.

For the United States and the other advanced capitalist economies, this failure of "It," a major depression, to happen again ranks as the single most important economic event of the forty-five years since the end of World War II. In the light of history, the postwar era is the anomaly; deep depressions were regular features of the capitalist experience during the century that preceded the Great Depression. Indeed, this lengthy respite from a general economic collapse implies that the capitalist economies of the second part of the twentieth century are markedly different in some essential way from the capitalist economies of the prior 100 years. A GREAT DEPRESSION AHEAD?

Marx wrote that the specter of communism is haunting capitalism. Today, the disintegration of the "iron curtain" has laid this specter to rest; no one seriously entertains the notion that the Soviet Union or the organized Communist parties of the developed world offer a viable alternative to a market-based economy. Yet, a new specter is haunting the rich, capitalist countries of the developed world. This specter arises from the fear that our good fortune is over, the fear that a 1930s-type economic collapse lies in the immediate future.

One cause of this fear is the belief that the successful performance of the capitalist economies in the postwar era owed much to the mobilization of resources to contain what was, until not long ago, known as the evil empire. The fear is that, without a monolithic enemy to sustain government defense spending, the props buttressing the capitalist economies will buckle, thereby, leaving the industrial world to crash into depression.

Another contributor to the fear that "It" will happen again takes the form of persistent doubts about the economy's ability to support the liability structures that the private and public sector have built up during the past forty-five years. The fearful believe that the economy is in some sense overindebted and, hence, vulnerable to a debt-deflation of the sort to which Irving Fisher attributed the Great Contraction of 1929-33.(1)

The Great Depression of the 1930s still stands as a watershed event in the history of advanced capitalist economies. It stemmed from an integrated collapse of the monetary and financial system and of what economists later came to call aggregate demand. During the aggravated decline of 1929-33, rather than promoting systemic coherence, the self-interested behavior of each economic unit - households, businesses, banks, and nonbank financial institutions - made things worse for the macroeconomy. …