Economic Insecurity and the Institutional Prerequisites for Successful Capitalism Author(s): Hyman P. Minsky and Charles J. Whalen Source: Journal of Post Keynesian Economics, Vol. 19, No. 2 (Winter, 1996-1997), pp. 155-170 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/4538526 Accessed: 09/06/2010 11:36 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=mes. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Journal of Post Keynesian Economics. http://www.jstor.org HYMAN P. MINSKY AND CHARLESJ. WHALEN Economic insecurity and the institutional prerequisites for successful capitalism Fifty years ago, PresidentTruman signed into law the EmploymentAct that committedthe U.S. governmentto the goal of employmentoppor- tunitiesfor all Americans.The act representeda pledge to avoid another GreatDepression. It acknowledgedthat governmenthas a vital role to play in establishingnational economic stabilityand prosperity. U.S. economic performanceduring the past fifty years can be divided into two periods of roughlyequal duration.The first was characterized by a successful economy: cyclical instability was controlled; public investmentand human resource development were supported;and flaws in selected marketswere corrected.It was a period of robusteconomic growth, rising workerincomes, and falling inequality. The second period broughta reversal of fortune. We have avoided another depression but suffer from a return of financial instability. Economic growth has been sustained for the near term, but public infrastructureis neglected and family earningsare stagnant.Corporate profits have been stabilized,but inequalityhas increasedconsiderably and economic insecuritynow pervadesthe work force. Ourcurrent difficulties make it necessaryto considernot only how we measurethe success of an economy but also the institutionalprerequi- sites for a successful twenty-first-centurycapitalism. But first we must ask: What accounts for the split in the United States' economic experi- ence duringthe post-World War II era? When this articlewas written,the authorswere DistinguishedScholar and Resident Scholar,respectively, at the JeromeLevy Economics Instituteof BardCollege. HymanMinsky died on October24, 1996. CharlesWhalen is currentlySenior Econo- mist at the Institutefor IndustryStudies, an entity within the School of Industrialand LaborRelations at Cornell University.An early version of this articlewas presented at "The EmploymentAct: Fifty Years Later,"a session of the EasternEconomic As- sociation Annual Meeting, Boston, March15, 1996. Valuableassistance and/or com- ments were providedby Don Goldstein,Triveni Kuchi,Jonathan Neale, Ronnie Phillips, Bob Pollin, SamiraRajan, Jim Tobin, and RandyWray. Journal of Post KeynesianEconomics / Winter 1996-97, Vol. 19,No. 2 155 156 JOURNALOF POST KEYNESIANECONOMICS Money-manager capitalism Numerousexplanations have been proposed to accountfor the falling worker incomes and rising instability,inequality, and insecurityof the past two decades.Increases in taxes,government spending, and regulation are not to blame.The United States' income problems can be tracedto pretaxeamings; governmentshares of total employmentand expenditurehave not been growingsince 1979;and regulatory costs havedeclined (Mishel, 1995).' Other explanationsfocus on one or more of the following develop- ments: the shift of jobs from goods-producingsectors to the service sector; a long period of slow overall productivity growth, despite significanttechnological change (especially in the realmof information processing);public-sector privatization and corporatedownsizing and outsourcing;increased immigration; the erosion of the minimumwage andthe decline of unions;the growthof contingentwork; the appearance of persistenttrade deficits; and increasedcapital mobility, trade liberal- ization, and global competition.While some have sought to calculate the relative impact of these developments, Barry Bluestone (1995) seems to emphasize the most essential aspect of the matter when he suggests that the solution to this mystery is the same as in Agatha Christie'sMurder on the OrientExpress- they all did it. Despite the relevance of the aforementionedfactors, one crucial ele- ment has been left out-the evolution of the financial structure.Capi- talism is a dynamic, evolving system that comes in many forms. Nowhere is this dynamismmore evident than in its financialstructure. The financial structureof the American economy has undergone significantevolution over the historyof the republic.In the initialera of commercialcapitalism, external finance was used primarilyto facilitate commerce by financing goods in process or in transit. The present period,in contrast,is one of money-managercapitalism,where financial marketsand arrangementsare dominatedby institutionalinvestors.2 Three financial stages, industrial,financial, and managerial capital- ism, were dominantbetween the eras of commercialand money-man- ager capitalism. The shift away from commercialcapitalism came as financing for productionand trade purposes became dwarfed by the I While there is little evidence linking contemporaryeconomic problemsto tax in- creases, Wolfson ( 1993) identifies a numberof business tax breaksenacted since the 1980s that have providedstrong incentives for corporaterestructuring. 2 As the name "commercial"capitalism suggests, merchantand commercialbanks were the dominantfinancial institutions of this early capitalistera. ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 157 reliance on external funds to finance long-term capital development. Thus, industrialcapitalism was characterizedby the rise of industries thatrequired vast resourcesfor projects such as railroads,utilities, mills, and mines. This createda marketfor the services of investmentbanks thatnot only arrangedto financesuch investmentsbut also financedthe rise of trusts and cartels. The largely unregulated era of financial capitalism that emerged was broughtto an end by the United States' economic contraction and eventual financial-system collapse in the period 1929-33. The managerial era was ushered in by the economic policies and reformsof the New Deal. Importantaspects of the managerialperiod's financialsystem included: * Countercyclicalfiscal policy, which sustained profits when the economy faltered;3 * Low interestrates and interventionsby the FederalReserve uncon- strainedby gold-standardconsiderations; * Deposit insurancefor banks and thrifts; * An infusionof governmentequity into transportation, industry, and finance throughthe ReconstructionFinance Corporation(a tem- porary,national investment bank); * Restrictionson competition(including geographic barriers to mar- ket entry, compartmentalizationof financialinstitutions by func- tion, and interest-rateregulation); and * Interventionsby specializedorganizations (such as the Agricultural AdjustmentAdministration and the FederalHousing Administra- tion) createdto addresssectoral concerns. Anotherimportant aspect of themanagerial period was thenature of indebt- edness.From 1933 through the end of WorldWar II, government represented themain source of extemalfinancing for the economy. By 1946,a broadset of householdsowned financial assets mainly in the formof governmentdebt or as interestsin insurancepolicies and bank deposits that were in turnlargely offsetby governmentdebts. Business and household indebtedness was mini- mal;many ofthe great corporations had large net positions in govemment debts and bankdeposits--and many working-class households held substantially largernet financialasset positions than hitherto. 3For a discussion of how the National LaborRelations ("Wagner") Act was also de- signed to contributeto macroeconomicstabilization, see Kaufman(1996). 158 JOURNALOF POST KEYNESIANECONOMICS Money-managercapitalism emerged out of this initial postwar posi- tion. In part, it was the result of the evolution of financial practices toward more speculative endeavors. But money-managercapitalism was also a consequence of institutionalinnovations and the growth of privatepensions that supplemented social security.As the label"money- manager"capitalism suggests, centralto this new stage are institutions that manage large portfoliosof financialinstruments. Economic activity in the early postwar setting began with a cautious use of debt.But, as the periodof economicprosperity began to lengthen, marginsof safety in indebtednessdecreased and the systemevolved: not only