Endogenously generated movement: "stability is destabilizing"
In Keynes's theory, the economy does not need to be exogenously "shocked" to move. Capitalism is an evolutionary system that is always in the process of generating endogenous change, sometimes slowly and
sometimes rapidly.
Minsky is well known for his defense of the Keynes's commitment to the thesis that "stability is destabilizing." I have already discussed this phenomenon in the sections of this book focused on The General Theory's treatment of: the "liquidity preference" theory of the interest rate in chapters 13 and 15; the theory of the determination of stock prices in chapter 12; the effects of deflation in chapter 19; and the business cycle in chapter 22. Since the main ideas relevant to endogenous instability have already been covered, I only offer here a brief example of the kinds of arguments made in support of this thesis.We could begin our narrative either with a relatively stable or a rising rate of profit on capital investment or with a relatively stable and attractive level or rate of growth of security prices over an extended period of time. Following Minsky, we begin with financial markets.
Consider a situation in which financial markets have been relatively stable for some time. If this situation persists long enough, investors will begin to expect that stocks and bonds are not especially risky in the current era and therefore will increase their purchases of these securities. This will increase stock prices and lower interest rates. Investors, relying on Keynes's conventional expectation-formation process, will begin to incorporate the recent rise in capital gains into their expectations of future security prices. The longer this process continues, the more optimistic investors will become and, equally importantly, the more confident they will become in their optimism. Because they are confidently optimistic, investors will feel comfortable taking on increasing leverage to buy stocks and bonds, and their brokers will be comfortable lending them the money to do so.
If the financial market boom lasts long enough, financial analysts and economics professors will begin to assure investors that we have entered a "new era" in which the boom can go on forever - "this time is different."Capital investment would be expected to increase because, throughout much of the boom, the expected profit rate is rising, confidence in expectations is rising, and the interest rate is falling. Rising investment spending will cause income and employment to increase. Corporations will be willing to increase borrowing to finance investment because they believe they can safely take advantage of the positive effect of leverage on the rate of return on owner-capital. Consumption spending would be buoyed by rising wages and increased job security, by household access to credit on easy terms, and by the wealth effect of capital gains on consumption spending. The stimulation of real-sector growth by the financial boom will have a positive-feedback effect on the financial sector, just as Keynes described in his discussion of interacting real and financial sectors in the QJE article of 1937.
But if this boom is long and strong, it may leave in its wake both financially fragile balance sheets and confidently optimistic expectations destined to be eventually disappointed. Economic booms always
A digression 287 eventually end. In Keynes's view, the rapid accumulation of capital over an extended period will eventually drive down the actual rate of profit on capital. In that sense at least, it never really is a "new era." If the inevitable downturn begins in an over-leveraged environment, it may trigger a financial crisis accompanied by a collapse of both optimism and confidence that leaves investors in a psychological panic. The outcome of this process can be ugly, as it was in the USA in the 1930s or in much of the world after 2007. The claim that Keynes insisted that unregulated or lightly regulated capitalist economies inevitably generate bouts of instability and crisis from time to time is fully explored and defended in chapter 2 of Crotty (2017), but is ruled out by assumption in IS/LM models.
Minsky was right to insist that Keynes's macro theory was based on ceaseless change in positions of temporary stasis brought about by powerful endogenous forces.
In the Marshallian long-run equilibrium there are no endogenous economic forces making for further change... [T]he Marshallian vision is that of a system tending toward rest. Every reference by Keynes to an equilibrium is best interpreted as a reference to a transitory set of system variables toward which the economy is tending; but, in contrast to Marshall, as the economy moves toward such a set of system variables, endogenously determined changes occur which affect the set of system variables toward which the economy tends. The analogy is that of a moving target, which is never achieved but for a fleeting instant, if at all. Each state, whether it be boom, crisis, debt-deflation, stagnation, or expansion, is transitory. During each short-period equilibrium, in Keynes's view, processes are at work which will "disequilibrate" the system. Not only is stability and unattainable goal; whenever something approaching stability is achieved, destabilizing processes are set off.
(Minsky 1975, p. 61, emphasis added)
For reasons already elaborated, I believe that Minsky's assertion that Keynes thought stagnation in the interwar period would soon be eliminated by endogenous forces and was thus "transitory" is profoundly mistaken.