Andrew Batson — Capacity to transform

Important. Andrew Batson summarizes Charles Kindleberger's insight into development in terms of ability to transform the economy — what promotes it and what hinders it.

Neoclassical economics assumes flexibility among the factors of production and also flexibility within them, resulting in immediate response to economic "laws," e.g., based on natural market forces that automatically generate spontaneous order (general equilibrium).

However, economic forces are not independent of social and political factors in society. Neoclassical assumptions generate an idealistic model that doesn't necessarily correspond to actual conditions. As a result there are market failures and idle resources.

There are different rates of transformational capacity and reasons for them. Charles Kindleberger considered them.

Andrew Batson's Blog
Capacity to transform

Andrew Batson

Tyler Durden — Minsky Cycle 2017: Where Are We Now

Over the weekend, DB's credit strategist Aleksandar Kocic discussed what Minsky Dynamics for the "New Normal" look like based on a matrix that charted the various progressions of Leverage vs Volatility, with four possible end states. However, since that graphic explanation proved too problematic for some, another Deutsche macro analyst, Alan Ruskin, released a far simpler representation of the current (and historical) Minsky cycle, which compartmentalizes the world's various assets in their 7 discrete states along the Minsky cycle (as defined in Charles Kindelberger's ‘Manias, Panics and Crashes – A History of Financial Crises’). These start with the 1) macro shock ‘displacement’, move to 2) ‘healthy expansion’, to 3) ‘leveraged driven gains’, to 4) ‘euphoria’, 5) ‘insider profit-taking’, 6) ‘liquidation and panic’ and onward and downward to 7) ‘revulsion and discredit.’

Where are we now?

Zero Hedge
Minsky Cycle 2017: Where Are We Now
Tyler Durden

Xinhua — FM: China, U.S. can avoid Thucydides Trap, Kindleberger Trap

China and the United States can sidestep the Thucydides Trap and the Kindleberger Trap and jointly chart bilateral ties from a long-term perspective, Chinese Foreign Minister Wang Yi said Monday in Beijing.…

The Thucydides Trap refers to a warning by the ancient Greek historian that cataclysmic war can erupt if a rising power causes fear in an established power.

The two countries will not fall to the Kindleberger Trap either, Wang said, as a single country cannot provide all public goods for the world with such complexity, and international cooperation is the only possible choice.

Charles Kindleberger, an intellectual architect of the Marshall Plan who later taught at MIT, believes that the disastrous decade of the 1930s was caused by the U.S. replacing Britain as the largest global power but failing to take on Britain's role in providing public goods.

Applauding U.S. Secretary of State Rex Tillerson's remarks during his recent visit to China, Wang said that China stands ready to advance bilateral ties from a strategic perspective.
Tillerson said that the United States and China should jointly chart bilateral ties for the next 50 years and plan all-round cooperation.…

China stands ready to shoulder its due international responsibilities, but never wants to lead the world, Wang said.

Ecns
FM: China, U.S. can avoid Thucydides Trap, Kindleberger Trap
Xinhua | Editor: Gu Liping

Also

China's door opens wider to outside world: premier
Xinhua | Editor: Gu Liping

Andrew Sheng and Xiao Geng — China’s Live Stress Test

China’s economy has succeeded through trial and error – and the country's recent stock-market collapse should be viewed as part of that process, to be used to drive the next phase of economic reform. One key lesson is that Chinese stock markets remain structurally biased toward state ownership and guidance.

No, China is not going to implode.

Though the blame game is ongoing, the historian Charles Kindleberger’s 1978 book Manias, Panics, and Crashes offers the perfect explanation for what China is experiencing. The economy has undergone a standard cycle of displacement, overtrading, monetary expansion, discredit, and revulsion, all in a matter of less than 12 months.…

This episode proved, once again, that highly leveraged markets are unstable and unsustainable. Financial crises have repeatedly been spawned by inadequately regulated financial innovation, with the combination of market greed and regulatory silos and blind spots enabling booms and busts.

Enter the Austrians.

In China’s case, the government interventionist approach is exacerbating the problem. Though market intervention may limit the scope of losses in the short term, it undermines markets’ ability to self-correct, not to mention the credibility of the Chinese authorities as neutral regulators.

Comes the walk back.

The problem was that retail investors were not equipped to judge the valuation of listed companies like Alibaba, yet they could use margin loans to engage in speculation. This was a dangerous combination – one that would have led to socially unacceptable losses to the retail sectors had the government not intervened. 

Project Syndicate
China’s Live Stress Test
Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong, member of the UNEP Advisory Council on Sustainable Finance, former chairman of the Hong Kong Securities and Futures Commission, and currently an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, Director of the IFF Institute and a professor and senior fellow of the Asia Global Institute at the University of Hong Kong

Lars P. Syll — The Keynes-Minsky-Kindleberger theory of financial crises

Charles Kindleberger quote.

Lars P. Syll’s Blog
The Keynes-Minsky-Kindleberger theory of financial crises
Lars P. Syll | Professor, Malmo University

Dirk Ehnts — NY Times reports on Keen, Bernanke, Kindleberger and Minsky

Economic research outside of the paradigm of the rationality postulate was made impossible by academic institutions – journals, central banks, etc. It is a great vindication for Hyman Minsky’s idea that (financial) stability creates instability.

Econoblog 101
NY Times reports on Keen, Bernanke, Kindleberger and Minsky
Dirk Ehnts | Berlin School for Economics and Law

The last mile closes a little more. 

But as long as Big Finance can point to rationality and market efficiency as standards, it can successfully lobby for less regulation, since "markets are optimally self-regulating" when left alone, given these assumptions.

Amazingly, Greenspan later admitted that he was mistaken about these assumptions, but Bernanke is paying no heed to the Maestro's admission of failure.

Lars P. Syll — Modern macroeconomics – like Hamlet without the Prince

Simon Nixon: "the most important contribution to the debate is an essay by Claudio Borio, deputy head of the monetary and economics department at the Bank for International Settlements, published last moth and titled: “The Financial Cycle and Macroeconomics: What have we learned?”

"In Mr. Borio’s view, the 'New Keynesian Dynamic Stochastic General Equilibrium' model used by most mainstream forecasters is flawed because it assumes the financial system is frictionless: Its role is simply to allocate resources and therefore can be ignored. Although many economists now accept these assumptions are wrong, efforts to modify their models amount to little more than tinkering. What is needed is a return to out-of-fashion insights influential before World War II and kept alive since by maverick economists such as Hyman Minsky and Charles Kindleberger that recognized the central importance of the financial cycle."

Lars P. Syll's Blog
Modern macroeconomics – like Hamlet without the Prince
Lars P. Syll

See also Useless stochastic models (John Hicks)

Brad DeLong on Economics in Crisis

The most interesting moment at a recent conference held in Bretton Woods, New Hampshire – site of the 1945 conference that created today’s global economic architecture – came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. '[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?'

"Here is the most interesting part of Summers’ long answer: 'There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.' That may sound obscure to a non-economist, but it was a devastating indictment....

"...He talked about 'the revolution in finance as it was realized that asset prices show large volatility that does not reflect anything about fundamentals,' but added that 'macroeconomics [did not] keep up with [this] revolution.' As a result, 'to the great detriment of contemporary macroeconomics,' his fellow economists did not understand asset prices, manias, panics, and liquidity...."

Read the rest: Economics in Crisis

Maybe Prof. DeLong will wake up to MMT and learn that some "heterodox economists" have been working in this field for decades.