Parallel Scholars: Minsky, Kindleberger and a Connection Revealed

By Perry Mehrling

When Charles P. Kindleberger sat for his official photograph as President of the American Economic Association, he positioned himself so that just over his left shoulder you can see the book of Hyman Minsky, Can It Happen Again? Essays on Instability and Finance. In due course the picture appeared in the March 1986 issue of the official journal of the Association, opposite the title page of Kindleberger’s presidential address, “International Public Goods without International Government.” 

By that time, the names of Minsky and Kindleberger had become interchangeable taglines for what most economists considered a fringe view. Just so, here is former US Fed Chair Ben Bernanke writing in the paper that has recently been cited by the Nobel Prize Committee: “Hyman Minsky (1977) and Charles Kindleberger (1978) have in several places argued for the inherent instability of the financial system, but in doing so have had to depart from the assumption of rational economic behavior.” Here, there is context for understanding Kindleberger’s staged photo as a proud assertion, notwithstanding present academic fashion, of the continuing relevance of the intellectual tradition that both men shared.

For most of their previous lives, however, Minsky and Kindleberger had travelled in quite separate circles, and there is little evidence that they even knew of one another’s existence, much less influenced one another’s thought. That changed when, after mandatory retirement from the Massachusetts Institute of Technology (MIT) in 1976, Kindleberger was looking to build on his World in Depression, 1929-1939 by expanding his horizon to include all of the international financial crises he could find. Learning of this project, his friend Martin Mayer suggested that he should have a look at the work of Minsky, which Mayer himself had highlighted in his own recent book, The Bankers. The rest is history, and the subject of my latest working paper that traces the evolution of what has come to be called the Kindleberger-Minsky model.

In the resulting book Manias, Panics, and Crashes: A History of Financial Crises (MPC), Kindleberger opens with what he calls the “Minsky model”:

“We start with the model of Hyman Minsky, a man with a reputation among monetary theorists for being particularly pessimistic, even lugubrious, in his emphasis on the fragility of the monetary system and its propensity to disaster. Although Minsky is a monetary theorist rather than an economic historian, his model lends itself effectively to the interpretation of economic and financial history. Indeed, in its emphasis on the instability of the credit system, it is a lineal descendent of a model, set out with personal variation, by a host of classical economists including John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher.”

In fact, it is in the work of those latter named economists that Kindleberger had first encountered the idea, back when he was a graduate student at Columbia University between 1933-1936, and living through the global depression he would later write about. Further, the “model” he exposits in MPC is arguably better understood as his own personal variation on that older tradition, putting central emphasis on credit-fueled speculative asset price booms and busts. The central billing that he gives to Minsky can be understood mainly as an effort to recruit a theorist to his cause, a cause that “has unaccountably slipped into disrepute during the Keynesian revolution and then monetarist counterrevolution. A notable up-to-date exception is Hyman Minsky.”

As evidence for this reading, it is important to appreciate that the work of Minsky on which Kindleberger relied in the first edition of MPC was early work, dating from 1966, and work that Minsky himself had by then moved beyond, most importantly in his book, John Maynard Keynes, in 1975. But Kindleberger learned about that only after his own book was published; indeed, he learned from Minsky himself at a conference Kindleberger helped to organize on “Financial Crises and the Lender of Last Resort.” In subsequent editions of MPC, he cites Minsky’s later work, and adds a section on “The Quality of Debt” that explicitly links Minsky’s later work to “the model set forth in the previous chapters”, but the model itself remains unchanged.

That is because the model is really Kindleberger’s personal variation, specifically adapted for the international financial crises with which he is concerned, quite different from the domestic business cycles that concerned Minsky. Kindleberger’s model is seen in his chapter headings: “Speculative Manias”, “Fueling the Flames: Monetary Expansion”, “The Emergence of Swindles”, “The Critical Stage” and “International Propagation.” And it’s seen again in Chapter 15 “Financial Crises” of his subsequent Financial History of Western Europe in 1984. His concern ever since World in Depression was always with the operation of an international lender of last resort, for lack of which the depression lasted as long and went as deep as it did.  

The fourth edition of MPC, published in 2000, was Kindleberger’s last, as he died in 2003, but the book lived on in new editions with a new co-author Robert Aliber, and it is from these later editions that modern students are introduced to the work of Kindleberger and Minsky. I imagine Kindleberger smiling from above at the apparent immortality of his little book of 1978; what was once fringe is now apparently mainstream. And maybe he would tell me to leave well enough alone. If people get the impression from these later editions that Kindleberger was actually using Minsky’s work, and maybe even imagine that Minsky “is the implicit organizing framework of [the earlier] World in Depression”, what does it matter? The important thing is that people are still reading the books.

Yes, I would reply, but are they understanding them? Maybe not so much. Today’s world, even more than in Kindleberger’s time, is a world of integrated global money and capital markets, a financial system that has repeatedly proven to be inherently unstable, so far rescued each time by heroic efforts of central bank cooperation and intervention. But what about next time? 

For Kindleberger, the fundamental problem is that the financial system is global, while the political system remains local, organized around nation states each proudly asserting its Westphalian sovereignty. As such, the question Kindleberger raised in his presidential address is the central question that faces us today: “International Public Goods without International Government.” Money is one of those public goods, mitigation of climate change is another. Kindleberger believed that global governance would eventually emerge as the response to global economy; for him, the example of central bank cooperation showed the way forward for other problems as well. How is the global community doing on that?