Wednesday, April 9, 2008
It is scandalous that nowhere in what passes for mainstream macroeconomics will you find anything that helps you understand what Hyman Minsky called "financial fragility" - the inherent instability of the credit system - and the implications for the real economy. No models - nothing!! - Nothing in a macroeconomics textbook that would aid in understanding the current crisis, and countless previous cises in the history of capitalism, therefore. Here is an exception which miserably confirms the rule: in Mankiw's intermediate level text, he gives passing mention to Fisher's debt-deflation account of the Great Depression. But the key insight of Fisher's article (not by any means original to him - see Hawtrey, Marx and others) , i. e., the self-amplifying nature of credit expansions and contractions - is not mentioned at all. Instead, Fisher chez Mankiw is made to say that Fisher saw falling prices redistributing wealth from debtors with a high marginal propensity to spend out of wealth to creditors with a low marginal propensity to spend out of wealth, thus reducing consumption. And that's it. It would be funny if it weren't so sad.