....most orthodox economists find it very counterintuitive that the performance of an economy can be systematically affected by the structure of the balance sheet. They tend to think of economic activity as a linear process that tends towards equilibrium, and this path towards equilibrium is perturbed only by external shocks. Equilibrium is assumed to be determined by fundamental factors, and so this is why most economists focus primarily on the fundamentals — i.e. the asset side — and how these fundamentals are managed. External shocks are of course unpredictable, and so they simply incorporate them into their analyses as they occur.
If you think about the economy as a dynamic “system”, however, then it is easier to understand how institutions, including the balance sheet, can create systematic biases and how imbalances evolve and must ultimately reverse themselves. When you read Minsky, for example, he spends a lot of time insisting that the economy is a system, and that it has its own internal dynamic, which is one of the reasons why he said stability is unattainable. It is also why it takes a huge “event” that only Minsky can explain to bring him into the mainstream debate. In ten years he will no longer be part of the debate.
....The framework most orthodox economists have does not permit systematic biases and unsustainable growth. When a finance guy says that the growth in the debt burden is implicit and necessary to maintain growth, and also that it cannot continue, it doesn’t matter how many times I say that I do not expect China to collapse, I don’t think they are able to combine the two statements. They genuinely believe that there is no difference between saying that growth is unsustainable and that China will collapse in a few months. To them, either China is following a stable equilibrium, or it is on the verge of collapse — nothing else is possible in the orthodox framework.