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Socialization of Risks without Socialization of Investment: The Minsky Paradox and the Structural Contradiction of Big Government Capitalism

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  • Minqi Li
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    Abstract

    A big government sector is indispensable for the normal operations of modern capitalist economy. However, the very success of the big government institutions encourages private investors to engage in excessive risk-taking activities, leading to growing financial fragility and frequent financial crises. The crises necessitate government interventions, forcing the government to run large deficits during recessions. These deficits, however, are not offset by surpluses during expansions. As a result, there is a tendency for the government debt to rise in relation to GDP. The government debt-GDP ratios cannot keep rising indefinitely. Beyond certain point, the debt-GDP ratio could be so high that the government’s ability to intervene with and stabilize the economy would be severely undermined. This may be characterized as the structural contradiction of big government capitalism.

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    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp205.

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    Date of creation: 2009
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    Handle: RePEc:uma:periwp:wp205

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