Uncertainty and the Institutional Structure of Capitalist Economies
In this working paper Distinguished Scholar Hyman P. Minsky explores the theoretical and practical causes of today's rising economic uncertainty and insecurity. He begins by noting views of uncertainty held by Keynes and adherents of the new classical economics by comparing Keynes's The Treatise on Probability and Sargent's Bounded Rationality in Macroeconomics. According to both views, decisions are made by agents based on varying degrees of ignorance and supposition; the agents have a more or less limited amount of knowledge and base their judgments on their own idea of how the economy works (their "model of the model"). In addition, agents are not homogeneous, but have differing abilities and histories. Thus the internal models used to guide decisions are not consistent from agent to agent. Minsky notes that although according to Sargent's concept of bounded rationality, all agents at any one time need not be acting according to mutually consistent models, Sargent ignores a point stressed by Keynes about the decision-making process: Economic events at any one time are the result of past mental models (and corresponding actions and expectations), and those past models are different from current models (and correspondingly different actions and expectations); therefore, factors that might determine long-term expectations are in a continuous state of flux. Despite this difference, the gap between the ideas of the two schools of thought have narrowed. Minsky points out that capitalism in the United States is an ever- evolving construct that recently entered a new stage: money manager capitalism. In this form of capitalism, nearly all businesses are organized as corporations; pension and mutual funds are the predominant owners of financial assets; and managers of these funds are judged solely on the total return on fund assets (dividends and interest plus appreciation in share value). One consequence of the money manager structure is predominance of short-ru
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