When I asked local economist Alan Harvey, what's he reading right now for our Person of Interest column, he said he is "rereading Hyman Minsky's John Maynard Keynes" and recommend that one read its last chapter first. I ordered a copy of book at the end of last week. It arrived by mail two days before Thanksgiving. I read its last chapter during a spell of insomnia on the night before the holiday, and finished it on the morning of Black Friday (today, the day America spends lots of money). Harvey is totally right. The last chapter, or more precisely, the book's last section (which contains three chapters that begin with "Social Philosophy and Economic Policy"), must not only be read first but can be read, and make a huge impact on your thinking, without reading the rest of the book. (The rest of the book basically attempts to explain why John Maynard Keynes's revolutionary ideas—markets do not tend toward full employment as a natural state, government spending is good for the economy, uncertainty is a major aspect of markets—were abandoned after the 1960s.)

Hyman Minsky, who died in 1996, was a forgotten American economist until 2008, when a number of investors and academics rediscovered him because of his work on financial markets (which is post-Keynesian in mode—meaning, he remained faithful to the revolutionary aspects of Keynes' ideas, which were very critical of capitalism, but also wanted to save capitalism from its failures and excesses). We now have the term “Minsky moment,” thanks to his analysis of the stages leading to a financial crash (the final stage, when a system collapses due to the weight of debts, is the Minsky moment). The final section in his book asks a very simple question: Why is capital scarce in an advanced capitalist society like the US? He asks this question because in 1930, Keynes wrote a short but brilliant piece of science fictional economics, "Economic Possibilities for our Grandchildren," that predicted that by our time, and the time Minsky wrote the book, 1975, the scarcity of capital would be a thing of the past. We would have solved the leading economic problem and have tons of free time on our hands. But this did not happen. Free time is nowhere near free or even cheap, and for almost all Americans, capital is scarce. Indeed, as Thomas Piketty pointed out in Capital in the Twenty-First Century, 50 percent of Americans have no capital at all. Many are indeed in the red. They have more debt than capital. Why is this the case?

Minsky provides an answer by analyzing this key passage in "Economic Possibilities for our Grandchildren":

Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes —those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs—a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.

Keynes already had the answer to why the economic problem he thought would be solved by our time is not yet solved. As Minsky explains, capital is scarce not because of absolute needs ("food, lodging, and other goods and services basic to life and health"), which in the current economy can be satisfied for all, but because of relative needs, which are insatiable and can absorb large amounts of capital. (As I have said in other posts, and particularly those relating to the housing market, the leading economic problem in our world is the absorption of surplus capital.)

Writes Minsky:

The direction taken by the growing relative needs is inspired by and already the product of education in the guise of advertising. In our current system, affluence has not brought a demand for the quite pleasures; but rather has been associated with proliferation of demand for goods that acquire capital assets.

We live in a society that not only moves and concentrates capital upwards but also makes it scarce by the generalization of "a variety of conspicuous consumption." This is not just stuff like executive cars or private jets or "gadgetry and weaponry" but also the values of financial assets, home values, the values of professional sports teams, and so on. Our form of capitalism is not one that's geared to improve the quality of our lives or souls but to search for and construct new and larger ways to soak up surplus capital. And the result of the scarcity is the presence of deep poverty, widespread homelessness, and even hunger in capital-rich societies.

Keynes thought that once all of our absolute needs were settled by a surplus of capital, a class of men and women who live on the high rents (rentiers) of scarce capital would go extinct. He thought this would be a natural process, in much the same way Marx thought socialism would be the natural result of the endogenous and mounting and finally indissoluble contradictions of the capitalist system (though Keynes was no fan of Marx). But Keynes was dead wrong. He missed the necessity of politics in economic thinking. In the past, economics was not called economics but political economy, and for a reason: shit does not happen in social matters without intervention at the level of the public, the political. The extinction of the rentier class (those who own large amounts of capital—homes, stocks, bonds, and so on) will not happen like the extinction of the dinosaurs. Only policies and laws can limit their power and influence, and instigate their "euthanasia."

Once again, Minsky:

Underlying Keynes's vision of the world in which capital is no longer scarce is a world in which income distribution is such as to avoid encouraging ever more extravagant consumption, and in which "civilized" standards discipline and control relative needs and move consumption away from capital-intensive patterns.

If you have grasped this, you have grasped one of the deepest thoughts in the history of economic thinking.

I will on Monday explain why Minsky is opposed to full employment in its current form.