by Yannis Dafermos, Daniela Gabor, and Jo Michell
In a new working paper, we draw on under-exploited insights from Minsky to provide a structured analysis of the evolution of the macrofinancial system over the last 70 years. Minsky called institutional structures that aim to stabilise the macrofinancial system ‘thwarting mechanisms’. These put a floor on depressive tendencies (such as weak economic activity), a ceiling on expansionary tendencies (such as high inflation) or both, over what Minsky called the ‘supercycle’: a long-run process of institutional and political change over which the effectiveness of institutional structures wax and wane.
We explore a ‘third’ cycle in macroeconomics that has a longer horizon than the standard business and financial cycles, and is anchored in institutional and ideational struggles. The architecture of thwarting mechanisms over each supercycle reflects conflicts between both social classes and opposing sets of ideas: thwarting mechanisms are, in part, the outcome of evolutionary processes driven by profit-seeking entities adapt to their environment. But they are also the result of conflicts over political control and over which ideas dominate in national political economies.
We posit that rich nations have passed through two supercycles in the post-war period: Industrial Capitalism and Financial Globalisation. To quantify our analysis, we introduce the Macrofinancial Stability Index (MSI). This captures the extent to which key macrofinancial variables deviate from their long-run upper or lower bounds, and thus evade the mechanisms that are intended to constrain them. The MSI includes measures of economic growth, employment, asset prices, current account balances, credit volumes and inflation. The figure below shows the MSI for the US and the UK since the early 1960s, alongside a timeline of key macrofinancial events. Macrofinancial stability rises and falls across two post-war supercycles.
Figure 1: Macrofinancial Stability Index (MSI) and supercycles, US and UK, 1952-2018
We apply a four-phase categorisation to these supercycles: each begins with a period of expansion, during which the effectiveness of stabilising mechanisms increases. This is followed by a maturity phase during which effectiveness wanes, as for instance the rise of shadow banking up to 2008 erodes the effectiveness of monetary, fiscal and financial stability policies. The macrofinancial system falls into crisis once the institutional framework is no longer able to constrain macrofinancial instability. At this point, the downturn of the ‘basic cycle’ – the usual boom-bust cycle of capitalism, driven by finance and economic activity – becomes a serious crisis.
Eventually, the crisis is followed by a genesis period: new thwarting mechanisms emerge out of conflict between social and political groups, and may initiate a new supercycle if effective at providing macrofinancial stability.
(see Table below).
Since around 2013, we argue, rich nations have been in the genesis phase of the supercycle: rapid institutional change triggered in the crisis phase of the financial globalisation supercycle– for example the greatly expanded role of central banks in lender-of-last resort and market maker-of-last resort operations and quantitative easing – has placed a floor under the depressive tendencies triggered by the 2008 financial meltdown.
But a new set of thwarting mechanisms that will stabilise the macrofinancial system has not yet emerged. The coronavirus crisis, and the rapid institutional change that it has triggered (such as the introduction of job retention schemes) will influence the ongoing process of institutional evolution.
We argue that a new supercycle, when it emerges, will necessarily be a ‘green’ supercycle. But this does not mean that the climate crisis will be effectively mitigated. Instead, thwarting mechanisms will emerge that try to constrain the macrofinancial instability caused by the climate crisis, as well as, potentially, mechanisms that try to constrain environmental damage itself.
The next stage of our ongoing research project will focus on analysing the details of two possible scenarios for a ‘green’ supercycle, assessing the potential outcomes of each, and drawing policy conclusions on this basis.
Note: for more details see the working paper here