Curated Publications

The Minsky model offers a unifying template to explain the last 18 banking crisis and calls for a run up in asset prices, which attracts large capital inflows and a rapid build-up of debt, and a subsequent collapse triggered by panic when the cycle turns. It is remarkably similar to the model of Self Organized Criticality (SOC) (Bak, Tang, and Weisenfield 1987) that explains avalanches in sand piles, earthquakes, as well as in the fossil record. SOC hinges upon the ever present state of metastability that exists just under the threshold in all dynamical systems, where any perturbation can radiate instantly to other entities that are poised on the brink and cause a crash.

This paper argues that Solow’s (1956) residual may not be a residual after all but the main element in an endogenous theory of growth. It argues that the unexplained effects of technological and intellectual augmentation is what fires growth in throughput and causes the business cycle along with it. A more appropriate metaphor to examine endogenous growth and the business cycle is offered by the Darwinian systems of nature that manage oversupply, innovation, survival, competition, dominance and waste far more effectively than capitalist systems that are invented by humans and that suffer from perpetual conditions of inequality, coercive hegemony and pollution. This approach relies upon what is called the “continuity hypothesis” which is a term used to describe an ontological continuity between biological and economic evolution despite the fact that mechanisms and regularities differ between these domains (Cordes, 2007, p. 141). Even Veblen acknowledged that “There is a lasting influence of embedded behaviors and tendencies that have been genetically coded into humans through the reproductive and selection processes of evolution and it is this continuity within the context of which economic development must be studied” (Veblen, 1898b, p. 388).

From an evolutionary perspective it can be argued that oversupply is caused by the institutionalization of innovation (Ulrich Witt, 1997). Here growth is largely a result of novelty seeking behavior that tries to outwit demise (the zero economic profit condition) and results in a transcendence of the natural constraints of nature that keeps systems in balance. The surplus that accrues to the dominants results in even more surpluses, in an amplifying cycle of oversupply of non satiable, exosomatic gadgetry that leads to an overhang in inventory and consequently the Business Cycle.

Adam Smith - even though he argued for equity, urging that the majority be “tolerably well fed, clothed and lodged” - can also be credited for introducing the idea that selfish interest of the participants would be good for the group, and that selfish interest could lead to societal benefit. This notion has formed the justification for a free market economy and has been further fortified by Vilfred Pareto’s notion of a win-win optimality based on superior trades, where most people would gain and no one would lose in unfettered markets. The further evolution of this notion through the Kaldor and Hicks efficiency criterion has suggested that for most people to gain, some people would have to suffer. This has led to utilitarian thinking. The expectation of a general gain has become the narcotic for the free market system, and has dulled the pain for the less fortunate, who understand that their misfortune is a necessary evil of the capitalist system, and must be borne for the greater good.

These arguments have provided the moral justifications that have assured traditional economics a seat at the table of honored social disciplines in spite of its shortcomings. But Steven Kelman (1981) has argued that as a branch of moral philosophy, utilitarianism is especially weak because the cost and benefit analysis that provides ready estimates of net gains over losses can wrongly justify most economic action. That while the profit motive has been extremely successful in expanding human well-being it is also culpable for the problems of inequality and pollution brought on by the same expansion."

Muhammad Yunus, the founder of Grameen bank, says that many of the world’s problems remain unresolved because we continue to interpret capitalism too narrowly. What is perceived as market failure is really a failure of conceptualization, where the entrepreneur has been defined as a uni-dimensional, profit seeking entity, who is devoid of any social motives. Introducing the social entrepreneur, who is primarily motivated by doing good but without making a loss, would provide an interesting balance to the profit motive and cure some market ills as well. At his commencement address at Harvard on June 7th 2007, Bill Gates expressed a similar sentiment when he pointed to the appalling disparities of health, wealth, and opportunity that have condemned millions to lives of despair. Perhaps he was invoking a Rawlsian notion of social justice when he questioned the fairness of system which has made a billion people on the planet better off, albeit at the expense of the other five billion.

Almost like clockwork and with regularity, the mantle of dominance shifts among nation states. There is a rhythmic quality to the transfers of power. There is a recurring pattern and a circularity that is evident in the rise and fall of dominants in capitalism. Amsterdam’s maritime leadership of the world in the seventeenth century was replaced by London in the eighteenth which itself fell to New York as a center of power in the nineteenth century (Braudel, 1992). Hegemonies are essential to the stability of trading systems, but as conditions change they get replaced by rising dominants that are better equipped to deal with the new realities. Not unlike the dynamic between predator and prey that keeps nature in balance, capitalist institutions too use the process of creation and destruction to prolong their dominance