[...] Through bailouts of one kind or another, ranging from bank rescues to central bank bond-buying programs, crisis managers have not only stabilized the system; they have exposed its unending dependence on state intervention. In doing so, they have fatally undermined the ideological premises of post–Cold War capitalism.

Almost twenty years ago, New York Times columnist Thomas Friedman, the bard of neoliberalism, waxed lyrically about what he called “the Golden Straitjacket” — the “defining political-economic garment of this globalization era,” whose “original seamstress,” Margaret Thatcher, would “go down in history as one of the great revolutionaries of the second half of the twentieth century.” For a country to fit into the Golden Straitjacket required following the “golden rules”:

making the private sector the primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of its state bureaucracy, maintaining as close to a balanced budget as possible, if not a surplus, eliminating and lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital markets, making its currency convertible, opening its industries, stock and bond markets to direct foreign ownership and investment, deregulating its economy to promote as much domestic competition as possible, eliminating government corruption, subsidies and kickbacks as much as possible, opening its banking and telecommunications systems to private ownership and competition and allowing its citizens to choose from an array of competing pension options and foreign-run pension and mutual funds.

[...] They were right that prices were necessary, but wrong that this required inequality or private ownership of the means of production. In fact, socialism could do prices better.

The competitive equilibrium of the textbooks was a fantasy so far as capitalism was concerned. In actually existing capitalism, firms were not price-takers, but occupied positions of greater or lesser market power, which they sought to defend and exploit. The happy results of welfare economics could only be reached in a socialist economy, where prices were set directly as if perfect competition prevailed.

Instead of profit-maximizing firms groping their way blindly towards minimum average cost while aiming at profit maximization, socialist managers would be directed to aim directly at cost minimization, taking prices as parameters. Planners would raise or lower prices according to the balance between supply and demand. The imaginary auctioneer of Walrasian general equilibrium economics — entirely unrealistic as a description of real market processes — would be made real.

[...] Where Keynes in the 1930s concentrated on dysfunctions of unemployment, Minsky in the 1970s focused on dysfunctions of inflation and asset price bubbles.

The underlying point is the same. There is no reason that the rational pursuit of individual self-interest on financial markets will generate a rational outcome for the system as a whole. There is no financial invisible hand.

But for Minsky in 1975, a stabilized capitalism would not be enough: the market also failed “in that it leads to a socially oppressive distribution of wealth.” A stable market may allocate efficiently, but efficiently much to the rich and efficiently little to the poor. “Acceptance of the market mechanism as the determinant of the direction of employment may rest upon a prior short-circuiting of the market distribution of income.”

Minsky’s Keynes saw this too and looked forward to the “euthanasia of the rentier,” but thought it would be all too easy. Keynes believed that returns to capital would diminish as wealth became abundant — in other words, there was a tendency for the rate of profit to fall. Rewards for mere wealth-holding would dwindle away. In fact, this was what would call for the “somewhat comprehensive socialization of investment”: the profit motive would dwindle away with it.

Alas, said Minsky, it was not so simple. Keynes thought capital would reach a saturation point because he mistakenly believed people would eventually be sated with commodities, at least commodities produced with substantial investments of capital. Rather than “philosophy and culture,” the rich continued to find new capital-intensive bundles of goods to desire and “their example filtered down to the not so rich.” Wave after wave of technological novelties hit the shops in the decades after World War II, while state contracts for capital-intensive weaponry continued to mount. There was no guarantee that capital would ever become abundant enough to wipe out returns from holding wealth. (This point, incidentally, was straight from Lange.)

Minsky thought that preferences might evolve in the direction of leisure and culture over gadgets and energy, but that this would be much more likely to happen in a society that was already egalitarian.

[...] For poor countries to access global institutional investors, they would need to reengineer their financial systems around securities markets on the terms of those investors, a Trojan horse for shadow banking and financial globalization.

On its 2017 launch, the World Bank euphemistically termed this strategy “Maximizing Finance for Development” (MFD). Its promotional video starts with simple arithmetic: ending extreme poverty and meeting the SDGs will cost $4 trillion a year; development aid is only $380 million a year, while remittances and philanthropy can generate another $1 trillion annually, leaving the world about $2.6 trillion short. Cue sad music and a bright solution outlined by an enthusiastic millennial voice: developing countries can offer $12 trillion in market opportunities to global institutional investors. These market opportunities include “transportation, infrastructure, health, welfare, education — everything actually.” Everything can become an asset class, as development is recast as an exercise in the privatization of public services to generate returns for global finance, and a “changed mindset” means abandoning any future hope for developmental states.

The World Bank video explains the process — formally termed the Cascade Approach — for turning everything into an asset class. The Cascade Approach offers a sequence of steps to diagnose why global investors are reluctant to finance development projects: first, identify reforms (regulatory or other policies) that improve the risk-return profile; if reforms are insufficient, then identify subsidies and guarantees to de-risk the project; if reforms, subsidies, and guarantees are still not enough, then opt for a fully public solution. This is a blueprint for promoting shadow markets in which bankable projects can be transformed into liquid securities ready for global institutional investors.