Four Authors You Absolutely Must Read Before The Super Crash

Though the mills of God grind slowly; Yet they grind exceeding small;
Though with patience He stands waiting, With exactness grinds He all.

      – Henry Wadsworth Longfellow, “Retribution”

The 2008 disaster was a long time in the making. Every time we have a crash, it is because we stubbornly entertained the wrong ideas for many years beforehand.

The seeds of destruction in 2008 were primarily ideological; they grew out of widely accepted but flawed ways of thinking about capital, economic growth, and financial regulation. Instead of basing economic growth on an honest free market model that privileges concepts such as equity, transparency, production, and prudent and limited regulation, those in positions of influence chose the path of debt, opacity, speculation, and wholesale deregulation.

There were two problems with this approach. First, the United States does not have a genuine free market; government regulation and crony capitalism play an enormous role in distorting incentives and interfering with market processes. Second, this regime is based on the radical error of pretending that markets are efficient and investors are rational when precisely the opposite is true.

A capitalist system inherently prone to booms and busts became even more susceptible to disequilibrium. In order to understand what happened and in order to rebuild a more resilient system, we must dig deeply into basic economic principles and reevaluate them.

And in order to do that, you absolutely must have a grasp of these four writers…

There’s No Substitute for These Four Intellectual Giants

There have been many influential economic thinkers whose work would greatly benefit market participants. In order to better understand the death of capital in 2008, four particular thinkers are worthy of extended discussion-Adam Smith, Karl Marx, John Maynard Keynes, and Hyman Minsky. But these thinkers need to be approached in a way that transcends economics. Three of the seminal works of economic theory that I recommend below –The Wealth of Nations (1776); Capital (1867); and The General Theory of Employment, Interest and Money (1936)-are best considered intellectual performances that far exceed the discipline of economics and qualify as both great literature and great philosophy that have influenced intellectual debate in a variety of disciplines for generations. Each of these works has been analyzed and debated endlessly in academic and policy circles for years and continues to provide rich material for thinkers in a variety of disciplines. This is a tribute to the genius of their authors and the fact that the concepts discussed in these works are subject to multiple interpretations and misinterpretations.

It is my contention that these intellectual giants provide insights into the nature of capital that have largely been misunderstood by investors, regulators, and policymakers. The result is that little progress has been made in effectively managing the boom and bust nature of free market capitalism, which in turn has caused capitalism to fall far short of reaching its full potential to contribute to the growth and welfare of human society.

That means, of course, that it’s absolutely vital to get a grasp on these authors to understand not only what is happening to us right now, but what will inevitably happen later if we are not careful.

Here are the works I recommend by each one of these authors (as well as some additional resources for further study). I hope you find them useful.

Smith and Marx

The first two thinkers, Adam Smith and Karl Marx, stand at opposite sides of the ideological spectrum yet share an enormous amount of common ground. These philosophers remain two of the most insightful students of capitalism long after their work began to influence the world. Adam Smith saw capitalism as a force for good, while Marx saw it as a cause of conflict and abuse. Their work provides important insights into the characteristics that render capital inherently unstable and crisis-prone.

Smith and Marx speak to several of the key intellectual and moral underpinnings of our economic collapse. Both men describe markets governed by complex human relationships that at their basic level are strongly affected by people seeking social approbation. They also make powerful statements about the fact that human economic interactions, and the relationships between money and goods, are highly mediated. Their writings help to illuminate some of the forces that drive economic actors to behave in certain ways that are ultimately very harmful to the long-term interests of society. By better understanding the profound truths that Smith and Marx described, we can hopefully address some of these flaws more effectively as we work to design a more productive economic system that serves the interests of all of us, not just the most privileged among us.

Adam Smith

  • Adam Smith, The Wealth of Nations (New York: Random House, 2000)
  • Adam Smith, The Theory of Moral Sentiments, Knud Haakonssen, editor (New York: Cambridge University Press, 2002)

For further study:

  • James Otteson, Adam Smith’s Marketplace of Life (New York: Cambridge University Press, 2002).

Karl Marx

  • Karl Marx, Capital, Vol. 1 (New York: International Publishers, 1967)
  • Karl Marx, The Eighteenth Brumaire of Louis Napoleon (New York: International Publishers, 1972)
  • Karl Marx, Grundrisse (London: Penguin Books, 1973)

For further study:

  • Francis Wheen, Marx’s Das Kapital: A Biography (New York: Grove Press, 2006)
  • Francis Wheen, Karl Marx: A Life (New York: W.W. Norton & Company, 1999)
  • Leszek Kolakowski, Main Currents of Marxism (New York: W.W. Norton & Company, 2008)

Keynes and Minsky

The last two thinkers wrote more recently and were particularly prominent in recent discussions surrounding the financial crisis of 2008. John Maynard Keynes and his most important modern interpreter, Hyman Minsky, understood the psychological aspects of capitalism as well as anybody who ever studied the system. In fact, Keynes may best be considered the greatest psychologist of economics, a mantle that Minsky assumed in warning of the dangers of financial instability. By focusing on the ways in which economic actors react to their environment, both men not only demonstrate great insight into human behavior but provide a road map for investors and regulators charged with navigating financial markets. Students of Minsky were undoubtedly the best prepared to recognize the unstable financing structures that led to the 2008 crisis, how these structures developed, and why such structures are endemic to the nature of capitalism and remain a serious threat.

John Maynard Keynes

  • John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace & Company, 1964)

For further study:

  • Hyman Minsky, John Maynard Keynes (New York: Columbia University Press, 1975)

Hyman Minsky

  • Hyman Minsky, Stabilizing an Unstable Economy (New Haven, CT: Yale University Press, 1986)
  • Hyman Minsky, “The Financial-Instability Hypothesis: Capitalist Processes and the Behavior of the Economy,” in Financial Crises Theory, History & Policy, ed. Charles P. Kindleberger and Jean-Pierre Laffargue (New York: Cambridge University Press, 1982)

Sincerely,
Michael

32 Responses to “Four Authors You Absolutely Must Read Before The Super Crash”

  1. Giancarlo Nicoli

    Hi,
    actually it is Keynesian ideas on debt that brought us here. Paul Krugman even got a Nobel Prize, go figure. The committee to destroy the world is made up by Keynesians.
    I would add to the four giants above Ludwig von Mises and Friedrich Hayek.
    Giancarlo

  2. You are to be congratulated for the effort to educate your readers. Further you should consider a book of your own. I say that all persons should strive to.lead humble and frugal.lives to.build suffienct capotal to.endure the economic cycles.
    As your wealth increases hou can loosen.up a bit. Avoid debt except to purchase a modest dwelling.

  3. Liberty Rancher

    Adam Smith’s “Theory of Moral Sentiments” is THE key to any discussion about societies and their economies. It is NOT that Capitalism had failed us but that WE have failed Capitalism in our immorality of dishonesty, etc. Moral Capitalism absolutely is the most pure and most free economic model. ALL other models don’t take into account the fallibility of man and make the assumption that “If we just have the right leaders running our centrally planned economy it will be Utopia for everyone!” No society is 100% moral but never forget, “Power Corrupts and Absolute Power Corrupts ABSOLUTELY !” Warmest Wishes to you all !

  4. Thanks for telling me about Human Minsky. I’ll have to check him out. I like that you don’t pick one of them to promote. My economic 101 professor was big on Keynes (late 60’s). I got into it with him when he tried to shove ‘supply and demand down’ our throats. I insisted prices were set in back rooms with handshakes. I think I won in the long run. Just look at the current oil prices.

  5. Its not that was wrong (necessarily) but that his theory is misunderstood and misapplied as policy. Sure, government can create stimulus in the economy when times are bad; but, government must pay off the accumulated debt when times are good. Constant stimulus and borrowing is not sustainable.

  6. We have been sacrificed by our leaders to the benefit of a growing minority, no one wants to address the issues because the faceless power brokers have strategically positioned themselves into control positions. The world is being trashed, the final thrust initiated by Bush, Blair & Clinton, many now live in misery yet peaceful coexistence can so easily be achieved, opposition is demonised, wealth is weak and feel compromised that they don’t speak out

  7. As an economic major all we got was.Smith and Keynes with a mention of Marx. Never heard of the Austrian School until I was too broke to benefit from it. Our leaders have all feathered their own nest for the last half century while creating their own school of thought.

  8. Ronald E. Baker

    Like you, Michael (and Janet Yellen, too) I studied economics at Brown University. But I was a Chemistry major and so I spent my career as a Chemical Engineer and manager; (Economics my minor concentration). We got stuffed with Keynes and also read/studied Marx, Engels, Stalin and Lenin Communist/socialist theories, Nazi and Fasciest texts as well as Malthus, Marshall and all the great traditional economists; yet my lasting impression was Adam Smith. Yes, he was head and shoulders above all the rest; her stands like a beacon in a sea of foggy understanding of economic realities. He told it like it truly was! (The rest were theorists and rather impractical dreamers or utopians). Now 50+ years later, we discover that the more things change, the more they are the same. Human beings are, alas, fallen creatures, on a quest for redemption. Our selfishness, greed and murderous narcissism have plagued us since Moses time and MUST be exposed and subject to reasonable checks and balances! We haven’t the honesty to admit it! Only an economic system of fair and free, open markets can expose mankind to a possible level playing field, providing it can be safe from rigged fiat currencies from corruptible governments and transacted only with an impartial, independent un-counterfeited media of exchange (precious metals) that nobody can openly corrupt. Our modern world financial and trade system is neither fair nor free; it is obscurely manipulated with the collusion of governments and a small clique of insiders who wield un-equaled economic power. Until the people can break this hammer-lock strangle hold by the few, nothing shall change. Sanders message has been that free, open, democratic transparency of all of these hidden power structures is the best way to weaken their hold on the vast majority of free men & women. His prescription is both necessary and improbable, since both major US political parties are controlled by the clique of power and vast money resources, unlikely to yield to any alternative. So America is locked in a battle with an unindicted criminal vassal of Wall Street and a lunatic con-man, bent upon a Mussolini approach to governance. Woe to the USA! The resolution of it all shall come when the derivative mountain of Pompeii proportions ($700 Trillion of derivatives) explodes and all in their path are covered in ash and lava. Chaos, destruction and mayhem await such a Super Ponzi scheme as the USA and World financial power systems have constructed. Nobody expects it and nobody has a way to overcome it. Once this financial tsunami hits and passes over the world, the residual survivors will have to start a-new. The day is past due; it shall come. Somber reality awaits us all, Clinton or Trump are mere pawns in the approaching storm, soon to be swept away for a new era of honest trade, money and commerce. Boy oh boy it shall be painful; but necessary!

  9. Sorry for an emotional reply, but I am deeply disturbed by your words about Karl Marx. Karl Marx was not a scholar,, but only writer of histories:
    1. He was a materialist. The matter was always, it changes over time but it did not have the beginning. Marx in this way puts in question the most fundamental principle of science namely, that every change has its cause. This principle – has been given by Aristotle about 2500 years ago in the book Methaphysics. This principle is very fundamental, no science exists if it neglect that. Therefore we may say that Marx was not a scholar, but an idealist. Second important thing about him is that he announced that there is only a matter, if there is anything spiritual among the people – which he could not negate, spirit (human spirit, thoughts, artistic experiences, mental processess like building mathematisc or developing sciences ) is the result of the internal contradiction of matter as such. Again, Metaphysics states that beings are not contradictory to themselves and never are.
    Marx’s thought rests on Hegel’s philosophy, which rightly is called an idealistic philosophy. Everybody can have ideas, but to qualify an idea as something scientific requires compliance with the bases of science. Again, seven or so of these principles were given by Aristotle in his book Metaphysics and there is no science which does not comply with it. Metaphysics precede mathematics and there would not be mathematics without the rules of thinking developed by Greek philosophers.
    Marx originated socialism. He gave the roots and principles of it together wit Engels. Just a reminder: Paris upraising in 1870 was done by followers of Marx, later Lenin was an avid reader of Marx as well as Stalin. Hitler was a national socialist, Mao Tse Tund, pol Pot were also socialists. Would anyone say today that their ideas incorporated into the state systems was scientific? Marx was one of the greatest liars living in this world.

  10. It all boils down to human nature. There is the “talented ten percent” who are very creative and very successful. They tend to take advantage of those less able and rule supreme. Then there is the above average who do very well and don’t realize that they have a responsibility for others, but try to become like the ten percent. The average lead normal middle class lives and tend to be fairly content, having a nest egg in the end. Then there is the below average who need help, but all those above them think they just need to try harder, and some of them do. All are fatally flawed because they are not aware of their responsibility to their fellow man. Someone had a redemptive answer to all the above. His name was Jesus. How about reading His book?!

  11. Sound of the Suburbs

    In the US, if your parents aren’t wealthy enough to get you into an Ivy League University you are not going to get a top job.

    The US has the same atrocious social mobility as the class ridden UK.

    What the “talented ten percent” have to do with anything I am not sure.

  12. Sound of the Suburbs

    The most fundamental thing that hardly anyone understands, money itself.

    Money and debt are opposite sides of the same coin.
    If there is no debt there is no money.
    Money is created by loans and destroyed by repayments of those loans.

    Step out of the dark and into the light.

    “Where does money come from?” available from Amazon.

    Or the BoE if you prefer:

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneyintro.pdf

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Banks were deregulated and reserve requirements were set very low to allow almost infinite credit to enter the system.

    Before 2008, tons of new debt was coming into existence and the money supply increased and fed into the general economy. It felt like there was lots of money about because there was.

    All this new money didn’t impact inflation figures that much because most of the inflation was taking place in real estate that isn’t included in the inflation figures.

    After 2008, hardly anyone is taking on new debt and everyone is making repayments, the money supply shrinks and gets sucked out of the general economy. It feels like there isn’t much money about because there isn’t.

    Look at the US money supply figures leading up to 2008, its all private bank money creation through debt.

  13. Smith and Marks wrote within the context of contemporary life. The “Capitalism” Marks spoke of was indeed, Merchantilism, not Free Enterprise Capitalism. Smith recognized the evils of this Merchantilist regime though apparently took for granted what Albert J Nock recognized as the Merchant State which presided over the economic affairs of society. All the stated inherent shortcomings of “Capitalism” are in fact properly attributed to Merchantilism and the Merchant State, NOT Private Free Enterprise Capitalism. I believe these definitions need to more carefully respected least we all become grieviously misled. If fundamental soundness of an idea is a criteria, I will say Marks and Keynes are not “Giants” but rather “Dwarfs” I haven’t yet come up with a name for someone who adulates those who would use the power of their (substantial) intellect to twist the truth and misguide the unwary. I do appreciate Mr Levitt’s appreciation of the power of ideas and the seminal (largely unfortunate) impact that these folks have had on society.

  14. Forgive me a brief Diatribe:
    I have read all the economic writings you mentioned, except Minsky, which I plan to read.
    Having said this, it is NOT historically clear that “Free market economics” has ever existed! Your article gives me the impression that capitalist markets are free markets which have lead to booms and busts. Yes, free markets are capitalist markets but not all capitalist markets are free markets. This is not to say that booms and busts will not occur in a “free market,” it simply means that we cannot say or imply that (significant) booms and busts WILL occur in a “free market.”
    The most likely scenario is that a “free market” cannot exist with a government overseer. Perhaps anarchy is the only way to truly perform an experiment with a truly capitalistic “free market”…it’s never been tried!
    Keynes clearly saw the flaws inherent in capitalism elucidated by Karl Marx. He also realized Marx’s paucity of a workable mechanism to make socialism actually functional in society without significant abuses of power…Let it be clear that Keynes was pro-capitalist..just not Laissez Faire capitalist! He was not a fan of socialism in and of itself. He truly sought to find a balance between Socialism and Capitalism, modernly termed Progressivism. Although he was was brilliant in his wit and assessment he was not complete in his understanding as the “greatest psychologist of economics”.
    In a simplified way, he basically recommends that governments save during the Inflationary or stable economic periods (booms) and begin Monetary Easing durning Deflationary periods (busts). It is my impression, although his ideas were impressive, he failed to capture the variability of human nature.
    His approach fails to recognize the variability in psychology of human nature, such as sociopathy, especially seen in many politicians. These are people that are granted power…! This is amplified in a democracy where the people have realized they can vote themselves favors and advantages. They will not save during good economic times..they will most likely gain favors by spending…
    Also, this “in-between” (progressivism) approach seems to break down as discussed by Ludwig Von Mises in his book Liberalism: In The Classical Tradition, 1985.
    Keynes seemed so convinced he was right that he seemed to force his theories as absolute, which had many inadequacies. An example is the “Keynesian multiplier” of which H. George J. Stigler said, “The multiplier is the fuzziest part of his (Keynes’) General Theory.”
    In terms of economic theory, M. Agarwal (economicdiscussion.net) rightly stated “[no economic theory] is wholly invalid, whether it be mercantilism, classical economics, the historical school, the Austrian School or Keynesian economics. Each has made its contribution to economic thought and every economist should be familiar with the basic tenets of each system.”
    I have and continue to expand my economic knowledge, as this helps us understand the world just a little better. I have come to realize that, just as in medicine or biology, there are no unifying formulas or mathematical theories that can show exactly what will happen in organic systems…there will always be outliers (“Black Swans”).
    Economic “Booms and Busts” will likely always happen no matter what the system.. maybe we need to change our paradigm and think in terms of each individual taking responsibility for oneself before figuring out others’ problems. Yes, perhaps economics should be hands-off observation rather than activism…

  15. Look people, Keynes, Marx, Friedman, Minsky, what does it matter if we are hit by an asteroid and if we survive, we will enter an ice age like 12,000 years ago.
    Show me the money – I need to get my kid through college.
    Should I buy Gold futures?

  16. Steven Vasconcellos

    Thanks
    all your observations and insight has sparked my interest in the true form of exchange a full belly ,a comfortable shelter from the Storms of this existence and the expression of a utopian Peace within ourselves along with Laughter from our Children’s Children..

  17. You did not include in your list the Bible. It has a lot to say about wealth creation: ” … it is He (God) that giveth thee power to get wealth .. ” (Deut. 8:18); “But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.” (Matt. 6:33); “Bring ye all the tithes into the storehouse, … and prove me now … if I will not open you the windows of heaven, and pour you out a blessing…” (Mal. 3:10); etc. The Bible’s theology implies that wealth creation is also a function of the sometimes unseen hand of God, and is based on one’s relationship with God. Regards.

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