I've just read David Prychitko's article assessing the financial instability hyposthesis from an Austrian perspective. It is in the current issue of the Review of Austrian Economics (a first class edition, I must say...), and I've also noticed (via Steve Horwitz) that not only has Peter Lewin shared his thoughts, but that Peter Lewin is blogging (this is fantastic!)
I really enjoyed the article, which argues that the "Minsky moment" can be viewed as one phase of the overall Austrian business cycle story, one that is already explained by the ABC, and one that fails to provide for an account of the overall cycle. In short, we can learn from it and shouldn't ignore the insights, but it's neither a full blown alternative not refutation.
The part I found most interesting was when Prychitko discussed the Greenspan put (p.219). I confess that this is normally a red flag to me, indicating that someone is using traditional Public Choice-style incentive arguments and not distinctly Austrian attention to knowledge problems. I am a big fan of Jeff Friedman on this point (and have a working paper with him), and have a paper under review that spells this out in more detail (email me for a copy - it's based on talks at the 2008 Southerns and the FEE conference on Vienna to Virginia). My problem is those who downplay the differences between the Austrian and Public Choice approaches, settling for the idea that both matter. The problem is that in many empirical examples these offer two alternative hypotheses. My concern is that the similarity between the conclusions between the two schools lead people to downplay the analytical differences.
My understanding of the "epistemic primacy thesis" (previously alluded to here) is the following:
epistemic factors take primacy over motivational ones
I follow Lavoie (1985) in treating the "problem of knowledge" as more fundamental to the "problem of motivation", and Kirzner's view that:
“unless one could imagine that Mises’ calculation problem has somehow been solved, questions of motivation… cannot even be asked” (Kirzner 2006, 30).
(Incidently, I view Chris Coyne's "After War" as a classic example of taking epistemic primacy seriously.) In terms of the financial crisis, I therefore think that people who advocate moral hazard explanations are typically not taking knowledge problems seriously. And indeed when I re-read Prychitko on this it became clear that he's using the Greenspan put as an example of the consequences of the conditions of uncertainty and ignorance. In this sense we do indeed see knowledge problems being treated as primary to incentive ones. Maybe I should re read other articles to see if they do possess this subtlety, but it's something that leaps from the page.
I appreciate that this sort of claim is best tested within the peer review process, but given the public debate of Prychitko's article (and the fact I happened to read it today), I wanted to make this small contribution.