Warsh, beyond Powell and glory

 

Soon in a theater near you!

Kevin Warsh will have a difficult task ahead. But it is not quite the one most political and economic analysts have been emphasizing. For much of the commentariat, Warsh’s problem is that he needs to hike interest rates, and defy Trump. Many are concerned that he won't have the courage to do it.

Although he was seen as a hawk on inflation, he has been tempted by the possibility that artificial intelligence might raise productivity and allow lower interest rates. Like Alan Greenspan in the 1990s, who came to believe that the internet had reduced the inflationary impact of growth, Warsh appears, at least circumstantially, as a dove. Worse, he might do Trump's bidding and effectively end the independence of the Fed (gasps from the audience), and undermine its credibility (a terror flick for very serious economists).

But for most commentators the mild acceleration of inflation, associated to the price of oil and the war in Iran, and the uncertainty about the actual impact of AI (on that see Austan Goolsbee on Soumaya Keynes podcast) have made that position look less tenable for most analysts. Hence the renewed calls not merely to resist Trump’s pressure for lower rates, but to hike them. To imitate Powell, in this view, would be the path to respectability. Perhaps even to glory. It would also be a mistake.

Ruchir Sharma, for example, draws the conventional hard-money conclusion. Warsh, he argues, should begin his tenure by raising rates and ending the Fed’s easy-money bias. The argument is wrapped in populist language. Inflation hurts workers and the poor, while easy money fuels asset prices and benefits the rich. There is a kernel of truth there. But it is not always the case (see also). Besides rate hikes will not produce cheaper oil. The best hope there is the end of the war in Iran.

Powell was lucky. His interest-rate hikes did not produce a recession through the housing channel, reducing credit and consumption. But those hikes were not the main reason inflation came down. Inflation declined largely because the cost-push pressures associated with the pandemic value-chain disruptions and the oil shock after the Ukraine war subsided. The lesson is not that Powell became Volcker and saved the Republic. The lesson is that supply shocks eventually faded, and the Fed received more credit than it deserved.

This is the problem with the constant invocation of Volcker. As I argued before in my post on Paul Volcker’s legacy, the conventional story exaggerates the virtues of monetary toughness and obscures the social costs of disinflation. The Volcker shock was not a technocratic morality play in which courage defeated inflation. It was a brutal tightening that produced a deep recession, weakened labor, and accelerated the decline of workers bargaining power. It also caused the debt crisis and the lost decade for several developing countries. To recommend that Warsh seek his Volcker moment is to misunderstand both the causes of the current inflation and the political economy of monetary policy.

The same problem underlies what I called inflation paranoia. The New Consensus view treats inflation as always and everywhere a problem of excess demand, to be solved by the central bank through higher rates. But the recent pandemic inflation and its more recent and milder rekindling are not fundamentally excess demand, or a wage-price spiral driven by an overheated labor market and distributive conflict. It is a cost-push episode shaped by energy shocks and the previous one by logistics problems too. Again, this is NOT the 70s show.

Warsh cannot fix cost-push inflation by hiking interest rates. He can slow the economy, weaken labor markets, and perhaps prick asset bubbles. But that is not the same thing as solving the causes of inflation. There is no significant risk of high inflation. The biased lesson drawn from the Volcker legacy is that central bankers achieve greatness by inflicting pain. The better lesson is that Warsh should not seek glory by repeating Powell’s hikes or, worse, by chasing a new Volcker myth.

Rod O’Donnell on Keynes and Liberal Socialism

 

Hits and Mises (click for the joke)

I have been rereading again Rod O'Donnell's work on Keynes' political and social philosophy. I had not read his 1989 book, Keynes: Philosophy, Economics and Politics, in a long while. The occasion is the forthcoming 7th Workshop on Demand-led Growth in Rio, organized by Ricardo Summa, where I will discuss an extension my discussion of Keynes' political views, and in particular of the question of whether Keynes should be understood as a liberal or as a socialist. I had already discussed James Crotty's important contribution to this debate in my paper for Tom Palley's forthcoming Festschrift, available here. Crotty, in Keynes Against Capitalism, argues that Keynes wanted to replace the capitalism of his time with what Keynes himself called "liberal socialism." O'Donnell's case is in some ways older and, in my view, more careful, but it moves in the same direction.

 

O'Donnell's interpretation is that Keynes' economics cannot be separated from his ethical and political philosophy. Keynes was not merely trying to fix some technical problem in the theory of employment. His economics was part of a broader project concerned with the conditions for a civilized life. Keynes' social philosophy was about much more than the level of output and employment. It was about the possibility of reducing insecurity, limiting the power of the money motive, preserving individual freedom, and creating the material conditions for the good life.

 

In the two chapters on political philosophy in the 1989 book, O'Donnell presents Keynes as a liberal, but not as an old laissez-faire liberal. Keynes was not committed to the idea that private interest automatically promoted the public good. He believed that capitalism had to be managed, that the state had to take responsibility for investment, employment, public works, education, health, the arts, and the broader conditions of civilization. According to him, Keynes was also deeply critical of the moral foundations of capitalism, especially of the acquisitive mentality and the social prestige attached to money-making. 

 

That is why O'Donnell sees Keynes as moving beyond capitalism in the long run. For him, Keynes did not admire capitalism. He thought it was ugly, unstable, and morally corrupting. For O'Donnell, the instability is deeply connected to Keynes' views on probability and uncertainty. O'Donnell sees Keynes as believing capitalism is not self-stabilizing, largely because investment and economic life are organized around uncertain expectations, money, and private profit rather than social purpose. In this view, Keynes preferred capitalism to the alternatives available in his own time, above all Soviet central planning and fascism, but not because he regarded capitalism as an ideal social order.

 

O'Donnell is right to insist that Keynes' defense of capitalism was qualified. But I am less sure that Keynes wanted to transition to an alternative social arrangement. His disregard for some aspects of capitalism seems more aesthetic, at least based on his several bios, including Skidelsky's one, and in his writings like 'My Early Beliefs.' He might have thought that the pursue of profit was vulgar, and that the good life resided in the arts and the pursuit of beauty. But beauty and arts were defined in an avant-garde, elitist way. I doubt he saw beauty in a football game (or soccer as people calls it in the US). As I noted in the paper linked above, following Skidelsky, Keynes wanted to preserve the social arrangements in which he was brought up, the presuppositions of Harvey Road, as Harrod would have called them.

 

In his later 1999 essay on Keynes and socialism, O'Donnell pushes this further. Keynes, he argues, should be taken seriously as a "liberal socialist." The term, of course, was used by Keynes himself. O'Donnell's point is that socialism should not be reduced to Marxism, public ownership, class struggle, or revolutionary transformation. If socialism is understood more broadly as the use of social control for public purposes, then Keynes can be understood as a socialist of a particular kind.

 

There is something to this. Many of Keynes' views would now be seen as social democratic. Full employment policy, redistribution, social security, public works, capital controls, the euthanasia of the rentier, the socialization of investment, and the rejection of laissez-faire all became part of the language of the postwar welfare state. In that sense, Keynes does not fit the later caricature of liberalism as simply market liberalism. He is closer to the use of the term in the United States. But he belongs to a different tradition, the New Liberal tradition.

 

Peter Clarke's Liberals and Social Democrats shows that there was a group of left Liberals before Keynes, figures such as L. T. Hobhouse, J. A. Hobson, Graham Wallas, and the Hammonds, who moved British liberalism beyond the Gladstonian night-watchman state. They were all close to the Fabian Socialists, the Webbs, and Shaw, in varying degrees, and they all had a break with Fabianism. They accepted that formal liberty was not enough in a society marked by poverty, unemployment, inherited privilege, and social destitution. In that respect, they were close to what would later be called social democracy. That's Clarke's point to some extent, they were liberals and social democrats.

 

Indeed, one could say that they were among the intellectual ancestors of Keynes' liberalism. They were certainly moving away from liberalism, but, in my view, they fell short of social democracy, certainly as it was defined at that time, since they were averse to class conflict politics, and detached from any conception of the working class as the agent of political change. They were not Fabian Socialists (who mostly accepted marginalist economics), let alone Marxists, and certainly did not join Labour. They felt well represented by the Liberal Party under Asquith, and Lloyd George's People's Budget. In fact, Clarke suggests that Hobson's theories could be seen as shaping the policies of the Liberal administration.

Keynes' own political position is easier to understand in that context. He was not a socialist or a social democrat. He was a New Liberal, or perhaps a late heir to New Liberalism, who thought that liberal civilization could survive only if laissez-faire was abandoned. His political project was not to replace capitalism with working-class power, but to preserve a civilized, decentralized, liberal society by reforming capitalism from above. Managed by an educated elite, and not workers themselves. What distinguished him from the earlier New Liberals was that he developed a theory of why capitalism, although stable in purely economic terms, could settle into persistent unemployment and fail to resolve social conflicts harmoniously, thereby becoming politically unstable. But his theory was far more radical than his politics. He remained, as noted by Palley here, deeply antagonistic to the politics of class antagonism.

 

This does not mean that Keynes was against workers, at least not in any simple sense. On the contrary, his policies were favorable to workers. Full employment strengthens workers. Redistribution improves the bargaining position of workers. Public works reduce unemployment and insecurity. Low interest rates and the euthanasia of the rentier weaken capital. But none of this makes Keynes a socialist if socialism has anything to do with the working class as a political subject.

 

He was elitists and paternalistic when it came to workers. Keynes did not ground his politics in labor. He did not regard trade unions, class struggle, or workers' control as the foundations of a new social order. He certainly did not call for the abolition of private property or the collective ownership of the means of production (well duh!). Indeed, it is not even clear that he would have accepted the more moderate Labourite objective of bringing the commanding heights of the economy under public ownership as desirable in itself.

 

This is why the distinction between policies favorable to workers and working-class politics matters. Keynes wanted full employment, but not because he had adopted a socialist theory of class power, and the need for alternative ways of arranging productive forces. He wanted to prevent capitalism from producing the social conditions that could lead to revolutionary politics, authoritarianism, or collapse. In that sense, the old claim that Keynes wanted to save capitalism remains broadly correct, but it must be qualified. He wanted to save capitalism from laissez-faire capitalism. The educated bourgeoisie, people like him, would be in charge. That was illustrated by his remarks on Bretton Woods conference as a "monkey house" because of the presence of delegates from the dominions and other lesser countries.

This is also why the New Liberal connection is more useful than the socialist label. The New Liberals were reformers who understood that liberty required social conditions. They were critical of poverty and unearned income. They supported social reform and the early welfare state. But they were not socialists in the sense of grounding politics in class struggle, collective ownership or an alternative to the capitalist system. Keynes radicalized this tradition in the context of the interwar crisis, the collapse of the gold standard, mass unemployment, and the failure of orthodox economics. But he did not abandon its basic political orientation.

 

This is the crucial point. O'Donnell is right that Keynes was not a laissez-faire liberal. He is also right that Keynes used the term liberal socialism, and that Keynes' policies moved far beyond orthodox Liberal Party economics. But the problem is that O'Donnell can call Keynes a socialist only by expanding the meaning of socialism so much that it begins to cover what is more precisely called New Liberalism.

 

The paradox, then, is that Keynes' economics was more radical than the economics of many socialists of his time. Labour politicians were often trapped in sound finance and Treasury orthodoxy, while Keynes was willing to experiment with public works, managed investment, and the abandonment of old rules. But Keynes remained, in political terms, closer to the liberal tradition to which he repeatedly declared his allegiance. The confusion comes from the fact, as I emphasized in the paper linked above, that Keynes was never a socialist, but socialists eventually converted to Keynesianism. However, post-war socialists and social democrats used Keynesian tools in the fight to promote labor power. Keynesian means, but not Keynesian ends.

Stocks, flows, and the little matter of debt in dollars

I often tell students that Kalecki had a dictum to the effect that macroeconomics is the art of confusing stocks and flows. As usual, it is not clear he said it exactly that way, but the point is correct. One must never let exact textual evidence get in the way of a good aphorism. The standard textbook story suggests that the flow of saving finances the flow of investment. In fact, the flow of spending is financed by stocks, money, credit, debt, previously accumulated wealth, bank balance sheets, central bank liabilities, and so on. Savings is mostly the accounting record left behind after the spending took place.

The relevant question is not whether the economy has enough saving lying around, but whether the financial system can create the means of payment, and whether the real resources are there to make the additional spending useful rather than inflationary.

In a closed economy with spare capacity, the answer is often more straightforward than the guardians of sound finance would like to admit. As Keynes suggested in his 1940s letter to Sir Edward Bridges (excerpt shown above), domestic expenditure and overseas expenditure are not the same animal. In the domestic case, “within reason anything is possible financially,” provided the case for the expenditure is strong enough.

But open macroeconomics requires an amendment to Kalecki’s dictum. If macroeconomics is the art of confusing stocks and flows, then open macroeconomics is the art of confusing debt in domestic currency with debt in foreign currency. The confusion is everywhere. Somebody notices that part of the public debt is held by foreigners and immediately concludes that the nation is now dependent on foreigners, that future generations are forever burdened. But the key issue is not who holds the debt. The key issue is the currency in which the debt is denominated. Btw, see this old post on Chester C. Davis, then President of the St. Louis Fed, who in 1942 understood perfectly well, as did Keynes, that a domestically denominated public debt did not present the same problems as an external debt.

If the debt is in the domestic currency, the state can always make the payments in that currency. That does not mean there are never distributive consequences, inflationary pressures, or political constraints. It means that default is not forced by the lack of the unit of account in which the debt is payable. The United States does not run out of dollars in the way Argentina can run out of dollars. This is not American exceptionalism in the usual tedious sense. It is merely monetary sovereignty, helped enormously by the fact that the dollar is the hegemonic currency.

Foreign-currency debt is different. It must ultimately be serviced with foreign-currency revenues. In the long run that means export proceeds. Borrowing abroad can postpone the problem, but it cannot abolish it. Principal and interest are not repaid with patriotic speeches or with central bank press releases in the domestic currency. If a country owes dollars and earns pesos, reais, drachmas, or some other less divinely ordained currency, it must somehow get the dollars. Printing domestic currency to buy foreign currency may work when markets are tranquil and foreign exchange is available. But when the problem becomes serious, the exchange rate moves, reserves disappear, import capacity is squeezed, and the only solution becomes devaluation, which is both inflationary and contractionary. That often means default. Keynes knew about that.

This is exactly why Keynes insisted on the distinction between domestic and overseas expenditure. Domestic expenditure mobilizes domestic resources and is paid in domestic money. Overseas expenditure creates a claim on foreign resources and foreign exchange. Keynes’ concern was not the silly household analogy, that Britain should tighten its belt because father had maxed out the credit card or something. His point was that external payments could impose a real constraint because they required command over resources abroad. You can always spend your own money at home, subject to real capacity and inflation. You cannot always spend someone else’s currency abroad, unless you can get it. Keynes was this close of finding out about the external constraint.

In some circles this simple and reasonable notion is mocked or seen as politically biased in some sense (see the tweet above in Spanish; I'm a pseudo progressive and Peronist, an insult I guess,* because I don't get the relevance of fiscal deficits. After that tweet one is tempted to say that for some Very Serious Political Scientists, all debt is external debt as long as the word debt appears in the sentence. The currency denomination, apparently, is a technicality best left to accountants, heterodox economists, and other suspicious characters). This is particularly true in developing countries where foreign debt is a problem, like Argentina. Of course the external debt limits what can be done in the fiscal front. See my paper on that here, and my response to an MMT author from Mexico, who suggested that with flexible rates you should have no need for reserves (in dollars).

So the amended dictum should be that open macroeconomics is the art of confusing domestic-currency debt with foreign-currency debt. The first confusion leads to the idea that saving finances investment. The second leads to the idea that all public debts are external debts. Both errors are useful, of course. They provide employment for orthodox economists, central bank consultants, and Very Serious People. One should not underestimate the Keynesian employment effects of bad economics.

* The funny thing is that the family was very Gorila, as they refer to non or anti-Peronists. As per the first page of the NYTimes below (hard to read, but you can enlarge it), my father's uncle had put Perón in jail in 1945.

Note, however, that my father was not a dogmatic man. He did vote for the Kirchners (not Menem, the Peronist that neoliberals love).

Stiglitz on Keynes and the instability of capitalism

 

Stiglitz delivering the 6th Godley-Tobin Lecture in 2023*

The Economist published a short piece by Joseph Stiglitz on Keynes. I would agree with Stiglitz's on the broad political point that Keynes was not a revolutionary socialist, as I have discussed before. He wanted to save capitalism from itself, as they say. Stiglitz essentially says the same. For him: “Roosevelt’s pragmatism and Keynes’s ideas saved capitalism from the capitalists,” because unfettered capitalism in a prolonged depression might not have survived. He also says Keynes was “no left-wing radical,” believed in the market economy, and saw intervention as a “minor fix” rather than a revolution.

Stiglitz correctly suggests that Keynes remained a liberal, not a socialist, and that he was a moderate in politics even if he was willing to experiment pragmatically with policy. In that he differs from Jim Crotty, and Rod O'Donnell's work on Keynes political views, who suggest he was a socialist. Stiglitz, in contrast, suggests that Keynes understood that laissez-faire capitalism had to be transformed or transcended, but he did not abandon bourgeois liberal society. In my paper I say he was “a revolutionary in economic theory, but a moderate in his politics.”

The key difference between Stiglitz interpretation and my view is on theory. Stiglitz’s Keynes is still, to a significant extent, the Keynes of mainstream Keynesianism. Markets can fail badly, can remain in unemployment for long periods, and government spending is needed to stabilize demand. But he frames the issue partly as one of slow self-correction. Even if there are forces bringing the economy back to full employment, “they worked too slowly” to avoid hardship. That leaves open a conventional reading in which Keynes is mainly an imperfectionist, for whom markets may eventually work, but sluggish wages, prices, interest rates, failed expectations related to uncertainty, or financial frictions that make the adjustment too slow.

The disagreement is not over Keynes’ politics, but over the depth of his theoretical break. Stiglitz emphasizes Keynes as the economist who showed that government could stabilize an inherently unstable capitalist economy. I would emphasize Keynes as the economist who broke with Say’s Law and developed the Principle of Effective Demand. That is why, in my interpretation, Keynes is not simply saying that markets adjust too slowly to full employment, rather he is saying there is no automatic tendency to full employment even with flexible wages and prices. Even if he had to resort to uncertainty at the end, because in many ways he remained too close to mainstream Marshallian principles.

The point is not that Keynes thought capitalism was intrinsically chaotic in the sense of constantly tending toward breakdown. Rather, he thought it could be economically stable in a bad equilibrium, capable of persisting for long periods at sub-normal levels of output and employment. He said so in the General Theory, capitalism is “not violently unstable,” and may remain in “a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse."

Stiglitz emphasizes instability in the more conventional economic policy sense. Capitalism produces deep fluctuations, depressions, recessions, and crises, and Keynes showed that government could counteract them. That is true, but it risks making Keynes look like someone whose main theoretical contribution was to show that capitalism is unstable and needs stabilization policy. The Keynes of the 1920s essentially defended that. In my view, Keynes’ more radical theoretical point, only developed in the early 1930s, was different, the system can be stable without being self-correcting to full employment.

Stiglitz stresses Keynes as the theorist of crisis prevention and macroeconomic stabilization, which is fair enough. Certainly that is the dominant view on Keynes. I would stress Keynes as the theorist of stable underemployment capitalism. The danger, for Keynes, was not simply that capitalism would spiral mechanically into economic collapse. The danger was that a system capable of remaining stuck below full employment would generate social and political pressures that could undermine liberal capitalism itself. It was politically unstable, but not necessarily in economic terms.**

Keynes wanted to save capitalism, but not because he thought markets were simply fragile and prone to immediate economic disintegration. He wanted to save capitalism because persistent unemployment and stagnation made the liberal order politically vulnerable, both to Soviet style socialism and fascism. His policy prescriptions aimed at full employment domestically in the face of the rising tide of fascism and communism, both of which he abhorred, as I noted in the paper linked above.

This makes Keynes neither a simple imperfectionist nor a crude instability theorist that believed the system to be on a knife-edge. He was trying to say something subtler. Capitalist economies may be stable enough to survive economically at low levels of activity, but precisely that stability at underemployment makes them politically dangerous. The economic problem is not automatic collapse, but the absence of any reliable automatic mechanism restoring full employment. It was a political problem, and it remains so, even if there are some important changes from his time.

Today, at least in the United States and other advanced economies, the problem is less often mass unemployment in the Keynesian sense than the quality, security, remuneration, and social meaning of employment. Capitalism may deliver low levels of unemployment while still producing precarious, poorly paid, or socially degrading jobs, thereby reproducing a different form of political instability.

* Stiglitz's Godley-Tobin Lecture is free for download here.

** Capitalism would undermine political stability. On a recent post on Schumpeter (the one in the Substack) I suggested that: "The irony is that Schumpeter thought that markets were efficient and capitalism would collapse, while Keynes thought that markets produced suboptimal results, and that capitalism might survive." I would add, Schumpeter thought that democracy would undermine capitalism, Keynes thought that capitalism would undermined democracy.

What made Keynes, Keynes

A few years back, a paper of mine was rejected in a prestigious heterodox journal, because it failed to grasp the importance of Keynes' sexual diaries. In fact, I had not read them (guilty as charged). My research was outdated, I was told by an angry referee (number 1, as it turns out). Not long after, I was asked to referee, for the same journal, I might add, a paper on Keynes' sexuality and its possible implications for his economic thought. The paper dealt with Keynes' sex diaries from the early twentieth century and suggested that Keynes' sexuality, together with his broader philosophical views, may help explain some of his later economic ideas. The question is interesting, not least because it has often been raised in different contexts and with very different political implications.

A decade ago or so, Niall Ferguson suggested that Keynesian profligacy was connected to Keynes' homosexuality and his alleged lack of concern for future generations. The notion that Keynes' theory was a short run one because he was childless has a long pedigree, associated to other conservative luminaries like Joseph Schumpeter. Same arguments were made by Murray Rothbard, as noted in the paper linked above. Ultimately, the argument is analytically weak, since it tries to move directly from biography to policy conclusions without establishing the relevant links.

The paper I read was sympathetic to Keynes and tried to connect his sexuality to his sensibilities about the economy as a whole, his views about “the good,” his relation to G.E. Moore’s philosophy, and eventually his views on uncertainty, money, and economic life.

Still, the broader problem remains. It is one thing to say that personal experiences, including sexuality, help shape the sensibilities of an author. That is almost certainly true, and in some sense trivial. It is another thing to claim that sexuality explains a particular set of analytical propositions. That is a much more ambitious claim, and it is far harder to sustain. In the case of Keynes, the relevance of the sex diaries for understanding the central analytical ideas of The General Theory (GT) is far from obvious.

There is no doubt that Keynes' philosophical views mattered. His early engagement with Moore, the Bloomsbury milieu, and his rejection of certain Victorian conventions all shaped his conception of life, morality, beauty, friendship, and the good society or the good life. These things may also have influenced his impatience with narrow utilitarianism and with purely mechanical views of economic behavior. But the difficult question is how one moves from those philosophical and personal sensibilities to the concrete analytical propositions that define Keynes' contribution to economics.

The question of exactly what was Keynes' main contribution to economic thought is often vaguely answered, and even within Post Keynesian groups there is considerable disagreement. If the answer is simply uncertainty, as for many in the heterodox camp, then the argument is incomplete. Keynes certainly gave increasing importance to uncertainty, especially in his 1937 response to critics of GT. Chapter 12, with its discussion of long-term expectations, conventions, and the famous beauty contest metaphor, is central to that interpretation. But Keynes’s contribution cannot be reduced to uncertainty.

Moreover, uncertainty alone does not make Keynes distinctive. Frank Knight and Friedrich Hayek also thought uncertainty was central to economic life, yet they reached very different conclusions from Keynes. G.L.S. Shackle, a student of Hayek and an important figure in some Post Keynesian interpretations of Keynes, combined elements of both Keynesian and Hayekian views. This suggests that the recognition of fundamental uncertainty can be grounded in very different theoretical frameworks and can lead to very different policy conclusions. The harder question, then, is not whether Keynes cared about uncertainty, but why uncertainty had the role it did in his broader theory of capitalism.

In my view, the central proposition of the GT is not simply uncertainty in a monetary economy, but the principle of effective demand. Keynes' main analytical break was with Say’s Law and with the idea that investment would automatically adjust to full-employment savings, even if slowly. The point of the GT, as Keynes himself made clear, was first of all a theory of employment. Autonomous spending determines income. Investment does not adjust automatically to full-employment saving. The level of activity can settle below full employment, not as a temporary deviation caused by rigidities, but as a normal outcome of a monetary production economy.

Uncertainty matters in that argument, but it is not central to the argument. It is the uncertainty about autonomous demand that matters. In fact, Keynes’s emphasis on uncertainty only became more explicit as he responded to critics and tried to explain why investment could not be treated as a simple function that smoothly adjusted to the full-employment level of saving, in part as a result of his acceptance of significant elements of marginalist economics. If uncertainty is presented as the core explanation, there is a danger of turning Keynes into an imperfectionist that believed that markets would work well enough if only expectations were less volatile and in the presence of full information. That was not Keynes’s deeper point.

His more radical proposition was that capitalism could be economically stable at less than full employment. It was precisely that economic stability below full employment that made the system politically unstable.

There is also a comparative problem. Michal Kalecki developed a version of the principle of effective demand independently, and arguably before Keynes. Kalecki's intellectual background was very different, shaped by Marx and Marxist authors rather than by Moore and Bloomsbury. This raises the question of how Kalecki's sexuality shaped his theory of effective demand. In that light, the question seems less compelling. That does not mean that biography is irrelevant. But it does suggest that the route from personal life to analytical theory is indirect, mediated by intellectual traditions, political commitments, historical circumstances, and theoretical problems internal to economics.

There is also the issue of Keynes' own intellectual development. Keynes' philosophical views were formed relatively early, if we are to believe Robert Skidelsky, and many other authors on the matter. But his economic views changed considerably over time. The Keynes of the Tract on Monetary Reform, the Treatise on Money, the Macmillan Committee, and The General Theory are not the same. If his basic philosophical and personal sensibilities were already present early on, the questions is  why did the principle of effective demand emerge only later, after the debates with the Cambridge Circus in the early 1930s. These questions cannot be answered simply by appealing to sexuality or early philosophical commitments.

A more plausible position would be that Keynes' sexuality and personal life formed part of a broader rejection of Victorian moral and social conventions. That rejection may have made him more open to questioning established economic doctrines, including the neoclassical faith in adjustment mechanisms, thrift, and the moral virtues of saving. It may also have contributed to his skepticism toward purely ascetic or efficiency-centered views of social life. Keynes did not think economics was an end in itself. He thought economic arrangements should be judged in relation to broader human purposes. In that limited sense, his philosophical and personal world mattered.

But the analytical core of Keynes' economics still has to be explained analytically. His theory of effective demand emerged from concrete debates about saving, investment, money, employment, and the failures of orthodox theory in the context of the Great Depression. His sexuality may help us understand Keynes as a person, and perhaps some of his broader sensibilities. It does not, by itself, explain the logic of the GT.

It is also a peculiar feature of the literature on Keynes' broader philosophical views to portray his motivations in a somewhat simplistic way as being apolitical. He had concerns with the good life, but not the public good. To accept the notion that Keynes was apolitical flies in the face of his extensive participation in the political process, not just as a bureaucrat, but more importantly as a direct participant in political campaigns, involved in the drafting of government program for Lloyd George in the 1929 election, for example.

Ultimately, the more interesting question is not whether sexuality caused Keynesian economics. It did not. The question is whether Keynes' position as an outsider to certain social conventions helped him imagine capitalism differently from the orthodox economists of his time. That seems plausible. Perhaps a good social scientist, a good economist, has to be more than "mathematician, historian, statesman, [and a] philosopher – in some degree," as Keynes suggested. They need to be a bit of an outsider, to see things from an alternative perspective.

Even then, what made Keynes, Keynes was not simply his personal life. It was his ability to transform a set of philosophical, political, and historical concerns into a powerful analytical critique of the self-adjusting market economy.

The General Theory at 90: The reconstruction of macroeconomics

On February 4, 1936, Maynard Keynes published The General Theory of Employment, Interest and Money (GT). I'm off by a few days. ROKE did notice it, but I had no time to post. I recently presented on the social policies discussed in the last chapter of the book at the ASSA Meetings in Philly (photo below; paper soon, hopefully).

Ninety years later, the book remains perhaps the single most important book in twentieth-century economics. The work that most decisively changed the direction of the discipline. And yet, much of what people think about the book is wrong.

The first thing to understand is that the GT is not a book about economic policy. Keynes says so explicitly at the outset. It is a theoretical work, written for fellow economists. It is not a blueprint for government spending programs. It is not a political manifesto. It is not a defense of deficit finance in simple terms. It is a theoretical reconstruction of how a monetary economy actually works.

The popular image of Keynes as the prophet of fiscal stimulus obscures this. Ironically, the book itself says very little about fiscal policy. There are some vague remarks about what Keynes calls the “socialization of investment,” but there is no systematic discussion of fiscal policy, for how to pursue expansionary fiscal policy or the construction of the welfare state, which is also often associated with Keynes. The policies we associate with Keynesianism, deficit spending, expansionary fiscal policy, tolerance for deficits and debt, at least in times of crisis, are not the core contribution of the book.

Another important historical irony, the GT arrived relatively late, both politically for the New Deal, but also in Keynes' own trajectory as a policy wonk. By 1936, Franklin Delano Roosevelt and the New Deal had already reshaped American politics. The Wagner Act had strengthened unions. The CIO was organizing industrial labor. Sit-down strikes in Detroit had forced General Motors to negotiate with the United Auto Workers. Figures like Frances Perkins, the first woman to hold a cabinet position, were central to labor reforms. Obviously Marriner Eccles (see my paper on him here), and his advisor Lauchlin (not Laughlin) Currie (and on him here) had not yet won the battle for fiscal activism, but they were entrenched in the New Deal environment. The shift toward a more interventionist state was already underway.

In that sense, Keynes’ theoretical revolution did not initiate policy change. It provided a new framework for understanding an economic world that was already politically transforming. So what was truly new in the GT, you may ask? After all, many still claim that the Treatise on Money, his previous work, with endogenous money, and more institutional discussion was a better book (Schumpeter, for example; Friedman preferred his Tract on Monetary Reform, more aligned with the Quantity Theory of Money). The revolutionary core of the GT is the principle of effective demand.

Neoclassical economics rested on Say’s Law (and so did classical economics, properly defined, but in a different way; without full utilization of labor), the idea that supply creates its own demand. Production generates income, and income automatically generates sufficient demand to purchase output. Persistent unemployment, therefore, could only be temporary. Keynes turned that logic upside down in the GT. Demand generates income. Output and employment are determined by the level of effective demand. There is no automatic mechanism guaranteeing full employment.

This idea was not fully developed until 1932, during intense discussions in Cambridge among the group known as “the Circus,” which included: Joan and Austin Robinson, Richard Kahn, James Meade and Piero Sraffa. Their critiques of Keynes’ earlier Treatise helped push him toward the insight that defines the book. That theoretical shift, not fiscal activism, is the true intellectual rupture.

Another misconception is to assume that Keynes needed the GT to defend fiscal activism. Theory and policy would be tied up together. In fact, he had already been advocating public works and expansionary measures since the mid-1920s, especially after Britain’s return to the gold standard created severe deflationary pressures. The 1926 General Strike and the electoral victories of the Labour Party in 1924 and 1929 occurred in this context of economic stagnation (see my paper on this here). Keynes’ policy activism predated his theoretical breakthrough. In other words, the policy ideas were not new. The theory that justified them, and explained why unemployment could persist, was.

It is also worth dispelling another myth. Keynes was not a socialist bent on expanding the state at all costs. He remained, throughout his life, a liberal in the classical sense, though one deeply critical of laissez-faire orthodoxy. His goal was to save capitalism from its own instability, not to replace it.

The “socialization of investment” he envisioned was pragmatic, not revolutionary. It reflected a recognition that private investment decisions were volatile and insufficient to guarantee full employment, not a desire to abolish markets or even for economic planning.

Ninety years on, The General Theory still matters, but his views have been in retreat since the 1930s, and only succeeded, during the so-called Golden Age of Capitalism, because they could be incorporated within the mainstream of the profession. The irony is that the book most associated with fiscal stimulus is fundamentally about something deeper: a reconstruction of macroeconomic theory. That task is still ahead.

The bridge to austerity and stagnation

I have always emphasized in the blog the importance of  the Principle of Effective Demand and the pitfalls of Say’s Law, as central to understand Keynesian economics. Keynesianism is about that and NOT about the rigidity of wages, or the interest rate, or even fundamental uncertainty (something to which Keynes had to appeal to defend his ideas from 1937 on, as a result of retaining the marginalist notion of the marginal efficiency of capital). Very often that is an abstract discussion, hard to follow for students. I'm in the middle of teaching this again this semester (first time I taught Intermediate Macro was in 1993 at the Universidade Federal Fluminense, UFF).

A recent paper by Guilherme Haluska, Franklin Serrano, and Ricardo Summa (2026) provides a good empirical look at these theories in action. The authors analyze the period from 2015 to 2022 in Brazil, a phase marked by a radical shift toward fiscal austerity, labor reforms, and a rigid constitutional cap on government spending. This policy shift, famously dubbed "The Bridge to the Future," was predicated on the neoclassical belief that cutting public spending would boost confidence and reduce interest rates, thereby triggering an explosion of private investment and export-led growth.

The results, as the authors demonstrate, were exactly the opposite: the bridge led straight to stagnation. By utilizing a demand-led growth framework, they show that the sharp contraction in public investment and social spending actually dragged down aggregate demand. Far from being crowded in, private business investment fell as a share of GDP because firms, facing a shrinking domestic market and stagnant consumption, had no incentive to expand capacity. In other words, the accelerator works. As often emphasized in this blog.

The paper serves as a powerful contemporary reminder that, as Keynes argued and as we have noted in many prior posts (too many to link), when the state retreats from its role in managing demand, the market often fails to find a natural path back to prosperity, leaving the economy trapped in a low-growth equilibrium.

PS: A version of that, linked in the blog before, here. For a few similar posts suggesting Brazil has no fiscal problems, see this from 2024, or this one, this one from 2019, and this one from the beginning of the Brazilian stagnation period in 2015 (check how correct, in your view, my predictions were).

Paul Davidson (1930-2024)

 

Paul (I'm next to him) and the Brazilians at the UMKC, PK Conference in 2002

Paul has passed away a few days ago. He wasn't in good shape for a while, and this was expected. He lived a long and productive life. I wasn't personally close to him, even though I met him several times from the mid-1990s onward. He went to two conferences I co-organized at the Federal University in Rio, always with Louise, which was a central figure of Post Keynesian (PK) life, and basically run the Journal of Post Keynesian Economics (JPKE) for him.

He was more effective as an institutional organizer, and as an observer of economic reality (and his main book was called Money and the Real World) than in his theoretical endeavors. His views on Keynes stayed close to the flawed discussion of the Principle of Effective Demand in chapter 3 of the General Theory, and an insistence on the importance of uncertainty and non-ergodicity in Keynes' work, that proved to be somewhat of a dead alley for PKs. He also emphasized the ideas of Tony Thirlwall, and his export-led model of growth, as a central PK contribution to economic theory. Finally, he tended to accept the views of Robert Skidelsky on Keynes' intellectual development, who, as I noted here, accepted a conventional on interpretation of Keynes' ideas, relying on imperfections to explain unemployment, even if he provided a much needed accurate biography of Keynes (in contrast to Harrod).

JPKE, that he created with Sidney Weintraub, and help from John Kenneth Galbraith among others, was central for a generation of PKs. He was part of the Trieste Summer Conferences that, in the early 1980s, that included many heterodox groups, and was the closest to Marc Lavoie's broad tent in real life, but failed to provide a unified view, and an alternative to mainstream marginalist theory. Many thought that the PK project was sectarian, and could not incorporate other views. I tend to think that the failure resulted from the fragmentation of the mainstream, that was reflected in the fragmentation of the heterodoxy, and were part of the era. Certainly not Paul's fault, who, at least in my experience, was very open and willing to debate, even if he did stick to his views. At least, not his personal fault.

When LP (Rochon) invited me to start a new journal, more or less at the time Paul was substituted as the editor of the JPKE by Jan Kregel and Randy Wray, on PK monetary economics, I suggested we needed a journal that would bring other Keynesians into the conversation. Hence, the Review of Keynesian Economics (ROKE).* Paul wrote to me once he knew about the new name of the journal. I knew from him that they had thought of naming their journal the Journal of Keynesian Economics, but the acronym would have been JOKE, so they opted for Post Keynesian, and the name stuck to the school of thought. He wasn't happy. But he understood that our project was very different.

Ours was not a journal to propagate the ideas of the heterodox followers of Keynes, and to emphasize the notion that effective demand mattered, at times that Keynesians were under attack with the neoliberal turn, and the rise of Monetarism and New Classical economics (Paul was in the book of debaters with Milton Friedman, that included also Jim Tobin, and a few other more conventional Keynesians). Ours was an attempt to recreate a Keynesian big tent (not an heterodox one) to reinforce the commonalities with all Keynesians (in spite of the many differences).

Paul was combative, forceful in his discussions, particularly about Keynes' legacy, and a key figure in the preservation of Keynesian ideas, when those were considerably less popular, and the profession moved incorrectly away from the Keynesian Consensus. Later many would gladly talk about the return of the master. Paul never abandoned him, and he was right. A great loss for the profession.

* On that see Tom Palley here and my discussion of Bob Solow's role here.

Keynes’ denial of conflict: a reply to Professor Heise’s critique

Tom Palley reply to response about his paper on Keynes lack of understanding of class conflict. In many ways, this is how Tom discusses Keynes lack of understanding of old classical political economy. Tom is correct in pointing out that:

"Kalecki (1933 [1971]) began the process of incorporating conflict into the Keynesian paradigm, but there is much more to be done regarding recognizing conflicts’ implications for economic theory and recognizing the multiple fora in which it appears."

Of course, Kalecki was building on Marx and classical political economy. Read the full reply here.

Was Keynes a Liberal or a Socialist?

 

A Socialist Rag

My old Will Lyons  Lecture at Franklin & Marshall College in the Spring of 2021 is now a working paper. Prof. Lyons was a Bucknell Graduate, and a professor at F&M. The topic was based on the, at that time, recent reading of Jim Crotty's book. From the abstract:

Right-wing critics of Keynes have often suggested that he was a socialist. His policy proposals were very often described as a slippery slope that would lead society into a totalitarian nightmare. Alternatively, from the left, Keynes was often seen as a reformist that intended to preserve the essence of capitalism. His reforms were mere window dressing on an exploitative system. The scholarship on Keynes also remained divided. However, in the last few decades a more robust position in favor of Keynes’ socialist affiliation was developed, particularly in the careful scholarship by Rod O’Donnell and James Crotty. This paper suggests that while Keynes was a pragmatist willing to experiment in economic policy, and fully aware of the need to transform and transcend laissez-faire capitalism, he remained a liberal, in particular because Labourites, and most socialists, remained conservative in their economic policy outlook. Keynes was a
revolutionary in economic theory, but a moderate in his politics.

Read paper here.

The problem with Keynes' General Theory: by Tom Palley

New working paper by Tom Palley. From the abstract:

Keynes' General Theory was a massive step forward relative to classical economics, but it was also a step backward in its denial of the conflictual nature of capitalism. There is need to understand Keynes' technical contributions regarding the workings of monetary economies, but also need to understand the flaws within his thinking and the consequences thereof. Keynes made a fundamental contribution elucidating the mechanism of effective demand, and he also has claim to be the preeminent monetary theorist. However, owing to his denial of conflict, he had a flawed view of capitalism which is why establishment Keynesianism struggles to explain contemporary stagnation. That flawed view also undermines the case for Social Democracy. Contrary to conventional wisdom, his view of capitalism is supportive of Neoliberalism and Keynes can be viewed as a compassionate (Third Way) Neoliberal.

In some ways this is the argument in Geoff Mann's In the Long Run We Are All Dead. I think one way of thinking about it is that Keynes' effective demand as a critique of marginalist (neoclassical) economics needs to be completed by old classical (political economy) ideas, which put the class conflict at the center of analysis. That of course is necessary for a policy break with neoliberalism.

Review of Crotty's "Keynes Against Capitalism" (forthcoming in ROKE)

It should not be a surprise that John Maynard Keynes is often seen as being relatively conservative by many progressively inclined or radical economists, that often tend to prefer the views of Michal Kalecki, or the more radical approach of Keynes’ favorite disciple, Joan Robinson. That is not the case in James Crotty’s book Keynes Against Capitalism, who takes a diametrically opposite view. He tells us that: “It is almost universally believed that Keynes wrote his magnum opus, The General Theory of Employment, Interest and Money [GT from now on], to save capitalism from the socialist, communist, and fascist forces that were rising up during the Great Depression era”, but in his view, that “was not the case with respect to socialism. The historical record shows that Keynes wanted to replace then-current capitalism in Britain with what he referred to as ‘Liberal Socialism’” (Crotty, 2019: 1-2). His Keynes was anti-capitalist and, in some sense, a socialist. The notion that Keynes was a socialist often encounters as much resistance as the notion that he was somewhat conservative, of course.

The book is divided in three parts. The first part of the book traces the development of Keynes’ ideas in the inter-war period starting with his significant role during the negotiations of the Treaty of Versailles, and the publication of his instant bestseller, The Economic Consequences of the Peace, that made him a worldwide celebrity, to development of the revolutionary ideas in the GT. The second part analyzes the theoretical ideas of the GT, and how they provide the foundations for a radical and socialist remaking of British capitalism. The third and last part discusses Keynes’ program in action, in the buildup to the war, and during World War-II, and its relevance for our days.

The first part of the book suggests that the Keynesian Revolution started in the 1920s with the slow evolution of Keynes’ thinking about the problems of the British economy, and his rethinking of neoclassical economics. Crotty uses the term classical, as did Keynes, creating unnecessary confusion, in particular because of his own sympathies with Marxist economics, that builds critically on the classical surplus approach. Crotty makes an important point, often neglected in the discussions of Keynesian economics. For Keynes the need for a new theory derived from an appreciation of the historical and institutional changes of British capitalism. Crotty argues: “Keynes’s core belief [was] that the West had entered a completely new historical era in which the institutions and policies currently used to regulate economic life were totally inappropriate. He associated himself with the American institutionalist economist John R. Commons’s view that Europe and America were currently in transition to a new historical epoch in which the main task was to create a new ‘regime which deliberately aims at controlling and directing economic forces’” (Ibid.: 81).

The doctrines of laissez-faire, that were well adapted to the Victorian Era, were not suited for the world that emerged from World War-I, in which mass production, mass consumption and the rise of organized labor required a certain degree of government intervention to manage the economy. This is the best and most original part of the book, in which Crotty reminds us that: “Keynes’s enthusiastic and consistent support for state control of most large-scale capital investment is not the only ‘radical’ policy position overlooked by mainstream ‘Keynesian’ economists; his support of detailed industrial and labor-market policy has escaped their attention as well” (Ibid.: 87). The emphasis on the importance of industrial and labor policies, in particular, their direct connection with Keynes’ opposition to the return to Gold Standard and his support of the coal miners’ strike of 1926, are central to understand his need to rethink his economic theory.

However, even in this part, there is a neglect of an important element of Keynes’ trajectory, and for the development of the ideas exposed in the GT. Crotty forgets to note that Cambridge monetary theory was quite underdeveloped in the 1920s, and was based mostly on an Appendix to Alfred Marshall’s Principles of Economics, and his evidence to some Royal Commission, and was in fact being developed by Keynes and his colleague Dennis Robertson during the 1920s. At that point it was unclear that this was a complete rupture with Marshallian economics on monetary affairs, as much as Piero Sraffa was starting to break with the marginalist theory of value and distribution with Keynes’ support. In fact, Keynes’ thought that his book A Treatise on Money was the culmination of the development of the alternative theory, which he defended as a member of the Macmillan Committee, and that argued that the Depression resulted from the high interest rates, that prevented investment from adjusting to full employment savings, as a result of the Gold Standard. This view was perfectly compatible with neoclassical economics, even if Keynes already advocated for public works, an unorthodox policy, as a solution for the crisis.

However, it was at this point, exactly as a result of the criticism of his book by the young economists of the Circus – a group that included besides Sraffa and Robinson, the latter’s husband, Austin, Richard Kahn, and James Meade – that Keynes finally developed in 1932, relatively late, his main theoretical contribution to economics, the Principle of Effective Demand. In other words, while the 1920s were formative, it was only with the Great Depression and his immersion in pure theory in the early 1930s that Keynes finally broke with orthodoxy in theory. The fact that he changed his diagnosis of the Depression, and adopted a whole new theory right after the publication of what should have been his major theoretical work to the date, led to the traditional complain that Keynes was inconsistent and held more than one view at the same time. Friedrich Hayek and Keynes’ opponents at the London School of Economics would make a of this inconsistency one of their main criticisms of Keynesianism.

This is also relevant because it shows that Peter Clarke is correct when he argues that: “The Suggestion that he [Keynes] wrote The General Theory because he had an axe to grind in immediate policy arguments is wide of the mark” (Clarke, 1991: 163). In other words, Keynes’ views on policy issues could be defended, and in fact he did defend them in the 1920s as noted by Crotty, even before he developed the notion that changes in the level of income were the mechanism by which savings adjusted to investment, and not the other way round. The fact that Crotty suggests that the GT was written: “to convince economists and members of Britain’s intellectual, business, and political elites that the theory that informed their economic worldview and provided essential support for the disastrous conservative economic policies of the era was fundamentally flawed” (Crotty, 2019: 161) seems incorrect.

This is compounded by the fact that Crotty accepts Keynes’ theory of interest and the notion of a marginal efficiency of capital in the second part of the book, and as such is forced, as Keynes was, in particular in the famous 1937 paper in the Quarterly Journal of Economics (QJE) amply cited by Crotty, to use the argument of fundamental uncertainty to preclude the possibility that a sufficiently low interest rate would equilibrate investment to full employment savings. Crotty centers his analytical interpretation of Keynes on chapter 12 of the GT, and his defense of the GT in the QJE paper. The argument is essentially one associated with uncertainty and financial instability. In his words: “The outbreak of pessimism and the loss of confidence in the conventions that underlie expectation formation will also cast a pall over the bond market, a point Keynes also stressed in his 1937 defense of The General Theory in the QJE” (Ibid.: 266). It is clear that the abandonment of the marginalist, or neoclassical, notion of a marginal efficiency of capital would actually strengthen Crotty’s point, but for some reason he neglects the important results that followed from the capital debates in the 1960s, which were central for the completion, on a theoretical level, of the Keynesian Revolution in theory.

On the issue of Keynes’ adherence to some form of socialism, Crotty also makes a valiant case for his position. He provides copious circumstantial evidence, and quotes the famous phrase by Keynes in which he says that: “I am sure that I am less conservative than the average Labour voter; I fancy that I have played in my mind with the possibilities of greater social changes than come within the present philosophies of Mr. Sidney Webb, Mr. Thomas, or Mr. Wheatley. The republic of my imagination lies to the extreme left of celestial space” (Keynes, 1926: 308-309). The part that Crotty forgets to cite is the subsequent phrase, in which he tells us: “Yet—all the same—I feel that my true home, so long as they offer a roof and a floor, is still with the Liberals” (Ibid.). Certainly, many of Keynes’ policy proposals were radical. They moved in the direction that was compatible with socialist or social democratic views. And he recognized he had many common goals with Labour and the Fabian Socialists. But he called his views liberal socialism, and remained an Asquith New Liberal all his life.

Liberalism also spoke to Keynes political and social outlook in ways that Labour or Socialism never did. He was an elitist, the product of Eton and King’s College, Cambridge, and a member of the Apostles and the Bloomsbury group. To some extent Labour reciprocated. Philp Snowden, Labour’s first chancellor of the exchequer, was a committed defender of the Treasury View, and an avowed anti-Keynesian. Hugh Dalton, Clement Atlee’s first chancellor of the exchequer, was averse to Keynesian policies, and for him Keynesianism: “was virtually a deathbed conversion, for only in his fourth, final, fatal Budget of November 1947 did he explicitly relate his measures, which stepped taxes across the board, to the problem of controlling inflation… The paradox is that a Keynesian approach was directed chiefly to the problem of keeping demand down, not up” (Clarke, 1991: 186-87). But if there is a future for socialism, Crotty’s view that Keynes’ ideas remain relevant is correct, and there could be no sensible socialism without a good dose of Keynesianism.

References:

Clarke, P. 1991. A Question of Leadership: Gladstone to Thatcher, London: Hamish Hamilton.

Crotty, J. 2019. Keynes Against Capitalism: His Economic Case for Liberal Socialism, London: Routledge.

Keynes, J. M. 1926. “Liberalism and Labour,” in A. Robinson and D. Moggridge (eds.), The Collected Writings of John Maynard Keynes: Essays in Persuasion, Volume IX, Cambridge: Cambridge University Press, 1972.

Kalecki's alternative to Keynes and White and its consequences

Partial video (my fault) of the conference about the book edited by the late Jerzy Osiatynski and by Jan Toporowski published by Oxford University Press. Our chapter on Prebisch with Esteban Pérez is available in a preliminary version here.

Beyond vulgar heterodox economics: a note on the legacy of Pierangelo Garegnani (1930-2011)

My paper, in Italian, which was a modified version of a talk last year, has been published in Moneta e Credito, and is available for download here.

The Price of Peace by Zachary D. Carter

Each era gets its own version of Keynes. The post-war era got the sanitized biography by his disciple and friend Roy Harrod. It emphasized the somewhat late Victorian values of what he called the presuppositions of Harvey Road, Keynes’ birth place at Cambridge, representing the ethical principles that he received from his parents. Not only it avoided any discussion of Keynes' sexuality, that was verboten at that time, and not just because Keynes’ mother was still alive, but also it was well suited to the moderate Neoclassical Synthesis version of Keynesianism that came dominate American academia and the profession with its emphasis on wage rigidities and imperfections. Lord Robert Skidelsky famously argued that Harrod’s biography was “an exercise in covering up and planting false trails” (Skidelsky, 1983: xxv).

 Skidelsky had the advantage of time, and his biography – the three volumes that came out after the publication of Keynes’ Collected Writings, one might add – was more direct and truthful about his subject. Yet, the biography was published between the 1980s and the early 2000s, the period in which the crisis of Keynesian economics was complete, and his ideas forgotten, or worse, as famously noted by Robert Lucas Jr., simply ridiculed. In many ways, Skidelsky’s biography, which broke new ground on the personal life of Keynes, was defensive and did not challenge the notion that his theory relied on imperfections.

 Zachary D. Carter’s book is not quite a biography in the same way that the two cited above, or the one by Donald Moggridge, one of the co-editors of Keynes’ Collected Writings. There is little need for another detailed speculative analysis of the lesser known aspects of Keynes’ life and how these affected his economic views. Carter does something better. He provides a lively discussion of the rise and fall of Keynesian ideas, beginning with how Keynes’ developed his analytical framework, from his theoretical struggles of the 1920s, with some retrospective analysis of his previous life and work, to his premature death in 1946. He also discusses the apogee and the fall of Keynesian economics after Keynes’ death, and the rise to dominance of neoliberal ideas, at least until the last crisis. In that respect, the book has two parts. The first twelve chapters that discuss Keynes’ life and the intricate dance between economic policy debates and rapidly changing economic ideas that eventually propelled the Keynesian Revolution, and a second part from chapter thirteen to seventeen, where John Kenneth Galbraith and Joan Robinson pick up Keynes’ mantle as the proselytizers of the true Keynesian gospel. They battled not only with avowed neoliberals and anti-Keynesians like Milton Friedman and Friedrich Hayek, but also against the brand of Keynesianism that came to dominate academia, and the “greatest prophet of this ‘New Economics,’ as it would come to be known in the John F. Kennedy years, … Paul Samuelson” (p. 399).

 Read rest here.

Laissez-faire policies, self-adjusting market system, and neoliberalism

Classical political economics was in part a discourse for the rising bourgeoisie, and as such most of its members – that accepted some version of the labor theory of value and that distribution was conflictive – were for laissez-faire policies. That was certainly the case of the Physiocrats, and of Adam Smith and David Ricardo, the two most accomplished of the British political economists.

However, the classical analytical scheme did not assume full employment of labor or that the economic system was self-adjusted. Competition meant that market prices fluctuated around the natural prices, but those did not imply efficient allocation of resources. The notion that markets are self-adjusting with a tendency to full employment was a development of the last quarter of the nineteenth-century, and part of the so-called Marginalist Revolution. Marginalism also implied that each factor of production, capital and labor, received a share of income in accordance with the services rendered in production. Distribution was harmonious and not conflictive.[i] However, that did not imply that marginalist authors were all for laissez-faire.

It is clear that laissez-faire policies – leaving markets to its own devices without government intervention – could theoretically lead to efficient outcomes in the new theoretical scheme. But many marginalists authors believed that imperfections were relatively common in the real world and that under these circumstances some degree of government intervention was required. Market imperfections were a central reason for government intervention, before the Keynesian Revolution. In addition, most marginalists believed that economics was a science, technical in nature and not an art that required understanding of political factors, like class interests, wage bargaining, the power of capitalists, etc. These were imperfections, and they required government intervention. That was certainly the dominant view within marginalism associated with Cambridge University in England, and with its main academic figure Alfred Marshall.[ii]

Marginalists were part of a late nineteenth-century trend that believed in the power of experts, technocrats, in a period in which economics was becoming professionalized, and independent of the moral sciences. They were policy advisors. Simplifying considerably, one may say that classical authors were for laissez-faire, but not for the self-adjusting nature of capitalism, while marginalists were for the notion that markets are self-regulated, but less keen on hands-off governments. The conjunction of the two, the notion that laissez-faire capitalism is self-adjusting, was a distinctive feature of some of the marginalist authors, in particular the ones associated with the Austrian school, with Ludwig von Mises and his disciple Friedrich Hayek. That is, it is only with the rise of neoliberalism that laissez-faire and the self-adjusting nature of capitalism become associated.[iii]

----------------
[i] The notion that distribution is harmonious and not conflictive as assumed by classical authors precedes marginalism or neoclassical economics, and was fundamentally developed in the period after the abandonment of Ricardian economics by pamphleteers and political economists that were afraid of the social implications of the work by David Ricardo, and the development of Socialist theories. Nassau Senior is probably the key author, and Frédéric Bastiat and Harriet Martineau the popularizers of the new dogma. Karl Marx referred to these post-classical authors as vulgar economists, and the term seems fitting.

[ii] Arthur Cecil Pigou, Marshall's main disciple, and John Maynard Keynes' teacher, was concerned exactly with the imperfections caused by externalities that required some sort of government intervention. These would be taxes or subsidies, depending on the nature of the externalities.

[iii] Later, in the 1940s after encountering insurmountable problems with his theory of cycles and the notion of capital, when he distanced himself from economics, Hayek exposed a different argument in favor of laissez-faire policies based on complexity and unintended consequences of government intervention. In this case, the argument was that government failures were worse than market failures or imperfections.

Was Keynes a Liberal or a Socialist?

A shorter version at the ISET conference of my Will Lyons Lecture at Franklin & Marshall. And yes, I think Harrod and Skidelsky were right (not Crotty and O'Donnell). He was definitely an Asquith Liberal.

Prebisch’s Critique of Bretton Woods Plans

Prebisch, Williams and Kalecki

New Working Paper with Esteban Pérez at the networkideas. From the abstract:

The name and work of Raúl Prebisch are often associated with the problem of long-term economic development in Latin America. Less well known and explored is Prebisch’s contribution to the study of the monetary and financial problems of the countries of the periphery in relation to those of the center. Prebisch analyzed the post-WW-II monetary plans of John Maynard Keynes and Harry Dexter White from the perspective of their compatibility with his national autonomous monetary policy proposal. He thought that both plans had important shortcomings that would prevent the achievement of their intended objective, international equilibrium in the balance-of-payments. The plans ignored the differences in the levels of development between center and periphery. These differences implied that economic and monetary phenomena could not be viewed through the same lens and that all countries could not be subject to the same norms in monetary policy. Prebisch’s concerns were shared by John H. Williams and also, by Michal Kalecki.

Esteban Pérez on John Maynard Keynes

One of my favorite economists, and John Maynard Keynes too. Don't miss this lecture, in Spanish of course, on one of the central economists of the 20th century and its relevance for the periphery, particularly during the current pandemic. I'll post links to the Zoom and Facebook stream soon.

Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?

Thomas I. Palley, Esteban Pérez Caldentey and Matías Vernengo

Professor Robert Rowthorn delivered the second annual Godley–Tobin lecture in New York City on 1 March 2019. The title of his lecture was ‘Keynesian economics – back from the dead?’ and it is published in this issue of the Review of Keynesian Economics. The lecture was attended by a large audience and the Question & Answer session provoked a stimulating discussion. Prompted by that discussion, we thought it would be interesting to invite some leading economists to independently address Professor Rowthorn's lecture topic. This symposium is the outcome of that invitation.

We are living in a time which many believe has a distinctly Keynesian character. That is captured in the belief that many economies appear to suffer from aggregate demand shortage or, at least, a proclivity to demand shortage. It is also captured in the revival of the concept of ‘economic stagnation,’ which was an idea that had much traction in the 1930s and 1940s but then fell away in the 1950s with the post-war boom and the non-reappearance of depression-like conditions.

Another Keynesian feature of the times is the character of macroeconomic policy, particularly fiscal policy. Following the financial crisis of 2008 and the Great Recession it spawned, there was a global turn to sizeable coordinated fiscal stimulus. Though that turn was truncated (Keynesians would say mistakenly), its legacy remains in place in the sense that discretionary counter-cyclical fiscal policy is back. That is evident in the renewed widespread belief among economists and policymakers regarding the value of fiscal stimulus to combat recessions, though the details of when, how, and how much are still contested. That contrasts with the situation before the Great Recession when the mainstream consensus was that discretionary counter-cyclical fiscal policy was largely ineffective.

Read rest here

From the last issue of ROKE with free papers by Rowthorn and Eichengreen.