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 My research was outdated, I was told by an angry referee (number 1, as it turns out).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.

Maria da Conceição Tavares and demand-led growth in developing countries

New paper by Franklin Serrano, Miguel Carvalho and Ricardo Summa on Maria da Conceição Tavares (1930-2024) and her contributions to demand-led growth theory. The paper reviews the pioneering contributions of Maria da Conceição Tavares to the theory of demand-led growth, emphasizing her early recognition that effective demand is central not only in the short run but also in the long-run process of capital accumulation. In that respect, it is more focused and detailed in the discussion of economic growth, than my paper (in this book) that tried to put her ideas in the context of the Latin American Structuralist School, and the emergence of heterodoxy in Brazil.

From the 1960s onward, Tavares developed a framework that departed from dominant development economics, which typically treated growth in developing countries as supply-constrained. Instead, she argued that developing economies function like any capitalist system, where output and growth respond to demand.

A key contribution highlighted in the paper is Tavares’s analysis of structural change during import substitution industrialization. She explains how growth regimes can shift from export-led to domestic demand-led as the economy develops a capital goods sector and increases the domestic content of demand. Public investment and industrial policy play a central role in sustaining this transition, reinforcing the idea that growth is driven by expanding demand rather than limited by supply constraints.

The paper also stresses her critique of stagnationist theories. Against views (including Celso Furtado’s work) that predicted long-run stagnation due to structural constraints, Tavares argued that slowdowns are typically the result of insufficient effective demand rather than inherent limits to growth. By distinguishing between capacity and its utilization, she shows that apparent structural problems often reflect cyclical demand deficiencies.

Another central element discussed in the paper is her Kaleckian inspired separation between distribution and accumulation. Tavares argued that income distribution does not mechanically determine growth. Instead, it affects demand conditions but does not impose a necessary trade-off between consumption and investment. Growth depends on autonomous components of demand, and different distributive regimes can sustain accumulation depending on the broader demand structure.

The paper emphasizes her original contribution regarding autonomous demand, particularly capitalist consumption and public expenditure. These components, along with residential investment, are seen as crucial drivers of long-run growth because they sustain demand without directly expanding productive capacity. This insight anticipates later developments in demand-led growth theory, especially the supermultiplier framework.

Finally, and perhaps more importantly, the authors discuss Tavares’s views on investment and financial capital. Drawing on Hilferding, Hobson and Schumpeterian ideas, she incorporates autonomous investment linked to innovation and financial structures. The paper concludes by showing her influence on two strands of contemporary research, one that treats investment as fundamentally autonomous, related to the financialization literature, particularly as developed at Unicamp, where Tavares taught starting in the 1970s, and another, associated to Serrano himself and his co-authors at Tavares's alma mater in Rio, that led to the Sraffian supermultiplier, where investment is entirely induced.

On Schumpeter as an economist, sociologist and prophet

I guess we are on a history of thought week. I wrote about Adam Smith being misinterpreted. Now it is about Schumpeter, who is often celebrated as the great theorist of innovation, the dynamic force behind capitalism according to him, being overrated. In this longer post (link to substack below), I argue that this reputation is largely overstated. While Schumpeter offered an influential narrative centered on entrepreneurs and technological change, his economics remained firmly within the marginalist tradition and added little analytically beyond earlier authors like his teacher Böhm-Bawerk. His real insights lay elsewhere, particularly in fiscal sociology in his famous essay on the tax state, but he was not much of a sociologist of technology, surprisingly. I discuss Schumpeter as economist, sociologist, and prophet (his approach to Marx in Capitalism, Socialism and Democracy), showing that he was a conventional theorist of growth, an interesting but limited sociologist, and a failed prophet about the fate of capitalism, especially when contrasted with Keynes, whose more modest proposals for managing capitalism proved far closer to historical reality. Read the whole thing here.

A short note on fiscal regimes and fiscal policy

There is a reasonable debate about how much taxes matter. Most economists would agree that taxes do matter. However, the way in which taxes matter is often not altogether clear. More often than not when discussing taxes the tendency is to concentrate on the short-term implications of tax policy. Economists, for the most part, ignore the historical issues associated with the rise of what Joseph Alois Schumpeter, in his essay on fiscal history, called the Tax State, an admittedly, as he noted, a pleonastic concept. Schumpeter was concerned with the long-term implications of what might be termed a tax regime, rather than tax policy.

Read the longer post here.

Alternative approaches to the history of economic ideas

Teaching two history of thought classes this semester. One more traditional, focusing on the evolution of the theories of value and distribution, and another one, my regular senior seminar, on the co-evolution of ideas and policy in the United States. For the former I used a short piece by Peter Boettke on the reasons for reading the original sources (and they do read a fair amount in my class). The blackboard (pictured above) is based on his discussion. I changed the titles and the definition of the logic a little bit.

The archeological approach tries to understand the analytical views of authors in their own historical context, while the theoretical reconstruction tries to understand its relevance for modern theory. BTW, the divide between archeological and theoretical reconstruction was basically what students came up by themselves when asked why one would read the original contributions. The second one corresponds to the Whig version of the history of economic thought, and the contrarian or radical view, with the former seeing linear progress in the development of the discipline (a history of mistakes), and the latter presuming that there are important contributions that have "been submerged and forgotten" and that should be recovered for a critique of economic theory.

I would put Donald Winch as a representative of the Archeological/Whig view, and Blaug as the Theoretical/Whig one, even though I put there Stigler and Schumpeter (in part because Boettke talks about Stigler; it is not clear where he would put him, at least to me). My suggestions for the Radicals are Ronald Meek and Piero Sraffa (the former a student of the latter), respectively, for the Archeological and Theoretical.

The end of Friedmanomics?

Friedman's advisees

Zachary Carter, of Price of Peace fame (a good book that I recommend, btw), wrote an interesting piece on Milton Friedman's legacy, which I think is, as Hyman Minsky said of Joan Robinson's work, wrong in incisive ways. But even before we get to his main point, that the era of Friedmanomics is gone, it is worth thinking a bit about the way he approaches the history of ideas. This is clearly a moral tale for Carter, with good guys and bad guys. Gunfight at high noon. It is more about vision than analysis, in the terminology of Schumpeter.

He starts, like Nancy MacLean in her Democracy in Chains -- I discussed only tangentially

the issue here -- with Brown v. Board of Education, and Friedman's, rather than Buchanan's, insidious behavior favoring policies that allowed the persistence of segregation. He tells us that: "it is hard to believe Friedman was merely naïve and not breathtakingly cynical about these political judgments, particularly given the extreme rhetoric he used to attack anti-discrimination efforts." Yet, as he continues he seems to change his mind and argue that: "yet he appears to have genuinely believed what he said about markets eliminating racism." So it seems he was naïve after all, according to Carter.

Of course, to determine whether Friedman was cynical or naïve is a thankless task and somewhat besides the point. Friedman was analytically wrong. There is a reason Schumpeter's monumental book is A History of Economic Analysis, and not of economic ideology. And Carter argument is built on moral, ideological grounds. Friedman is the bad guy. He tells us that: "[t]he chief political disputes of the 1950s and 1960s, as today, really were about moral values, not technical predictions." Don't get me wrong, vision matters, and it's hard to disentangle from analysis, but it is clear that Friedman's views differed analytically from the ones discussed by the Keynesian disciples at Cambridge (less so in the case of some of the Neoclassical Synthesis Keynesians that came to accept Friedman's notion of a natural rate of unemployment by the late 1960s). But it is hard to say that Friedman was for segregation, when he explicitly says he was against, and Carter himself thinks that he might have been sincere about that. Other than finding archival material that shows that Friedman knew better we are left with conjecture and guess work.

The key analytical differences between Friedman and the more heterodox Keynesians I alluded above, were not so much in his classic book on monetary history with Anna Schwartz, cited by Carter, but in his AEA presidential address from 1968. The return of the natural rate was the foundation that allowed, once the political circumstances were ripe for the demise of the Golden Age, for the return of marginalist analysis. In a sense, the notion of a natural rate of unemployment went full circle and added to the Neoclassical Synthesis notion that Keynes was fundamentally about wage rigidities or other imperfections. Note that this happened after the capital debates, when the logical foundations of the neoclassical theory was in shambles. In favor of Friedman, I might add, he did write the analytical model down in the debate with his critics, in contrast with Hayek, that after abandoning economics in the 1940s dedicated himself to ideological discussions without any analysis. Vision without analysis as my good friend Fabio Freitas poignantly says.

Carter is on firmer ground when he argues that Friedman was not a classical liberal, and had little in common with Adam Smith, although Friedman himself might have thought so; understanding of history of ideas is sadly vey uncommon among economists. Carter tells us that: "Friedman preferred to be identified as either a 'neoliberal' or a 'classical liberal,' invoking the prestige of the great eighteenth- and nineteenth-century economists—while conveniently gliding past their often profound differences with his political project. (John Stuart Mill, for instance, identified as a 'socialist,' while Adam Smith supported a variety of incursions against laissez-faire in the name of the public interest)." The differences with Smith were not fundamentally political though, but analytical (Stuart Mill is a more complicated transition author). Markets did not produce efficient allocation of resources or full employment of labor for Smith, as in the Marshallian world of Friedman and the Chicago School.

At any rate, the notion that Friedmanomics (or Neoliberalism for that matter; on that here) is dead is at best an exaggeration. In part, the misdiagnosis results from Carter's view according to which: "Friedman’s major theoretical contribution to economics—the belief that prices rose or fell depending on the money supply— simply fell apart during the crash of 2008." That's definitely not the main lesson from Friedmanomics. The quantity theory was never particularly dominant. It was a return to the simple notions of marginalism, of the theory of value, that suggests that supply and demand produce optimal outcomes, that lead to full employment, and that can fix all sort of social maladies (including racism, as Carter notes correctly) that was central to Friedmanomics, and neoliberalism.

In other words, his main legacy was the idea that the market society is a panacea. That free markets are prerequisite for a democratic society (Hayek was more forceful in that argument, without even trying to provide the analytical foundations). Something used cynically to favor the interests of a narrow group by the politicians Friedman advised (the three on top, for example). And while it is true that the last financial crisis (the 2008 one) has led to a reassessment of the role of government, and more so with the pandemic, as I discussed here, the notion that Friedmanomics is gone is wishful thinking.

Even though the profession has abandoned Friedman's Marshallian version of marginalism, his notion that markets do produce optimal outcomes has received no serious challenge within academia, and, in policy circles, interventions follow a pragmatic notion that market imperfections are worse than government imperfections. But that could change rapidly, like Larry Summers support for expansionary fiscal policies. Friedmanomics will certainly make a come back.

Trump's budget

The figure from the New York Times shows the changes in spending by category. More defense and less social spending. Not a surprise there. Schumpeter long ago (in his The Crisis of the Tax State) suggested that it is the fiscal history of a society that explains the spirit of the people and the character of the government, since it is there plain to see by those that can read it what they are trying to achieve.

The surprise to me, at least so far, is that the increase in defense seems to be more or less cancelled by the cuts in social spending. I suppose the stimulus part of his fiscal plan will come just from the tax cuts. If that is the case, I would not be too optimistic about the Trump boom.

Technological determinism and economic growth

Technological determinism is widespread. The Solow model basically suggests that it is technological progress, measured incorrectly as Total Factor Productivity (TFP), that drives growth. The same is true of Schumpeterian models with a demiurgic role for the innovating entrepreneur.

But technological determinism is not just typical of economics, historians too tend to accept that technology drives history. Leo Marx and Merritt Roe Smith tell us in the intro to their edited book titled Does Technology Drive History? that:

The collective memory of Western culture is well stocked with lore on this theme. The role of the mechanic arts as the initiating agent of change pervades the received popular version of modern history. It is embodied in a series of exemplary episodes, or mini-fables, with a simple yet highly plausible before-and-after narrative structure. Before the fifteenth century, for example, Europeans are said to have known little or nothing about the western hemisphere; after the compass and other navigational instruments became available, however, Columbus and his fellow explorers were able to cross the Atlantic, and the colonization of the New World quickly followed. Newly invented navigational equipment is thus made to seem a necessary precondition, or "cause," of as if it had made possible Europe's colonization of much of the world. 

Similarly, the printing press is depicted as a virtual cause of the Reformation. Before it was invented, few people other than the clergy owned copies of the Bible; after Gutenberg, however, many individual communicants were able to gain direct, personal access to the word of God, on which the Reformation thrived. As a final example, take the story, favored by writers of American history textbooks, about the alleged link between the cotton gin and the Civil War. In the late eighteenth century, slavery was becoming unprofitable in the American states; but after Eli Whitney's clever invention, the use of African slaves to harvest cotton became lucrative, the reinvigorated slavery system expanded, and the eventual result was a bloody civil war.

And when it comes to economics technological determinism is not only a trait of the mainstream of the profession. The editors argue that Heilbroner (who was very open, but more conventional in is economics than people think) is the closest in their book's collected essays to accept technological determinism. Heilbroner's classic paper "Do Machines Make History?" starts with Marx's (Karl not Leo) epigraph (from The Poverty of Philosophy) according to which: "the hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist." Mind you, I think that regarding Marx, the quote might be misleading. Marx clearly thought that there was a technological component to the mode of production, but social relations of production mattered too.

What is NOT discussed in most analyses of the technological determinism by conventional and more than a few heterodox authors is the role of demand in creating the conditions for technological change. In that case, technological change is not the cause of growth, but the result. As in Adam Smith's story, it is the extent of the market (demand) that limits the division of labor (productivity). In modern parlance the idea is known as the Kaldor-Verdoorn Law.*

Obviously there is a certain serendipity in the process of technological innovation, and, hence, it is not uniquely determined by the pressures of a growing market. The point is more that there is no reason for an invention to be pursued systematically if it does not somehow provide for an existing and pressing need. Think of steam engines (the ones that give you the industrial capitalist), which were known for millennia, way before Newcomen and Watt, but had no relevant productive use until they were employed for pumping water out of mines. Only then the potential of the machine was comprehended, and the real work of incremental improvements that made it really useful started.

The question is then one of causality (as it often is between heterodox and mainstream views). Do innovations cause growth or are caused by growth (even if there is some two-way causality the question is which one predominates)? Were the high wages in England that forced capitalists to economize on labor (Principle of Substitution) and led to the Industrial Revolution, as Robert Allen suggests, or did the high wage economy, and the extended domestic markets (let alone the external markets) that provided the stimulus for technological change? I still believe that the weight of the historical evidence suggests that demand rules the roost.

The notion that technology is demand driven is also the only alternative, even though that is not understood very well by historians (economic or otherwise) to technological determinism. In this case, the reasons behind innovations are associated to the more complex social forces that determine the expansion of demand. They involve issues related to income distribution (high or low wages), or the social patterns that determine tastes and consumption (the reasons why the British consumed Indian calicos and porcelain pottery), the access to foreign markets, and the geopolitical forces that explain why some won and others lost in the pursue of those markets, to name a few. Note that power and politics are central to technological innovation, since they involve issues like income distribution and global access to markets. How can you understand the US National Innovation System (NIS)** without the Military-Industrial Complex and its role in providing access to global markets?

Sure enough a demand driven story has space for the sort of external supply-side effects that allow technology and innovations to thrive. So the expansion of demand in a society like England that was going through a Scientific Revolution would have more chances to lead to technological innovation (there is a gap between science and technology, of course) and  provide certain advantages over their competitors for global hegemony, to say the least. In other words, a demand driven story does not imply that supply side factors are irrelevant, they are simply not the prime movers.

* Neo-Schumepterians often refer to this view as the demand-pull hypothesis, due to Jacob Schmookler's Invention and Economic Growth.

** Another Neo-Schumpeterian beloved concept.

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

The last issue of the Review of Keynesian Economics (ROKE) has a debate between Steve Keen with Brett Fiebiger, Marc Lavoie and Tom Palley. Two papers are available for download (Keen and Lavoie's). Tom's paper is available as a working paper here.

The basis for Steve's defense of endogenous money is based on the works of Schumpeter, as developed by the latter's student Hyman Minsky. In his words:

"The proposition that effective demand exceeds income is not a new one: it can be found in both Schumpeter and Minsky (and arguably in Keynes's writings after The General Theory, though not in as definitive a form – see Keynes 1937*, p. 247). A difference between income and expenditure, with the gap filled by the endogenous creation of money, was a foundation of Schumpeter's vision of the entrepreneurial role in capitalism. Minsky's attempt to reconcile endogenous money and sectoral balances is the closest antecedent to the argument I make, but I will start in chronological order with Schumpeter's analysis."

I have noted before that the idea of endogenous money is NOT central for heterodox approaches, since Wicksell and the whole modern New Keynesian consensus adopts it. And perfectly conventional authors like Irving Fisher had introduced debt in their models too. I also noted that Schumpeter is essentially a Real Business Cycle (innovations are nothing but exogenous productivity shocks) author, which thought that both short-run output and employment and long-run growth were determined by supply-side factors. So in general I'm not a great fan of having Schumpeter as a staring point, or the notion that to introduce debt and endogenous money is per se a critique of the mainstream.

In that respect, I tend to agree with Tom's point that it is the way in which endogenous money and debt are introduced in the model that matters. Keen's use of a variation of Fisher's equation of exchange, as pointed out by Tom, is troublesome. In Tom's words:

"The Fisher equation constitutes the monetarist framework for macroeconomics. Income-expenditure accounting constitutes the Keynesian framework and it offers an alternative approach to understanding the AD, credit, endogenous money nexus."

In fact, in the equation of exchange framework the presumption is that demand would adjust (in Steve's approach with endogenous money) up to the point that it meets supply at the optimal level (also something that would be perfectly in line with  Schumpeter). The whole point of the income-expenditure framework is that it puts demand in charge of the level of activity.

At any rate, a good debate that it's worth checking out. Enjoy!

* J.M. Keynes (1937), "Alternative Theories of the Rate of Interest," 47, Economic Journal, pp. 241-252. Available here (subscription required).

The rise and fall of the Tax State

David asked me about this paper, published in an interdisciplinary book (meaning a book that nobody, in any discipline, reads). It is about what Schumpeter referred to as the Tax State (the paper is "The Crisis of the Tax State" from 1918). By the way, this paper, written right before he actually became Finance Minister in Austria, is by far his best, much more relevant than his cycle theory, which remains essentially Austrian and associated to real shocks (yes there is a link between Schumpeter and the Real Business Cycle School).

My take from the conclusion:

The rise of the tax State can be seen as a struggle over who would carry the burden of taxation. Originally taxation was the sole burden of the working class, while the elites were free from taxes. Public debt as a form of repayable taxes fell on the shoulders of the elite; but that was not an excessive burden. Industrial development, urbanization, the democratization process, the enlargement of the franchise and progress in general meant that the burden of taxation was gradually shifted towards the privileged. That, however, has proved to be more problematic. The revolt of the elites has reversed considerably, in a relatively short period of time, the long process of formation of the tax State.

The general unifying theme of the book, I should note, was power, and I suggested (not very originally I might add) that it has been often absent in mainstream economics.

Jan Toporowski: Michał Kalecki and Oskar Lange in the 21st Century

It is possible to identify in The General Theory and Kalecki's work key ideas that they had in common.  The first is that in a capitalist economy output and employment are determined by business investment, so unless investment is high enough the economy is unlikely to be at full employment.  Secondly that investment determines saving, rather than the other way around.  Both men denounced the doctrine of the social value of thrift that so comforted the complacent Victorian bourgeoisie and that just made such a comeback today.  Finally, contrary to the Neoclassical and the Ricardian-Marxist view both men argued that wage rises would increase employment rather than decreasing it.  Underlying this commonality of view on how the capitalist economy works was a fundamental principle of the economic method that Kalecki explicitly employed to great effect and Keynes in a somewhat more haphazard way: the principle of the circular flow of income.  This is the idea that incomes are determined by expenditure decisions, rather than being decided in complex games of exchanging resources, capital or labor.  The principle goes back to the work of the French Physiocrat François Quesnay but had been lost to political economy by the 19th century with the ascendency of the idea that prices integrate individual exchange decisions, so all you need is correct prices.  Nevertheless, a hundred years ago the great Joseph Schumpeter recognized the importance of the circular flow of income...

See rest here

Bernard, Gervorkyan, Palley, Semmler: A Review & Critique of Long Wave Theories

In a previous post (see here), I had argued that the capitalist world economy can be conceived as resting on the dependence of historically-specific hegemonic institutions, whose rise and fall follow the trajectory of long waves, what Giovanni Arrighi defined as systemic cycles of accumulation (SCA's), periods of approximately 40-60 years, separated by A phases and B phases (see here). Lucas Bernard, Aleksandr V. Gervorkyan, Thomas I. Palley, and Willi Semmler, however, offer a penetrating critique of this central tenant of the world-systems tradition.

From the abstract:

This paper explores long wave theory, including Kondratieff’s theory of cycles in
production and relative prices; Kuznets’ theory of cycles arising from
infrastructure investments; Schumpeter`s theory of cycles due to waves of
technological innovation; Goodwin`s theory of cyclical growth based on
employment and wage share dynamics; Keynes – Kaldor – Kalecki demand and
investment oriented theories of cycles; and Minsky’s financial instability
hypothesis whereby capitalist economies show a genetic propensity to boom-bust
cycles. This literature has been out of favor for many years but recent
developments suggest a reexamination is warranted and timely. 

Read rest here.

On Austrian Business Cycle

This is not a topic I would normally write about. In particular, because I do not think Hayek was a particularly relevant theorist, even within the mainstream. By the way, that's the reason why within the neoclassical/marginalist school Austrians are sort of marginal. Note that marginal means that they are in the minority, but by no stretch of the imagination Austrians should be seen as heterodox [this is prove that Wikipedia, if you have doubts, is not entirely reliable. Again proper definition of heterodoxy means accepting that distribution is exogenous, and prices do not reflect relative scarcities, and that output and employment are demand determined in the long run, both positions that the Austrians would not accept].

But I got a few questions about Austrians and I think it is important to make one thing clear about their theory of business cycle, namely: it is not particularly different than mainstream theories, and is fundamentally Wicksellian in outlook, whether Austrians get it or not. There should be little doubt that Hayek believed that fluctuations were caused by monetary shocks, and that equilibration was based on the adjustment of a monetary rate to a natural rate [Remember his debate with Sraffa? One of the key issues in Sraffa's critique of Hayek was that he argued that latter's claim that the possibility of a difference between own rates of interest and thus a divergence of some rates from the equilibrium or natural rate is a characteristic of a money economy that is absent in a barter economy was simply wrong since there was no unique natural rate of interest from which the money rate could differ].

Even if you add his stuff on uncertainty, which many believe is close to post-Keynesian analysis, there is little in Hayek that departs from the basic Wicksellian framework [interestingly the Keynes of the Treatise shares that framework]. I should mention here that if you read Paul Davidson carefully, you would note that his concerns about fundamental uncertainty are basically related to lack of demand. When he tells you that firms do not hire workers for a lower wage unless they have demand, that means that government spending can reduce uncertainty very swiftly.

The only interesting Austrian is probably Schumpeter. Schumpeter, in contrast to Hayek, and like Wicksell, believed in real shocks, not monetary ones. Mind you, he was more interested in the sort of long term shocks caused by innovation. Still the framework is very similar, and Wicksellian in the fundamentals. Real shock (innovation) causes the spark for growth, diffusion eventually erodes the advantages of the innovators and the boom winds down. The economy moves from one circular flow, with the economy in Walrasian equilibrium to another one. So Schumpeter too is at core part of the marginalist tradition, as all Austrians are.

The role of the State in US Development

As part of Peter Ho's talk yesterday, two graduate students presented some of their research. One of the topics, was the role of the State, the Fiscal-Military State in particular, in the early process of industrialization and development in the US, which was, as noted by Peter, very much in line with his arguments for managed trade. Here is a link to a paper I wrote on the rise of what Schumpeter termed the Tax State. On the Fiscal-Military State read this. The classic book by John Brewer, The Sinews of Power, was essential in the development of some of these ideas, in the sense that it shows the fundamental role of the State for industrialization and the creation of a global empire. The argument put forward, in the talk yesterday, was that the US development can only be understood from a Fiscal-Military Developmental State perspective.