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). This is particularly true in developing countries 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). 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.

A Left Moral Vision Needs a Political Economy to Match

Gustavo Petro’s “economy for life” captures something essential about the planetary crisis. Turning it into a program requires confronting the structures that stand in the way.

Read the whole article, where I challenge some of the myths about the New Global Order, here. 

Review of Glory Liu's Adam Smith's America

My review of Glory Liu's Adam Smith's America. The book is a valuable history of the many American reinventions of Smith, from the Founding era to the Chicago School. But, as I argue in my review, the central problem is not simply that Smith was read selectively, or that his moral philosophy was ignored. The deeper issue is that Smith belonged to the classical surplus tradition, concerned with production, distribution, accumulation, and conflict, while modern interpreters often read him through the later neoclassical framework of equilibrium, efficiency, and individual optimization.

The Robin/Beckert debate on the “transition” to capitalism

 

Robin and Beckert (wink, wink)

I haven’t finished Sven Beckert's Capitalism: A Global History yet (long semester and still grading), so my thoughts on this are still unfinished. Corey Robin, in his review for The Nation, argues that while the book is an ambitious and impressively researched work, it is ultimately hobbled by deep conceptual confusion and internal contradictions.

Beckert's central thesis is that capitalism "was born global," and he traces its origins back to long-distance merchants in the 12th century. Robin systematically dismantles this starting point, asserting that neither the principle of accumulating capital nor the existence of long-distance trade was new at that time. He argues that Beckert's own evidence repeatedly points away from trade and toward an alternative conclusion. In his view, capitalism's true "foundry" was the alliance between the modern state and capital owners who seized direct control of production, most importantly by transforming the nature of labor exploitation.

Robin also contends that the book's key analytical distinctions collapse under the weight of its own historical detail. Beckert posits a shift from an early, violent "war capitalism" to a more modern "industrial capitalism" defined by wage labor. Yet, as Robin highlights, Beckert's narrative is filled with evidence of persistent and expanding slavery, state coercion, and violent conquest well into the 19th and 20th centuries, making the supposed "radical departure" between the two eras blurry at best.

Ultimately, Robin frames the book's failures as symptomatic of a larger problem facing the "new history of capitalism." In an era where capitalism appears to be a total, all-encompassing global system with no viable alternative, it has lost its historical specificity. Unlike earlier historians who provided a clear analytical definition of capitalism, Beckert's book would be representative of a school that does not use theory, and celebrates it. This is perhaps the most relevant point raised by Robin. He notes that the: "greats of history and theory—Smith, Braudel, Marx, and Weber—are claimed as inspirations, without their presence materializing on the page" and that for the New History of Capitalism School the lack of definition of capitalism is “a virtue … not a vice.” As a result, the analysis of capitalism becomes a-historical, leading to the analytical confusion at the heart of an ambitious, but ultimately flawed book.

The intellectual lineage of the conflict between Corey Robin and Sven Beckert's views, as framed in the former’s review, is to a very large extent a modern reframing of the classic Dobb/Sweezy transition debate of the 1950s (incidentally I used to teach a course, a long time ago, in a far away land that discussed this topic). Beckert occupies the Sweezy position, emphasizing the role of long distance trade, global networks, and circulation. Robin takes on the Dobb role, arguing that the real change is in the social relations of production, specifically the control and organization of labor.

Sweezy argued that feudalism was a stable system that was dismantled by an external force, namely, the growth of long-distance trade and the revival of monetary relations. Beckert makes a strikingly similar argument on a grander scale. His thesis that capitalism "was born global" and originated with 12th century merchants places the engine of change in the act of connecting distant places through trade. Arguably, for both, capitalism comes from the outside, from the networks of exchange that break down older, more localized systems.

Dobb, the orthodox Marxist/Cambridge don, countered that feudalism collapsed due to its own internal contradictions, specifically the class struggle between lords and peasants. This internal breakdown created the necessary conditions for capitalism. In particular, it created a class of dispossessed peasants who had to sell their labor to survive (there are many posts on the topic in this blog; see this one). Robin mirrors this argument in the review. He dismisses Beckert's focus on merchants and argues that: "[c]ontrary to what Beckert sometimes says, his book shows that capitalism does not begin with trade and long-distance connection. It does not arise from merchants behaving like merchants. It does not follow from accumulation of wealth. It begins with capital’s taking control of production and unlocking workers’ highly prized and protected capacity for labor." For Dobb/Robin, the key is not trade, but the fundamental reorganization of how things are made and by whom.

Because Sweezy/Beckert see trade as the driver, their origin story is necessarily diffuse and network-based, not located in one specific place. Beckert explicitly argues against seeing capitalism's origins in "one place" (i.e., England), favoring "the connections between various places." Dobb located the transition specifically in the English countryside, where the transformation of agricultural labor first occurred. Robin, while acknowledging the global scale, repeatedly points to the specific sites where labor was reorganized for production, be it the English countryside or, crucially, the slave plantations of Cape Verde and the Americas, as the places where the "radical innovation" happened.

While the core logic is the same, the Robin/Beckert debate is not a simple repetition of the Dobb/Sweezy one. It's updated for the 21st century in three crucial ways, the centrality of slavery, the role of the state, and the collapse of Soviet socialism.

The original Dobb/Sweezy debate was largely Eurocentric and focused on the transition from feudalism to wage labor. The "New History of Capitalism," which Beckert represents, places chattel slavery and what Beckert calls "war capitalism" at the absolute center of the story. Robin's critique is not just a call to look at wage labor in England (the classic Dobb argument; I used to teach the old debate in a somewhat Dobbious way; see what I did there?). Instead, he uses the Dobbist (is this better?) logic to argue that the slave plantation was a key site of capitalist innovation in production, a brutal factory in the field where new forms of labor control were pioneered. This moves the focus from a binary of feudalism/wage-labor to a more complex reality where coerced and unfree labor were foundational to industrial capitalism. I should note that this reminds me of the Latin American debate between those that thought that there was a feudal like past, and those (e.g. Bagú, Caio Prado) that argued that we entered the world in the mercantile phase of capitalism, fully as part of that global (world) system.

Robin gives the state a much more prominent role than Dobb did. He highlights Max Weber's concept of "political capitalism", the "memorable alliance between the rising states" and capitalists., citing the more recent work by Branko Milanovic. For Robin, the state's military power, its ability to grant monopolies, and its violent suppression of populations were not just helpful but essential to capital's seizure of production. In this respect, I think the work by Priya Satia should had been referenced in this context. As she argues: "state institutions drove Britain’s industrial revolution in crucial ways ... war made the industrial revolution."

This is Robin's final, and harshest criticism. Dobb and Sweezy were arguing in the shadow of the Cold War, a time when socialism appeared as a real historical alternative. Capitalism was understood by both as a specific historical system with a beginning and a potential end. Robin argues that Beckert is writing in an era of capitalist triumphalism, where it seems absolute and eternal. This, Robin suggests, is why Beckert's analysis becomes a blurry, unending story of "the great connecting." Without the political horizon of an alternative, capitalism loses its sharp historical edges and becomes a "Once upon a time..." setting rather than a system to be explained.

I should say that this is not my perception of the book so far. Robin seems to create a false dichotomy. He seems to be arguing that because Beckert emphasizes exchange (the Sweezy position), he inherently cannot properly center the violent relations of production (slavery, state coercion). That is certainly not the case. In Slavery's Capitalism, Beckert's deals the centrality of the peculiar institution for the rise of capitalism in the US. Also, as with the Dobb/Sweezy debate, it is possible that Beckert isn't choosing exchange over production, but noting that global mercantile connections were central in the process that changed relations of production. Beckert might be arguing that the imperative of building a global network of exchange was the primary driver that necessitated and shaped the specific forms of violent production seen in slavery and colonialism.

I'm also not sure that I would read Beckert as accepting a triumphalist view of the global market exchange system, if that is the implication. He is clearly a critic of how a global system of exchange was built on the foundations of slavery and state violence. The disagreement is ultimately about the analytical starting point, class struggle in the fields (Robin/Dobb) or the global network connecting those fields to the factories and markets of the world (Beckert/Sweezy).

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.

Crisis of Neoliberalism or Continuity of a Transformed Global Order?

The starting point of my short intervention at the conference on The Economy for Life in Colombia, co-organized by the Progressive International and the government of Colombia, was to problematize the dominant diagnostic. Part of the contemporary discourse, particularly that framed around the idea of an economy for life, tends to sidestep a central issue, that neoliberalism has fundamentally been a regime favorable to capital. In that context, proposing an alternative in terms of “life” is excessively vague. If one aims to build a consistent critique, the focus should shift toward an economy explicitly organized around workers. Welfare, ultimately, is not a moral abstraction but the concrete improvement of the living conditions of the majority, who are, in fact, workers. It should counter the neoliberal narrative for whom workers are only consumers and/or entrepreneurs.

From this perspective, my first point is that neoliberalism is not in crisis, at least not in the strong sense often claimed. The dominant narrative suggests that the neoliberal order is broken, yet there is little solid structural evidence to support that claim. What we observe instead is a significant continuity in its core principles, combined with a capacity to adapt to new circumstances. This is, at most, a transformation within the same regime, not its collapse. In fact, as discussed at the conference, governments of the left have have difficulties in overcoming some institutional limitations imposed by neoliberalism. Neoliberalism is doing what it was supposed to do, creating conditions for the accumulation of capital, and making the lives of workers more difficult. Higher inequality does not reflect its failure, but its success.

The second point concerns the frequent comparison between the current moment and the crisis of the 1970s. This analogy is misleading. The crisis of the 1970s was indeed a crisis of the regulated capitalism of the postwar era, the so-called Keynesian consensus, and it was marked by intense distributive conflict. That conflict rested on two pillars. On the one hand, the bargaining power of organized labor, and on the other, the ability of oil-producing countries, grouped in OPEC, to influence international prices. In addition, the United States was then a net importer of energy. None of these conditions hold today. Workers’ bargaining power is much weaker, OPEC has lost relative influence, and the United States has become a net exporter of energy. In this sense, we are not facing a crisis of neoliberal capitalism, but rather tensions within a capitalism that has already disciplined both the labor force and part of the periphery. But exactly because it succeeded, it created important changes. Which brings the issue of the rise of China.

Third, it is important to address the question of China and the so-called new international order. In some respects, this new order already exists. The rise of China as a global productive center, what might be called China 2.0, is undeniable. This was, in part, the result of the opening of China, first by Nixon in the 1970s, and then by Clinton in the late 1990s, by grating Most Favored Nation status and access to the World Trade Organization (WTO).

However, this shift has not fully extended into the financial sphere. The hegemony of the dollar remains intact, indicating a fundamental continuity in the structure of the system. Moreover, this process is neither recent nor abrupt. It has a long gestation that can be traced back to the opening of China in the 1970s, promoted by US foreign policy, and to the demonetization of gold, that actually reinforced the hegemonic position of the dollar. It is therefore a prolonged transition rather than a rupture, and in monetary matters a great deal of continuity.

In this context, Latin America occupies a position of dual peripheral integration. Even progressive governments in the region have largely been forced to insert themselves into this new configuration. They have integrated commercially with China while remaining subordinate to the financial structure, and ultimately to the military power, of the United States. This significantly constrains their room for policy autonomy.

From the standpoint of economic policy, it is crucial to distinguish between what has worked in practice and what orthodoxy prescribes. The strategies that have shown some effectiveness are not fiscal austerity or strict central bank independence, but rather policies aimed at reducing external vulnerability and promoting domestic economic growth. These include avoiding debt in foreign currency, accumulating international reserves, maintaining a relatively stable nominal exchange rate (in a flexible regime), expanding real minimum wages, and sustaining transfer mechanisms to support the most vulnerable. Even tools such as capital controls have produced mixed and, in some cases, limited results (e.g. Argentina). Industrial policy is central to promote technological development at the national level, and that requires, high levels of public investment.

A problematic aspect of current debates is the optimism surrounding the integration of the so-called Global South. the Global South is NOT a synonym of Prebisch's periphery. There is a tendency to assume that deeper ties with China or other Southern countries automatically provide a path to development. However, there is no reason to assume that China has an intrinsic interest in the development of our economies. What we observe instead are national strategies driven by its own priorities. Any development project, therefore, must be conceived from the periphery and oriented explicitly toward the needs of workers.

At the same time, it is important to challenge certain myths about advanced economies. In particular, the idea that the West, and especially the United States, abandoned industrial policy and have now rediscovered it. This is largely incorrect. In practice, state intervention in strategic sectors has been a constant, even if it is often denied at the level of discourse. In many ways it was free markets for the periphery (or part of it), and industrial policy for the center.

In sum, it is possible to agree with many of the goals present in contemporary debates, particularly the need to improve living conditions, while strongly disagreeing with the dominant diagnosis. We are not facing a crisis of neoliberalism in a strict sense, nor a repetition of the crisis of the 1970s, nor a complete transformation of the global order. South-South integration is no panacea. More importantly, without an adequate diagnosis, alternative proposals risk becoming vague or ineffective. For that reason, it is essential to reintroduce the analysis of distributive conflict and the central role of workers into contemporary political economy, and the role of military power in the understanding of the geopolitics of money.

The New Center-Periphery Relations

A new paper (in Portuguese) by Carlos Medeiros and Esther Majerowicz analyzes the economic relationship between China and Brazil using the center–periphery framework developed by Raúl Prebisch. It argues that, in the 21st century, this relationship reflects a dual process: China’s rise as a new global economic “center” and Brazil’s passive adaptation as a peripheral economy, reinforcing asymmetric development patterns.

A key claim is that China has become central not just because of its size, but because it is now a major source of industrial production and technological innovation, influencing global demand, trade patterns, and commodity prices. Its growth has reshaped the world economy, especially by increasing demand for raw materials and lowering prices of manufactured goods. For Brazil, this has led to a reprimarization of exports. The country increasingly exports commodities (soy, iron ore, oil) to China while importing manufactured goods. This pattern strengthens traditional center–periphery dynamics, despite being framed politically as South–South cooperation. This suggests similar problems as identified by myself and Esteban Pérez in a paper discussing the development strategies in Latin America. The main difference is that in the last decade and a half, the central position of China is more clear, even if the typical notion that American hegemony is over has been exaggerated in American liberal circles.

The authors identify two possible development paths. The dominant one is a business as usual strategy, aligned with Chinese demand and Brazilian agribusiness and mining interests, which deepens dependency. The alternative is a developmental strategy based on diversification, industrial upgrading, and technological cooperation, but this path seems currently unlikely. They also emphasize that Chinese investment in Brazil is concentrated in extractive industries and infrastructure, reinforcing the existing specialization pattern, although there are some emerging opportunities in sectors like renewable energy and digital technologies.

Finally, the paper argues that shifting toward a more balanced relationship would require active state planning, political will, and supportive social coalitions in Brazil. Without these, the current asymmetrical structure is likely to persist or deepen.

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.

Martin Wolf and what to do about the commodity shock

Martin Wolf's column today reflects on the commodity shock on the basis of the data provided by the World Bank in the last Commodity Markets Outlook. As has been the prevailing consensus he suggests that this is an unprecedented shock, larger than the oil shocks of the 1970s, and any other commodity crises of the last 50 years.

In his words, based on the World Bank: "the initial impact of the closure of the strait was a global loss of 10.1mn barrels a day of oil in March. This was much larger than the impact of the Iranian revolution in 1979, the Arab oil embargo in 1973, Saddam Hussein’s invasion of Kuwait in 1990, or the Iran-Iraq war in the 1980s."

The current data on the price of oil has not yet confirmed these pessimistic predictions. The issue might be related to how much of a chockepoint the Strait of Hormuz really is, and how trade can adapt to it. Note that between 1967 and 1975 the Suez Canal was closed and forced oil shipments around the Cape of Good Hope. This caused a surge in transport costs, incentivized the development of massive supertankers, and forced a rerouting of trade, but it had limited initial impact on oil prices compared to the 1973 oil crisis.

It is obviously to soon to say, but so far the current oil shock has not lived to previous ones, when oil producing countries in OPEC had more power. Figure below shows the nominal and real price of Brent oil, which remain quite below the 1970s peaks.

Wolf is on the pessimistic side of things, and suggest, correctly on that, that costs will be unevenly distributed and that action to avoid worst problems is necessary.  He says: "this is a sizeable disruption, which is sure to hit many of the world’s poorest people and most vulnerable countries hard. The rise in oil and fertiliser prices guarantees that. This underlines the moral case for continuing to provide international assistance." That's all good, even if one is more cautious about possible outcomes.

But then he goes on to say that: "central banks are going to have a tricky time navigating the consequences. But they must not let inflationary expectations slip out of control." In other words, this is going to hurt the poor, and he thinks it will very much, since this is an unprecedented shock, but central banks should not care, and be concerned only with inflation expectations.

Before the Pandemic inflation there was some growing understanding, now less so, that inflationary expectations are not that relevant (on that see this). Jeremy Rudd wrote an article for ROKE suggesting that modern macroeconomics assigns too much importance to inflation expectations, with weak theoretical and empirical justification. Measures of inflation expectations (surveys, market-based) are noisy, inconsistent and weakly correlated with actual inflation outcomes. For him, this makes them unreliable as a key driver in models.

If inflation is caused by a hike in costs of production, there is very little that a hike in interest rate could do to control it, other than repress wage increases by slowing down the economy. Not that this should be a major concern in most advanced economies, at least.

My guess is that the impact will be smaller than expected, and that central banks will overreact. That might be the case of the Fed today, that should reduce rates, but probably won't because of inflationary expectations.

Central Bank Independence and Fiscal Rules in the Periphery

 

Reading Keynes in Buenos Aires

This week I participated (virtually) in a conference in Colombia organized by the finance ministry, alongside a remarkable group of participants, including Rafael Correa, Isabella Weber, and Daniela Gabor. The focus of the discussion was the ongoing dispute between the government of Gustavo Petro and the Colombian central bank over the persistence of relatively high interest rates, and the broader question of central bank independence.

None of this, of course, is new. Variants of this conflict have played out repeatedly, including in the United States, where Donald Trump has openly criticized the Federal Reserve for maintaining interest rates he considers too high, and has clashed with Jerome Powell, as I have discussed here. But the Latin American context adds an important layer that is often missing from these debates.

The first point worth stressing is historical. The notion of an independent central bank is a relatively recent invention. Central banks have existed for centuries, but their functions have evolved significantly. Early central banks, even before institutions like the Bank of England (see here and here), were deeply intertwined with the fiscal needs of the state. They acted as fiscal agents, helping to finance public debt, often at levels that would alarm today’s orthodox commentators. In Britain, public debt during the Industrial Revolution exceeded 100 percent of GDP, with significant portions effectively absorbed by the central bank.

In this context, I suggested an analogy with Ha-Joon Chang’s argument about kicking away the ladder. Chang shows that today’s advanced economies relied heavily on protectionism and industrial policy during their own development, only to later promote free trade as the universal path, effectively denying developing countries the same tools. Something similar can be said about central banking. Historically, advanced economies used their central banks as instruments of development and as fiscal agents of the state, helping to finance large public debts and support economic transformation. Once they achieved development, they moved toward promoting central bank independence as a general principle, thereby limiting the ability of developing countries to use similar financial tools. In that sense, one could say that they also kicked away the financial ladder.

The idea that central banks should operate according to fixed rules, insulated from political pressures, is more closely associated with the gold standard era and the late nineteenth century. Even then, this rule-based framework reflected specific historical conditions rather than a timeless principle. And, as is well known, it broke down in the interwar period, when governments, faced with high unemployment, and the crisis of British hegemony, abandoned orthodoxy in favor of more active coordination between central banks and treasuries.

The US experience is illustrative. Under Marriner Eccles during the New Deal and World War II, the Federal Reserve worked closely with the Treasury, including maintaining low interest rates on government debt. It was only with the Treasury–Fed Accord of 1951 that the modern notion of central bank independence took shape. Even then, the separation was never as clean as the textbooks suggest.

This is because, at a more fundamental level, the central bank and the Treasury cannot be meaningfully separated. The central bank still acts as the fiscal agent of the state. Government spending creates money, whether through keystrokes in digital accounts, as emphasized recently by Modern Money Theory authors, or more traditional mechanisms. The idea that governments can run out of money (domestic issued money) in a technical sense is a useful fiction, one that obscures the real constraints, which are not financial but material. As John Maynard Keynes famously suggested, if it can be done, financing can be arranged.

This brings us to the present conjuncture. The recent inflationary episode in the United States was not primarily the result of excessive demand, but of supply-side disruptions, pandemic-related bottlenecks and energy price shocks (I wrote many posts on that; see this one). As these factors subsided, inflation fell. The Federal Reserve’s aggressive interest rate hikes were, at best, incidental to this process, and at worst risked pushing the economy into recession. What prevented that outcome was not monetary policy, but fiscal expansion, particularly the initial stimulus enacted by the Biden administration, the one that Larry Summers referred to as the worst economic mistake of the last 40 years (it's worth remembering).

If this is the case at the center, the implications for the periphery are even more significant. In Latin central bank independence is even more recent than in the US. It results from institutional arrangements that have evolved particularly in the wake of the debt crises of the 1980s and the imposition of the Washington Consensus, but that have been fully accepted by left of center governments in the region (note that most central banks in the region were created to deal with development issues in the aftermath of the 1930s crisis; this is represented by Prebisch, reading Keynes in Buenos Aires, in the figure above*).

The debate in Colombia mirrors similar tensions in Brazil, where Luiz Inácio Lula da Silva has criticized high interest rates maintained by the central bank under the previous chairman, appointed by Jair Bolsonaro, Roberto Campos Neto.  Interest rates, which remain high with the current president of the Brazilian Central Bank, Gabriel Galípolo, have not precluded growth, which depended on fiscal expansion and higher wages. True, Brazil has returned to growth, but it has done so more slowly than it could have, but not as a result of the interest rate policy. Instead, the slower pace of growth results from the self-imposed fiscal limits (see this by Haluska, Serrano and Summa).

Here is where the Colombia and Latin America, more generally, diverge from the US case. In the periphery, central banks do not operate in a vacuum. Their policies are constrained by the global financial environment, particularly by the stance of US monetary policy. Higher interest rates in the United States put pressure on developing countries to maintain relatively high rates of their own, in order to stabilize nominal exchange rates and avoid capital outflows and depreciation. Currency depreciation is not only inflationary but also contractionary, making macroeconomic management far more difficult.**

This is why the question of central bank independence, while important, is ultimately secondary to the issue of fiscal rules. Even countries without severe external constraints, such as Colombia or Brazil, face self-imposed limits on their ability to use fiscal policy to expand demand and promote growth. These constraints are not natural. The challenge, then, is not simply to debate whether central banks should be independent or not and from whom (certainly from financial markets). It is to rethink the broader framework within which monetary and fiscal policy operate, particularly in the periphery.

The discussion in Colombia, therefore, is not just about the appropriate level of interest rates or the degree of central bank independence. It is about the broader question of how much room governments have to use fiscal policy as a tool for development.

* Yes, the figure is AI; and the 9 of July monument, the obelisk, which was completed in 1936, was designed by Raúl's brother, Alberto Prebisch.

** Hélène Rey refers to this as the dilemma (instead of trilemma), since countries, with fixed or flexible (and, I guess, anything in between) exchange rate regimes, loose monetary policy autonomy with greater capital mobility.

Robert Skidelsky and the Many Lives of Maynard Keynes

Keeping up with the Keyneses

The death of Robert Skidelsky last week marks the passing of one of the most important interpreters of John Maynard Keynes. He will be remembered above all for his monumental three-volume biography of Keynes, widely regarded as the definitive account of Keynes’s life and times. That work, written over several decades, together with the publication of the Collected Writings edited by Donald Moggridge, did much to reposition Keynes as a historical figure. It also humanized him in ways that earlier accounts, such as Roy Harrod’s, had not. In that sense, Skidelsky’s contribution helped bring Keynes back into the conversation at a time when Keynesian economics itself was in retreat.

Skidelsky was also, importantly for us, a member of the editorial board of the Review of Keynesian Economics (ROKE), and a supporter of its broader intellectual mission. As I noted in my short piece on Robert Solow, the journal was conceived as a counter-cultural project, aiming to reestablish Keynesian economics, understood broadly, and without hyphens, as a central framework for macroeconomic analysis. Skidelsky understood that mission and supported it, at a moment when such a project was far from obvious or widely accepted.

At the same time, Skidelsky’s interpretation of Keynes was not without its limitations. In his own critique of Roy Harrod’s biography, he rightly argued that it sanitized Keynes and obscured important aspects of his life and work. Yet his own work, written in the context of the dominance of the Neoclassical Synthesis and the broader retreat of Keynesian ideas, often did not fully break with that framework. Skidelsky’s biography, while more historically accurate and richer in detail, remained in important respects defensive, accepting the view that Keynes’s theory rested on imperfections rather than representing a fundamental break with orthodox economics.*

This matters because the interpretation of Keynes is never neutral. The postwar Keynesianism associated with the Neoclassical Synthesis reduced Keynes to a theory of market failure, wage rigidities, and short-run stabilization, leaving intact the core of marginalist theory and Say’s Law in the long run. In that reading, Keynes becomes a useful supplement to an essentially self-correcting market system, rather than a critic of it. Skidelsky did much to restore Keynes the person, but less to fully recover Keynes the theorist.

None of this should detract from his achievements. Skidelsky was a serious scholar, a prolific writer, and a public intellectual engaged with the issues of his time. He consistently defended a moderate, pragmatic Keynesianism, what he himself sometimes described as a middle way between the excesses of unregulated capitalism and the failures of central planning.

For those of us working in the Keynesian and heterodox traditions, his legacy is therefore a mixed but important one. He helped keep Keynes alive during decades in which the profession largely moved in other directions. He supported efforts, like ROKE, to rebuild a broad (pluralistic) Keynesian consensus in the profession. But his interpretation also reflects the limits of the period in which it was developed, a period in which Keynesianism was often reframed in more conventional, and less radical, terms.

Each generation, gets its own Keynes. Skidelsky gave us one that was richer, more human, and more historically grounded than the sanitized versions that preceded it. The task remains to recover, more fully, the theoretical and political implications of Keynes’s work.

* See the more recent work by Zachary Carter that connects Keynes' biography with the ideas of Joan Robinson and John Kenneth Galbraith, and the development of heterodox views based on Keynes thought. 

Milei, Markets, and Mirage: Why Argentina’s “Success” Is Not What It Seems

There is a growing narrative in the international press, and among those who consume it, that Javier Milei has turned Argentina into a success story. Inflation is supposedly down, poverty is falling, growth is rebounding, and the long-standing problems of fiscal excess and state overreach are said to be finally resolved. For some, this is taken as vindication of “free market” principles.

 

But before we rush to declare ideological victory, it is worth pausing. If one is willing to infer from Argentina that markets work, why not infer from Scandinavian welfare states that intervention works just as well? The answer, of course, is that these simplistic conclusions misunderstand how economies actually function. There are no single-policy experiments in macroeconomics, and certainly none that can be reduced to slogans about the "free market” versus “the state.” As I will argue below, the apparent successes of the current Argentine administration are far more fragile, and far more misleading, than commonly portrayed.

Yes, inflation has come down from the extremely high levels reached at the end of the Alberto Fernández administration. But context matters. Those peak inflation rates, above 200% annually, were largely the result of massive exchange rate depreciations, including one induced under pressure from the International Monetary Fund (IMF) during the election of 2023.

Crucially, the current government itself triggered a sharp devaluation at the outset, accelerating monthly inflation from roughly 12% to 25% in December of 2023. The subsequent decline in inflation is not the result of laissez-faire policies, but rather of exchange rate stabilization, made possible by external financing. This includes a swap line with China and a substantial IMF agreement (around $14 billion disbursed), alongside additional support linked to political ties with the United States, again close to the midterm elections last year.

In other words, inflation came down not because markets are free, and fiscal spending was contained -- that caused a slowdown of the economy (more on that below) -- but because the exchange rate was actively managed with the help of international financing. So much for free markets. Even now, inflation remains around 30% on an annual basis, higher than during much of the period under Cristina Fernández de Kirchner. If this is success, it is a rather modest one.

The claim that Argentina is booming is equally misleading. What is improving is not the domestic economy, but the external sector. After several years of drought that depressed agricultural exports, favorable weather and higher commodity prices, especially for soybeans, have boosted export revenues. Additionally, infrastructure projects initiated under previous administrations, such as energy investments linked to Vaca Muerta, have reduced energy imports and improved the trade balance. None of this has much to do with current policy. It is largely the result of exogenous factors and past investments.

Meanwhile, the domestic economy is stagnant, and this is the direct result of the draconian cuts of government spending, including investment and spending on crucial areas like Research & Development that will hurt growth, and exports in the future. Capacity utilization collapsed in December 2025, when he assumed the government (as can be seen below), as much as real wages did (as I have shown before here).

 

Poverty has indeed declined from its recent peak. But here again, the explanation is more mechanical than structural. Poverty in Argentina is highly sensitive to inflation. The spike in prices, partly triggered by the initial devaluation under the current administration, pushed poverty sharply upward. As inflation stabilized, poverty naturally declined from those elevated levels. This is less an achievement than a reversal of a self-inflicted shock, even if poverty was increasing at the end of the previous government. And it remains higher than it was with Cristina. And it is higher than what his government claims (as is inflation; note that the head of the statistics office resigned for issues with inflation measurement, something that the right always criticized about the Kirchners).

On further note, part of the reduction in extreme poverty is due to the continuation of transfer programs, ironically maintained under pressure from the IMF. Without these policies, indigence would be significantly worse. This underscores a basic point often ignored in market triumphalism, markets do not solve poverty. In any functioning society, that responsibility falls to the state.

 

This is not a story of market-led success. It is a story of short-term stabilization underpinned by external support, which has increased indebtedness significantly,making Argentina by far the biggest debtor to the IMF (see above; the other expansion was with Macri, that had the same economic team; yeah he is also an outsider, wink, wink, say no more), combined with policies that risk undermining long-term productive capacity and the external sustainability of the country's foreign obligations. In other words, Milei makes a crash much more likely.