Rod O’Donnell on Keynes and Liberal Socialism

 

Hits and Mises (click for the joke)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Peter Clarke's Liberals and Social Democrats shows that there was a group of left Liberals before Keynes, figures such as L. T. Hobhouse, J. A. Hobson, Graham Wallas, and the Hammonds, who moved British liberalism beyond the Gladstonian night-watchman state. They accepted that formal liberty was not enough in a society marked by poverty, unemployment, inherited privilege, and social destitution. In that respect, they were close to what would later be called social democracy. That's Clarke's point to some extent, they were liberals and social democrats. Indeed, one could say that they were among the intellectual ancestors of Keynes' liberalism. They were certainly moving away from liberalism, but in my view they fell short of social democracy, certainly as it was defined at that time, since they were averse to class conflict politics, and detached from any conception of the working class as the agent of political change. They were not Fabian Socialists, let alone Marxists, and certainly did not join Labour.

 

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

 

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

 

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

 

This is why the distinction between policies favorable to workers and working-class politics matters. Keynes wanted full employment, but not because he had adopted a socialist theory of class power, and the need for alternative ways of arranging productive forces. He wanted to prevent capitalism from producing the social conditions that could lead to revolutionary politics, authoritarianism, or collapse. In that sense, the old claim that Keynes wanted to save capitalism remains broadly correct, but it must be qualified. He wanted to save capitalism from laissez-faire capitalism. The educated bourgeoisie, people like him, would be in charge.

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

 

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

 

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

On the longevity of metal standards

In a recent post, I noted that in modern history -- in a long durée  sense -- there have been essentially three monetary standards. Repeating myself, a silver standard, dominated by the Spanish silver peso (which anchored global trade and is shown above),* and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.). The transition to the gold standard was associated with the demonetization of silver (The Wizard of Oz effect, one might call it), and the rise of the dollar was associated to the demonetization of gold. I discussed both things in my paper (not paywalled paper) on the end of Bretton Woods a few years back.

However, I did not discuss why metal standards were so durable or why they were adopted in the first place. This is often interpreted in the mainstream literature as evidence of the correctness of the metallist interpretation of money origins, which does not have any basis on the archeological evidence of the development of money, I might add. Before I get to that, it is worth exploring why in the modern era, after the rise of modern nation states, silver, and gold remained the dominant standards for so long.

Metallic standards survived for a long time, but their historical function changed once a dominant state was able to impose its own liabilities as the international means of payment, reserve asset, and unit of account (this one is the central function, BTW). The rise of the pound did not simply mean that gold replaced silver because gold was technically superior. Rather, Britain’s industrial, financial, naval, and imperial power allowed the pound to become the true organizing currency of the system. Gold remained the formal standard, but the underlying system was increasingly a pound standard, as noted by Marcello de Cecco long ago. In that context, the demonetization of silver was part of the consolidation of British monetary hegemony. Silver, historically the dominant monetary metal, was displaced as the key international monetary anchor when the pound became the central currency of world trade and finance. As noted, the demonetization of silver took place with the rise of the pound as hegemonic currency and the late nineteenth-century establishment of the gold standard.

The same logic applies to gold and the dollar. Bretton Woods was formally a gold-dollar system, but in practice it was already predominantly a dollar system. The reality of a dollar-based order was already evident by the Second World War.  Just as the pound had been the de facto key currency before World War I, the dollar had become, for all practical purposes, the key currency by the war. The closing of the gold window in 1971 therefore did not create dollar hegemony from scratch. It removed the residual metallic constraint on a system already organized around the dollar.

The deeper explanation is state power and hierarchy, not metallism. Agents accepted pounds and later dollars not because these currencies were attached to gold or silver, but because Britain and then the United States had the military, financial, commercial, and institutional power to make their currencies the international unit of account and reserve asset. The willingness to use pounds and later dollars for trade, contracts, reserves, and calculations about the future was not due to their connection to gold, but to “raw military power” and the capacity to enforce rules globally (as I said in the paper linked above).

That also means that the demonetization of metals marks the transition from metal-mediated hegemony to increasingly explicit state-money hegemony. Silver was demonetized as pound hegemony became consolidated through the gold standard. Gold was demonetized as dollar hegemony became consolidated through the flexible dollar standard. In both cases, the metal was less the foundation of the system than a transitional institutional device through which a rising hegemon’s currency acquired and stabilized the international monetary system.

The contrast with a metallist view is important. A metallist account would say that silver and later gold lost because of their inadequacy as monetary anchors, changes in their relative scarcity, and so on. Instead that metals were demonetized when they became unnecessary, or worse restrictive, for the dominant state’s currency. The decisive factor was not the intrinsic property of the metal, but the ability of Britain and later the United States to make the world accept their state-backed monetary liabilities.

Of course this argument can be made compatible with the conventional metallist story, but only if the metallist argument is demoted from a theory of money’s essence to a theory of the historical conditions under which early monetary power could be exercised. The conventional metallist view says precious metals became money because they had useful physical properties, namely: durability, divisibility, portability, relative scarcity, and high value-to-weight ratios. One does not need to deny that. In fact, those characteristics help explain why, in early long-distance trade and pre-modern fiscal systems, metallic money was a practical instrument. Where states had limited administrative capacity, limited policing power, weak or nonexistent banking systems, and no modern anti-counterfeiting technology, precious metals made monetary claims more secure. It was in the state's interest to use the metals as monetary standards.

But those physical properties do not explain why a monetary standard becomes hegemonic. They explain why metals were useful vehicles of money, not why money has value or why one monetary system dominates another. The widespread view among monetarist bros that money needs to have some intrinsic value is nonsensical. The deeper issue is power. The capacity to define the unit of account, enforce contracts, tax, borrow, command resources, and control trade routes.

In other words, metals mattered because early states and merchant powers lacked the institutional and technical capacity to impose pure state fiat money across large geographical spaces. Precious metals were a solution to the limits of enforcement. They allowed payment and settlement beyond the immediate reach of political authority. In that sense, metallism captures something real about the constraints of early monetary systems. But once state capacity expanded and paper currency (Chinese invention), public debt and central banking were invented (both Western inventions), military reach and productive capacity were expanded, and anti-counterfeiting technology was developed, the metal standards became less foundational and more of a historical shell around state-fiat money.

That fits better what we know about money origins. Money does not originate naturally from barter or from the intrinsic scarcity of precious metals. Scarcity cannot explain international monetary hierarchy. Silver did not dominate merely because of its physical characteristics, nor did gold replace silver simply because it was technically superior, or more scarce. And the dollar did not replace gold because fiat money was naturally more efficient. These shifts reflected the rise of successive hegemonic powers. First the mercantile and imperial trading powers, then Britain, then the United States dominated the global economy. This requires a chartalist/classical-political-economy point of view to be fully understood. Metallic standards do not imply that money is not based on state power. Historically, it was often the form through which state (read military/coercive) and mercantile power could be projected before the institutional conditions for a global fiat standard existed.

* As I often tell kids in class, in many Romance languages the word for money itself is silver (e.g. argent, plata). 

Milei is not Roca

 

From the 'conquest of desert' to the creation of a productive desert

Pablo Gerchunoff has an interesting interview in La Nación in which he suggests that Milei, like Roca (the Argentine Porfirio, for gringos that know something about Mexico), has seen a structural change in the Argentine economy and has been able to convert it into a political opportunity. In Roca’s case, the combination of railways and refrigerated shipping opened the possibility of the old agro-export model. In Milei’s case, Gerchunoff points to the new productive geography along Route 40, with mining and energy potential. The natural gas and oil of Vaca Muerta, the possibilities of lithium, the mining and energy resources of Patagonia and the northwest frontier.

There is something to the point. But the analogy, I think, is more misleading than illuminating. I also might add that it is striking that someone like Gerchunoff, who once admired what he saw as Alfonsín’s non-Peronist social-democratic model (something that I share), could now find historical promise in Milei.*

On the historical issue, it is clear that Roca's model was not similar to the current one. The so-called generation of 80 did talk the language of liberalism, but the construction of that economic model required a very active state. Military occupation, territorial incorporation, railways, ports, public credit, land policy, immigration policy, and a political regime designed to guarantee the conditions for accumulation. Free markets did not spontaneously build the agro-export economy. It was built by the state, often violently. The current government wants the epic of a new productive frontier without public works, without infrastructure, and without the political construction that made the old liberal order possible.

There is another problem. Much of the so-called Route 40 strategy depends on investments and institutional decisions that preceded Milei. Vaca Muerta did not fall from the sky in December 2023. Energy infrastructure, the development of shale production, and the reduction of energy imports are the result of previous policies and investments. Milei can try to appropriate the narrative, and he may even give excessive incentives to some sectors, like AI (see Milei's piece in the FT), through the RIGI and other measures (for an explanation of the investment regime go here). But the current improvement in the external sector is not evidence that chainsaw economics works. It is evidence that past public investment, together with favorable external conditions (and a lot of dollars from the IMF and the US Treasury), can temporarily improve the balance of payments.

This is also why the idea that Milei is an outsider was always implausible. As I have noted before, the economic team is not new. Caputo and Sturzenegger are not outsiders to Argentine economic policy. They were central to the Macri experiment, which led to the 2018 IMF agreement and the renewed dollar debt trap. Milei’s rhetoric is anti-caste, but the economic program is the old neoliberal package of fiscal austerity, deregulation, trade and financial liberalization, and external indebtedness. The dog may be new, but the fleas are not.

Gerchunoff is right to worry about the losers of creative destruction (not sure how much is being created). But here too the Roca analogy fails. Argentina today is not a sparse nineteenth-century frontier society organized around land, beef exports, and a small urban elite. It is a modern, urban, very unequal society with a large working class, a complex service sector, industrial remnants, public employment, pensions, universities, health systems, infrastructure needs, and a binding external constraint. You cannot tell workers in the so-called conurbano to wait until 2050 or move to Patagonia. That is not a transition strategy. And it is not even good politics.

Where I disagree more sharply with Gerchunoff is on the exchange rate. He suggests that if the central bank moved the dollar closer to the top of the band (a devaluation in Latin American usage), Milei would almost guarantee reelection. That seems wishful thinking. Milei’s only clear achievement has been the reduction of inflation from the very high levels reached after the exchange-rate jumps of 2023. But that stabilization was not caused by fiscal austerity as such. The fiscal shock caused recession and the persistence of Argentina stagnation since 2011. The stabilization of prices came mainly from controlling the exchange rate, with substantial external support. The initial maxi-devaluation in December 2023 doubled monthly inflation and produced the collapse of real wages. Another depreciation would risk repeating the same mechanism. Higher import costs, higher prices, lower real wages, weaker consumption, and renewed instability.

In a peripheral economy with a strong pass-through from the exchange rate to prices, depreciation is not a magic route to competitiveness. It is often contractionary and inflationary. It reduces real wages, worsens distributional conflict, raises the domestic cost of imported inputs, and may fail to generate exports to compensate for the contraction of domestic demand. The idea that a cheaper currency automatically solves the external constraint is another version of the same marginalist fantasy that relative prices are the main mechanism of adjustment. In Argentina, relative prices often adjust by generating a crisis. Note that he already has a positive external situation in the short run (in the long run, the next several governments will have to contend with much higher external debt obligations).

This does not mean that the current exchange rate regime is sustainable indefinitely. It probably is not. But the problem is not solved by devaluation. The problem is that the government is trying to stabilize a highly dollarized economy with negative interest rate differential, offering insufficient incentives to hold pesos, scarce reserves, external dependence, and a brutal recessionary adjustment. In those conditions, a depreciation may be less a solution than the beginning of the next round of instability.

The broader issue is that the nineteenth-century liberal model cannot be recreated in a twenty-first-century Argentina. Even the nineteenth-century liberal model was less liberal than its admirers pretend. Today, a development strategy would require public investment, infrastructure, industrial and technological policy, energy planning, external management, and institutions capable of integrating the losers of structural change. Milei has none of that. He has a chainsaw, a Twitter account, and the enthusiastic support of the same groups that benefited from previous failed neoliberal experiments.

Roca, for all the brutality and exclusions of his project, built a state capable of organizing a model of accumulation. Milei is dismantling state capacity while claiming to inaugurate a new era of material progress. The result may last long enough to win an election if external financing keeps arriving. But the logic of the model points, as before, toward a crash. Roca 'conquered' the desert, Milei is creating a productive one.

* If you read Spanish I highly recommend his book on Alfonsín. 

On Mirowski and neoliberalism

New post on Substack that argues that Mirowski is right that neoliberalism cannot be reduced to textbook neoclassical economics, since it is a broader political and institutional project (see the old debate here). But I defend that, on a theoretical, the reverse point is correct. Neoliberalism also cannot be separated from marginalist economics, that is in a sense broader than neoliberalism. All neoliberals must be in some sense neoclassical, I argue.

The more detailed reasons are in the Substack post. The gist is that the public policy rhetoric of neoliberalism invokes Adam Smith's laissez-faire and classical liberalism, but its analytical core comes from neoclassical ideas about the theory of value and the notion of markets as superior coordinating mechanisms. The key distinction is therefore that classical liberalism provides neoliberalism with political legitimacy, while neoclassical economics provides its theoretical foundation. Mirowski helps clarify neoliberalism as a movement, but the post argues that his account underplays the common marginalist ground uniting its different strands.

Chokepoints and the resilience of American power

Quinn Slobodian has a good review in the New York Review of Books of Edward Fishman’s Chokepoints: American Power in the Age of Economic Warfare. Fishman’s book, as discussed by Slobodian, suggests that the old geography of imperial power, associated with control over maritime chokepoints, has been displaced, or at least supplemented, by a new kind of geopolitical chokepoint embedded in the infrastructure of globalization itself.

The old strategic passages, Suez, Hormuz, Malacca, have not ceased to matter, of course. But the new chokepoints are less visible. They are located in dollar payment systems, correspondent banking networks, shipping lists, insurance, transaction data, export controls, semiconductor supply chains, and the legal mechanisms that allow American sanctions to reach firms and governments well beyond U.S. territory. The empire is not only in the fleet, but also in the spreadsheet, the compliance office, the server, and the bank account.

Slobodian’s central point, a moral or ethical one, is that Fishman is too complacent about the American use of these instruments. Sanctions and export controls are presented too easily as clever instruments of policy, when in fact they are instruments of economic warfare. They often miss ruling elites and impose enormous costs on ordinary people. They restrict access to medicines, raise the cost of living, reduce growth, and produce humanitarian consequences that rarely enter the calculations of the sanctioning power. No surprise there. Fishman is an insider of the US bureaucracy.

More importantly, he notes that there is also a paradox. Sanctions and economic warfare reveal American power and erode it at the same time. In the short run, they demonstrate the extraordinary coercive capacity of the United States. Washington can freeze assets, cut access to dollar payments, block technology transfers, threaten third-party firms, and punish countries that do business with the wrong partners. In the longer run, however, the repeated use of these instruments encourages both adversaries and allies to search for alternatives. Russia, China, Iran, and even European firms and governments learn that dependence on US-controlled networks is a vulnerability (The Chinese already knew that; see Jake Sullivan’s piece in the last issue of Foreign Affairs).

That is certainly right. But it is also incomplete. Slobodian’s critique captures the self-undermining logic of financial and technological chokepoints, but it underplays the military dimension that makes those chokepoints effective in the first place. The dollar system, the control over payment systems, the ability to impose secondary sanctions, and the capacity to define who can and cannot participate in global markets are not simply instruments of market power or legal jurisdiction. They are embedded in a broader imperial architecture.

That architecture includes US military reach, naval dominance, intelligence capabilities, alliance systems, bases surrounding potential rivals, and the capacity to enforce rules globally. The chokepoint is not only financial or technological. It is also geopolitical and military. The old geography of power has not disappeared. It has been internalized into the institutional and technological infrastructure of globalization. This is important because otherwise one ends up with an overly pessimistic view of American hegemony.

It is true that the strength of the system creates vulnerabilities. The more the United States weaponizes interdependence, the more other countries have incentives to escape from it. China’s efforts to build technological autonomy, Russia’s attempts to find payment alternatives, and the search for non-dollar channels of trade all reflect this dynamic. However, as Tim Barker notes in a recent piece in Phenomenal World, American declinism has often been less a description of terminal weakness than a political language for imperial renewal.

Further, hegemony also reproduces American power. The dollar is not simply a convenient currency that survives because markets trust it. Nor is its dominance ultimately explained by gold, credibility, or some spontaneous market convention. The willingness of agents across the world to accept dollars, to denominate contracts in dollars, to hold reserves in dollars, and to organize their calculations around the dollar rests on power. More precisely, it rests on the capacity of the United States to enforce the rules of the global system.

Monetary hegemony (the role of key currency) depends on military technology, which in turn depends on access to key commodities (mostly energy) and technological dominance (mostly in sectors related to the military), but then access to commodities and military power depend on the ability to spend without significant limits, which is based on monetary hegemony, in a circular and self-reinforcing way.

In a simplified way, since the transition to capitalism, there have been essentially three monetary standards. A silver standard, dominated by the Spanish silver peso (which anchored global trade), and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.).

The rise of the pound was associated to the demonetization of silver, and the end of Bretton Woods to the demonetization of gold. The end of Breton Woods, in this sense, did not represent the beginning of the end of dollar hegemony. Quite the opposite. The collapse of the dollar-gold link created the first genuinely global fiat standard and enlarged the policy space of the United States. Freed from the gold constraint, the United States could use its currency, its public debt, and its central bank in ways unavailable to other countries. The dollar standard allowed the United States to spend, borrow, and sustain its military and technological capacities on a scale that others could not replicate.

This is the fiscal-military side of dollar hegemony. The hegemonic currency allows the state to spend without the same external constraint faced by peripheral countries. That spending supports the military-industrial complex, government procurement, research & development, and the hidden developmental state. In turn, military power sustains the international order in which the dollar remains central. Monetary power and military power are not separate. They are mutually reinforcing.

This is why the rise of China must be analyzed carefully. China has changed the geography of global production. It is no longer simply a low-wage assembler of cheap consumer goods. It is now a central actor in high-tech manufacturing, electric vehicles, batteries, solar panels, telecommunications, and other strategic sectors. The old complacent view that the United States would innovate and design while China assembled is gone. That was one of the illusions of the pro-globalization cheerleaders.

There is an argument, the energy-hegemony argument,, we may call it, made recently by Danny Bessner in David Sirota’s podcast, and in a more systematic way by Helen Thompson in her book Disorder,* that suggest that China is to become dominant because of its control of clean energy sources. Bessner said that “the country that is the leader in new energy technologies is the country that is going to dominate global economics,” and he frames the present as a possible hinge point in which countries begin shifting toward a different energy base. Britain with coal, the United States with oil, and perhaps China with batteries, solar panels, electric vehicles, and the supply chains required for electrification.

There is something to this. Energy transitions are never merely technical, and they reorganize production, finance, and geopolitics. But one should be cautious about moving too quickly from China’s lead in renewables to the end of American hegemony. Energy leadership matters, but monetary and military power have their own inertia. The dollar system, the Treasury market, US military reach, and the legal-financial architecture of sanctions do not disappear because China sells more electric vehicles.

In other words, China’s productive rise has not displaced the financial and military architecture centered on the United States. The geography of production has changed much more than the geography of money. China remains deeply constrained by the dollar system, while the United States does not need to hold renminbi reserves. The United States has military bases around China’s neighborhood and China does not have anything comparable around the United States. China has become a great manufacturing power, but it has not become the issuer of the world’s hegemonic currency.

This asymmetry is central for understanding the current world order as I suggested in my Jacobin piece. In that sense, the discussion of chokepoints should not lead to the conclusion that American hegemony is disappearing. It should lead to a better understanding of how that hegemony operates. The United States no longer relies only on the direct control of territorial routes, although naval power remains essential. It also controls the institutional and technological circuits through which trade, finance, and production are organized. The sea is supplemented by the payment system, the microchip, the export license, and the sanctions list. In a sense, the notion that finance was central to hegemony not just trade, was true (with technological differences) about the pound centered world of the 19th century.**

The overuse of these instruments may indeed generate resistance. But resistance is not the same thing as successful displacement. Alternatives to the dollar system are costly, partial, and difficult to build. Technological autonomy takes time. Financial autonomy requires deep markets, political power, and geopolitical protection. The capacity to escape American chokepoints is unevenly distributed, and most countries remain trapped in the networks they would like to avoid.

The danger, then, is not that American hegemony is about to vanish. The danger is that it becomes more openly coercive as its legitimacy declines. The veneer of politeness associated to the liberal rhetoric of a rules-based order gives way to the crass use of direct interventions, sanctions, export controls, industrial policy for the center, and austerity for the periphery. The old ideology of globalization promised interdependence and efficiency, gives way to more openly nationalist discourses. The reality of coercive interdependence is the same.

* On the energy-hegemony nexus Thompson says: “Geopolitically, an energy change will necessarily result in upheaval. If Britain were the power that climbed to dominance during the age of coal and the United States the power that ascended during the age of oil and coal, the spectre haunting Washington is that without a decisive American strategic turn to renewables and electrification, the new energy age that depends on metals and minerals will belong to China.” Her statement is more nuanced than Bessner, and less categorical about the rise of China, but certainly linked to the energy transition.

** See my article on the use of central banks as weapons of hegemony, and why Ha-Joon Chang's kicking away the ladder was also monetary and financial in nature.

Two traditions in the history of ideas

The chart above is a summary of my history of thought class here at Bucknell. Over the last years I have used the Vaggi and Groenewegen textbook. The central divide in the history of economic thought is between the classical political economy tradition and the utilitarian-marginalist tradition. The classical tradition, running from Petty, Cantillon, and Quesnay through Smith, Ricardo, Marx, and later Sraffa, is organized around production, reproduction, surplus, accumulation, and distribution among social classes. Its object is the economy as a historically specific social system, marked by conflict over the surplus. By contrast, the Benthamite tradition, passing through John Stuart Mill, Jevons, Marshall, Pigou, and modern neoclassical economics, shifts the center of analysis toward utility, exchange, individual choice, scarcity, and the marginal calculus.

This divide in economics mirrors a broader division in social science, discussed by Randall Collins, between a conflict tradition, concerned with power, class, institutions, and historically evolving social structures, and a rationalist-utilitarian tradition, which begins from rational individuals and explains social order as the unintended or aggregate result of their choices (Collins has four traditions in sociology, and I'm simplifying here). In that sense, the Smith/Ricardo/Marx line belongs, despite its internal differences, to the conflict-centered political economy tradition, while the Bentham/Mill/Marshall line provides the economic counterpart to the rationalist/utilitarian strand of social theory.*

The same divide reappears in modern theories of value and distribution.** In the classical-Sraffian tradition, value is not derived from individual preferences or subjective scarcity, but from the technical conditions required for the reproduction of the system. In a Sraffa-Leontief framework, given the input-output relations of production and one distributive variable, such as the real wage or the profit rate, relative prices can be determined as prices of production. Distribution is therefore not solved by marginal productivity, but reflects a social and institutional determination of the division of the surplus.

By contrast, in the Arrow-Debreu intertemporal model, prices are equilibrium signals that reflect relative scarcities across commodities, dates, and states of nature, ultimately grounded in individual preferences, endowments, and technologies. In that framework, distribution is treated as the result of the initial allocation of resources and the competitive valuation of scarce factors, rather than as a historically specific conflict over the surplus.

Thus, the old contrast between classical political economy and marginalism survives in modern form as the contrast between reproduction, surplus, and distribution on the one hand, and scarcity, preference, and intertemporal exchange on the other.

* It is interesting that Friedman, in his classic Capitalism and Freedom, although he quotes Smith, mostly for rhetorical reasons, in my view, in his crucial chapter on the importance and antecedence of economic freedom over political rights, he only cites Jeremy Bentham as a precursor.

** On this, the kind of confusion in the profession is somewhat surprising. Some people (e.g. Cowen here) suggest that the classical tradition has no alternative to the simplistic labor theory of value (LTV), with prices proportional to the quantities of labor, and ignore the Sraffian model (see this). Alternative, some of the same people assume that the Marshallian, not even the general equilibrium version of say Knut Wicksell, has no problems, not considering the insurmountable issues with partial equilibrium shown by Sraffa's critique. The reasons for the change in the notion of equilibrium, noted by Garegnani go unnoticed by almost the whole profession.

PS: There are plenty of differences between authors in those two traditions. Clearly Friedman and Samuelson had many economic policy differences, and Samuelson and some left-Keynesians like Joan Robinson would agree on some of those.  But on an analytical level, Samuelson was closer to Friedman.

Beyond green scarcity: a simple taxonomy

New post on Substack on ecological economics, inequality, and why environmental degradation is not just a market failure. Degrowth raises real questions, but for the periphery the issue is development, structural transformation, and the external constraint. This is based on the paper I presented at the BIPP conference.

Inflation or Paranoia

Josh Bivens has a good post at EPI on the so-called affordability crisis, making the obvious, but often forgotten, point that affordability is not about prices alone. It is about prices relative to incomes. That is, the price of gas, rent, or health insurance matters, but what matters even more is whether the income of workers has kept pace with the capacity of the economy to produce those things. In other words, the affordability crisis depends not just on the price level, but on the wages of workers, that have not kept up, over the long run, with prices.

This is also why the endless obsession with inflation as the root of all evil is so misleading. I have often noted, following the old Bruno and Easterly paper, that inflation below a relatively high threshold, around 40 percent annually, does not seem to have clear negative consequences for growth (see this post with a link to the paper). Their point was not that inflation is wonderful, or that prices do not matter, but that the conventional view that even moderate inflation is economically disastrous has very little empirical support. Excluding high-inflation crises, they found no consistent relationship between inflation and growth.

Incidentally, when I was at the Central Bank of Argentina and inflation was at around 25 percent per year (below Milei's average inflation, BTW), I often said that inflation was high, but no a problem, since wages were growing faster. In other words, the Very Serious People who treat 5 or 6 percent inflation as Weimar in the making are, as usual, confusing their ideological preferences with evidence.

The real issue with inflation is distributional. If prices rise, and wages follow, the consequences are very different from a situation in which prices rise and wages lag behind. In the latter case, inflation becomes a mechanism for reducing real wages and redistributing income upward. That was one of the central points of my old chapter on money and inflation, that the heterodox tradition, particularly the structuralist and conflict-inflation approaches, understood inflation as the result of unresolved distributional conflict, external constraints, bottlenecks, and institutional arrangements, not simply as too much money chasing too few goods.

The problem is not inflation in the abstract, but who has the power to protect their income when prices change. That is why Josh’s post is important. As he and his co-authors say: "US families’ feeling that life is less affordable than it should be is grounded in objective realities about how the economy has failed them." It's not simply a subjective perception. More or less what I suggested in this post. The affordability crisis is, in that sense, another name for the long wage squeeze.

Note that the paranoia about inflation will have consequences for policy making. Now that inflation increased a bit, as a result of the Iran War, and has remained a little bit above the target, the new Fed chair will a much harder time bringing interest rates down (that is if they do not increase instead). Wall Street anxiety's are more important than the realities of working class people.

PS. On the decrease in real wages see this piece on FT. 

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

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

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

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

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

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

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

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

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

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

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

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

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.