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 to 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 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. In my view, Keynes’ more radical theoretical point 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.

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.

ROKE's New Clothes

A first look at the new ROKE cover, launching next year for the journal's 15th anniversary.

A little bit of the history of the journal appears in Robert Solow's obit, who was a member of the editorial board.

On Schumpeter as an economist, sociologist and prophet

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

Development by invitation: a short digression on the concept

 

Development? Be my guest 

The concept of development by invitation, as far as I know, and most of my knowledge comes from Esteban Pérez's paper in a book we co-edited long ago,  originates with Arthur Lewis and refers to a development strategy in which small developing economies attract foreign capital to initiate industrialization. For Lewis, the problem of many small developing economies, particularly in the Caribbean, was that they lacked several key elements required for industrialization, namely: domestic capital, entrepreneurial skills and large domestic markets. Because of these constraints, industrialization could not easily emerge through domestic investment alone. Lewis therefore proposed industrialization by invitation, meaning that governments should invite foreign firms to establish manufacturing activities in the country.

Immanuel Wallerstein refers to a path of development in which a peripheral country advances economically because the multinational corporations from central countries actively expand into the world economy. This development occurred not through autonomous national transformation, but through external investment resulting from political and economic cooperation with central countries. For Wallerstein, the concept referred to a structural process within the capitalist world-system. In his framework, central countries allowed limited industrialization in some peripheral areas as multinational firms relocated production. That was, in fact, to some extent the phenomenon in a good part of the Latin American periphery, In other words, development by invitation was not a development policy, but a mechanism of global capitalism that reorganized production.

In the work of Carlos Medeiros (published with Franklin Serrano; he is pictured above), the notion of development by invitation refers to a historical process in which peripheral or late-industrializing countries accelerate their development because the leading powers of the international system actively support or tolerate their industrialization for geopolitical reasons. The concept is embedded in their analysis of international monetary regimes and growth dynamics. Growth is demand-led, and based on the supermultiplier, if that wasn't clear.

For Medeiros, the starting point is that capitalism naturally generates divergence between countries due to structural asymmetries in military power, technological capabilities, and monetary hegemony. All three are interrelated. Because of these asymmetries, most peripheral countries face a balance-of-payments constraint that limits growth. However, in certain historical periods, some countries can overcome these constraints when the dominant power facilitates their development.

For Medeiros,  development is not simply the relocation of production associated to multinational or transnational firms, be that as a policy strategy or an endogenous process of integration within the capitalist system. It involves state-led industrialization and strategic geopolitical support from the hegemonic power. Hence, development by invitation can produce successful industrial catch-up, not merely integration into the world economy.

Note that Esteban's discussion implicitly highlights a critique of the early concept from a structuralist perspective. Even though Lewis viewed the strategy as a path to development, in practice it often led to enclave industrialization and persistent dependence on multinational firms. The outcome sometimes resembled the type of dependent integration emphasized by Wallerstein. In a sense, Medeiros version is a further critique, suggesting that the interaction of political coalitions, behind the developmental state, and the geopolitical context matter.

Note that one might be correctly skeptical  of the notion that a country develops simply because the hegemonic power invites it to do so. Even acknowledging that favorable geopolitical contexts existed, such as those of Japan, South Korea, or several European countries in the postwar period, one might argue that development was ultimately the result of internal strategies, that is, strong states pursuing active industrial policies of technological catch up. In this view, the invitation may have constituted a favorable external framework, but it was never the decisive factor.

However, this critique appears to address a somewhat simplified interpretation of Medeiros’ concept. In his framework, development by invitation was never presented as a purely external process or as a microeconomic explanation based on private decisions. The concept was formulated in macroeconomic and geopolitical terms, placing emphasis precisely on the role of the state. The question was not whether Japan or Korea developed simply because the United States invited them, but rather why certain developmental states were able to industrialize so rapidly through manufactured exports. The answer highlights that these states benefited from exceptional external conditions. First, the unilateral opening of the US market, financial transfers,  very often facilitated technological transfers, beyond tolerance toward aggressive industrial policies, and strategic support within the context of the Cold War. This was not diplomatic magic, but rather a combination of an internal developmental state and a relaxation of the external constraint facilitated by American hegemony.

In other words, Medeiros’ concept does not attempt to explain development exclusively through external factors, but rather to illuminate why certain developmental states faced fewer external constraints, had greater access to financing, and enjoyed broader access to strategic markets than others. This allowed for a particular mix of export promotion and import substitution and helps explain why several Asian countries not only avoided the lost decade that followed the debt crisis of the 1980s, but also managed to accelerate their process of industrialization as a good part of the center, and other peripheral regions deindustrialized.

If the discussion is brought to the current Argentine case (I wrote a short note on this in Spanish), the most important point may not be to deny the relevance of the concept but to recognize that Argentina today lacks a developmental state capable of taking advantage of any potential invitation. If the government dismantles industrial, technological, and financial policy instruments, then whether a country is invited or not becomes almost irrelevant. The issue is not whether Washington extends a diplomatic invitation, but whether there exists a national strategy capable of transforming a favorable geopolitical context into productive accumulation.

Ultimately, the debate should not revolve around whether development arrives mechanically by invitation, but rather around the interaction between internal state strategy and external conditions. Development has never been automatic or purely external, but neither has it been independent of the geopolitical order and the decisions of the hegemonic power.

The Wealth of Nations at 250! Misunderstood icon of free markets

Today, March 9th, marks the 250th anniversary of the publication of The Wealth of Nations (WN) in 1776. Adam Smith may also be one of the most misunderstood thinkers in the history of economics. Smith is not the father of modern economics, neither of capitalism, a term he never used.

In modern discussions Smith is often portrayed as a precursor of contemporary economics, something like an early version of the Arrow-Debreu model of competitive equilibrium. I remember Sam Bowles suggesting that (he actually said something to the effect that Smith, Marx and Arrow, all said the same thing) at a talk at the University of Utah. In that interpretation, Smith supposedly discovered that self-interested individuals interacting through markets generate optimal outcomes, the infamous “invisible hand.”

Many books, including most classics on the topic suggest that interpretation. For example, yesterday WAPO had an op-ed (actually two; the other was much less problematic) by Jesse Norman, who will be publishing a book titled, you guessed, Adam Smith: Father of Economics. He correctly notes that the: "250th anniversary is not a moment for hagiography. It is an opportunity to recover a way of thinking that is directly relevant, indeed urgent, to the economic, social and political challenges we face today." He goes on to analyze essentially the question of tariffs with modern economic notions. Note that back in the 1790s, just after Smith passed, Alexander Hamilton, using Smithian ideas and method achieved very different policy conclusions.*

These readings of Smith as a father of modern economics and a champion of free market capitalism tells us far more about modern neoclassical economics than about Smith himself. The conceptual universe of modern economics is fundamentally different from that of classical political economy, the tradition to which Smith belonged.

Smith should be understood as part of a broader intellectual tradition that begins not with him but with William Petty, and continues through Cantillon, the Physiocrats, Ricardo, and ultimately Marx, what later came to be called the surplus approach. This tradition was concerned with the material conditions for the reproduction of society, the generation of surplus, and the process of accumulation.

In that framework, economics was not primarily about individual choice or utility maximization. It was about the reproduction of society. Seen in this light, Smith’s analysis was fundamentally about social conflict and the distribution of income, not about harmonious equilibrium among optimizing individuals. The core problem of political economy was explaining how societies generated and distributed the surplus that allowed accumulation and growth.

Another common myth is that Adam Smith founded economics. In reality, Smith was the great systematizer of a body of ideas of the surplus approach. Political economy emerged gradually during the Scientific Revolution and the early modern period. Petty, Cantillon, and the Physiocrats had already developed crucial insights about value, production, and economic reproduction before Smith wrote the WN. Smith’s real contribution was to organize these insights into a coherent framework and to place them at the center of his critique of the mercantilist system he saw as dominant. His book certainly helped establish political economy as a distinct intellectual discipline.

Nor was Smith the theorist of capitalism in the modern sense. The term itself was not part of his vocabulary. Smith spoke instead of commercial society, a stage in historical development characterized by the expansion of markets, manufacturing, and exchange.** He was certainly against the mercantile system, and believed that Physiocracy had incorrectly limited the creation of wealth to agriculture. But his defense of the system of natural liberty was not a defense of free markets in the modern sense.

Modern defenders of free markets often claim Smith as their intellectual ancestor. But the relationship between the liberalism of classical authors (not classical liberalism, which brings another series of confusions) and neoliberalism is far more complicated. Smith’s defense of laissez-faire was largely a reaction against the mercantilist system and the remnants of feudal regulation that constrained economic activity in the eighteenth century. The liberalism of Smith and Ricardo was historically progressive; it aimed to dismantle the privileges of the Ancien Régime and promote economic development.

Neoliberalism, by contrast, emerged in the twentieth century as a reaction against the Keynesian and welfare-state reforms of the New Deal era. Its central objective has been to limit the ability of democratic governments to regulate markets or redistribute income. In that sense, neoliberalism is better understood as a revival of what Marx called “vulgar economics”, rather than a continuation of the classical tradition.

Perhaps no concept has been more abused than Smith’s invisible hand. In modern economics it is often interpreted as a general theorem about markets producing optimal outcomes. But in Smith’s text the metaphor appears in a very specific context: merchants preferring domestic investment for reasons of security, which incidentally supports domestic employment. That is a far cry from the sweeping claim that all self-interested behavior leads to socially optimal results.***

Smith was also deeply skeptical of concentrated economic power. His famous warning that “people of the same trade seldom meet together… but the conversation ends in a conspiracy against the public” reflects a profound concern with monopoly and collusion. Competition, not the invisible hand, was the mechanism that restrained self-interest. He was anti-monopoly, not anti-state. In fact, he was for taxes to fund public education, a radical proposition back then (and now if you believe libertarian views that education is not a public good).

If you want to understand more about Smith ideas I recommend Tony Aspromourgos' The Science of Wealth: Adam Smith and the framing of political economy. For a book that puts in perspective how the legacy of Smith evolved in the 19th century read  After Adam Smith: A Century of Transformation in Politics and Political Economy by Murray Milgate and Shannon Stimson.

* On the distortions on Smith's views within the American context see my comments on  Glory M. Liu's book Adam Smith's America: How a Scottish Philosopher Became An Icon of American Capitalism. 

** On Smith's views on history and the four stages of development see the classic paper by Ronald Meek.

*** On that see the revised entry on the Invisible Hand by Tony Aspromourgos for the New Palgrave Dictionary of Economics.

PS: He also did not build up on the ideas of Ibn Khaldun, who, in turn, cannot be seen as a precursor of classical political economy or of Smith. On that see this post.

 

The macroeconomic perspectives: The GDP and employment numbers and the war in Iran

The new GDP and employment numbers are out, and they confirm something I have been arguing for a while, namely: the US economy is slowing down, but it is not in a recession, and the tariffs did not cause the stagflation that so many commentators confidently predicted.

Real GDP growth slowed again in the most recent quarter, but it still expanded at about 1.4 percent. Real GDP growth is slower than in 2024, but it was still above 2 percent (see below). That is clearly below the pace we saw in the immediate aftermath of the pandemic, when fiscal expansion and the reopening of the economy generated unusually strong growth. But it is still positive growth. As in previous quarters, consumption remains the central driver of the economy, which should not be surprising in a country where household spending accounts for roughly seventy percent of GDP.

The more worrisome component in the GDP report is actually government spending, which fell significantly. This decline reflects the wave of layoffs of federal workers and the broader push toward fiscal restraint that has accompanied the current administration, including falling nondefense spending. In other words, a certain degree of austerity has been quietly introduced into the federal budget, with a negative bias with respect to social spending. That matters because the rapid recovery of the US economy after the pandemic owed a great deal to fiscal expansion. As that support fades, or is actively reversed (although I doubt that) the economy naturally settles into slower growth.

On the labor market side, the most recent BLS employment report shows a decrease of about 92,000 jobs. That is certainly weak by the standards of the last few years, but it is not yet consistent with a recession. A lot of this was caused by a major, four-week, strike involving over 30,000 nurses and health care workers. Unemployment remains relatively low, and the labor market appears to be softening rather than collapsing. In other words, what we are seeing is broadly consistent with what macroeconomic theory would predict: when growth slows, job creation also slows. Okun’s law still works.
 
The decline in federal employment is part of that story. But here again there is an interesting political twist. While civilian federal jobs have been cut, the administration has promised a significant increase in military spending, which is likely to offset some of the contractionary effects of austerity elsewhere. This is not exactly a new strategy. Economists used to call it military Keynesianism, using defense spending to sustain demand when other forms of public spending are politically difficult.
 
All of this confirms something that was widely disputed last year. The tariffs did not trigger the recession that so many analysts predicted. Nor did they produce a surge in inflation. They also did not bring back manufacturing jobs, but that isn't a surprise either (on that see this post). As I argued repeatedly, tariffs might produce a one-time increase in the level of prices, but that is very different from generating persistent inflation. And the effect was small, with CPI increasing by less than it did in 2024 (see figure above). The data have borne this out. Inflation has remained relatively subdued, and the economy, while slowing, continues to grow.
 
That does not mean the risks have disappeared. In fact, the risks may now be higher than they were earlier in the year, but for reasons that have little to do with tariffs. The most important new development is the war with Iran and the sharp increase in oil prices. Since the beginning of the conflict, oil prices have risen by more than 25 percent (see below). Energy shocks have historically played an important role in US inflationary crises, including the Pandemic. Higher oil prices increase production costs,  push inflation and squeeze household budgets. The affordability issue (like the Epstein files) might not go away.

But the key channel here is not simply inflation. The real issue is the Federal Reserve’s reaction to these cost pressures. Throughout last year I have argued that the main recession risk comes from monetary policy, not trade policy (and to a lesser extent fiscal policy). The Fed kept interest rates relatively high for a prolonged period in order to combat inflation after the pandemic. Those high rates have already slowed residential investment and put pressure on consumption through higher mortgage rates and credit costs. If oil prices push inflation slightly higher again, the Fed may become even more reluctant to reduce interest rates further. Kevin Warsh was a hawk before he wasn't. 
 
In other words, the oil shock could reinforce the Fed’s cautious stance and delay the easing of monetary policy. That would prolong the period of tight credit conditions and increase the risk that the slowdown eventually turns into a recession. Ironically, this means that the biggest macroeconomic danger today comes not from tariffs, not from supply chains, and not from the uncertainty that commentators love to invoke. It comes from the interaction between energy prices and monetary policy.
 
PS: My view has been more or less in line with the results of the Fair model forecasts. He sees a slowdown of growth and a small increase in inflation (last one was before the Iran war).