Decolonizing Keynesian Macroeconomics by Jayati Ghosh

 

The 9th Godley-Tobin Memorial Lecture was delivered by Professor Jayati Ghosh, from UMass, Amherst, one of the leading development economists. Jayati argues that Keynesian economics must be further “decolonized” by recognizing how financial globalization and currency hierarchies constrain developing countries. Even fiscally disciplined poorer countries face higher borrowing costs, capital volatility, and reduced policy autonomy, so effective Keynesian policy requires tighter regulation of finance and reform of the international monetary system.

Smith, Hamilton, and the Revenge of the Mercantilists

Heinz Kurz recently gave a very stimulating lecture, "The Wealth of Nations (WN) at 250: The Revenge of the Mercantilists" at the Federal University of Rio de Janeiro, and I was the commentator. His central point was that Adam Smith has been badly served by both his admirers and his critics. Smith was not the apostle of selfishness, laissez-faire, and the minimal state imagined by later free-market ideologues. Political economy was, for him, a branch of the science of the statesman, concerned with the institutions and policies required to promote prosperity, liberty, and justice.

Kurz rightly emphasized Smith’s distrust of merchants and manufacturers. Smith understood that business interests do not automatically coincide with the public interest. Merchants frequently seek monopoly, protection, and political privilege. The “mercantile system” was objectionable not simply because it involved state intervention, but because the state had been captured by particular interests. This reminded me of what Bob Heilbroner used to say, the enemy in the WN is not the state, but monopolies.

Kurz also criticized the revival of economic nationalism associated with Donald Trump. Trump’s policies reproduce some of the errors criticized by Smith, especially the obsession with bilateral trade balances and the confusion of particular corporate interests with the national interest. But Trumpism is not really a restoration of historical mercantilism. Mercantilism was part of a broader process of state formation, institutional development, naval power, public finance, and industrial transformation. Trump has tariffs, but no coherent development strategy.

This is where I would place the emphasis somewhat differently. The historical success of the Italian City States, Netherlands, Britain, and later the United States rested not simply on trade protection and some degree of what today is called industrial policy. It depended on the construction of a fiscal and monetary architecture based on the so-called Military-Fiscal State. Taxation, public debt, public banks, central banking, infrastructure, where central elements of the Military-Fiscal, and Fiscal-Naval, state. These institutions made sustained developmental policy possible. Trump revives the rhetoric of mercantilism while neglecting the other elements that successful countries actually used. I discussed why Trump's protectionism would not birng back manufacturing jobs here.

Kurz’s discussion also raises an old controversy about Smith’s “Physiocratic prejudice.” Following a line of interpretation originating with Piero Sraffa, Kurz argues that Smith continued to give agriculture and “corn” a privileged position within his analytical system, even though Smith explicitly rejected the Physiocratic doctrine that agriculture alone was productive. On an analytical level, there is no doubt that Professor Kurz is correct and that the foundation of the Smithian growth model is Physiocratic. 

Kurz's argument is subtler than simply saying Smith believed only agriculture was productive. Instead, Kurz reconstructs Smith's analytical system in Sraffian terms and argues that Smith distinguishes "necessaries" (corn) from luxuries. Corn is treated as the only genuine basic commodity, because every production process ultimately requires workers' subsistence. Manufacturing therefore cannot become the independent engine of cumulative growth. Consequently Smith retains what Sraffa calls a "Physiocratic prejudice." Notice that Kurz's criticism concerns the architecture of Smith's growth theory, not Smith's explicit statements about productive labor.

Tony Aspromourgos provides a counterpoint, with a more direct textual reading of Smith. Textually, Smith clearly regarded manufacturing, transportation, and commerce as contributors to the social surplus. Aspromourgos stresses that Smith rejected this outright: "The capital error of this system ... seems to lie in its representing the class of artificers, manufacturers and merchants, as altogether barren and unproductive." He notes that Smith systematically repudiates the Physiocratic limitation of productive labour to agriculture in Book IV of WN. This reflects the difference between a historical-institutional reading of Smith's aims and the theoretical basis of his model.

Ronald Meek suggests another way of looking at the issue. Smith was not primarily constructing a timeless model of production in the manner of Ricardo or Sraffa. His central concern was historical development, in particular the movement from hunting to pastoral, agricultural, and commercial society, and the corresponding transformation of property, law, government, and social classes. Agriculture may therefore be historically central without being the only analytically productive sector.

This has implications for the interpretation of Alexander Hamilton, and Hamiltonian protectionism, often defended as the first in a long line of American protectionists, an American School, as Michael Hudson has called it. Hamilton’s Report on Manufactures should not be read as a theoretical rejection of Smith. Hamilton relied on distinctly Smithian mechanisms, the division of labor, the extent of markets, the vent for surplus that created demand for agricultural output. His disagreement concerned the policies appropriate to a new, agrarian republic rather than the underlying theory.

Hamilton did not believe that the policy appropriate to an already industrial and financially developed Britain could simply be transferred to the United States. Public credit, a national bank, taxation, and the encouragement of manufacturing were historically specific applications of political economy to American conditions. In that sense, Hamilton was not a mercantilist in Smith’s pejorative meaning. He was a Smithian developmental statesman.

Paradoxically, Jefferson’s agrarian ideal was closer to the Physiocratic privileging of agriculture, while Hamilton’s emphasis on manufacturing, urbanization, finance, and the division of labor was closer to the dynamic elements of Smith’s commercial society. Kurz’s lecture therefore provides an excellent starting point for recovering a Smith who was neither a free-market ideologue nor an opponent of developmental statecraft.

Right-Wing Populism Did Not Kill Neoliberalism

My new piece is out in Jacobin. I argue that neoliberalism is not dead simply because governments now use tariffs, sanctions, subsidies, or industrial policy more openly. The core of neoliberalism was never only about free trade, but the insulation of markets and capital from democratic control. Right-wing populism has changed the rhetoric, but it has largely preserved the underlying neoliberal order. Contemporary right-wing populism should not be mistaken for a clean break with neoliberalism.

Donald Trump's tariffs, sanctions, and attacks on globalization are often presented as a rejection of the old free-market consensus. But the underlying arguments remain deeply neoliberal. The entrepreneur is still the hero (Tech and crypto-bros). Government is legitimate when it protects national business, punishes foreign competitors, or clears obstacles to private accumulation. Tariffs are sold less as a challenge to markets than as a way of restoring a supposedly fair market order against cheating foreigners, bureaucrats, and global elites.

The same point applies more broadly to the new industrial policy, which was never completely abandoned in the United States or Western Europe, one might add. States may subsidize national champions, direct investment, or protect selected sectors. Yet they can still treat profitability, competitiveness, shareholder value, and private returns as the ultimate criteria of success. Protectionism is not, by itself, an alternative to neoliberalism. Nor is a larger state. States have always intervened in markets. The question is whether intervention changes the social hierarchy of power or merely uses public resources to secure a more competitive capitalism.

Read it here.

On the Fiscal-Military State

The fiscal-military state was not simply a state that spent more on war. It was a new institutional form in which taxation, public debt, public banking, naval procurement, bureaucracy, and war-making capacity were joined together. I discuss it in a longer post on substack. I argue that the British case shows how this system became a foundation of capitalist development. Also, ancient Athens shows that public finance and naval power could be constitutive of state formation much earlier, but it lacked the permanent funded debt, central banking, and capitalist financial system that made Britain distinctive.

Jane D’Arista, 1932–2026

 

From the right, at the top and only the back of the head, José Antonio Ocampo, then Robert Blecker, and then Jane. I'm next to her to the left. In 2000, I think

I was saddened to learn of the passing of Jane D’Arista, economist, poet, and one of the most insightful analysts of money, finance, and financial regulation of her generation. Jane died on July 4 at the age of 94.  I had been in contact with her last year about her lovely memoir. Her long career included work as a staff economist for the US House Banking and Commerce Committees, as a principal analyst at the Congressional Budget Office, and later as a teacher and researcher at Boston University, PERI, the University of Utah, and The New School. She authored important work on the evolution of U.S. finance, monetary policy, regulation, and financial crises, including The Evolution of U.S. Finance and All Fall Down.

Her memoir tells the remarkable story of how she became an economic analyst almost by accident. Hired initially to organize the papers of Congressman Wright Patman, she entered the world of banking policy through archives, hearings, investigations, and congressional staff work. From Patman’s populist battles against concentrated financial power, to her work on the Reconstruction Finance Corporation, the Federal Reserve, foreign bank regulation, offshore banking, and the CBO, Jane learned economics from the inside of institutions. That practical knowledge gave her work unusual depth. She understood finance not as an abstract market mechanism, but as a political and institutional structure shaped by law, power, public purpose, and regulation. She famously anticipated the concept of shadow banking in the early 1990s, referring to it as the parallel banking system.

 

Jane between me and Robert Blecker at an event at American University honoring her late husband in 2018

I was fortunate to meet Jane while working for Lance Taylor at The New School. She was incredibly generous with younger economists and a profound source of wisdom. During my time at the University of Utah, she taught briefly, and she later visited the Federal University of Rio de Janeiro, my alma mater, for a conference I co-organized. I am deeply saddened by her passing, but grateful to have had the opportunity to know her.

Jane belonged to a tradition of economists who took institutions seriously, understood the dangers of unregulated finance, and believed that public policy could and should discipline financial power. She will be missed, but her work remains essential reading.

Prices, Quantities, and the Problem of Inflation

A recent exchange on X (Tweeter) pointed to a paper that proposes to separate demand from supply-driven inflation by looking at the relation between prices and quantities. According to the paper, if both rise, inflation is treated as demand-driven (as shown below). If prices rise while quantities fall, it is treated as supply-driven (no figure, but easy to visualize, a shock to Ys, the aggregate supply). The problem is that this does not identify the cause of inflation.

Prices can rise because of higher costs (e.g. energy, imported inputs, etc.) while quantities increase for independent reasons (e.g. increase in government transfers to the unemployed). The economy may be recovering, public spending may be growing, credit may be expanding, or firms may be drawing on unused capacity. In that case, prices and quantities rise together, but it does not follow that demand caused the price increase (old post on why prices and quantities can and should be treated as analytically separate here).

The real issue is capacity. Higher demand becomes inflationary when it encounters binding limits on production. But full capacity is not fixed or directly observable. It depends on the technology, on the availability of labor and inventories, on access to imported inputs, and sector-specific bottlenecks. There are many measures of capacity utilization, non perfect, obviously. Most of my discussion of why the inflationary acceleration of the pandemic was not demand driven is based on looking at different measures of that.

A growing economy can therefore have rising prices and rising output for many different reasons. Cost pressures may push prices up while demand supports expanding production. The sign of price and quantity changes cannot tell us which force caused inflation. The procedure classifies observed co-movements. It does not establish the structural source of inflation. To do that, one must examine costs, mark-ups, distributional conflict, supply disruptions, and the actual conditions of production, not simply whether prices and quantities move in the same direction.

Rogoff on debt, growth, and the return of the New Consensus

Professor Rogoff has written an unusually angry letter to the New York Review of Books in response to Trevor Jackson’s critical review of his recent book, Our Dollar, Your Problem. It seems that someone never had a bad review before. Rogoff seems particularly offended that the reviewer did not sufficiently appreciate the success of his book or its favorable reception elsewhere (boo hoo).

But the substance matters more. Rogoff returns to the old argument that very high legacy debt weighs on growth. He acknowledges that the infamous 2010 Reinhart-Rogoff paper contained “one mistake,” but insists that the error did not affect the later and more complete work, which reached the same conclusion. He also argues that high debt may limit a government’s capacity to respond to financial crises, pandemics, and wars. Finally, he complains that progressive economists who once believed in a fiscal “free lunch” are now walking back their views because of the post-pandemic rise in inflation and interest rates.

The first problem is that the 2010 result was not a trivial early-stage slip. The Herndon, Ash, and Pollin replication found selective exclusion of available data, coding errors, and an inappropriate weighting procedure. Correcting those problems changed the alleged result dramatically. For the postwar sample, countries with debt ratios above 90 percent of GDP had averaged growth of 2.2 percent, rather than the minus 0.1 percent reported by Reinhart and Rogoff. More importantly, there was no robust historical cliff at the supposedly fateful 90 percent threshold.

That mattered because the paper was not merely an academic exercise. It became a central intellectual prop for post-2008 austerity. It was cited by US and European officials eager to defend smaller fiscal packages, and to present fiscal retrenchment as a matter of arithmetic rather than of class politics. The notion was that public debt above a certain level produces stagnation, so governments must tighten their belts even in the aftermath of a financial crash. That was always bad economics and worse policy.

Even the IMF later concluded that there was no magic threshold. Growth rates (that reduce the burden of debt), interest rates (that determine the growth of previous debt), currency denomination (never discussed), and the political limits of state action (often related to class issues) are the real issues. A country that issues debt in its own currency and has a central bank willing to act as the fiscal agent of the Treasury is in a radically different position from one that borrows in foreign currency or, as in the eurozone, lacks a genuine lender of last resort and unified fiscal policy.

Note that Rogoff does not discuss the distinction between debt in domestic and foreign currency. The relevant issue is not a universal public debt-to-GDP ratio in domestic currency that slows down growth. The issue is, for most countries, whether they have an external constraint and need debt in foreign currency. Hegemonic countries with the key currency don't face that constraint.

This is hardly a novel insight. Britain’s eighteenth-century experience should be enough to make anyone wary of universal debt thresholds. British public debt rose through the century and reached roughly 260 percent of GDP after the Napoleonic Wars. Yet that debt did not bankrupt Britain. It happened as the Industrial Revolution was underway (perhaps a coincidence). It financed war, helped sustain a powerful fiscal-military state, and formed part of the historical conditions under which Britain industrialized and became the dominant global power. The question, as I argued years ago, is not the size of debt in the abstract, but how it is used and how it is funded. Deficits that create employment, build infrastructure, expand public services, and increase productive capacity are not equivalent to deficits that rescue banks, subsidize rentiers, or finance tax cuts for the wealthy. Functional finance begins from that elementary point.

Rogoff’s invocation of the post-pandemic inflation episode is revealing. The issue is whether inflation and higher interest rates prove that the return of fiscal restraint was necessary, as he seems to think. To be clear; they do not. The pandemic inflation was shaped by supply disruptions, energy shocks, and bottlenecks. It was not a straightforward result of excess demand generated by government deficits, even if government spending did maintain demand and allowed for a fast recovery (that was the point, BTW). What Rogoff’s language reveals is the return of the New Consensus. In this view, inflation is presumed to the result of excessive demand, and higher rates restore discipline. In this context, fiscal policy must once again be constrained by fear of debt.

That was precisely the framework that made austerity appear reasonable after the Global Financial Crisis and the European Debt Crisis. The return of inflation anxiety now performs a similar ideological function. It allows the old argument to be revived in a new form. For Rogoff and the defenders of the old New Consensus, governments spent too much, public debt is dangerous, and the space for public action must therefore be narrowed. The danger is not simply that this misreads the causes of recent inflation. It is that it prepares the ground for the next round of fiscal restraint when public investment, housing, infrastructure, climate policy, and social protection are badly needed.

There is one final issue. From Rogoff’s letter alone (since I haven't read this great book that is immensely popular and everyone liked but Mr. Jackson), his argument about the dollar appears problematic. He emphasizes the forces that might weaken dollar dominance, including the weaponization of finance, fiscal policy, and threats to Federal Reserve independence. A confidence argument. The overuse of sanctions, to the extent that it leads to the search for alternatives, might be a real source of pressure, the others are more doubtful.

What he does not say is that there are also powerful reasons to expect continuity of dollar hegemony. The dollar is  not sustained by confidence in US market-oriented policies and rule of law abiding institutions, but by deep Treasury markets, a global payment infrastructure, and its correspondent banking and legal jurisdiction, which, in turn, rest upon American military power. The dollar system is resilient, as I noted recently, precisely because it is embedded in a broader fiscal-military architecture. That does not make it eternal. It does mean that predictions of imminent decline are exaggerated. Predicting catastrophe might sell books, but is often poor scholarship.

Quote of the day

Transcription (not that it is needed): "The fatal mistake of Economics is that it is not true to its statical assumptions. They believe that, by introducing complicated dynamic assumptions, they get nearer to the true reality; in fact they get further removed for two reasons: a) that the system is much more statical than we believe, and its “short periods” are very long; b) that the assumptions being too complicated it becomes impossible for the mind to grasp and dominate them -- and thus it fails to realise the absurdity of the conclusions" (Sraffa's Papers: D3/12/11: 32).

Alan Greenspan’s legacy

 

He was not a crook!

If Volcker symbolized the neoliberal turn in monetary policy, Greenspan embodied its financial side. He saw enough of the late-1990s stock-market mania to warn of “irrational exuberance,” but he treated the bubble as something the Fed should not seriously confront and continued to promote deregulation, including the dismantling of Glass-Steagall and the resistance to controls on derivatives.

That was not merely an error of forecasting. Greenspan’s faith in self-regulating finance helped produce an economy in which asset prices and executive compensation surged while wages stagnated. Financial deregulation and the gains accruing to finance were central to the rise of inequality, together with the destruction of unions and the weakening of workers’ bargaining power that had begun under Volcker.

The political consequences were predictable. Rising inequality, economic insecurity, and the sense that democracy no longer responds to ordinary people created fertile ground for the radical right. Greenspan’s late admission that laissez-faire had failed was not meaningless, but it was too little and far too late. By then the financial crisis had already revealed what his market discipline meant in practice, private gains, public rescues, and a more unequal and politically unstable society.

Milanovic and the end of neoliberalism

Branko’s FP piece argues that neoliberalism, understood as the form of globalization dominant from the early 1980s to around 2020, was built on the principles of cosmopolitanism and competition. Cosmopolitanism meant treating individuals everywhere as equally entitled to pursue improvement through private property, free trade, low taxes, and limited government. Competition meant allowing and encouraging people and firms to compete across borders.* In his view, these principles generated exceptional global growth, above all because of Asia’s and especially China’s rapid expansion.

He acknowledges that this period greatly increased global output and income. Average world income per person more than doubled between 1980 and 2020–21. To a great extent as a result of the growth of the East Asian Tigers, and then China and India. Total global production therefore expanded enormously. But Branko notes that this aggregate success did not translate into political support for neoliberal globalization in the rich countries, because much of the electorate there experienced weak real-income growth while the rich did much better. His elephant graph explains this.

For him, this uneven distribution was crucial. Neoliberalism was not merely pro-rich. In the United States and much of the West, it also produced slower broad-based growth than the preceding postwar period. The global gains associated with China’s development and international integration were real, but politically abstract for workers in advanced economies who experienced deindustrialization, stagnant wages, insecure employment, and the erosion of local economic opportunities.

His point is that cosmopolitanism and competition eventually undermined one another. Cosmopolitanism treated the welfare of foreigners and compatriots as morally comparable, while national political systems remain organized around citizens who expect some degree of national solidarity. The winners of globalization, he argues, often appeared indifferent to compatriots who lost from import competition, offshoring, or the reorganization of production. Worse, they tended to interpret failure in competitive markets as evidence of personal or moral inadequacy.

The 2007–08 global financial crisis made these tensions unmistakable. It showed, in his account, that the rich and the financial sector could be rescued while those who had lost economic security were expected to absorb much of the cost. The center-left was poorly positioned to capture the resulting discontent because it was either discredited by the history of “real-existing socialism” or associated, through Third Way politics (New Dems, New Labour, etc.), with the very neoliberal globalization that had alienated working and middle-class voters.

This helps explain why the backlash moved predominantly to the right. Right-wing nationalist parties promised national solidarity, limits on the equal economic treatment of citizens and foreigners, the return of industrial employment, and a restoration of dignity and traditional values. In the international sphere, Milanovic sees neoliberal globalization being replaced by neomercantilist policies, protectionism and the increase in tariffs, import restrictions, the use of economic sanctions, including asset seizures, and a much more politically acceptable restriction of migration.

In somewhat Marxian fashion, he says that the internal contradictions of neoliberal globalization produced the conditions for its own demise. Globalization’s success created global growth but generated domestic inequality, social resentment, and political nationalism in the rich countries. Neoliberalism is therefore being replaced by a more protectionist, nationalist, and economically coercive international order.

Branko thinks neoliberalism has genuinely ended and has been replaced by neomercantilism. I’m more skeptical about that. The United States and Europe may now use industrial policy, tariffs, subsidies, and geopolitical controls, but it’s not clear that they ever stopped using them. Meanwhile a good part of limits imposed on the working class in advanced economies and in the periphery, remains subject to the old neoliberal discipline. In other words, the attachment to free-market ideology was always qualified in the center, and the complete reversal of policies should be taken with a grain of salt.

It is clear that neoliberal globalization generated political discontent, weakened labor, intensified inequality, and helped create the conditions for nationalist backlash. It is also true that the old cosmopolitan language of free trade and borderless markets is no longer adequate to describe the behavior of the major powers. But it doesn’t follow that neoliberalism itself has ended. In my account, the system has adapted remarkably well because its core purpose was never simply free trade or small government. It was the reorganization of society in favor of capital, the discipline of labor, and the restriction of democratic policy space.

The main thing that Branko underestimates is that cosmopolitanism was never the whole substance of neoliberalism, and that the underlying logic of competition was never fully abandoned. That is why the underlying project was the protection of capital, the weakening of labor, and the encasement of markets against democratic control could survive. When the ideology ceases to serve those purposes, neoliberalism can survive through protectionism, industrial policy, militarization, fiscal rules, and geopolitical coercion. Let alone that in good parts of the periphery – certainly in many parts of Latin America, like in Argentina – the old neoliberal free-market ideology and policies are alive and kicking.

The essential point is that the free-market ideology has not been completely abandoned by right-wing populists such as Trump. The celebration of entrepreneurship, of techno-billionaires, and crypto bros, the belief that markets are the most effective mechanism for coordinating information, and the idea that there are no workers, only potential entrepreneurs, remain central to the MAGA revolt. The self-made-man myth is still doing much of the ideological work. Tariffs and sanctions are therefore presented less as a rejection of markets than as a means of leveling the playing field against foreign competitors and unfair practices. Financial deregulation, and Musk's failed Department of Government Efficiency (DOGE), celebrated the efficiency of the private sector, and the waste of the state. In other words, the ostensibly post-neoliberal right maintains core neoliberal ideological commitments, they abandoned cosmopolitanism, but not free-market individualism.

* I’m not sure that people, or more precisely, workers were, at any point in the more recent neoliberal era, allowed to move freely. There was an asymmetry between the mobility of labor and capital for sure. Free labor, in the neoliberal context, often meant free from unions, which are seen as an impediment on the individual bargaining position.

Warsh, beyond Powell and glory

 

Soon in a theater near you!

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

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

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

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

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

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

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

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

Rod O’Donnell on Keynes and Liberal Socialism

 

Hits and Mises (click for the joke)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

 

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

 

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

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).