Economics, Bosses, and Interest

Stephen Marglin is Walter S. Barker Professor Economics at Harvard University, where he has taught since he received tenure in 1968. Somewhat infamous for his post-tenure radicalism, Marglin has published extensively on a wide range of topics over his decades-long career. Among his most cited early works is the two–part “What Do Bosses Do?”, which sought to explain hierarchical production as a function of accumulation, not technical efficiency. Divisions of labor between workers, managers, and bosses do not, Marglin argued, serve increases in productivity and material prosperity, but rather the consolidation of wealth and power.

Similarly influential work published with Amit Bhaduri in 1990 contested neoclassical models that view economic growth as a product of technological advancement and increases in the factors of production. Drawing on a Kaleckian framework which sees output as a function of effective demand, their paper distinguishes between “wage-led” and “profit-led” growth regimes. In the former, income redistribution increases employment and productivity, and in the latter it does not. Marglin’s numerous other books and papers have touched on cost-benefit analysis, the dynamics of labor-surplus economies, the determinants of captialism’s “Golden Age,” and much else. His 2008 book The Dismal Science continued his lifelong project of challenging the foundations of economic orthodoxy.

His latest book, Raising Keynes, forthcoming in 2021, revisits and expands Keynes’ General Theory, aiming to provide the foundations for a twenty-first century macroeconomics. We met with Marglin last winter to discuss his theoretical development, the new book, and his reflections on the future of research in the social sciences.

An interview with Stephen Marglin

Shani Cohen: Tell us about your coming out as a radical economist.

Stephen Marglin: There’s a story that keeps coming back and is never going to go away: most people believe that I only revealed my radical leanings after receiving tenure. The facts of the story are true—I was a neoclassically trained economist, I got tenure, and I changed my orientation. But the implied cause and effect are false.

I was a pink diaper baby. Pink, not red. I vividly remember my cousin coming back from WWII and trying to convince my parents to join the Communist Party, and their heated push-back. As a young adult, I was broadly left wing, but I didn’t view economics as an ideological discipline. For me it was a kind of operations research; I was at the tail end of a generation who entered economics in order to improve the world through appropriate government interventions. I saw no contradiction at all between doing neoclassical economics from nine to five and going to demonstrations against the Vietnam War evenings and weekends.

Things changed dramatically in 1968. I was in India during the academic year 1967–68, working on water-resources planning and teaching graduate students at the Indian Statistical Institute. Their mathematical preparation was so much better than that of Harvard grad students I had taught the previous year that I could indulge my own predilection for mathy economics. But I was surprised to learn that for many of my students, who had grown up in rural villages with largely communal forms of living, classical theory which began with the interests of individuals made little sense to them. The theoretical assumptions of economics bore no clear relation to how they lived. Working with these students formed the personal transformation through which I registered the assassinations of Martin Luther King and Robert Kennedy. From afar, the May protests in France seemed to herald the breakdown of the existing order.

Then came the anti-Vietnam demonstrations in the fall of ’68 and the occupation of University Hall at Harvard the following spring. My most vivid memory was of a group of undergraduates from an intermediate theory course who came to my office one day to ask me to help them prepare anti-Vietnam War arguments that might convince their fathers, who as I recall were executives of prominent New York banks. I remember thinking that the anti-war movement had finally won in the battleground of public opinion, whatever their fathers might think. So it was the combination of my personal experiences and the general political shift that changed me and, hardly incidentally, changed my understanding of economics and its role in legitimizing the existing economic order. This all happened shortly after I got tenure, so it was easy for friend and foe alike to mistake tenure as the life-changing event.

For a time, because of the pressure of students, Harvard and Harvard economics opened up to new ideas. Unfortunately, the openness of the economics department was very brief. While my radicalization and my tenure were coincidental, the denial of tenure to slightly younger colleagues like Sam Bowles and Herb Gintis was not coincidence. They paid a price for their radical views even as they went on to distinguished academic careers elsewhere.

Jack Gross: What was it like to publish “What Do Bosses Do?” in that environment?

sm: That was kind of my coming out, and there was actually a great deal of interest around the paper. At Harvard, there was a period of great intellectual ferment from 1966 until about 1974, when Bowles and Gintis left. I had Michael Reich, David Gordon, and Rick Edwards all in my first graduate economic theory class in the fall of 1966. From my perspective, the decade from the mid-60s to the mid-70s was the last time that there was so much intellectual ferment in department.

Maya Adereth: In “What Do Bosses Do,” you offer a more structural definition of the specificity of capitalist social relations. But much of your work forwards a moral critique of capitalism, as a set of attitudes. Which of these understandings of capitalism do you find more compelling? And, if we do conceptualize capitalism morally, what does that say about the potential for change?

sm: I think they are both true, that the material and cultural aspects of capitalism developed symbiotically over several hundred years. Markets require a certain kind of individual, and they create a certain kind of individual. For me, the assumptions of neoclassical economics are really the assumptions of modernity. These chickens are coming home to roost. A key assumption of modernity and mainstream economics is that we live in a world without limits to consumption and accumulation. (This is a bit ironic given that the conventional definition of economics is the allocation of scarce means to unlimited wants.)

As for a theory of change, I’ll repeat what I say at the end of my forthcoming book, Raising Keynes. I argue that the Keynesian revolution was successful because it coincided with the rise of a new politics: the New Deal in the United States and social democracy in Europe. Keynes didn’t create those political movements, and those movements didn’t create Keynes. But the Keynesian revolution and the left politics of the period from the 1930s to the 1970s were mutually supportive, symbiotic. Conversely, it’s not a coincidence that the demise of Keynesian economics came at the same time as the collapse of the New Deal coalition and social democracy, nor that the politics of Ronald Reagan and Margaret Thatcher came at the time of the neoclassical revival.

So what’s the moral? The moral is that to effect change you need ideas, but ideas won’t thrive until they are associated with a political movement. In Raising Keynes I put forward some ideas, but I don’t know whether there will ever be a political movement which can make use of them. I think of what I’m doing, and what other radical economists are doing, as planting seeds. We don’t know if the soil is any good, we don’t know if we’ll get the rainfall that we need, we don’t know if the plants will grow at all. Nonetheless, we do what we can to raise our crops; we not only hope for a good harvest, we work for one.

ma: Tell us more about the argument of the new book.

sm: There are four main points. The first is that Keynes’s General Theory was not about market rigidities and imperfections, as it has been interpreted in mainstream macroeconomics. (Joan Robinson called mainstream Keynesians “bastard Keynesians” in that it was a perversion of his theory to make it simply a theory of market imperfections.) Instead, it was a critique of fundamental aspects of the capitalist system.

sc: Including that it’s incorrect to assume that perfectly competitive markets lead to full employment.

sm: That’s right. The capitalist system, even stripped of all its warts and imperfections, has no self regulating mechanism. To see why, we have to abandon the conventional focus on equilibrium as demand equals supply and instead focus on the dynamic adjustment process. Equilibrium as a balance of forces tending in different directions may or may not exist. But if it does, there is no reason why it would imply full employment.

A second challenge to mainstream macroeconomics is that demand matters in the long run as well as in the short run. The conventional view is that imperfections and rigidities—the warts on the capitalist body—dissolve in the long run. Even if unemployment can exist in the short run, there is a self-regulating mechanism at work in the long run. The “proof” is that if there weren’t such a mechanism, the economy would be characterized by growing unemployment or chronic labor shortages, neither of which we observe in practice.

There is a self-regulating mechanism, but in my view the mainstream has it backwards: it is not that the demand for labor adjusts to the supply, but that the supply adjusts to the demand. In the long run, the labor force available to a capitalist economy is endogenous. Capitalism draws on new and different parts of society to generate new “reserve armies” (to borrow from Marx) as needed.

In the twentieth century we’ve had three reserve armies in the United States. One was the family farm, which constituted 40% of the population in the early twentieth century and dropped to 2% of the population by the end. The second is women, who were increasingly integrated directly into the capitalist labor market. And the third is immigrants.

A third innovation of Raising Keynes is a substantial revision of Keynes’s theory of interest, the most original ingredient of the theoretical apparatus of the General Theory. Keynes’s enduring contribution was to locate the determination of interest rates in markets for financial assets. This was a departure from the mainstream theory of Keynes’s day and the mainstream theory of today, in which the rate of interest is determined in the real economy, by the forces of productivity and thrift, by the demand for investment and the supply of saving. In Keynes’s view interest rates affect investment, but investment and savings do not determine interest rates.

So far, so good. But Raising Keynes argues that while Keynes had the right intuition about where interest rates are determined, he doesn’t really have a theory of interest rates. There is a missing link because Keynes provides only a theory of interest rate spreads (the difference between, say, short- and long-term interest rates on government bonds or the difference between rates on government and corporate bonds). He does not provide a theory of the level of interest rates.

The General Theory obscured this lack because it never went beyond a simplified model with only two financial assets—cash and bonds. Because the interest rate for cash is zero, a theory of interest which only considers cash and bonds is a theory of the level of the interest rate as well as a theory of the spread between the return on cash and the return on bonds. But a cash vs. bonds model is misleading because there are in fact assets which serve the same purposes as cash but do pay interest, namely Treasury bills. Without a theory of the interest rate on Treasury bills, a theory of spreads does not tell us what the level of interest rates is, and it’s the level of interest rates, not the spread, that is important for determining the level of investment.

Does this matter? At one level no, because central banks fix the rate of interest on short-term Treasury bills, so knowing the spread also means knowing the level. For practical purposes, central banks provide the missing link in Keynes’s theory.

But Keynes’s theoretical purpose was to show that a capitalist economy left to its own devices, that is, without a central bank, had no self-regulating mechanism. In this perspective the missing link has drastic implications. Keynes disputed the mainstream view that a market equilibrium meant full employment; he believed instead that equilibrium would usually fall short of full employment. But if you don’t have a theory for the level of the rate of interest, you don’t have a theory of equilibrium at all. On its own terms Keynes’ model was incomplete. We are thrown back on a non-market theory of interest rates!

The final innovation of the book is more directly related to current policy proposals like the Green New Deal. This is the section of the book that deals with “functional finance,” a term which originated in the work of Abba Lerner. Lerner sought to use Keynes’s theory to legitimize deploying fiscal policy to serve the needs of the economy rather than being bound by an artificial and counterproductive constraint of balanced budgets, which is what passed, and in large part still passes, as “sound finance” on Main Street, Wall Street, and the halls of Congress.

Lerner’s emphasis is on the need for the government’s budget to balance out the vagaries of private demand over time, increasing spending and reducing tax revenues in times of slack demand. In short, the emphasis was on counter-cyclical public finance, with the proviso that if private demand remained slack for an extended period—the idea of “secular stagnation” first raised by Alvin Hansen as the Great Depression entered its second decade and recently revived by Larry Summers and others as the Great Recession lingered on—then functional finance implied a readiness to accept fiscal deficits on a more or less permanent basis. In this case functional finance would imply a growing public debt.

Over the last half century we have had a quasi-permanent deficit, but not because of the lack of private demand that Hansen and others expected. If all that were at issue was stabilizing the economy, deficits needed to maintain the economy on an even keel in periods of slack demand could and would have been offset by surpluses in the good times.

My contribution in Raising Keynes is to provide a framework for analyzing a second Lernerian explanation for why the government budget might not be in balance, a political choice about the combination of private consumption, publicly funded consumption (think public parks or summer camps for disadvantaged children), publicly funded investment (schools, roads, airports), and private investment. This is a choice about the composition of aggregate demand, not about its level. Unlike the use of the government budget to stabilize the economy, choices about the composition of aggregate demand necessarily have permanent consequences for the deficit and the debt.

Consider in this light the Green New Deal, which proposes public investment of trillions of dollars to repurpose the American economy to meet the challenges of the twenty-first century, starting with the threat of climate chaos. If this program is enacted in the context of full employment, it will require a reduction in demand somewhere along the line, starting with the reversal of Trump’s tax “reform” that reduced taxes on the rich and even more so on the very rich. If that’s not enough, then taxes will have to be raised farther down the income distribution. The point is that at full employment something has to give if public investment is significantly increased.

But there’s a further point: the requisite tax increases would not be to balance the budget for the sake of balancing the budget (sound finance), but to keep aggregate demand in line with the productive capacity of the economy (functional finance).

This suggests two important qualifications to the need for taxation to pay for a Green New Deal. First, if the program is undertaken in a time of slack private demand and unemployment, then the new GND jobs would be a bonus, a free lunch for the economy as a whole, paid for by a deficit that fights unemployment at the same time it repurposes the economy for a green future. Second, if the Green New Deal is undertaken over a period of time that approaches the economist’s long run—say, a decade or more—then, as I have argued earlier, full employment need not be a constraint at all. Instead one or more reserve armies would be mobilized. Which ones? That remains to be seen, but the gig economy seems to be a prime candidate. And I imagine that a large number of part-time workers in the private sector would readily enlist in better-paid, career-building jobs that pave the way (perhaps literally) to a green future. Immigration could, as it has in the past, make America great once again.

sc: Many neoclassical economists claim that people, like rational agents in models, smooth their consumption over time. You have argued instead that most people just spend what they have. Empirically, we see that people don’t actually save. Some economists in recent years have tried to resolve this using the notion of ‘present bias,’ but the coefficients still don’t match. Why don’t people’s savings behaviors fit the expectations of neoclassical theory?

sm: My view is that consumption smoothing works for a small portion of the population. James Duesenberry, who was my teacher, and then a colleague for many years, once quipped that the life cycle hypothesis is exactly what you would expect from a middle-aged college professor. There is a lot of truth to that, because the middle-aged college professor, if she has tenure, has a fairly predictable income and is therefore capable of planning her financial life. But for most of the population, which doesn’t have stable, secure, and predictable incomes, the theory doesn’t make sense at all. And then you have the 1%—no one has any clue what determines their savings and consumption. We know they’re not living paycheck to paycheck, and we can be pretty sure that they’re not doing lifecycle planning for retirement. The takeaway is to situate consumption and saving behavior in class terms; we are not analyzing a homogenous population which can be characterized, as in mainstream macro, by a representative agent.

sc: Shifting to the discipline more broadly, I wonder whether you can discuss the relationship between the positive, normative, and predictive functions of economics. Should economists aim to predict people’s behavior? Tell people how to behave? Or simply describe their behaviors in the past?

sm: On very small questions, we may be able to predict people’s behavior. But there is nothing in my book, or anyone else’s book, that would have allowed them to predict the financial crisis in 2008. We also can’t really predict how an economy functioning on entirely different premises than the capitalist economy might operate. We can’t predict these large questions because human beings, and the institutions we’ve developed, are too complex.

Economics claims to be primarily a descriptive subject, with a secondary normative function. But I think the relationship is exactly the opposite—economics is basically a normative discipline, and those normative beliefs shape our descriptive tools and analyses. That is not a criticism; it is rather a call for honesty about our political and moral presuppositions, and how they shape the way we think about the economy.

There’s another aspect to economics, which I refer to in an earlier book, The Dismal Science, which is the constructive function. Economists not only describe and make judgments; they also try to shape the economy in the image of their economics. Given the predominance of the mainstream, this means shaping the economy in the image of a self-regulating market and curing any market failures by more and better markets. This would less pernicious if economists were upfront about their ideological presuppositions rather than claiming their economics is ideologically neutral.

ma: What do you think is the best use of empirical research in economic theory?

sm: There is certainly an important role for empirical research. In Raising Keynes, I try to understand what drives interest rates and rely heavily on empirical research to figure that out. A few years ago, my work with Peter Spiegler looked at state responses to the Obama stimulus. The novelty of our research was that we actually asked state budget officers what they did with the money. These are questions on which empirical research sheds light, and empirical research does not mean just econometric analysis.

While empirical research is certainly very important, it won’t settle the kinds of questions that really interest me and, I think, most of us: what is a good economic system? How much should we rely on markets? How can we configure other forms of economic activity? How can we make the economy work for the most vulnerable among us?