General Theories

Raising Keynes: A Twenty-First-Century General Theory
by Stephen Marglin
Harvard University Press, 2021

In 2022, the audience for books about John Maynard Keynes is probably as large as it has ever been. With two global economic crises followed by widespread use of government interventions, debates recently relegated to history books and academic journals have acquired new urgency. The curious reader can pick from a wealth of recent books. Geoff Mann’s In the Long Run We Are All Dead: Keynesianism, Political Economy, and Revolution (2017) and heterodox economist James Crotty’s Keynes Against Capitalism: His Economic Case for Liberal Socialism (2019) offer perspectives from critical political economy, while Zach Carter’s The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes (2020) presents a detailed biography. But until now, there has been nothing quite like Stephen Marglin’s Raising Keynes, which subtly promises no less than A Twenty-first Century General Theory. The text runs to more than 896 pages, weighs four pounds in hardcover, and, as Marglin acknowledges, is not an easy read. But the result is truly original.

Marglin is uniquely positioned to carry forward the trajectory of the Keynesian tradition. Like Keynes, Marglin’s early career saw him transform from the star pupil of the reigning economic theories of his training—neoclassical economics—into a sort of a radical economist of his own category after receiving tenure. And, like Keynes, Marglin argues that it was his observation of the world around him that forced him to shed his allegiance to neoclassical theories and their claim to represent how the world works.

Marglin is emphatic that he is not a historian of economic thought. But he does see his work as a kind of historic rescue mission. In his view, generations of so-called Keynesians have blinded themselves and their students to the “central vision” of the General Theory: “Namely, that a capitalist economy is not self-regulating” in either the short or the long run. Not content to demolish the mainstream neoclassical synthesis, Marglin charges into the wreckage to offer his own novel formalization of Keynesian theory, reconstructed by means of mathematical tools that its originator lacked. Finally, he tests his theory against the historical record, especially the Great Depression and the post-2008 recession. It is this triple undertaking—blending history of economic thought, formal economic theory, and economic history—that sets Marglin’s book apart on the shelf of recent books on Keynes.

Why have economists understood Keynes so poorly? According to Marglin, the confusion centers on two mistakes. First, mainstream Keynesians have interpreted Keynes as “a sophisticated theorist of sand in the wheels,” for whom “the problems of capitalism are rigidities, frictions, and imperfections” (most famously: “sticky” wages and prices, which do not adjust downward as the textbook says they should). But Keynes’s original critique was more radical. Even a perfectly competitive market economy for Keynes contained no force guaranteeing full employment equilibrium.

The second mistake is that aggregate demand—the total amount of spending on goods or services in an economy, and the motor of Keynesian analysis—matters only in the short run. In the long run, rigidities and frictions will be eliminated, all prices and quantities will achieve balance, and the “classical” economics that Keynes attacked would regain its validity. This was the heart of the neoclassical synthesis: short-run imperfections and long-run equilibrium.

Formalizing Keynes

Marglin is highly critical of the macroeconomic modeling that has reigned since the 1970s, including “New Keynesian” models. He interrogates the microfoundations of mainstream macro, including profit and utility maximization, the rationality of individuals, or the propensity of firms to ignore sunk costs of physical capital and exit industries when their management knows that it’s curtains. Throughout the text, Marglin critiques Dynamic Stochastic General Equilibrium (DSGE) models, the methodological tool used widely in articles published in the highest-tier journals. DSGE models explain the effect of changes in the economy—a market friction here, an exogenous shock there—with a series of assumptions regarding the behavior of individuals and institutions. However, when one begins from alternate premises—the economy is largely out of equilibrium, actors and institutions respond ably to multiple phenomena, and class position, historical contingency, and power make experiences varied—the core logic of DSGE dissolves. 

Nevertheless, Marglin argues that one reason for the distortion of Keynes’s legacy was the absence of elaborate models articulating the General Theory. Given the mathematical transformation of economics following Keynes’s death in 1946, the lack of formal models proved to be an Achilles heel in the discipline. When Keynes’s followers (from Franco Modigliani to Axel Leijonhufvud) took up the task of formalizing his work, they put short-run rigidities at the center of their models. These models, in turn, proved vulnerable to antagonists such as Milton Friedman, who identified flaws in Keynesian theory that a more adequate formalization would have resolved. In Marglin’s assessment, the so-called failure of Keynesian economics in the 1970s tells us less about Keynes than it does about “the distortions of the General Theory perpetrated by friends as well as enemies.”

Marglin presents his own models. Key to their significance is a critique of comparative statics. At the macroeconomic level, many factors can influence variables in ways that are difficult to isolate or understand in their totality. Present debates about the causes of inflation are a good example. Are wages to blame? Or is it the shortage of inputs? And which inputs? Which effects dominate, and which are induced by other features of reality? Static models are snapshots of economic relationships at a given time. A standard comparative static model like the model of supply and demand examines the simple relationship between price and the quantity of output purchased or produced. Other factors—income, societal norms, production costs, and anything else that might influence overall demand or supply—are exogenous. Comparative static models simplify the myriad factors at play, and isolate the potential effect of one variable to influence another.

By design, such static models allow for ambiguity. Will an increase in income counteract an increase in labor costs that may lead firms to decrease output at all possible price levels? If increased borrowing by firms expanding output has the potential to induce an increase in the interest rate, will it do so? And would this hypothetical increase in the interest rate nullify the effect of increased demand for credit? In Keynes’s rendering, the ISLM (investment-savings and liquidity preference-money supply) framework—which shows how practices in product markets and production may generate parallel changes in financial systems and vice versa—makes no claims about how one equilibrium turns into another. It consistently reminds the reader of the myriad possibilities that can occur when actors and institutions are uncertain about the future. Marglin rightly notes the ambiguity of the central comparative static models that mid-century Keynesian economists derived from Keynes’s work, and reveals the pernicious consequences of assuming an ultimate path toward equilibrium.

Because of their ambiguity, comparative statics are a poor tool for drawing definitive conclusions about how changes in one economic sphere will play out in the real world, where people and their institutions live, work, and make decisions. The appeal of a comparative static model is its tractability, but this simplicity may bias conclusions away from important factors. Comparative static models typically embed assumptions about behavior which may be impossible to visualize, or inaccurately describe particular relationships. More advanced economic models, which account for multiple variables influencing outcomes, may be impossible to map in a two-dimensional space. Formulas that rely on growth rates of other variables introduce yet more complexity to a model that would represent the possible implications of different factors for an economic outcome. While the comparative static model can give enough information for understanding the potential effect of one variable on outcomes compared to another, anyone trying to predict which factors are most pertinent or dominant in determining particular outcomes will come up short with a comparative static model. Conversely, a perfectly dynamic and realistic model with arrows and multiple dimensions risks the Borgesian problem of a representation that is infinitely long and complex in its attempt to capture all potential realities and outcomes.

Class and power in the General Theory

The dynamics of an economy are driven by its participants, but not all participants are created equal. In his work, Keynes gave due consideration to the varieties of economic experience, and he did not avoid the language of class in explaining this complexity and uncertainty. Appropriately, Marglin devotes much of his exegesis to unpacking the range of class experiences in the realms of consumption, investment, relative preference for cash, and financial instruments, while acknowledging that actors and institutions respond to multiple stimuli, prioritizing different ends at different times for equally rational reasons.

Class figures in the discussion of differential consumer response to uncertainty (via savings), the propensity of investors to purchase financial assets or hold cash, and the enigma of investment demand by firms. Marglin identifies a particular blind spot in (non-fundamentalist) Keynesian economics arising from many professional economists’ assumptions that consumers will behave like the economists. Because of this assumption, these thinkers opened themselves up to attack whenever the broader economy failed to behave the way that they might have expected, such as during the bout of stagflation in the 1970s.

Thinking in the long run

The reconstruction of Keynes on offer here hinges on Marglin’s discussion of the long run. As Keynes engaged neoclassicals on their own turf, Marglin holds that any alternative macroeconomic interpretation of the world ought to engage long-run growth models. In order to tell a story of long-run growth, Marglin therefore seeks to formalize the role that employment, wages, and prices have in determining and resulting from economic growth. He advocates a theory which articulates how investment, prices, and wages are determined, and how aggregate demand may alter growth trajectories. To this end, he borrows insights from Roy Harrod, Evsey Domar, and Robert Solow—all of whom attempted to explain long-run growth through their attention to the supply side of economies—and incorporates Joan Robinson’s work on aggregate demand.

Marglin’s full model of long-run growth draws from Robinson’s insight that unpaid work, family businesses, and informal employment function as an escape valve for those without employment in industrial capitalist enterprises. Any “general theory” must account for the continued persistence of these forms of work alongside the growth of formal employment. These contributions are enormously relevant for debates about the relative exploitativeness of large or small firms, the widespread withdrawal from the labor force of people with care obligations in the absence of reliable child and elder care in the ongoing waves of the pandemic, and the persistent reticence by major powers to increase immigration quotas.

Labor forces, Marglin argues, should be seen as endogenous. If we open our analysis to the global economy, there may be an unlimited potential supply of labor. Alternatively, if we narrow our focus to domestic constraints of racism, sexism, and xenophobia, we can appreciate how social norms limit the potential for growth (of the labor supply and of the economy). In some ways, this flips the reserve army theory on its head. While larger labor forces may increase the aggregate number of unemployed, and depress bargaining potential within the employed portion, employing more workers and paying them more may increase social welfare even as aggregate profits rise. The argument thus allows for new conclusions about aggregate growth in the long run, and the book feels like an exciting springboard for future research in this direction.

Marglin’s treatment of investment likewise accounts for diverse forms of investment expenditure—at times, capitalists will invest in ways to lower the costs of production (capital deepening), and at times they will invest in order to increase their productive capacity (capital widening). These differing modes of investment respond to different pressures. In times of decline or stagnation, capitalists failing to sell or produce to their full capacity will try to make their production costs go further, which may be linked with downturns in employment and real wages. By contrast, in periods of expansion, capitalists may respond to incentives to increase their production capacity, in ways that will increase employment opportunities and relative wages in the longer-run. These tensions are notable in our current moment of high growth limited by supply factors originating at home and abroad; Marglin allows for ambiguity in recognizing that different supply shocks may have disparate effects on investment decisions, employment and wages, and growth overall. The complexity of Marglin’s modeling will be challenging for the uninitiated; however, his descriptions of how the real world presents a diverse array of challenges for workers, capitalists, and the unemployed allow for expansive application of his arguments in work that others may pursue.

On the topic of long-run investment, Marglin breaks with past work, notably a 1990 paper co-authored with Amit Bhaduri. In that work, Marglin and Bhaduri contended that the effects of rising wages on employment were ambiguous. While they agreed with the wage-led growth view that rising wages might encourage more expenditure, which in turn might encourage more production and therefore employment, their model demonstrated how rising profits could potentially yield more employment (the profit-led view), allowing for social, political, and class contingencies. In their telling, it was conceivable that measures to raise wages in ways that depressed profits might encourage cost-cutting investment, with ultimately negative implications for employment overall. This observation meant that economists, particularly left-leaning Post-Keynesian ones, ought to establish how sensitive investment was to profits before arguing definitively that higher wages should always lead to more growth. But over time, Marglin has grown skeptical of the likelihood that profit-led growth will prevail. Distinguishing capitalists’ tendency to cut costs via  investment from the tendency to increase capacity demonstrates the pitfalls of leaving development to the private sector.

The distance from that earlier work seems to rest on a reappraisal of the relative propensity of capitalists to engage in capital deepening. In Marglin’s words, he and Bhaduri, “lumped all investment together, implicitly assuming that investment takes place solely to expand capacity,” when, in fact, capitalists might also invest in order to “cut costs by substituting capital for labor, energy, or other inputs—capital deepening for short.” In light of historical data on investment, employment, and wage rates, Marglin concludes that in the US since the 1970s, whether investment is capital widening or deepening depends on whether the economy is growing or shrinking. If capitalists decline—for whatever reason—to increase capacity, despite the prospects for more growth and higher wages that could follow, more active participation by governments in directing economic development may be necessary.

A political economy

Across 900 pages, Marglin challenges economists to account for what they have tended to ignore: social class, fundamental uncertainty, management decisions about investment expenditure and pricing policy, and the responses of workers and consumers (often the same people) to changing prices. Once these dynamics are reintroduced, outcomes deemed impossible by friction-minded Keynesians reemerge into the realm of feasibility. Time and again, Marglin tests his models of the long run against US economic data from the twentieth century. And time and again, Marglin’s formalizations of Keynes’s informal comparative static models into beautiful schematics of spaces and probabilities and dynamics seem to accurately predict the outcomes that have transpired—in the Great Depression, over the 1970s, and in the period before and after the 2008 Global Financial Crisis.

Alongside his formal models, Marglin weaves in political economy of a particular form. He shows how political factors inflected the uptake of Keynesian ideas, for good and for ill, arguing that the success of Keynesian economic theories relied on Keynes’s larger political project, and the canniness with which he promoted them in the UK and the US. In this way, Marglin’s text fits with the recent work of both Crotty and Carter, who noted how Keynes modified his own vision once he was welcomed back into the policy-making arena during WWII.  Later, Keynes’s work was discredited by political opponents of demand management and the welfare state, not just by professional economists. The eclipse of Keynesian practices after the 1970s was part of a political project, not just the progress of science.

It’s this recognition of how political environments shape the reception of economic ideas which drives Marglin into formal modeling—if the mainstream has rejected Keynesian ideas on the assumption that they are unproven or unrigorous, Marglin will make sure that these excuses no longer serve. By the same token, he hopes that anti-Keynesian policy prescriptions will be less beguiling after he has challenged their formal rigor.

Politics is also key to another distinctive element of Marglin’s exposition, namely the insistence on formalizing Keynes without rigidities and imperfections. One could imagine a fellow heterodox economist objecting that real-world capitalism is characterized by administered prices and other forms of frictional market power. Why should a macroeconomic model assume, against all evidence, that perfect competition actually exists? But if Marglin embraces the perfect market in theory, it is only in order to defeat market utopianism in politics. If “the problems of capitalism are rigidities, frictions, and imperfections,” then capitalism could be fixed by getting rid of imperfections, such as unions and minimum wages. But if even a perfect market does not guarantee stability and growth, then we can lay to rest the idea that capitalism “can be cured by remaking the economy in the image of textbook accounts of perfect competition.”

Compared to Crotty’s Keynes Against Capitalism or Carter’s Price of Peace, Raising Keynes is a technical book. But no less than Crotty or Carter (or, for that matter, Keynes) Marglin brings a moral vision to his writing. The last chapter of the book ends with a rumination on the class violence of austerity, whose human costs include “an entire generation of Greeks, Italians, and Spaniards… sacrificed on the altar of fiscal rectitude.” The epilogue nods to the social movements that have emerged in the last decade. Climate change also haunts the later pages. “My own conclusion,” writes Marglin, “is that the moral imperative is for the rich nations of the world to slow down growth if not bring it to a complete stop.” If this were to happen, deficit spending would be more important than ever, to maintain full employment without high levels of new investment. “We must hope,” Marglin concludes, “that functional finance is an idea whose time has come.”

Most obviously useful as an accompaniment to Keynes’s General Theory, Raising Keynes is as much history as textbook, rich in narrative and the empirical changes in demand, production, and policy over time. If, as Marglin writes, his goal is to plant seeds of inquiry in the heads of scholars, policy-makers, and activists, its publication is more timely than ever. Fundamentalist Keynesians and Post-Keynesians have been doing this for a while now; so too have empirically and model minded heterodox and radical macroeconomists. Marglin’s book is an invitation for more to come aboard. Economists, policy-makers, and journalists should accept the invitation.