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Aug 30, 2022

Back to the future: a heterodox economist rewrites Keynes’s General Theory of Employment, Interest, and Money to serve as the basis for a macroeconomics for the twenty-first century. John Maynard Keynes’s General Theory of Employment, Interest, and Money was the most influential economic idea of the twentieth century. But, argues Stephen Marglin, its radical implications were obscured by Keynes’s lack of the mathematical tools necessary to argue convincingly that the problem was the market itself, as distinct from myriad sources of friction around its margins.

Marglin fills in the theoretical gaps, revealing the deeper meaning of the General Theory. Drawing on eight decades of discussion and debate since the General Theory was published, as well as on his own research, Marglin substantiates Keynes’s intuition that there is no mechanism within a capitalist economy that ensures full employment. Even if deregulating the economy could make it more like the textbook ideal of perfect competition, this would not address the problem that Keynes identified: the potential inadequacy of aggregate demand.

Ordinary citizens have paid a steep price for the distortion of Keynes’s message. Fiscal policy has been relegated to emergencies like the Great Recession. Monetary policy has focused unduly on inflation. In both cases the underlying rationale is the false premise that in the long run at least the economy is self-regulating so that fiscal policy is unnecessary and inflation beyond a modest two percent serves no useful purpose.

Fleshing out Keynes’s intuition that the problem is not the warts on the body of capitalism but capitalism itself, Raising Keynes provides the foundation for a twenty-first-century macroeconomics that can both respond to crises and guide long-run policy.

Stephen A. Marglin is the Walter Barker Professor of Economics at Harvard University. His books include The Dismal Science: How Thinking Like an Economist Undermines Community and Growth, Distribution, and Prices. He is a past Guggenheim Fellow and member of the Harvard Society of Fellows.

“Marglin has taken 80 years of neoclassical distortions of Keynes, presented them with great clarity in their own language, and then pounded them into dust, pushing the detritus back into the faces of the high priests of the neoclassical synthesis, the New Keynesians, and the New Classical Economists. Raising Keynes issues a challenge that they would be cowardly to refuse—which is not to suggest that they won’t do their best to ignore it.”—James K. Galbraith, Project Syndicate

“Stephen Marglin’s magnum opus makes a powerful case that we cannot expect the economy to solve its own problems, and that instead economists and policymakers need to put persistent unemployment at the center of their thinking in order to both better understand the economy and to make a stronger case for using fiscal and monetary policy to change it for the better.”—Jason Furman, Harvard University, former Chairman of the U.S. Council of Economic Advisers

“This is a thought-stimulating reconstruction of John Maynard Keynes’s insight that market economies do not automatically gravitate to full-employment equilibrium even if prices are flexible. Stephen Marglin shows, with modern analytical tools and (yet) in an often entertaining style, how normal signal processing leads to real-time adjustments to shocks that can move a competitive economy out of equilibrium in the short run and into a different equilibrium in the long. He succeeds in demonstrating this without invoking all those frictions and imperfections so indispensable to New Keynesians. The book opens a wide array of unorthodox, but well-founded perspectives on past and current issues of economic policy. It is the fruit of life-long research, and it deserves a wide readership.”—Hans-Michael Trautwein, University of Oldenburg, Germany

“Raising Keynes is a work of great significance that anyone seriously interested in how capitalism functions and malfunctions should read carefully. Stephen Marglin succeeds in clarifying the central ideas in John Maynard Keynes’s revolutionary macroeconomic framework, while also extending and deepening those ideas in important ways, applying the ideas to our contemporary conditions, and also delivering devastating critiques of orthodox macroeconomic theory and practice. The book is also highly accessible for a work of this nature, without skimping at all on technical details—an almost impossible combination to pull off.”—Robert Pollin, University of Massachusetts Amherst

Table of Contents

• Notation
• Prologue: What Is This Book About?
• I. Background: The Rise and Fall
  
  • 1. Introduction: Is This Resurrection Necessary?
  • 2. What Were They Thinking? Economics before The General Theory
• II. Keynes Defeated: Static Models and the Critics
  
  • 3. The Determination of Output and Employment: First and Second Passes at Equilibrium
    
    • Appendix 1: Keynes’s Definition(s) of Unemployment
    • Appendix 2: Do Interest Rates Adjust Saving and Investment?
    • Mathematical Appendix
  • 4. Equilibrium with a Given Money Supply: Critical Perspectives on the Second-Pass Model
    
    • Mathematical Appendix
• III. Keynes Vindicated: A Theory of Real-Time Changes
  
  • 5. The Price Mechanism: Gospels According to Marshall and Walras
    
    • Mathematical Appendix
  • 6. The General Theory without Rigid Prices and Wages
    
    • Appendix: A Brief History of Stationary Real-Price Equilibria
    • Mathematical Appendix
  • 7. Dynamics vs. Statics: Can the Economy Get from the Here of Unemployment to the There of Full Employment?
    
    • Mathematical Appendix
  • 8. A Dose of Reality: The Evidence of the Great Depression
    
    • Appendix: Milton Friedman and Anna Schwartz on What Made the Depression Great
    • Mathematical Appendix
• IV. Building Blocks
  
  • 9. Consumption and Saving
    
    • Mathematical Appendix
  • 10. Investment
    
    • Mathematical Appendix
  • 11. The Theory of Interest, I: Liquidity Preference in a World of Money and Bonds
    
    • Appendix: Bond Coupons as Insurance against Price Declines
    • Mathematical Appendix
  • 12. The Theory of Interest, II: Liquidity Preference as a Theory of Spreads
    
    • Mathematical Appendix
    • Empirical Appendix: What Do the Data Say?
  • 13. Taking Money Seriously
    
    • Mathematical Appendix
• V. Fiscal Policy in Theory and Practice
  
  • 14. Functional Finance and the Stabilization of Aggregate Demand
  • 15. Did the Obama Stimulus Work?
    
    • Empirical Appendix: Regressions and Their Discontents
  • 16. Functional Finance and the Composition of Aggregate Demand
    
    • Appendix 1: Sound Finance as Starving the Beast
    • Appendix 2: The Empirics of Debt Sustainability
    • Appendix 3: Are Government Bonds Private Wealth? And What Difference Does It Make for the Sustainability of the Debt?
    • Mathematical Appendix
• VI. Keynes in the Long Run
  
  • 17. First Steps into the Long Run: Harrod, Domar, Solow, and Robinson
    
    • Appendix: Inventory Accumulation as a Brake on Output
  • 18. Keynes in the Long Run: A Theory of Wages, Prices, and Employment
    
    • Mathematical Appendix
  • 19. Inflation and Employment Empirics in the Keynesian Long Run
• Epilogue: Attack Them in Their Citadel
• Notes
• References
• Acknowledgments
• Index

TRANSCRIPT

Speaker 1:
I once attended lectures that Duncan Foley was getting on a book called Growth Distribution and Prices, which was a great experience. I was fascinated by the book and partly because of Duncan's enthusiasm for the book, and that was written by Stephen A. Marglin, and today I have the great privilege of speaking Stephen Marglin about his newest book, which is Raising Keynes:, K-E-Y-N-E-S, Twenty-First Century General Theory, Harvard University Press 2021. Duncan referred to the Growth Distribution and Prices, as a tour to force, and I think this is another tour to force. Thank you for joining me. I should to give your status, your past Guggenheim fellow and member of the Harvard Society of Fellows. Steve A. Marglin is the Walter Barker professor of economics at Harvard University. Welcome Steve.

Stephen Marglin:
Thank you very much [inaudible 00:01:18] Appreciate the opportunity.

Speaker 1:
So how did this book come about?

Stephen Marglin:
Good question. So, as you indicated, the earlier book dealt tangentially with Keynes and I'm a little embarrassed now I XX think back about how little I really knew about Keynes at that time, the book wasn't about Keynes, so I guess it was more forgivable. I've been interested in Keynes and Keynes's theory and the distortions of Keynes theory and the evolution of theory since I was an undergraduate, which was in the 1950s. So off and on, I've done various things along these lines, including giving a course at Harvard, the early part of this century or the late part of the last century maybe, I think it actually straddled the turn of the century, and finally giving that up for lack of interest, not on my part, but on the students' part, there just wasn't much interest in Keynes. So I decided I had other projects and that sure, I could continue my own interest in Keynes, but I wasn't going to inflict it on an unwilling audience.

Stephen Marglin:
So I did turn to other things and that included giving an undergraduate course, an alternative deck 10 as we call it, EC 101 is often generically referred to and I was coming back from a lecture in that course on September 15th, 2008, the day that Lehman brothers crashed or they crashed on the weekend, but this was when the stuff hit the fan, and in the foyer of the Littauer Building, the home of the Harvard Economics department, there was a group of younger professors discussing, "Well, what are the consequences? What's likely to happen as a result of this financial debacle?" And I kind of eavesdropped. I didn't participate, I eavesdropped and tried to see what the currents were and this was group of economists, so there were different opinions to be sure, but I came away from that conversation with two conclusions.

Stephen Marglin:
One, that the weight of that group was that it wasn't going to have a big effect. This was a financial crisis, the real economy was in pretty good shape. Yes, we were in a recession, but the real problem were elsewhere, and this would write itself pretty quickly. That was conclusion one. Conclusion two was that Keynes's moment had come back, that there was going to be a reason why people would be interested in Keynes. Things were not going to be as rosy as the weight of opinion was. 

Stephen Marglin:
So I decided that being, having just finished book called The Dismal Science, on the problems of economics as a social science and as an intellectual endeavor that leaves totally out of the picture community and just finished that I was ready for another project. And I thought, "Well, this is a time summarize my interpretation of Keynes and put it out there for the public."

Stephen Marglin:
I thought that this was a project that was going to take two years at the outside because I thought I knew what I wanted to say. Well, I discovered after two years that I was still learning what I wanted to say. I was learning a lot, but it was a moderately slow process and I think it took me three or four years to figure out really what I wanted to write and then another four or five years to write it. So the book was over 10 years in preparation. So the impetus, you could say the final cause was the crash of 2008 and the reaction of the economics profession to it.

Speaker 1:
And this came out in 2021, the pandemic economy. This is also extremely pertinent for that.

Stephen Marglin:
Well, I was putting the finishing touches because everything was slowed down cause of the pandemic. I was putting the finishing touches of this book in the spring of 2020, the pandemic had just started. Was I going to revise it? And I thought, "Geez, if I start revising now there's going to be no end to it." So there's really nothing about the pandemic.

Speaker 1:
I understand that.

Stephen Marglin:
In fact the only reference to pandemic or anything like it is with regard, I think, to the Black Death, if I remember. I do think it's relevant, the issues that have come up since the pandemic, but curiously, in a way, it's World War II and it's aftermath, which I think is most relevant to the pandemic and it's aftermath in terms the economic consequences.

Speaker 1:
Interesting. Well, I think heard... Well, a lot of people have said this, but I guess it was Lucas who we trace it back to, that there are no laissez-faire people, I guess, in a foxhole.

Stephen Marglin:
Well, you said there are no atheists in a foxhole actually. No. He said... No, no. He said, yes, what did he say?

Speaker 1:
We're all [inaudible 00:07:05] in a foxhole or something like

Stephen Marglin:
Something like that, yes. I used this phrase in a response to an interview Lamond and the question were in French and my answers were in English when they were going to translate this, at which they did, into French, they didn't have a clue what this meant because the foxhole in French, the first definition is the hole to which a fox goes.

Speaker 1:
Of course there are no-

Stephen Marglin:
And I had to straighten that out for them.

Speaker 1:
Right.

Stephen Marglin:
But yes, he did say that. And then he qualified that statement by saying, "I don't think we're there yet," or something to that effect, but yeah, there was a kind of 10 minute period. I think it wasn't on the day of Lehman Brothers crash, but when things started to unfold and it's clear that this was going to be a much more consequential event than people had anticipated on September 14th or September 12th and there was a kind of a 10 minute moment when I think the economics profession was bewildered and open to new ideas, but the ranks closed pretty quickly.

Speaker 1:
Did they? Okay. You've returned to teaching this to undergrads?

Stephen Marglin:
I did. I started teaching it not the next year, but I think maybe in 2011 and I taught it all the way through the writing process. I'm teaching a slightly different version of it now, which is a seminar based thing in which I want to explore with undergraduates, the possibilities of further research and what kinds of topics and emerge from this book that people might do research on. I don't know how that will go. We start classes day after tomorrow. So if we come back and talk again in a couple weeks, I might have a better fix on that or a couple of months, probably even better. 

Speaker 1:
Right. Well, were the undergraduates more interested in the course while you were writing the book as opposed to when you were teaching Keynes before?

Stephen Marglin:
Yes. It wasn't the kind of mass turnout that I hoped and feared because I didn't want to teach a large class, but I would've been gratified by the interest, but certainly there was a sustained interest. I think the average turnout was, and this is of course an upper class elective that nobody has to take and I think it ran normally between 10 and 20. So that that's not a bad turnout for this kind of course.

Stephen Marglin:
It was very heavy reading and I'm just reminded by my TF, that the reading for this semester is much more than undergraduate courses normally happening. So it was a good turnout and certainly in terms of engagement, I felt that a number of the students really engaged in the material and accomplished what I wanted to do, was to get them to rethink everything they had thought they knew about economics.

Speaker 1:
Absolutely. It does a great job of that. I kind of felt like it was a textbook. Well, it's a lot of different things. It's a textbook and it's a book on theory. I think that in economics, maybe in other fields, if you say something is a textbook, that's kind of a put down, but in economics, textbooks are very important.

Stephen Marglin:
And it is, as you say, it doesn't fit neatly into any category. I wouldn't categorize it first and foremost as a textbook, that` I hope it will be used as such. I may have some illusions about how accessible it is to undergraduates. I think the fact that there was a course that went along with the book made it much easier to get the ideas across, but it's written purposely with the mathematics all put in separate compartments so that people with really a minimum of math can follow the argument, though I certainly wouldn't claim it's bedtime reading. 

Speaker 1:
Correct. Yeah, no, as I was reading it has a very economics feel. It's models and it starts with one model and then layers another on top and then goes back, layers another on top and it requires real focus and it uses a lot of graphs, which we're used to in economics as sort of an idea a way of getting the intuition.

Stephen Marglin:
That's something does come out of teaching it and teaching it as I was going along because if I'm not going to use mathematics, which is the normal way of presenting this kind of material nowadays, what are the aids that I can use to get ideas across and graphs seem to work. I don't know how it would was for you or how be for others to read it on their own without-

Speaker 1:
A course

Stephen Marglin:
... a course, but the aim was to make it accessible to people who wanted to put in the effort.

Speaker 1:
That's absolutely right. Yeah, I was saying I for the first time in my life understood ISLM from one of your graphs.

Stephen Marglin:
Which is a step along the way. It's not the...

Speaker 1:
No, it is-

Stephen Marglin:
[inaudible 00:12:58]

Speaker 1:
... and it shows how much of a mere step along the way it is. Right.

Stephen Marglin:
Yeah and of course I had to relearn ISLM. That was one of the things I figured out along the way. I thought I knew what it was, but I realized I hadn't understand either how Hicks meant it or how it had evolved into what it is in the textbooks, how it ought to be used.

Speaker 1:
Yes. So if we think about, as you say, the fall and rise of Keynes, I wasn't very interested in your explaining how Keynes was interpreted. So if you read the general theory, it doesn't read like a piece of economics today.

Stephen Marglin:
No.

Speaker 1:
And then the people-

Stephen Marglin:
There's a [inaudible 00:13:47]-

Speaker 1:
Go ahead.

Stephen Marglin:
... divide between the kind of economics that Keynes knew, believed in, wrote.

Speaker 1:
Right.

Stephen Marglin:
This is not due to Keynes. This was in the works. The younger generation was learning a whole new mode, which they then tried to apply to Keynes.

Speaker 1:
Right and-

Stephen Marglin:
It was never an easy book to read for anybody, but for the present generation, it just seems like it's-

Speaker 1:
You can't make heads or tails of it. Yeah. 

Stephen Marglin:
Yeah.

Speaker 1:
So then I love this section of your book with friends like Modigliani, which is part of, I guess, what you had to go through and recreate is Keynes's, this inscrutable book, how was it converted into a modern model and what did it miss?

Stephen Marglin:
Right, that was one of the tasks I learned. I really hadn't understood any of that and I had to reconstruct it. So I leapt ahead myself and was thinking in the dynamic terms that I actually end up presenting, amending, however you put it, Keynes, and I didn't have the understanding of what Keynes was up to and what it then became in the hands of the next generation, both friendly and unfriendly critics.

Speaker 1:
Right. Now one of the things is you point out that Keynes did not have the math available to him, even if he had wanted to capture his insights. Tell us about what math that was.

Stephen Marglin:
Well, it's basically the mathematics of differential equations and it's not that it didn't exist, but it was just being mobilized by younger economists in the 1930s and to me, what interesting mysterious, if you will, question is not why didn't Keynes deploy this mathematics, which he didn't have, but why didn't the next generation deploy it, which they had it, but they didn't deploy it... Well, haltingly and fitfully in the 19-late sixties, early seventies, but by then the currents were flowing in a different direction and those got sidetracked and it was not picked up by the third generation, if you will. 

Stephen Marglin:
The second generation was Samuelson, Tobin, Solo, just to mention three who Modigliani himself, just now four who won Nobel prizes, I wouldn't say that it stopped contributing to economics, that's certainly not true, but they were not the up and coming generation. The up and coming generation was Lucas, Sergeant, Kidman, et cetera, the rational expectations, new classical, the economics, if you will, of neoliberalism.

Speaker 1:
Now you mentioned a book by Frank Fisher on this general topic or on the-

Stephen Marglin:
Well, on the general topic of adjustment out of equilibrium, not really on Keynes.

Speaker 1:
Oh, no. Right.

Stephen Marglin:
Yeah, it sunk like a stone. Fisher was a very bright MIT economist and who did many, many things and this was one that was never picked up on.

Speaker 1:
Right. So what would you say in terms of Fisher's... Fisher was looking at the Disequilibrium Foundations of Equilibrium Economics. Could you say something about that? How-

Stephen Marglin:
He was looking at what is the key question. We have this concept of equilibrium and we have a lot of theorems about equilibrium and so forth, which leaves totally unasked, not to mention unanswered, well, what happens when you're not an equilibrium? Fisher tried to come to terms with that in terms of the same high theory that had been applied to equilibrium analysis, and he had some very interesting things to say, but as I said, nobody picked up on it. 

Stephen Marglin:
I've always found very interesting the candid comment of the authors of one of the leading textbooks of graduate economic theory, which it's called Microeconomic Theory and the authors are three emanate economists, Mas-Colell, Green and Winston and that book has been the kind of... A, if not standard graduate text, since it was published in the nineties, and it's about a thousand pages, about the same length as mine, but it was very dense mathematics, 990 of which are devoted to the analysis of equilibrium and about 10 pages to dynamics, that is what happens outside of equilibrium. And the authors are very clear about this. They say, "Well, we know a lot about equilibrium. We have a lot of good theory about equilibrium. We don't know much about disequilibrium, so we won't say anything about it," which has always struck me about as akin to the joke about the drunk and the lamppost who's looking for his lost car keys and he is looking under the lamppost because there's light there, not because he thinks the keys are there. 

Speaker 1:
Yeah. I think I remember a textbook Crepes on game theory, where it in the textbook, I think he pointed out that we have these concepts of equilibrium, but we don't actually think that that's what we observe. We don't actually observe empirically the equilibrium predicted in Nash or whatever. I guess that the response would be that this is about modeling.

Speaker 1:
I wanted to talk to you about this anyway, but economics, we see this world, which is just so complex, and things going up and down and many people happy and many people unhappy, and as I think about economics the idea is a great economist will pick out some simplifying assumptions, and then work through a model which captures some insight, but the assumptions aren't necessarily simplifying, they're not accurate.

Stephen Marglin:
Absolutely.

Speaker 1:
So it raises the question of how do we judge our assumptions? One could say, "Well, it's the lamppost, but we don't really have a good grasp on disequilibrium, so we'll do the best, we'll use equilibrium and that'll be our simplifying assumption," in a sense. That might be the response.

Stephen Marglin:
Yeah, but it turns out that is my judgment and I offer Raising Keynes as the defense of my judgment. That's not a very useful assumption for understanding the macroeconomic fluctuations, depression, growth, the things we really... are not the only things we're interested in, but among the top 10 of what we're actually interested in about how the economy functions.

Stephen Marglin:
So I agree with you completely. All modeling involves some simplifications, mine certainly does and the question is, are those simplifying assumptions appropriate to what the questions are at issue. So in terms of what are the questions at issue, I think the overarching question, the Keynes theoretical question is, is there a self regulating mechanism in a capitalist economy which produces an efficient allocation of resources, provided there are no, what I call warts on the body of capitalism, that is imperfections like monopoly, oligopoly, trade unions, government intervention, et cetera.

Stephen Marglin:
So the idealization is an economy of small agents with no power to set prices, but are responding to markets, et cetera and the argument is that in that economy, the mainstream argument before Keynes and today was and is that there is a self regulating mechanism, vaguely speaking, Adam Smith's invisible hand, that produces an efficient allocation of resources, including and chiefly, full employment, that is a job for every willing worker. Corollary to that is, "Well, if you observe unemployment, it must be because of some imperfection in the economy, some wart on the body of capitalism and that leads then to a policy stance, which is excise the warts."

Stephen Marglin:
And this is not just theory because this was the theory behind the move towards deregulation that started, not with Ronald Reagan, as it's usually often... Well, not usually, but often associated, but with Jimmy Carter. So it was a bipartisan effort with the backing of the new classical economics that was taking over in the 1970s and 1980s and culminated in the financial deregulation of the late 1990s under, not Ronald Reagan or George Bush, but Bill Clinton.

Stephen Marglin:
I think arguably that was certainly one of the contributing causes to the great recession of 2008, with its long recovery period. We didn't really recover from that recession to the end of the Obama administration. 

Stephen Marglin:
So these are not just... You we'd say, "Well, it's what difference does it make? We know the world is not perfectly competitive. We know they are always imperfection, so why are we interested in analyzing an economy where a model, it's not an economy, it's the model of an economy in which the warts have been removed?" And I think the clear answer is because it's that model which has produced very bad policies of laissez-faire and deregulation based on the idea that the economy isn't self-regulated.

Speaker 1:
Right. And I think if you looked at AFDC, Aid to Families with Dependent Children, it also, I think, was counter to this laissez-faire viewpoint and it was also acts during Clinton.

Stephen Marglin:
That's exactly right. Yes, that's exactly right. Yeah.

Speaker 1:
So I know quite a few young people who are not economists, and I think that if they were to hear that this was a alternative economics book or approach and that it was dealing with unemployment, they would say, "Oh, okay, well then you're talking about racism and domination by capitalists of people who are not like them, and as the..." at least these are the young people that I speak to, "this shows the Smith of rugged individualism and it's all wrong and people need to be nicer to each other," and they would be surprised to hear that in an alternative course is not one about racism or capitalist domination.

Stephen Marglin:
Well, if I were giving my introductory course that I gave in the early years of the century, this would be one piece of it and not the whole course and all the things that you mentioned would figure certainly in that course, I don't know, I'm not pretending this is the whole story. 

Speaker 1:
Gotcha.

Stephen Marglin:
I think the mainstream would say, "Well, racism is a wart of the body of capitalism. We're not racists and we're against racism and we want racism removed, and if we can succeed, it's not an economic issue, it's a..." Famously the Nobel prize winner, Gary Becker attributed racism to a taste for discrimination. If we can just get people's tastes to be a little better, then we can eliminate discrimination. So yeah, this is not my textbook on economics, this Raising Keynes.

Speaker 1:
I gotcha. I understand. And it shares a lot... In a sense it's making its job difficult because it wants to show enduring unemployment without any of those things.

Stephen Marglin:
Exactly.

Speaker 1:
Right. So I was thinking about how is this the same and how is it different than... I was thinking about comparing your text to an advanced undergrad, or graduate textbook. You're taking this model approach, this very precise approach where you lay out your assumptions very clearly and you work them through, you've got individual decision making organized around and the economy is driven a lot by profit maximization?

Stephen Marglin:
No.

Speaker 1:
And you have different layers of models. I don't know what else is similar, but then if we start to think about the differences, I have a list of them too, but why don't you tell us. If I missed any of the similarities and also we can start talking about some of the differences.

Stephen Marglin:
Well, no, I think it may be even more, it's not mathematical, but more careful in terms of letting of assumptions and so forth than other books.

Speaker 1:
Yeah, that's true.

Stephen Marglin:
So I plead guilty to that.

Speaker 1:
I agree with you.

Stephen Marglin:
But I mean the differences, I think the main theoretical difference is that I recognize the problems caused by super imposing Keynes' novel idea, which is that, we can get into why this case, but that this new concept that he introduces of aggregate demand, why that matters and why it complicates things enormously and why it necessitates a whole different method, which is not starting from equilibrium, but starting from the processes that work when the economy is not in equilibrium and in a sense, asking the question, "Well, do these processes lead to an equilibrium? If so, what kind of equilibrium? how is it different from the standard equilibrium that is studied in a framework which doesn't take account of the processes at work?"

Stephen Marglin:
So those are all the theoretical questions of a general nature and then I do get into some of the more nitty gritty of Keynes' assumptions, especially about how interest rates are [inaudible 00:30:18] and how consumption is determined and how investment is determined, where I'm basically following as much as I can Keynes, but at certain points, argue that Keynes didn't get it right and got wrong and here's what we have to do to get it right.

Speaker 1:
Exactly.

Stephen Marglin:
And then there are places where I think it's important to try to bring in data and real experience in order to actually test how useful these theories are. Are they conclusive tests? No, I wouldn't argue that, but I think they're very rarely the case that an empirical test in economics is conclusive. 

Speaker 1:
I gree with that. I would agree with that, yes. And the way that this plays out is the model is more dynamic than comparative statics so-

Stephen Marglin:
Because it's looking at the processes.

Speaker 1:
Exactly. So if our listeners aren't familiar, how would you describe the orthodox approach to change, which is really comparative statics?

Stephen Marglin:
Well, I can describe because I did it myself for many years and it's a useful product, it's useful technique.

Speaker 1:
Absolutely.

Stephen Marglin:
But you have to understand its limits. What is the technique? Well, for example, here's a critical question for Keynes and for Keynesians and for anti Keynesians, what is the consequence of a change in wages? What happens if wages change because the argument that started... Well, I don't think it started there, but certainly prominent in the great depression and the analysis of the great depression was that, well, wages are too high. If only wages would fall, then everything would be okay. We would be back to the nirvana of full employment and all would be well. How does the mainstream analyze a fall in wages?

Stephen Marglin:
What they do is they set up two universes. Universe A is the same as universe B, except in universe A, the wage rate, now this is a simplification of just one wage rate, the wage rate is $20 per hour in universe B the wage rate is $15 an hour. So the analysis then looks at how much employment and how far are we from full employment in those two universes?

Speaker 1:
That works out an equilibrium in both cases.

Stephen Marglin:
Works out an equilibrium. That equilibrium in each universe is completely static. Universe A is totally unchanging. Universe B is totally unchanging [inaudible 00:33:27] time.

Speaker 1:
Exactly.

Stephen Marglin:
If you want to look at change, you do interplanetary travel.

Speaker 1:
Yeah, that's interesting.

Stephen Marglin:
You get on a spaceship and you go from universe A to universe B and that's how you analyze change and the argument is, "Well, if you have enough universes with different wages in them, one of them will have full employment." Well, that's a very different argument, actually, from what it means in everyday language to ask the question, "What happens if the wage falls from $20 to $15?"

Speaker 1:
Right. We want a narrative, something continuous.

Stephen Marglin:
Well, yeah, and something that's taking place in real time. And it's a different question with a different answer. And Keynes was asking, I think that's the question that people were interested in, the second question, but the analysis of economists was all about the first question and it gave the wrong answer to the second question. So that's why you need a framework in which you actually trace through the consequences of the wage being today $20 and tomorrow being $15 six months from now or whatever.

Speaker 1:
Right. 

Stephen Marglin:
That's the fundamental difference in framework between analyzing real time changes and comparative static. Now, does that mean comparative static is useless? 

Speaker 1:
I understand.

Stephen Marglin:
No, it's a very useful technique, but you got to know what questions it is useful for and why it's not useful for the particular question of, "If the wage is $20 today and we lower that to $15 tomorrow, what will be the consequences for employment?"

Speaker 1:
Right. Partly because the path will determine where you end up.

Stephen Marglin:
The path will determine where you end up. People start today with debts that they incurred on a basis of a $20 wage and now they're being asked to pay those debts with a wage which hasn't changed between today and tomorrow, but they're being asked to pay those debts with a $15 wage. So all kinds of things change and they do affect the outcome and more important, not just theoretically, that's what happened in the great depression, which was the occasion for Keynes to rethink his own ideas and to write the general theory.

Speaker 1:
I think another way to say this or another level of dynamic versus static, is to say that your models are "overdetermined," that there are more equations than unknowns?

Stephen Marglin:
Well, that's what causes the problem in the first place. When you introduce this concept of aggregate demand, you're adding one more equation without any more variables, so you can't even apply the static analysis. You can't apply it in the same old way anyway, so you're driven, in my view, to a dynamic analysis, but even if it was some way of resolving that as- 

Speaker 1:
Modigliani.

Stephen Marglin:
Yes, that still doesn't get you off the hook because there's all these issues as to why a change in real time is not the same as a change between universes.

Speaker 1:
Right. So you say this is page... Well, I don't know the page number, I've written down, but I can't read it. "Keynes' is critical endeavor was to establish that a perfectly competitive market system would not normally provide full employment if left to its own devices."

Speaker 1:
We chatted a bit about this on email. One of the things about you're being very honest about what you're doing here, that sounds like Keynes already knows what he wants to show, and it has a political charge to it, and he's now getting a model or a way of thinking which explains something that he believes politically. So you might say it's ideological and you might think there's something wrong about that.

Stephen Marglin:
I'm with you all the way to, "There's something wrong about it." I think that we all have ideology. We tempted to say, "You have ideology, I have truth," but we all have ideology because there's always these things that we can't prove and we have intuitions about and we have beliefs about, and we have views about, but we can't prove them logically because in some cases they may be unprovable, and in some cases we just haven't got there yet, but we need to act in any case. So in that sense, we all have ideology. And with Schumpeter, Keynes's rival, as it were, certainly saw himself as Keynes' rival, I'm not sure that Keynes returned the favor, but Schumpeter was a great economist and is, like Keynes, going through cycles and I think his stock is on the upturn now.

Speaker 1:
Is it? Okay. 

Stephen Marglin:
And deservedly so. I think he was very good economist with a lot important things to say.

Speaker 1:
A lot about dynamics.

Stephen Marglin:
Yeah, and one of the things he said was he has this two part, I would say there's really a three part division, but it doesn't matter. There's what he calls the pre-analytic vision, which he rants is, one might say, I would not, and I hope you would not, say tainted by ideology, but which is ideological in part. And then the theory is what elaborate in order to work out that vision and I think a good economist, you try to separate that theory from the vision in the sense that you want it to survive and you want to be able to argue it to people who don't share your pre-analytic vision. 

Stephen Marglin:
So I think that's what Keynes was doing. He had this vision, this intuition, if you will, that, and this was hard come by, because as he says himself, he was brought up in this old school and the hard part for him was getting rid of the old ideas, which didn't allow for long term unemployment or any departures that were more than momentary from full employment and there he was faced like the rest of the world with the Great Depression and what do you make of it? And he rethought his vision, and then, as you say, I think was groping for the model and it took him several years, much less than 10 years I took on Raising Keynes, but it took him several years to figure out the theory, and it's an unanswerable question. 

Stephen Marglin:
Keynes only survived 10 years after the publication, the General Theory, much of that time he was ill, the rest of it, basically, most of it, was World War II and he was absorbed in practical issues of British policy in the war, but it's an interesting question. If he had survived another 10 years, what he would've made of the General Theory and what a second edition of the General Theory might have looked like. We don't know that.

Speaker 1:
Yeah. I think my understanding is that there's a sense in which Keynes gave his life to the public good, in the sense that he was at Bretton Woods when he was very ill and he died just after that.

Stephen Marglin:
Yeah, he died in spring of '46. So yeah, he was very ill by then and he'd been ill really since I think '38, is when he was first hospitalized and there are pictures of him in the [inaudible 00:41:49] period. He had a heart condition and there are pictures of him smoking cigarettes.

Speaker 1:
Right. Oh, it just kills you. 

Stephen Marglin:
And [inaudible 00:41:58] they didn't know. 

Speaker 1:
Right, I know. Yeah, the famous picture of the Tour de France, where the guys were smoking on their bike. Well, you talked about, he needed to get rid of his old ideas and I think my impression of this book is that I think that many times, to me, the left can just criticize, criticize, criticize, or attack, attack, attack.

Speaker 1:
What's not done so much or so effectively is constructing an alternative model, and I think that this book does a great job of working through showing the flaws in the way that one has been brought up thinking in economics and building another approach or the start of another approach, not just attacking, but building up an alternative approach, which I think it's very exciting. And congratulations. I think the main reason to read it would be that you find it interesting, which is what I did, but it also, I'm hoping that it does serve as a springboard. Thank you so much, Steve.

Stephen Marglin:
Well, thank you very much and thank you for the compliment at the end, because that's exactly what I was trying to do and I'm glad I succeeded at least with one reader. I do hope that it is the start of something. It is meant to be that and I hope it does serve that purpose. So thank you very much for this opportunity to talk about it with you. 

Speaker 1:
The pleasure of mine and you're welcome. Thanks so much. Okay. Bye Steve.