April 15, 2022
Gerald Epstein, University of Massachusetts – Amherst
Steve Marglin’s Raising Keynes is a very big book (856 pages of text and equations) about a very narrow — but important — question: will a capitalist market economy sustain full employment through the operations of Adam Smith’s (and Milton Friedman’s) invisible hand? John Maynard Keynes answered a resounding “NO!” Keynes argued in the General Theory of Employment, Interest, and Money, that this “free-market” idea of sustained full employment is a special case, whereas the general outcome will be one in which unemployment will prevail unless there is outside intervention. In other words, Keynes held that, in general, the government must steer the economy with fiscal and/or monetary policy to sustain full employment in a capitalist economy.
Marglin argues that Keynes was right about this key question, but that he did not have the mathematical tools to prove it; as a result, according to Marglin, neo-liberal (neo-classical) economics used this flaw to win its counter-revolution against Keynesian theory and policy in the 1970s and ’80s. In response, Marglin painstakingly develops a series of mathematical models, mostly explained in the main body of the chapters with simple numerical examples and with many well-illustrated and well-explained graphs. These are accompanied by detailed and, at times, sophisticated mathematical appendices to provide more mathematically rigorous bases for his claims. These models and explanations clarify well for students of macroeconomics some of the underlying logic and nature of some of Keynes’ key arguments and extensions. In addition, Marglin’s book has useful discussions of functional finance and other aspects of fiscal policy, a number of enlightening empirical analyses, and a discussion of Keynes’ theory of effective demand in the “long-run.” As someone who teaches a graduate macroeconomics course with a strong dose of Keynes, these aspects of Marglin’s book are very much welcome to me and will also be to my students (at least, in the “long-run”). In this sense, Marglin’s book will certainly help to raise Keynes.
Marglin’s positive contributions go significantly further, however, in ways I note below. Nonetheless, there are also points where I disagree with Marglin’s reading which I turn to later, arguing that we should instead address more directly the “socialization” of investment that Keynes, in my view, wanted to promote.
Claims about “What Keynes Really Said”
I start with the positive.
First, Marglin correctly insists that Keynes’ argument about capitalism and unemployment is primarily an argument about dynamic processes taking place in what Joan Robinson calls “historical time,” rather than a story of static equilibria taking place in “logical time.” This accords with Keynes’ main views in his General Theory, despite his occasional use of comparative static forms. Marglin is spot on that Keynes’ argument is about how “you can’t get there from here”: if you have a collapse of the type the U.K. and U.S. experienced in 1929 or 2007–2008, the stabilization mechanisms inherent in capitalism will almost certainly not get you back to full employment by themselves. Many of the negative dynamic forces that prevent stabilization, as Marglin points out (following Keynes) have to do with financial aspects of capitalism, such as high levels of indebtedness, and the vulnerability of banks to bankruptcy with attendant negative impacts on banks’ creation of money and credit. With these negative dynamic feedback loops, money and finance can often make the situation worse, rather than stabilize the ship. For example, the tendency of long-term interest rates to rise and not fall during a slump will only worsen the crisis.
In this regard, Marglin’s mathematical prowess as applied to macroeconomic dynamics of Keynesian adjustment is a tour de force and an important contribution to advancing a Keynesian understanding of macroeconomics.
A second major contribution is Marglin’s discussion of the key theoretical role of central banks in the determination of interest rates. Marglin argues that, in a non-commodity money world without a central bank, only relative interest rates will be determined, not an absolute level for the interest rate. Marglin shows that without a central bank establishing an absolute rate of interest, the spectrum of interest rates — and consequently much else in the whole macroeconomic structure — will be indeterminate, and therefore potentially unstable. In short, according to Marglin’s interpretation of Keynes, a “coherent” Keynesian macroeconomic model requires an “endogenous” central bank as part of the system.
Third, Marglin stresses that neo-classical (neo-liberal) macroeconomic theory makes highly unrealistic assumptions about the capacity for knowledge and information processing that humans possess. For Keynes, these false premises explain why free market capitalism fails to sustain full employment and prosperity on its own.
Having said that, the way in which Marglin discusses this cognitive/knowledge gap is quite different from Keynes’ own argument. In my view, these differences have some rather profound and problematic implications for the way Marglin discusses money, interest rates, investment and macroeconomic dynamics. Here, then, I part ways with Marglin.
Fundamental Uncertainty, Money, Interest, and Investment
In discussing knowledge limitations, Marglin draws on his earlier work on local and interpersonal knowledge and offers an insightful and useful critique of the mainstream approach to these issues, namely the focus on “subjective probability” as a kind of dodge of the profound knowledge questions. But he fails to systematically grapple with one of Keynes’ most important methodological advances in this area: the importance of “fundamental uncertainty” about future events to an understanding of money, interest rates and investment.
In the General Theory and then again in his 1937 answer to its critics published in The Quarterly Journal of Economics (QJE), Keynes highlighted the importance of the fundamental uncertainty economic agents often necessarily have about some important decisions regarding the future, notably money demand and investment decisions. In his QJE article Keynes says:
“By ‘uncertain’ knowledge….I do not mean merely to distinguish what is known for certain from what is only probable…the game of roulette is not subject, in this sense, to uncertainty…The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention…About these matters…We simply do not know.”
This uncertainty profoundly affects decisions that are not easily or costlessly reversable, such as investment in long-lived capital equipment. Marglin notes the irreversible nature of such investment (used capital goods market are poorly developed, so one cannot easily sell off one’s mistaken investments in plant and equipment). But he fails to use this as an entry point to systematically bring fundamental uncertainty in investment decisions into the discussion. Keynes argued that in this circumstance of fundamental uncertainty, agents fall back on conventions, norms, and heuristics, and often follow the behavior of others, either because they believe the others are experts, or because they would rather fail along with the crowd than stick their necks out and fail on their own.
None of this is per se inconsistent with aspects of Marglin’s discussion, but Marglin does not take into account: 1) what this implies for the theory of money and interest rates 2) how this makes expectations endogenous to the system — which means that a true Keynesian dynamics would need to include a discussion of the endogeneity of expectations — and 3) how this affects the theory of investment that Keynes develops. I take each in turn.
1 – Implications for Money and Interest Rates:
This discussion of “fundamental uncertainty” bears importantly on the theory of money. Marglin claims that Keynes does not have a “coherent” theory of money. But while Marglin correctly identifies the store of value motive for Keynes’ theory of the demand for money (alongside the more traditional “transactions” role and motive), he does not emphasize sufficiently Keynes’ key idea: in a world of “fundamental uncertainty,” the demand for money as a store of value rests on its value as a “safe haven.”
As Keynes writes in Ch. 13 of the General Theory, “There is, however, a necessary condition failing which the existence of a liquidity-preference for money as a means of holding wealth could not exist. This necessary condition is the existence of uncertainty (Keynes’ emphasis) as to the future of the rate of interest, i.e., as to the complex of rates of interest for varying maturities which will rule at future dates.” As a result of fundamental uncertainty, Keynes notes that “the rate of interest is a highly psychological phenomenon.” Keynes elaborates on this point in his 1937 QJE article: “Partly on reasonable and partly on instinctive grounds, our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions regarding the future…this feeling about money…. operates, so to speak, at a deeper level of our motivations. It takes charge at the moments when the…more precarious conventions have weakened…The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of our disquietude.” The measure of disquietude is the rate of interest on less safe or longer term assets.
“Money” as a “safe asset” in a sometimes chaotic and dangerous world of “fundamental uncertainty” seems like a pretty “coherent” theory of money to me, even if it is not easily placed in a mathematical model. This idea links to more recent writings on the hierarchical theories of money, from Duncan Foley’s seminal piece in 1983, to the work of Perry Mehrling and others. Here, money is the safe asset at the bottom of a pyramid of moneys that can be a final means of payment for debts, even in a crisis. In recent decades, this bottom rung has been occupied by “safe assets” denominated in US dollars.
2 – Endogenizing Expectations:
These ideas of fundamental uncertainty and “safe-haven money” also connect to another lacuna in Steve Marglin’s treatment of money, liquidity preference and interest rates. I noted earlier that two of the positive contributions of Marglin’s work are to bring the central bank into the foundation of the analysis of the monetary system and to bring other financial assets into the analytical sphere of money. But Marglin does not explore what it is that makes these assets “safe-haven” assets. If they are not safe assets, then they cannot be (store-of-value) “money” for Keynes.
What makes these assets “safe assets” and, therefore, “money” are government and central bank policies — for example, deposit insurance, and increasingly important, central bank bailouts. Marglin does not discuss central bank bailouts as far as I can tell (I have to admit that I have not read the whole book yet). But if one really wants to endogenize the central bank and bring things up to date into the 21st century, as Marglin correctly says we need to do, one must endogenize the lender of last resort mechanisms of central banking, à la Minsky and Kindleberger, in order to understand the nature and role of “money” in a coherent way. In short, Marglin has made an important contribution by showing the key role of central banks in a coherent theory of money and interest, but he has not gone far enough. He has ignored the key role that central bank bailouts play in the determination of what assets are safe and therefore what constitutes “money” in the Keynesian sense of the term.
Note that endogenizing central bank bailouts along with endogenizing expectations would almost certainly impact the dynamic analysis which Marglin correctly wants to focus on.
3– The Theory of Investment:
Failing to adequately incorporate “fundamental uncertainty” into the analysis of “money” is strangely compounded by Marglin’s treatment of investment. In the General Theory Keynes takes two passes at analyzing the determinants of investment. In the first, as noted by Marglin, Keynes assumes that the hurdle rate of interest on investment is determined in the bond market in relation to the demand for money. But in the second pass, Keynes brings in the role of equities as a financial asset and analyzes investment decisions in a world in which firms raise financing for investment not on the bond market, but by selling equities. Here, importantly, the rate of return on equities determines the “hurdle rate” that returns on real investment have to jump over to justify real investment.
It is here that the role of fundamental uncertainty, endogenous expectations, excessive liquidity and speculation take center stage and where Keynes has some of his most memorable quotes about “casino capitalism” and financial speculation:
“If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise….Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlwind of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Keynes deplored the situation in which speculation dominated investment decisions. He blamed excessively liquid financial markets, noting that for the society as a whole, capital is illiquid: when a company builds a factory, for example, we are stuck with the investment decisions made by firms. But when individual investments in the stock market are highly liquid, and easily bought and sold, affecting their prices and investment decisins, this makes for potentially anti-social behavior. Keynes argued that a situation where there is more “social control over investment” is likely to lead to much better social outcomes. Indeed, Keynes concludes this chapter on “long-term expectation” with this: “For my own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficientcy of different types of capital, calculated on the principles I have described above, (i.e., speculation) will be too great to be offset by any practicable changes in the rate of interest.”
Interestingly, though Marglin makes occasional references to this chapter and analysis, he does not incorporate it into his analysis in any systematic way. What difference might doing so have made in Marglin’s analysis?
Well, if the main question of interest that Marglin wanted to answer is whether, left to its own devices, capitalism will generate full employment in response to a shock, then perhaps incorporating these aspects would not have made a lot of difference. One suspects these considerations would have further tilted the answer in the Keynesian direction to reach an answer of no.
But the issue of adjustment after a shock was not the only and perhaps not even the main question that Keynes was trying to address in the General Theory. As my colleague James Crotty shows in his important book, Keynes Against Capitalism; His Economic Case for Liberal Socialism, Keynes was focused on an even bigger question: whether laissez-fair capitalism, as existed in England and elsewhere could, over the long run, generate enough and the right type of investment to undertake the necessary economic transformations the U.K. required and to sustain in the long run full employment and economic prosperity. The casino of chapter 12 and the capital misallocation that resulted from it captures a core part of the problem that Keynes was concerned with.
Crotty argues that as early as 1924 Keynes began developing his analysis that Great Britain would need to “socialize” a large component of British investment, by which he meant that public and quasi-public institutions would need to play a much more significant role in allocating investment. In a 1939 interview Keynes said: “The question is whether was are prepared to move out of the nineteenth-century laissez-faire state into an era of liberal socialism, by which I mean a system where we can act as an organized community for common purposes and to promote economic and social justice, whilst respecting and protecting the individual — his freedom of choice, his faith, his mind and its expression, his enterprise and his property.”
Keynes did not mean Soviet-style ownership of all the means of production but a “comprehensive socialization of investment” provided by a variety of ownership forms: state ownership, cooperatives, public -private partnerships, and the like. What is crucial, argued Keynes is that the “State is able to determine the aggregate amount of resources to augmenting the instruments (of production) and the basic rate of reward to those who own them…” That ability was necessary because of the obstacles, including the casino, preventing sufficient private investment and because, “It seems unlikely that influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment.”
Marglin makes a brief reference to Crotty and O’Donnell’s argument in his final chapter, but he dismisses them as relying on one document for proof. However, as Crotty shows in extensive detail, after 1924, Keynes never fundamentally wavered from the idea that Britain must use public investment to make the transition to the 20th century. Moreover, Crotty shows that the “centerpiece of Keynes’ new policy regime was control over major capital investment projects by “public and semi-public” institutions through a “Board of National Investment,” funded by tax revenue and granted the ability to borrow at the relatively low interest rates available to the government.
According to Crotty, Keynes wrote the General Theory to convince his fellow economists of two things: the first, as Marglin emphasizes, was that when left to its own devices, capitalism will not sustain full employment in response to a shock to its system. But the second goal was to show that in the long run, the dynamics of capitalism, and especially the forces driving investment, were not sufficient to sustain a level and type of investment that would allow Great Britain (and other capitalist economies) to transform and sustain themselves with widely shared prosperity.
Just as Britain faced a major transformation at the turn of the 20th century, requiring, according to Keynes, much more social control over the amount and allocation of capital investment, so the U.S. and, indeed, the whole global economy face an even more daunting social transformation today, particularly in confronting catastrophic climate change. Updating the General Theory for the 21st century requires addressing the necessity of more socialization of investment in the Keynesian sense in order to confront this dire challenge.
Why was the “real Keynes” ignored, to be replaced at first with a watered-down version of Modigliani and Samuelson, and then overthrown by Milton Friedman and the Chicago Boys? Marglin discusses a number of factors that accounts for the “whitewashing” of Keynes: the political attacks by right-wingers and business interests in the US that destroyed the career of a “radical” Keynesian like Lori Tarshis and substituted a milder version of Keynes, like the one constructed by Paul Samuelson. Ultimately, Marglin settles on the logical flaws in Keynes’ approach as the key vulnerability that left a theoretical opening for Milton Friedman and the gang.
But if one takes Crotty’s interpretation seriously, one must surely look more squarely at the power politics involved. Lori Tarshis, along with Paul Sweezy, Maxine Yaple Sweezy along with four other Harvard Economists, sent a manifesto to Roosevelt in 1938 that got a lot of attention. The program, which Roosevelt reportedly read, was very much like the one that Crotty described as developed by Keynes. The response was rabid. Opponents tried to get Tarshis fired from Stanford and his textbook banned from economics classes. This right wing business assault was widespread and well-funded, as many researchers have documented. The Swedish Central Bank even went so far as to try to legitimize neo-liberal economics by establishing a pseudo-Nobel Prize in Economics. I am quite sure that Steve Marglin is well aware of this history and in fact he discusses some of it in his book.
I would venture that this onslaught of money and power would have overthrown Keynesian economics, technical flaws or not. In Raising Keynes, one of Marglin’s innovations is to show that Keynes’ model is overdetermined. He makes the related point that in an overdetermined model, it is necessary to look at the dynamics to determine the outcome. Here, by analogy, the dynamics of a powerful, energized and ruthless right wing and collection of business interests seem overwhelming and, it seems to me, similarly overdetermined the outcome.
Despite all, Keynes has NOT been totally vanquished. Two major crises in little more than a decade have resurrected him. Steve Marglin’s masterful book will certainly help in this revival, especially among graduate students and other economists willing to open their minds and sit down and dig around in the equations. I, for one, will be using Marglin’s book in my graduate macro class. And I very much hope that many others will do the same.
 Stephen A. Marglin, Raising Keynes: A Twenty-First Century General Theory (Cambridge: Harvard University Press, 2020), Chapter 1. BACK TO POST
 Joan Robinson, “History vs. Equilibrium”, in Collected Economic Papers, vol. 5 (Cambridge, MA: MIT Press, 1980). BACK TO POST
 Marglin, Raising Keynes, Chapters 4 & 13. BACK TO POST
 Marglin, Raising Keynes, Chapter 10. BACK TO POST
 Marglin, Raising Keynes, Chapter 10. BACK TO POST
 James Crotty, Capitalism, Macroeconomics and Reality; Understanding Globalization, Financialization, Competition and Crisis; Selected Paper of James Crotty (Northampton, MA: E. Elgar Press 2017): Chapter 2. BACK TO POST
 Marglin, Raising Keynes, Chapter 13. BACK TO POST
 John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt Brace 1936): 168. BACK TO POST
 Ibid, 202-203. BACK TO POST
 Keynes, “The General Theory of Employment,” 116. BACK TO POST
 See Christine Desan, “How To Spend a Trillion Dollars: Our Monetary Hardwiring, Why It Matters, and What We Should Do About It” Mimeo, Harvard Law School (2022) for an enlightening discussion. See also Gerald Epstein and Robert Pollin, “Neo-Liberalism’s Bail-Out Problem” Boston Review (June 2021). BACK TO POST
 See Keynes, The General Theory of Employment, Interest, and Money, Chapter 12. BACK TO POST
 Ibid, 158-59. BACK TO POST
 Ibid, 164. BACK TO POST
 See Rod O’Donnell, “Keynes Socialism: Conception, Strategy and Espousal,” in Keynes, Post Keynesianism and Political Economy: Essays in Honour of Geoff Harcourt, Vol III, ed. C. Sardoni and P. Kriesler (New York: Routledge, 1999): 149-75. BACK TO POST
 Quoted in James Crotty, Keynes Against Capitalism: His Economic Case for Liberal Socialism (New York: Routledge, 2019): 2; Marglin also quotes on page 856. BACK TO POST
 Keynes, The General Theory of Employment, Interest, and Money, 378. BACK TO POST
 Marglin, Raising Keynes, 855-56. BACK TO POST
 Crotty, Keynes Against Capitalism, 6. BACK TO POST
 Lorie Tarshis, The Elements of Economics (Boston: Houghton Mifflin, 1947). BACK TO POST
 Kim Phillips-Fein, Invisible Hands: The Businessmen’s Crusade Against the New Deal (New York: Norton, 2009); Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Vintage Press, 2012); Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (New York: Viking, 2017); Jane Mayer, Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (New York: Anchor, 2016). BACK TO POST
 See Anver Offer and Gabriel Soderberg, The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn (Princeton: Princeton University Press, 2016). BACK TO POST