Prompt for Discussion

Contributors: Michael Woodford, Charles Goodhart, Gerald Epstein, James Galbraith, Bill Janeway, David Laidler, Marc Lavoie, Perry Mehrling, James Rose, Carolyn Sissoko, & Randy Wray

John Maynard Keynes had two related goals in The General Theory of Employment, Interest and Money. The first was to show that capitalism, even an idealized capitalism without rigidities and frictions, would generally fail to provide jobs for willing workers. The second was to prescribe remedies. His second goal fared better over time than the first even as prescriptions he intended for general use were whittled down to remedies in extremis—the Great Recession the leading case in point.

Stephen Marglin’s Raising Keynes: A Twenty-First-Century General Theory shares Keynes’s vision of how and why capitalism fails to be self regulating, and fleshes out the argument with a rigorous theoretical framework that resolves the most glaring gaps and shortcomings in Keynes’s own formulation. One area in which The General Theory fell short is its treatment of money.

Keynesian models are generally characterized by a money supply fixed in quantity. Its division between servicing transactions and satisfying the desire of wealth holders for liquidity is central to the determination of interest rates. Interest rates in turn are a determinant of the level of aggregate demand.

Simple—until we ask what is the money that is fixed in supply? Is it a commodity—gold, silver, or cowrie shells? Is it determined by a central bank? What is the role of the banking system? Marglin argues that Keynes’s magnum opus did indeed provide new theories of employment and interest, but when it came to money the GT simply muddied the waters. Keynes’s theory of the influence of money on the rate of interest and his theory of how interest affects aggregate demand make sense if money is a commodity. But Keynes knew better and for the most part we are given to understand money as the creation of a central bank. The role of banks in money creation is largely ignored.

Raising Keynes concludes that Keynes’s failure to provide a coherent theory of money prevented The General Theory from delivering on its promise of an alternative to the orthodox theory of interest. And for this reason it fails to provide a theory of how employment is determined in a capitalist economy left to its own devices. In Chapter 13 Marglin summarizes his argument. This roundtable is intended to assess Marglin’s argument critically, to point out the defects and to build on the strengths.