On Keynes, Marx and the value of models at a time of Crisis: A reply to David Laibman

Following my post Keynesian Legacies neither Europe nor Keynes deserved: A critique of New and ISLM Keynesians in the context of Europe’s Crisis, I received an email from David Laibman, my dear friend and wonderful colleague, long standing editor of Science & Society, the oldest and, in my opinion, most significant academic journal dedicated to Marxist scholarship. In his email David raised two significant points, which I try to address below. The first point simply poses the question of whether, in this hour of our Global Crisis, the issue is to ‘retrieve’ the ‘real’ Keynes, while remaining mute on Marx. (In other words, is our predicament one of insufficient aggregate demand? Or is there something rotten deeply buried in the foundations of capitalism that Marx highlighted in a still relevant way?) The second question concerns the importance, or otherwise, of economic models. Thanks David for two crucial points. I hope that my feeble attempts at offering the rudiments of answers, below, are somewhat helpful.

1. Is it a matter of retrieving the ‘real’ Keynes? Or is there something more that we need? Something that we cannot glean without help from Marx?

Here is how David worded this question in his email: “Your interventions into the Europe/crisis/policy discussions depend significantly on a defence of the true Keynes (a la Axel Leijonhufvud, 1968).  But what is the relation between Keynes and Marx in this?  I worry about founding an anti-austerian program entirely on “rejection” of macro models as such, on grounds of uncertainty, etc.” 

Let me start by explaining the relative impact of Keynes and Marx on my thinking about the current Crisis; especially that in Europe. To begin with, Marx is the undisputed master when it comes to comprehending capitalism’s internal contradictions. He invokes the dialectic to explain how things can look at their best just before The Fall. Of how the collapse is least expected a second before it happens. For him, the dialectic is just a way of spotting, in any social situation, the potential for qualitative change and teasing it out. He looks to capitalism’s strengths for clues regarding its limits. And then immediately turns to its sorrier moments for insights into its next upsurge.

In Marx’s thinking, automation (i.e. substituting labour with machines) is at the heart of capitalism’s tendency to generate crises. Like Sisyphus who pushes the rock almost to the hill’s top, before it rolls right back, so capitalism’s drive to automate production never gets quite to the aimed at complete substitution of free human labour with machinery. Just before it does, profitability collapses into a heap, investment dies out, and the whole process goes into reverse. Thus, just like Sisyphus almost succeeds in his uphill struggle, capital accumulation comes close to dehumanising production, with the organic composition of capital rising (i.e. the contribution of machines, relative to humans, in the production of a single unit of output) seemingly unstoppably (think of the almost fully automated car plants of Japan). But before the last remnant of human labour is ‘bleached out’ of the production line, profits collapse, factories close, machines remain idle, investment ceases. At that point human labour power regains some of its cost advantage (vis-à-vis machine labour) given that, in the middle of the recession, desperate people will do desperate things (like, for example, infuse more labour input into products while selling their labour power for far less). Again like Sisyphus, capitalism picks itself up, dusts itself off, and starts pushing the proverbial rock back on the uphill path of renewed growth and capital accumulation.

Marx’s theory of capitalism is, thus, a splendidly narrated tragic tale which captures beautifully the basic contradictions built into capitalism’s foundations. However, and here I think Keynes’ contribution enters the stage, there is something important missing in Marx’s analysis of crashes and crises. What? The possibility that, when the ‘faeces hits the fan’, and some monumental, as opposed to run-of-the-mill, Crash occurs (as it did in 1929 and then again in 2008), capitalists will simply fail to play the game that Marx said they will. What game is that? Of investing in capital goods, production, labour, every penny they have accumulated as a result of past and present profits. Instead, as Keynes so eloquently said: “The modern capitalist is a fair-weather sailor. As soon as a storm rises, he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbour off and himself in. [i]

The main point here is that Keynes rejects a standard assumption all his predecessors made, including Marx: that all profits are automatically re-invested. Keynes’ argument is that whether they are or not depends on average optimism; recall the little game that I used in the original post as an illustration of the importance of optimism. Marx left no room for optimism in his analysis. This is why crises, in his theory (e.g. Vol. 1 of Das Kapital), are redemptive: they generate misery but, also, they immediately start the process for the next recovery.

Why did Marx not consider the possibility that a recession, a crisis, can lead to a depression, a capital ‘c’ Crisis? Because, the answer is, he was in the business of, what David and I refer to, immanent criticism (see below for more). And what is immanent criticism? In brief, it is the following: You take the establishment theory, the dominant paradigm, and you refrain from criticising its basic presumptions. What you do is to show that, by its own criteria, on the basis of its own assumptions, the model (or theory) which the Establishment accepts as valid, produces ‘subversive’ results. Nothing upsets the Establishment more than to have something like this demonstrated; that its ‘favourite’ theory recommends views and policies which are detrimental to the Establishment’s own ideology.

In practical terms, what Marx did was to take the model of capitalism that had the most kudos in his time (i.e. the theories of Adam Smith ad David Ricardo) and show that, by their own criteria, and under the force of their own assumptions, even the most efficient, most competitive, corruption-free capitalism would, unavoidably generate crises. To show this, Marx strove to demonstrate that, even if all profits were automatically saved, capitalism would periodically fall in deep holes of its own making. This was quite an achievement; one with lasting value. For it alerts us to reasons why crises occur in capitalism; reasons that go well beyond the creation of (Austrian, Hayek-like) bubbles, of a depletion in optimism (negative animal spirits, as Keynesians might have called it), of over-indebtedness by governments, corporations etc. 

And Keynes? Without ever having acknowledged Marx’s contribution, he instinctively understood something  important about capitalism that Marx did not allow himself to dwell upon: that when capitalism digs a hole and then falls into it, it is perfectly capable of failing to climb out again. You see, the difference between Keynes and Marx was that Keynes believed in capitalism; he thought of it a little like Churchill thought of democracy (a terrible form of government but the best of all available alternatives). In fact, Keynes was eager to save capitalism from itself; to identify faults in its functioning and fix them so as to prevent crises from turning into implosions with the capacity to undermine its long term future.

Marx, on the other hand, had an agenda for transcending capitalism (socialism, he called the ‘next’, more developed, phase). For this reason, his analytical endeavours were all about concentrating on a utopian capitalism (one in which, for example, all profits are automatically invested) in order to show that, even in its utopian guise, capitalism is irrational, inefficient, unnatural, wasteful.

Which brings us to Great Recessions and the likelihood that they may turn into Depressions. Marx had no time for this question, dedicated as he was to showing that even an ideal form capitalism ought to be ‘overcome’. Keynes did. Having questioned the automatic investment of all accumulated profits, his mind was ready to explain the 1930s Depression in terms of a failure of the redemptive powers of the capitalist dynamic. Today, here in Europe, Keynes would busily apply this insight to explain the eurozone’s failure to respond to austerian policies and to recover even though labour costs and interest rates are falling fast. Whether Marx would have done the same, or rather concentrate on treating the Crisis as an opportunity for bringing about a socialist eurozone, is not a question that I think it is fair (to Marx) to answer.

So, back to David’s original question: Am I overly concerned about ‘recovering’ the ‘real’ Keynes? No. Indeed, I am utterly uninterested in any of the dead white men per se. I am just keen to retrieve Keynes’ precious idea during the time of Crisis (and, in the case of Greece, a Depression): that once negative expectations dominate the mind of capitalists, drops in wages and interest rates will do nothing to restore investment and growth. Why? Because these negative expectations suffice to generate a negative-expectations (a ‘bad’) equilibrium that Keynes grasped (in the manner I explained in my previous post) but which his IS-LM-Samuelsonian ‘Keynesian’ followers are forced to bypass (courtesy of their models’ construction).

Finally, at the political level, David’s question boils down to this: Is the Crisis not an opportunity to go beyond a discussion of how to bring about capitalism’s recovery? Is it not the right time to discuss ways and means of transcending capitalism? My answer is simple: Like David, I too disagree with Keynes on the intertemporal merits of capitalism. Marx was right: capitalism cannot be civilised by means of some benevolent government that applies the right dosage of fiscal and monetary policy at the right time.

Having said that, I genuinely believe that a Crisis is not the time to construct alternatives to capitalism. As we used to put it in an earlier, more confident, ‘era’, times of Crisis are not revolutionary times. As the 1930s amply showed (and the last few years have confirmed), the only political forces that exploit a Crisis are the xenophobes, the anti-semites, the misanthropes etc. Retrieving Keynes’ insight is, in this sense, an essential ingredient for (a) overcoming a Crisis which is incapable of generating something better than capitalism, and (b) giving humanity a chance to develop further Marx’s point about the need for a less wasteful, more rational way of producing and distributing surpluses.

2. The role of models and immanent criticism as a bulwark of progressive politics

David’s second point concerned the role of models in working towards a better world. He felt, reading this piece of mine, that I dismissed the importance of models as a means by which to ‘subvert the dominant paradigm’. This is how he put it in his email:

“[Lastly, you write] that an opponent of Keynes (and Krugman) can demolish any argument coming out of this ISLM geometry by re-drawing one of its curves (e.g. the aggregate supply curve, which if drawn perpendicular to the output axis, all room for fiscal policy disappears). And since Krugman’s positioning of these curves is just as arbitrary as his opponent’s, the debate will reach a stalemate.” 

Further down his message, David offers an example of what I would call (and he would agree, I am sure) subversive modelling. He draws upon “our illustrious predecessor”, Maurice Dobb, and re-tells the story of how Dobb took the most toxic of neoclassical (or New Classical) macro-theories, tampered with their assumptions mildly, and showed that the same model could predict precisely the opposite conclusions.

The model in question was the infamous Lucas-Sargent one which has it that there is nothing the government can do, even in the short run, to improve employment. Geometrically speaking, this means that the aggregate supply of the macro-economy is… vertical [when drawn in a two dimensional diagram with employment (or national income) on the horizontal axis and the average price level (e.g. CPI) on the vertical axis]. What does this mean? If aggregate supply is fixed at some level of employment (or economic activity), then all attempts to reflate a sagging economy by means of fiscal or monetary policy (that boosts aggregate demand) will simply force the economy up the aggregate supply curve; i.e. while employment and income will remain fixed, prices will increase. Thus, all the government can do by meddling in the macro-economy is to produce inflation without creating a single job!

The Lucas-Sargent model (even more extreme than Milton Friedman’s, who at least conceded that fiscal policy could improve the real economy in the short term) hinged, most people thought, on the so-called Rational Expectations Hypothesis. That is, on the assumption that people ‘see through’ government-induced attempts and are never ‘fooled’ to increase their investment/output/hirings when the state prints more money or borrows-and-spends. The idea that here is a model which (a) does not assume people are dummies (or ‘puppets’, to use the term Goldman Sachs functionaries allegedly use to describe their… clients) and (b) is couched in highly sophisticated mathematica; language, explains to some extent its fabulous success in the 1970s.

So, what did Maurice Dobb do to ‘subvert the dominant paradigm’? He took the same model, re-jigged mildly some of its assumptions, and proved (deploying just as much mathematical rigour as Lucas and Sargent had done), quite remarkably, that the aggregate supply curve suddenly becomes… horizontal (rather than vertical)! Which means that expansionary fiscal policy increases employment, national income  and aggregate investment while leaving prices unchanged. [David has, in fact, dedicated a whole chapter of his magnificent new book to Dobb’s proof. The book is entitled Political Economy After Economics (Routledge, 2011) and the relevant chapter is Chapter 8, entitled “Broadening the Theory of Aggregate Supply: A ‘New Critical’ Proposal”.]

Why does David mention this feat by the truly illustrious Maurice Dobb? To quote from his email, because it illustrates “…the importance of immanent critique-from-within and use, rather than rejection, of theory”.  The term ‘immanent criticism’ (see above, when it was defined already) refers to the practice of undermining, or subverting, a dominant theory by… accepting its assumptions. How does accepting the assumptions of a dominant theory help subvert it? The answer is: By demonstrating that its conclusions are falsely derived from its very own assumptions. If one manages to demonstrate this, one will have dealt a massive blow at the dominant ideology or theory that one has targeted. Just like Maurice Dobb did against the Lucas-Sargent model.

As the reader may surmise from the above, I am not one to disagree with David on the huge importance of immanent criticism. Indeed, I have dedicated my whole career (especially my work on game theory) doing precisely that: striving to show that what passes as ‘scientific economics’ these days (since the early 1970s to be precise) is not even consistent with its own assumptions. To sum up, David is right: playing around with models is serious business and has the potential of informing policy debates by pinpointing the incongruities of the models that the powers-that-be would like to have us think as the epitome of science. Where David and I may be parting ways (something that I surmise from many past conversations) is on whether toying with models can do anything more than subvert pseudo-theories. My hunch is that they cannot.


David’s parting shot was: “I’m afraid I see lurking behind Keynes — even one divested of ‘new’ and ISLM interpretations — a closet empiricist.  Marx is still the elephant in the room where these discussions are taking place.” I agree. Marx remains the elephant in the room. And Keynes was moved not so much by theoretical objections to the ‘received wisdom’ of his time but by empirical evidence that contradicted it. However, his ‘empiricism’ led him to an important insight which Marx, too eager to move to the next ‘mode of production’, chose not to see. In our hour of Crisis, we can afford neither to turn a blind eye to Keynes’ insight nor to Marx’s immanent criticism of capitalism. Models are, to conclude, excellent tools in the discursive wars against austerian idiocies. But the truth of our current reality, or of what may replace it, cannot be found in models.

[i] John Maynard Keynes (1932). ‘The World’s Economic Outlook’, The Atlantic Monthly