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.

Epilogue

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

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

  1. A most stimulating discussion, Prof. Varoufakis. I’ve been following much of the Left’s work concerning the global economic crisis since 2008. I had initially found the standard Keynesian-Marxist underconsumptionist explanation the most convincing—which, unless I’m mistaken, your analysis is in line with—but have recently began questioning it upon reading Andrew Kliman’s research. Kliman’s recent publication, ‘The Failure of Capitalist Production: Underlying Causes of the Great Recession,’ empirically challenges the underconsumptionist narrative and instead attempts to prove that the crisis is better explained by the orthodox Marxist theory of the falling rate of profit.

    Are you familiar with Kliman’s work? If so, what are your thoughts on his methodology?

  2. Well, it seems that it is another of those fashionable speeches about marx without having read nothing from Marx! If you have… wow, then it’s even worse, because you haven’t understood anything at all.
    I will only point to that “view” of Marx as a mecanicist who consider human beings acting like robots under stimulus. This is absolutely opposite to Marx’s theory of capitalism.

    Marx is not relevant but VERY relevant, and will be while capitalism goes on ruling, do you realize or not. So my sincere recomendation is to read him.

    • (It’s also astounding to read that Marx simply took on Smith’s and Ricardo’s theory to critizice capitalism… Really don’t you know that Marx made a deep critique of that classical political economy?)

  3. Can someone post the reference for the M. Dobb extension of the Lucas-Sargant model ? that would be most appreciated.

  4. Pingback: daily oligarch » Marx and Keynes

    • Correct he is disgusting. To put 40% GDP at risk to create silly not workig bailout packages for irresponsible countries or to “save” an anyways soon worthless currency… What an idiot.

    • NEUD:

      What 40% Debt to GDP? Germany’s total debt is much higher.

      Total debt(defined as Household+Nonfinancial Corporations+ Financial Institutions+Government debt) to GDP ratio is as follows(Total Debt/GDP =):

      Japan @ 512%
      UK @ 507%
      Spain @ 363%
      France @ 346%
      Italy @ 314%
      South Korea @ 314%
      USA @ 279%
      Germany @ 278%
      Australia 277%
      Canada @ 276%
      Ireland @ 663%
      Portugal @ 356%
      Greece @ 267%

      So why this obsession with Greece from Schaeuble and shouldn’t he be looking himself in the mirror as the bigger sinner in need of reform?

      http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth

    • “To put 40% GDP at risk to create silly not workig bailout packages for irresponsible countries” = German contribution to various official and inofficial debts guarantees and loans to PIFGIS. This comes on top of the “own debt”

  5. Pingback: On Keynes, Marx and the value of models at a time of Crisis: A reply to David Laibman « Yanis Varoufakis « Grin Without Cat

  6. Marx also took from Ricardo the fiction that the state is a bystander in market economies. In the Manifesto, he and Engels write that the efficient organization of the Lancashire mills was the “heavy artillery” that knocked down the “Chinese walls” of those backward third world nations- quite a ridiculous argument for an essay written nicely between the two Opium wars.

  7. Marx also took from Ricardo the fiction that the state is a kind of bystander. In the Manifesto, he and Engels write that the efficient production of Lancashire mills was the “heavy artillery” that knocked down the “chinese walls” of those backward eastern empires. That’s a remarkably counter-factual claim for an essay written between the two Opium Wars.

    • Too bad you decided to take history lesson when you were supposed to be getting a lesson in free trade.

  8. To all of you that still believe that Greece is an important export market for German companies:

    Number of cars registered in Greece in March:
    VW = 474
    Audi = 176
    BMW = 71
    Mercedes = 75
    Porsche = 0

    This is about as “many” as a larger (~EUR 2 billion) privately owned company buys per year!

    Note on the side: Compared to 2008 this is a 85% decrease. The German car producers still had a record year in 2011.

    YoY change for all producers (all countries) for Greece is -43% (Portugal -50%, Italy -27%, Spain -5%, USA +13%)

    Source: http://www.seaa.gr/sites/seaa/files/files/statistics/2012-3-a_0.pdf

    • Who does?

      I believe German products will decrease in Greece.
      It is a sentimental thingy.

    • Greeks need to buy more Greek products. e.g. Greek tomatos instead of Dutch tomatos!

    • You have a point No EU Dictatorship.But no sane person would buy a more expensive product for the same usefulness.And although the main cause for this fact,are the middlemen between producers and consumers rather than wages etc it bothers me to see the troika making no demands towards the elimination of middlemen.The so called “potato movement” that has been taking place in Greece for the last months,has shown what harm the middlemen have been doing.Producers decided to sell potatoes directly to consumers with NORMAL prices both for the consumer and the producer and it ended up being a success.Several producers of other goods have start moving towards this direction with no or little help from the public sector.

    • Crossover, the market should eliminate the middle man if it makes sense.

      However what you say is reflected in data that shows that “Greece” is not becoming cheaper despite salary cuts.

  9. People like me, with rudiments of economics and distaste for the mess that trying to apply a realistic socialism has created ( Greece might be one of the last experiments), tend to view your abstractions as too rudimentary, whether Kanes or Marx.

    Is the only human trait “optimism” that influences economics?
    In my opinion it is the bag of total human traits, from greed to self absorption to clannishness to joy of game playing …. that come into the story, willy nilly. In this internet age with fast communications this has been exacerbated to a much higher degree then in the 1930s, because it is the human traits that will take advantage of this facility to impose collective wills and decisions. And globalization with no checks and balances was the last straw.

    In my opinion again, we are rushing into a new feudal system, which is I suppose the capitalist system at one of the strange attractors of the chaotic system that an economy is. The lords now are the banks and the huge globalized corporations.

  10. One very small quip. Marx did not argue that capitalism was unnatural. He argued that it placed severe constraints on human nature. For Marx human nature was nothing more than the creative capacity to transform nature and thereby transform ourselves.

    • Does that man really think that the majority of people consider the whole existance of finance as the problem?

      We do not throw the car because of a flat tire ,but we really get mad with the engineer that purposefully causes mechanical problems.

      Our “stupidity” is that we do not learn even the basics of how a car functions.
      For those in the know ,this type of stupidity (the comfort zone type) is a big advantage.

      Also did he say that they have theories about behaviour?
      I’ve got the best one. I am I and You are You.

      As for people not understanding the financial inventions because it is harder than understanding an Apple product ,well ,i consider the basis for this (except the comfort zone above and garbage education) ,the lack of knowledge of the difference between two types of notions and the utility of a third notion:
      a) the material energy forms
      b) the immaterial energy forms
      c) energy flow

      a) The notions of material energy forms are easily understood because they are more obvious and more stable and absolute in the human mind. You can not confuse a pie with a lamp.

      b) The notions of immaterial energy forms are harder to be conceived from the human mind ,not because the human mind has not the ability but because we get focused more on what is of the a type.

      Then people truly confuse notions that are quite different but of finer nature. Like “immaturity” with “boyishness”. It truly is like one confuses a pie with a lamp. And that can cause many many problems. Especially if one eats the lamp.

      Notions of each of the above two types ,can also be considered relative (R) or absolute (A).
      So we have Ra ,Rb ,Aa ,Ab.

      c) The energy flow is the connections ,interactions between forms.

      Now if the “experts” do not agree about definitions ,for instance in using Ab and specifying the ways of c ,how the hell can we have a better structure?

      Also he talks about finance being of broader form ,more democratic. What’s new?

      People should not be protesting ,they should be creating their own “systems”.

    • Professor Shiller thinks that the development in China, India and the rest of the world is the result of financial capitalism. The development of those countries is a result education as a public good, by knowing, people can design and build staff, which they do.
      The speeding of the development of those countries however is the result of massive involuntary transfer of the wealth of the middle class in the west to those countries. Each enterprise consists of the capital of the shareholders, the know-how that is already built in the enterprise, which is mostly paid by the education which is paid by everybody in the country and many other benefits from the government that really represents the effort of everybody. By transferring the companies to less developed countries the people who built those companies get zero, they lose their jobs, the many small companies that were depended on those enterprises have to close because the people who use to buy, can’t anymore. The only people who benefitted are the management and the developed countries.
      The massive participation in the stock market by the population is the result of government allowing tax write-off of the invested monies. The people who can’t afford to invest however have to pay the taxes for those who can. So instead of people investing on whatever they want, now they can invest only on enterprises that are members of the stock exchange. However they transferred huge wealth to intermediaries who do nothing from the creation of goods and services.
      Professor Shiller to me looks like those people who used to say that the idea of communism is good, the people are misusing it, the financial capitalism is good, only people are misusing them. I think that should be a law to disallow professors to mingle on the affairs of people.

  11. “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”

    Surely not? The masses of people in the Arab world, the Far East and indeed in Greece, who have organised themselves against depression of living standards have not sat on their hands. The Occupy movement, for all its weaknesses, was international. This crisis is occurring at a far more advanced stage of capitalist development, globally. The failures of the 1930s can’t be assumed to be the only possibility for the 2010s.

  12. Yani, my response to this will be Spartan because I can’t pretend I care too much about theoretical constructs.

    Contextual capitalism a la Keynes, was meant for economies of the old center (i.e. Europe, US and Japan) with the rest of the world in either mild or severe forms of subjugation. The dominant thesis of such old model is that the rest of the world was/is subordinate to the economies of the center (aka empires, or a form of sanitized global slavery for the benefit of some key economies – the engines of growth).

    The context today is quite different. Whereas, the economies of the center are aging rapidly focus is shifting to the rest of the world. The capitalism model applied for the economies of the center can not be the same for the emerging (old slave/subordinate) economies.

    This inability to recognize the difference has lead to this unprecedented debt crisis. Naively enough, capitalism of the center thought that the issuance of debt will spur perpetual growth of like-capitalism to the rest of the world. Alas, consumption models for the rest of the world do not equal those of the old economic center.

    So, in some sense, in a heroic effort to establish itself in perpetuity, old capitalism flooded the rest of the world with liquidity which in the most part was misapplied and lost.

    Neither Keynes or Marx are relevant today (other than as points of reference). What’s unfolding in front of us is a brave new world of the periphery obscuring the center and dictating a brand new model of conduct. What’s this new conduct and how it works, I have no idea.

    All I know is that neither capitalism nor its counter weight socialism work anymore as they were originally envisioned. Time for adopting new rules to the game.

  13. David Laibman’s whole work is purely logical deductive and totally a historical. If to be Marxist leads to this give me Keynes and Galbraith anytime and also Stiglitz. Keynes was not an empiricist.

  14. Pingback: On Keynes Marx and the value of models… « zumoit

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