The Intellectual Odyssey of James R. Crotty: From the War on Vietnam to a Socialist Alternative to Global Capitalism

Abstract

We summarize the intellectual journey of James R. Crotty in this tribute. We discuss how Crotty’s approach to macroeconomics based on Marxian and Keynesian insights led to a series of flexible models based on realistic assumptions that help us better understand the contradictory evolution of capitalism from the 1970s to the 2010s. The basic building blocks of Crottyian macroeconomics consist of the emphasis on macro foundations, focus on the concrete capitalist processes with their endogenous, dynamic, and conflict-ridden nature, and the centrality of money, credit, and competitive dynamics of the capitalist system. We also discuss how a study of these dynamics led to his final work on “liberal socialism” as the way to end the disruptive cycles of capitalism. We argue that those aiming to construct a solid theoretical foundation to guide the understanding, transformation, and transcending of contemporary capitalist societies would find much inspiration in Crotty’s intellectual legacy.

JEL Classification: E11, E12, B51

1. Introduction

An influential thinker’s sustained intellectual labor often leads to an endpoint—a theorem or hypothesis so distinctive that the name of the scholar and the breakthrough in question is forever linked. A common remark at gatherings of the many political economists influenced by Jim Crotty is that he left no “Crotty hypothesis” behind. This is arguably because his work did not reach a particular endpoint that was distinctively his; it is better thought of as a circular, if arduous, journey that led back to its point of departure. Crotty entered economic debate via several publications that critically assessed US macroeconomic policy using analytical tools associated both with mainstream and heterodox theory. Much of his work in subsequent years involved journeying deeply into both the vast collected works of Marx and Keynes and the political-economic dynamics of crises in the United States and East Asia. The ultimate object of this dual quest was to understand capitalism as a system. While he did not identify, as such, a defining characteristic, his quest resulted in a series of flexible models based on realistic assumptions that help us better understand the contradictory evolution of capitalism since the 1970s.

Crotty understood capitalism as an inherently unstable system, whose core mechanics—its financing mechanisms and means of exploiting labor and extracting rents—were continually in motion, mainly because they led to contradictory macro structures that regularly resulted in innovations in micro behaviors and strategies. The next set of convention-exploding innovations and disruptions would always overturn any quasi-equilibrium this system reached. In Crotty’s view, the only way to end these disruptive cycles would be to tame capitalism into a path he termed “liberal socialism.” Finding this idea buried and largely overlooked in Keynes’s opus, albeit hiding in plain sight, he could return to his point of departure—how to construct macroeconomic policy to shift onto paths with saner economic dynamics that might bring about a more humane world. In this essay, we visit critical passages in Crotty’s outward and return voyages.

2. The 1970s: From the Vietnam War to Marxian Crisis Theory

Crotty’s doctoral study at Carnegie Mellon between 1961 and 1966 put him at the intellectual hub of the “rational expectations hypothesis” revolution in macroeconomics that would, a decade later, lead mainstream Keynesians to abandon the “neoclassical synthesis” macro models they used to guide capitalism’s “Golden Age.” With a growing set of collaborators, young-generation hot-shots Lucas and Prescott developed a hypercritical internal critique based on identifying key internal inconsistencies between the supposed general-equilibrium core of mainstream economics and the hodgepodge of applied methods that guided then-conventional macroeconomics. As one consequence of his exposure to the progenitors of this new macroeconomics, Crotty probed the mathematical logic of formal economic macro models, acquiring a precise understanding of how grounding economic theory in general equilibrium and efficient-market postulates all but eliminated any productive role for government intervention within the mainstream macroeconomic theory. This methodological revolution exposed the internal inconsistency of conventional economists’ efforts to square the need for macro policy interventions with tools whose internal consistency depended on equilibrium logic. ¹ Conventional economists who prioritized general equilibrium as the indisputable conceptual center of economic theorizing were trapped by this logic and would be forced to surrender their structural Keynesian models in the face of this onslaught. But for Crotty and others who were radicalized by the antiwar movement of those years, it was painfully clear that standard economic theory offered no solutions for the masses. Crotty, writing with Boddy, applied the surgical analytical approach he had absorbed at Carnegie Mellon to Friedlaender’s (1973) equilibrium-compliant effort to use revealed-preference theory to justify the Keynesian policy objectives of the Eisenhower and Kennedy-Johnson administrations (Boddy and Crotty 1975a).

The sources of crisis in capitalism emerged as a central topic for the increasing number of dissident economists seeking alternatives to the mainstream. Marx’s work, along with that of Luxembourg and Sweezy, among many others, was the topic of fierce disagreement about long run tendencies inherent in capitalism’s historical labor-saving momentum (“the tendency of the rate of profit to fall”) and in capitalism’s tendency to generate more output than could be consumed (“underconsumption”). The iconic RRPE paper by Boddy and Crotty (1975b) came precisely at a time when radical economics in the United States was resurgent and immediately became a reference point in this debate (“conflict theory”). ² They began by noting responses to the fact that radical political economists, since Kalecki (1943), have:

done little to explain and interpret short-run macropolicy and the phenomenon of the business cycle in terms of their class implications. This failure has serious political ramifications. The recurrent pattern of economic expansions and contractions affects not only the welfare of the working class, but its militancy and class consciousness as well. (Boddy and Crotty 1975b: 1)

They articulated a “class conflict theory of macroeconomic policy,” which:

assume[s] that the maximization of corporate profits is the objective of government fiscal and monetary policy and show that the pursuit of this objective requires the business cycle. . . . We view the erosion of profits as the result of successful class struggle waged by labor against capital—struggle that is confined and ultimately reversed by the relaxation of demand and the rise in unemployment engineered by the capitalists and acquiesced in and abetted by the state. (Boddy and Crotty 1975b: 1)

Boddy and Crotty (1976) responded to Sherman’s contention that “labor costs are not the primary cause of increasing costs in the latter part of expansions and that the slow growth of wages actually leads to a realization problem.” Their point was that both realization problems and class conflict in wage struggles were crucial aspects of capitalist crises. One did not rule out the other: to the contrary, one can feed the other, and how these elements interacted depended on historically unfolding contingencies. This response foreshadowed Crotty’s insistence that capitalist crisis is a moving target that evolves as capitalism itself does, at national and global scales.

3. The 1980s and Beyond: Excavations of the Writings of Keynes, Marx, and Minsky

In the 1980s, many radical theorists were using Marxian and Keynesian concepts to identify the stable institutional mechanisms that would permit the long-term (even stable) reproduction of capitalist relations. Prominent among these efforts were the social structures of accumulation approach (Kotz, McDonough, and Reich 2009), the regulation school (Jessop 2001), and Harvey’s approach to Marxian accumulation theory, which centers on the “spatial fix” (Harvey 2001). Crotty’s alternative, which emphasized the plasticity and instability of capitalist economies, began to emerge from his deep (re)readings of the works of Marx and Keynes in the 1980s (and after). His reading of Theories of Surplus Value, the Grundrisse, and Capital led him to see the centrality of monetary relations and their breakdown in capitalism. Marx demonstrates that expanding (endogenous) money and credit flows facilitate accumulation on an expanded scale (the “boom”) but also render those flows fragile and unstable, leading to a “slaughter of capital” (the “bust”) that can reset the system. The capstone of this encounter with Marx’s monetary ideas was Crotty (1985), which showed how capitalist formations come along with monetary circulation and payment systems that constitute “abstract forms of crisis” because of the separation of purchase and sale in time and space, leaving open the possibility of disappointment, of the collapse of the latticework of credit, and of debt-deflation cycles.

Crotty’s conclusion from this deep dive—the idea that financial behavior under advanced capitalism can undercut nonfinancial accumulation processes—then led him to profound critiques of the work of two prominent Keynesians that have shaped subsequent post-Keynesian analysis: Tobin and Minsky (Crotty 1990). Both advanced theories that undercut their intention of showing the need to control market processes. Crotty observed that Tobin’s Q theory of investment, wherein the ratio between a company’s equity share and the cost of increasing that company’s productive capacity determines its level of investment, depends on efficient market conditions; this assumes that shareholders and managers share the same objectives and thus constitutes a neoclassical general equilibrium model.

This led Crotty to critique Minsky’s “two-price model” of investment, which simply reproduces Tobin’s Q theory and unintentionally aligns him with Tobin’s mainstream model, despite Minsky’s emphasis on financial forces and their importance in capitalist dynamics. Both theorists, of course, invisibilize labor and class conflict. Beyond this, in Minsky’s model, “every conceivable level of gross investment will generate an equal level of gross savings so that aggregate excess demand will be zero at every level of investment: every level of investment is self-sustaining. . . . The rate of profit is likewise constant, no matter what the level of investment” (Crotty 1990: 11). In sum, Crotty’s drill-down into the internal logic of these models found that while they emphasize the importance of finance, they lack a crisis trigger. Profits funneled to financial firms, linked to rising asset prices, could lead to ever higher profits in the financial sector as the real sector stagnates in a pure Minskyian model.

Ironically, his immersion in the writings of Marx and his critical encounter with Minsky led him to a more profound appreciation of Keynes. As he put it in an interview:

So why do we need Keynes? And I think the reason Keynes is helpful is that up until I wrote that paper, in 1985, we had several generations of Marxists who never saw this. They had no theory of money and finance and uncertainty and instability—at least I couldn’t find any. Keynes puts this stuff center stage, right at the entry point. In my 1985 paper, I say that the financial markets and processes are theorized at the highest level of abstraction in Marx, so that indicates that it’s really very important to his own theory. . . . Keynes really puts this stuff center stage. . . . It’s not as good as Marx at all, because Marx has a much better theory of the real sector than Keynes. . . . Marx has got a better integrated system, a better historical sense, a better evolutionary sense than Keynes, but Keynes has some properties that are, I think, very positive additions to Marx. (Mason 2016)

4. Crisis and Postcrisis in East Asia: The Global Neoliberal Frame

Crotty’s hosting of a series of Japanese scholars at University of Massachusetts-Amherst, and the influence of his work, led to invitations to Japan and to South Korea. The East Asian crisis of 1997 and the subsequent IMF intervention led to his visit to South Korea during the crisis and coauthoring an article (Crotty and Dymski 1998) rejecting “moral hazard” game-theoretic explanations (e.g., Krugman 1998), pointing instead to the links between opening the country to cross-border capital and credit flows and demands for labor discipline and retrenchment. That paper’s insistence on the dual motor forces of global stagnation and domestic class conflict led to its rejection at another radical journal because of its delineation of the local causes of the crisis instead of focusing solely on its global determinants.

Later, with Kang-Kook Lee, he wrote several papers setting out a profound critique of the IMF policy approach, showing how its interventions actually generated the profound crisis that occurred in the way it occurred, with devastating consequences.

Ironically, Jim’s time in East Asia led back to the Marx-Keynes nexus:

In 1995, I was in residence at Hitsotsubashi University in Tokyo, in Japan. Hitsotsubashi means “one bridge.” I was always confused because there were no bridges on the campus. So, I had little to do except to give a set of lectures to the faculty. It had a really good library in English. So, I spent a lot of time reading the collected works of Keynes—many, many of the volumes. I also spent a lot of time reading British political and economic history. . . . I discovered that the Keynes that I had been taught was not the right Keynes historically, and this was interesting for a number of reasons. Keynes is, maybe, one of the two or three, most famous economists in history. So how could we have gotten all this stuff so wrong about Keynes? (Mason 2016)

5. Financialized Global Capitalism

As Crotty’s (1990) critical review of post-Keynesian theory demonstrates, he was ahead of the curve in understanding the centrality of international dynamics and of what would later be termed “financialization.” His research trajectory in subsequent years encompassed not just money and finance, as explored above, but globalization—especially global finance. Attacks on unions, wages, and the Keynesian welfare state, accelerated by deregulation, were justified in the Reagan/Thatcher era as responses, in part, to fierce competition from abroad. This argument was crystallized in the notion of Eurosclerosis, which held that an overregulated economy, whose participants were protected by high barriers to entry into labor, would necessarily fall into stagnation and decline. By implication, economies permitting the freest movement of capital across border would be the most competitive and future fit. The deregulation of US banking and finance (paralleled by that in other economies) corresponded to this TINA (there is no alternative) logic.

In the early 2000s, Crotty (2003, 2005) identified the structural contradictions of global neoliberalism and focused on how destructive competition together with the developments in modern financial markets negatively affected the performance of the nonfinancial sector. After the 2008 global financial crisis, he focused more on the functioning of the modern financial markets and raised the question of why profits were so high in the financial sector? Crotty (2008: 167) analyzed the “seemingly strange coexistence of intense competition and historically high profit rates in commercial banking.” He denoted this as Volcker’s Paradox and traced it to financial firms operating in a high growth industry, in which the rise of market power has sustained high profitability, with profit rates rising because, while risks have risen, new banking strategies trade high risk for high profit. As he put it, “giant banks have become innovation machines that can protect high profit margins on most derivative products.” He concluded:

When, as is inevitable, storms return to these markets, the unreliability of the rosy risk assessments generated by VAR exercises will be exposed and the high profits of the recent past will dissipate. Risk taking has been so widespread and leverage has become so high that a systemic crisis is not out of the question. History insists that there are no permanent “perfect calms.” (Crotty 2008: 181)

Once the crisis he’d foreseen had come, Crotty (2009) demonstrated how the so-called “new financial architecture” had been a central factor in generating the global financial crisis. These works culminated in three papers that returned to themes Crotty had first explored in the mid- and late 1970s. Crotty (2012) demonstrated the centrality of class in US macropolicy, leading to a great austerity war based on false premises. Crotty (2013a, 2013b) then showed, as he had three decades earlier, that the realism of assumptions matters in economic modeling: replacing the dubious assumptions used in dominant macroeconomic paradigm, especially efficient market theory, with a Keynes-Minsky theory of financial markets would provide a far better guide to financial regulation policy.

6. Reclaiming Keynes for Socialism: Keynes against Capitalism

Crotty (2019) marks not only a culmination of decades-long examination of Marx and Keynes, but it also counters a trend among post-Keynesian economists to consider Keynes in isolation from Marx. ³ Crotty’s drill-down into the five models within the General Theory demonstrates once again that he is using Keynes’s own “flexible” approach to flesh out the Marxian theory of conflict and competition that he had been expositing since the 1970s. Crotty lists five overlapping models and argues that as a short-run static equilibrium model, IS-LM fails to incorporate four most significant building blocks presented by Keynes: a long-run model of sustained high unemployment and secular stagnation; a dynamic intermediate model of the business cycle focusing on endogenously generated instability in real and financial markets; a model of destructive disequilibrium processes focused on wage and price deflation and instability in financial asset prices; and, a short-run quasi model of periods or points of extreme instability, especially in financial markets. In his discussion of Keynes’s implicit models, Crotty once again turns to emphasize a realistic theory of capitalism cannot be built on crudely unrealistic assumptions and it is necessary to start with a set of assumptions that realistically present the historically specific institutions and behaviors that exist in the actually existing capitalism in any particular place and time.

Crotty highlights the importance of inflationary and deflationary pressures for distributional consequences of policy, especially between rentiers and entrepreneurs. And indeed, the global economy has swung from deflation (in the in the post-World War I period) to chronic inflation (1970s–1980s) to deflation (post-GFC) and back to inflation (post-Covid), generating huge losses and gains for different segments of national populations.

Crotty shows us that secular stagnation was a concern of Keynes in the 1920s and recalls the arguments of Baran and Sweezy (1966) and of Sweezy and Magdoff in the 1970s and 1980s. This is, in effect, Crotty’s last analysis of capitalist crisis. And it is based, as in his 1975 paper with Boddy, not on the notion of a stable “regime” of accumulation (or its collapse), but rather on an analysis of the various fractions and subfractions of capital, financial and otherwise, clawing for positional advantage in markets through control of technology, access to government special favors (such as bailouts in crisis times), and so on. Crotty has, in effect, set the “conflict model” analyzed for the US economy in 1975 onto the global stage.

Crotty argues that Keynes’s plan for liberal socialism reflects the situation then evolving in real time. He calls for a National Investment Board, with sufficient staff capacity and expertise in the relevant ministries and central bank so that they would receive democratic support. This board would socialize and run about at least two-thirds of total investment and control most large-scale capital investment, using it as the primary policy tool for sustained full employment. Financing of these investments would come from tax revenues and low interest borrowing under Central Bank guarantees. In this plan, while public and semipublic corporations would essentially dominate the macroeconomic scene, nonoligopolistic industries and firms are left to operate in the market economy and not all productive assets are brought under state ownership. Even though industrial policy mostly disappears in modern Keynesian macroeconomics, here “many kinds of industrial policies” together with “policies to regulate competition” go hand in hand with macro policy, complemented by redistribution focused on progressive taxation on income and wealth together with controlled economic relations with the outside world with managed trade and capital controls. Hence, his plan calls for maintaining adequate levels of aggregate demand that are maintained by democratically controlled public investment. The criteria for project selection will be not the rate of monetary return but quality of life issues, arts, culture, education, working-class housing, environmental issues, and so on. Crotty’s answer to the question of whether such a system could be considered socialism is:

The conventional wisdom that Keynes wanted to save capitalism is thus either false or capitalism must be redefined to apply to any economic system in which markets, monetary incentives, and freedom of consumer choice are allowed to exist in some form, even if most important economic decisions are determined collectively via democratic political processes before people get to choose in the marketplace. If we use the traditional definition of capitalism, it was clearly Keynes’s goal to replace capitalism with a form of democratic socialism. (Crotty 2019: 10–11)

Here is where his careful reconsideration and reflection on Keynes’s opus, unfolding at a time of building and then exploding global crisis in the 1920s and 1930s, comes to fruition and realizes that Keynes is seeing the need to forego capitalism and to move instead to socialism as a way of organizing not just the national economy, but the global one.

And there is a return here to his points of origin, but with a twist. In the first stage of his work, he built a critique that was expressed in the language of the Marxian theory of crisis. This critique was also expressed in a critical form in dialogue with neoclassical/mainstream economists. Having for years joked with his students that Keynes was a minor post-Marxian (inverting Samuelson’s acid comment that “from the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian”), here we see Crotty going back to Keynes as a reference point. It’s an admission that the mainstream is there, a barrier to global socioeconomic progress. And this book was rejected by MIT Press. So, it is not putting his argument for Keynes’s “liberal socialism” as a defining frame into a mainstream venue. It is an effort to sustain a pathway to reason for a profession that once let economists such as Crotty have space in their journal pages, but now no longer does.

7. What Is Crottyian Macroeconomics?

Both of us were privileged to cross ways with him as graduate students, Gary in the 1980s and Özgür in the 2000s. Jim would leave all over his students’ drafts very detailed comments and criticisms, with a red pen! Many years on from our exposure to that “red pen,” we can see it as the perfect metaphor for describing the method of Crottyian macroeconomics. After all, we are talking about a thinker who sought to use his uncommon breadth of scholarship, his deep intellectual insight, and his creativity to (re)construct a radical political (macro)economy. With a methodological red pen in hand, he adeptly examined the theoretical insights of Keynes, Schumpeter, Minsky, and others to discern what had real-world relevance, discarding what did not. His own publications built on his own continued critical engagement with mainstream theories in his search for a robust alternative conceptual foundation. This approach extended beyond external critique: Crotty was unafraid to subject his own writings to rigorous self-examination. As his former students witnessed as his writings unfolded, he was always his own harshest critic: to take one example, there are more than 10 versions of his 2019 book.

At its core, Crottyian macroeconomics embodies a critical political economy, embracing Marx’s concept of ruthless criticism. It rejects blind commitment to any single theory or analytical method, instead focusing on understanding the macroeconomic dynamics of capitalism and transcending their limitations. This approach enables a deep engagement with the most pressing issues of the day while retaining historical and institutional perspectives.

7.1. Why engage with mainstream macroeconomics?

Crotty emphasized the need to expose the flaws in mainstream theory through rigorous critique based on a committed analysis of mainstream macroeconomics—not just its ur-texts, but the evolving models that its practitioners used to both create and serve as apologetics for neoliberal policies. If anything, this continuing engagement deepened Crotty’s skepticism about possibilities for integrating heterodox and mainstream methods:

There was a debate at UMass-Amherst in which some agreed with Sam [Bowles] that we should be trying to change the mainstream. I was much more cynical about that. . . and thought that we should be trying to create the best theories that we can and, whether the mainstream accepts them or not is probably not in our power to change. (Mason 2016)

His skepticism about any analytical confluence stemmed from two observations. First, while some mainstream macroeconomists have incorporated some features that permit a recognition of real-world shortcomings, they remain tethered to an informing general-equilibrium point of analytical departure. Second, there is a sociological aspect to the mainstream/radical divide that is based on what might be termed, to borrow Schumpeter’s term, preanalytical commitments in support or in denial of a deep acceptance of the view that choice-based decentralized market processes remain—no matter what—superior to any social-decision mechanisms in any provisioning process:

Did the mainstream get changed? So. . . we have all these new Keynesian models, non-clearing labor markets, non-clearing credit markets, and so forth. . . . [But] the end result is—not all that much. So, you end up saying the labor market doesn’t clear, the loan market doesn’t clear at the Pareto optimal point. How important is that?. . . So, we’ve improved on the absurd Walrasian fairy tale, a little, but we really have nothing systemic to put in its place as a theory of capitalism. Now, while there are some game theoretic models that give some insights into market processes, I don’t consider this to be really a great advance. We’re not going to convert the mainstream. The mainstream does what it does, and they’re not interested in us, I don’t think. (Mason 2016)

Crotty instead puts front-and-center the challenge of the “collective creation of a solid theoretical foundation on which to build an understanding of the ‘laws of motion’ of capitalism. . . Knowing how and why the evolution of capitalism over recent decades took the destructive form that it did can help us design new policies and institutions to either reform present-day capitalism or replace it” (Crotty 2017: 4). It bears emphasis that in Crotty’s view, we should be wary of the limitations of mathematical models as we take on this challenge. Since the capitalist system is a moving target, heterodox economists should use formal models selectively and for limited purposes: such modeling locks in the explanatory mechanisms privileged by that model’s mathematics, restricting what other factors can be brought into view. This is not to say these types of models are not useful, but to point out the danger of limiting the analytical approach to the confines of the particular tool.

7.2. Five defining features of Crottyian macroeconomics

Five features of Crottyian macroeconomics can be defined. The first, contrary to the trend of grounding macroeconomics in microfoundational mechanisms, is to emphasize the macro foundations of micro behavior. ⁴

Second, macroeconomics needs to be aware of concrete reality. Crottyian macroeconomics emphasizes the study of historical capitalisms, each with its own distinct institutions, psychologies, and behavioral tendencies. While abstraction is necessary, macroeconomics should remain rooted in the tangible realities of capitalism’s institutional arrangements. This entails a comprehensive analysis of capital, corporations, finance, and their decision-making processes within a framework of fundamental uncertainty. Generating realistic theories requires realistic assumptions. This includes the unknowability of future (Keynesian uncertainty) and the irreversibility of actions without suffering substantial costs—and decision-making under these conditions.

Third, understanding the dynamics of competition and oligopolization is a crucial aspect of Crottyian macroeconomics. Cooperation and competition coexist within capitalist markets, necessitating an analysis that incorporates both cooperative endeavors, such as avoiding price wars, and competitive aspects such as cost-cutting, technological improvement, and product innovation. Crotty’s dialectical approach explains the interplay between macro-level conditions and micro-level behavior, highlighting the importance of adequate aggregate demand growth and its implications for labor relations and overall economic performance.

Fourth, Crotty recognized the indispensability of money and credit within the capitalist system. His analysis draws from Marx’s insights on financial fragility and instability, anticipating Minsky’s later contributions. Crotty’s approach integrates financial dynamics with theories of competition, innovation, and class conflict, offering a more comprehensive understanding of capitalist crises.

Fifth, Crottyian macroeconomics emphasizes the endogenous nature of crises and the role of conflict within the capitalist system. By scrutinizing class interactions and contradictions, this approach highlights the internal or endogenous forces that drive changes in the economy, business cycles, and crises. Such an understanding moves beyond attributing economic changes to exogenous shocks and instead underscores the fundamental contradictions inherent within capitalism.

What these five components of Crottyian macroeconomics all point to is, however, a deeper insight: no matter how many of these five elements you can bring to bear in any given analysis, the most important thing in building your work is to know which side you are on. As he wrote in the introduction to his collected essays: “I believe with Marx that the purpose of political economy is not just to understand the world, but to change it for the better through political, economic, and social intervention” (Crotty 2017: 5).