Monday, August 2, 2010

Marx and Keynes: The Problems of Unemployment and Crisis.

Marx's analysis of capital was an attempt to uncover the fundamental laws of motion that govern the capitalist mode of production. Marx differed from many of his contemporaries in that he conceived of capitalism as necessarily dynamic and incapable of homeostasis . This resulted from a complex array of factors, the ultimate source of which is the need to produce surplus-value. Marx claimed this amounted to the “absolute law’ of capitalist production. However, the expansionary impetus of capital is not a smooth linear process of growth and the accumulation of capital is subject to recurrent interruptions and crises. Marx argued that this tendency toward crisis arises from the competition between capitalists and the success of prior accumulation. In apparent contradiction to Marx, Keynes formulated a theory of effective demand that explained economic fluctuations and downturns in terms of insufficient aggregate demand. For Keynes, the causal factor that leads to below capacity economic activity and involuntary unemployment are low entrepreneurial expectations and inducement to invest that result in ineffective demand. Thus, while capitalism has no innate tendency toward an equilibrium of full employment it is not incompatible with the system either. In contrast, Marx held that capitalism required unemployment and underemployment to moderate the demands of labour upon capital. Marx and Keynes, despite some substantive difference of opinion, are not polar opposites in their respective conceptions of capitalism. Differences in political philosophy and technical vocabulary belie many common elements of economic analysis.

In many respects, Marx’s theory of growth was a re-working of earlier models developed by François Quesnay, Adam Smith and David Ricardo. As stated above, the concept of surplus-value is of central importance to Marx’s theory of capital accumulation. The centrality of this notion has given rise to much controversy. However, Paolo Sylos Labini has argued that much of this criticism is confused and can be dispensed with, if it is remembered that the concept of surplus-value largely coincides with the concept of net income developed in the works of Quesnay, Smith and Ricardo and its explanatory power does not require acceptance of the labour theory of value . Labini did note differences; for Quesnay net income consisted of ground rents, whilst for Marx, Smith and Ricardo net income (or surplus-value) is constituted in rent, profit and interest . Marx differed from Smith and Ricardo in that he placed considerable importance upon the expansion of “constant capital” (machines and raw materials that comprise the means of production) and not just “variable capital” (the wage-fund that sustains labour-power) and rent. Marx employed two schemes of reproduction to illustrate the dynamics of economic activity and the nature of surplus-value, constant and veritable capital.

The first of Marx’s schemes of reproduction, simple reproduction, is largely a heuristic tool that models a stationary capitalist economy in which there is no growth. Simple reproduction, heavily influenced by Quesnay’s economic table, helps to define the necessary conditions of economic reproduction. Simple reproduction demonstrates two straightforward ideas: 1) the process of production must also be one of reproduction, and 2) this circular process reproduces the relations of production. The direct implication of simple reproduction is that to maintain economic viability the constituent elements that comprise the process of production must be recreated anew in each cycle of production. Thus, both the constant capital and variable capital required for the next cycle of production must be produced in the last. Marx’s scheme of simple reproduction is often illustrated by sector models. Luigi Pasinetti provides a three-sector model of Marx’s scheme of simple reproduction that contains; 1) a capital goods sector, 2) a wage goods sector and 3) a luxury goods sector. The capital goods sector produces constant capital (C), the wage good sector produces variable capital (V) and the luxury goods sector provides an outlet for surplus-value (S). It follows that in order for simple reproduction to occur, the value of C produced in the first sector must equal the constant capital requirements of all sectors. Similarly, the value of V produced in the wage goods sector must equal the variable capital needs of all sectors. And finally, the value of S extracted from all sectors must be consumed within the luxury goods industry. The assumption that all surplus-value appropriated by the owners of the means of production is consumed in the form of luxury goods is the crucial distinction between simple and expanded reproduction. From the perspective of Marx, his scheme of simple reproduction is an abstraction and leaves aside the issue of accumulation of capital . However, this model demonstrates the circular nature of production that is itself reproduction of its constituent elements. Moreover, the scheme highlights the interrelated nature of production and consumption.

Importantly, simple reproduction can only be maintained when the values that comprise production (C, V and S) are recreated in proportionate quantities. If say, the quantity of C produced in the first sector vastly exceeds the needs of all sectors then the price of C will not reflect the value imbued in the commodities of the sector. Disproportionality between sectors of the economy can result in a form of “realization crisis” if the imbalance is significant enough and within a crucial sector of the economy. Realization crises are defined by the quantitative gap between consumption and production that end in the inability to sell commodities at their value within the market. Crises that stem from a disproportionality between the sectors are only one form of realization crisis. Paul M. Sweezy argued persuasively that disproportionality crises are of secondary importance when compared with realization crises that result from the “underconsumption of the masses”. Marx’s called this lacuna between the consumptive and productive powers of the capitalist mode of production its “fundamental contradiction”. Moreover, Marx argued that: “the conditions of direct exploitation and those of the realization of surplus value are not identical” . In Marxian terms, the rate of surplus-value is determined by the ratio of value embodied in commodities and the replacement costs of production . From this it follows that, the aggregate wages of workers is exceeded by the aggregate cost of commodities. This results in a precarious situation in which the drive for increased surplus-value on behalf of capital can undermine its ability to realize this surplus value in the market.

Similarly, Keynes, in his outline of the theory of effective demand, argued that increased wealth can also increase the gap between the possible production of a society and its actual production. Deficient aggregate demand and the resultant involuntary unemployment form the core of what Keynes called the “paradox of poverty in the mist of plenty”. Like Marx, Keynes had theorized that entrepreneurs (that is, capitalists) are motivated by the desire for profits. Employment of workers is only rational from this premise if the benefits derived from employment exceed the costs of said employment. Expectations of profits are therefore the key determinate in what Keynes called the “inducement to invest”. If aggregate demand, determined in any given society by their propensity to consume and the rate of new investment, is insufficient to achieve effective demand then unemployment and sub-optimal levels of economic activity will ensue. The problem arose, Keynes felt, that the wealthier a given community becomes the harder it is to sustain adequate levels of aggregate demand. This resulted from the inability to of the community to absorb commodities beyond their propensity to consume, that Keynes claimed increased with income, but not by the same proportion. Therefore, new investment has to fill the gap between the community’s propensity to consume and effective demand. However, there is no inherent law that inducement to invest increase in proportion to the existing level of wealth in a society. Marx differed from Keynes, in that; the ability of the community divided between classes to absorb surplus-production was not limited a given propensity to consume, but was derived from its inability to acquire commodities given the narrow basis of their consumptive power relative to productive power.

The contradiction between the consumptive power and productive power of the capitalist mode of production is the result of the drive for surplus-value and capital accumulation. Importantly, the process of capital accumulation does not necessarily reproduce each variable of production in exact proportions. The accumulation of capital, at fist expands quantitatively without qualitative change. This affects the demand for labour-power and therefore increases the bargaining power of workers. Given that profit is defined by an inverse relation to the wage rate, when the latter reaches a point where it threatens the rate of accumulation capitalist introduce technical innovation that displaces labour and relives downward pressure upon profits . Marx’s noted the effect of war demands and legal reductions of the absolute rate of surplus value on the agricultural industries between 1849 1859. At first, it seemed that the agricultural workers had made considerable gains given the shifted nature of supply and demand. However, this quickly gave agricultural capitalist the incentive to revolutionize the means of production. Unemployment, in the form of a reserve labour of army, is a necessary mechanism for the accumulation of capital. However, this moderation of the wage rate functions both ways. Michel Kalecki argued a decline in real wages and therefore consumption can undermine wage-good industries and therefore cause decreased output it not counteracted with increased capitalist consumption or investment for which he saw no necessary reason to assume.

Marx’s conception of capitalism was developed in dialogue with classical political economy that he simultaneously attempted to overcome and absorb. His focus, like much of political economy, was on the phenomenon of economic development and capital accumulation. The circulation of capital and the resultant accumulation of capital is a dynamic process that requires the production of surplus-value above that required to sustain the economic process of production and reproduction. However, this dynamism is subject to contradictions between the productive capacity of capital and the consumptive capacity of labour. As Keynes noted, the gap between the community’s propensity to consume and production becomes increasingly problematic as economic development continues. This derives more so from the inability to the proletariat to consume the products of capitalist production given the extraction of surplus value. In the process of accumulation of capital, whenever demand for labour outstrips that of supply, the wages of labour will increase and can affect the rate of profit. Incentive to introduce labour-displacing technologies then increase and the reserve labour of army is reestablished to adequate levels. As Kalecki noted, decreases in the real wage can also affect the ability of capital to realize their profit and undercut the process of capital accumulation. That is to say, from the perspective of capital, optimal wages are consistent with Aristotle’s ethical aphorism: a mean between two extremes.

Written by Mathew Toll.


Kalecki, Michal. (1966), Studies in The Theory of Business Cycles, London; Basil Blackwell.

Keynes, John Maynard. (1937), “The General Theory of Employment”, The Quarterly Journal of Economics, Vol 51, No. 2, pp 209-223.

Keynes, John Maynard. (1951), The General Theory of Employment Interest and Money, New York; Harcourt, Brace and world.

Labini, Paolo Sylos. (1984), The Forces of Economic Growth and Decline, Cambridge; MIT Press.

Marx, Karl. (1986), Capital: A Critique of Political Economy, Vol 1, Trans Samuel Moore and Edward Aveling, Edited Frederick Engels, Moscow; Progress Publishers.

Pasinetti, Luigui. (1977), Lectures on the Theory of Production, New York; Columbia University Press.

Schumpeter, Joseph A., (1950), Capitalism, Socialism, and Democracy, New York; Harper & Brothers Publishers.

Sweezy, Paul, (1970), The Theory of Capitalist Development: Principles of Marxian Political Economy, New York; Modern Reader Paperbacks.

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