A Keynesian Takes on Karl Marx

In this reply, unless otherwise noted, text in italics and in brackets in Marx quotes is carried over from the version taken from the Marxist Internet Archive.

A friend N has asked if there is any difference between “the over-accumulation of capital” and “the overproduction of commodities.” Another friend M sent me a critical article by leading American Keynesian economist Brad DeLong on Chapter 17 of Marx’s “Theories of Surplus Value.” DeLong’s article is titled “Marx’s Half Baked Crisis Theory and His Theories of Surplus Value, Chapter 17.”

It so happens that in Chapter 17 Marx deals with the relationship between the “overproduction of capital”—also called the “over-accumulation of capital”—and “the overproduction of commodities.” The economists of Marx’s time—the middle years of the 19th century—admitted the “overproduction of capital”—equivalent to the over-accumulation of capital—while denying the “overproduction of commodities.”

Therefore, DeLong’s critique of Marx and N’s question about the relationship between the overproduction of commodities and the over-accumulation of capital are connected by Chapter 17 of “Theories of Surplus Value,” the target of Brad DeLong. It is therefore possible to deal with DeLong’s critique and N’s question in a single reply.

Brad DeLong

James Bradford DeLong, now a professor of economics at the University of California, Berkeley is, along with Paul Krugman and Joseph Stiglitz, perhaps the leading U.S. Keynesian economist today. DeLong, a Democrat—like most U.S. Keynesian economists—served as an assistant undersecretary of the treasury under the Democratic Clinton administration.

DeLong is also a prominent blogger. DeLong, in contrast to neo-liberals of the Friedman, rational expectations and Austrian schools, strongly believes that it is the responsibility of the government to ensure “reasonably full employment.” By the standards of most professional economists today, DeLong is very much on the left.

To avoid misunderstandings, DeLong is no Paul Sweezy. He is much more like an American early 21st century version of Keynes himself. Just like Keynes was a supporter of capitalism in general and British imperialism in particular, DeLong is very much a supporter of capitalism in general and American imperialism in particular.

However, DeLong believes that in order to preserve the capitalist system, the government can and should follow Keynesian stabilization policies to avoid major economic downturns that threaten the current capitalist—and imperialist—order. DeLong’s critique of Marx enables us to continue what has become a leading thread in both the main posts and the replies on this blog—the relationship between the economics of Keynes and the economics of Marx.

While Keynes generally ignored Marx, at least in public, Brad DeLong has decided to take on Marx’s Chapter 17 of “Theories of Surplus Value” no less. This is a welcome development. Not only is it a sign of the times that a leading American professional economist feels he cannot simply ignore Marx any longer, but DeLong’s critique of Marx also sheds considerable light on the relationship between the economics of Marx and Keynes.

How did DeLong come to critique Marx?

DeLong explains how it happened that he came to write a critical article on Marx: “While I was waiting for my panel to start at the California Democratic Party convention last weekend, I went back through Marx’s Theories of Surplus Value, chapter 17, to try to figure out if anything could be rescued from it.”

Before we examine what if anything DeLong could “rescue” from Marx, we should examine what part of Marx’s work DeLong is examining and attempting to come to grips with. Exactly what is Marx’s “Theories of Surplus Value” and how does it relate to Marx’s critique of classical bourgeois political economy as a whole?

“Theories of Surplus Value,” sometimes considered the fourth volume of “Capital,” deals with the history of bourgeois political economy. As Marx originally conceived it, the work now known as “Theories of Surplus Value” was to form only a part of a longer work that would explore the history of political economy—the science that studies the laws of the capitalist economy.

The most important question that political economy must explain is the nature of and origin of profit—in the broad sense of profit of enterprise, interest and rent. How can the existence of profit—surplus value—be reconciled with the exchange of commodities containing equal quantities of human labor. If all commodities including “labor” (1) sell at their values, how can the capitalists make a profit? Profit is, after all, the sole motive for carrying out production under the capitalist system. As far as we know, this was the only part of the book on the history of political economy that Marx found time to work on.

Moreover, “Theories of Surplus Value,” mostly written in the early 1860s, was far from ready for publication as Marx left it. In a sense, it is “half-baked,” though not in the sense that DeLong means but in the sense that it is very much a work in progress. The manuscript was not published in the lifetime of either Marx or of Engels—the person who would have been most qualified to edit it.

The first version to be published after the death of Engels was edited instead by Karl Kautsky, the theoretical leader of the Second International. Later, a second version was published by the Communist Party of the Soviet Union’s Institute of Marxism-Leninism. All quotes from Marx in this reply are cut and pasted from the English translation of the second, the Soviet, version of “Theories of Surplus Value.”

Marx wrote before the era of the typewriter, not to speak of modern word processors. He had notoriously bad handwriting, and it is said that it takes special training to translate Marx’s handwriting, written in German with some passages in English, into a readable text in any language. There is always the risk that the handwriting “translator” could misinterpret what Marx was trying to say.

One thing is certain. If Marx had lived to complete the work that is now known as “Theories of Surplus Value,” it would have been quite different than what we actually have. However, there is a certain advantage in the actual state of affairs. Marx is sometimes writing things down just as thoughts are coming into his head. We get a chance to get “inside Marx’s head” that we would not if we had a fully polished and edited work.

DeLong imagines himself as a professor of economics grading Chapter 17 with Marx in the role of a present-day economics student who submitted it for grading. DeLong makes clear he would send it back to the “student” for additional work! Well, Marx certainly did intend to do additional work on it—especially the part on crisis theory. Quite a bit of additional work, in fact, as we will soon see.

Because “Theories of Surplus Value” is unfinished—half baked if you wish—when we read it, we get a glimpse of the “baker” at work. It is far more challenging to read than a finished work would be, but perhaps there are some advantages that we have it in a “half-baked” form. It presents a challenge: How would we take this “half-baked”—and as regards crisis theory actually considerably less than “half-baked”—work and finish it? (2)

Since he was writing a history of economic thought, Marx was wrestling in Chapter 17 with his predecessors in economic science, the giants of classical political economy—Adam Smith and David Ricardo. Therefore, if we combine DeLong’s critique of Marx with Marx’s critique of Adam Smith and David Ricardo, it is as if we entered a room where Adam Smith, David Ricardo and Karl Marx are arguing with one another. Then DeLong—an economist of the early 21st century—joins in. We get a kind of argument across the centuries.

Adam Smith and Ricardo represented a still immature capitalism in the bloom of its youth; Marx the revolutionist critically studied a capitalism that had reached its adulthood; and DeLong is a representative and champion of the moribund monopoly capitalism of our own day.

Chapter 17 of “Theories of Surplus Value” can be divided into two parts. The first part largely deals with Marx’s critique of Smith’s and Ricardo’s view that all capital can be reduced to wages in the final analysis. DeLong, however, shows no interest or perhaps no comprehension of this question.

What interests Delong is the second part of Chapter 17, where Marx makes some remarks on the question of crises. It is almost certain that DeLong had the crisis of 2007-09 and its aftermath in mind when he opened up a copy of “Theories of Surplus Value” in order to prepare himself for his panel at the recent California Democratic convention. What does Marx have to offer to the U.S. Democratic Party today? It turns out not much, as DeLong was to discover.

DeLong reduces Marx’s chapter—really the second part—to two points. “The first,” he writes, “is John Stuart Mill’s point: a general glut of commodities is the same thing as an excess demand for money….” DeLong goes on: “Marx’s second major point is that balanced capitalist growth at full employment is impossible. The workings of the processes of accumulation and surplus value extraction forbid it.”

DeLong as a supporter of Keynes and capitalism simply cannot accept this. He believes that on the contrary “balanced capitalist growth at full employment” is both necessary and possible in order to ensure that capitalism continues to exist. However, like Keynes and unlike the “neo-liberals,” DeLong believes that capitalism can only achieve “balanced growth at full employment” with the help of the government and its “monetary authority.”

Those who read DeLong but are not familiar with Chapter 17 or Marx’s work on economics in general would be led to believe that Marx is lifting his theory of crisis straight from the mid-19th century English economist and philosopher John Stuart Mill. Marx, however, considered John Stuart Mill to be an economist of relatively minor importance. In Chapter 17, Marx only makes passing references to him.

Marx is far more interested in criticizing John Stuart Mill’s father, James Mill, and the elder Mill’s close friend, the giant who brought English political economy to its highest point, David Ricardo.

Marx wrote: “The conception (which really belongs to [James] Mill), adopted by Ricardo from the tedious Say (and to which we shall return when we discuss that miserable individual (3), that overproduction is not possible or at least that no general glut of the market is possible, is based on the proposition that products are exchanged against products, or as Mill put it, on the ‘metaphysical equilibrium of sellers and buyers’, and this led to [the conclusion] that demand is determined only by production, or also that demand and supply are identical.”

Marx emphasized that Ricardo even when he was mistaken was always consistent. (4) Marx quoted Ricardo: “There cannot, then, be accumulated in a country any amount of capital which cannot be employed productively, until wages rise so high in consequence of the rise of necessaries, and so little consequently remains for the profits of stock, that the motive for accumulation ceases”. (5)

Marx continued quoting Ricardo: “It follows then…that there is no limit to demand—no limit to the employment of capital while it yields any profit, and that however abundant capital may become, there is no other adequate reason for a fall of profit but a rise of wages, and further it may be added, that the only adequate and permanent cause for the rise of wages is the increasing difficulty of providing food and necessaries for the increasing number of workmen”.

Therefore, according to Ricardo, as long as there is a sufficient quantity of workers, all the surplus value that will be produced by these workers can be realized within the home country. Remember, according to Ricardo only a rise in wages—or a decline in the rate of surplus value—can produce a fall in the rate of profit. According to Ricardo, there can never be a general overproduction of commodities nor a general overproduction of capital.

Ricardo believed that difficulties in producing surplus value could arise if there was an insufficient number of workers caused by an insufficient quantity of fertile land necessary to produce the food that would keep the workers alive and reproducing. Ricardo, however, flatly denied that there would be any difficulties in realizing surplus value.

Ricardo’s bourgeois successors stubbornly denied that “general gluts” of commodities were possible, and we continue to hear this claim by “neo-liberal”—especially the Austrian—economists down to this day. But the economists of the mid-19th century, unlike Ricardo, had to explain the periodic economic crises that were beginning to affect the world capitalist economy.

Marx wrote: “Ricardo himself did not actually know anything of crises, of general crises of the world market, arising out of the production process itself [my emphasis—SW]. He could explain that the crises which occurred between 1800 and 1815, were caused by the rise in the price of corn due to poor harvests, by the devaluation of paper currency, the depreciation of colonial products etc., because, in consequence of the continental blockade, the market was forcibly contracted for political and not economic reasons. He was also able to explain the crises after 1815, partly by a bad year and a shortage of corn, and partly by the fall in corn prices, because those causes which, according to his own theory, had forced up the price of corn during the war when England was cut off from the continent, had ceased to operate; partly by the transition from war to peace which brought about ‘sudden changes in the channels of trade’. (See Chapter XIX—’On Sudden Changes in the Channels of Trade’—of his Principles.)”

In modern language, the economic crises that occurred between 1800 and 1815 were caused by shocks that were external to the economic system. Capitalism had not yet reached the stage of development where it was producing crises through its own internal contradictions. The crises that did occur could always be traced to accidental factors that were external to the economic system. Therefore, Ricardo couldn’t understand crises in part because he lived just before the era when the forces of production that capitalism brings into existence come into conflict with the relations of production at more or less regular intervals resulting in crises of general overproduction.

“Later historical phenomena,” Marx explained, “especially the almost regular periodicity of crises on the world market, no longer permitted Ricardo’s successors to deny the facts or to interpret them as accidental [my emphasis—SW]. Instead—apart from those who explain everything by credit, but then have to admit that they themselves are forced to presuppose the over-abundance of capital—they invented the nice distinction between over-abundance of capital and overproduction.”

So by the middle of the 19th century it was quite respectable among the (bourgeois) economists to admit the “over-abundance of capital—or “over-accumulation” in today’s language—but to talk about the general overproduction of commodities was quite beyond the pale of respectable economic discourse as it remains down to the present.

Let’s for the sake of argument reject the view that crises are the result of a general overproduction of commodities and accept instead that crises are the result of the “overproduction” or “over-accumulation” of capital. This raises another question. “According to the same economists,” Marx wrote, “capital is equivalent to money or commodities.” He continued: “Over-production of capital is thus overproduction of money or of commodities. And yet these two phenomena are supposed to have nothing in common with each other. Even the over-production of money [is of] no [avail], since money for them is a commodity, so that the entire phenomenon resolves into one of over-production of commodities which they admit under one name and deny under another.”

The mid-19th century bourgeois economists were only playing with words here. They were upholding the economic liberal dogma—Say’s Law—that a general overproduction of commodities was impossible, but tacitly admitting in different words that crises were indeed the result of an “over-production” of “capital.” And since capital is made up of commodities, this comes down to explaining that crises are caused by the overproduction of commodities!

We have seen that in a crisis strictly speaking not all commodities are overproduced but rather all—or most—commodities are overproduced relative to one special commodity—money. Marx explained in Chapter 17: “That only particular commodities, and not all kinds of commodities, can form ‘a glut in the market’ and that therefore over-production can always only be partial, is a poor way out. In the first place, if we consider only the nature of the commodity, there is nothing to prevent all commodities from being superabundant on the market, and therefore all falling below their price. We are here only concerned with the factor of crisis. That is all commodities, apart from money [may be superabundant].”

Now Marx finally gets to the younger Mill:

“Incidentally, those economists are no better, who (like John Stuart Mill) want to explain the crises by these simple possibilities of crisis contained in the metamorphosis of commodities—such as the separation between purchase and sale. These factors which explain the possibility of crises, by no means explain their actual occurrence. They do not explain why the phases of the process come into such conflict that their inner unity can only assert itself through a crisis, through a violent process. This separation appears in the crisis; it is the elementary form of the crisis. To explain the crisis on the basis of this, its elementary form, is to explain the existence of the crisis by describing its most abstract form, that is to say, to explain the crisis by the crisis.”

In all seriousness, Brad DeLong writes: “The first is John Stuart Mill’s point: a general glut of commodities is the same thing as an excess demand for money…Marx is, however, strangely unwilling to credit Mill or anybody other than himself for this point.”

The claim that Marx borrowed his theory of money and crises from John Stuart Mill is absurd and only shows the depth of DeLong’s ignorance of the history of classical and post-classical bourgeois political economy—his own specialty. On the contrary, Marx was always extremely scrupulous never to take credit for the discoveries of others. Instead, he took delight in finding crucial insights in the work of even the most obscure writers.

Marx on how to build a crisis theory

Unlike his father, John Stuart Mill did understand that the splitting up of commodities into commodities and money make a crisis of general overproduction possible. But Mill the younger could not explain why crises are not only possible but at a certain stage of the development of capitalist production begin to recur at quasi-regular intervals.

Starting with 1825 and continuing to the present—most recently in 2007-09—this quasi-regular succession of crises has survived all attempts by the capitalist states and their “monetary authorities” to stamp them out. But why have crises periodically broken out only since 1825, though the bare possibility of crises resulting from the split between money and all other commodities has existed for thousands of years? This is the question that crisis theory must answer.

Marx wrote: “The world trade crises must be regarded as the real concentration and forcible adjustment of all the contradictions of bourgeois economy [my emphasis—SW]. The individual factors, which are condensed in these crises, must therefore emerge and must be described in each sphere of the bourgeois economy and the further we advance in our examination of the latter, the more aspects of this conflict must be traced on the one hand, and on the other hand it must be shown that its more abstract forms [underlying lawful contradictions—SW] are recurring and are contained in the more concrete forms.”

In other words, before we can build a complete—fully baked—theory of crises we must fully examine all the contradictions of capitalist production. This involves not only grasping the nature of surplus value—though this is of course vital—but also it requires a full examination of competition among the classes—capitalists, landlords and workers—and between the individual capitalists themselves, including competition between the capitalists that produce money material and those who produce other commodities.

For example, what determines the amount of the money material? How does the capitalist economy see to it that the correct quantity of money material is produced in the long run? How exactly does competition cause market prices to fluctuate around the prices of production. Why can’t market prices keep rising indefinitely relative to production prices, or what prevents them from falling indefinitely relative to production prices? In a nutshell, how does the law of value actually regulate the concrete everyday capitalist economy?

In order to build an adequate crisis theory, we have to study the evolution and development of the credit system, banking and credit money. What is the relationship between money and credit? We must explore the laws that govern the three forms of money—metallic, token and credit money. Exactly what is the relationship between banking and credit crises and crises of overproduction? We have to examine the competition between borrowers and lenders and the competition between different lenders and different borrowers.

And there is more. Absolutely vital to any concrete crisis theory is a thoroughgoing examination of world trade and rates of exchange between different currencies, since crises take as their stage the world market as a whole.

Marx had no intention of providing a fully developed theory of crises in Chapter 17 of “Theories of Surplus Value.” He was simply explaining how a crisis theory would have to be constructed—a task which, as it turned out, was left to Marx’s successors.

Crisis theory

Once we have built an adequate crisis theory—no easy task as we have seen—crisis theory turns out to be itself only a stepping stone to an even more important question. Where is modern society going? We have seen in the main posts that the periodic crises that started in 1825 became the motor force in the transition from the industrial capitalism based on free competition to today’s monopoly capitalism. Monopoly capitalism, however, is not a stable form of society since it combines monopoly and planning—planning at the level of the ever more gigantic corporations and cartels combined with cutthroat competition.

The continuation of crises that began on the basis of the competitive industrial capitalism of the 19th century and have continued under monopoly capitalism, despite all the attempts of Keynesian “stabilization policies” to stop them, or at least tame them, points to the inevitability of the transformation of monopoly capitalism into a higher mode of production—socialist production. This in my opinion is what crisis theory is all about.

DeLong’s critique of Marx

Let’s examine DeLong’s critique of Marx. Paraphrasing Marx, he writes: “Because capitalists extract surplus [value—SW] only to reinvest it and because larger capitals extract more surplus [value—SW], as a boom continues consumption must fall as a share of full-employment output. Thus the investment share of output must rise. Capitalists must be not just confident that the boom that will continue, but increasingly confident as time passes that the boom will continue faster.”

It is certainly true that as capitalism develops, the production of commodities that function as the material elements of constant capital grow relative to the production of commodities that function as items of personal consumption. And as Keynes and Keynesians in general are well aware, investment is far more unstable than spending on items of personal consumption. No matter how much the rate of profit falls—or even if profits give way to losses—the capitalists must keep eating. But they can wait as long as it takes for profits to return—many years sometimes—before they renew and expand the existing constant capital and again employ the unemployed workers.

This implies that capitalism should have an organic tendency to become more unstable with more intense crises as it develops. However, it doesn’t really explain why crises occur in the first place. This is the question that we must answer first. Once an upswing in the industrial cycle begins, why doesn’t it simply go on indefinitely through the operation of the multiplier and accelerator effects. DeLong attributes to Marx the view that a boom must proceed at an ever faster rate if it is not to collapse into a new crisis—a view that DeLong rejects.

However, I don’t know where Marx actually says this, either in Chapter 17 or anywhere else.

It is true that the upswing in the industrial cycle once it starts tends to accelerate until it ends in a new crisis. However, Marx was well aware of the fact that in the course of this upward movement, the industrial cycle tends to “pause” once or twice before the boom proper begins that ends in crisis. These pauses—sometimes called by bourgeois “business cycle” theorists “Kitchin recessions” after statistician Joseph Kitchin, who described them—represent pauses within the expansionary phases of the industrial cycle that do not themselves develop into major crises.

As we saw in the main posts, Marx was well aware of these minor pauses—or oscillations—that mark the upward movement of the industrial cycle. Marx probably first learned of them in the 1840s from his friend Frederick Engels, who as the son of a businessman who worked in his father’s Manchester textile factory was well aware of the many ebbs and flows of business.

More revealing is the view that DeLong attributes to Marx that capitalists must be “confident” that the boom will continue, since if they lose “confidence” the boom will collapse. This is not the theory of Marx but the theory of Keynes.

While Marx saw crises as emerging out of “all the contradictions” of capitalist production, bourgeois business cycle theorists like DeLong emphasize the psychological state of the capitalists. (6) This is a natural extension of the view of the modern (bourgeois) economists that value is a subjective thing, as opposed to the view of Marx—and the classical economists—that value is an objective relationship among people engaged in production.

According to the views of the Keynesians, including DeLong, if the capitalists lose “confidence” for whatever reason—perhaps some accidental event like a rise in the price of some key commodity—they slash investments and the economy starts contracting. If only the capitalists could keep up their “animal spirits,” the boom would continue indefinitely.

In the view of Keynes and DeLong, in contrast to that of Marx, crises play no necessary role in capitalist production; they are merely unfortunate accidents. DeLong, who as an eminent professional economist is well trained in both marginalist and Keynesian economics with its subjective or psychological theory of value, cannot but read the materialist, objective Marx through the idealistic and subjective lenses of modern bourgeois economic theory.

DeLong writes, “…Marx is right: sooner or later as capitalist accumulation proceeds there will come a negative shocks [sic] to animal spirits, and there will come a sudden excess demand for money, and there will come a crisis.”

This is DeLong’s, not Marx’s, theory of crises. There are “shocks” that are accidents—though more or less inevitable, but accidents all the same—that make the capitalists suddenly pessimistic about profit-making opportunities after an extended period of excessive “optimism” about profit prospects.

The capitalists react to their sudden pessimism by slashing investment, overall spending plunges, and the demand for money soars. This leads to a “general glut of commodities”—a crisis.

But unlike Marx, who sees crises as temporarily solving the inherent objective contradictions of capitalist production, and therefore playing a necessary role within a mature capitalist system, DeLong strongly believes that crises can be prevented by appropriate fiscal and monetary polices that can and should offset the changing psychological stages of the capitalists.

For example, if there is a sudden increase in the desire to hold money, the monetary authority should print the extra money that the capitalists desire. DeLong was reading Marx when he found some spare time at the recent California Democratic Party convention, but he was thinking Keynes.

“In this way,” DeLong writes, “Marx, I think, links his value theory through Mill’s monetary theory to produce a crisis theory.” But DeLong is intelligent enough to sense that something is missing. He continues: “Or, rather, if I were the referee on Marx’s chapter 17, that is what I would conclude that he really wanted to say [emphasis added—SW], and that is what I would urge him to revise his chapter when I sent him his revise and resubmit. As it stands the thing is a mess.”

I agree with DeLong that there is a mess here. But the mess arises in DeLong’s brain because he is trying to comprehend Marx within a Keynesian framework. Any attempt to do this inevitably produces “a mess.”

Marx a goldbug like Ron Paul?

DeLong complains: “I think—I am not sure, but I think—Marx’s rejection of a monetarist or Keynesian cure is based in part on the fact that Marx is like Ron Paul: he believes there’s something wrong about credit. The liquidity the government creates by printing money is to Marx, I think, fake liquidity that is bound to come to a bad end. The only real liquidity for Marx is gold.”

Ah Marx was just another “gold bug” like today’s Ron Paul!

This is a frequent complaint against Marx. Many readers of my blog—especially those who hold more or less to the Monthly Review school—have raised the same question. Doesn’t wealth in capitalist society consist of commodities as a whole, and not just gold, which is a very minor element in the wealth of society? Since the gold standard is long gone, why do I focus so much on the question of gold?

These readers believe that though gold might have played an important role in the past, it doesn’t have much of a role today. I have dealt with this question in many places in both my main posts and my replies, most recently in my critique of the economics of Michael Kalecki.

DeLong, like Keynes was, is an outspoken opponent of the gold standard. His complaint about Marx being like Ron Paul is no accident. DeLong admits that overproduction is possible—unlike supporters of the Austrian school such as Ron Paul. The followers of Keynes conclude that some “shock” to the “animal spirits” of the capitalists can cause a sudden spike in their demand for money as opposed to commodities.

But DeLong believes that there is an easy cure. Have the “monetary authority”—today the U.S. Federal Reserve System—increase the quantity of money until the increased demand for money by the capitalists is fully met.

The job of “stabilization” policy is to watch for signs of any incipient increase in the demand for money as opposed to commodities by the capitalists. As soon as such signs appear, you then have the Federal Reserve System increase the money supply before things get out of hand and a full-scale crisis results.

From DeLong’s point of view, the crisis of 2007-09 was a major failure of stabilization policies. The Fed, perhaps overly concerned about the danger of inflation, waited too long to increase the money supply. But DeLong believes that such mistakes can and must be avoided in the future if capitalism is to go on.

Any form of gold standard limits the ability of the “monetary authorities” to increase the money supply to meet an incipient increase in the demand for money by the capitalists—and an incipient crisis. Why is this so? Because under the gold standard the amount of banknotes that the “monetary authority” can issue is more or less tied to the quantity of gold that is in the vaults of the monetary authority by legislation. The cure? Free the hands of the monetary authority to fight crises by passing legislation that eliminates the relationship between the quantity of money that the monetary authority can create and the quantity of gold in the monetary authority’s vaults.

Then all the monetary authority has to do is to increase the quantity of money it can now freely issue at the first sign of an increased demand for money by the capitalists. Then the capitalists can have all the money they want and crises can be avoided

Then, Keynesians like DeLong hold, if the capitalists refuse to spend the extra money created by the monetary authority, the government can always step in and borrow the idle money from the capitalists, and spend it itself. If a crisis occurs anyway, it is because “stabilization policy” is being incorrectly carried out. We must and can do better in the future, until a crisis-free capitalism with “a reasonable approximation to full employment” is achieved and maintained once and for all.

Sixty-five years after the death of Keynes, they are still trying to get “stabilization policy” right. For example, the U.S. government and Federal Reserve System—armed with all the “tools” of modern stabilization policy, and no gold standard—couldn’t prevent the crisis that began in 2007 from being longer than the crisis of 1907, even though there was no “modern stabilization theory” in 1907, the gold standard was in effect, and the U.S. didn’t even have a central bank.

This is not to deny that incompetent fiscal policies by the government and incompetent monetary policy by the central bank can’t make crises worse. They can indeed, as Marx himself explained when he examined the effects of the Bank Act of 1844, which prevented the Bank of England from issuing additional banknotes beyond its gold reserve when the demand for banknotes as a means of payment soared.

But Marx explained that not even the most enlightened policies by the government and the central bank can eliminate crises as long as the capitalist system continues to exist. At best, the government and central bank can follow policies that prevent things from getting worse than they have to, considering the contradictions of capitalist production.

That is Marx’s theory. In practice, it is a fact that the “stabilization policies” inspired by the work of Keynes and Milton Friedman is “a mess.” We can say, of course, that it is due to all the contradictions of capitalist production. And that answer would be correct, though quite abstract. Let’s be a little more

I have shown in both the main posts and my replies that the quantity of money—measured in terms of its purchasing power and not arbitrary units such as dollars—is tied to the quantity of gold, an actual commodity, not by legal laws that can be changed by legislation but rather by economic laws that can only be changed by a workers’ revolution that transforms the mode of production from capitalist production to socialist production.

Because this is the case—however much Brad DeLong wishes it wasn’t—the demand for money is a demand for an actual commodity whose supply can only be increased by applying human labor to the forces of production, both those created by human labor and those created by nature.

The supply of money can indeed be increased in a crisis. Indeed, crises actually stimulate the production of gold. But this takes a certain period of time. When a shortage of money relative to the demands of the capitalists—a general overproduction of commodities—reveals itself, a crisis rages as the quantity of commodities on one side is reduced and the quantity of money on the other side is increased. This eventually does resolve the crisis—as Marx said, there is no permanent crisis—but not before unemployment soars on one hand while on the other the means of production either lie fallow or are destroyed outright.

Since the quantity of money—measured in terms of its purchasing power—is tied to the quantity of money material that must itself be a commodity, not by legal laws but by economic laws, stabilization policies will continue to fail to stamp out crises—with all their consequences such as recurring mass unemployment of workers on one side and idle means of production on the other. The only thing that stabilization policies can accomplish as long as capitalism lasts is to prevent fiscal and monetary policies from actually intensifying crises.

The consequences of continuing crises

As crises continue at periodic intervals on the basis of monopoly capitalism, the centralization of capital will continue to grow and with it the depth of the contradiction between the two basic classes of capitalist society, the capitalist class and the working class. The development of human society, far from stopping at the stage of of a somewhat “kinder and gentler monopoly capitalism”—as Keynes wanted and DeLong desires—monopoly capitalism will sooner or later have to give way to a higher mode of production—a socialist society where class rule will be abolished once and for all.


1 Remember, Marx answered the question of where profit comes from by making a distinction between (abstract) human labor, which when embodied in commodities makes up the social substance of value, and the amount of (abstract) human labor that is necessary to produce labor power as a commodity. The worker does not sell her labor but her labor power, or ability to work, to the capitalist. The difference between the amount of (abstract) labor the worker performs in a given period of time, and the amount of labor socially necessary to (re)produce her ability to work, or labor power, in that given period of time is the surplus value the worker produces, the sole source of profit.

2 It is quite possible Marx would have left out the section on crises that now forms part of our Chapter 17 entirely if he had lived to complete his entire critique of political economy. If Marx had been able to carry out his original plan to write a series of books critiquing political economy where “Capital” would have only been the first book, the theory of crises would belong in the book that would have dealt with credit, competition and the world market. Logically, Marx would have dealt with the development of crisis theory in a book on the history of political economy that would have dealt with the development of the ideas of the economists on credit, competition and the world market.

Therefore, at most Marx is merely anticipating and making a few remarks on crises, just like he does in Chapter III, Volume I of “Capital,” nothing more. If DeLong understood Marx’s work and method, he would not expect to see a fully developed crisis theory anywhere in “Theories of Surplus Value.”

3 While Marx greatly admired Adam Smith and Ricardo even when he was subjecting them to the most devastating criticism, his attitude to Say, who he calls a “miserable individual,” is one of complete contempt. Marx can hardly write the man’s name without expressing his aversion.

4 Marx noted that Say, following Adam Smith, talked about a fall in interest rates—Say actually meant profits—when there is an abundance of capital in a country. The consistent Ricardo, however, saw no reason why either the rate or mass of profit should fall if there is an “abundance of capital” in a country, since didn’t Say himself demonstrate that there can be no general overproduction of commodities and consequently of capital? Why then would “abundant” capital lead to a fall in the rate of profit? Marx cannot but admire Ricardo’s consistency, even when he believes, like is the case here, that Ricardo is writing complete nonsense.

5 The term “over-accumulation of capital” avoids that nasty word “overproduction” entirely and therefore is far more respectable in academic circles than the “overproduction” of capital, which sounds too much like the “general overproduction of commodities.”

6 Marxists don’t deny that the changes in the phase of the industrial cycle are reflected in the minds or the psychology of its individual capitalist agents. But changes in the “moods” or “animal spirits” of the capitalists are reflections in the minds of capitalists of events that are occurring in the external world. While Keynes and DeLong tended toward an idealistic, subjective analysis, Marx’s analysis is both materialistic and objective.

6 Responses to “A Keynesian Takes on Karl Marx”

  1. Brad DeLong Says:


    John Stuart Mill made Marx’s critique of James Mill and Ricardo 34 years before Marx did. The fact that Marx did not like John Stuart Mill does not mean that a great deal of Marx’s crisis theory–C-M-C’, M-C-M’, etc.–is not a reproduction of Mill’s thoughts on business cycles…

  2. duvinrouge Says:

    Seems to confirm my views that the Keynesian flaw (& monetarist) is the subjective marginal utility theory of value.
    Hence ‘animal spirits’.

    With an objective value theory, the labour theory of value, it is then possible to see where profit comes from: the difference between the value produced by labour & the wages paid to labour.
    Which then raises the issue of how capital can accumulate; the realisation problem.
    This then explains the role of credit & imperialism & why prices can diverge from values; boom & bust.

    Does this mean Marxists are then in agreement with Schumpter & the Austrians about ‘creative destruction’ of capital?
    If so, why do Marxists see this as opening the door for revolution & the Austrians don’t?
    Or is the Marxist argument that revolution doesn’t necessarily come from the cyclical booms & busts but from the breakdown of capitalism as alluded to in part 3 of Volume III of Capital & directly referred to in Luxemburg’s Accumulation of Capital?
    And if breakdown is key, is the current crisis exhibiting features of breakdown?

  3. critiqueofcrisistheory Says:

    Prof. DeLong, actually Marx credited Simonde de Sismondi (1773-1842), whose “Nouveaux Principes” was published in 1819, 44 years before Marx wrote “Theories of Surplus Value,” as the real “father of crisis theory,” in the words of Sam Williams in one of his posts. The following pertinent quote is from Chapter 19 of Marx’s “Theories”:

    “Sismondi is profoundly conscious of the contradictions in capitalist production; he is aware that, on the one hand, its forms—its production relations—stimulate unrestrained development of the productive forces and of wealth; and that, on the other hand, these relations are conditional, that their contradictions of use-value and exchange-value, commodity and money, purchase and sale, production and consumption, capital and wage-labour, etc., assume ever greater dimensions as productive power develops. He is particularly aware of the fundamental contradiction: on the one hand, unrestricted development of the productive forces and increase of wealth which, at the same time, consists of commodities and must be turned into cash; on the other hand, the system is based on the fact that the mass of producers is restricted to the necessaries. Hence, according to Sismondi, crises are not accidental, as Ricardo maintains, but essential outbreaks—occurring on a large scale and at definite periods—of the immanent contradictions.”

    Clearly, Marx did give credit where credit was due.

    Jon B

  4. pebird Says:

    Gold (or whatever monetary unit is chosen as the “universal” or “base”) is used to ultimately “settle” exchanges. This settlement “commodity” is critical because it is used to mark the realization process. It is the object that mediates (acts to regulate) the relations between people). As long as there is an agreed-upon standard of settlement that will suffice to mark the act of realization, it does not matter of what material that object is made. I would argue that even post-capitalism there will need to be some sort of value realization method using objects, but perhaps only for a period of time and most likely not forever.

    As you note, one reason gold is important is that it has material integrity. Historically gold certainly has been manipulated by private interests (from simple coin clipping to banks moving the same gold between locations to meet reserve requirements, etc.). Gold acts as “material insurance” against distrust, fraud, etc. But it is not perfect.

    Since capitalism is a system where things appear as relationships and relationships as things (the world inverted), it should be obvious that capital cannot function without some “thing” acting as the settlement vehicle, as you rightly point out.

    However just as in the productive sphere capital establishes the foundation for a higher form of economic functioning, it also does so in the circulatory sphere. The evolution of money from thing/material-form to token/virtual-form (whether it is called state money, or fiat money, etc.) is the glimpse of that potential future where society establishes the trust relationships necessary to use whatever agreed-upon accounting method to identify when value has been realized.

    Obviously capitalism, with its fundamental primacy on competition and its necessary techniques of deception and exaggeration (also known as marketing), only supports trust to the extent it is absolutely necessary to maintain its hold on social relations.

    So just as the factory and technology demonstrate the productive power needed to free humanity in a material sense, there is an emerging apparatus that reveals a powerful realization process to free society in a nominal/representational sense. That apparatus is located in an area we might least expect it, within the banking and state functions. Not surprisingly, institutional economists have tended to ignore the banking sector (even to the extent of excluding it from economic models). Why draw attention when mystery is more effective?

    It is important to note that over-production does not mean that the population as a whole has too much material wealth. It means that there has been more produced material (commodities) than can be realized as exchange value within a given time frame. This time frame is critical – it is predetermined by capital as an expectation of return and establishes the competitive relationships between capitalists.

    I believe that crises can also be viewed as a manifestation of capital “getting ahead of itself”, revealing too much of its inner workings and pointing to a new form of social organization. Capital must stamp this out by any means necessary in order to survive. This inner contradiction of all things – they hold the seeds of their own destruction within their very being – is displayed by capital when it demonstrates the vast productive capacity of an economy (although we may question the forms of that productivity), yet must retain a realization method that requires the destruction of productive capacity (e.g., debt, bankruptcy, unemployment, etc.).

    It should be no surprise that the solutions which some progressives support, such as increased stimulus spending, homeowner debt forgiveness, public employment schemes, if implemented are done so as half-measures – the bare minimum needed to sustain capital. The work we need to do is to demonstrate why the implementation of such solutions (while theoretically beneficial to the public) would further reduce the realization of surplus value and lead to more powerful crises. Only in the event of a truly systemic crisis (which I don’t know that 2008 would qualify, but it certainly did scare a lot of people) would capital be willing to suspend its playbook in order to survive. Such circumstances would of course require a highly mobilized and coherent opposition. Not surprisingly, the state is vigorously implementing methods to combat this possibility.

  5. Grytolle Says:

    My thoughts after reading all your material on Keynes up to this point:

    It seems to me that you would do good to integrate the Keynesian take on crises as described by DeLong in your crisis theory, but then emphasizing that correct as their description of phenomena might be, it doesn’t touch the root cause of the crisis (heck, you might even throw in a compliment or two). The thoughts of Keynes are compatible with those of Marx, as long as you keep Keynes subordinate to Marx: the psychology of capitalists plays a role, but it’s not the real cause of periodic crises; it is theoretically possible to somewhat dampen the trade cycle, but the real solution is to get rid of it by abolishing capitalism, …

    You did that quite brilliantly with regard to Keynes vs. monetarism and Marx’s theory of money, after all.

    Whether you believe that it is really of benefit to your theory, it might be a wise move tactically to make Keynesians who are becoming radicalized by the crises feel more welcome to know that not all they’ve learnt is useless as a critique of capitalism.

  6. Christos Says:

    “The thoughts of Keynes are compatible with those of Marx, as long as you keep Keynes subordinate to Marx”…That is ignore the inexistence of any common notional ground .Unless you are the Kopperfield of science, there is absolutely no common ground between the concepts of Marx and the “vulgar” political economy, as he calls the bourgeois political economy after classics. Therefore none of them can be “placed” “under” Marx, nor Keynes, nor any other apologist stream, especially in our times, where the “economic faculties” work as Bank’s accounting centers…[,,such was the case of Socialdemocracy which tried to “marry” marxism to marginalism…]

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