Are Keynes and Marx Compatible? Pt 2

John Bellamy Foster’s case for Keynes

I explained in last month’s reply that John Maynard Keynes is the leading economist of non-Marxist progressives. Marxists themselves are sharply divided on the nature and usefulness of Keynes’s work and its relationship to Marxism.

As a rule, Marxists who support the Grossman-Mattick school or other schools that blame capitalist crises on the periodic inability of the capitalists to produce sufficient surplus value to maintain capitalist prosperity are quite hostile to Keynes’s work. According to these schools, the only way out of a capitalist crisis within the limits of the capitalist system is to increase the rate of surplus value―the rate of exploitation of the workers―and thus restore an “adequate” rate of profit for the capitalists.

Any attempts by a government inspired by Keynes’s theories to restore the purchasing power of the people during a capitalist crisis only makes it more difficult for the capitalists to restore an adequate production of surplus value. Therefore, the “not enough production of surplus value” schools of Marxist crisis theory hold that Keynesian policies only make a capitalist crisis worse. By spreading dangerous reformist illusions about the possibility of improving the condition of the working class and its allies within the capitalist system, these schools of Marxists claim the “Keynesian Marxist” tendencies such as the Monthly Review School build support for opportunist reformist tendencies within the workers’ movement.

Left-wing Marxists

These strongly “anti-Keynesian” Marxists are very left wing and want nothing to do with non-Marxist progressives who want to improve the conditions of the workers and other exploited people in the here and now.

But what about a situation where workers and their allies are willing to struggle to defend their standard of living and basic rights from the attacks of the capitalists but do not see―or rather do not yet see―the need for the revolutionary seizure of power by the working class? Don’t we run the risk of discouraging all workers’ struggles if we agree with the bosses that partial struggles waged by the workers within the capitalist system will only make an ongoing crisis worse? If the workers are unable to engage in partial struggles with at least some prospect of winning partial victories in the here and now, how will they ever accomplish the far more difficult task of seizing political power and then using it to build a socialist society?

However, if the “not enough surplus value” schools of Marxist crisis theory are correct, we have to face the consequences no matter how unpalatable they may be politically. Marx was above all a revolutionary, but he could not be an effective revolutionary without being a scientist. We have no alternative but to pursue economic science to wherever it leads us.

But, as we know, there is an opposite family of Marxist crisis theory that is far more open to Keynesian arguments. The underconsumptionist schools of Marxist crisis theory see the inability of the working class to buy back a sufficient percentage of the commodities they produce as the cause of both periodic acute cyclical crises and the economic stagnation and mass unemployment that follow in the wake of such crises.

Like all Marxists, these “underconsumptionist Marxists” or “Keynesian Marxists” believe that only the transformation of capitalism into socialism can provide a final solution for the ills of capitalism―including the problem of cyclical crises, the growth of monopolies, economic stagnation, and the mass unemployment that cyclical crises breed. But the underconsumptionists believe that Keynesian measures aimed at restoring the purchasing power of the working class and other oppressed sections of the population during a crisis can improve the conditions of the working class and its allies under the capitalist system.

They therefore favor working with non-Marxist Keynesian progressives in fighting for Keynesian economic measures they believe will improve the conditions of the workers under the present system. U.S. Marxist economist Paul Sweezy, who founded the Monthly Review magazine, and John Bellamy Foster, who now edits it, have both been leaders of this school of Marxist thought.

Foster makes his case for Keynes

Throughout 2010, Monthly Review and its editor John Bellamy Foster have been making the case for the basic compatibility of the work of Marx and Keynes. Indeed, it can be said that in the wake of the crisis that began in 2007 Foster has been putting much more emphasis on the relevance of Keynes than of Marx.

Rather than rejecting Foster’s views on Keynes dogmatically on the grounds that Keynes was a bourgeois economist and that we have nothing to learn from him, let’s objectively examine Foster’s “case for Keynes.”

“In any attempt to address the role of finance in the modern economy,” Foster writes in the October 2010 edition of Monthly Review, “the work of John Maynard Keynes is indispensable.” Foster explains: “In 1933 Keynes published a short piece called ‘A Monetary Theory of Production,’ which was also the title he gave to his lectures at the time. He stressed that the orthodox economic theory of exchange [Foster is referring to the reigning marginalist theory―SW] was modeled on the notion of a barter economy. Although it was understood that money was employed in all market transactions under capitalism, money was nonetheless ‘treated’ in orthodox or neoclassical theory ‘as being in some sense neutral.’ It was not supposed to affect ‘the essential nature of the transaction’ as ‘one between real things.’ In stark opposition, Keynes proposed a monetary theory of production in which money was one of the operative aspects of the economy.”

Hopefully, Foster and/or other writers associated with Monthly Review will now be paying more attention to the whole question of the nature and theory of money than has been the case in recent times. Paul Sweezy did write insightfully on the relationship between money and commodities, but that was many decades ago. Sweezy (and Baran) completely ignored the question of monetary theory in “Monopoly Capital,” first published in 1966, just like they ignored value theory in this work, which is widely seen as the bible of the Monthly Review School. (1)

Since the 1980s, Monthly Review writers, beginning with Paul Sweezy himself, have written a lot about credit and “financialization”―the vastly increased role of credit in the economy―but have had little to say about the nature of money.

Money and credit relations are by no means identical, though they are often confused with one another by bourgeois economists. What is true is that money―not non-monetary commodities―is the foundation of the credit system. Therefore, in order to understand the nature and limits of credit, one must first grasp the nature of its foundation―money.

If Foster now turns his attention to Marx’s writings on money, this will mean making a turn toward studying Marx’s whole theory of value in a new and more profound light. It will mean studying the nature of commodities, labor value, the relationship between concrete labor, which produces use values, and abstract labor, which produces value―the form of (labor) value where the value of one commodity is measured in terms of the use value of another commodity, thus excluding the possibility of “non-commodity money.” The whole relationship between the three different forms of money―real (commodity) money or gold, token (paper) money, and credit (checkbook) money―and the different laws that govern them will have to be examined. Certainly, in my view at least, the grasping of these economic categories is indispensable if we are “to address the role of finance in the modern economy.”

The problem is that Foster, though he is an avowed Marxist and indeed is the leader of a major school within Marxism―the Monthly Review School―is referring to the indispensability of Keynes and not Marx. The danger is that Foster and by extension the Monthly Review School will base their future work on Keynes and not on Marx.

Or is this really a danger? If the theories of Keynes and Marx were the same with only terminological differences as regards commodities and money, there would be no danger at all. The same would be true if Keynes was correct against Marx. In the latter case, Marxists would need to “unlearn” Marx and instead master Keynes. Of course, it is also possible, and I believe this is the case, that while Keynes and Marx did agree on some things this partial agreement does not prevent their overall theories of finance―money and credit―from being profoundly different.

To what extent are Marx and Keynes compatible?

Now, as I explained in the main posts Marx and Keynes did agree on some aspects of monetary theory and the determination of interest rates. Closely related to the views on money they have in common, Marx and Keynes also agreed that capitalism, at least when left to its own devices, is an extremely unstable system.

But does this mean that the views of Marx and Keynes are compatible overall? If we answer in the affirmative, Keynes has the advantage over Marx of having lived more recently―closer to our own time―and therefore perhaps put more emphasis on the relationship between finance and production than we find overall in Marx’s work.

And for those of us in the English-speaking world, Keynes might be easier to understand, since he wrote in English and did not use terminology borrowed from early 19th-century German classical philosophy as Marx sometimes did.

This is not to say that Keynes’s most important work “The General Theory of Employment, Interest and Money,” first published in 1936, is light bedtime reading. It is not. But Keynes, at least in some of his less “technical” writings, can indeed be a pleasure to read. Therefore, there is no alternative but to examine closely the actual economic theories of Marx and Keynes. Let’s begin with Marx, because he lived and wrote earlier than Keynes did.

Marx’s theory of value and surplus value

Marx’s theories on “finance”―money, credit and interest rates―are built on his basic theory of labor value and surplus value. Basing himself on the law of labor value that he took over from classical political economy and perfected, Marx’s theory of surplus value holds that even if all commodities including labor power are sold at their values, the workers produce surplus value by performing unpaid labor for the capitalists and landowners. Surplus value once it has been produced is in turn divided between the two main property-owning classes of capitalist society: the capitalists, who appropriate their share of the surplus value as profit, and the landlords, who appropriate their share of the surplus value as ground rent.

Profit, in turn, is divided into interest appropriated by the money capitalists and the profit of enterprise that goes to the industrial capitalists―owners of productive capital―and commercial capitalists―owners of commodity capital. On these subjects, I think Foster himself will agree there is little in common between the economic theories of Marx and Keynes. This raises the question, then, on how similar can the theories of Marx and Keynes on finance―money, credit and interest rates―really be if their underlying theories of value and the nature and the origin of profit―profit of enterprise plus interest―are so different?

What we can say here is that if you reject Marx’s law of labor value―like, for example, the “neo-Ricardians,” whose views I have examined and criticized in my replies dealing with the transformation problem and Okishio’s theorem here and here―and also reject Ricardo’s law of labor value as well as Marx’s law of surplus value―you of course might prefer Keynes’s theory of money and interest rates precisely because it is unencumbered by Marx’s “incorrect” views on value and surplus value.

But Foster does not and before him Paul Sweezy did not reject Marx’s law of value and surplus value. Sweezy was very critical of the “neo-Ricardian” school for rejecting Marx’s―and Ricardo’s―law of labor value. Therefore, logically, though he has, as far as I know, up to now written little about them, Foster should be expounding Marx’s basic theories of money, credit and interest rates including Marx’s view―but not Keynes’s view―that interest is a fraction of the total surplus value.

A weakness in the Monthly Review School up to now, in my opinion, has been that it has paid little attention to exactly what determines the division of the profit―(surplus value minus rent)―into the profit of enterprise and interest. The importance of examining the forces that determine the division between the profit of enterprise and interest and its effects on the employment of workers and machines under the capitalist mode of production is something that most Marxists, including the Monthly Review School, really could learn from Keynes. Perhaps Foster and other members of the Monthly Review School will be examining this crucial question in their future work. (2)

But before we dive into this question―also examined in my main posts―we should examine the background of Keynes’s break with the economic “orthodoxy” of his time. This takes us back to the debate about the possibility of a general glut or overproduction of commodities that occurred among the political economists during the first decades of the 19th century. Both Keynes―by the 1930s―and Marx were well aware of this debate, and both Marx and Keynes closely studied the arguments of both sides.

On one side of this debate were arrayed the Swiss economist Simondi Sismondi (1773-1842) and the English economist Thomas Robert Malthus (1766-1834), who not only saw a “general glut” of commodities as possible but indeed a pressing danger. On the other side were the French economist J.B. Say (1767-1832), James Mill (1773-1836) and David Ricardo (1772-1823). These latter economists claimed that a general glut of commodities was impossible.

Say’s so-called law of markets, the quantity theory of money, and the neutrality of money

J.B. Say “proved”―some authorities attribute the proof to James Mill―that a generalized overproduction of commodities was impossible. Say and his supporters held that in the final analysis commodities are purchased by other commodities.

According to the supporters of Say’s Law, money as a means of circulation makes commodity exchange more efficient but it does not change the essence of the exchange of commodities. Therefore Say and his supporters claimed that in order to analyze commodity exchange, it is proper to abstract money. Once we abstract money, we see that while the overproduction of particular commodities combined with an underproduction of other commodities is indeed possible, a generalized overproduction of commodities is not.

Suppose the supply of commodities was suddenly doubled. We would, according to Say’s Law, by doubling the quantity of commodities by definition be doubling the means of purchasing commodities. Say’s Law is popularized by the saying that “supply creates it own demand.”

Every child knows that commodities are generally purchased not with other commodities but with money. But Say and the liberal trend in economics in general―today continued by the neoliberals―see money simply as a means of circulation. (3) But couldn’t a shortage of money relative to commodities represent a general overproduction of all commodities relative to money? Not at all, the liberal school―Say, Mill and Ricardo―answered.

Suppose there was a shortage of money. In that case, wouldn’t prices including wages fall until the shortage of money vanished? If the total sum of prices were too high relative to the quantity of money at existing prices, prices including wages would fall until the market “cleared.” Since both wages and prices would fall together, neither real wages―which, according to the economists in those days on both sides of the debate, would have to include the biological upkeep of the working class and little more―nor real profits would be affected.

Therefore, real wages, real profits and real rents―wages, profits and rents in terms of commodities―could only be affected by changes in the quantity of commodities relative to population but not by the quantity of money relative to commodities. (4)

If money, on the other hand, was too abundant relative to commodities at existing prices, the opposite would happen. Prices and wages would rise―or the purchasing power of money would fall―until the glut of money vanished. Nominal prices would be higher but so would nominal incomes―wages, profits and rents. Real incomes―the amount of commodities that the incomes could purchase would again not be affected.

The economic liberals assumed that the quantity of commodities and the quantity of money would adjust themselves to one another through changes in the general prices level quickly and with little friction―what is today called the “efficiency of markets.”

Since the quantity of commodities and the quantity of money change on a daily basis, it was assumed by the economic liberals that the daily movement of prices and wages would keep the quantity of commodities and the quantity of money in balance making a general glut―or shortage―of commodities impossible.

It should also be noted that the quantity theory of money was applied both to metallic money such as full-weight gold coins and to paper money. According to the liberal economists, it made no difference whether additional money came from newly opened gold mines or from the printing presses of the Bank of England―or the virtual electronic “printing presses” of the Federal Reserve System today―the effect would be the same.

This doctrine is known as the “neutrality of money.” Neither a rise nor a fall in the quantity of money within a nation will affect the real wealth of the nation. The only thing that is affected, according to the liberal view, including today’s neoliberals (5), by changes in the quantity of money relative to the quantity of commodities is the wealth of the nation measured in terms of money.

But the liberal upholders of the “neutrality of money” hold that―since the wealth of nations consists of the use values of commodities or, as the modern economists prefer to put it, the utilities of commodities relative to subjectively determined human needs―the real wealth of nations is not affected by the quantity of money. Money merely circulates the commodities that constitute the real wealth of nations.

This view that money is “neutral” is in sharp contrast to the views of the earliest political economists known as the mercantilists. Both Marx and Keynes were well versed in mercantilist literature. The mercantilists held that the wealth of a nation was determined by the total quantity of money―in their day gold and silver―in the nation.

According to these economists, if the quantity of gold and silver in a nation increased, domestic trade would boom, production would rise and the wealth of the nation would increase. If the amount of gold and silver declined, trade would be depressed and the wealth of the nation would decay because a lack of monetarily effective demand would make production unprofitable. To those versed in modern Keynesian theories about the importance of “effective demand,” mercantilist literature has a surprisingly modern ring.

Therefore, in sharp contrast to their liberal successors, the mercantilists held that the wealth of a nation is ultimately reducible to the quantity of money―gold and silver―within the nation. While the economic liberals advocated “free trade,” the mercantilists had supported massive intervention by the state to increase the quantity of gold and silver money in the nation.

This meant that―leaving aside nations that had major gold and silver mines on their own territories or in their colonies―any increase in the quantity of money in a given nation had to be at the expense of other nations. The only way a nation that did not itself produce gold and silver could increase the quantity of gold and silver in its economy was to run a positive balance of trade and payments.

A negative balance of trade and payments would drain away the gold and silver of the nation, according to the mercantilists, causing interest rates to rise, the internal market to contract, and of special interest to Keynes, production and employment to decline. Since all nations could not possibly run balance of trade and payments surpluses at the same time, the mercantilist doctrine implied a merciless life and death struggle for markets among nations and by extension periodic wars between the trading nations. Not a pretty picture.

In contrast, the liberal quantity theory of money implied that all the trading nations can thrive together and therefore all benefit equally by free trade. This view was further developed by David Ricardo, who first developed the theory now known as comparative advantage. I have dealt with this question at length in my main posts. It forms together with Say’s Law and the quantity theory of money the “trinity” of economic liberalism. These three theories rise or fall―and with Marx and Keynes I believe that they fall―together.

We therefore see that Marx and Keynes do agree on some things as against the economic liberals. Both Marx and Keynes held that a “general glut” or a generalized overproduction of commodities was possible. Both rejected the quantity theory of money and the neutrality of money. On what is called today “monetary theory,” both Marx and Keynes were closer to the mercantilists than they were to the economic liberals.

Did Keynes borrow from Marx?

In his October 2010 article, Foster provides evidence that Keynes indeed borrowed from Marx, a fact that Keynes chose to conceal in his “General Theory.” Since Keynes did borrow from Marx, to what extent is Keynes of the “General Theory” a “Marxist,” even if an unacknowledged one? If Keynes was a “Marxist,” he was a very peculiar one, because he remained a supporter of capitalism against socialism in general and a champion of British imperialism in particular. Let’s examine the evidence that Foster has brought to light on this question.

Foster writes: “…Keynes distinguished between what he called a ‘co-operative economy’ (essentially a barter system) and an ‘entrepreneur economy,’ where monetary transactions entered into the determination of ‘real-exchange’ relations. This distinction, Keynes went on to explain in his lectures, ‘bears some relation to a pregnant observation made by Karl Marx…. He pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C―M―C′, i.e., of exchanging commodity (or effort) [Keynes cannot get himself to blurt out the word “labor” since if he did he would be flirting with the Ricardo-Marx law of labor value―SW] for money in order to obtain another commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M―C―M′, i.e., of parting with money for commodity (or effort) in order to obtain more money.’”

Here Keynes is indeed borrowing from Marx. But exactly what did Keynes borrow? What Keynes refers to as the “attitude of business” is actually Marx’s general formula for capital M―C―M’. Marx contrasted this to C―M―C of simple circulation, not C―M―C’. Indeed, Keynes’s slip referring to C―M―C’, an expression that Marx did not use, is extremely significant as we will soon see.

Marx explains that even assuming simple circulation of commodities, C―M―C, an overproduction of commodities is theoretically possible. Just because A has produced a commodity and sold it at its value for M doesn’t mean that A must immediately exchange M for C. Or what comes to exactly the same thing, just because I have just sold doesn’t mean I must immediately buy.

It is here that the theoretical possibility of a crisis of generalized overproduction is established. Marx already established this in the third chapter of Volume I of “Capital.” In the same chapter, Marx already rejected the quantity theory of money, which claims that if there is an excess demand for money as opposed to commodities, prices will fall, thereby demonstrating the “neutrality of money.”

But Marx does not develop these points there. In “Capital,” particularly in Volume I, he is interested in another question, which is much more pressing for Marx, though, as we will see, of no interest to Keynes whatsoever. This question is, exactly where does the excess of M―C―M’ (M’ minus M) come from?

Starting in Chapter 4, Marx develops the M―C―M’ general formula of capital. A capitalist starts with a sum of money of a given labor value M, exchanges it for C―commodities that represent productive forces including labor power of the same labor value―and ends up with a commodity C’ of a greater labor value. Assuming all goes well, the capitalist sells it for M’.

Naturally, there exists the possibility that the capitalist will produce C’―what Marx calls commodity capital―which contains (C’ minus C) surplus value in the form of commodities that cannot be sold at profitable prices. The problem is that surplus value in the form of commodities is not yet profit. To become profit, the aim of capitalist production, the commodities that contain the surplus value, the C’, must be exchanged for M’, a sum of money that has the same value as C’.

It is the need to transform the commodity form into the money form that caught Keynes’s attention.

To Marx, important as this is, it is still secondary to where the the surplus value―whether in commodity form (C’ minus C) or money form (M’ minus M)―comes from in the first place.

Here Keynes was playing with fire and he knew it. If he were to pursue this question, it would lead right to the question of the production of surplus value by the unpaid labor the working class is forced to perform for the capitalists. If Keynes had been willing to explore this question, this would have obliged him to break with his own class. Then he really would have become a Marxist.

This is exactly what happened with the young Paul Sweezy, the most promising Harvard economics student of his generation, who later went on to found the Monthly Review School. But, unlike Sweezy, Keynes showed no interest in doing this, despite the urgings of some of his left-wing friends. He was above all and remained until is death in 1946 a patriot of his class in general and a patriot of British imperialism in particular.

What we do see here is the leading bourgeois economist of the 20th century borrowing, like a naughty child sticking his hands into the cookie jar when he hopes his parents are not looking, from a man who was the leading economist of the working class―the leader of the class enemy from Keynes’s point of view.

Keynes was obliged to do this because of the complete bankruptcy of the economic theory developed by the hired champions of his own class. This theory was the marginalism that Keynes had been trained in and advocated as a young economist. The leaders of “neoliberal” reaction have long accused Keynes of being something of a Marxist himself―and in a very small way we see that Keynes was indeed a “Marxist” of a sort. Not surprisingly, in his main work, “The General Theory,” Keynes made no mention of his debt to Marx. (6)

What Keynes did not learn from Marx

However, before we get too carried away by Keynes’s “Marxism” we should examine what Keynes did not learn from Marx. Keynes was unwilling and unable―not because of his lack of intelligence, Keynes had plenty of that, but because of his class allegiance―to explore the origins of surplus value. He was thus unable to grasp the real nature of value or money or the true nature of interest as a mere fraction of the total surplus value.

Foster explains: “When Sweezy wrote to Keynes’s younger colleague Joan Robinson in 1982 about the publication of Keynes’s 1930s lecture notes in which he discussed Marx, asking if she had any additional knowledge of this, she replied: ‘I was also surprised at the note about Keynes and Marx. Keynes said to me that he used to try to get Sraffa to explain to him the meaning of labor value, etc., and recommend passages to read, but that he could never make out what it was about.'” Quoted in Paul M. Sweezy, “The Regime of Capital,” Monthly Review 37, No. 8 (January 1986).

Unfortunately, Foster left this crucial point to a footnote. In my opinion, rather than  banishing it to a footnote, Foster should have put it at the center of his articles dealing with relationship between Marx and Keynes.

The marginalist revolution and the possibility of a generalized overproduction of commodities

Keynes himself observed that the liberal view that a general glut of commodities was impossible emerged triumphant―this despite the fact that shortly after the controversy on the possibility of a “generalized glut” ended, the era in which we are still living of periodic capitalist crises of generalized overproduction began. In the Depression decade of the 1930s, Keynes claimed that it was very unfortunate that the supporters of Malthus had not emerged the victors against the supporters Ricardo.

Why did the view that a generalized glut of commodities is impossible emerge the victor among later generations of (bourgeois) economists until the Great Depression banged them on their collective, extremely dense skulls? And why have the (bourgeois) economists tended to return to the view that a “general glut of commodities” is impossible again and again much like a drug addict who can’t “kick the habit”?

The dark age of macroeconomics

The editors of Monthly Review quote the contemporary economist Paul Krugman, a former advisor to Ronald Reagan who has since moved to the left and emerged not only as an outspoken Keynesian but perhaps the leading non-Marxist progressive economist in the United States today. Like Keynes was in his later years, Krugman in recent years has become obsessed with the possibility of a general glut of commodities, or in Krugman’s own words “Depression economics.”

The editors write: “To understand the disaster that is present-day economics, it is crucial to recognize that we are living today, not only in the deepest economic crisis/stagnation since the Great Depression, but also―as Paul Krugman declared in his New York Times blog on January 27, 2009―in ‘A Dark Age of Macroeconomics,’ in which the central discoveries of the 1930s have been forgotten or discarded. ‘What made the Dark Ages dark,’ Krugman wrote, ‘was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.'”

What exactly is “macroeconomics” anyway? After the work of Keynes, bourgeois economics split in two. Traditional marginalism was still taught in the guise of “microeconomics.” As we saw, Keynes and his followers were obliged to dump doctrines that were dear to the marginalists because they fit so well into their underlying theories such as Say’s law of markets, the quantity theory of money and the neutrality of money. (7)

Even during the heyday of Keynesian economics after World War II, liberal marginalism was taught as the basic economic theory in “microeconomics” classes. But the teaching of marginalism could if necessary be relaxed or tactically disregarded altogether when it came to exploring practical policies that governments and central banks should follow in order to “stabilize” the real-world capitalist economy.

The very need for the field of “stabilization” policy tacitly admits that contrary to the teachings of the marginalists capitalism is in practice a very unstable economic system. If it were stable, as the marginalists hold, there would be no need for “stabilization policy” in the first place. The need for a successful “stabilization policy” was judged particularly necessary during the “Cold War,” when the planned economies of the Soviet Union and its allies existed as an alternative economic system.

However, since economics students were still taught marginalism in the form ‘microeconomics’―they certainly weren’t taught the Marxist law of labor value and surplus value―those young economists who craved consistency when it came to “macroeconomic theory” tended to revert back to the quantity theory of money and the neutrality of money and therefore to Say’s Law, which denies the possibility of a general overproduction of commodities. This was particularly true as memories of the Great Depression faded and finally when the “stagflation” crisis of the 1970s discredited in practice the policies favored by Keynesian economists.

The marginalist revolution ‘banishes’ the contradictions of capitalism

In the 1870s, the so-called marginalist revolution swept the then emerging field of professional academic economics. Marx, remember, began his analysis in Chapter 1 Volume I of “Capital” by examining the basic contradictions of the commodity relationship of production. Marx was able to show how these contradictions inevitably lead at a certain level of development not only to the split between the capitalist class and the working class, on one hand, and, on the other, to a split between the money commodity and all other commodities. The split between money and commodities makes possible, and at a certain stage of development inevitable, periodic crises of generalized overproduction.

Studying the contradictions of capitalism was natural for Marx, both as an opponent of capitalist exploitation who looked forward to a future society that would be free of class rule and exploitation and as a student of Hegel and classical German philosophy. It was the combination of the recurrent overproduction crises and the consequent growth of monopolies on one side, and the growing conflict between the capitalist class and the working class on the other, that Marx held would eventually lead to the downfall of capitalist class rule and economic exploitation.

The marginalists in order to “refute” Marx, whose main work, Volume I of “Capital,” had appeared just before the marginalist revolution swept the universities, began by assuming the contradictions of the commodity relationship of production, such as the contradiction between the use value of a commodity and the exchange value of a commodity, do not exist. Instead, the marginalists held that objects of utility acquire value not because they are products of human labor but because they are scarce relative to subjectively determined human needs.

They therefore began by denying the fundamental contradictions of the commodity at the very beginning of their analysis and thus built right into the foundations of their analysis the assumption that capitalism was a system without contradictions and therefore was the final absolute mode of human production.

A great advantage of marginalism is that it can be easily formalized in mathematical terms. Marginalism makes great use of the methods of calculus and its differential equations―the branch of mathematics that studies rates of change. It seems that the conclusions about the contradiction-free, absolute nature of capitalist production emerges from the equations themselves, when they are in reality already present in the underlying postulates. Or what comes to exactly the same thing, the marginalists assume what they pretend to prove.

This is the beauty of the neoclassical marginalist school of economics. It not only fools the lay public that does not understand and cannot argue with the mathematics. (8) It also fools the (bourgeois) economists themselves. And this is where the capitalist class itself pays a price: It periodically fools the policymakers themselves. Just ask Alan Greenspan, the now-discredited former “maestro” of the U.S. Federal Reserve System.

Marginalism is a classic example of what Marx meant by “ideology” or false consciousness. It fools not only the oppressed but also the ruling class itself. While marginalist economics makes great ideology, it leaves government and central bank policymakers disarmed whenever a severe economic crisis breaks out. It is precisely during a crisis that contradictions of capitalist production such as the contradiction between use value and exchange value, concrete and abstract labor, commodities and their independent value form money, which are normally hidden, suddenly rise to the surface in the absurdity of a crisis of mass poverty being caused by “too much” production.

Keynesian-inspired macroeconomics with its borrowings from the mercantilists, Malthus and, even if unacknowledged, a sprinkling from Marx, is a poor fit with marginalist “microeconomics.” While microeconomics tries to be rigorous and mathematical, macroeconomics, reflecting its mixed pedigree, is often muddleheaded and pragmatic.

But it is the very logical flaws of “macroeconomics” that appeal to non-Marxist progressives. They find congenial the view that gaping wounds of capitalist society can be addressed by a series of piecemeal reforms that avoid the root of the problem―the class contradiction between capitalist and wage worker. Non-Marxist progressives do not like to be told that their proposals violate basic economic laws―whether those dreamed up in the heads of the marginalists―or the very real economic laws discovered by Marx and before him the classical political economists.

Next month I will examine Marx’s and Keynes’s views on employment and unemployment.

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1 I would not dwell on the weaknesses of “Monopoly Capital,” written a half century ago when economic and political conditions were very different―and which in my opinion did not represent Sweezy’s best work―if Foster himself didn’t constantly refer back to it and treat it as a kind of “bible.” In contrast, Sweezy himself did not hesitate to criticize “Monopoly Capital” when he thought it was appropriate. For example, Sweezy expressed regret with the decision he and Baran made to replace the term surplus value, the most important category of all Marxist economics, with the term “the surplus.” Foster himself has wavered between using the terms “the surplus” and “surplus value,” though he has shown a welcome tendency in his most recent writing to return to “surplus value.”

2 To be fair to the Monthly Review School, this has been a weakness in Marxist writings as a whole since the death of Engels in 1895. Why is this so? Marx was interested above all in the nature and origins of surplus value. He showed that profit, including interest and rents and their derivative incomes, is produced by the unpaid labor of the working class even if all commodities, including the commodity labor power, sell at their values. From the viewpoint of the workers who actually produce the surplus value, exactly how the surplus value is divided up among the various groups of exploiters―industrial and commercial capitalists, money capitalist, landlords, and the state machine and so forth―after it has been produced is a secondary question. The chief subject of “Capital” is the production of surplus value and not the realization of surplus value. If you don’t understand how surplus value is produced, you cannot possibly understand how it is realized.

However, to say a question is secondary is not to say that it is unimportant. Industrial capitalists like the pro-Nazi, anti-semitic Henry Ford have sometimes attempted to appeal to the workers and the mass of people in general by attacking the parasitic money lenders who live off interest as opposed to the “producers” such as themselves. Marx’s theory of surplus value cut right through these types of arguments. It showed that the industrial capitalists―such as Henry Ford―are just as much exploiters of the working people and appropriators and consumers of surplus value as are the bankers and other money capitalists.

The German working class―but not the urban middle classes or the German peasantry―trained in the basics of Marxist economics by the work of first the German Social Democratic Party when it was a Marxist party and then the German Communist Party proved largely resistant to the Nazi claims about “Jewish” money capitalists but not the “Aryan” German industrial capitalists being the chief enemies of the working people of Germany.

This is only one example from history, and we are seeing similar demagoguery today often aimed at Muslims and can expect much more as the current social crisis that began with the 2007-09 economic crisis continues to intensify. In combating this type of demagoguery, Marx’s theory of surplus value remains our main weapon.

Marx had seen “Capital”―all volumes―as simply a portion of a multi-book critique of political economy. Marx did indeed discuss the division of profit into profit of enterprise and interest in Volume III of “Capital.” But Volume III was not published in Marx’s lifetime and remained an unfinished work. Therefore, it had vastly less influence in the classical workers’ movement than Volume I of “Capital.”

Unfortunately, Marx did not live to complete his entire critique of political economy, the final part of which would have dealt with capitalist crises. For crisis theory, the splitting of profit into the profit of enterprise and interest is of crucial importance. Any attempt to analyze crises and the capitalist economic stagnation bred by crises that ignores this question is much like attempting to drive an automobile on two wheels.

In dealing with these questions, some bourgeois economists like Keynes, who had no interest or desire to explore the basic nature of surplus value, have analyzed the role of the rate of interest and its role in capitalist crises and stagnation, a question that has been largely ignored by Marxists until now. I believe, however, that we can do a lot better than Keynes could do in analyzing the division of profit into profit of enterprise and interest if we actually understand the nature of surplus value. Unlike Keynes, we have nothing to hide and can afford to build on a solid foundation.

3 The division between the economic liberals versus the supporters of a possibility of a general glut of commodities should not be confused with the division between the classical economists who studied the real laws of capitalist economy and what Marx called the vulgar economists. The vulgar economists were the hired guns of the ruling classes―capitalists and landowners―who limited themselves to studying only the surface appearances. The division about the possibility of a general glut cut across the division between the genuine classical economists and the vulgar economists.

According to Marx, J. B. Say was very much a vulgar economist, but Ricardo brought classical political economy to its highest point. This was despite Ricardo’s grave error in denying the possibility of a generalized overproduction of commodities. Marx also grouped Sismondi, who before Malthus drew attention to the danger of crises of generalized overproduction, with the classical economists, while he considered Malthus―who was Keynes’s real hero―to be very much a vulgar economist.

Marx expresses a certain frustration with Ricardo when he supported Say’s Law and complains that this was “unworthy of Ricardo.” Ricardo probably supported the views of Say because Ricardo was an advocate of the most complete development of the forces of production possible―production for the sake of production, as Marx put it―and was extremely reluctant to admit that capitalism itself could be a barrier to production. Malthus, on the contrary, was more than willing to hold back the development of Britain’s industry if it would strengthen the position of the landlord class that Malthus represented.

4 Ricardo was an opponent of the Bank of England and its inflationary policies under the Bank Restriction act of 1797, which allowed the Bank of England to issue paper notes inconvertible into gold much like central banks do today. Ricardo pointed out that the inflationary depreciation of the bank’s notes against gold disturbed the relationship between creditors and debtors. He therefore favored a return to the gold standard as soon as possible or, what came to exactly the same thing, termination of the bank’s ability to issue paper money inconvertible into gold.

5 The neoliberals led by Milton Friedman revived the quantity theory of money in the post-Keynes, post-Depression era in the form of their so-called “monetarist doctrine.” But after the Depression, the quantity theory of money was very much “damaged goods,” so Friedman was forced to modify and weaken the theory considerably to make it seem even superficially plausible.

Retreating from the original quantity theory of money, Friedman admitted that fluctuations in the quantity of money had a considerable impact on production and employment in the short run―often dwarfing the impact the changes in the quantity of money had on the level of nominal prices and wages. Indeed, Friedman very famously claimed the Depression of the 1930s was caused by the failure of the U.S. Federal Reserve System to combat the contraction of the money supply by one-third between 1929 and 1933 and not by any basic contradictions of the capitalist system whose existence he denied. Friedman held that the Depression could easily have been avoided if the Federal Reserve System had had any idea of what it was doing.

But Friedman claimed that the quantity theory of money was still true, because in the long run fluctuations in the rate of growth of money relative to commodities do not affect output but only nominal wages and prices, just like the classical quantity theory of money claimed.

Friedman himself pointed out that the term “monetarism” applied to his theories was misleading. The term “monetarism” implied, at least to the lay public, that Friedman applied a special importance to money. But Friedman explained that this is quite misleading, since as an economic (neo)liberal he held that in the long run changes in the rate of growth in the quantity of money relative to the rate of growth in the quantity of commodities actually don’t matter at all as far the growth in real output―real wealth―is concerned. Friedman while admitting and even stressing that money was not “neutral” in the short run insisted that it was neutral in the long run.

Friedman was attempting to return to the views of the original marginalists that held in contrast to both Marx and Keynes that capitalism was a stable economic system. According to Friedman, capitalism was only seriously destabilized by the short-term unexpected fluctuations in the quantity of money, which he blamed on interference by governmental “monetary authorities.” Some extreme neoliberal economists such as Robert Lucas and the “rationalist expectations school” have tried to out-Friedman Friedman by claiming that capitalism is stable even if the quantity of money fluctuates violently and unexpectedly, instead blaming economic crises such as the 1930s Depression on alleged excessive taxation by the government.

6 About the only thing that Keynes openly borrowed from Marx in the “General Theory” was Marx’s concept of the classical economists. However, Keynes showed no real understanding of what Marx meant by the classical economists as opposed to the vulgar economists―Keynes himself, despite some genuine insights, was very much in the tradition of the vulgar economists. Hence his admiration for Malthus―and his extension of the concept of the “classical economists” to include the marginalists. Marx, in contrast, would have certainly classified the marginalists with the vulgar economists as Engels did in a few remarks on marginalism during the final years of his life.

7 I would also add the theory of comparative advantage, about the only part of Ricardo’s work that is still taught to college economics students today.

8 Except for the “Austrian” branch of marginalism, which prefers to argue in terms of ordinary language as opposed to mathematics and thus appeals to right-wing “non-mathematical” intellectuals.