Are Marx and Keynes Compatible? Pt 3

In the October 2010 edition of Monthly Review, John Bellamy Foster wrote that John Maynard Keynes demonstrated that ”the economy did not automatically [emphasis added—SW] equilibrate at full employment.” (“Notes from the Editors”)

Here Foster does not in any way distinguish his own views from those of Keynes. He seems to assume that Marx as well held the view that while capitalism does not automatically equilibrate at full employment it can be made to do so if the government and the monetary authorities follow policies designed to achieve full employment. This was indeed Keynes’s opinion. But did Marx agree? Is it really possible to achieve full employment under the capitalist system?

Marx and the reserve industrial army of the unemployed

Marx believed that capitalism actually needs what he called the reserve industrial army of labor. By reserve industrial army of labor, Marx meant something more than the extremely narrow definition of unemployment that is given by capitalist governments when they calculate their monthly unemployment figures.

Capitalist governments count as unemployed only those workers who are actively looking for work. They also count as “employed” workers who work only a few hours a week. People who have given up looking for work because they quite realistically realize that no “employer” will offer them a job are not counted as “unemployed” by the authorities.

In contrast, Marx defined the reserve industrial army of labor as consisting of all persons who would take a job if one were actually offered to them. The reserve industrial army, according to Marx, consists of various layers. It ranges from workers who are only occasionally unemployed all the way to the lowest level of the reserve industrial army consisting of people who are chronically unemployed.

For people who belong to this lower layer, employment is very much the exception not the norm. But they can be drawn into active work if an unusual demand for the commodity labor power develops. However, from the viewpoints of the buyers of labor power, such labor power is of low quality, and they will not as a rule buy it if they have any alternative. But the capitalists will buy it if exceptional circumstances render the commodity labor power scarce enough relative to demand.

A good example of this was the “Rosy the riveter” phenomena in the U.S. during World War II, when the exceptional demand for labor power in the war economy drew into active industrial employment housewives who in those years were not normally working outside the home. But why, according to Marx, does capitalism need a “reserve army” of unemployed workers? Why can’t capitalism have “full employment” where everybody who desires a job can quickly find one?

The reason, according to Marx, is rooted in the very nature of capitalist exploitation. Unlike the case under earlier modes of exploitative production, such as chattel slavery and serfdom, the workers under capitalism (1) are free to sell their labor power to anybody they choose when they choose or indeed not to sell it at all. Under capitalism, once it has become well entrenched, no one—prisoners excepted—is forced by law or brute force to work for another person. This, along with the ability of any person who either owns or can borrow a sufficient sum of money to buy such “freely offered” labor power, forms the foundation of capitalist “free societies.”

What would happen if there was no industrial reserve army?

Suppose a situation of genuine full employment actually existed. By “full employment” (2) I mean a situation where all who want jobs could quickly and easily find employment after a short search and not the kind of “full employment” as defined by our present-day bourgeois economists, where millions are unemployed.

Such a situation wouldn’t rule out some “frictional unemployment,” as the modern bourgeois economists call it—that is, people between jobs. Some workers might quit their present jobs—a basic right workers have under capitalism that did not exist under slavery and serfdom—for many reasons. Perhaps the workers believe they can get a job with better pay or working conditions. Or workers might seek work that is more interesting or fulfilling. Or they might want to move to another part of the country, perhaps to live closer to friends or relatives.

In addition, individual capitalists might be forced to lay off workers due to declining demand for their particular commodities or services. But if “full employment” really exists, everybody who desires employment who was “between jobs” could find a new job after only a brief search—days or a week or two at most.

If such a situation ever came into being, the “labor market”—the market that brings together both the sellers and buyers of the commodity labor power—would strongly favor the sellers of labor power—the workers—over the buyers of labor power, the capitalists. According to the laws that govern competition, even in the absence of unionization, competition would be minimal among the sellers of labor power.

But fierce competition would rage among the the buyers of labor power. The bosses would attempt to lure workers working for other capitalists by offering higher wages and better working conditions. This situation would not only affect the demand for skilled labor—occasionally acute competition does develop in the labor market among the bosses for skilled labor power—but in the market for unskilled labor as well.

Absolute overproduction of capital

If such a situation arose, this would indeed be be a wonderful situation for the workers, but it would be a nightmare for the bosses. The rate of surplus value, the ratio of paid labor to unpaid labor, would progressively shrink. The conditions that make the production of surplus value possible and therefore capitalist production possible would be destroyed. Indeed, Marx gave a name for such a hypothetical situation. In Volume III of “Capital,” he called it an “absolute overproduction of capital.” (3)

The absolute overproduction of capital would be a situation where so much (variable) capital has been accumulated that the supply of additional labor power—not just skilled labor power—has been exhausted. Under these conditions, any further investment of capital would fail to increase the mass of surplus value. Indeed, by further increasing the competition among the capitalists for the commodity labor power, it would actually cause the amount of surplus value being produced to shrink.

Measures by capital to prevent absolute overproduction of capital

Marx explained that when the capitalists are even threatened by a danger—to the capitalists, that is—of an absolute overproduction of capital, they do not stand idly by. They take active measures to prevent it from developing.

When the demand for additional labor power increases to the point that the rate of surplus value starts to decline, the bosses react by transforming an increasing portion of the newly capitalized surplus value into constant capital—machines—and less into variable capital—purchases of additional labor power. The bosses say to the workers: If you insist on any further wage increases, we will replace you with machines. The workers then find themselves in increasing competition with machinery. Unlike living workers, machines don’t form unions, insist on higher pay and better working conditions or otherwise resist capitalist exploitation.

These defensive measures by the capitalists then slow down the march toward an absolute overproduction of capital, though it comes at the price for the capitalists of an increasing organic composition of capital, which further lowers the rate of profit already undermined by a falling rate of surplus value.

Suppose, however, that the accumulation of capital is so rapid that though the variable component of capital shrinks relative to the constant component, variable capital still grows so rapidly in absolute terms that the supply of labor power is exhausted. Or what comes to exactly the same thing, the former reserve industrial army of labor is now fully employed and has thus disappeared. This would mean that even people who had not worked for decades, if at all, now find themselves gainfully employed. All attempts by capital to stave off the dreaded—for the capitalists—absolute overproduction of capital have failed. Would this mean that “full employment” capitalism has finally been established?

Not at all—or at least not for very long—according to Marx. Again, an absolute overproduction of capital is a situation where the further production of ever greater amounts of surplus value has become impossible.

Let’s recall the basic formula for capitalist production M—C..P..C’—M’. As the absolute overproduction of capital developed, capitalist production would break down at the M—C phase on the left side of the formula. The capitalists would hold on to a portion of the M—hoard some of their money capital. More precisely, if an absolute overproduction of capital existed, the capitalists’ money would not be able to function as capital, since there would be no further possibility of exchanging money for the commodity labor power, the only commodity that actually produces surplus value. Even if there were no realization problems, that is the C’—M’ that appears on the right side of the formula were proceeding smoothly, the prospects for further profit making would vanish. (4)

No surplus value no profit

Surplus value that is not produced cannot be realized. If there is no C’, there can be no M’ and thus no profit. And no profit no capitalist production. As the capitalists increasingly hold onto their M, investment and the demand for the commodities that constitute the means of production will plummet. And so will any further demand for the commodity labor power, since the *use value* of labor power for the capitalists is precisely that it produces surplus value.

If labor power does not produce surplus value, it loses its use value for the capitalists and can no longer be sold by its owners—the workers—to its buyers—the capitalists. Furthermore, the resulting collapse of demand for labor power will indirectly reduce the demand for means of subsistence by the now-growing number of unemployed workers.

The very shortage of labor power will under capitalist conditions of production cause an economic crisis leading to the reappearance of mass unemployment. Therefore, even if capitalism developed with such vigor that the industrial reserve army entirely disappeared into active employment, this would cause an economic crisis that would reconstruct the industrial reserve army.

Here we get to the essence of what distinguishes capitalism from other modes of exploiting labor. Slavery, where the worker is the private property of the boss and therefore has no freedom at all, and serfdom, where the worker is bound to land and cannot quit and seek alternative employment, are backed up by brute force. If a slave tries to escape, the “boss” uses force, whether his own private force or the state power, to reclaim the ownership of his private property. Under serfdom, the feudal lords could similarly forcibly pursue the serfs who fled from their lord’s domain without permission.

This is not the case under capitalism once capitalist relations of production have been consolidated. What replaces the brute force of slavery and serfdom is the threat of unemployment—that is, the very existence of the reserve industrial army, which holds the employed workers in check. The prospect of starvation, or at least poverty, that unemployment brings takes the place of the whip and lash of old. Without the reserve industrial army, the whole capitalist system of exploitation of “free wage labor” therefore could not, according to Marx’s analysis, exist

Another function of the reserve industrial army

Marx pointed out that the reserve industrial army plays another vital role for the capitalists. Periodically, he explained, the demand for either a particular commodity or the market for commodities in general—the world market—undergoes a sudden expansion causing the demand for labor power to periodically soar. In my main posts, I examined why such sudden expansions of the market are an inevitable part of the capitalist mode of production. However, if there was not a preexisting reserve army of potential workers when such sudden expansions of the market occur, from where would the workers come to produce the commodities to meet the suddenly increased demand?

In the absence of a substantial reserve army of labor, as soon as the “boom” began it would collapse because of an absolute overproduction of capital. Indeed, capitalist labor market experts still scratch their heads when they examine the evolution of the labor market during the middle of the last century. By the end of the Depression decade of 1930s, the capitalists had written off millions of people—almost an entire generation of youth—as “unemployable.” But when the war economy, and then immediately after the war the world market, entered one of its periodic sudden expansions, millions of people who the bosses had written off as “unemployable” were productively—from the viewpoint of producing surplus value, and in other ways as well—employed. If there had been “full employment” during the 1930s, where would all the extra workers have been found who were necessary for the war economy and then the postwar “boom” economy that followed?

The reserve army and the industrial cycle

Marx explained that the the proportion of the population that makes up the industrial reserve army relative to the employed workers is not fixed but fluctuates with the phases of the industrial cycle. During the depression phase that follows the crisis, the demand for labor power hits its lowest point of the cycle. This causes the industrial reserve army to swell to its maximum size.

The reserve army begins to shrink again during the phase of average prosperity that follows the stagnation-depression phase and reaches it lowest point during the phase of boom and overproduction that precedes the next crisis. However, the inability to realize the surplus value embodied in the commodity capital (C’—M’, on the right side of the general formula for capitalist production) ends in a new crisis of general relative—not absolute—overproduction of commodities and capital well before the industrial reserve army completely disappears. Or what comes to the same thing, a crisis of a general relative overproduction of commodities and the productive capital used to produce the commodities occurs before an absolute overproduction of capital can develop.

An important function of crisis

Therefore, one of the most important functions of the crises that crown the industrial cycle is to periodically renew the ranks of the reserve industrial army. If the problem of realizing the value and surplus value of commodities could actually be overcome by the methods advocated by Keynes and his followers—or any other way—the drive of the industrial capitalists to increase production without limit would actually lead to an absolute overproduction of capital.

But this, as we have seen, would be a far more serious crisis for the capitalists than the crises of relative overproduction of commodities and productive capital that occur in the real world. Therefore, according to Marx, “full employment,” at least for any period of time under capitalism, is a utopia, though the movements of the industrial cycle and the depth, frequency, severity and durations of its downturns in different historical periods cause considerable fluctuations in the actual size of the reserve industrial army. And these fluctuations can have very important political consequences.

What progressives don’t like about Marx

This aspect of Marx’s economic theory is very unappealing to non-Marxist progressives who dream of “full employment” as a demand that can be realized under the capitalist system. They greatly prefer Keynes, who tells them that “full employment” can be realized under capitalism—even if “full employment” can only be realized through enlightened government policies designed to achieve it.

Keynes’s marginalist roots

Anybody who actually reads Keynes’s “General Theory of Employment, Interest and Money,” which is now available free of charge online, will find that his theory of employment and unemployment is simply a modification of the theory of employment developed by Keynes’s teachers, the pioneering marginalist economists of the late 19th century. Therefore, in order to understand Keynes’s theory of employment, we first have to examine the marginalist theory of employment.

The marginalist theory of employment

In complete opposition to Marx, the marginalist economists—sometimes called “neoclassical economists”—claimed that a capitalist economy will always move toward an equilibrium at “full employment” as long as there are no “monopolies”—like trade unions—and no minimum-wage laws. According to marginalist economic theory, capital produces “interest,” labor produces the “wage” and land produces “ground rent.” In addition, entrepreneurial risk-taking and initiative produce the “wages” of the entrepreneurs and an “economic profit” beyond the interest produced by capital itself.

Suppose, the marginalists explain, a situation existed where labor (5) is producing more value than it receives in wages. Even a marginalist would concede that this would mean “labor”—the worker—is being exploited by the capitalist. Under such conditions, the marginalists explain, the capitalists would make an extra profit above and beyond the interest on capital and any wages and “economic profits” that the capitalists would produce through their own labor as entrepreneurs. The capitalists, hungry for even more profits, will hire additional labor. But the very rise in demand for labor will increase wages. Wages will keep rising, according to the marginalists, until an “equilibrium” situation arises where the wages received by the workers exactly equals the value that the workers are producing.

Therefore, the marginalist hold, the very workings of the labor market, assuming that complete “free competition” prevails, prevents the exploitation of labor by the capitalists, at least for any period of time. This conclusion by the margnalists is the exact opposite of Marx’s theory of surplus value.

Could the workers, according to the marginalists, actually exploit the capitalists? Yes, the marginalists answer, but again assuming free competition such a situation could not persist. A situation where labor was exploiting capital is defined, according to marginalist theory, as one where the value created by the workers’ labor is less than the value that the workers receive in wages.

But such a situation would not be stable either, assuming free competition. The capitalists would not for very long employ workers if the capitalists are being exploited by the workers because they would be making losses by doing so. The demand for such “capital-exploiting labor” would soon vanish.

Therefore, the only equilibrium that is possible in a free-market economy is a situation where the owners of “capital” and the “entrepreneurs” get exactly the interest and profits that they and their capital produce—not a penny more and not a penny less. The workers also get exactly the value they produce through their labor, not a penny more or a penny less. The same will be true of rent-producing land for the landowners.

Under equilibrium, none of the three factors of production—capital, labor and land—will be able to exploit any other factor of production. If you take a college-level economics course, this is what you learn, as the young Keynes learned from his teachers.

Workers free to choose between labor and leisure, according to the marginalists

In a free society—that is, a capitalist society—the workers have two choices, the marginalists explain. They can either sell their labor or they can choose leisure over labor. As Milton Friedman put it, they are “free to choose.” If they choose leisure, they avoid the “disutility” of labor but forgo the utility of the extra goods they could have purchased with their wages if they had chosen to work. (6)

Freedom of choice and voluntary unemployment

If workers want work but can’t get it at the prevailing wages—assuming there are no unions that enforce wage scales or minimum-wage laws that undermine the workers’ freedom to work for any wage—they simply lower the wages they ask for until a capitalist offers them work. It might be, the marginalists concede, that a worker will choose not to accept employment at wages that represent the actual value that the workers’ labor will produce. But in that case, the marginalists explain, the workers are freely choosing leisure over labor. In such a situation, workers are “voluntarily unemployed.” And in a free society, unlike a slave society, the workers are free to be voluntarily unemployed if they choose to be!

Since this a free choice on the part of the workers, this not really problem. If it becomes a problem for the unemployed workers, the marginalist economists explain—for example, if they face severe poverty and even starvation—they will no doubt freely offer their “labor” at a wage that actually represents the value they will produce for the capitalists and they will then quickly find employment. Therefore, the marginalists economists explain, as long as there is free competition—no unions and no minimum-wage laws—the only real “involuntary unemployment” will be what they call “frictional unemployment”—people between jobs—which is not really a problem since it is of short duration.

The marginalists as champions of the poor and unemployed

But suppose there are trade unions that enforce a wage schedule. The marginalists argue that while the more skilled workers will get employment because their labor produces a great deal of value, the less-skilled and less-experienced workers will be denied work because the union-enforced wages will be greater than the value the unskilled workers can produce with their less-productive labor.

The marginalists, now claiming to be the champions of the poor and the oppressed unskilled workers, “explain” that the poor never get a chance to improve the productivity of their labor because they never get a chance to work. It is only through work that the poor and unskilled acquire the skills that will make their labor more productive.

Instead, because of the selfish unions of skilled workers and the “well-meaning” but sadly mistaken minimum-wage laws passed under the pressure of people who do not understand (marginalist) economics, the poor get locked into chronic unemployment and poverty. The cause of poverty, according to these well-paid “economic scientists” of the ruling class, is the basic organizations of the workers and minimum-wage laws—and not the capitalists who, wonder of wonders, don’t like unions and hate minimum-wage laws!

Other causes of poverty, according to the marginalists

Also very harmful to the poor, the marginalists explain, are welfare and unemployment insurance. These encourage the poor or unskilled workers to depend on “government handouts” rather than seek work at initially low wages that will enable them to gain skills that later on will enable them to earn the higher wages of skilled workers. Therefore, in order to help the poor, the marginalist economists urge the abolishment or at least the drastic reduction of welfare, unemployment and social security benefits and other “well-meaning” but sadly “mistaken” social legislation.

In this way, highly paid professional economists explain, the poor will gain the skills that will enable them to earn high wages and achieve independence.

The marginalists and cyclical unemployment

But, we might ask a marginalist economist, what about the unemployment caused by cyclical crises? Marginalist theory, which builds into its foundations Say’s Law, the quantity theory of money, and the neutrality of money—as well as the theory of comparative advantage, which explains that free trade is equally in the interest of rich and poor nations, denies that crises of generalized overproduction are even possible in a capitalist economy, let alone inevitable.

But if an economic crisis occurs anyway, due perhaps, marginalist economists will explain, to some “external shock” like crop failures or some other economic accident arising outside of the economic system such as mistaken policies of the government or the monetary authority, it will be short-lived. Full employment will be quickly restored as long as the government stays out of the way and does not interfere with the free market. Private charity, the marginalists explain, should be more than enough to take care of any short-term involuntary unemployment caused by such “accidental” and short-lived economic crises.

Marginalism and Marxism, two completely different economic theories

We have here two completely different theories of employment and unemployment. Marx’s theory of employment and unemployment is rooted in his basic theory of the nature of commodities and money as a social relationship of production, labor value, and labor power as a commodity, and his theory of surplus value. The marginalists’ theories are rooted in their theory of value. According to the marginalist theory, value arises not from the labor that is socially necessary to produce a commodity, as both the classical political economists and Marx held, but rather from the scarcity of goods that have a subjective utility for their owners.

Since the basic factors of production that produce the scarce goods—capital, labor and land—are themselves scarce, the market will equilibrate where each factor of production receives income that exactly equals the value it produces. In this situation, each factor of production including “labor” will be “fully employed.” Therefore, the marginalists—before Keynes and today after Keynes as well—draw the conclusion that the only economic equilibrium that is possible in a “free market” capitalist economy is “full employment.”

Progressives hate marginalist economics

Non-Marxist progressives consider both the marginalist and Marxist theories unacceptable. They refuse to accept Marx’s arguments that it will take a full-scale political and social revolution to end unemployment by abolishing capitalism. But they are repelled by the marginalist economists whose “solution” to unemployment amounts to union busting, repealing minimum-wage laws and abolishing unemployment insurance, social security, welfare and all other progressive social legislation. Surely, progressives believe, there must be a third way between the extremes of “Marxist revolution” and “marginalist reaction.” For non-Marxist progressives, the theories of Keynes represent the “third way.”

Keynes ‘corrects’ marginalist theory

Keynes’s starting point was not that of Marx, notwithstanding his expressed interest in 1933 in Marx’s C—M—C (which he garbled into C—M—C’) and M—C—M’. This is not surprising since Keynes had first learned economics from the pioneering English marginalist economists of the late 19th century such as Alfred Marshall, his main teacher in economics.

As a young economist in the early years of the 20th century, the talented Keynes became in his own right a leading advocate and developer of marginalist economic theory. But when he was faced with Britain’s—Keynes was always English-centric—prolonged unemployment crisis that set in with the post-World I recession of 1920-21, and that was reinforced by the U.S.-centered super-crisis of 1929-33, and lasted right down to the mobilization for World War II, Keynes realized that there was something wrong with the marginalist theory of employment.

However, unlike many of the younger economics students of the 1930s, including the young Paul Sweezy, Keynes found the Marxist alternative unacceptable, since to accept it he would have had to break with his class.

In order to explain the unemployment crisis, Keynes merely modified the marginalist theory. He now held that the marginalists had unwittingly only analyzed the “special case” of “full employment” while failing to realize that they were only analyzing a “special case.” It is as though Albert Einstein had developed the theory of special relatively without realizing that he had left out acceleration. Therefore, the marginalist theory wasn’t wrong, according to Keynes, it was merely incomplete. A full marginalist theory of employment and unemployment would have to explain not only the “special case” of an equilibrium at full employment but also equilibriums at less than full employment as well.

Keynes’s amended marginalism

Let’s examine how Keynes amended the marginalist theory of employment. During the Depression years, arch-reactionary marginalist economists such as the Austrian (7) economists Ludwig von Mises and Fredrick von Hayeck and the English economist Lionel Robbins, for example, were claiming that the mass unemployment was caused by wages that were too high relative to the value that the unemployed workers’ labor was capable of creating if they were actually employed. This was, of course, the standard marginalist analysis.

Therefore, the only way back to “full employment,” these traditionalist marginalist economists argued, was for the bosses to show more backbone in standing up to the unions and push through the wage cuts that were needed to return to equilibrium and full employment.

Much to the embarrassment of many trade union and progressive supporters of Keynes, Keynes agreed with von Hayeck, von Mises, Robbins and others that the root cause of the Depression-era unemployment crisis was that wages were higher than the value that the unemployed workers could create if they were employed at the prevailing wage. But Keynes pointed out that money wages and real wages—wages in terms of commodities—are by no means the same thing.

Keynes versus Ricardo and Marx on wages and prices

In his “General Theory,” Keynes claimed that the general price level was largely governed by the level of money wages. This was the view that was also held by Adam Smith and Malthus but was later refuted by David Ricardo on the basis of his law of labor value.

Ricardo explained that higher wages would mean a fall in the rate of profit, not a rise in the general price level. Marx strongly defended Ricardo’s arguments in a talk he delivered to a meeting of the International Workingmen’s Association (First International), which was later reprinted as “Wages, Price, and Profits” or “Value, Price, and Profit.”

Keynesian economists as ‘friends’ of the trade unions

Today, “neoliberal” marginalists—marginalists who defend the traditional marginalist arguments and reject Keynes’s amendments, such as the late Milton Friedman—also tend to reject the claim that higher money wages are inflationary, even though they are certainly not friends of the trade unions. Keynesian economists, on the other hand, tend to strongly support Keynes’s view that higher money wages will lead to inflation. They therefore urge that the trade unions practice “wage moderation” in order to avoid inflation.

During the “stagflationary” 1970s, the Keynesian economists explain, the unions abused their power and mistakenly pressed for higher money wages and thus caused the inflation that opened the door to “neoliberalism.” Despite this, Keynesian economists are seen as allies of the trade unions by many trade union leaders and other progressives and even serve as advisors to the trade unions.

Keynes’s views on wage policy were shaped in no small measure by the evolution of the class struggle in Britain during the 1920s. In 1926, a move by the coal bosses to cut wages measured in terms of British currency after Britain had returned to the gold standard at the pre-war rate led to the General Strike.

The return to gold at the pre-war rate had meant a revaluation of the British currency not only against gold but also in terms of the currencies of Britain’s competitors on the world market such as the U.S. dollar. Assuming that the wages of the British workers in terms of pounds remained unchanged, this amounted to a wage increase in terms of gold—world money—as well in terms of dollars and other currencies whose values remained unchanged in terms of gold.

The General Strike of 1926

The miners’ resistance to the wage cuts in terms of pounds that bosses saw as the only way to counteract the rise in the value of the pound against gold and other currencies spread to the rest of the working class, leading to the great General Strike of 1926. For a brief moment, the General Strike raised the specter of a workers’ revolution in Britain such as the one that had occurred in Russia in October 1917.

Keynes like bourgeois English people in general never wanted to see anything like that again! He drew the conclusion that the way to cut real wages was through currency devaluations and inflationary expansions of the money supply, and not through the cutting of money wages that would lead to workers’ resistance.

In the “General Theory,” published just a decade after the General Strike, Keynes claimed that during a period of crisis marked by falling prices, money wage cuts cause prices to fall further. The result, Keynes complained, is that *real wages* do not fall and may even tend to increase during crises leading to still more unemployment.

Indeed, before World War II the cost of living generally fell during periods of recession, which often did lead to a rise in real hourly wages. The income of the working class as a whole still fell during recessions, however, because of the reduced hours of work. In order to restore “full employment,” Keynes explained, it is necessary to lower the amount of actual commodities that the workers receive for performing a given amount of work.

The only way to achieve this, according to Keynes, was not through cuts in money wages carried out by individual capitalists. This, he claimed, would only lead to offsetting declines in the cost of living and could spark dangerous resistance on the part of the workers. The way to achieve the “needed” cuts in real wages was for the government and its “monetary authority” to follow monetary polices such as currency devaluations and inflationary increases in the money supply designed to encourage rises in the cost of living independent of movements in money wages.

Today, the progressive-Keynesian economist Paul Krugman is calling for a massive devaluation of the “overvalued” U.S. dollar relative to the “undervalued” Chinese yuan.

In general, Keynesian economists play down the danger of inflation. Far from being an evil, the Keynesians explain, a “little inflation” is just what is needed to lower real wages and restore “full employment.”

And while Krugman is only advocating inflationary measures, his former colleague at Princeton University’s economics department, the Republican head of the Federal Reserve System Ben Bernanke is acting. Bernanke has announced that the Federal Reserve is buying $600 billion worth of U.S. government bonds in order to carry out quantitative easing—also known as “running the printing press.”

The Fed is making no secret that it considers the current rate of increase in the cost of living to be dangerously low. Since cost-of-living clauses have virtually disappeared from union contracts in the U.S., the “modest” rise in the rate of inflation that the Fed is hoping to engineer through its policies of “quantitative easing” and dollar devaluation will mean lower real wages for both union and nonunion—the great majority of—U.S. workers.

In addition, the bipartisan so-called U.S. Deficit Commission is strongly advocating that the cost-of-living increases built into Social Security payments be reduced—this just as the Federal Reserve is moving to increase the rate of inflation. By reducing Social Security payments in real—commodity—terms more older people will be forced to return to the labor market putting further downward pressure on the wages—both money and real wages—of workers. This is on top of a proposed increase in the retirement age!

What genuine progressives, or even trade union officials who support Keynesian economics, choose to ignore is that policies often advocated by Keynesian economists such as “devaluing the overvalued currency” and increasing the money supply are *designed* to lower the *real* hourly wages of the workers and *increase profits*. This is how the Keynesian economists hope to restore “full employment”—by which they generally mean in the U.S. the levels of unemployment of the late Clinton administration.

The Keynesian theory of ‘effective demand’

But there is another side of Keynes’s theory, his theory of *monetarily effective* demand that is far more palatable to trade unionists, progressives and “Keynesian Marxists” such as John Bellamy Foster.

While Keynes believed that the real hourly wages of employed workers during a period of high unemployment had to be lowered in order to return to “full employment,” he also believed that overall monetarily effective demand would have to be increased if world capitalism was ever to emerge from the mass unemployment that prevailed during the 1930s when he wrote his “General Theory.” If full employment were restored, overall monetary demand would be higher than it was in the Depression, even if the *hourly real wages* of the employed workers were less.

Since with full employment the workers employed even during the Depression would in many case be working longer hours—much more overtime, for example—their total real income might still rise. And of course the incomes of the unemployed could only rise once they became employed even if the average real wage level measured in terms of real wages earned per hour of labor fell.

What caused the mass unemployment of the Depression era, according to Keynes?

But Keynes if he were to provide a bourgeois alternative to Marx’s explanation of unemployment still had to answer the question: Why was there so much unemployment not only of workers but also machines during the Depression decade—and in Britain during the decades of the 1920s, as well? Hadn’t the marginalist theory “proven mathematically” that the only possible equilibrium condition of a capitalist economy was one of “full employment” of both machines and workers? How could the British capitalist economy remain so far from its only possible equilibrium of “full employment” for 16 years and counting—which was the case when Keynes published his “General Theory” in 1936?

Unlike the typical economics professor who taught the traditional marginalist theories in the universities in those years, Keynes was far too intelligent to claim that the mass “involuntary unemployment” of the Depression was caused by the “over-strong trade unions” and minimum-wages laws! However, Keynes was not about to go over to Marx’s analysis of the necessity of a reserve industrial army of labor in a capitalist system either. If he had, he would have had to admit that unemployment was a necessary feature of capitalist society and would last as long as capitalism itself existed.

We shouldn’t forget that the Depression years were also the first years of five-year plans of the the Soviet Union, which showed in practice that a planned economy made possible by a workers’ revolution could indeed eliminate mass unemployment. As a defender of capitalism, Keynes was determined to prove that unemployment could also be eliminated within the framework of the capitalist system. This is what he tried to prove in his “General Theory.”

Keynes still a marginalist

The Keynes of the *General Theory* to the extent that he had any value theory at all supported what he called our “modern” theory of value—the marginalist theory of value. According to the marginalists, objects of utility—it doesn’t matter whether they are produced by human labor or by nature—acquire value because of their scarcity relative to subjectively determined human needs. The means of production or capital—to bourgeois economists including Keynes, unlike Marx, the means of production are always “capital” regardless of the prevailing social relations of production—are also scarce because the “goods” they produce are too scarce to fully satisfy all subjectively determined human needs even when they are fully employed.

Suppose the economy has been in a depression, Keynes reasoned, but has begun to recover. As more and more of the available capital is utilized, the “goods” produced by capital become less scarce and therefore the value of the “goods” and the capital that produces the “goods” will decline. Unlike other economists, Keynes made a distinction between the rate of profit “earned” by the owners of productive capital and the rate of interest “earned” by the money capitalists—rentiers in Keynes terminology.

According to Keynes, real capital—factories, machines, and so on as opposed to money—has a “marginal efficiency” for its owner. The marginal efficiency of capital is defined by Keynes as what the entrepreneurs expect to earn when they put an additional unit of their capital into motion. Since it takes time to create new means of production or capital, the amount of potential capital—utilized means of production plus idle means of production—is, Keynes assumed, fixed in the “short run.”

Capital has a marginal efficiency and therefore a value to the capitalists, according to Keynes, only because it is scarce. The more capital was set in motion, assuming at least in the short run that the population is also fixed, the less scarce the “goods” produced by the capital would be relative to subjectively determined human needs and the lower will be their value. Therefore, with the population given, the more capital that is set in motion, the lower would be the marginal efficiency—or value—of capital. Or for those readers who are not professional economists, the lower will be the additional profit that the industrial capitalists could reasonably expect to earn by re-activating previously idle means of production.

Keynes’s theory of interest versus Marx’s theory

Keynes defined interest as the reward to the money capitalists *for not hoarding money*. This explanation cleverly dodges the question of how “interest” is produced in the first place. Here Keynes, as I explained elsewhere, drew a conclusion that was similar to the conclusion that Marx drew. Marx noted and Keynes agreed that everything else remaining equal a contraction in the quantity of money within a country will cause interest rates to rise, while a rise in the quantity of money will causes interest rates to fall. Marx would stress that this applies only to real money—gold—but Keynes did not make any such distinction. To Keynes, money was money whether it was newly produced by human labor in the gold mines or was created by the “monetary authority.”

An even more fundamental difference between Marx’s and Keynes’s theories of interest is that Marx saw interest as a portion of the surplus value that the workers produce by performing unpaid labor for the capitalists. More specifically, Marx defined interest as a portion of the total profit—surplus value minus rent.

Therefore—and this point is crucial to what will follow—in Marx the rate of interest has an upward limit, namely the rate of profit. Keynes, in contrast, saw no such upward limit to the rate of interest. According to Marx, interest is not produced by a shortage of money, the quantity of (real) money merely determines the division of already-produced surplus value between the money capitalists on one side and the industrial and commercial capitalists on the other.

Keynes was in *partial* agreement* with Marx in that he rejected by the 1930s the quantity theory of money that he had learned as an economics student from his marginalist teachers and what goes with the quantity theory of money, Say’s Law, the “neutrality” of money, and comparative advantage in international trade.

On these questions, Keynes as I mentioned last month was, like Marx, closer to the pre-liberal mercantilists economists than he was to the liberal economists like Ricardo or to the founders of marginalism. John Bellamy Foster points to Keynes’s agreement with Marx with regard to Say’s Law, the neutrality of money and so on to argue that Marx and Keynes-inspired “macroeconomics” are largely saying the same thing, even when they use different terminology.

But *unlike Marx*, Keynes based his rejection of the quantity theory of money and the “neutrality of money” not on Marx’s perfected theory of labor value but on the alleged “stickiness” of money wages and the alleged determination of the general price level by such sticky money wages. Therefore, the common rejection of the quantity theory of money, Say’s Law and so on by Marx and Keynes are built on entirely different foundations. It therefore is not surprising that Marx and Keynes drew completely opposite conclusions about the possibility of achieving lasting “full employment” under capitalism.

If only money wages weren’t sticky on the downside, the quantity of money and all that goes with it, such as Say’s Law, would apply, according to Keynes. But, Keynes argued, money wages, all other things remaining equal, determine the general price level, and since they are so sticky on the downside, a contraction of the money supply within a country would cause interest rates to rise, and conversely an expansion of the money supply would cause interest rates to fall—as long as money wages didn’t increase as well.

Keynes agreed with the traditionalist marginalists—but not Marx—that even given sticky money wages that invalidate the quantity theory of money, the capitalist economy will move to an equilibrium point where the rate of profit on productive capital equals the rate of interest. But in contrast with marginalist economic theory up until that point, it was, according to Keynes, a matter of pure chance whether this equilibrium would occur at “full employment” or at a point well below “full employment.”

Suppose, following Keynes’s—not Marx’s—theory, real capital was very scarce relative to the population. According to Keynes, this would mean that the marginal efficiency of capital—or rate of profit—would be high and full employment would be achieved at a high rate of interest. But what if capital though still scarce relative to subjectively determined human needs over time becomes less scarce relative to human needs as society becomes richer? Or what to Keynes came to the same thing, what would happened if productive capital—the means of producing “goods”—was growing faster than the population?

If the world was to avoid an ultimate Malthusian disaster of “overpopulation,” population growth would have to slow down sooner or later. Keynes believed the marginal efficiency of capital, or rate of profit, would then fall as productive capital became less scarce relative to population. It is important to realize that Keynes’s theory of the tendency of the rate of profit to fall was radically different than Marx’s theory. Keynes like all economists trained in marginalism was very far from realizing that only variable capital produces surplus value, and he had no concept of a tendency of the rate of profit to fall due to a rising organic composition of capital.

Keynes—like many of early marginalists—simply believed that the rate of profit would decline as capital became less scarce. Like the pioneering marginalists, he saw this “falling rate of profit” as an answer to socialist criticism of capitalism. The high profit and interest rates relative to the miserable wages paid to the workers was only a feature of early capitalism, Keynes and the early marginalists held, that would give way to a far more equalitarian division between profits and interest rates on one side and wages on the other as capitalism matured. (8)

This expected fall in the rate of profit—or declining marginal efficiency of capital—was exactly what Keynes thought was happening in the decades of the 1920s and 1930s. The problem as Keynes saw it was that the rate of profit on productive capital was falling faster then the rate of interest was falling. Because the fall in the rate of profit on productive capital was outpacing the fall in the rate of interest on money capital, Keynes reasoned, the capitalist economy was now reaching “equilibriums”—where the rate of profit on productive capital equaled the rate of interest on money capital—at higher and higher levels of unemployment of both workers and machines.

Keynes on the industrial-trade cycle

According to Keynes, the difference between the profits expected by the entrepreneurs during an upswing in the trade cycle, as the English call the industrial cycle, and their actual profits produces the cyclical pattern of boom and crisis and all the transitional states in between. However, Keynes assumed not unreasonably, as did Marx for that matter, that the profit expectations of capitalists, though they will usually be either above or below what the capitalists will actually realize, will over time fluctuate around the actual profits that successful capitalists come to expect. Those capitalists that prove over time to be unable to gauge more or less correctly the movements of profit rates will be eliminated through competition.

Both Marx and Keynes alike agree on this. Therefore, according to Keynes, the capitalists having unreasonably high profit expectations during a boom will accumulate so much productive capital that (productive) capital becomes much less “scarce” causing the rate of profit to fall well below the prevailing rate of interest. When the industrial capitalists realize that they are making less on their new investments than they would if they merely invested their newly realized profits in government bonds, they will dramatically reduce their productive investment and shift to bonds instead. As is said by Keynesian economists, they will then attempt to save more than they are (productively) investing. This causes the trade cycle downturn.

The downswing in the trade cycle brings with it slumping industrial production and unemployment-breeding layoffs. During the depression or stagnation phase of the trade cycle that follows the crisis, capitalist expectations about profits will now lag behind the actual profits that the capitalist could be making as the excessive “pessimism” of the depression replaces the unwarranted optimism—about profits, that is—of the “boom.” Falling investment, however, increases the profits earned by productive capital as productive capital agains grows scarcer while interest rates fall during the depression as the demand for borrowed money contracts.

Eventually, the marginal efficiency of capital again will exceed the rate of interest and the trade cycle will turn upwards. Over time, Keynes believed, the trade cycle fluctuates around a long-term equilibrium rate of profit on productive capital that equals the rate of interest—which might or might not represent full employment.

If the economy was fluctuating around an equilibrium of “full employment,” Keynes reasoned, the unemployment caused by recessions would be short-lived and full employment would be quickly restored as the traditional marginalist economists had claimed. But if the equilibrium level of employment that the trade cycle fluctuated around was well below “full employment,” this would not be the case. Instead, there will be considerable involuntary unemployment that will persist across the trade cycle, though unemployment would still be highest during the trade cycle downturn and least during the trade cycle “boom.”

This is exactly what Keynes thought was happening when he wrote the “General Theory.” If nothing was done and the problem of mass unemployment persisted or worsened as capitalism achieved equilibriums that were more and more below “full employment,” Keynes feared that his beloved capitalist system would be increasingly discredited. The British capitalist class might not be so lucky the next time they faced a situation like the General Strike of 1926. Therefore, Keynes believed that something had to be done to prevent this ultimate disaster for his ruling capitalist class. Keynes was certainly not looking forward to a socialist future.

Keynes’s proposed solution to the unemployment crisis of the 1930s

Keynes, however, did not believe the situation was hopeless for his class. According to him, it was well within the power of the capitalist government and the “monetary authority” to end the unemployment crisis and return to “full employment.” How could this be done? The simplest way would be to have the “monetary authority”—the Bank of England—print more money until the rate of interest fell to the point where it again equaled the marginal efficiency of capital at full employment. For this reason, Keynes wanted the Bank (of England) to have complete freedom to print whatever amount of money it took to lower interest rates right down to the point where interest rates would equal the “marginal efficiency of capital” at “full employment.”

Therefore, Keynes hated the gold standard in any form and strongly advocated what was called in the 1930s a “managed currency” and today is called a “fiat monetary system.” Under such a system, the “monetary authority” does not have to redeem the currency it issues in gold or any other precious metal.(9) If any form of gold standard were retained, Keynes feared, a run on the Bank of England gold reserves could force it to keep interest rates above the very low levels that Keynes believed were by the 1930s necessary to achieve an “equilibrium at full employment.”

The utopia of ‘non-commodity money’ central to Keynes’s solution to mass unemployment

Keynes, who had no notion of any version of the law of labor value, did not of course understand Marx’s perfected law of labor value. In his perfected law of labor value, Marx explained that the law of value requires a value form, or exchange value. The value form, or exchange value, means that the value of a commodity must be measured in terms of the use value of another commodity. This means that money, which is the universal equivalent that in its use value measures the value of all other commodities, must itself be a commodity. The non-commodity money that was so essential in Keynes’s view to achieving “full employment” under capitalism is a complete utopia.

Therefore, like Keynes, non-Marxist progressives strongly oppose any proposals to return to the gold standard in any form. In general, progressives agree with those bourgeois economic historians who, strongly influenced by Keynes, blame the 1930s Great Depression largely on the gold standard. (10) While accepting Keynes’s rejection of the gold standard, progressives play down those parts of Keynes’s theories that imply that monetary policy alone can ensure “full employment” by lowering the rate of interest to the point that it equals the “marginal efficiency of capital” at full employment.

Many pro-business conservative “neo-Keynesians,” claiming that “human needs are infinite,” deny there is a tendency for the rate of profit—Keynes’s “marginal efficiency of capital”—to fall. These conservative “neo-Keynesians” hold that correct monetary policies by the monetary authorities should be sufficient to maintain “full employment,” at least under “most circumstances.” In contrast to these conservative “neo-Keynesians,” progressive Keynesian—sometimes called “post-Keynesians”—who are not far from the Monthly Review School, demand government policies that directly address unemployment and poverty.

Expansionary fiscal policies

Especially under the current conditions of mass idleness of both workers and machines, the Keynesian progressives hold that these desperately needed programs should be financed by borrowed money. This is what is called by Keynesian economists an expansionary fiscal policy. A hallmark of progressive Keynesians as opposed to conservative “neo-Keynesians” is the claim of the former that fiscal and not monetary policy is key to ensuring full employment.

Liquidity trap

Back in the 1930s when Keynes wrote the “General Theory,” he believed that if capital was as “scarce” relative to the population as he believed it to be before World War I, the “marginal efficiency of capital” would still be high at “full employment.” Under these conditions, which Keynes assumed generally prevailed before World War I, monetary policy alone would be able to ensure that interest rates would low enough to ensure a “full employment” equilibrium. Looking back at the pre-World War I years, Keynes concluded that better results would have been achieved if a “managed currency system” rather than the international gold standard had been in place, since the gold standard required the Bank of England to sometimes raise interest rates to levels that were too high to maintain a “full employment equilibrium” in order to safeguard its gold reserve.

But the gold standard notwithstanding, Keynes believed that the scarcity of capital relative to population had ensured a high enough marginal efficiency of capital to prevent the kind of mass unemployment crisis that was to hit Britain and most of the rest of the capitalist world during the 1920s and 1930s.

But with Britain and world population growth declining after World War I, Keynes believed that by the 1930s the “marginal efficiency of capital” was so low that it was becoming increasingly difficult in practice to drive the interest to the very low levels that were required to ensure anything close to an “equilibrium at full employment.” The problem, Keynes believed, was that while it is easy to reduce say a 6 percent rate of interest to a 3 percent rate of interest by simply having the monetary authority expand the money supply, it was far more difficult to reduce an interest rate of 1 percent by simply printing more money. Interest rates—especially long-term interest rates—stubbornly resist falling all the way to zero.

Therefore, if the marginal efficiency of capital was below 1 percent at full employment, even a long-term interest rate of say 1 percent was too high to ensure an equilibrium of full employment. Such a situation is called by Keynesian economists a “liquidity trap.” Today, once again progressive Keynesian economists believe that the capitalist world is in a liquidity trap where monetary policy alone is incapable of ending the current unemployment crisis.

Euthanasia of the rentier

In principle, Keynes did believe that the rate of interest could fall all the way to zero, and indeed predicted that would happen eventually as productive capital ceased to be scarce. He called this the “euthanasia of the rentier.” In a world without “scarce” capital, Keynes explained, there would be no need to keep money scarce and interest on money would vanish. Nobody would then be able to live off interest alone without working. In the “General Theory,” Keynes looked forward to this day, explaining that this would strip capitalism of one of its most repulsive features—the ability of the rich to live off the interest on their capital without performing any work at all, not even the work of managing and running a business.

In a future world of capitalist abundance that Keynes believed was now near at hand, this would become impossible. But Keynes believed the powerful money capitalists that lived off “clipping coupons” were naturally resisting the further declines in interest rates that would move the economy back to “full employment.” When Keynes wrote the “General Theory,” the Bank of England—Britain’s monetary authority—was still a privately owned institution. (11) It wasn’t to be nationalized until 1946, the year of Keynes’s death. Keynes claimed that the bank’s stockholders, who after all represented the very cream of Britain’s money capitalists, were preventing the bank from printing enough money to drive interest rates down to a level sufficient to restore full employment.

Under these kinds of conditions—and Keynesian progressives assume as I mentioned that a similar “liquidity trap” exists today—the only way out is for the government to intervene more directly in the economy through deficit spending, or an expansionary fiscal policy.

Deficit spending, Keynesians believe, works in two ways. When the government borrows money—as opposed to raising it through taxation—an extra demand is created as the government or its dependents spend the borrowed money. This in turn stimulates other businesses that sell either to the government directly or to its dependents in a “multiplier effect.” As business picks up, these businesses spend more and hire more workers who spend their newly earned wages, stimulating other businesses in turn.

Goods and the means of producing additional goods—capital—therefore become scarcer relative to the now expanded level of “monetarily effective demand” increasing the rate of profit on productive capital both absolutely and relative to the long-term rate of interest. The economy therefore moves towards an equilibrium at a point closer to full employment.

Keynesian supporters of expansionary “fiscal polices” hold that as long as significant unemployment exists, the government should not fear increased deficit spending. The “problem” of deficits should not be addressed until “full employment” is actually achieved.

Today, Keynesian progressives are saying that Obama’s “stimulus plan” of deficit spending was far too small in light of the level of unemployed workers and machines created by the “Great Recession,” and that federal deficit spending in the United States and other capitalist countries should be further increased, not cut, until “full employment” returns.

Only then, these Keynesian progressives hold, should measures be taken to reduce or eliminate the deficits. It would be a grave error, they hold, to attempt to reduce federal deficits when tens of millions of workers are unemployed, which much to the chagrin of the progressives is exactly the stated policy of the Obama administration.

Another way that deficit spending works, according to Keynesian theory—less emphasized by the Keynesian progressives—is that a high level of unproductive government spending slows down the accumulation of capital and therefore keeps capital “scarcer” than it would otherwise be. This will mean capital will retain a higher marginal efficiency—higher rate of profit— and therefore interest rates will not have to fall quite so much to ensure “full employment.”

Military Keynesianism

What progressives fear is that governments under the influence of reactionary business interests will resort to “military Keynesianism” in order to solve the unemployment crisis. Instead of spending the borrowed money on public works and directly employing the unemployed in useful ways, the government will instead spend the money on arms buildups, employing young people as solders, and finally actually engage in shooting wars on a much larger scale than it is already doing.

If these wars escalate to the point where they destroy large amounts of capital, capital will become scarcer and according to Keynesian theory its “marginal efficiency or rate of profit will rise making it possible to achieve “full employment” at higher rates of interest once again.

In progressive circles, fears of military Keynesianism and its logical extension of large-scale warfare have been increasing in light of the wars and conservative domestic policies that have so far been followed by the Obama administration. It is widely believed by progressives—and many reactionaries as well—that only the large-scale deficit spending and the massive destruction of capital that accompanied World War II really ended the Depression of the 1930s.

Many progressives believe that World War II as fought by the democratic governments of the United States and Britain was a progressive war against fascism—the last truly “good war.” A happy side effect of the defeat of fascist tyranny was that it finally ended the Depression. But what kind of “economic recovery,” progressives ask—even if they can imagine the U.S. government fighting another “good war”—would accompany and follow a new world war fought with nuclear and other modern “weapons of mass destruction”?

Monthly Review School’s criticisms of Keynes

The Monthly Review School, founded by Paul Sweezy and now led by John Bellamy Foster, is often accused by more “orthodox” Marxists of replacing the Marxist analysis of capitalism with a Keynesian analysis. (12) However, while obviously greatly admiring Keynes’s analysis of capitalism, the Monthly Review School has advanced its own criticisms of Keynes.

Paul Sweezy, both in “Monopoly Capital,” co-authored by Paul Baran, and in articles published over many years, pointed out that Keynes completely ignored the question of monopoly in the “General Theory.”

Sweezy claimed that just like the traditional marginalists and the classical economists before him, and even Marx, Keynes assumed “free competition.” Since Keynes wrote the “General Theory” well into the monopoly-capitalist imperialist era—it was published exactly 20 years after Lenin’s “Imperialism”—this is indeed a major omission in Keynes’s work, to say the least.

According to Sweezy, Baran and their like-minded supporters, corporate monopolies are the major cause of stagnation in modern capitalism. Monopolies earn super profits by restricting production and thus increase their potential profit—the surplus—through their ability to charge monopoly prices, according to these economists. Since the giant monopoly corporations tend to restrict production, they have a considerable margin of excess capacity and this discourages new investment that will create additional capacity.

The problem they then face is how to realize this potential profit without increasing production, which if they did would cause the monopoly profits to disappear. In addition, the Monthly Review School holds, high monopoly prices made possible by the virtual disappearance of price competition among the giant corporations undermine the purchasing power of the rest of the population, further intensifying stagnationist tendencies through “underconsumption.” Unless these tendencies are offset by either revolutionary technological innovations such as the railroad in the late 19th century or automobiles in the 1920s, or massive government spending, the result will be Depression conditions like those that prevailed in the 1930s.

Sweezy and the other Monthly Review writers note therefore that for all his “insights,” Keynes managed to overlook the main cause of the tendency toward stagnation—monopoly. But the Monthly Review School holds that Keynes managed anyway to draw the correct conclusions when he held that only large-scale government spending could keep a Depression at bay and ensure “full employment” under monopoly capitalism. The key question becomes whether the government spends money in a way that is in the interests of the great majority of the people, like public works, public housing, and directly employing the unemployed, or whether it is spent on militarism or war.

A hyper-Keynesian argument

In “Monopoly Capital,” Baran and Sweezy expressed their disagreement with most Keynesian economists who hold that only deficit government spending increases monetarily effective demand and thus counteracts capitalist stagnation and unemployment. Baran and Sweezy held that even when the government raises money through taxation—not borrowing—demand is increased by the exact amount that the government spends. For example, if the government raises a billion dollars in tax revenue and spends it, the market will increase by a billion dollars. The only difference will be that unlike borrowed money, there will be no multiplier, or what comes to exactly the same thing mathematically, the multiplier will be 1. If the government borrows and spends a billion dollars and the multiplier is 4, the market will expand by $4 billion, but if the government raises a billion dollars through taxation and then spends the money, the market expands by only a billion dollars.

Therefore, it is perfectly possible, Baran and Sweezy held, for a capitalist government to expand monetarily effective demand right up to full employment without a dangerous accumulation of government debt.

Here Baran and Sweezy are being more Keynesian than Keynes. They are saying costly government is a good thing in itself—unless full employment already exists—or the spending is for completely harmful purposes such as military outlays and wars.

Until the Cold War, Paul Sweezy shared a belief that was widespread among left-wing New Dealers that the further intensification of the stagnationist tendencies of capitalism even beyond those of the 1930s would force the government to appropriate and spend more and more of the national income—in Marxist terms V + S. Sweezy hoped that the further growth of the percentage of the national income spent by the government would lead to full employment and massive social reforms that would be part of a gradual evolution towards a socialist society.

Instead came the Cold War and massive military spending even in “peacetime.” In the United States at least, spending on public works was increasingly limited to the construction of new highways to encourage purchases of private automobiles at the expense of pubic transportation—or neglected altogether. Like many, perhaps even most, postwar Marxists, Sweezy and other supporters of the Monthly Review School believed that in the absence of progressive government spending policies it was only military spending that was staving off the return of the Depression.

Seeing no socialist potential in the U.S. working class at all, Sweezy largely abandoned hope of progressive change within U.S. society. Instead, he transferred his hopes to the national liberation movements and revolutions that swept the former colonial and semi-colonial countries of the “Third World” countries. His hopes were especially raised by the Chinese Revolution under the leadership of Mao-Zedong, though he was surely disappointed by the polices of Mao’s successors. (13)

Sweezy, however, had genuine difficulty explaining why the U.S. government cut back rather than expanded New Deal policies into a genuine “full employment” policy after World War II. In “Monopoly Capital,” he and Baran actually predicted that U.S. big business itself would push for higher spending by the government and even higher taxes in order to ensure sufficient “monetarily effective demand.” In this way, Baran and Sweezy believed the giant corporate monopolies would actually realize their potential profits—the surplus—in the form of high monopoly profits.

If the U.S. government had followed at least to some extent a progressive Keynesian policy, such policies should have greatly strengthened U.S capitalism, according to Baran and Sweezy’s analysis. Didn’t the capitalists understand their own interests? Why were they so blinded by conservative ideology that they opposed “tax and spend” policies that would actually increase their profits.

In “Monopoly Capital,” Baran and Sweezy developed a theory that individual sectors of the capitalist class were obstructing reforms that would in theory, they believed, be in the interests of the capitalist class as a whole. For example, the real-estate interests strongly opposed and succeeded in destroying New Deal-era public housing programs. Apartment owners obviously did not want competition from government-owned housing.

In the October 2010 Monthly Review, Foster puts forward a similar argument. He seems to believe that a massive program of government spending aimed at increasing effective demand while carrying out long overdue social reforms could bring about a full employment monopoly capitalism that would overcome the stagnation inherent in monopoly capitalism when left to its own devices. However, the dominant portion of the capitalist class, what Foster calls “monopoly-finance capital”—the big banks and other financial institutions—are opposed to these polices. Perhaps we see an echo here of Keynes’s belief that the interests that controlled the Bank of England were opposing the further reduction of interest rates to the level that would ensure a return to an equilibrium at full employment.

What is really needed, according to Monthly Review is a movement that isolates the “monopoly finance capitalists” within the capitalist class and builds coalitions of a revived labor movement with those sections of the capitalist class that would support Keynesian full-employment policies that would not only end mass unemployment but increase their profits. This would represent a revival of the Popular Front-New Deal politics of the 1930s. Foster himself seems, however, to be increasingly pessimistic about the prospect of actually building such a movement in the foreseeable future.

The conservative conclusions of the ‘General Theory’

To return to the “General Theory,” Keynes concluded that the marginalist analysis of employment was basically correct. The only real mistake the marginalist had made was that they had assumed that the special case of equilibrium at full employment was the only possible equilibrium state. They had created a correct “special theory of employment” but failed to realize it was a special case.

According to Keynes, as long as equilibrium occurs at full employment, the marginalist argument is correct. “But,” Keynes wrote in the concluding chapter of the “General Theory,” “if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory [Keynes is referring to the “classical” marginalist theory—SW] comes into its own again from this point onwards.” (Chapter 24, “General Theory of Employment, Interest and Money”)

Assuming full employment, which Keynes believed could be achieved by correct policies of the government and the monetary authority, every factor of production— capital, labor and land—is properly rewarded according to its relative scarcity. The distribution of the national income will then be one that encourages the maximum economic efficiency and be socially most just exactly as the marginalists explained.

Guided by the free market, industry will produce the goods in the the proportions that best meet the needs of economic efficiency and the desires of the population. Therefore, despite the attempts of many over the years to draw socialist conclusions from it, Keynes’s “General Theory” is not so much a replacement as a mere amendment to the traditional marginalist theory.

Needless to say, the vast majority of the people of the world, who unlike Keynes were and are not rich, would disagree. Even if we abstract the question of unemployment and expenditures of militarism and war, the capitalist economy uses a huge percentage of the labor available to society in production of luxury commodities for the rich while the needs of the workers are met only to the extent that the workers are necessary to produce the surplus value that enables the capitalists to live without working. None of the reforms that Keynes foresaw in the “General Theory” would change this.

Keynes also believed that once government actually adopted such “full-employment” and “counter-cyclical” policies, as they came to be called, to flatten the fluctuations of the trade cycle, the Marxist criticisms of capitalism would be disarmed. According to Keynes, in the future as capital continued to accumulate—assuming that the rate of growth of the population slowed—the rate of interest would fall to zero. This would mean that it would become impossible to live off interest and the rentier—money capitalist—would, as Keynes put it, be euthanised.

Since productive capital would no longer be scarce relative to human needs for the goods it could produce, the “wages” of the entrepreneurs and their “economic profits”—their “reward” for risk-taking and innovation—would decline relative to the wages of ordinary workers.

As the average rate of profit—or marginal efficiency of capital—approached zero, there would be no more expanded reproduction. Simple reproduction—or a “stationary state,” as John Stuart Mill put it—would replace expanded reproduction. Economic growth having done its work and eliminated scarcity would no longer be necessary. Unlike Marx, Keynes believed that would happen within the capitalist system of private ownership of the means of production and wage labor. Keynes thought this might be achieved in about 30 years—by the 1960s. This “post-scarcity” capitalism would be the final form of human society.

The Monthly Review School and the prospects for socialism

The Monthly Review School under the influence of Keynes seems to really believe that Keynesian policies could work if only the resistance of “special interests” within the capitalist class—but not the capitalist class as a whole—that stand in the way could be broken. But is this really true?

If we for the sake of argument assume that Keynesian policies can really work and a post-scarcity “full employment” monopoly capitalism can be achieved, wouldn’t this make socialism unnecessary? And if socialism is unnecessary, then according to the tenets of historical materialism isn’t socialism a utopia? Instead of fighting for a workers’ government that will build a “socialist utopia,” shouldn’t we fight for a government of all people of good will regardless of class who will implement truly progressive Keynesian policies of full employment by spending the money necessary to achieve full employment in ways that actually meet the needs of the people rather than on militarism and war? (14)

Next month, I will examine the real-world effects of Keynesian economic policies. We will then be able judge whether Keynesian policies can really bring about “full employment,” or whether notwithstanding Keynes’s work, socialism remains very much a historic necessity.


1 In North America during the colonial period, the commodity labor power was extremely scarce. Newly arrived colonists found lots of free land available. All they had to do was drive off or kill off the native peoples. Therefore, all kinds of forced labor such as indentured servitude and of course African slavery flourished not only in the South but even in the North. It took several centuries before enough “free wage labor” was available to make these various forms of semi-slave and outright slave labor unnecessary for the white settlers. Only when a considerable reserve industrial army was established and could be tapped by the exploiters on demand was it possible for bourgeois society to depend entirely or almost entirely on “free labor.”

2 When our present-day (bourgeois) economists talk about “full employment,” it turns out with few exceptions that they really mean a situation of an optimal level of unemployment for the capitalists. Naturally, the capitalists don’t like deep depressions that make it impossible to realize in money form the surplus value they can wring out of the working class. In addition, extreme levels of unemployment raise the possibility that large sectors of society will turn against the capitalist system increasing the danger from the viewpoint of the capitalists that their political rule will be overthrown and that they will be stripped of their capital.

But the capitalists and their economists also do not like a situation where unemployment falls to the point that the workers are able to win higher wages and better working conditions that threaten to lower the all-important rate of surplus value. Therefore, most economists define as “full employment” a situation where many millions of workers who are actively seeking work are unemployed and where many more millions of people would work if they had any realistic prospects of finding jobs.

The (bourgeois) economists have even coined a term, “overemployment,” for a situation where unemployment, or in Marx’s terminology the reserve army of the unemployed, has fallen below the level that is ideal for the capitalists. When official unemployment in the U.S. briefly fell below 4 percent near the end of the Clinton administration, economists were surprised that wages were not soaring, since most of the bourgeois economists were convinced that an official unemployment rate below 5 or 6 percent would constitute “overemployment.”

Beyond that point, they believed wages would start to rise rapidly causing the rate of surplus value to fall. The bourgeois economists don’t put it exactly that way of course! But in the U.S., wages continued to be under pressure even at the peak of the late Clinton era “prosperity” with official unemployment less than 4 percent. What this really shows is that the number of people who wanted to work but were stuck in the lower levels of the reserve army of labor that never appears in the unemployment statistics was far greater than the bourgeois economists had realized.

3 Many Marxists, mistakenly in my opinion, believe that Marx was talking about the actual mechanism of the industrial cycle when he wrote about the “absolute overproduction of capital.” But Marx makes clear in many places that real-world cyclical economic crises are crises of the relative overproduction of commodities and consequently of the productive capital that is necessary to produce them, not the absolute overproduction of capital. A crisis of relative overproduction ends the upswing in the industrial cycle long before it leads to an *absolute* overproduction of capital.

4 It is the very lack of realization problems that would bring about the absolute overproduction of capital in the first place.

5 Unlike Marx, the marginalist economists make no distinction between labor and labor power.

6 The mariginalists like to use the term “goods” rather than commodities. Indeed, they have no concept of commodities as representing a social relation of production where the private labor of individuals can be validated as a portion of social labor only through exchange. Therefore, in explaining marginalist theory, I too will use the term “goods” to indicate the complete lack of any conception by the marginalists of capitalism as a contradictory and therefore transitory mode of production.

7 In the sense that they came from Austria and they also were the leaders of the Austrian School of economics, which was first developed in Austria.

8 All the same, like Adam Smith, Ricardo, Marx and even the early marginalists, Keynes also believed that the tendency of the rate of profit would be downward as capitalism developed. One of the first economists to express doubts about the downward movement of the rate of profit was Paul Sweezy, the future founder of the Monthly Review School. In his “Theory of Capitalist Development,” published in 1942, unlike in his better-known book “Monopoly Capital,” which he co-authored with Paul Baran, Sweezy analyzed capitalism in terms of the categories developed by Marx in “Capital.” From a Marxist point of view, this work is in my opinion far more interesting than “Monopoly Capital,” though it is rarely referred to by the Monthly Review writers.

In this early work, Sweezy noted that in Marx’s illustrations of the law of the tendency of the rate of profit to fall, he assumed a constant rate of surplus value. Sweezy believed, however, like most Marxists have, that the rate of surplus value—the ratio of unpaid to paid labor—rises with the development of capitalism. He also explained that the organic composition does not rise nearly as fast as what Marx called the “technical composition of capital,” because the elements that make up constant capital become devalued with the advance of labor productivity.

In his “Theory of Capitalist Development,” Sweezy drew the conclusion that the actual long-term trend of the rate of profit was indeterminate rather then definitely downward, though he accepted the possibility that the rate of profit might trend downward.

Later in “Monopoly Capital,” Sweezy (and Baran) relegated the whole question of a falling tendency of the rate of profit to the bygone era of “competitive capitalism.” In “Monopoly Capitalism,” Baran and Sweezy claimed that the growing power of the giant monopoly corporations was leading to a tendency of the surplus—or the potential profit—to rise due to their ever-growing monopoly pricing power. The problem that the giant monopolies now faced was to actually realize these potential profits in light of the difficulty of finding buyers for commodities sold at ever higher monopoly prices. In my opinion, this concept of the tendency of the surplus to rise comes dangerously close to the old mercantilist doctrine of profit upon alienation, surplus value generated in the sphere of circulation, a view sharply criticized by Marx..

9 How much Keynes hated gold is shown by his reaction to U.S. President Franklin D. Roosevelt’s determination to push ahead with devaluation of the U.S. dollar even though it blew up the International Monetary Conference of 1933. Due to the financial crisis of 1931, the Bank of England was forced to suspend the gold standard and allow the British pound to fall not only against gold but against other currencies including the U.S. dollar that remained on gold. This had given the British capitalists a temporary competitive advantage over their U.S. and other rivals. Roosevelt’s decision to devalue the U.S. dollar in 1933 was viewed as aimed at wiping out the temporary advantage that the British capitalists had gained in international competition by “competitively” devaluing the pound.

Normally, Keynes would have been expected to be sharply critical of a move by a foreign government that in any way undermined the competitive interest of British capitalism. But Keynes instead hailed Roosevelt’s dollar devaluation decision because he hoped that it would end the international gold standard once and for all and would free central banks, including the Bank of England, to issue the amount of currency that would be necessary to restore “full employment” without having to worry about maintaining the convertibility of their currencies into gold.

10 What these historians can’t explain is why the Depression did not occur before 1914 when the international gold standard was at its peak instead of only after World War I when it was already severely undermined.

11 The Bank of England was and still is a corporation owned by its stock owners. Since 1946, the British government has been the sole owner of Bank of England stock. In the U.S., the Federal Reserve Board, which controls the Federal Reserve System, is a government agency, but the 12 Federal Reserve Banks that make up the Federal Reserve System are privately owned stock corporations, with most of the stock owned by the commercial banks that operate in each Federal Reserve district.

In “Capital,” Marx noted that the Bank of England was a peculiar mixture of private and public. It was hard to know where the state power ended and private property began. Though in Marx’s day the Bank of England was in theory a privately owned institution, in reality it already had a special relationship with the government—holding the government cash reserves in its vaults. As such, it was obliged to put its function in guaranteeing the gold standard while attempting to stabilize the British economy above its corporate drive to maximize its own profit.

While today the Bank of England like most central banks is owned by the government, the Federal Reserve System, which under the dollar system operates in effect as the world central bank, remains a peculiar mixture of private and public where it is often hard to see as was the case with the Bank of England in Marx’s day exactly where private property ends and government authority begins.

12 The Monthly Review School is not a monolith and there have always been shades of difference among its adherents. While Paul Sweezy wrote relatively little about the production of surplus value, Harry Braverman, who joined the Monthly Review School during the 1950s, was a former trade unionist and concentrated in his writing on the exploitation of the workers. A case might also be made that Harry Magdoff was somewhat less of a “Keynesian” in his thinking than Sweezy was. Every Monthly Review writer has to be judged in his or her own light and not as a spokesperson of some “monolithic” Monthly Review School.

However, that said, the work of Paul Sweezy remains the point of reference for what is called the Monthly Review School, as John Bellamy Foster himself emphasizes.

13 After World War II, Paul Sweezy, however, supported all revolutionary movements and opposed all pro-imperialist counterrevolutionary ones with a consistency that was extremely rare on the socialist left, especially in the U.S., the center of world imperialism. In this we should all strive to emulate Paul Sweezy.

14 Foster himself, perhaps realizing that the Monthly Review School’s highly Keynesian interpretation of Marxism seems to undermine the necessity and therefore the inevitability of socialism, has tried to make a case that socialism is necessary not so much because of the contradiction between the productive forces created by capitalism, on one side, and the social relations of production—capital—on the other, the traditional Marxist view, but rather the contradiction between the productive forces created by capitalism and the natural environment. Foster considers himself a green socialist. This, however, does not really answer the question of exactly how we will make the transition from a future Keynesian full-employment monopoly capitalism—assuming that is possible—to a socialist society.


4 thoughts on “Are Marx and Keynes Compatible? Pt 3

  1. Enjoying the blog immensely so far! I hope to catch up within a month or so, meanwhile, here’s something that came to my mind while reading this post that a friend sent me a while back:
    This article relates vaguely to the question of the reserve army, in that it concludes that workers face the most uncertainty under the capitalist system (profits and rent as a reward for delaying consumption). In general it obviously pertains to the question of the compatibility of Keynes and Marx too.

  2. Dear Sam,

    I think you’ll like Foster’s upcoming article on Kalecki, which will be out in the next month. The utility of Keynes is that he bucked orthodoxy and is still influential to some degree today even in mainstream circles. When Keynes’ argument is followed logically (and with more rigor) the conclusions become quite radical indeed (as demonstrated by Marx, Kalecki, Baran and Sweezy, etc.). Even though Keynes was a forthright defender of capitalism he also thought it would most certainly be replaced by a more humane system in the future. As Joan Robinson commented, Keynes “was startled by the indictment of the free-enterprise system that [his analysis seemed to represent” (_What are the Questions?_, p. 99).

    Regardless, Sweezy (and especially Baran) were always cautiously critical of Keynes—and even Kalecki, who drew directly from Marx and anticipated _The General Theory_ in most important respects (See volume 1 of Kalecki’s _Collected Works_). MR has consistently argued that nothing short of revolution can transform capitalism in any meaningful way. Articulated in terms of revolutionary strategy the conclusion is that any demands for reform, to the limited extent they are possible, must be rooted in mass action (presupposing a much higher level of organization) and, to an increasing extent, global. (See, “The Global Reserve Army of Labor and the New Imperialism,”

    Thank you for the extremely thoughtful and critical reflections 🙂

  3. Very nice, solid Marxian critique of Keynesian policy and Keynes’ ideological abstractions. Sometimes hard to keep up as it is a very broad analysis and darts somewhat between different concepts and terms (some of which are quite alien to me), but good materialist analysis nonetheless.

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