Are Marx and Keynes Compatible? Pt 7

Last week, I examined the letter Baran sent to Sweezy in 1960 that dealt with the concept of the “economic surplus.” Over the next two weeks, I will examine the letter Sweezy sent to Baran dated September 25, 1962, which deals with monopoly, capitalist stagnation and Keynes.

Sweezy and stagnation

Sweezy described himself as a “stagnationist.” In his mature writings, he came to believe that the “default” condition of monopoly capitalism is a state of “stagnation.” But what exactly did Sweezy mean by “stagnation”? To understand what he meant, we have to understand the traditional marginalism that formed the starting point of Sweezy’s economic studies.

Marginalist, or “neoclassical,” economics claims that a capitalist economy has a strong tendency toward full employment of both the means of production and workers. Remember, the marginalists hold that, assuming there are no unions or social legislation, the capitalist economy will have as its normal condition a situation of full employment of both the means of production and workers.

When Sweezy began his economic studies at Harvard before both the New Deal and the rise of the CIO (Congress of Industrial Organizations), there was virtually no social legislation or social insurance of any kind in the United States. The union movement was very weak and, outside of mining, in basic large-scale industries was virtually nonexistent.

Therefore, according to marginalist theory the U.S. economy should have been very close to a situation of full employment of both the means of production and the workers. But in the early 1930s as Sweezy was studying economics at Harvard, the U.S. was facing an extreme crisis of mass unemployment. Clearly, there was something very wrong with the economics that Sweezy was learning.

Ricardo and unemployment

The (bourgeois) economists had not always claimed that under capitalism there would be a full employment of workers. Before the “marginalist revolution” of the last part of the 19th century, the economists had taken for granted that besides the employed workers there would always be what was called a “surplus population.” Ricardo, accepting both Say’s Law and Malthus’s so-called law of population, had assumed a full employment of the means of production but not of the workers.

Indeed, according to the Malthusian theory of population if wages rose much above biological subsistence levels, the working-class population would rise. Therefore, Ricardo reasoned, if there was full employment of workers, wages would rise above the “value of labor.” (1)

Ricardo, remember, made no distinction between labor and labor power. The rise of wages above biological subsistence—or “value of labor”—would lead to a considerable growth of the number of workers seeking employment. Inevitably, a surplus of workers would develop as the working-class population grew in response to wages that were above the biological subsistence level, driving the price of labor—wages—below the value of labor once again.

Once wages fell below the value of labor, the working-class population would inevitably contract, repeating the cycle. In this way, fluctuations in the size of the surplus population would keep the price of labor tied to the value of labor in the long run.

Therefore, Ricardo, unlike his marginalist successors, assumed the full employment of the means of production but not of the workers. According to Ricardian theory, if a situation of the full employment of workers persisted, the rise in the price above the value of labor would undermine capitalist profit, since according to Ricardo the more wages rise the more the rate of profit falls. (2)

Since Ricardo realized that profit was the driving force of capitalist production, the surplus population provided by the Malthusian law of population was within Ricardian theory an absolute necessity for capitalist production. Only with the late 19th-century “marginalist revolution” did the economists begin to claim that capitalism tended toward a full employment not only of the means of production but of workers as well.

Marx, much like the classical economists before him, generally assumed that even if there was full employment of the means of production, there would still be a surplus population, which Marx called the reserve industrial army of the unemployed. Sweezy made note of this in his 1962 letter to Baran.

Marx in order to distance himself from Malthus’s alleged law of population used the term relative surplus population as opposed to the Malthusian absolute surplus population. But Marx in various places in his writings indicated that even outside of crises, the normal condition of the capitalist economy includes not only a reserve army of unemployed workers but also idle means of production.

That is, the normal condition under capitalism is a surplus of both means of production on one side and unemployed workers on the other. The capitalist economy rarely, if ever—especially if we leave aside the special case of an all-out war economy—utilizes all available means of production even during periods of economic boom. And Marx pointed out that when the capitalist economy comes close to a full utilization of available means of production—leaving aside the case of an all-out war economy (which Marx did not analyze)—it indicates that a crisis is not far off.

Sweezy’s definition of stagnation

Sweezy defined stagnation as a lack of full utilization of the means of production plus the additional unemployment of workers, with the latter caused by the former. However, Sweezy as is clear from his 1962 letter to Baran—and elsewhere—indicated that he could not understand why there would not be a full utilization of the means of production in a capitalist economy as long as free competition prevailed.

In his 1942 book, “The Theory of Capitalist Development,” Sweezy expressed surprise that Marx wrote about the lack of full employment of factories and machinery back in his day, before the transformation of the “competitive” capitalism of the 19th century into monopoly capitalism.

Elsewhere, however, Sweezy seemed to forget that Marx considered a less than full utilization of the means of production a normal condition of competitive pre-monopoly capitalism. After all, hadn’t the “neoclassical” economists provided elegant mathematical proof that assuming “perfect competition” such as presumably prevailed during the first three-quarters of the 19th century there should be a full utilization of the means of production as well as full employment of workers?

Even after he had studied Marx later in the 1930s, Sweezy still couldn’t understand what was wrong with the marginalist arguments if “free competition” prevailed.

Bourgeois business cycle theory and marginalism

Well before the so-called Keynesian revolution of the 1930s, bourgeois economists empirically studied and described the various phases of the business cycle. Interestingly enough, the economists who carried out these valuable empirical investigations, such as Wesley Mitchell (1874-1948), were not themselves neo-classical marginalists but supporters of the institutional school of economics. The institutional economists had little or no interest in value theory, whether marginalist or Marxist.

It is no accident that studies of the business cycle were carried out by non-marginalist economists. The pioneers of marginalism had virtually nothing to say about the industrial or business cycle, since the logic of marginalist value theory is that capitalist crises of overproduction are impossible and there should therefore be no such thing as the “business cycle.”

But well before the Depression disaster of the 1930s, it was undeniable that business cycles and crises were occurring in real world capitalism. Therefore, side by side with marginalist theory there arose an empirical study of business cycles and capitalist crises, which was taught to economic students such as the young Paul Sweezy. However, these empirical studies of business cycles and crises were not integrated into and really could not be integrated into the marginalist economics that provided and still provides the theoretical backbone of modern (bourgeois) economics.

The reason for this deep-seated incompatibility between marginalism and even empirical studies of the business cycle is the crisis of the general overproduction of commodities that crowns each business cycle. According to marginalism, a crisis of general overproduction of commodities is a theoretical impossibility.

Marginalist value theory maintains that the value of commodities arises from their scarcity as material use values and not the quantity of human labor that is socially necessary to produce them. How then can there possibly be crises of overproduction of scarce use values?

Therefore, between the marginalist revolution in bourgeois economics that began in the 1870s and the Keynesian revolution of the 1930s, there was already a duality between basic (bourgeois) economic theory—marginalism—on one side and the study of business cycles and crises on the other.

Later, after Keynes, this duality deepened with traditional business cycle theory being absorbed by Keynesian-inspired macroeconomics, while marginalism continued to be taught separately as microeconomics.

“The continuous [emphasis Sweezy’s] operation of Say’s Law is rubbish,” Sweezy wrote to Baran. “But this was really quite well known to Keynes’s predecessors: after all business cycle and crisis theory had a long and respectable history prior to 1936. What the earlier theorists maintained was that the breakdown couldn’t persist indefinitely. Unemployment and unused plant would lead to price (including wage and interest rate) and income changes that would sooner or later (depending on reaction times, mobility of resources, etc.) set the stage for an upswing which, once under way, would carry up to full employment. Except under very special assumptions, the condition of full employment couldn’t persist either, of course.”

Sweezy’s wording is interesting. He does not here seem to completely reject Say’s Law, he only rejects the “continuous” operation of this so-called law. Marx, to put it mildly, was considerably harsher in his assessment of Say’s Law. Nor does Sweezy completely reject outright that full employment could persist either. He implies that the “condition of full employment” would persist if we make “very special assumptions.”

Sweezy does not say exactly what these “very special assumptions” are. It is clear from the context that Sweezy did not believe “full employment” could persist in practice under “competitive” capitalism. But even the “mature Sweezy” of the Monthly Review period continued to believe that a competitive capitalist economy would harbor a strong tendency toward “full employment.”

Keynes and equilibrium at less than full employment

Keynes, remember, had claimed in the “General Theory” that capitalism could very well achieve an equilibrium—an equality of the rate of interest and the expected rate of profit on new investment—at less than full employment. Soon after the “General Theory” was published, however, Keynes’s theory of an equilibrium at less then full employment came under attack by marginalists.

Suppose, the marginalists argued, the economy was in a condition of unemployment of both workers and means of production but there was an equality of interest rates and the (expected) rate of profit. Would such a situation really be an equilibrium? The marginalist critics of the “General Theory” answered no.

According to the marginalists, if there was an excess of means of production combined with unemployed workers, both prices and wages would fall. The only true equilibrium is, after all, a situation where supply equals demand at current prices. Only under these conditions will prices and wages neither rise or fall, or what comes to exactly the same thing, be in equilibrium.

According to the marginalists, in a situation where supply exceeds demand the direction of prices including the “price of labor”—wages—will be downward. Therefore, Keynes’s marginalist critics argued, as long as unemployment exists, even if the “monetary authority” leaves the money supply unchanged in nominal terms, the fall in both wages and prices will expand the supply of money in real terms. The consequent expansion of the real money supply will in turn lower the rate of interest.

Therefore, as long as there is unemployment of either means of production or workers, prices, wages and interest rates will fall. The rate of interest will only stop falling when prices and wages stop falling. And the marginalists “proved” that this would only occur when full employment of both means of production and workers returned. Therefore, the marginalist critics of Keynes declared, they had again proven mathematically that, Keynes notwithstanding, the only possible true equilibrium of the capitalist economy is full employment of means of production and workers.


This gave birth to a more conservative kind of Keynesianism that became known as “neo-keynesianism.” The neo-Keynesians argue that the historical experience of the 1930s Depression and lesser episodes of prolonged mass unemployment had proven in practice that capitalism left to its own devices could get stuck in periods of prolonged, though not permanent, mass unemployment. Therefore, if the government let things take their natural course, there was the danger the workers and their allies would turn against capitalism during a prolonged depression. Hence, the neo-Keynesians agreed with Keynes of the “General Theory” that on purely pragmatic grounds the old pre-Keynesnian arguments that any depression would be short-lived if the government stood aside were false.

Therefore, the neo-Keynesians support “Keynesian” policies of deficit spending and monetary expansion during periods of recession or above-average unemployment. They remain haunted by the fear that a recession will get out of hand and turn into a new Depression if the government fails to follow “expansionary” policies. Or as Keynes himself put it about capitalism’s alleged long-term tendency toward full employment: “In the long run we are all dead.”

As Sweezy’s 1962 letter to Baran and other writings as well indicate, Sweezy did not know how to answer these marginalist arguments as long as a competitive capitalist economy is assumed. Even in 1962, Sweezy seemed to find convincing the arguments of the marginalists against Keynes’s claim that an equilibrium at less than full employment is possible, as long as free competition is assumed.


But what happens, Sweezy asked, if monopoly replaces free competition? To the extent monopoly replaces competition, Sweezy held that the tendency toward full employment is replaced by a situation where stagnation and unemployment of a portion of both the means of production as well as workers becomes the new norm. But what did Sweezy really mean by a “monopoly capitalist” economy, and how did such an economy differ from a competitive capitalist economy?

To understand what Sweezy meant by a monopoly capitalist economy and a competitive capitalist economy, we have to again return to the neoclassical marginalist economic theory that formed Sweezy’s introduction to economics and thus the starting point of his own economic work.

The marginalists build their theories around the assumption of “perfect competition.” They assume that each branch of production consists of many independent firms, each of which controls only an insignificant share of the total production of the given branch of production.

As a result, the production decisions made by the “individual firms” approach to the limit of zero their effect on the total supply of the commodity produced by each branch of production. Since the production decisions of the “individual firm” have almost no effect on the total supply of commodities, they have no effect on prices. Or, as the economists like to put it, the individual firms are “price-takers” not “price makers.”

The degree of monopoly

Under these conditions, the marginalists argue, each individual firm will produce at the level where their marginal cost of producing a given type of commodity will equal the price of the commodity. The marginalists then go on to prove that at this point each firm is producing at its optimal level—full employment—and moreover, producing commodities in such proportions that any change in the mix of what is produced will reduce the “total satisfaction” of consumers. This is the essence of what the neoclassical economists call “general equilibrium theory,” supposedly the greatest achievement of modern economic science.

But what will happen if a branch of production is divided into only a few producers, where each individual firm controls a considerable percentage of the total production of a given commodity?

Unlike the case with “perfect competition,” if we assume “a degree of monopoly,” as the economist Michal Kalecki (1899-1970) (3) put it, the individual industrial corporations will exercise a considerable influence on the total supply of the commodity and therefore on its price. Or as the economists like say, in this case the individual “firm” is at least to a degree a price maker and not just a price taker.

Therefore, according to marginalist price theory, in a situation of monopoly where individual firms produce more than a non-trivial percentage of a total commodity of a given use value—or utility in marginalist lingo—the firm will set its production at the level where its marginal costs equal its marginal revenue. As a firm increases its level of production, not only will its marginal (and therefore its average) costs change, but the price it is able to charge for its commodities will also change.

Therefore, according to this extension of marginalist price theory to a situation of monopoly as defined above—which Sweezy himself helped to pioneer in the 1930s—the industrial corporations will find it in their interests to produce at levels that are likely to be well below full employment. In order to maximize their profits, they will tend to leave some of their productive capacity idle and therefore hire fewer workers than they would if they produced at full capacity. This, according to Sweezy and indeed the Monthly Review School, is the “microeconomic” foundation for “macroeconomic” stagnation.

Indeed, all the claims made by marginalist “general equilibrium theory” goes to pieces once the assumption of “perfect competition” is dropped.

Sweezy the marginalist and Sweezy the Marxist

But wasn’t Sweezy a Marxist who defended Marx’s labor theory of value, which holds that the quantity of labor that is socially necessary to produce a commodity determines its value? And didn’t Marxists believe that prices are determined by labor values? Weren’t early marginalists such as the English economist William Stanley Jevons (1835-1882), for example, quite clear that the theory of “marginal utility”—early marginalism—was meant to replace and not supplement the law of labor value of classical political economy? How could Sweezy as a Marxist apply marginalist theories to the questions of prices, profit maximization and full employment versus stagnation?

In Marxist theory, the relationship between values and prices is a complex one. According to Marx, through the process of competition, which tends to equalize the rate of profit across the different branches of production with different organic compositions of capital and variable capital turnover periods, values—or direct prices—are transformed into prices of production that inevitably deviate from their direct prices. According to Marx, assuming free competition, market prices will fluctuate according to the changing conditions of supply and demand around the prices of production.

In Volume III of “Capital,” Marx presents a partial solution to the “transformation problem” that can only be fully solved by transforming not only the outputs but the inputs as well. Once the transformation of values into prices is complete, so that both input and output prices are consistent, we have a situation where market prices fluctuate around the prices, or “costs,” of production that equalize the rate of profit across the various branches of production in such a way that equal capitals yield equal profits in equal periods of time.

Indeed, all the major schools of economics—the classical school, the Marxist school, and the neoclassical marginalists school, as well as the so-called “neo-Ricardian” school—agree on this much. Therefore, Sweezy saw no real contradiction between modern microeconomics—marginalist price theory—and Marxism.

According to Sweezy, while Marxism got to the social essence of things—the exchange of commodities as products of human labor and the exploitation of the working class through the production of surplus value, marginalism provides a powerful and elegant way to analyze prices in a practical way. In Sweezy’s mind, this applied both to analyzing prices under competitive capitalism and its extension to analyzing prices under monopoly that Sweezy himself helped develop during the 1930s.

Sweezy on value

In “Monopoly Capital,” Sweezy (and Baran) ignored the question of value, employing only a little marginalist price theory. But in the “The Theory of Capitalist Development,” first published in 1942, which was largely written in the 1930s, Sweezy devotes considerable attention to Marx’s value theory. In analyzing the problem of value in “The Theory,” Sweezy got off to a good start when he distinguished between the qualitative and quantitative aspects of value. When the producers work independently of one another for their own account, their individual private labors can only validate themselves as social labor through the process of exchange—the market.

Under these conditions, the products of human labor take the form of commodities, and human labor in the abstract assumes the form of value. Abstract human labor embodied in a commodity is the quality or substance of value. Sweezy explains that this should not be confused with the quantitative aspect of value. For example, if an orange requires twice the quantity of abstract human labor to produce than an apple, an orange will represent twice the quantity of embodied human labor than the apple does, or what comes to exactly the same thing have twice the value of an apple. This is the quantitative aspect of value.

Next to Marx’s theory of surplus value, Sweezy stresses this distinction between abstract and concrete labor—or as Sweezy puts it, between the the qualitative and quantitative aspect—as Marx’s greatest contribution to economics. Therefore, Sweezy explained, Marx’s theory of value is not simply a restatement of the Ricardian theory of labor value like many Marxists more or less assume, but something that represents a major advance beyond Ricardian value theory.

However, at this point Sweezy breaks off his analysis of value. Having dealt with the quality of value and distinguishing it correctly from the quantity of value, Sweezy assumed in “The Theory” that he had said all that really needed to be said about value.

What Sweezy ignored was another of Marx’s key advances beyond Ricardian value theory, the relationship between value and the form of value. This was a subject that Marx spent a considerable amount of time on in the first three chapters of “Capital.” There Marx developed two primary forms of value, the relative form and the equivalent form. The value of one commodity, the relative form, is measured by the use value of another commodity, the equivalent form. This analysis in the first three chapters of “Capital” leads straight to Marx’s theory of money, a subject that Sweezy specifically did not deal with in “The Theory.”

Marx explains that money is merely the generalization of the equivalent form of value. In the course of the development of commodity production, one or at most a few commodities emerge as universal equivalents that in their use values measure the values of all other commodities. Prices are the values of commodities expressed in the use value of the universal equivalent measured in terms appropriate to that use value—such as weights of precious metals.

Under capitalism, all wealth comes to be measured in terms of money, or what comes to exactly the same thing, the use value of the commodity that serves as the universal equivalent. Not only prices, including wages, but profits, interest and rents as well are measured in terms of the use value of the commodity that serves as money.

Even objects that are not commodities in the strict sense, such as unimproved land and “honor,” come to be measured in terms of the use value of the money commodity. As the cynical saying goes, doesn’t everybody have a price—that is, a sum of the use value of the money commodity?

Like many other students of Marx over the decades, Sweezy probably assumed that Marx’s treatment of the forms of value represented some Hegelian philosophical theorizing that was without practical significance in economic science and could be dispensed with. This was a grave error on Sweezy’s part, which was to cast a shadow over his work for the rest of his life.

As we have seen in this blog, the question of crises cannot be understood without understanding the forms of value, or in plain language the relationship between commodities and money. And without understanding crises, in my opinion, we cannot understand why capitalism, even pre-monopoly competitive capitalism, once it has developed to a certain point, inevitably generates at periodic intervals generalized crises of overproduction. (4)

And it is these crises that drive the transformation of competitive capitalism into monopoly capitalism. But things do not end there. As crises continue into the future, monopolies will grow and monopoly capitalism itself will prove merely transitional to a higher mode of production where production is based on human need and not profit.

To be fair to Sweezy, he is not the only Marxist who has committed this error. To one degree or another, most Marxists who have dealt with these questions from the death of Engels in 1895 to the present have to be judged guilty on this account. This is a weakness that runs through much of 20th-century Marxism.

I believe this is a weakness that must corrected if we are to create a Marxism of the 21st century that will be adequate for the new era of revolutions, as the events in recent weeks—January-Febuary 2011—in North Africa and the Middle East indicate has now begun.

The economic limits of monopoly pricing

Because Sweezy cut short his examination of Marx’s theory of value, he was obliged to analyze prices in an impressionistic—that is, in a marginalist—way. Marginalist economists build complex mathematical models of “general equilibrium,” but they have no understanding that price is a quantity of the use value of the commodity that functions as the universal equivalent, or the money commodity, measured in the unit appropriate for the use value of the money commodity such as weights of gold. They do not understand that wages, interest income, profits and rents have to be measured in terms of specific units of the use value of the money commodity. Unfortunately, the same thing is to a large extent true of 20th-century Marxism as well.

The history of prices since 1933

Since 1933, prices in terms of U.S. dollars, and other currencies more or less linked to the U.S. dollar, have with brief exceptions risen almost continuously, sometimes rapidly and sometimes slowly. This change in the behavior of prices is central to the analysis that Baran and Sweezy develop in “Monopoly Capital.”

The behavior of prices measured in terms of currencies is in sharp contrast to the century preceding 1933, where periods of rising prices in terms of currency were almost exactly offset by periods of falling prices. Notice that the transition from the period of continuously rising currency prices does not coincide with what is generally considered the transition to monopoly capitalism—1870 according to Sweezy or 1900 according to Lenin—but occurs later, in 1933 the year that Franklin Roosevelt assumed office.

Indeed the two most violent periods of price declines in terms of dollars in U.S. history occurred within the era of monopoly capitalism. One of these was in 1920-21, and the other during the super-crisis of 1929-33.

The reason for this change in price behavior is not difficult to figure out. In 1933, the Roosevelt administration began what became a 40 percent devaluation of the U.S. dollar against gold. Since that date, whenever major crises have threatened the U.S. government and its “monetary authority,” the Federal Reserve Board, has engineered a new devaluation of the dollar—a rise in the dollar price of gold—sufficient to keep commodity prices measured in terms of U.S. dollars on an upward trajectory.

We have seen this once again with the 2007-09 crisis, where the dollar price of gold has risen from about $675 a troy ounce at the beginning of the crisis to over $1,300, and briefly over $1,400 at times, in late 2010 and early 2011. They even have a name for this policy of periodic currency devaluations—it is called “inflation targeting.”

In “Monopoly Capital,” unlike in “The Theory,” Sweezy (and Baran) did not deal with value as such, but they did refer to value indirectly using the economic vernacular term “production costs.” (5) As Baran and Sweezy state in “Monopoly Capital,” the corporations—industrial capitalists—are able to continuously lower production costs—that is, the values of commodities. But Baran and Sweezy also believed that the monopoly corporations had acquired the power to raise prices continuously above production costs—values—giving birth to the “tendency of the surplus to rise” (6). This tendency was attributed by Baran at least at one point in his 1960 letter to Sweezy to an additional profit that monopoly capitalists are able to add to surplus value.

In “Monopoly Capital,” the authors tried to build whole new laws of motion that apply to monopoly capital as opposed to competitive capitalism centered on the “tendency of the surplus to rise.” (7) But as I have explained, if prices in terms of the use value of the money commodity were to rise continuously above the values—direct prices—of commodities, the production of money material—the money commodity—would be rendered completely unprofitable.

But under the capitalist mode of production, commodities that are not profitable to produce are not in the long run produced at all. If no additional money material is produced, the market ceases to grow. Long before the production of money material falls to zero, crisis intervenes and lowers prices once again to values—or indeed for a while below values—which restores the profitability of the production of money material, enabling the market to keep growing.

Remember, according to Marx—and he was surely right on this—an expanding market is not optional for capitalist production but an absolute necessity. A capitalism without a growing market—leaving aside short-term fluctuations—is not a sick or dying capitalism, it is a dead capitalism. But it is perfectly possible to have repeated devaluations of the monetary tokens such as paper dollars—which represent the money commodity in circulation—against the commodity that serves as money.

The devaluation of monetary tokens is an age-old phenomena that began long before the rise of capitalism. The devaluation of monetary tokens—for example, the lowering of the precious metal content of coins of a given denomination—which leads to rising prices in terms of the devalued currency tokens—goes back to the invention of coined money that occurred about 2,500 years ago. We see it repeatedly in the history of the Roman Empire, to name only one well-known historical example.

Until early modern times, currencies were devalued by reducing the precious metal content of the coins. Today, the Federal Reserve Board accomplishes the same thing by simply allowing the dollar-denominated U.S. monetary base to grow faster than the world’s gold mines increase the quantity of monetary material, causing the dollar price of a troy ounce gold to rise.

In those days long before the rise of capitalist production, not to speak of monopoly capitalism, the devaluation of the currency tokens against the money metals also led to rising commodity prices measured in terms of the devalued monetary tokens. As I explained elsewhere in this blog, the apparent ability of the corporations to continuously raise the prices of the commodities they sell is simply the result of repeated devaluations of the monetary tokens that make up currencies.

The corporations had no ability to permanently, let alone continuously, raise prices more and more above values before 1933 when the international gold standard prevailed, and they gained no such ability since then if we measure prices and profits in terms of weights of gold and not devalued monetary tokens. Therefore, the attempt to derive new “laws of motion” for monopoly capitalism such as the “tendency of the surplus to rise” based on the nonexistent ability of the corporations to raise prices continuously above the values of commodities was built on sand.

Crises the missing factor in Sweezy’s stagnation theory

If we examine the rising stage of each industrial cycle, we see that the multiplier and accelerator effects indeed do push the capitalist economy toward a situation of full employment of both of means of production and workers. Each individual industrial capitalist under the pressure of competition is forced to increase industrial production, limited only by the total supply of labor power on one hand and the supply of raw materials on the other. This pushes the economy not only toward a full utilization of the existing means of production—as well as the creation of new ones—it causes the demand for the commodity labor power to grow faster than the supply. The capitalist economy seems headed for full employment.

But as the economy approaches full employment, the powerful tendencies toward continued expansion are overwhelmed by an even more powerful force—the generalized overproduction of commodities. The appearance of overproduction is no mere tendency. It happens in every industrial cycle. Before the economy reaches full employment, overproduction develops to such a point that a crisis breaks out forcibly halting the overproduction. The crisis reinforces the unemployment of both means of production and workers that were left over from the last crisis.

The capitalist economy resembles Sisyphus of the ancient legend. In the course of every industrial cycle, the economy climbs the mountain toward the summit of full employment. It is driven up the slope of the mountain by the whip of competition, which forces each industrial capitalist to increase production without limit. But just as the summit of full employment comes into view, a crisis of overproduction breaks out that pushes the capitalist economy right back down the mountain into the valley of mass unemployment of both means of production and workers.

The capitalist economy is recovering but never recovered

This is even reflected in the terminology used by the mass media. Outside of actual periods of recession, the media is talking about the “economic recovery.” The press explains how it has lasted X number of months and how it is “gaining strength.” But before the economy is fully “recovered,” it suffers a relapse of the “illness” of “recession” with its idle means of production on one side and mass unemployment of workers on the other.

It is therefore the crises that breed stagnation and stagnation that breeds monopoly. Monopoly then reinforces stagnation and drags it out. But monopoly itself is the offspring of the crisis. Therefore, the stagnation that is caused by monopoly is ultimately rooted in the recurrent crises of overproduction. And the crises of overproduction are themselves rooted in the deep-seated economic laws that dictate that the the ability of capitalism to physically increase production exceeds the ability of the market to expand. Hence the periodic capitalist crises and the stagnation they breed prevent production from growing faster than
the market in the long run.

Coming up

In order to keep these replies within reasonable limits, I have decided to break this one into three segments, not two as I planned last week. The next and I believe final segment of this reply will be next week and will deal with Sweezy’s approach to crisis in his “Theory of Capitalist Development.” After that, there will be one final segment where I will examine how the working class can fight unemployment. This will then close these replies focusing on Keynesian economics. After that, I expect to revert to a once-a-month schedule.


1 In light of Marx’s perfected theory of labor value, the term “value of labor” used by Ricardo makes no sense. Value is a social—not physical—substance. It consists of abstract labor that becomes embodied in a commodity. Each commodity represents a certain quantity of abstract labor measured in terms of time. Therefore, neither abstract labor, which is the very substance of value when it becomes embodied in commodities, or the concrete labor that produces use values can itself be said to have “value.” To speak about the value of abstract labor—concrete labor produces use values and also has no value—is like speaking about the temperature of heat.

It should be noted that the value of commodities is measured in terms of the use value of the money commodity—gold—and like is the case with all use values, it is the concrete labor, not abstract labor, that produces gold as a material use value. However, it is the physical substance measured in terms of weight—and not the hours of concrete labor that goes into producing gold—that serves as the universal measure of value of commodities.

2 Following Adam Smith, Ricardo believed that what Marx would later call constant capital could be reduced to variable capital in the final analysis. Therefore, when Ricardo wrote about the rate of profit he was really referring to the rate of surplus value.

3 Born to a Jewish family in Poland, Kalecki was a left-wing pro-socialist professional economist. He is said to have discovered the “General Theory” independently of Keynes. His views on economic theory were very similar to Sweezy’s—in both their strengths and weaknesses—and he has exercised considerable influence on the Monthly Review School.

4 Concretely, capitalism reached the point where it began to generate crises on a regular basis in 1825, when the first modern global capitalist crisis of overproduction broke out. Within 75 years after the start of the first modern capitalist crisis—a human lifetime—capitalism based on free competition was transformed into monopoly capitalism.

5 “Productions costs” more or less refer to the prices of production. But with some modifications, we know that production costs are ultimately determined by underlying labor values.

6 If we were to define “the economic surplus” as simply another name for Marx’s surplus value, which Sweezy did in places after the death of Baran, the only difference would be where “Monopoly Capital” talks of a tendency of the surplus to rise, Marx saw a rise in the total mass of surplus value not as a tendency but an absolute necessity if capitalism was to continue to exist. However, given the overall context of their work, it seems that what Sweezy and Baran really meant was that there was a tendency for the rate of profit to rise due to the monopoly pricing power of the corporations.

7 The Belgium Marxist Ernest Mandel (1923-1995) did date a new phase of capitalism that he alternately treated as a phase of monopoly capitalism or as a whole new phase of capitalism in its own right from around that time. Mandel first called this alleged new phase of capitalism “neo-capitalism” and then “late capitalism.” However, Sweezy (and Baran) only distinguished between what they called “competitive capitalism” from the beginning of capitalism to about 1870 and monopoly capitalism after 1870.

Baran and Sweezy in “Monopoly Capital” also specifically rejected the term favored by the Soviet economists and the parties of the former Third International—“state monopoly capitalism.” This term is used as representing a stage of capitalism beyond “monopoly capitalism” characterized by the growing intervention of the state in the capitalist economy.


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