The Ideas of John Maynard Keynes (pt 6)

Keynes and the falling rate of profit

Keynes, along with Adam Smith, Ricardo, Marx and even the “classical” marginalists, believed that the long-term trend of the rate of profit—marginal efficiency of capital in Keynes’s language—was downward. However, Keynes—and other marginalists—gave very different explanations than Marx for this tendency.

Marx applied his perfected law of labor value, which unlike the Ricardian version distinguished between (abstract) labor, the social substance of value, and the labor power purchased by the industrial capitalists. (1) He showed how the tendency of the ratio of constant capital—fixed capital plus raw and auxiliary materials—to rise with capitalist development relative to variable capital would mean a fall in the rate of profit if the rate of surplus value—the ratio of unpaid to paid labor—remained unchanged.

Marx also demonstrated that even if the rate of surplus value increases, the rate of profit can still fall if the ratio of constant to variable capital—the organic composition of capital—rises sufficiently. In analyzing the effects on the rate of profit of a rising organic composition of capital, Marx abstracted a fall in the rate and mass of profit associated with problems of the realization of surplus value.

An inability to realize surplus value—either fully or at all—will cause a temporary fall in the rate and even mass of profit. In contrast, the long-term rise in the organic composition of capital will cause a permanent fall in the rate of profit.

Keynes, as we have seen, had no notion that surplus value is even produced in the production process, let alone that surplus value is produced by variable capital alone. Keynes, in the manner of vulgar economics, simply assumed that profits arise in the sphere of circulation due to the scarcity of capital.

According to “classical” marginalism, capital yields an interest to its owner because it is a “scarce” factor of production. Keynes modified this and said real, as opposed to money, capital has a marginal efficiency—yields a profit—for its owner to the extent that real capital is scarce.

According to Keynes, compared to what is real capital relatively scarce? It is scarce relative to the varying needs for material use values of the individual human beings who make up the total population. If the quantity of capital is fixed, then according to Keynes, the the scarcity of capital will be governed in the long run by the total size of the population. Therefore, Keynes held that if the quantity of real capital increases relative to the population, the total quantity of fixed capital will become progressively less “scarce,” and the rate of profit—marginal efficiency of capital—will fall.

Since the rate of growth in the population was falling in Britain—he was above all an Englishmen—Keynes assumed that the accumulation of capital was proceeding faster than the population growth. Therefore, Keynes reasoned in the post-World War I period, the tendency of the rate of profit, or marginal efficiency of capital, was strongly downward.

All quotes from Keynes that follow are from the concluding chapter of Keynes’s “General Theory,” entitled “Concluding Notes on the Social Philosophy towards which the General Theory might Lead.”

“I feel sure,” Keynes wrote, “that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.”

Keynes and Marx on the historical direction of the rate of interest

Marx explained that interest is merely a portion of profit, which consists of interest plus profit of enterprise. This total profit is itself a fraction of the total surplus value, which also includes rent. (2)

Marx believed that the rate of interest would fall in the long run, not only relative to capital but also relative to the rate of profit. Or what comes to exactly the same thing, in the future more of the total profit would have to go to the industrial capitalist in the form of the profit of enterprise and less to the money capitalist in the form of interest. (3)

The lower the rate of profit, the lower the maximum rate of interest can be and still allow a positive profit of enterprise. In addition, if the rate of profit is low, the rate of interest has to be much lower still if the rate of the profit of enterprise is to be high enough to provide sufficient incentive to produce surplus value.

Keynes, as we have seen over the last few weeks, unlike most economists—including Marx—denied that the industrial or commercial capitalists actually appropriate interest. Instead, Keynes defined as interest only the “reward”—in Marxist terms, the fraction of the surplus value—appropriated by the pure money capitalist. Since Keynes, unlike Marx, believed that the rate of profit—or marginal efficiency of capital—and the rate of interest tended toward equality, he necessarily believed that the fall in the rate of profit would bring about a fall in the rate of interest.

“Now,” Keynes wrote, “though this state of affairs [where the rate of profit has fallen to extremely low levels—SW] would be quite compatible with some measure of individualism [that is, capitalism—SW], yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”

This is one of the few places in the “General Theory” where Keynes used the term “capitalist.” And significantly, he referred to the exploitation by the capitalists not of the working class but of the “scarcity-value” of capital. Here we see Keynes remained very much a vulgar economist.

Also, as was common in the 19th century, Keynes used the word capitalist to refer to the money capitalist who appropriates his or her share of the total surplus value under the title of “interest.” (4) Marx liked to use the term industrial capitalist to emphasize that the owners of industrial enterprises who employ wage labor and appropriate both the interest on the capital they own, as opposed to the capital they borrow, and the profit of enterprise were also capitalists.

“Interest,” Keynes continued, “today rewards no genuine sacrifice [emphasis added—SW], any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.”

Like some other marginalists, Keynes saw the decline of the rate of profit not as pointing toward a revolutionary transformation in the mode of production but rather as representing a progressive softening in the antagonism between the capitalists and the working class. These marginalists are saying that as capital becomes “less scarce” relative to “labor,” the rate of profit will fall and real wages will rise. More of the total product will therefore go to the working class and less will go to the capitalists. This is the opposite of what Marx predicted. Therefore, according to the marginalists, as capital accumulation continues, the working class will be progressively reconciled to the capitalists.

Mass unemployment

On the way to this happy reconciliation of the capitalists and working class, however, Keynes held that a major hitch had developed. This hitch, according to Keynes, was as we have seen over the last few weeks the growing tendency of the capitalist system to reach an equilibrium at mass unemployment.

Remember, according to the Keynes, capitalist equilibrium is marginal efficiency of capital = rate of interest. According to Keynes, under the new conditions that prevailed after World War I, interest rates and the marginal efficiency of capital were equalizing at rates that corresponded to mass unemployment. Unless major corrective action was taken by the government, Keynes feared, there might be a very unhappy outcome for the capitalist class. However, Keynes was convinced that if the correct policies were adopted by the government, things would get back on track for the happy reconciliation of the capitalists and the working class.

Keynes on the causes of the Great Depression

The causes of the Great Depression of 1929-40 are not only of interest to economic historians but all who are concerned with the fate of modern society. Why did this unprecedented economic collapse, so much worse than any of the crises that preceded it, occur in the first place? What are the chances of something like the Depression repeating itself? Can capitalist governments prevent a repeat of such a debacle like Keynes claimed they could? And finally, what is the relationship of the Depression as a concrete historical economic episode in the history of capitalism to the ultimate historical limits of capitalist production?

Since the Great Depression of 1929-40 occurred long after the deaths of Marx and Engels, the founders of Marxism wrote nothing on it. The Depression also occurred after the deaths of Luxemburg and Lenin, so they, too, had nothing to say about it. I intend to examine the Great Depression and its causes in the posts that will deal with the controversial theory of “long cycles” or “long waves” and again in the posts on the breakdown theory. But here, since I am dealing with Keynes, I will summarize Keynes’s view of the Depression, which clearly inspired him to write the “General Theory.”

Keynes’s explanation of the Depression

According to Keynes, during the 19th century the high rate of population growth caused the rate of profit, or marginal efficiency of capital, to be high. Or what comes to exactly the same thing, the marginal efficiency of capital was high because capital was scarce. Therefore, economic equilibrium as defined by Keynes—the marginal efficiency of capital = the rate of interest—was pretty close to, if not at, “full employment.”

Therefore, Keynes reasoned that in the pre-1914 period the unemployment created by recessions was short-lived, misleading the “classical” marginalists into believing that the only equilibrium possible in the capitalist economy was at “full employment.” This was qualified only by the influence of the trade unions, which kept the labor market from being completely “free.”

But as population growth slowed down after World War I, the growth in the quantity of capital began to exceed the growth in the population. The marginal efficiency of capital—the rate of profit—began to plummet. Indeed, the fall in the “marginal efficiency of capital” was far beyond anything that Marx would have thought possible due to the increase in the organic composition of capital. (5)

The equilibrium equation marginal efficiency of capital = money rate of interest still held good, and the economy was still fluctuating around its equilibrium. But according to Keynes, the new equilibrium was increasingly an equilibrium of mass unemployment, not full or near-to-full employment as it had been before World War I.

Interest rates that would have been low enough to represent full employment, or indeed inflation, before World I now corresponded to to an economic equilibrium of mass unemployment. (6) According to Keynesian theory, a sufficiently low rate of interest could still bring about an equilibrium that would correspond to “full employment.” But under the post-World War I conditions, where the marginal efficiency of capital was radically lower than that which prevailed before the war, the rate of interest would have to far lower than the interest rates that prevailed in the pre-1914 days.

But the central bankers, not aware of the radical change of economic conditions after World War I—they could not, after all, have read the “General Theory” before Keynes wrote it—therefore mistakenly kept interest rates too high under the new conditions. In addition, the banking interests, which dominated the central banks, profited from high interest rates. Finally, because the “marginal efficiency of capital” had fallen to such low levels, especially after the crash of 1929, it was very difficult to lower the rate of interest to the near zero level that would represent an economic equilibrium representing full employment.

Keynes’s solution

Keynes was well aware that the persistence of the kind of mass unemployment that prevailed during the Depression would threaten the very existence of his beloved capitalist system. His ultimate nightmare was that sooner or later the British working class, radicalized by endless mass unemployment, would rise up much like the workers in Russia had done in October 1917.

If the rate of population picked up again and capital became more scarce, the marginal efficiency of capital would start to climb, making “full employment” or at least “fuller employment” easier to achieve. But Keynes did not look for solution in this direction, since that would push capitalist society into the horrors of Malthusian overpopulation.

Keynes did not, however, think the situation was hopeless. On the contrary, he thought he had a program that would save it. One plank of Keynes’s solution was that everything should be done to lower interest rates as much as possible. But he suspected that would not be enough. Secondly, he thought that “investment” would have to be “socialized.”

At first glance, this would seem to indicate that Keynes, who had been an economic liberal during most of his professional life, had become a socialist, at least to a certain extent, under the influence of the Depression.

But Keynes did not mean that productive investment should be socialized. One of the reasons why Keynes in some passages seems much more radical than he really was, is that marginalists had dropped the distinction made by the classical economists—as well as Marx—between productive labor that produces surplus value and unproductive labor, which does not. If you don’t make the distinction between productive and unproductive labor, you can’t make the distinction between productive investments that produce surplus value on an increasing scale and expenditures that merely consume the existing capital of bourgeois society.

What Keynes was actually advocating was an increase of what the classical economists and Marx would have called unproductive expenditures. The government would not be spending more to produce surplus value and accumulate capital—act as an industrial capitalist itself—but rather consume the capital already in existence. This was very similar to the program that Malthus had advocated in the days of—and against the strong opposition of—Ricardo.

An increase in the amount of productive investments by the state would only increase the quantity of real capital and thereby lower the “marginal efficiency of capital” even more. What was really needed, according to Keynes, was the kind of government expenditures that would increase demand without increasing the quantity of capital, thereby raising, not lowering, the marginal efficiency of capital.

As the marginal efficiency of capital rose, it would be easier to achieve “full employment” without interest rates being driven down lower than was really possible. Economic growth would still be very low, but there would be “full employment.” What Keynes really wanted was to reconcile economic stagnation—the cessation of the development of the productive forces—which he saw as inevitable, indeed even desirable—with the continued existence of the capitalist system.

Public works in a growing, as opposed to a stagnant, capitalist economy

During the 19th century, the political parties that championed industrial capitalism in the United States, such the Federalists and the Whig and later Republican parties, had strongly supported public works—internal improvements—against the opposition of the Democratic Party, which represented the slave-owning interests. (7)

Rapidly developing capitalist countries like the 19th-century United States often find themselves short of both money and real capital. To develop railroads, canals, and later roads and airports, often requires raising sums of money that is far beyond the ability of individual capitalists or even corporations to raise.

Also, it is not always possible to run basic “infrastructure” projects on a for-profit basis. Once upon a time, highways were run as private for-profit toll roads. But if this practice had continued, the U.S. auto industry would never have developed to the extent it did during the last century. If, however, infrastructure projects such as highways or airports are not run on a for-profit basis, they cannot be developed by for-profit corporations. Therefore, the government must step in and finance them itself, either directly through taxes or through borrowed funds.

In a country where capitalism is developing rapidly, “internal improvements”—to use the 19th-century U.S. term for government public works programs—act as a powerful lever for increasing the rate of economic growth. This is true whether they are financed directly through taxes or through borrowed funds.

For example, the development of canals, railroads and highways greatly increases the turnover of (variable) capital, thereby increasing the rate of profit. These profits, in turn, fuel the entire process of capitalist expanded reproduction.

But these kinds of public works were not what Keynes had in mind. The Keynes of the “General Theory” was a prophet of economic stagnation, not of growth. Characteristically, Keynes pointed to the “full employment” of World War I as an example of “full employment” created by the deficit spending he advocated in order to reduce unemployment.

It would be unfair to Keynes to claim that he actually advocated war to achieve full employment. Keynes hoped that the increased government expenditures would somehow produce useful things. But since the real purpose of this kind of deficit spending was to increase demand and not produce additional wealth, production of useful things was not really necessary.

Therefore, “military Keynesianism” is very much in the spirit of Keynes’s economics. When the government buys bombs, tanks, bombers and destroyers and purchases the labor power of soldiers, it does not produce surplus value. Indeed, the use value of these commodities to its buyer the government is not that it increases wealth but rather that it destroys wealth—as well as human lives.

Keynes on the redistribution of the national income

Unlike the classical economists, especially Ricardo, who emphasized economic growth, Keynes was an economist of stagnation. If continued economic growth would in the future be neither possible nor desirable, why not then redistribute the national income in favor of the workers? The workers, after all, spend almost their entire incomes on personal consumption, as opposed to the capitalists, whose historical justification is that they, unlike the workers, are in a position to spend a substantial portion of their much larger incomes on expanding the productive forces of society.

Keynes answered this question—with reservations—in the affirmative. In the future, there would be little if any “net investment.” If capitalist society, Keynes reasoned, depended on net investment—the very heart of expanded capitalist reproduction—to generate demand, it would suffer from a chronic insufficiency of demand and resulting mass unemployment. If the amount of personal consumption increased in the economy so that it took the place of net investment—in other words, if expanded reproduction gave way to simple reproduction—the economy, Keynes believed, would become more stable.

Weren’t violent swings in (productive) investment behind the violent booms and slumps that increasingly characterize the capitalist system? Wouldn’t an economy in which a much larger percentage of the total expenditures was for personal as opposed to productive consumption be far more stable, even if there would be little or no economic growth? Keynes answered yes to both these questions.

At first, you would think that Keynes would have been a great champion of the trade unions. Isn’t the elementary function of the trade unions to increase wages and reduce profits? But no. Remember, Keynes claimed that if the trade unions win higher money wages, this simply leads to higher prices. Therefore, trade union activity—the independent activity of the working class through its own organizations, though at its most elementary level—would not be be able to bring about the necessary redistribution if we believe Keynes’s assertion that higher money wages simply mean higher prices.

But undoubtedly Keynes, who was a very class-conscious bourgeois, had another reason in mind. Though trade union struggle as such is simply about the rate of exploitation and not about the continued existence of exploitation, it still involves the actual organization of the working class on a class basis. Wouldn’t trade union organization lead sooner or later to political organization?

Indeed, by the time Keynes wrote the “General Theory,” the British workers had already organized the Labor Party, a party based on the trade unions. While the British Labor Party, like the trade unions it was based on, did not challenge the capitalist system, couldn’t the Labor Party turn out to be simply a first step toward an eventual conquest of political power by the British working class?

The very fact that the British working class had progressed from organizing itself on a trade union basis to organizing itself as a political party reflected this historical trend. Keynes was not at all happy about this trend and indeed sought ways to reverse it.

Keynes had first began to advocate practical “Keynesian economics”—large-scale deficit-financed spending by the government on public works to combat mass unemployment—after the General Strike of 1926. Keynes had teamed up with British Liberal Party leader Lloyd George in advocating a public works program to be financed through government borrowing in order to combat the mass unemployment Britain was already experiencing. Keynes was hoping to lure the British workers away from the Labor Party and back into the Liberal Party. Indeed, Keynes wrote the “General Theory” largely to find a theoretical justification within bourgeois marginalist economics for the practical economic policies he had been advocating for some time.

Despite the throughly bourgeois policies of the British Labor Party, Keynes was no supporter of the Labor Party any more than he was a supporter of redistributing the national income through trade union struggles against his beloved capitalist class. Instead, Keynes advocated a redistribution through the tax mechanism of the state. In this way, the redistribution of the national income would be achieved through the bourgeois state—perhaps headed by a government led by a revived Liberal Party—and thus keeping the whole process of income redistribution safely under the control of the ruling class itself.

Keynes’s view of a future society

As the “scarcity-value” of capital vanishes, according to Keynes, economic growth would peter out. Expanded reproduction would give way to simple reproduction. Interest rates would fall to zero or very close to zero, causing the gradual extinction of the hateful “money capitalists.” This would leave the industrial and commercial capitalists, who carry out the labor of superintendence and who would be able to earn a little extra profit by taking on “entrepreneurial” risks.

The ownership of the means of production would, however, remain safely in private hands. Since real capital would have lost most of its “scarcity value,” the gap between the incomes of these “entrepreneurial” working capitalists and the ordinary wage workers would shrink, though by no means disappear altogether. Just like the case with the classical marginalists, the working class and the capitalist would be happily reconciled.

Unlike Ricardo, who championed the boundless development of the productive forces—and supported industrial capitalism precisely because of its tendency to develop the productive forces without limit—Keynes looked forward to the end of the development of the forces of production. Marx pointed out that in Ricardo’s time, Malthus had advocated the development of the productive forces only to the extent that it enabled the members of the old semi-feudal class to enjoy a higher standard of living.

Keynes, who greatly admired Malthus, was afraid that any further development of the forces of production would pull the rug out from under the feet of the capitalist class. Marx pointed out that Ricardo was always willing to sacrifice classes and sections of classes if it meant the further development of production—humanity mastering of the forces of nature. Keynes, in contrast, wanted to sacrifice the development of production in order to preserve capitalist class rule for its own sake.

Ricardo was the economist of the rise of capitalism. Keynes, in contrast, is the economist of the decay and decline of capitalism.

The fate of Keynesian economics

The traditional marginalists gradually launched a counterattack against the “General Theory.” Pointing to the ultimate contradiction between Keynes’s admission that overproduction is possible under capitalism and his retention of the marginalist notion that use values acquire value because of their scarcity, they were able to show that using marginalist assumptions accepted by Keynes, the economy would still move in the long run toward an equilibrium of full employment.

Assume that the economy is in a deep depression and its associated “liquidity trap.” Wouldn’t prices, the marginalist traditionalists argued, including the price of “labor,” inevitably fall until the point was again reached where supply and demand would be equal?

The marginalist critics gave an affirmative answer to this question. Even if the “monetary authority” fails to expand the money supply during a depression, they claimed, the consequent fall in prices, including the price of “labor,” will expand the “real money supply” allowing interest rates to fall to whatever level is necessary to allow once again a positive rate of profit on new investment. And once the positive rate of profit appears on new—the marginal—investment, wouldn’t the economy start to recover? In the end, no matter how you throw the marginalist cat, it lands on its “full employment” feet.

The traditional marignalists split into two camps. One is made up of the diehards of economic liberalism, largely economists of the so-called Austrian school represented by men such as Frederick von Hayek and Ludwig von Mises. They blamed the Depression on the trade unions, the alleged inflationary policies of the central banks, and the “socialist” policies of governments.

Many of these economists were to find jobs at the University of Chicago, where a young economics instructor named Milton Friedman had also found employment. The department of economics of the University of Chicago resisted the rise of Keynesian economics. They became the darlings of business interests opposed to the concessions—limited though they were—to the working class by the New Deal and the rise of the CIO industrial unions.


But more “moderate” marginalists were chastened by the Depression. (8) Even if the capitalist economy tended toward full employment in the “long run,” the long run was a lot longer than the “classical” marginalist had assumed. The 1930s—and in Britain the 1920s as well—showed that in practice mass involuntary unemployment could drag on for decades.

The moderate marginalists agreed with Keynes that increased government spending accompanied by tax cuts during periods of recession was a good idea, perhaps even absolutely necessary if capitalism were to survive. Deficits during periods of recession were now viewed as a positive good, not a necessary evil as in the past. The marginalist “moderates” also agreed that the governments and the “monetary authorities” should follow policies that encourage a “moderate” but persistent rise in prices of about 1 to 3 percent a year. (9)

As the maginalist moderates saw it, the necessary reduction in interest rates during a period of recession could be achieved in two ways. One, the traditional method, was to allow prices to fall thereby increasing the real money supply, which would help lower interest rates. But didn’t falling prices encourage buyers, especially the industrial capitalists, to postpone purchases until prices fell even more? This, the moderate marginalists argued, tended to transform recessions into prolonged depressions with all the accompanying mass unemployment. If another Great Depression occurred, the workers might finally rise up and overthrow capitalism.

But there was another way to achieve the necessary reduction in interest rates, the moderate marginalists claimed, the way advocated by Keynes. As long as unemployment was at levels that were dangerous to capitalism, the monetary authorities should accelerate the growth of the “money supply” and drive interest rates lower.

They should continue to do this until “full employment,” by which they really mean the optimal-for-capitalism level of unemployment—high enough to intimidate the workers but not so high as to dangerously radicalize them—is reached. Only when unemployment falls to a level that “dangerously” strengthens the trade unions—which our moderate marginalist economists call “overemployment”—should the “monetary authorities” curb the growth of the “money supply.”

A policy of “permanent if moderate inflation” has the further “advantage” of putting continuous downward pressure on the real wages of the workers, thereby overcoming the tendency for real wages on a hourly basis to rise during recessions.

According to the moderate marginalists, it is very dangerous to do nothing to combat a recession beyond having the central bank cut its discount rate—the traditional policies advocated by marginalists before Keynes—and thus allow a recession to “feed on itself.” If this were done, there would be a good chance that sooner or later another recession would turn into a new Great Depression with perhaps fatal consequences for the capitalist system. But as long as the government runs increased deficits and the “monetary authorities” make whatever cuts in interest rates are necessary, there will be no danger of a new Depression.

Perhaps recessions cannot in practice be avoided completely, the moderate marginalists argue, like Keynes dreamed of in the “General Theory.” The point was not necessarily to prevent recessions entirely but to prevent a recession from getting out of hand and turning into a 1930s-style Depression. The moderate marginalsts were confident that their policies would prevent this from happening.

These moderate marginalists came to be called “neo-Keynesians.” It was these pro-capitalist, pro-imperialist economists who came to dominate the university economic departments from the late 1930s onward. They combined “classical marginalism,” which they called “neoclassical economics,” with the “insights” of Keynes. This was the new economic mainstream of bourgeois economics, which over time was challenged by the more traditional marginalists of the Chicago School on the right.

There were shadings, of course. Some of the neo-Keynesians thought that sufficiently “bold economic polices” by the capitalist governments could eliminate recessions entirely or almost entirely. Such views began to get the upper hand when the powerful economic boom of the 1960s encouraged the view in university economics departments and government policy-making circles that recessions might be eliminated altogether. Other more “conservative” neo-Keynesians were more cautious.

No falling rate of profit?

After World War II, the neo-Keynesians, in sharp contrast to Keynes himself and even to the “classical” marginalists, came to deny that there was any tendency toward a falling rate of profit. Perhaps the “cold war” led to increased awareness among professional bourgeois economists of Marx’s law of the “tendency of the rate of profit to fall.” That had to be refuted, of course.

The “neo-Keynesians” were afraid that any concept of a falling tendency in the rate of profit might imply that capitalism was something other than an eternal system. Especially during the cold war, all speculation in that direction had to be squashed. Therefore, these neo-Keynesian explained that Keynes had been mistaken about a falling tendency in the rate of profit, because, happily, human material needs are infinite and can never be satisfied.

Therefore, “scarcity,” and capital itself, is an eternal category. No doubt, the high profits of the post-World War II economic boom encouraged this idea. Perhaps there was still life in capitalism—the expanded reproduction of capital—after all.

In addition, the challenge to capitalism represented by the Soviet bloc with its high post-World War II rates of growth meant that capitalism could hardly enjoy the luxury of resigning itself to economic stagnation in the manner of Keynes of the “General Theory.” Once again, capitalism had to be pictured as a system of endless economic growth. So anything even suggesting a falling tendency of the rate of profit had to go.

On the other hand, the “mainstream” economists didn’t want to claim that the rate of profit tends to rise, since that would imply an intensification of the social contradiction between the workers and the capitalists. (10) Therefore, they compromised and claimed that the rate of profit was pretty much fixed, tending neither to decline or fall.

Radical Keynesians

In addition to the pro-capitalist, mainstream neo-Keynesians, there arose a tendency that drew radical, even socialist, conclusions from Keynes’s work. On the left of this tendency, there were and are attempts to combine Marx with Keynes. These radical Keynesians have become known as “post-Keynesians.” The left Keynesians originally hoped that the growth of state intervention, necessary they believed to avoid permanent depression conditions, would lead to a gradual democratic transition to a socialist society.

Unlike Keynes himself, the radical Keynesians developed the concept of monopolistic competition. The “classical” marginalists and Keynes as well were really only interested in the “monopoly” in the labor market imposed by the trade unions. But though it was largely ignored by the traditional marginalists and Keynes, the role of cartels, syndicates and huge monopolistic corporations, also called “trusts,” was growing.

The left Keynesians expanded marginalism into a theory of “monopolistic competition” to deal with the situation where the competition among the industrial and commercial capitalists was far removed from the free competition models of the “classical” marginalists.

The “post-Keynesian” economists, who are viewed as dangerous radicals by the ruling capitalist class, have been far less influential than the pro-capitalist, pro-imperialist “neo-Keynesians.” It is quite difficult for “post-Keynesians” to get university posts, and if they do, to receive tenure. The economics departments of the universities, dominated as they have been since the 1980s by “neoliberals,” generally want to hire only pro-capitalist economists. This means hiring mostly neoliberals along with the occasional “neo-Keynesian” for balance on the “left.”

The Monthly Review school

Paul Sweezy, the founder of the Monthly Review school, as it has become known, was strongly influenced by Keynes as well as Marx. During the 1930s, the young Sweezy was involved in the development of the theory of “monopolistic competition,” which left its mark on the Monthly Review school.

Unlike Keynes, Sweezy became a socialist during the 1930s and remained one until his death in 2004. He looked forward to the end of capitalism and its replacement by socialism.

Sweezy was an instructor of economics at Harvard during the 1930s and 1940s. As the cold war set in, despite the support of his friend, the famed conservative economist Joseph Schumpeter, Sweezy was unable to get tenure, and Harvard did not renew his contract to teach. He was therefore forced to abandon any hope of pursuing an academic career and instead devoted himself to editing Monthly Review, the socialist magazine he founded, from which the Monthly Review school gets its name.

Originally, Sweezy accepted the Keynesian claim that depressions could be avoided by massive government spending. He hoped, like many left Keynesians, that such spending would be carried out in the interests of the working class leading to a gradual transition to socialism.

But as the Cold War unfolded, Sweezy progressively abandoned these hopes, since the only form of massive government spending that the Democrats and Republicans would agree to was spending for war purposes. He put little hope in the U.S. working class and the working classes of he other imperialist countries, seeing them as hopelessly integrated into the capitalist system. Instead, he looked to the struggles of the oppressed countries and revolutionary movements within them as the most likely route towards a socialist society.

In his last years, Sweezy also began to move away from his earlier position that capitalist governments were really able to stabilize the economy sufficiently to avoid another Depression in the long run. He put great emphasis on the explosion of debt and the implications it had for future crises, but complained that he was too old—Sweezy was well into his eighties at the time—to analyze the new conditions.

Economics is split in two

The pro-capitalist, pro-imperialist “neo-Keynesians” have split economics into two sub-disciplines. One, called “micro-economics,” was the traditional unmodified marginalist theory as it was before Keynes. A new sub-discipline, inspired by Keynes’s work, was named “macro-economics” and deals with the practical questions of what came to be called “stabilization policy.”

Stabilization is aimed, above all, at avoiding deep prolonged depressions. For these purposes, the assumptions of marginalism could be tactfully disregarded if they got in the way of the need to devise policies aimed at stabilizing the capitalist economy. Individual bourgeois economists tend to specialize in either micro- or macro-economics.

And so ends this digression into the dreary world of modern bourgeois economics. Next week, I will return to the Marxists and the question of whether in addition to the 10-year industrial cycle there is a “long cycle” or “long wave.”

Could such a long cycle explain the Depression of the 1930s and the stagflation of the 1970s, as well as the post-World War II boom and later the “Great Moderation”? Could the current economic crisis represent the first stage of a new downturn in the “long cycle” or “long wave”? Stay tuned.


1 An industrial capitalist is any capitalist who purchases labor power with the intention of using it to produce surplus value.

2 Other incomes such as those deriving from taxes, and the wages of unproductive workers, are derivatives of the primary incomes. For example, a wealthy landlord might have a huge army of servants. But the wages of these servants will be paid out of the landlord’s rental income. If a capitalist maintains a similar army of servants, the wages of the servants would be paid out of profit. If taxes fall on the wages of the productive workers, then the wages or salaries of the employees of the state will be derivative of the wages of the productive workers.

Similarly, to the extent that the taxes are paid by the productive workers, interest paid on government bonds will also be derivative of the incomes of the wages of the productive workers.

3 The industrial capitalists insomuch as they work with their own capital—as opposed to borrowed capital—appropriate both the interest and the profit of enterprise.

4 The use of the term “capitalist” in this sense lingers on in the term “venture capitalist.” Venture capitalists are firms that specialize in providing money capital to new enterprises called startups. Except for the use of the term “venture capitalist,” the term “capitalist” is almost completely avoided by the capitalist media and, for the most part, by bourgeois economists today.

5 The fall and indeed the collapse of the rate of profit during the Depression era involved a collapse of the possibility of realizing surplus value, not producing it. A decline in the rate of profit caused by a rise in the organic composition of capital is necessarily gradual, manifesting itself only over long periods of time.

6 According to Keynes, if the rate of interest is below the marginal efficiency of capital at full employment, the result will be inflation, since there will be no possibility of increasing output to meet the extra demand in the short run. The only way that supply and demand can then be equalized will be through higher prices that reduce the demand for commodities. For example, since Keynes saw money wages as being the chief determinant of prices, if the demand for “labor” exceeds the supply of “labor” at a given money wage, the supply and demand for “labor” can only be equalized at a higher money wage. Higher money wages mean a rise in prices of all commodities, according to Keynes.

7 Abraham Lincoln, whose bicentenary is being celebrated this year, was a strong supporter of internal improvements as a member first of the Whig and then Republican parties. He opposed the Democratic Party, not because he was an opponent of racism—Lincoln was, like the overwhelming majority of white people of his time, a racist himself—but because he was the consistent champion of the development of industrial capitalism. He correctly saw the Democratic Party as an opponent of progress, though of course the progress that Lincoln had in mind was of necessity capitalist progress.

The internal improvements fueled the progress of industrial capitalism, accelerating the development of the productive forces of society and therefore represented historical progress. They also involved huge giveaways to capitalist interests. Even in its progressive industrial phase, capitalism was fueled by the drive of the capitalists to enrich themselves at the expense of the workers and the other exploited classes of society.

8 In addition to moderate marginalists, who evolved into the mainstream “pro-business” neo-Keynesians, there remained died-in-the-wool supporters of “classical” marginalism. These classical marginalists insisted that the capitalist economy would quickly return to “full employment” if only the governments and central banks would allow the “free market” to function. Many of these economists taught at the University of Chicago in the United States. They paved the way for the rise of “monetarist” Milton Friedman and his “neoliberals,” who came to dominate the bourgeois economic profession from the 1980s onward.

9 While the followers of Milton Friedman urge a steady rate of growth of the “money supply,” the pro-business neo-Keynesians support a policy of cutting interest rates during recessions accompanied by an accelerated growth in the money supply. Indeed, neo-Keynesians advocate these policies whenever the rate of unemployment is above the optimum rate of unemployment, called by neo-Keynesians and monetarist alike “full employment.”

During periods of “overfull employment,” the neo-Keynesians support a policy of slower growth of the money supply to encourage higher interest rates with the purpose of pushing unemployment back up to its optimum “full employment” level. Unlike the followers of Friedman, who urge the central banks to pay attention only to the rate of growth of the variously defined “money supplies,” the neo-Keynesians urge the central banks to pay attention to the rate of interest.

This is also the view of the practical central bankers themselves, who generally consider Friedman’s idea that they should aim at a steady rate of growth of the “money supply” as nonsense. It’s no accident that despite his alleged expertise, Milton Friedman was never appointed to the board of governors of the U.S. Federal Reserve System.

10 Marx explained that the rate of surplus value does tend to rise as capitalism develops, leading to an intensification of the antagonism between the workers and the capitalists, despite the fact that the rate of profit, the ratio of surplus value to the total capital, tends to fall.

2 Responses to “The Ideas of John Maynard Keynes (pt 6)”

  1. m Says:

    this was a really good critical review of Keynes’ ideas from a Marxist standpoint. Thanks.
    I was just wondering if you read Paul Mattick’s book “Marx and Keynes”

  2. MaterialConceptual Says:

    Thank you for this explanation of Keynesianism, it revolutionized the way I think about economics.

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