A Keynesian Takes on Karl Marx

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

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

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

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

Is the Economic Crisis Over?

According to the media, the world capitalist economy has been in a recovery for almost two years. Yet there remains a widespread impression that the economic crisis that began in 2007 is far from over. True, the rate of profit has risen sharply since 2009, and the mass of profits is at record levels. Yet the crisis of mass unemployment persists.

At the current rates of job creation in the U.S. and other imperialist countries, it will be years before the number of jobs returns to the levels that prevailed in 2007 on the eve of the crisis. And even the pre-crisis 2007 levels were far from full employment. Therefore, is the economic crisis that began in 2007 really over?

The passage of a cyclical crisis described

Rosa Luxemburg in “What Is Economics?”—which was written shortly after the economic crisis of 1907-08—gave this vivid description of how a cyclical crisis of overproduction is reflected in the capitalist media:

“…once the crisis is in full swing, then the argument starts about who is to blame for it. The businessmen blame the abrupt credit refusals by the banks, the speculative mania of the stockbrokers; the stockbrokers blame the industrialists; the industrialists blame the shortage of money, etc.”

Though these words were written a century ago shortly after the 1907-08 crisis, they could just as well have been written to describe the crisis that began exactly a century later in 2007.

The recovery

“And when business finally picks up again,” Luxemburg continued, “then the stock exchange and the newspapers note the first signs of improvement with relief, until, at last, hope, peace, and security stop over for a short stay once more.”

“Modern society,” Luxemburg further explained, “notes its [the cyclical crisis—SW] approach with horror; it bows its head trembling under the blows coming down as thick as hail; it waits for the end of the ordeal, then lifts its head once more—at first timidly and skeptically; only much later is society almost reassured again.”

Crisis of 1907-08 in historical perspective

As it turned out, after the crisis of 1907-08 capitalist society had little time to get “reassured again.” If the industrial cycle that began with the crisis of 1907 had followed the typical 10-year course, the next crisis of overproduction would have been due around 1917.

Instead, a new worldwide recession began in 1913, about four years early. In Europe, this new recession did not end with a new upswing that left society “almost reassured again.” Instead, it ended with the “Guns of August”—the outbreak of World War I.

Capitalism ‘celebrates’ the anniversary of 1907 crisis

The capitalist economy “celebrated” the 100-year anniversary of the crisis of 1907 in the most “appropriate” way possible—with yet another crisis. And like its predecessor a century earlier, the crisis that began in 2007 proved to be unusually severe. There is a feeling now that the crisis of 2007-09 is perhaps, like the crisis of 1907-08, no ordinary crisis. Could this crisis, too, be the herald of a far more fundamental crisis of capitalist society?

A New Imperialist War

The last few weeks have seen the beginning of a new imperialist war, this time against the small oil-rich country of Libya. The war began on March 19, when the United States, Britain and France launched a missile attack against Libya’s air defenses.

The opening of this new U.S.-led imperialist war of aggression occurred on the eighth anniversary of the U.S.-led invasion of Iraq. To add to the irony, the first missiles began to fall during U.S. West Coast anti-war demonstrations timed to mark the beginning of the imperialist invasion of Iraq—a first in the history of anti-war demonstrations, I believe.

I had been asked what is my opinion of the current economic conjuncture. I had intended to devote a reply to this question, since I have not written about this for some time and there have been some interesting developments on this front. However, the explosive events in North Africa and the Persian Gulf region combined with the Japanese earthquake, tsunami and nuclear disasters are raising a different set of questions that should be dealt with first.

What will be the effects of these events on the world capitalist economy? These events are external to the industrial cycle, though they will no doubt exert an influence on the evolution of the current global industrial cycle that began with the outbreak of the last general crisis of overproduction in 2007. Therefore, this month I will examine the effects of the North African and Persian Gulf events and the Japanese disasters on the capitalist world economy. I will postpone until next month an examination of the current conjuncture in the global industrial cycle.

Are Marx and Keynes Compatible? Pt 5

Keynesian economists blame their failure on the trade unions

Keynesian economists in general—and some Marxists influenced by them—blame the failure of the Keynesian policies of the 1970s on the trade unions. Basing themselves on Keynes, they falsely blame the inflation of the 1970s not on the inflationary monetary policies of the central banks that were so strongly supported by Keynesian economists at the time but on the trade unions.

These economists claim that by achieving raises in money wages during the inflation, “over-strong” unions were responsible for the inflation of the 1970s. Supposedly, a “wage-price spiral” pushed money wages relentlessly higher forcing the central banks to periodically raise interest rates to prevent even worse inflation, which in turn led to the recessions and unemployment of the 1970s and early 1980s.

However, in reality it was the trade unions that found themselves increasingly on the defensive as both inflation and unemployment rose during the 1970s and into the early 1980s. What the Keynesian economists call the “wage-price spiral” of the 1970s was really a “price-wage spiral.” The unions were only reacting to the ongoing inflation in their attempts to maintain—not entirely successfully—the living standards of their members.

Are Marx and Keynes Compatible? Pt 4

The Keynesian revolution in economic policy

Before Keynes, neo-classical marginalist economists believed that capitalism was stable if left to its own devices. These economists held that a capitalist economy tended strongly toward an equilibrium at full employment of both workers and machines. Therefore, if a recession were to occur the response of the authorities should be pretty much confined to having the central bank lower the discount rate. Otherwise, the government should stay out of the way. As long as it did, the marginalists claimed, the capitalist economy would quickly move back to its only possible equilibrium position, “full employment.”

The events that followed World War I, especially the U.S.-centered Great Depression of 1929-1941, discredited this view. Under the influence of Keynes—and more importantly the Depression itself—most of the new generation of (bourgeois) economists believed that it was now the duty of the capitalist government to actively intervene whenever recession threatened.

Bourgeois economics split in two. One branch, purely theoretical, is called “microeconomics.” Microeconomics is simply the old marginalism. The branch that emerged from the Keynesian revolution is called “macroeconomics.”

Macroeconomics tries to explain the movements of the industrial cycle. More importantly, it seeks to arm the capitalist governments and “monetary authorities” with “tools” that will keep the capitalist economy from sinking again into deep depression with the resulting mass unemployment. The new stance of the bourgeois economists was that if the capitalist governments and their monetary authorities use the “tool chest” provided them by macroeconomics correctly, they should be able to maintain “near to full employment with low inflation.”

Full employment was defined by this new generation of (bourgeois) economists not the way workers would define it—everybody who desires a job can quickly find one—but rather as a level of unemployment sufficiently high to keep the wage demands of the workers and their unions in check but low enough to prevent wide-scale unrest that could lead to working-class radicalization and eventually socialist revolution.

Are Keynes and Marx Compatible? Pt 2

John Bellamy Foster’s Case for Keynes

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

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

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

Bichler, Nitzan and Hudson versus Marx

Reader B asks what I think of the views expressed in two articles.

Article one is by two professors of political economy, Shimshon Bichler and Jonathan Nitzan. Bichler teaches at colleges and universities in Israel, and Nitzan at York University in Canada. Article two is by U.S. economist Michael Hudson.

These two articles actually cover quite a lot of ground. Our reader correctly notices an echo of the views of the 19th-century American reformer Henry George. We can also see in these articles the influence of the Monthly Review School. The article by Bichler and Nitzan contains a long and I think revealing self-critical quote by Paul Sweezy that points straight to the weakness of the Monthly Review School.

Therefore, in these two articles we are dealing with three tendencies. One tendency represents the views of Shimshon Bichler and Jonathan Nitzan . A second tendency is the viewpoint of Michael Hudson, and a third the Monthly Review School of Baran and Sweezy and their successors at Monthly Review magazine. Of the three tendencies, only one, Paul Sweezy and his Monthly Review School, is considered a tendency within Marxism. Neither Bichler, Nitzan nor Michael Hudson are Marxists.

Why Capitalism Requires Expanded Reproduction

A friend Nick wants to know why capitalism can only exist as expanded reproduction. In Volume II of “Capital,” Marx developed the diagrams for both simple and expanded reproduction. Why can’t capitalism function as a system of simple reproduction?

I examined the question of simple and expanded reproduction in my main posts, especially here and here. Here I want to focus on the question of why capitalism can’t exist as a system of simple reproduction. Didn’t Marx, after all, create a mathematical model that shows exactly how simple capitalist reproduction works? Yet in many places throughout “Capital,” Marx emphasized that capitalism can exist only as expanded reproduction.

Without going into detail, let’s review the basics of Marx’s diagrams of simple and expanded reproduction.

First, Marx assumed a pure capitalism. He was not interested in other modes of production such as simple commodity production that in the real world exist side by side with capitalist production.

Second, Marx was interested only in the two most economically important fractions of the two major classes in capitalist society. These are the industrial capitalists—defined as the capitalists who purchase the labor power of productive-of-surplus-value workers—on one side, and the industrial workers—the workers who produce surplus value—on the other. The non-industrial capitalists such as merchants and money capitalists and non-productive workers—workers who do not produce surplus value—play no role in the diagrams.

Simple reproduction

In Marx’s diagram, or mathematical model, of simple reproduction, the accumulation of capital is absent. The total social capital is simply conserved, not accumulated. All the surplus value produced by the working class is consumed in the form of items of personal consumption by the capitalist class. This consumption consists of what Marx called necessities, items that are also consumed by the working class, and luxury items that are consumed by the capitalist class alone.

The economy simply reproduces itself without any change. As machines are used up, they are replaced by identical machines. Raw materials and auxiliary materials that are consumed are replaced by identical raw and auxiliary materials. As workers die or retire, they are replaced by other workers with identical skills.

The market and the monetary system in Marx’s diagrams of reproduction

Many Marxists when they produce diagrams of simple reproduction—as well as expanded reproduction—simply leave out the question of money and the market. By leaving out money, they imply a system of barter where commodities exchange directly with commodities. They therefore build Says’s so-called law—that commodities are purchased by means of commodities, and therefore a general overproduction of commodities is impossible—right into the foundations of their model. Attempts to explain crises on the basis of mathematical models of either simple or expanded reproduction that leave out money are doomed to failure from the start.

A New Gold Standard?

A reader asks, what is the significance of the reported moves by the central banks of China, India, Russia and perhaps other countries to increase their gold reserves? Why are China, India and Russia moving to increase the percentage of their reserves held in gold as opposed to foreign currencies such the dollar and euro? Could the moves of these countries to increase their gold reserves point to a possible revival of the international gold standard in some form?

The answer to the first question is that these countries are nervous about the future of all paper currencies. During the first phase of the crisis of 2007-09, the dollar fell not only against gold but also against the euro. Naturally, countries increased the percentage of euros in their reserves, since it seemed like a good bet against the falling dollar.

Then came the sovereign debt crisis in Europe that assumed acute form just a month or so ago. The euro plunged against the dollar. But the dollar is not looking too good itself. While the dollar was soaring against the euro, it was slipping against gold, the money commodity. For the first time, the dollar price of gold inched above $1,200. Unlike paper currencies, gold is a commodity. And like all commodities, its value is determined by the amount of labor socially necessary to produce it under the prevailing conditions of production.

With the world’s gold mines facing growing depletion, the value of gold for the foreseeable future seems a little more certain than the future value of any paper currency, whether the dollar, euro or yen. No matter how bad things get, gold cannot be “run off the printing presses.” New gold can be produced and the existing supply increased only by the slow process of the labor of workers in the gold mines and in the gold refining industry.

Does this mean that the international gold standard is about to be restored? The answer for the immediate future is a definite no. The three countries that are reportedly moving to increase their gold reserves are not imperialist countries. Indeed, these countries have few gold reserves. The great bulk of the gold that is held by governments or central banks is held by the governments of the United States and the European satellite imperialist countries such as Germany, France and Italy.

Can Gold Ever Be Overproduced?

Reader Julio Huato quotes me as writing, “Gold as money cannot be overproduced.”

“Do you,” Julio writes, “mean that somehow the commodity money abolishes the laws of the relative value form? I think not.”

He continues: “For a given period of time, the demand for gold is the sum of the demand for gold as object of use plus its demand as money — i.e. as a means of circulation, payment, and value storage. And that total is never an infinite figure. Gold has to be ‘purchased’ with other commodities, which are not produced in infinite amount, since the productive force of labor is always finite. You seem to be conflating the qualitative determination of money as universally desirable (vis-a-vis other commodities) and its quantitative determination, which is necessarily bounded.

“Marx’s critique of the view that the inflows of gold into the New World led to price inflation do not imply that an oversupply of gold above and beyond the size of the social stomach for gold will not lead to a fall in the relative value of gold in terms of the other commodities. His view is that, on average, that relative value is determined by the requirements of social labor producing, respectively, gold and the other commodities. But fluctuations around that average are allowed. The aim of Marx’s critique is the misunderstanding that gold makes the commodities valuable, rather than their being products of labor.

“I suggest that you re-check that section on the quantitative determination of relative value in chapter 1. And also this, from Marx:

“‘The expression of the value of a commodity in gold — x commodity A = y money-commodity — is its money-form or price. A single equation, such as 1 ton of iron = 2 ounces of gold, now suffices to express the value of the iron in a socially valid manner. There is no longer any need for this equation to figure as a link in the chain of equations that express the values of all other commodities, because the equivalent commodity, gold, now has the character of money. The general form of relative value has resumed its original shape of simple or isolated relative value. On the other hand, the expanded expression of relative value, the endless series of equations, has now become the form peculiar to the relative value of the money-commodity.'”

Julio is asking, if too much gold is produced relative to other commodities, won’t what Marx calls the expanded relative form of the value of gold—in plain language, price lists read backwards—fall? Or what comes to exactly the same thing, won’t an overproduction of gold cause prices in terms of gold to rise?

And therefore, isn’t it true that in fact gold can be overproduced?