The Ideas of John Maynard Keynes (pt 4)

Keynes’s theory of surplus value

Over the last couple of weeks, we saw that Keynes denied that surplus value was produced by the unpaid labor of the working class. So how does surplus value—profit, interest and rent—arise, according to Keynes, if it is not produced by the working class?

“It is much preferable,” Keynes wrote in chapter 16 of the “General Theory,” “to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive—at least in the physical sense.”

The difference between the “aggregate value,” to use Keynes’s terminology, and the “supply price”—the cost to the capitalist of that asset—is the surplus value that “asset” yields—not produces, according to Keynes—to its owner. But where does this surplus value that is “yielded” come from if it is not produced—that is, if it does not arise in the sphere of production? As we saw over the last several weeks, Keynes accepted the “classical” marginalist postulate, or unproved assumption, that the worker does not produce any surplus value but simply reproduces the value of the worker’s wage.

The Phases of the Industrial Cycle (pt.4)

From boom to crisis

Marx sometimes called the stage of the industrial cycle just before the outbreak of the crisis the phase of fictitious prosperity. The economy is going gang-busters, the rate of profit appears to be high, and the mass of profit keeps growing. Unemployment compared to all other phases of the industrial cycle is very low and still falling. At long last, the balance of forces on the labor market are beginning to tilt in favor the working class.

But the continuation of the boom now depends on the increasingly unsustainable inflation of credit. As long as debts can be “rolled over” rather than paid, and terms of payment can be further extended, the boom can go on.

Later, after the boom’s inevitable collapse, the recriminations fly. Why was “regulation” so lax? Why were so many derivatives and exotic credit instruments created? How could so many loans have been extended to people who couldn’t possibly repay them?

But those questions will be asked later. While the phase of fictitious prosperity lasts, it can only be maintained by progressively eliminating regulations designed to prevent the reckless extension of credit and instead encouraging “financial innovation” to unfold without hindrance.

The Phases of the Industrial Cycle (pt. 3)

The real industrial boom begins

The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during the boom that capitalist expanded reproduction develops with full vigor. Therefore, it is the boom that develops the contradictions inherent in capitalist production to the point where they can only be resolved—only temporarily as long as capitalist production is retained—by a crisis.

I explained in the last post that during the phase of average prosperity, excess capacity is whittled away at both ends, so to speak, by the closing down of factories that will never again be profitable, and the reopening of factories and machinery that after write-downs can once again yield to the industrial capitalists the average rate of profit.

As the margin of excess capacity shrinks, the percentage of industry that is lying idle is reduced to such an extent that the industrial capitalists are forced to undertake massive investments in new factories packed with state-of-the-art machinery. The industrial capitalists do not want to see their margin of excess capacity shrink to zero. They want to maintain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand.

The Phases of the Industrial Cycle (pt. 2)

How recessions end

During recessions, inventories—commodity capital—are run down as production declines faster than sales. At some point, therefore, industrial production will begin to rise, because the industrial capitalists have to rebuild their inventories. This is why all recessions eventually end.

The recovery begins first in Department II—the department that produces the means of personal consumption. The contraction in industrial employment more or less comes to a halt once rising industrial production caused by the need to rebuild inventories begins.

However, industrial employment rises very little during the first phase of the upturn. Many factories during the recession were forced to operate at levels far below their optimum level of productivity. As inventory rebuilding proceeds, more factories come closer to their optimum utilization levels. The resulting surge in productivity enables the bosses to increase production considerably while adding few, if any, workers. Therefore, for a considerable period of time after the recession proper ends, labor market conditions continue to favor the industrial capitalists over the workers. This remains true after the rise in the rate of unemployment begins to taper off.

The Phases of the Industrial Cycle

The crisis, sometimes called the “recession,” marks the end of one industrial cycle and the beginning of the next one. Recession is characterized by a decline in industrial production and employment. The decline in employment is most severe in the industrial sector but affects many other sectors of the economy as well. The recession, or industrial crisis, ends when industrial production reaches its lowest point.

The period between the lowest point of industrial production and when industrial production again reaches the highest point of the preceding cycle is known as the “depression,” or sometimes the phase of “stagnation.”

The phase of the industrial cycle that follows the end of the depression, or stagnation stage, is called the period of “average prosperity.” There is still considerable unemployment of both workers and machines, and capital investment is still weak. Stagnation and depression conditions therefore linger longest in the industries of Department I, the sector that produces the means of production.

After the period of average prosperity comes the boom. Industry is operating as close to “full capacity” as it ever does—outside of all-out war—under the capitalist mode of production. Unemployment sinks to its lowest level of the cycle. Conditions become more favorable to the sellers of labor power. This is the most favorable point in the industrial cycle for union organization and strikes.

The Rate of Interest and the Profit of Enterprise

The development of the credit system splits profit—total surplus value—less rent into two parts, interest and profit of enterprise. What determines the division of the relative shares of interest and profit of enterprise?

Suppose the rate of profit is 10 percent. Unless all the profit goes to interest, the rate of interest cannot be higher than 10 percent. Indeed, the rate of interest in the long run cannot be as high as 10 percent, because at a 10 percent rate of interest there will be no additional profit from carrying out an industrial or commercial enterprise. Therefore, an interest rate of 10 percent, assuming a rate of profit of 10 percent, will destroy the incentive to *produce* surplus value. And without production of surplus value, there is neither ground rent, interest nor profit of enterprise.

Therefore, the rate of profit establishes an *upper* limit to the rate of interest. But what then determines the lower limit? The rate of interest cannot fall to zero, because if it did the money capitalist would turn miser. There would be no advantage in loaning money. Why take a risk of not being paid back, or being paid back in devalued currency, for no “reward” whatsoever?

At an interest rate of zero, the money capitalist will simply hoard money in the form of bullion and gold coins. Therefore, the rate of interest must be somewhere above zero but below the the total rate of profit. It is quite possible to have a low rate of interest with a high rate of profit, though it is not possible to have a high rate of interest with a low rate of profit.