Marx versus Keynes in the summer

I just finished debating with a left ‘post-Keynesian’ on the relative merits of the contributions of Marx and Keynes to an understanding of what causes crises in capitalism and the potential solutions for labour.  This took place at the summer school of the anti-capitalist left in Spain that I was invited to speak at (see my post,

Below I outline what the supporter of Keynes said and my contribution on behalf of Marx.  The post-Keynesian presented his contribution in Spanish so my English synopsis is based on written material sent by him and it may be unfair or at least inadequate to the arguments of a very honest and positive debater.

He said that the modern orthodox neoclassical synthesis of Keynesian economics represented a distortion of the original ideas of Keynes.  Keynesian economics is not mainly a theory about “depression economics” but one about unemployment and undercapacity equilibrium.  Keynes wants to explain what determines the level of output in a capitalist economy at any time, not how total income is distributed in an economy operating at full employment/capacity.

Keynes’ starting point in his General Theory is a critique of the view that the equilibrium level of output is determined in the labour market. Keynes argues that this cannot be the case because, even if the level of investment and real wages can be uniquely correlated (assuming fixed productivity and technology), we cannot know what the level of investment will be at any given time from the level of real wages.  And the level of investment determines the level of real wages, not the other way round.  Keynes had a clear theory of what determines investment decisions linked to expected profits which depend on expected future effective demand (i.e. the ability to realise those profits).

Keynes and Marx were united in their critique of Say’s law (that supply creates its own demand) as a common starting point for theorising about the possibility of insufficient effective demand and the realisation problem.  Keynes theory of effective demand is that the decision to invest depends on expected future profits which depend on the future price that the entrepreneur expects to get for his product.  But this decision is surrounded by uncertainty that cannot be estimated probabilistically.  Keynes’s concept of ‘liquidity preference’ (the propensity to hoard money) is a reflection of this uncertainty.

The interest rate is the return that the money hoarder needs to get in exchange for parting with his money hoards and investing them. The interest rate and the return from investing capital have to be in equilibrium. If the first is above the second, investment demand falls along with the price of investment goods. Investment goods, or productive capital, loses value until the rate of return on capital rises by enough to meet the rate of interest again. Disequilibrium is thus a temporary and transitory phenomena from which the market mechanism comes out of by itself.   The level of investment determines the marginal efficiency of capital for a given level of technology and productivity.  It’s true that Keynes’ liquidity preference theory makes no sense without an objective theory of value.  But Keynes openly said that he sympathised with the labour theory of value of classical political economy.

Keynes’s theory is superior to Marx in some ways.  Marx never assumed that the value of production and the value of effective demand always meet each other, as his critique of Say’s law makes it clear. But he did (like the other classical political economists) expected the economy to always tend towards full capacity utilisation even if he (like Ricardo) theorised about technological unemployment in an economy operating at full capacity utilisation.  Keynes did not make such an assumption.

Moreover, the long-run tendency of the rate of profit to fall just explains that there is a tendency for the rate of profit to fall that emerges endogenously from the dynamics of capitalist accumulation, but it does nor per se explain why the income derived from the value generated by output may or may not always be fully spent on the output. It does not per se explain the realisation crisis in capitalism of which Marx was also fully aware. You may have less and less returns on your investment, but as long as you keep investing and not hoarding there will be no realisation crisis. The theory of the long-run tendency of the rate of profit to fall by itself does not tell you why at some rate of return capitalists will hoard instead of invest.  Keynes does that.

My contribution was longer!  It went something like this (the full version is here – Contributions of Keynes and Marx).

Keynes’ important contribution was in recognising that capitalism cannot sustain full employment.  For him, high unemployment was not a temporary aberration in the smooth running of capitalist production as the economic orthodoxy said at the time.  No, unemployment could well set in for a long time.  It was the product of a failure within ‘capitalism’, or what he preferred to call, a ‘modern economy’.  But for Keynes, high unemployment and depression in the economy was due to what Paul Krugman, the modern disciple of Keynes, called a ‘technical malfunction’.  This malfunction was to be found in the financial sector of the economy, the ‘rentier’ part, in the distribution of value or income in an economy and not in any way in the productive sectors of the economy.  There was nothing wrong with the capitalist mode of production as such.  Indeed, capitalism would eventually deliver prosperity for all, more leisure and a better society.  Keynes specifically argued for this capitalist future to his students at Cambridge at the height of the Great Depression in the early 1930s, as he was deeply worried that his students had become ‘infected’ with the dreaded and ridiculous ideas of Marxism.

And don’t be under any illusion that Keynes was radical supporter of labour or that he sided with the workers or had any sympathy for Marxist or socialist ideas.  For him, Marxism was to be condemned for “exalting the boorish proletariat above the bourgeoisie and the intelligentsia, who are the quality in life and carry the seeds of all human advancement”.  And you may not like this, but he saw Marxism as a product of a combination of (quote) ‘jewish and russian natures’.  And for him, that was bad.  Keynes was an upper class snob with all the class prejudices.  He refused to support the Labour party in the 1930s, siding with the Liberals because Labour was “a class party and the class is not my class.  The class war will find me on the side of the educated bourgeoisie.”

For Keynes, in so far as capitalism could not deliver on full employment and dropped into crises and slumps and even long depressions, the culprit was not Capital as such but the financial sector and the cause was in the monetary nature of the economy, not its capitalist nature.  You see, according to Keynes, a crisis and slump comes about when suddenly there is a change of ‘animal spirits’ among the holders of money.  They no longer want to lend money for investment or consumption.  Instead, they start to hoard it.  Thus a lack of ‘effective demand’ emerges in the economy.  With the drying up of funds for investing or spending in the shops, investment and consumption drops and employment falls.

Keynes’ special explanation of this is that this situation could last indefinitely because holders of cash or lenders of credit will prefer to keep their money liquid.  They have extreme ‘liquidity preference’ and the economy goes into a ‘liquidity trap’.  Thus the state and the central bank must intervene to kick-start the economy again with easy or cheap money or outright government spending to compensate for the private sector drying up.  It might even be necessary to ‘socialise’ investment (ie boost public investment) to get it going.  A determined government policy in the short term can thus end the depression, restore ‘animal spirits’ and get the productive sector of the capitalist system back into action again.  Then all will be well.

Did Keynes come up with satisfactory policy answers to slumps in capitalism?  Well, the history of the Great Depression and the experience of the current Long Depression so far would suggest that where Keynesian monetary policies have been adopted, like cutting interest rates to zero and getting central banks to print money so that the financial sector is flooded with liquidity (QE measures), that they do not work.  More radical Keynesians would say that policy cannot just rely on ‘easy money’.  Governments must also increase government spending through more borrowing – fiscal stimulus.  This would be much more effective and it has not been tried.  It was not really tried in Keynes’ time in the 1930s when most governments imposed ‘austerity’ rather than expand government spending in the 1930s and they are doing the same now.  So the efficacy of Keynesian alternatives has not been tested.

Well maybe.  But say Keynesian policies were applied in full and radically as many trade union leaders and lefts advocate.  And say that this worked to end the ‘technical malfunction’ in the economy.  I don’t think it would, but if it did, does that mean that crises won’t return later and Keynes will be right that the ‘economic problem’ will be solved?  We just have to apply Keynesian economic management whenever an economy starts slipping into recession and all will be well?

Look what happened in the 1970s.  Then Keynesian economics was all the rage and government management of the economy with central banks and government spending was the order of the day.  Even President Nixon declared that we are ‘all Keynesians now’.  But by the end of the 1970s, the strategists of capital had ditched Keynes and opted for what we now call ‘neoliberal’ policies of cutting back on the size of government, privatising, weakening the trade unions, liberalising markets (including financial markets) and imposing tight monetary and fiscal austerity (or at least in part – austerity did not apply to defence and wars!).

Why was this?  It was because Keynesian policies had failed to avoid new crises, indeed, the biggest worldwide economic slump in capitalism since the war in 1974-75 and then a deeper and more damaging slump in 1980-2.  How could there be these new crises if Keynesian-style economic management was in operation everywhere?  Keynesian economics had no answer.  The 1970s had seen significant inflation, not deflation and above all a collapse in the profitability in the productive sectors of the major capitalist economies.

This was a crisis that only Marxist economics could explain, not Keynes.  Indeed, in a way, the strategists of capital recognised that too.  Their aim was to raise the profitability of capital at all costs as the only way out – not to revert to Keynesian ‘demand management’.  Even Keynes in his later years seemed to think that his policies were only to be used temporarily before reverting to traditional neoclassical economics – namely government stays away from interfering in markets and capitalist production and lets the market do its work.  “I do not suppose that the (neo) classical medicine will work by itself or that we can depend on it.  We need quicker and less painful aids.  But in the long run, these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again.”  Keynes 1946

Keynes thought that Marxist economics had nothing to offer.  He considered that Das Kapital was “an obsolete economic textbook which I know to be not only scientifically erroneous, but without interest or application to the modern world”.  Marx’s ideas were “characterised… by mere logical fallacy” and was a “doctrine so illogical and dull”.   But in the 1970s, when Keynesian economics was in crisis, was what Marx saying about the capitalist economy erroneous and without application to the modern world?

On the contrary: Marx said that the key to understanding the capitalist mode of production lay in the nature of production to sell commodities on a market for profit.  Profit was the key.  And contrary to the views of capitalist economics, both neoclassical and Keynesian, value and surplus value (profit) came from the labour of the working class.  Those that owned the means of production could appropriate the value of the commodities and selling them on the market for money.  The workers got their wages but did not get the full value of what they produced.  The difference was profit for the capitalists.

Now the capitalists might have to use some of that profit to pay interest on loans or rent on property and, if these ‘rentiers’ (bankers and landowners) squeezed the profit-holding capitalist too far, sure they could cause a crisis in investment.  But the Marxist view shows that, even if interest rates are low or zero and even if rents are low or zero, even if the rentiers had passed away in euthanasia or had been killed off by the capitalists or by a progressive government, there would still be crises, slumps and depressions.  Why? Because rent and interest and profit come from surplus value, not the other way round.  And that surplus value comes from the exploitation of labour.

Marxist theory turns things round the right way.  Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall.  Marx says: let’s start with profits.  If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall.  Then there would be a lack of effective demand, as Keynesians like to put it, but this would not be due to a drop in ‘animal spirits’, or ‘confidence’ (we often hear that phrase from economists: ‘a lack of confidence’), or even due to ‘too high’ interest rates, but because profits are down.  The problem lies in the nature of capitalist production, not in the finance sector.

Think of how a capitalist crisis caused by falling profits (and profitability) can be solved if Marx is right.  The only way that it could be ended was if enough capitalists went bankrupt, enough old machinery and plant were close down and enough workers were laid off.  Then eventually, the costs of production and investment would be sufficiently reduced to raise the profitability of production for those capitalists still surviving to start to invest again.  After a while, however (maybe years, even decades), the law of profitability would again exert its power and the whole ‘crap’, as Marx called it, would start again.  Thus we have cycles of booms and slumps.

Policies designed to reduce interest rates, or even get some government spending going, namely Keynesian policies, would not avoid these slumps or even get recovery going.  Indeed, more spending on welfare and unemployment benefits could drive up taxes and extra borrowing could drive up interest rates.  And more government investment that replaced or encroached on private sector investment could be actually damaging to the profitability of capital.  So Keynesian policies could even delay the capitalist recovery.

For that matter, contrary to some in the left of the labour movement who demand higher wages to boost demand and solve the crisis and invoke Keynes in support of such policy, Keynes himself was not on the side of the workers in a solution to a slump.  “In emphasising our point of departure from the classical system, we must not overlook an important point of agreement. … with a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated, so that, in general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages. Thus I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.”  So cutting real wages was part of the solution to a slump for Keynes.

Indeed, the austerity policies of most governments are not as insane as Keynesians think. Keynesians say: why can’t big business see that it is their interests for governments to spend more, not less, in a slump?  But austerity policies are perfectly rational: they follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labour movement so that profits can be raised.  It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s.  Capitalism came out of the Great Depression only when profitability rose and that was when the US went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort.  Capitalism needed war, not Keynes.

So in my view, contrary to Keynes’ view, Marx is both right and relevant about why there was a Great Recession and why we are still in a Long Depression.  Marx’s analysis shows that the capitalist system is not just suffering from a ‘technical malfunction’ in its financial sector but has inherent contradictions in the production sector, namely the barrier to growth caused by capital itself.  What flows from this is that the capitalist system cannot be reformed or corrected in order to achieve sustained economic growth without booms and slumps – it must be replaced.  That is the ultimate policy action for the left.

18 thoughts on “Marx versus Keynes in the summer

  1. Can you please provide the sources of those derogatory remarks of Keynes on the working class. Are they from the General Theory?

    1. They’re legit, forgot where they’re from tho.

      Keynes was part of a very liberal group of thinkers and artists (Bloomsbury group?).

      I imagine if he lived today he would find all the reality tv boorish as well. And frankly, I can’t blame him. Maybe not right to blame it on the nature of the proletariat, but you can see how a man who loved the arts would have a hard time identifying himself with somebody who is keen on watching Big Brother.

      Not defending Keynes, just tryint to put it in todays perspective.

    2. Marx’s ideas were ‘characterised … by mere logical fallacy’, and he believed that ‘Marxian Socialism must always remain a portent to the historians of opinion – how a doctrine so illogical and dull can have exercised so powerful and enduring an influence on the minds of men, and through them the events of history’ (Keynes, Laissez-Faire and Communism, quoted in Hunt 1979: 377).
      ‘How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and intelligentsia who, with whatever faults, are the quality in life and carry the seeds of all human advancement?’ (JMK: CEW 9 – A Short View of Russia (1925)
      “It is a class war and the class is not my class…. The class war would find me on the side of the educated bourgeoisie” (A Short view of Russia).

  2. I think Keynes was a bit unrealistic with respect to the problem of unemployment. It seems as though he wanted to go about fixing this, the biggest of capitalism’s ills, like a mechanic would fix a car (you mentioned something about his views on the depression in an article about Krugman, or was it Stiglitz?). Sure, I suppose one could say that if capitalism had full employment all would be (relatively) well. But would that still be capitalism? Would that be the economic system we’ve had up till now?

    I can’t find the quote right now, but I remember Joan Robinson (a post-Keynesian, or a Post Keynesian if u perscribe to Davidson) saying something along the lines that full employment and capitalism don’t mix. She mentioned this in the context of inflation, I believe, but in holds in general, whereas socialistic regimes with full employment needed to employ a large part of their resources to keep their populations in check and had to worry about all sorts ideological nonsense, in capitalism deviance is punished or deterred with the “inivisible hand” of looming unemployment.

    While I’m not sure about Keynes, the article from Kalecki, Political Aspects of Full Employment, that was mentioned by Krugman/stiglitz (probably the 1st, he seems to be a bit more active lately) more or less says the same thing. Technically we could have a system of full employment (by technically I mean that in various theoretical models there is nothing stopping us from achieving full employment), if it weren’t for those pesky rentiers and capitalists.

    Pretty big if.

    Most post-Keynesians are, to my mind, far too unrealistic when it comes to unemployment and underutilization, not taking into account the social aspects of unemployment and the benefits of unemployment to the capitalists. That being said there was a great debate between post-Keynesians whether or not they should be a large heterodox coalition consisting also of neo-ricardians and neo-marxists. The editor of the Journal of Post Keynesian economics was not keen on it, whereas a lot of the other big names believed we all have something to learn from each other. After all, the original Cantabrigian post-Keynesians were far from a homogenous group.

    A final note, Keynes might have been a snob, but I see where he is coming from. While I disagree with him politically, I do share his love of arts and science and aesthetics. Maybe he got a few things wrong, but at least he gave it a shot (unlike the big names in academia today).

    Also a nice read (maybe not for marxists, but still, I liked it):

    Enjoyed the blog as always!

  3. Many people who are working class detest reality tv shows like Big Brother And X-factor Post-Kaleckian. They see them as often cruel and exploitative. They are also aware that they are produced and broadcast by the bourgeoisie to make money (and perhaps as a method of distraction). Please don’t buy into the idea that workers are, generally speaking, thick philistines.
    Along with his powerful and creative intellect, Keynes was obviously a snob; or at least he sometimes could be.

  4. I can not suppress the feeling that all of this is related to the Great Depression of 1930s. I thought, especially Postkeynesians wrote about the role of big business, including monopoly banks at that time. I remember John Strachey, Joan Robinson and of course M. Kalecki. In the 70s some of them discovered the role of transnational corporations and the way this outdated Keynesian policies and also the Marxian analysis based on R. Hilferding’s monopoly capitalism.

    I recommend to read Models of Political Economy by M. Barratt Brown (1984/1995), on the Keynesian Model, the Monetarist Model and the new models for understanding transnational capitalism, on which someone like Keith Cowling wrote.

  5. Excellent exposition of the two camps.

    Suggestion: Round it out with explicit stress on the need for class struggle. Workers fight for their needs. It is not their job to make the economy work for both them and capitalists. That fact colors observations like this one:

    “Indeed, more spending on welfare and unemployment benefits could drive up taxes and extra borrowing could drive up interest rates. And more government investment that replaced or encroached on private sector investment could be actually damaging to the profitability of capital. So Keynesian policies could even delay the capitalist recovery.”

    Keynes might endorse these policies (briefly, as you note), but they are not the intellectual property of those who use a Keynesian model.

  6. I am still wondering, and this is something you shortly touch upon in your blog, about something like a “certain rate of profit below which capitalists stop investing”. In my mind, the rate of profit below which capitalists stop investing is not a fixed rate, nor in time, nor in space. It depends on a sort of “socially accepted” rate of profit. If this rate is not fixed, this implies two things:
    – You cannot really explain why capitalists stop investing at a certain moment. So to explain the crisis in terms of the rate of profit is still in a certain way a shallow explanation.
    – More importantly, by changing the balance of power leftist movements could try to force capitalists to accept a lower rate of profit (as there is no “natural” rate of profit below which investment falls). This is in a way a progressive reformist (and not necessarily anti-capitalist) motive (although I personally also think that in the medium-to-longer run this is difficult to sustain for various reasons, so we still need to aim for a post-capitalist society).
    Or am I missing something?

    1. I think the point when investment stops and the slump begins is when the weakest capitalists see a fall in their total profits (not profit rate). Then they will stop investing and reduce employment or go bankrupt. That spreads the slump into the stronger capitalists, their mass of profit also falls and the slump becomes widespread. So a fall in the rate of profit is not the trigger but a fall in the mass of profit is. This is the answer to the ‘shallow’ explanation of the crisis based on a falling rate of profit. The falling rate of profit leads to a fall in the mass of profit. The slump ends when there is sufficient reduction in the value of the stock of capital (factories, offices, equipment and workforce) mainly through bankruptcies eventually allowing the survivors to take over at a smaller scale of production. The mass of profit recovers and so does the rate. However, investment may not return to previous levels if the rate of profit is not fully restored to previous levels.

  7. Sometimes broken debt obligations trigger a slump, when returns fall below even conservative estimates on which the debts were based in good times. This happens because of the fall in the general rate of profit, which is not known until after the fact. The total mass of profit need not have fallen.

    – The explanation is not shallow. If you die during a marathon drinking session, doctors can determine the cause was alcohol poisoning, explaining the cellular processes. But they did not know enough about your particular body to determine your precise tolerance for alcohol.

    – Political action can affect the rate of exploitation to a degree. But where is the example of political action forcing significant investment at returns that capitalists judge inadequate?

  8. didn’t Keynz also believe that as economies matured and rates of profit fell that most all investment would have to be delivered through the state, basically because expected returns would not coax liquid out the traps? “animal spirit” and “confidence” seem pretty similar to expectations of profitability, I think. hard to tell ‘tween Marx vs Keynes, for me

    didn’t he say that the work week should/would be shorter?

    even very mainstream, n-c synthd Keynzians like Krugman said fiscal stimulus would be best constituted by (re)hiring of public employees.

    how is a Marxian program different from tax-funded health/child/elder care, state tutoring and robot factories?

  9. A depressed rate of profit isn’t the spark that starts the fire but rather the tinder that takes the spark.

  10. “Keynes theory of effective demand is that the decision to invest depends on expected future profits which depend on the future price that the entrepreneur expects to get for his product. ”

    Wouldn’t a Marxist argue that future profits depend on future worker exploitation rather than future price?

  11. While I have a quibble or two with the summation the author made of Keynesianism, I find it overall fair.

    However, I must confess this surprised me:

    “It’s true that Keynes’ liquidity preference theory makes no sense without an objective theory of value. But Keynes openly said that he sympathised with the labour theory of value of classical political economy.”

    I’d appreciate it if further details were made available.


    Regarding Keynes’s personal attitude to class: his pamphlet Essays on Persuasion contains very revealing essays.

    I’ll admit Keynes was a brilliant man. This does not stop me from considering him scum.

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