HMNY – the profit-investment nexus: Keynes or Marx?

The main themes of this year’s Historical Materialism conference in New York last week were the Russian Revolution and the prospects for revolutionary change one hundred years later.

But my main interest, as always, was on the relevance of Marxist economic theory in explaining the current state of global capitalism – if you like, understanding the objective conditions for the struggle to replace capitalism with a socialist society.

On that theme, in a plenary session, Professor Anwar Shaikh at the New School for Social Research (one of the most eminent heterodox economists around) and I looked at the state of the current economic situation for modern capitalism.  Anwar concentrated on the main points from his massive book, Capitalism, published last year – the culmination of 15 years of research by him.  This is a major work of political economy in which Anwar uses what he calls the classical approach of Adam Smith, David Ricardo and Karl Marx (and sometimes Keynes) under one umbrella (not specifically Marxist apparently).  His book is essential reading (and I have reviewed it here) and also see the series of lectures that he has done to accompany it.

His main points at the plenary were to emphasise that capitalism is not a system that started off as competitive and then developed into monopoly capitalism, but it is one of turbulent ’real competition’.  There has never been perfect competition as mainstream economics implies from which we can look at ‘imperfections’ like monopoly.

Anwar went on to say that crises under capitalism are the result of falling profitability over time in a long downwave (see graph comparing my measures with Shaikh).  The neoliberal period from the early 1980s was a result of the rejection of Keynesian economics and the return of neoclassical theory and the replacement of fiscal management of the economy, which was not working, with monetarism from the likes of Milton Friedman.  But even neo-liberal policies could not avoid the Great Recession. And since then, there has not been a full recovery for capitalism.  Massive monetary injections have avoided the destruction of capital values, but at the expense of stagnation.

In my contribution, I emphasised the points of my book, The Long Depression, which also saw the current crisis as a result of Marx’s law of profitability in operation.  I argued that mainstream economics failed to see the slump coming, could not explain it, and do not have policies to get out of the long depression that has ensued since 2009 because they have no real theory of crises.  Some deny crises at all; some claim they are due to reckless greedy bankers; or to ‘changing the rules of game’ by the deregulation of the finance sector causing instability; or due to rising inequality squeezing demand.

In my view, none of these explanations are compelling.  But neither are the alternatives that are offered within the labour movement. Anwar was right that neoclassical economics dominates again in mainstream economics, but I was keen to point out that Keynesian economics is dominant as the alternative theory, analysis and policy prescription in the labour movement.  And, in my view, Keynesianism was just as useless in predicting or explaining crises and thus so are its policy prescriptions.

Indeed, that was the main point made in the paper that I presented at another session at HM at which Anwar Shaikh was the discussant.  In my paper, entitled, The profit-investment nexus: Marx or Keynes?, (The profit investment nexus Michael Roberts HMNY April 2017), I argued that it is business investment not household consumption that drives the booms and slumps in output under capitalism.  For crude Keynesians, it is what happens with consumer demand that matters, but empirical analysis shows that before any major slump, it is investment that falls not consumption and, indeed, often there is no fall in consumption at all -the graph below shows that investment fell much more from peak of the boom to the trough of the slump in US post-war recessions.

Moreover, what drives business investment is profit and profitability, not ‘effective demand’.  That’s because profits are not some ‘marginal product’ of the ‘factor of capital’, as mainstream marginalist economics (that Keynes also held to) reckons.  Profits are the result of unpaid labour in production, part of surplus value appropriated by capitalists.  Profits come first before investment, not as a marginal outcome of capital investment. In the paper, I show that the so-called Keynesian macro identities used in mainstream economic textbooks fail to reveal that the causal connection is not from investment to savings or profit but from profits to investment.  Investment does not cause profit, as Keynesian theory argues, but profits cause investment.

Shaikh commented in his contribution that Keynes was also well aware that profits were relevant to investment.  That sounds contradictory to what I am arguing.  But let Keynes himself resolve how he saw it, when he says that “Nothing obviously can restore employment which first does not restore business profits.  Yet nothing in my judgement can restore business profits that does not first restore the volume of investment”.  To answer Keynes, my paper shows that there is plenty of empirical evidence to show that profits lead investment into any slump and out into a boom – the Marxist view.  And there is little or no evidence that investment drives profits – the Keynesian view.

Shaikh at HM argued that it is the ‘profits of enterprise’ that matter not profits as such.  By this he means that the interest or rent taken by finance capital and landlords must be deducted before we can see the direct connection between business profits and business investment.  Maybe so, but the evidence is also strong that the overall surplus value in the hands of capital (including finance capital) is the driving force behind investment.  Interest and rent can never be higher than profit as they are deductions from total profits made by productive capital.

Also Shaikh reckons that it is expectations of future profit on new investment that is decisive in the movement of business investment, not the mass or the rate of profit on the existing stock of capital invested.  Yes, capitalists invest on the expectation of profit but that expectation is based on what their actual profitability was before.  So the profitability on existing capital is what matters.  Otherwise, the expectation of profit becomes some ephemeral subjective measure, like Keynes’ animal spirits’.  Indeed, as I quote Paul Mattick in my paper, “what are we to make of an economic theory …. which could declare; “In estimating the prospects for investment, we must have regard therefore, to the nerves and hysteria and the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends” (Keynes).

My paper concludes that different economic policy conclusions flow from the Marxist or Keynesian view of what drives investment.  The Keynesian multiplier reckons that it is demand that drives investment and if consumer and investment demand is low or falling, a suitable boost of government investment and spending can compensate and so pump prime or boost the capitalist economy back on its feet.

But when we study the evidence of the efficacy of the Keynesian multiplier, as I do in this paper, it is not compelling.  On the other hand, the Marxist multiplier, namely the effect of changes in the profitability of business capital on investment and economic growth, is much more convincing.  Thus Keynesian fiscal and monetary stimulus policies do not work and do not deliver economic recovery when profitability of capital is low and/or falling. Indeed, they may make things worse.

At the plenary I pointed out that Donald Trump plans some limited form of Keynesian stimulus by government spending on infrastructure programmes worth about $250bn.  I have discussed these plans and their fake nature before.  But even if they were genuine increases in state investment, it will do little.  Business investment as a share of GDP in most advanced capitalist economies is around 12-18% of GDP.  Government investment is about 2-4%, or some four to six times less. That’s hardly surprising as these are capitalist economies!  But that means an increase of just 0.2% of GDP in government investment as Trump proposes will make little difference, even if the ‘multiplier effect’ of such investment on GDP growth were more than one (and evidence suggests it will be little more,LEEPER_LTW_FMM_Final).

What matters under capitalism is profit because the capitalist mode of production is not just a monetary economy as Keynesian theory emphasises; it is, above all, a money-making economy.  So without profitability rising, capitalist investment will not rise.  This key point was the starting point of another session on Fred Moseley’s excellent book, Money and Totality, which explains and defends Marx’s analysis of capital accumulation, his laws of value and profitability, from competing and distorting interpretations. I have reviewed Moseley’s book elsewhere.

But the key points relevant to this post are that Moseley shows there is no problem of reconciling Marx’s law of value (based on all value being created by labour power) with relative prices of production and profitability in a capitalist economy.  There is no need to ‘transform’ labour values into money prices of production as Marx starts the circuit of production with money inputs and finishes it with (more) money outputs.  The law of value and surplus value provided the explanation of how more money results – but no mathematical transformation is necessary.

But this also means that for Marx’s law of value to hold and for total value to explain total prices (and for total surplus value to explain total profits), only labour can be the source of all value created.  There cannot be profit without surplus value.  That is why I disagree with Anwar Shaikh’s view that Marx also recognised profit from ‘alienation’, or transfer.  I have explained where I disagree here.

The danger of accepting that profit can come from somewhere else than from the exploitation of labour power is that it opens the door to the fallacies of mainstream economics, particularly Keynesian economics, that creating money or credit can deliver more income (demand) and is not fictitious but real value.  If that were true, then monetarism and Keynesian policies become theoretically valid options for ending the current Long Depression and future slumps without replacing the capitalist mode of production.  Luckily, the view that profits can be created out of money and by not exploiting labour is demonstrably false.

13 thoughts on “HMNY – the profit-investment nexus: Keynes or Marx?

  1. Roberts is perhaps the best Marxist economist practising today — certainly the best who is blogging today.

    Everything here is consistent with the research I have done over the past four years. I have been analysizing various aspects of the 2007-8 economic crisis, includung the paper I’m presenting on June 1 at the Socialist Studies coference in Toronto. It projects into the near future the contradictory twin effects of rising productivity and falling profitability. We find that job creation in the US has already fallen behind growth in the working-age population. And net job creation in services will soon fall behind job loss in good-producing sectors. The rate of technological displacement — responsible for over 80 percent of manufacturing job loss in the 2000s — is only going to accelerate; it’s already pushing aggressively into service sectors.

    In othet words, “jobs, jobs, jobs” is an increasingly hallow promise — try assuring a group of 20-somethings that they will ever have steady employment or decent jobs, let alone careers!

    I’m seriously drawn to some form of a guaranteed income — not “guaranteed annual poverty” a la Liberals and some social democrats but rather a redistributive annual income that taxes the rich to pay for a modest but comfortable basic income for all — no reductions in health care and other essential services, enhanced free education at all levels. Those who work would of course get more; the rest of us might “hunt in the morning, fish in the afternoon, herd sheep and criticize poetry after dinner” — or whatever.

    Unfortunately such a policy is not on the radar screens of the right — still wedded to locking us all up — liberals or even the NDP and most other social democrats. As T-rump might say, “sad”.

    Anyone wishing to read the papers on which my presentation is based please email.



    1. This has already been tried by an earlier empire: bread and circuses. I wonder if it would work under capital’s law of value? The US’s miserly, mass junk culture version only makes people fat and malnourished.

  2. With this problem of low rates of profit, i ask for myself: how many corporations will survive in the next 10 years?

  3. Michael,
    Of course profit can come about outside of the circuit of capital. If I sell my stock to someone and he re-sells it at higher price, he makes a profit, but this has nothing directly to do with the circuit of capital-m-c…p…c’-m’ as society has not expanded output but only transferred wealth from one person or another. Marx’s focus in Capital was on a new social relationship: owners of means of production and labor power that was developing in his time; a system that would develop human productive capacity tumultuously, but vastly more powerfully than any previous mode of production. And the transfers that Shaikh and I refer to have nothing directly due to the those that Marx refers. Those transfers might help explain mercantile capital, but the transfers of value that Marx refers have nothing to do with those profits. Through competition-within the circuit of capital-prices of production are formed by transferring surplus value to capitalist with higher value compositions from capital with lower value compositions. This higher profit is captured from the pool of surplus value contributed by all the capitalist producers and this pool tends to decline relative to the mass of means of production as accumulation takes place.
    Certainly, profits made outside the circuit of capital can be used to make investments in the production process, but a falling rate of profit makes those investments highly unattractive-hence bubbles, property swapping, etc. are the more likely tendency.
    Whatever the use of those profits on transfer, they seem to have little to do with resolving the transformation problem within the circuit of capital.
    I think Shaikh is correct that it is profit of enterprise that is important in making investment decisions. Although is the total surplus value in capitalist production that is of interest to Marx’s theory of capitalist accumulation and its limits, because it is from this total that new investment can be derived, it is the amount of profit of enterprise upon which most firms make investment decisions.

  4. “Anwar went on to say that crises under capitalism are the result of falling profitability over time in a long downwave.” You implicitly agree. Howver, you also “argued that it is business investment not household consumption that drives the booms and slumps.” This is demonstrated by charting changes of output, investment, and consumption for two years around turning points. This evidence does not establish long waves. The latter, if they exist of necessity, remain to be explained.

  5. IF NEO-CONS are forever in charge of western economies (i.e. sovereign administrations) how on earth will we ever see a transformative economy of the type you speak i.e. “… redistributive annual income….taxes the rich…” why would their current economic direction of monopoly of ‘surpluses’ ( and no wage increases) not be continued.. ad infinitum?

  6. Are the papers that you delivered at the HM conference available online? And it would be helpful if your comments as they come to my inbox were dated.

  7. I use to read this blog with enthusiasm although sometimes i of course agree with it and others not, but i don not understand why a journal called himself materalist sells books at prices only accesible to the rich. That happens i think when marxism only became a question for public workers and bureaucrats. I hope that marxism still is a mean to transform the world.

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