Marx and Keynes in Berlin

It’s 200 years today since Karl Marx was born.  And it’s just over 100 years since the great 20th century economist John Maynard Keynes wrote about Marx’s contribution.  Keynes wrote then: “how  can I accept the (Communist) doctrine which sets up as its bible above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to modern world”.  I think we can see that Keynes had a low opinion of Marx’s ideas.

And we can see why from the following comment of Keynes.  “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? “

Keynes stood for the preservation of capitalism and its ruling class, for all its faults, over the ‘boorish proletariat’.  This was my opening salvo in my presentation to the Marx 200 conference in Berlin, organised by the Rosa Luxemburg Institute.  My presentation went on to cover where I thought Marx and Keynes differed and why Marx’s ideas were superior as an analysis of capitalism and as a basis for political action.  In my view, it is necessary to spell out these differences because the dominant analysis of capitalism adopted in the labour movements of the major capitalist economies, especially by the leaders of those movements, is Keynesian theory and policy, not Marx.  Marx is ignored or dismissed, on the whole.

However, at the session, Professor Radhika Desai disagreed with me.  For her, the similarities (agreements) between Keynes and Marx were greater than the differences.  It’s a debate that we could have, because in my view expunging the influence of Keynes (a supporter of the ruling class) from his dominant influence in the labour movement is an essential task.  Certainly Keynes was determined to expunge the influence of Marx from the labour movement and from his economics students –as the quotes above show.

But let’s just briefly consider the similarities and differences between these two great political economists of the last 200 years.  First, the agreements as usually presented by those who see them.  Both Marx and Keynes think there is something wrong with capitalism.  Both Marx and Keynes have a falling rate of profit theory.  Both Marx and Keynes wanted the ‘socialisation of investment’.  Both Marx and Keynes wanted and expected the ‘euthanasia of the rentier’ (Keynes’ words), namely the disappearance of finance capital.

From this, it sounds that, despite Keynes’ crude dismissal of Marx, he had a lot in common with Marx’s analysis.  But that would be looking at it very superficially, in my opinion.  In my paper to the conference session, I make a lot of points about how Keynes rejected the labour theory of value (both classical and Marx’s) and stood by marginalist and utility theory.  Berlin 2018  For Keynes, there was no theory of exploitation of labour power that extracted profit from the unpaid labour of the working class.  Profit came from ‘capital’ investing.  Workers got wages for working; bankers got interest from lending and capitalists got profit from investing; each according to his or her own.  This is the standard mainstream ‘factors of production’ theory.  So from the start, Keynes denies that there is exploitation in the capitalist mode of production; the market decides and there is free and fair exchange: profit for capital, wages for workers.

Of course, if you have followed this blog and read Marx’s ideas, you would know that this is nonsense and a mere apologia for the rule of capital.  Where does profit come from in this mainstream theory?  There is no explanation.  Somebody must pay for it and yet there is free and fair exchange of commodities in the market –so there can be no profit in the market, merely an exchange of value (money).  Keynes’ and the mainstream approach really justifies the rule of capital and, for that matter, inequality of income and wealth by denying the reality that a small group controls of the means of production and forces the rest of us to work for a living.  Indeed, Keynes said that: “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“

Then there is the rate of profit theory.  Those who reckon Marx and Keynes are allies in their critique of capitalism like to point out that Keynes had a theory of a falling rate of profit as well as Marx.  Indeed, they were the same.  But Keynes’ theory has little to do with Marx’s.  Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital (MEC), to use Keynes’s terminology—as the main factor that determines the changes in the phases of industrial cycle: “Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.

But Keynes’ theory of MEC is based on falling ‘marginal productivity’ due to the growing ‘abundance of capital’ and on the psychological expectations of capitalists about the future.  The rate of profit will gradually fall as more and more technology is produced; the more abundant is capital, the less it is wanted and so its marginal value falls.  This is not Marx’s theory.  His depends on the continual drive by capital to replace labour in production with machines.  Individual capitalists compete with each other to drive down costs and in so doing that pushes up the organic composition of capital by shedding labour.  As labour is the only source of profit, not capital (as in Keynes’ theory), the rate of profit tends to fall.  And it is a tendency.

For Keynes, however, the MEC will fall not because insufficient value is being extracted from labour but because capitalists ‘suddenly’ lose their appetite for investment: “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.”

So the fall in Keynes’ rate of profit is due to individual capitalists’ subjective views about the future (‘confidence’) not because of an objective change in the conditions of accumulation of capital and production (Marx’s view).  As Paul Mattick Snr commented 50 years ago, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

The ‘sudden collapse’ in MEC has caused the slump (because interest rates are now too high compared to profitability and people ‘hoard’ money instead of investing or consuming).  But once that is overcome, we can return to the ‘normal’ capitalist mode of production.  “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.”  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

Then there is this ‘socialisation of investment’.  Keynes called for this (a vague phrase) as a ‘final solution’ to the problem of depression in a capitalist economy.  If monetary easing (cutting interest rates and pumping in money by central banks) or fiscal stimulus (tax cuts and government spending) did not work in reviving the capitalist economy and getting capitalist to invest more, then maybe it would be necessary for the government to step in directly and take over the show. It is not clear, however, that Keynes meant any expropriation of capitalist industry and companies – something he would hate.  He probably meant that state operations and even some plan should be introduced – something similar to Roosevelt’s New Deal projects in the 1930s in the US.  And anyway, it is clear that Keynes saw ‘socialisation of investment’ as just a temporary measure to get capitalism going again (perhaps like the war economy 1940-45 eventually did).  Once the ‘technical malfunction’ (lack of demand) in the capitalist mode of production had been overcome, then we could revert to free markets and investment for profit and end ‘socialised investment’.

In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.”

So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  So “the class war will find me on the side of the educated bourgeoisie.”  Fear of revolution was central to Keynes’ policies.  I don’t need to explain that Marx did not see this way at all.

As for the ‘euthanasia of the rentier’, Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall as the MEC fell.  So bankers and financiers would no longer be necessary; they could be phased out.  Well, that does not seem to be happening.  Indeed, the very people who claim that Keynes is a ‘progressive’ economist with great similarities to Marx now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

In contrast, Marx’s theory of finance capital did not foresee a gradual removal of finance; on the contrary, he describes the increased role of credit and finance in the concentration and centralisation of capital in late capitalism.  Yes, the functions of management and investment become more separated from the shareholders in the big companies, but as I have argued in a previous post, this does not alter the essential nature of the capitalist mode of production – and certainly does not imply that coupon clippers or speculators in financial investment will gradually disappear.

So I reckon that the differences (and there are others in my paper) between Keynes and Marx are fundamental and any superficial similarities pale in comparison.  That is important because it is Keynesian ideas that dominate in the labour movement, not Marx 200 years since his birth.

More on other things at the Berlin conference in another post.