This is Part 2 of my analysis of the way that fundamental ideas in Modern Monetary Theory (MMT) are totally consistent with a reasonable interpretation of Marx’s work. The motivation to clarify these issues came after I spoke at an event last weekend in the UK and shared a panel with a critic who claimed that Marx’s work established that MMT is wrong to assume that unemployment is a monetary phenomenon (insufficient spending) and that government spending can do anything about it. The claim was based on a view that Marx thought that capitalist firms have some unique logic that if they decide not to produce no amount of sales orders will induce them to expand production even if they have massive excess capacity (‘machines lying idle’) and a huge pool of idle labour to draw upon. No reasonable reading of Marx’s work would lead to that conclusion. In this part, we will consider what Marx thought about crisis and some later developments of his reproduction schemes, which make it clear that effective demand drives capitalist output, which conditions their employment decisions.
Marx considered that the capitalists are driven by a desire to accumulate capital which raises the inevitability of crisis (recession in the modern parlance).
While many people might have some sketchy idea of what Marx wrote in this context, and Marx himself, certainly wrote a lot about the topic, the fact remains that he did not present a fully developed theory of capitalist crisis.
Marx’s main aim was in showing that the claims by Jean-Baptiste Say and David Ricardo that general overproduction was impossible because there were unlimited wants and that production (supply) would always generate the capacity (demand) to absorb it.
At the time, there were theorists who conjectured that a lack of spending (effective demand) would create crisis because production would not be sold and capitalists would respond by reducing output and employment.
I am thinking of people like – James Maitland, 8th Earl of Lauderdale – whose major work in 1819 – Inquiry into the Nature and Origin of Public Wealth – argued that the state of the fiscal position (deficit or surplus) had a direct impact on economic activity (in the way we now understand this relationship).
He was rather prescient in that regard.
Others like Thomas Malthus and – Jean Charles Léonard de Sismondi – emphasised demand as the source of crisis.
Sismondi emphasised what became known as – underconsumption theory – which conjectured that competition between capitalists maintained wages at low levels, that, in turn, undermined the purchasing power of workers in an environment where capital expanded production in order to expand profits and increase their capital.
Others (such as the work of the idealist Robert Owen) also focused on the way low wages predisposed the system to demand deficiency and crises.
Marx sought to separate himself from these ‘bourgeois’ writers although he did write in – Capital Volume III (p.347) – that:
The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.
But I can equally find tracts in Marx which downplay the impact of low purchasing power among workers for the potential for crisis.
He considered it a “sheer tautology to say that crises are caused by the scarcity of effective consumption” (p.250) (Capital Volume II).
By which he meant that even if workers were given a wage boost to enjoy higher consumption, the dynamics that drove the mismatch previously would reassert themselves such was the inner logic of Capitalism.
What Marx wanted to focus on was the contradictions in the process of capital accumulation, which he considered was the primary motivation (and logic) of the system.
Producing to satisfy consumption needs of the masses was not the driving force although one can obviously see it as a necessary aspect of the accumulation process.
Marx considered the accumulation process would lead to an excessive build up of capital which would suppress the rate of profit and it was this dynamic that generated the crisis.
But, we need to be careful in unpicking the logic here.
Yes, the struggle to maintain rates of surplus value production (which is the basis of monetary profits) was paramount and led to all sorts of innovations – moving cottage industry under one roof (the rise of the factory system); the introduction of shop floor supervision; time and motion analysis (Taylorism) etc.
Yes, the owners of capital control production and employment and their expectations of future returns dictate the rate at which the capital stock accumulates over time.
In this context, I am reminded of the work of Robert Rowthorn, who in his essay – Inflation and Crisis (1980: 133) – wrote that:
Capitalists control production and they will not invest unless they receive a certain ‘normal’ rate of profit. If wages rise too rapidly, either because of extreme labour shortage or because of militant trade unionism, the rate of profit falls below its ‘normal’ level, capitalists refuse to invest, expansion grinds to a standstill and there is a crisis.
So when assessing the role of trade unions in any historical period we have to be cognisant of the logic of the union as an institution and the limits on its effectiveness within the conflictual relationships that define capitalism.
Rowthorn (1980: 134) summed up:
A strong and militant trade union movement may force up wages and resist wage cuts even in the face of high unemployment. In a boom situation this may squeeze profits and bring expansion to a premature end, whilst there is still a large surplus of labour; and in a depression it may delay recovery by reducing profitability. This may sound like a condemnation of the trade union movement, but it is not. It is simply stating the obvious fact that, so long as capitalists control production, they hold the whip hand, and workers cannot afford to be too successful in the wages struggle. If they are, capitalists respond by refusing to invest, and the result is a premature or longer crisis. To escape from this dilemma workers must go beyond purely economic struggle and must fight at the political level to exert control over production itself.
(Reference: Rowthorn, R. (1980) Capitalism, Conflict and Inflation: Essays in Political Economy, Lawrence and Wishart, London.)
But equally, when considering the causes of crises, we cannot avoid focusing on the realisation issue because it was through market exchange that capitalists were able to realise the surplus value they had expropriated in the production process by exploiting their workers into the monetary form of profit.
In this context, the capitalists, in pursuit of more sales, run the risk of overproducing relative to the purchasing power of consumers, which then means the surplus value they have produced cannot be realised back into a monetary form.
A lack of sales driven by a deficiency in effective demand (desires to consume backed by cash) then damages the rate of profit as capitalists are forced to discount their production and/or go broke.
Either way, a crisis occurs and the reproduction process (of capital) is disturbed.
So at this stage we can accept the view that for Marx, crises were endemic to the logic of capitalism – its inner contradictions.
Which means that they would repeat even if policy changes could restore the equilibrium (temporarily).
But we can move on from that.
While Post Keynesians typically begin with Keynes’ General Theory (1936) in explicating the principle of effective demand, the essential elements underpinning the critique of Say and the modern understanding of involuntary unemployment in a monetary capitalist economy can be found in Marx, particularly in his 1863 work – Theories of Surplus Value.
This complements the argument above.
Focusing on – Chapter 17 – we find various discussions about the Classical (Ricardian) denial of the possibility of generalised overproduction and how that erroneous view is based on the idea that products exchange against products.
This is at the heart of Classical neutrality which ultimately is the modern version of the claim that fiscal and monetary policy cannot favourably alter real conditions (output and employment) in the economy.
In Chapter 17, Marx’s critique of both Say and Ricardo highlights why the use of “barter economy” examples is deeply flawed. A monetary economy has dynamics that are not captured in a barter world where products exchange against products directly.
If we mapped the current conservative (neo-liberal) position (and most of mainstream economics) back into the classical propositions that Marx was attacking we would find the correspondence to be close to 100 per cent in terms of concepts and implications.
The existence of a circuit breaker in the form of idle money stocks (recognising that money is more than a means of exchange but also an independent form of commodity) led Marx to conclude that there was the possibility of stagnation (defined as a conflict between purchase and sale) – (see Theories of Surplus Value Vol 2, Chapter 17, paras 710-711).
Interestingly, in TSV (Vol II, Ch XVII, para 712) Marx also anticipated the modern distinction between nominal and effective demand which lies in the understanding of the real contribution of Keynes.
Marx noted that in denying the possibility of a general glut, Ricardo appeals to unlimited needs of consumers for commodities and any particular saturation would be quickly overcome by increased demands for other commodities.
He then (TSV, Vol II, Ch XVII, para 712) rhetorically asked for an explanation of the connection between ‘over-production’ and ‘absolute needs’ and indicated that capitalist production and quotes Ricardo’s denial of the “possibility of a general glut in the market”:
Too much of a particular commodity may he produced, of which there may he such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art. Some would consume more wine, if they had the ability to procure it. Others having enough of wine, would wish to increase the quantity or improve the quality of their furniture. Others might wish to ornament their grounds, or to enlarge their houses. The wish to do all or some of these is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means, but an increase of production …
Could there be a more childish argument? It runs like this: more of a particular commodity may be produced than can be consumed of it; but this cannot apply to all commodities at the same time. Because the needs, which the commodities satisfy, have no limits and all these needs are not satisfied at the same time. On the contrary. The fulfilment of one need makes another, so to speak, latent. Thus nothing is required, but the means to satisfy these wants, and these means can only be provided through an increase in production. Hence no general overproduction is possible.
What is the purpose of all this? In periods of over-production, a large part of the nation (especially the working class) is less well provided than ever with corn, shoes etc., not to speak of wine and furniture. If over-production could only occur when all the members of a nation had satisfied even their most urgent needs, there could never, in the history of bourgeois society up to now, have been a state of general over-production or even of partial over-production. When, for instance, the market is glutted by shoes or calicoes or wines or colonial products, does this perhaps mean that four-sixths of the nation have more than satisfied their needs in shoes, calicoes etc.? What after all has over-production to do with absolute needs? It is only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production—over-production as such in relation to the absolute need or the desire to possess commodities. In this sense there is neither partial nor general over-production; and the one is not opposed to the other.
Note the reference to the capitalist market being “only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production-over-production as such in relation to the absolute need or the desire to possess commodities.”
I urge you to read the whole section in Theories of Surplus Value because its wisdom lies at the heart of the modern problem of high unemployment and stagnant growth. Keynes didn’t offer much more than you can find in this work by Marx.
In 1953, Joan Robinson published – An Open Letter from a Keynesian to a Marxist – which was a note to New Zealand Marxist economist Ronald Meek, where she writes that:
I was a student at a time when vulgar economics was in a particularly vulgar state. There was Great Britain with never less than a million workers unemployed, and there was I with my supervisor teaching me that it is logically impossible to have unemployment because of Say’s Law.
Now comes Keynes and proves that Say’s Law is nonsense (so did Marx, of course, but my supervisor never drew my attention to Marx’s views on the subject).
Which shows that the essential characteristics of effective demand were in Marx, well before Keynes.
As we move through history, the scholars that followed Marx clearly understood that effective demand was a causal factor in determing unemployment and recession.
The Russian economist – Mikhail Tugan-Baranovsky – argued that the Marxian reproduction process could be rendered ‘harmonious’ if the distribution of income could be rendered compatible with an expanding social production.
In his 1901 book on business cycles – Studien zur Theorie und Geschichte der Handelskrisen in England – he wrote (page 25):
Die angeführten Schemata mussten zur Evidenz den an sich sehr einfachen Grundsatz beweisen, welcher aber bei ungenügendem Verständnis des Prozesses der Reproduktion des gesellschaftlichen Kapitals leicht Einwände hervorruft, nämlich den Grundsatz, dass die kapitalistische Produktion für sich selbst einen Markt schafft. Ist es nur möglich, die gesellschaftliche Produktion zu erweitern, reichen die Produktivkräfte dazu aus, so muss bei der proportionellen Einteilung der gesellschaftlichen Produktion auch die Nachfrage eine entsprechende Erweiterung erfahren, denn unter diesen Bedingungen repräsentiert jede neuproduzierte Ware eine neuerschienene Kaufkraft für die Erwerbung anderer Waren.
His views were, of course, avowedly non-Marxist despite his claim to be working within that tradition
A contemporary, who was very much operating within the Marxian tradition was the Polish economist – Rosa Luxemburg – who George Feiwal described in his classic work (1975) – The Intellectual Capital of Michal Kalecki – as “one of Marx’s most brilliant, original, and unorthodox followers” (p.56).
American Marxian economist – Paul Sweezy – called her the “queen of the underconsumptionists” in his 1942 classic – The Theory of Capitalist Development – a book I read over and over when I was a young student in the 1970s.
Feiwal considers that Marxists had really “neglected the underconsumption element in Marx’s theory” and “treated Luxemburg as a heretic”.
Luxemburg clearly brings together the two points – that capital seeks to accumulate more by producing more surplus value and it requires mass consumption to be sufficient to ensure that surplus value is realised as monetary profit.
In her only work on economics (1913) – The Accumulation of Capital – she extended Marx’s discusion on reproduction by suggesting that Marx’s focus on a closed system was an error.
Here is the 1951 – English Translation – in PDF.
She wrote (p.155):
The flaw in Marx’s analysis is, in our opinion, the misguided formulation of the problem as a mere question of ‘the sources of money’, whereas the real issue is the effective demand …
She quotes Marx (Capital, Vol II, page 202):
But the commodity-capital must be turned into money before its reconversion into productive capital and before the surplus-value contained in it is spent. Where does the money for this purpose come from?
Which indicates that Marx realised that the accumulation of capital could only proceed if there was adequate spending.
Rosa Luxemburg’s contribution was to identify that capital would seek and find new markets to absorb surplus production, which might be underdeveloped nations or sectors within the advanced nations that were not structured as capitalist production processes, such as “peasant agriculture”.
A most important sector in that latter regard was the government sector.
She wrote (page 466):
Further the multitude of individual and insignificant demands for a whole range of commodities, which will become effective at different times and which might often be met just as well by simple commodity production, is now replaced by a comprehensive and homogeneous demand of the state. And the satisfaction of this demand presupposes a big industry of the highest order. It requires the most favourable conditions for the production of surplus value and for accumulation.
She uses the example of what we now refer to as the military-industrial state to demonstrate how “government contracts … [are] … free of the vagaries and subjective fluctuations of personal consumption” and provides “the most favourable conditions for the production of surplus value and for accumulation.”
Now, I know a lot of the hard-core Capital Vol II lot dismiss Rosa Luxemburg as a failure and for trying to usurp the Master.
But one person saw what she was doing and that person was Polish economist – Michał Kalecki.
One could hardly dismiss him as a heretic or an irrelevance.
While Keynes denied Marx was useful at all, Michał Kalecki came up with a much richer account of the dynamics of effective demand by starting with Marx’s reproduction schema.
He praised Rosa Luxemburg’s observations about government spending in his 1966 book – Studies in the Theory of Business Cycles: 1933-1939.
He added analysis of the ‘income effect’ that would accompany the capitalist response to increased government contracts.
He argued that fiscal deficits would result in expanded production if there was excess capacity, whereas taxing workers would undermine effective demand in times of crisis.
In his 1945 article in the Oxford Economic Papers (No. 7, pp.83-92) – Full Employment by Stimulating Private Investment? (JSTOR link via library) – Michał Kalecki was very explicit about the role of government spending in stimulating the economy.
He wrote that (page 83):
In current discussions the view is frequently advanced that full employment may be maintained by stimulating private investment. The stimuli in question may be ‘cheap money’; the reduction of income tax; or subsidies to firms undertaking investment (which may be given, for instance, by deducting from taxable profits the full amount of new investment, or a percentage of it, etc.). The purpose of this paper is to show that to maintain full employment these measures must be applied not once only – as the authors of the proposals in question seem to assume – but cumulatively.
Pedantic Marxists believe that capitalist investment has its own logic and will not respond to government stimulus.
Kalecki, a modern Marxist, thought otherwise.
The fundamental problem being addressed is the deficiency of effective demand.
He considered two scenarios:
1. Promoting a return to full employment by stimulating private investment.
2. “solving the problem of full employment … [by] … the direct creation of effective demand by the Government through public investment or through subsidizing mass consumption.”
I would add a third – direct job creation in the public sector.
In the first case, he demonstrated that the government had a range of policy options available to stimulate private investment – tax cuts, subsidies, interest rate cuts etc.
To offset any tendency for the rate of profit on the expanded capital stock to fall and thus offset the possibility of a crises (so very Marxian), Kalecki wrote (page 87):
… if effective demand adequate to secure full employment is created by stimulating private investment the devices which we use for it must cumulatively increase to offset the influence of the falling rate of profit
So the policy design becomes important.
To motivate the second case, and this is important in terms of the allegations from last Sunday’s panel, Kalecki noted that if the private firms were not in a position to generate the growth in productive capacity in order to move the economy back to full employment, then the simple solution was for the government to step in, using state-owned enterprises, and extend the reach of public provision into areas that the non-government sector deemed to be unprofitable.
Kalecki wrote (p.88):
In this case the Government would undertake construction of objects which do not fall into the sphere of private enterprise, and thus do not compete with private capital equipment …
He said “full employment is achieved because the budget deficit makes good the amount by which” private investment “fall short” of the desired level.
In an earlier paper – Three Ways to Full Employment (1944) – Kalecki talked about slum clearances and the expansion of state housing as good examples of the activities that the state might pursue in this context.
Kalecki went further (1945: 92):
If private enterprise – even after the Government intervention has guaranteed to it markets sufficient to cause full utilization of its resources – is unable to fulfil the task of supplying new equipment at the rate required by the increase in population and productivity of labour, then State-owned factories should be built to fill the deficiency in private investment
So the basis of a very progressive and modern policy agenda.
And that would obviously include direct job creation which would bring unemployment down to its irreducible minimum (frictional).
As an alternative, Kalecki wrote (1945, p.88):
… the Government would increase mass consumption by granting family allowances, old-age pensions, etc., by reducing indirect taxation, and by subsidizing the prices of necessities. In either case the additional expenditure (or the fall in revenue) would be financed without increasing the existing taxes so that the rise in public investment and subsidized consumption would not be offset by the fall in private investment and unsubsidized consumption; the resulting budget deficit will have the same repercussions upon employment as a rise in private investment with a balanced budget.
What we learn from these works is that Kalecki was building his notion of effective demand on previous insights that Marx had provided.
There was never any question for Kalecki that governments could increase fiscal deficits and stimulate economic activity – either directly or through the stimulus of private production.
He was somewhat uncertain about the politics but not the economics.
The criticism that MMT is wrong because it disregards the Marxian view that increased government spending will really not stimulate employment and output really relies on a pretty skewed reading of Marx and those that followed.
I consider it to be incomprehensible for one to draw that sort of conclusion.
I have read as much Marx as anyone over my career.
And it is clear that capitalist firms will respond to increased sales demand by producing goods and services.
If they think the demand is stable they will invest and build productive capacity if they are currently at full capacity.
And if they decide for any reason not to respond, then the government can always employ and produce itself.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.