1. Keynes Seminar 5 November 2008
Claudio Sardoni
University of Rome ‘La Sapienza’
Keynes, Marx and The General Theory
© PKSG 2008

2. SAPIENZA – UNIVERSITY OF ROME
Keynes and Marx
CLAUDIO SARDONI
SAPIENZA – UNIVERSITY OF ROME

3. Introduction Why Marx and Keynes?
Both were convinced that, in their time, capitalism had entered a new historical phase.
Capitalism had ceased to be propulsive, i.e. able to guarantee unprecedented economic growth.

4. What Keynes thought of Marx
Keynes was not a scholar of Marx. His knowledge of Marx’s economics was mainly based on secondary literature.
This did not prevent Keynes from issuing trenchant judgements on Marx’s economics.

5. In The General Theory
In The General Theory , the book which was to ‘knock away’ Marxism, Marx is quoted only three times.
The first has to do with the definition of ‘classical economics’.
The “great puzzle of Effective Demand” had vanished from economics since Malthus and only kept on living furtively in the “underworlds” of Marx, Gesell and Major Douglas.
The future will learn more from Gesell than Marx.

6. Before and after The General Theory
In 1925: Marx’s Das Kapital is an “obsolete economic textbook”, which is “not only scientifically erroneous but without interest or application for the modern world.”
In 1934: Keynes’s feelings about Das Kapital were the same as his feelings about the Koran; its “dreary, out-of- date, academic controversialising” was ‘extraordinarily unsuitable’ to give inspiration to so many people and “its contemporary economic value … is nil.”
In 1942: Keynes had the feeling that he had before “that he had a penetrating and original flair but was a very poor thinker indeed.”

7. An exception
There is a stage in the development of Keynes’s ideas when he came rather close to Marx and his critique of Say’s Law.
In 1933, Keynes drafted several chapters of The General Theory. There, he criticized Say’s Law in a way that is close to Marx’s critique of the law.

8. The 1933 critique of Say’s Law
Keynes’s 1933 critique of the classical doctrine and Say’s Law is based on the distinction between a co- operative economy, a neutral economy, and an entrepreneur (or monetary) economy, that is, the capitalist economy in which ‘we actually live’.
Keynes explicitly referred to Marx’s analysis and recognised that the latter, starting from the formula M - C - M', had pointed out the essential characteristic of capitalist economies.

9. Cooperative and neutral economies
A co-operative economy is basically equivalent to a barter economy where the factors of production are rewarded by a share of the real output. Insofar as factors of production are rewarded in agreed proportions, money is only a ‘transitory convenience’ which is used to buy a predetermined share of the output.
We have a neutral economy when some factors do not use all their rewards to buy a share of current output but employ part of them to buy a share of pre-existing wealth. Full employment is still attained, provided that the sellers of pre-existing wealth use, in turn, their proceeds to buy current output.

10. Entrepreneur economies
For classical economists Say’s Law holds because they assume that capitalist economies behave as if they were co-operative or neutral economies.
But capitalist economies are essentially different. They are entrepreneur economies.
Capitalist entrepreneurs start productive processes in order to earn a monetary profit, and not in order to produce more goods and employ more labour.
Entrepreneurs direct money to production if they expect that to be profitable (in terms of money).
If production is expected to be unprofitable, money is kept idle. As a result, less employment is offered by entrepreneurs.

11. M-C-M'
It is in the description of how an entrepreneur economy functions that Keynes referred to Marx’s formula M - C – M'.
“The distinction between a co-operative economy and an entrepreneur economy bears some relation to a pregnant observation made by Karl Marx (…). He pointed out that the nature of production in the actual world is not (…) a case of C-M-C', i.e., of exchanging commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is the case of M-C- M', i. e., of parting with money for commodity (or effort) in order to obtain more money.”

12. Marx’s analysis
The objective of capitalist entrepreneurs is to produce and sell goods in order to obtain more money than they advanced to buy means of production and hire workers. They produce in order to make money profits (M – C - M').
Two relevant analytical issues stem from this:
The schemes of reproduction.
Overproduction crises.

13. The schemes of simple and expanded reproduction
Marx studied the conditions under which the capitalist thrust to produce for profits can give rise to an orderly process of production, circulation and growth.
The analysis of social circulation was developed in the second book of Das Kapital through the schemes of reproduction.

14. Simple reproduction (1)
The process at the macroeconomic level can be depicted by using a slightly modified version of the formula M – C – M'.
M – C … P … C' – M'
The monetary value of C' must be M' > M and (M' - M) is the monetary value of capitalists’ aggregate profits.
M' > M is the amount of money which is required to make it possible to sell all produced commodities at their normal prices.
At the end of the process the capitalist class draws from circulation an amount of money M' larger than the amount advanced.

15. Simple reproduction (2)
Where does the additional money come from?
It necessarily comes from the capitalist class itself which throws money into circulation to finance its consumption.
Where do capitalists initially find the additional money? Marx’s answer is that the additional money is already in the hands of the capitalist class in the form of money hoards.
Aggregate profits are thus determined by capitalists’ consumption decisions which, in turn, imply a decision to reduce their levels of money hoards.

16. Expanded reproduction (1)
In expanded reproduction, not all the surplus may be consumed. It is partly used to expand the scale of production.
Part of the additional money put into circulation [(M' - M)I] is now spent on investment goods by capitalists and another part [(M' - M)C] is spent on consumption goods.
The value of total profits is
[(M' - M)I + (M' - M)C] = (M’ – M)

17. Expanded reproduction (2)
The monetary value of aggregate profits is the same as in the case of simple reproduction but profits now depend on two sets of decisions by capitalists: investment and consumption decisions.
In general, aggregate profits depend on capitalists’ expenditure decisions.

18. Similarities and differences
There are important similarities between Keynes’s and Marx’s approaches.
For both, capitalists’ decisions about profitability and liquidity are crucial to understand the “world in which we live”.
However, there are also important differences.

19. Effective demand and general overproduction crises (1)
Crises were analysed, above all, in the second volume of Theories of Surplus-Value .
Both in simple reproduction and in expanded reproduction, if capitalists decide to advance an additional quantity of money (M'' - M) < (M' - M), the level of aggregate profits is negatively affected.
Aggregate monetary demand (M + M") falls short of aggregate supply (C' = M') and either stocks of commodities pile up or the prices of commodities decrease.
In any case, aggregate profits decrease.

20. Effective demand and general overproduction crises (2)
A general overproduction crisis is caused by an increase in the capitalists’ propensity to hoard that amounts to a shift of aggregate demand from commodities to money.
“… the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”

21. Crises and underemployment equilibria: differences between Marx and Keynes (1)
In Marx’s context, there are only two possibilities:
Capitalists’ decisions are such that the whole produced output is absorbed and there is no market perturbation.
Capitalists’ decisions generate an insufficient level of demand to absorb the whole output and, as a consequence, there is an overproduction crisis.
Marx did not contemplate the case in which firms as a whole correctly forecast a lower level of aggregate demand and they produce less than the maximum output, so that no market perturbation occurs (Keynes).

22. Crises and underemployment equilibria: differences between Marx and Keynes (2)
For Keynes, the level of production is a continuous increasing function of expected prices.
It is so because Keynes’s individual and aggregate supply curves are derived from Marshallian microeconomics under the hypothesis of short-period decreasing returns. Cost curves and supply functions are continuously increasing in prices.
Firms’ expectations might be wrong and the actual level of production might well be such as to have excess supply.
Keynes did not give much importance to this possibility. He concentrated on the possibility that firms’ expectations, although correct, produce underemployment equilibria.
In Keynes firms’ expectations always affect the level of output directly. In Marx, expectations directly affect production only if they become, so to say, “catastrophic”.

23. Conclusion
Marx’s economic theory was a significant advance from classical political economy. Marx contributed a new approach to money and the rejection of Say’s Law.
Marx’s critique of Say’s Law is similar to Keynes’s in
There are also important differences between Marx and Keynes. They essentially depend on their different backgrounds: classical for Marx; Marshallian for Keynes.