Keynes or Marx?

Keynes or Marx?

Michael Roberts takes sides in the debate between Keynes and Marx.

The purpose of this article is to consider the contributions that John Maynard Keynes and Karl Marx can make to our understanding of the nature of the capitalist system and the causes of crises. And also to identify the contribution that either or both can make to developing policy for action by socialists in the fight to defeat Capital and the damage it imposes through government policy on the living conditions of the 99%.

Let me start with Keynes. This upper-class British economist came into prominence in the 1920s in attacking the deal between the winning powers to impose draconian conditions of austerity on the losers after the First World War. Then he wrote several important theoretical works in the 1930s to argue for new economic policies to deal with the Depression and its chronic high unemployment, which he thought threatened the very fabric of the bourgeois society he loved.

In my view, 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’.

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.

Boorish snob

Don’t be under any illusion that Keynes was a 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 “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’ private 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.

Over the longer term, Keynes argued that there would be a secular decline in what he called the ‘marginal efficiency of capital’. This was Keynes’ equivalent to Marx’s profitability of capital. This MEC would gradually decline as more capital competed for available profit. That would not cause a problem as long as the money lenders reduced the interest rate they charged for borrowing. But there was no control over these ‘rentiers’, sitting in their banks. Thus it was likely that the interest demanded for lending money by the financial sector could get out of line with the return on productive capital and cause new disequilibriums or crises.

The disappearing parasite

However, Keynes argued that this was not a long-term worry for capitalism as gradually the economy would ‘phase out’ the rentier, the unproductive holder of interest and rent, so that the productive profit making sector could flourish. Then the ‘economic problem’, as he called, it would be solved. The modern economy was gradually moving in that direction, so all eventually would be well. Think about it; Keynes was saying that the finance sector, far from becoming stronger and stronger under capitalism, would gradually wither away!

Thus he told his Cambridge students: “I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race.”

Keynes says all will be well under capitalism, assuming no wars! And all will be well, assuming population stops growing! He did not add, because he did not recognise it, that all will be well, assuming no global warming, energy exhaustion, growing inequality globally, permanent poverty globally etc.

Anyway, 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, as I call it, 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.

Fiscal stimulus

But most Keynesians, at least the more radical ones, would say that Keynesian theory and policy would suggest that government cannot just rely on ‘easy money’ but 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 and they are doing the same now. So the efficacy of Keynesian alternatives has not been tested.

Well maybe. But let me pose this issue. 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 we can come back to that. 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.

Now it has been argued that Keynesian policies were never even adopted in the 1950s and 1960s anyway and this was not the reason for the Golden Age of economic growth and full employment achieved in those years. I have a lot of sympathy for that view. In my view, the Golden Age of capitalism was a product of a post-war high and even rising rate of profit that encouraged capitalists to invest and employ. But it was a relatively short period that came to an end in the mid-1960s. What is clear that in those years, governments were convinced that they could ‘manage’ a capitalist economy with a judicious mix of monetary and fiscal policy and suitable regulation of industry and finance – namely what became called a ‘mixed economy’ of a capitalist sector and government – that came to be the ideal of social democratic leaders as an alternative to socialism. The myth developed that this Golden Age was a product of successful Keynesian policies.

All Keynesians now

And it was a myth. 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’ and removed the dollar’s fixed rate to the price of gold – a longstanding policy of Keynes. 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 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, in my view, 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.”

Obsolete Marx

As we have seen, 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.

Start with profit

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.

But why should profits go down? Marx explained in Capital and other works that there was an inherent tendency for profitability to decline over time and this downward pressure on profitability would eventually cause a fall in the mass of profits and a crisis and slump would ensue. I have no space to deal with a deeper explanation of Marx’s law of profitability. Instead, think of how a capitalist crisis caused by falling profits 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.

No friend of the worker

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 emphasizing 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 economist have (rightly) asserted as indefeasible.” So cutting real wages should be 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 the capitalist sector 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. First, it is a much superior explanation. 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. And second, 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.

Michael Roberts blogs at

This article was written for a speech he gave to the Spanish anti-capitalist movement in Summer 2013.

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