Marx and Keynes: The Limits of the Mixed Economy

By Paul Mattick

Revolt Library Anarchism Marx and Keynes

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(1904 - 1981)

Paul Mattick Sr. (March 13, 1904 – February 7, 1981) was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions. Throughout his life, Mattick continually criticized Bolshevism, Vladimir Lenin and Leninist organizational methods, describing their political legacy as "serving as a mere ideology to justify the rise of modified capitalist (state-capitalist) systems, which were [...] controlled by way of an authoritarian state". (From: Wikipedia.org.)


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Marx and Keynes

From : Marxists.org

Chapters

25 Chapters | 128,000 Words | 872,344 Characters

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This book was written during a time hailed by the President of the United States as “the greatest upsurge of economic well-being in history.” Others, in other nations, spoke of an “economic miracle,” or else claimed that “we never had it so good.” Professional economists were overjoyed that their “dismal science” had finally turned out to be the hope of the world. They impressed governments and businessmen alike with their theoretical erudition and its practical applicability. With the unfortunate exception of an inarticulate minority, from the “High” down to the “Low” there was general agreement that business was excellent and that it would stay that way. There was some concern with a residue of poverty and with the few bottle-necks of unemployment which still marred the other wise beautiful face of Western prosperity; and there was something more than just concern with the unsolved problem of “underdeve... (From : Marxists.org.)

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The theories of bourgeois economists down to David Ricardo were developed before there was a real awareness of the class issues that dominate capitalist society. Ricardo, as Marx wrote, “made the antagonism of class interests, of wages and profits, of profits and rent, the starting point of his investigations, naively taking this antagonism for a social law of nature. But by this start the science of bourgeois economy had reached the limits beyond which it could not pass,” for a further critical development could lead only to the recognition of the contradictions and limitations of the capitalist system of production. By doing what could not be done by bourgeois economists, Marx felt himself to be the true heir, and the destroyer as well, of bourgeois economy. Though bourgeois economy was indeed unable to advance as Marx had said, it was able to change its appearance. Classical economists had emphasized production and the syste... (From : Marxists.org.)

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It is rather difficult to regard the theories of Keynes as a “revolution” in economic thought. However, the term may be used at will, and the Keynesian theory is called a revolutionary doctrine “in the sense that it produces theoretical results entirely different from the body of economic thought existing at the time of its development.” Yet since that “body of thought,” was neo-classical equilibrium theory, Keynes’ “revolt” may better be regarded as a partial return to classical theory. And this notwithstanding Keynes’ own opposition to classical theory, which in his strange definition, included the whole body of economic thought from Ricardo down to his own contemporaries. Although Keynes regarded himself as an anti-Ricardian, his critics saw, of course, that he tried “to arrive at economic truth in the manner of Ricardo and his followers” through... (From : Marxists.org.)

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Whereas Keynes’ preoccupation with monetary questions was based on his desire to make the capitalist system work more efficiently, Marx’s relative neglect of these issues stemmed from his goal of formulating a theory of capital development. This labor theory of value evolved out of his criticism of classical value theory. In order to yield regulatory results, the market automatism presupposes a principle on which exchange is based, a principle that explains prices and their changes. If a price is given, it may vary in the interplay of supply and demand, but the question of what determines prices remains. For the classicists, price derived from value and value was determined by the labor incorporated in commodities. This conception does not rule out specific cases in which price has no relation to labor time. Marx found the labor theory of value indispensable for understanding the developmental tendencies of capital production and in fact, the only... (From : Marxists.org.)

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In order to stay in business, every capitalist entrepreneur must strive for the largest possible amount of surplus-labor; for only by achieving this maximum can he maximize the profits he can realize through market prices. This profit maximum is only partly determined by his own exertions in maintaining or raising the rate of exploitation; it is co-determined by similar exertions on the part of all other capitalists. To increase the profitability of any particular capital, the profitability of total social capital must be in creased, for otherwise there would be no way of realizing the increased appropriation of surplus-labor as profits in the market. Since surplus-labor in the form of commodities falls outside the capital-labor relationship, it must be exchanged between capitalists themselves in their efforts to preserve their capital by augmenting it. The growth of any particular capital depends on the accumulation of total social... (From : Marxists.org.)

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Marxist criticism of bourgeois society had to encompass more than proof of the exploitation of labor by capital. The idea of surplus-value was inherent in the labor theory of value, and socialists prior to Marx had utilized it in their arguments. In order to show once more that profit or surplus-value is gained in production and not in exchange, Marx found it advisable to disregard the effects of market competition on value relations. This is possible only in theory, because the production process cannot actually be divorced from the exchange process. Yet, according to Marx, the laws of capitalist production “cannot be observed in their pure state, until the effects of supply and demand are suspended, or balanced.” This was not meant to suggest that such an equilibrium is actually possible because, in fact, supply and demand never balance. In bourgeois economic theory prices are determined by supply and demand. On the assumptio... (From : Marxists.org.)

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Marx was not particularly interested in demonstrating the viability of anarchic capitalism. His concern with the law of value relates to his “ultimate aim to lay bare the economic laws of motion of modern society.” The best points in Capital, Marx wrote to Engels, “are 1) the twofold character of labor, according to whether it is expressed in use-value or exchange-value (all understanding of the facts depends upon this); and, 2) the treatment of surplus-value independently of its particular forms of profit, interest, groundrent, etc.” The twofold character of labor-power is, of course, the equivalent of the social relations of capital production as a production of surplus-value. And the independent treatment of surplus-value points to this basic social relationship, which lies hidden behind the various categories in which surplus-value is split up among its various appropriators. (From : Marxists.org.)

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Marx’s value model of capital development is a methodological device to “grasp its inner interconnections,” which cannot be observed in immediate reality. To have a theory of capital development at all, the “force of abstraction” has to transcend the semblance of competition. The abstract value-scheme reveals that, apart from competition as the driving force of capital formation, profit production already finds a limiting element in the capital-labor relationship. In order to forestall a decline of profitability, accumulation must never rest. More and more surplus-value must be extracted; for this purpose, production must be steadily revolutionized, and markets must be continually extended. The two-fold character of commodity production as the production of exchange-value and use-value determines that the process of accumulation, and the variations in surplus-value which follow from it, will become increasingly more detrimental to... (From : Marxists.org.)

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According to Marx, “the contradictions inherent in the movements of capitalist society impress themselves upon the practical bourgeois most strikingly in the changes of the periodic cycle through which modern industry runs, and whose crowning point is the universal crisis.” Throughout the nineteenth century, crisis followed crisis in intervals of roughly ten years. The periodicity of crises, according to Marx, stem simply from capitalism’s ability to overcome the overproduction of capital through changes in conditions of production which increase the mass of surplus-value relative to the existing capital. The definite crisis-cycle of the last century is, however, an empirical fact not directly related to Marxian theory. It is true that Marx tried to connect the definite periodicity of the crises with the turn over of capital. But he did not insist on the validity of this explanation. In my case, his theory does not depend... (From : Marxists.org.)

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Because of the fetishistic character of capital production, the capitalist system in all its phases and in all its details may in a way be considered to be in a “permanent” condition of crisis. Depression is a precondition for prosperity; prosperity comes to an end in a new depression. They are, so to speak, two sides of the same coin. Since capitalists operate as individual concerns in a social production of world-wide scope, and are not able to comprehend the real possibilities and limitations of the “system as a whole,” over-expansion in some spheres of production, or in some nations, may lead to over-expansion in other industries and nations and may finally affect the world at large. Both the force of competition and the desire to profit by a boom turn an upward trend in business into a self-propelling expansion which can drive investments to a point where the profits demanded of them are no longer forthcoming. Over-production of ca... (From : Marxists.org.)

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Capitalist production must progress, for standing still means retrogression. It cannot cease accumulating without disrupting the whole social fabric on which it rests. Any static analysis of its relationships is purely fictitious, and is excusable only as a possible medium for grasping its real dynamics. In order to secure a continuous production of surplus-value adequate to the constant need to accumulate capital (which is the capitalistically-necessary precondition for a more or less satisfactory social production in real terms – such as sustains social existence) capitalism must unceasingly revolutionize the sphere of production in its search for ever more surplus-value, and must consistently expand its markets in order to transform surplus-value into additional capital. Yet the realization of surplus-value depends not simply on a larger market, but on one which allows for the expansion of capital in the form of new means of production, for the realization of... (From : Marxists.org.)

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Despite its highly abstract character, Marx’s capital analysis has proved to have great predictive power. The actual course of capital accumulation followed its general outline of development. Indeed, the course of capital development as predicted by Marx has never been denied; other explanations merely state the reason for this trend differently. Keynes offers one of these explanations. He explains the “long-run” trend of capital production differently, but his description of the trend itself and of observable crisis conditions differs from Marx’s only in the terminology employed. It boils down to the simple statement that investments depend on profitability, current and expected, and that investment tend to decline with a declining profitability. In contradistinction to latter-day Keynesians, Keynes himself discerned a direction and a goal for capitalism. He described the “end” towards which capital formation was tending a... (From : Marxists.org.)

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Keynesian interventions in the economy were at first rather ineffective. Keynes explained this by saying that “the medicine he recommended was too niggardly applied.” The unemployment problem remained unsolved until the approaching Second World War forced the various governments to do for the purpose of waging war what they had been unwilling or unable to do during the preceding depression. With the beginning of war production, how ever, Keynes was finally convinced that his theory would find confirmation, for now it would be seen “what level of consumption is needed to bring a free, modern community ... within the sight of the optimum employment of its resources.” War-policies, however, were quite independent of the developing Keynesian ideology. They did not differ from those employed in the First World War; nor did they differ between various nations, not all of which adhered to the “Keynesian revolution.&r... (From : Marxists.org.)

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Evaluating the work of Keynes, economists came to “distinguish the problems he opened up from the particular solutions he suggested. These solutions might all be altered, or discarded and replaced,” it was said, “and his work would still be revolutionary in the opening up of problems and the admission of the possibility of some solution different from the one that had previously been accepted and had foreclosed fresh inquiry.” In this, Keynes “succeeded where previous heretics had failed, partly because he came at a time that was ripe to receive his ideas.” Although Keynes’ “theory of stagnation gave modern expression to some indigenous elements stressed in Marx’s ‘break-down’ theory, such as chronic underconsumption, general overproduction and the secularly declining rate of profit, the important practical difference between them, though, is that Keynes... (From : Marxists.org.)

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As far as laissez-faire capitalism is concerned, Marx’s prediction of its decline and eventual demise is obviously still supported by the actual course of development. The prevalence of the “mixed economy” is an admission that capitalism would find itself in a depression were it not for the expanding government-determined sector of the economy. What does this government intervention imply as regards the private-enterprise economy? No doubt, state intervention increases production and thus expands the productive apparatus. But if the goal of such intervention is the stabilization of the market economy, government-induced production must be noncompetitive. Were the government to purchase consumption goods and durables in order to give them away it would reduce the private market demand for these commodities. If the government owned enterprises were to produce such commodities and offered them for sale, it would increase the difficulties of its p... (From : Marxists.org.)

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The Keynesians see the economy as a money economy and tend to forget that it is a money-making economy. In their view money appears as a mere instrument of manipulation for turning insufficient into sufficient social production. An excessive monetary growth by way of credit expansion and deficit-financing may lead to inflation, just as credit contraction and too little money tend to be deflationary. To avoid both excesses, there must be the “right” quantity of money; and it is the government’s function to arrange for this “right quantity.” Fiscal policies are in a way also monetary policies, as they merely allocate the “right quantity” of money in the direction most conducive to economic stability and growth. But in order to understand the dynamics of the mixed economy it is necessary to understand the relationship between money and capital. Well into the nineteenth century different nations adhered to different metall... (From : Marxists.org.)

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Apart from its irrational aspects, the mixed economy can exist a long as an increasing productivity yields a sufficient social product. Production must be large enough to maintain the necessary profit ability for the stagnating or relatively declining private capital, to secure existing living standards, and to allow for a growing quantity of nonprofit production. Since the national debt can be refunded, it is actually only the interest on it which need be covered by either taxes or new borrowings. And since the rate of private investment decreases, more funds become available for government borrowings. In the long run, however, and with the continuous, faster growth of the “public” as against the “private” sector of the economy, profit-production must contract. To prevent this development, government-induced production must remain a limited part of total social production. If definite limits cannot be kept, the market system will eventually be... (From : Marxists.org.)

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The increasingly organized character of the mixed economy has induced some economists and sociologists to speak of it as a “post capitalist” system. The possibility of an organized capitalist economy either pleased or worried many social theoreticians before – Rudolf Hilferding, most notably, envisioned a completely organized capitalism based on a class-antagonistic system of distribution. However, a noncompetitive capitalism, though perhaps conceivable on a national level, is quite inconceivable as a world-wide phenomenon and for that reason could be only partially realized on a national level. What national economic organization there is has arias en mainly in response to international competition; and the more such organization has entered into and transformed the market mechanism, the more chaotic and destructive the capitalist system has become. Capitalistic property relations preclude any effective form of social organization... (From : Marxists.org.)

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Keynes’ theory dealt with “mature” capitalism and its apparent incapacity for further “automatic” development. This preoccupation with “mature” capitalism reflected a rather general disregard for the development of the world’s industrially backward regions. In Keynes’ view, to recall, it is the diminishing scarcity of capital, a consequence of the diminishing propensity to consume, which explains insufficient demand and unemployment in the developed capitalist nations. In countries where capital is scarce and the propensity to consume consequently high, this problem does not exist, for a “poor country will be prone to consume by far a greater part of its output, so that a very modest measure of investment will suffice to provide full employment.” He also said that there has “been a chronic tendency throughout human history for the propensity to save to be stronger than the induc... (From : Marxists.org.)

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Marx’s model of capital accumulation represents a closed homogenous system in which the rising organic composition of capital results in a fall of the rate of profit and therewith in the decline of capital expansion whenever the conditions of production do not allow for a sufficient rise in the rate of exploitation. But capitalism is not a closed system: it is able to slacken the rising organic composition of capital through its outward extension and to better its rentability through importation of profits from abroad. It is the value-expansion of the existing centralized capital, however, which determines the size as well as the character of the world market, and which limits the capitalization of underdeveloped nations to serve the specific profit needs of the dominating capitals. Given this world market, it is no longer possible for the underdeveloped part of the world to further its own capitalization independently of the profit requirements of the highly-deve... (From : Marxists.org.)

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While Marx’s theory of accumulation covers the mixed economy, it seems to lose its validity for the completely-controlled capitalist economy, i.e., state-capitalism or state-socialism as represented by the so-called communist societies of the Eastern power bloc, where government decisions and economic planning determine production, distribution and development. These societies are not the product of a slow transformation from a “mixed” to a state-directed economy but are the direct outcome of war and revolution. In practice, they have continued and extended the state-directed war time economy; theoretically, they regard their activity as the realization of Marxian socialism. This is somewhat plausible because they adhere to an “orthodox” interpretation of Marxism which sees in private property relations the main, or only, condition of exploitation. Actually, the conditions which Marx expected to result in the “expropriation of capita... (From : Marxists.org.)

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Although often proclaimed as an established fact, the conjunction of free enterprise and government planning does not really produce a “mixed” economy. The combination of automatic market relations and conscious determination of production cannot be more than a side-by-side affair. In the course of development, one must come to dominate the other; this means the maintenance of either a competitive or a planned economy. But to avoid the transformation of the mixed economy into state-capitalism, as we have seen, it is not enough to curtail its domestic development, for it is no longer possible to consider the national in isolation from the world economy. The general trend toward state-capitalism must be halted because the continuous expansion of the one system implies the contraction of the other. And in fact the cold war which agitates the world relates not to an evolving struggle between capitalism and socialism, but to a divergence of interests between par... (From : Marxists.org.)

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Lenin’s Marxism did not express the practical necessities of the modern international, anti-capitalist class struggle, but was determined by conditions specific to Russia. Russia required not so much the emancipation as the creation of an industrial proletariat, and not so much the end of capital accumulation as its acceleration. The Bolsheviks overthrew Czarism and the Russian bourgeoisie in the name of Marx and by revolutionary means, only to become themselves a dictatorial force over the workers and peasants. And this in order to lead them, eventually, by way of intensified suppression and exploitation, into socialism. Lenin’s Marxian “orthodoxy” existed only in ideological form, as the false consciousness of a non-socialist practice. When dealing with the questions of the socialist organization of the economy, Lenin’s proposals were therefore almost exclusive of a pragmatic type, and no attempt was made to relate them to Marxi... (From : Marxists.org.)

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Marx did not envision an intermediary stage between private-enterprise capitalism and socialism. His rather clean-cut differentiation between feudalism, capitalism, and socialism made for a certain “orderliness” and “simplicity” in his revolutionary expectations. He recognized, however, that his history of the rise of capitalism pertained solely to Western Europe, and he opposed any attempt to turn it into “a general historical-philosophical theory of development valid for all nations, no matter what their historical conditions might be.” Marx, as well as Engels, allowed for courses of development different from those in Western Europe, and for a shortening of the road to socialism for pre-capitalist nations, in the wake of successful proletarian revolutions in the West. They recognized the state-capitalist tendencies in developed capitalist nations as indications of the coming socialist revolution without fores... (From : Marxists.org.)

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Baran, P. A., The Political Economy of Growth, New York, 1960. Berle, A. A., Economic Power and the Free Society, New York, 1957. Berliner, J. S., Soviet Economic Aid, New York, 1958. Bernstein, E., Evolutionary Socialism, New York, 1961. Beveridge, W. H., Full Employment in a Free Society, New York, 1945. Böhmm-Bawerk, Karl Marx and the Close of his System, New York, 1949. Bucharin, N., Ökonomik der Transformations Periode, Hamburg, 1922. Burns, A. F., The Frontiers of Economic Knowledge, Princeton, 1954. Clark, J. M., Alternative to Serfdom, New York, 1960. Crosser, P. K., State Capitalism in the Economy of the United States, New York, 1960. Denian, J. F., The Common Market, New York, 1960. Deans, V. M., New Pattern... (From : Marxists.org.)

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