If one looks at Marxism and Keynesianism from an ideological and political perspective, the difficulty in finding a relationship between them is evident. At first glance, Marxist and Keynesian economics appear to be far apart, but there exist important points of contact between the two approaches to economic problems.
Keynes knew little of Marx. His knowledge of Marx’s economics was mainly based on secondary literature,1 but this did not prevent him from issuing trenchant judgments on Marx’s economics in The General Theory as well as before and after its publication (see, e.g., Sardoni, 1997).
However, despite Keynes’s opinion, there has always been a certain interest in the relation between Marxist and Keynesian economics.2 Joan Robinson, one of the most prominent Keynesian economists, has showed a constant interest in Marx’s economics and its relationship to the Keynesian approach. Moreover, Keynes himself, at some point in the evolution of his ideas toward The General Theory, came to consider Marx’s ideas in a positive way, particularly with respect to the critique of Say’s Law.
Here, we concentrate on Marx and Keynes on Say’s Law and on Joan Robinson’s idea that Keynesian economics would benefit from considering Marx’s economics more thoroughly and seriously.
If Marx’s critique of Say’s Law is compared with Keynes’s critique in The General Theory, they undoubtedly appear different. However, before the publication of The General Theory in 1936, Keynes carried out the critique of Say’s Law along lines that are quite similar to those followed by Marx, in spite of the fact that their criticisms were addressed to two different versions of the law.3 We look at this aspect of the relationship between the Marx’s and Keynes’s economics in the following section.
Joan Robinson considered Marx’s schemes of reproduction as an important analytical device, starting from which a fruitful relation between Marxist and Keynesian economics could be established. In this perspective, she regarded Kalecki’s approach to economic analysis as epitomic. Kalecki arrived at analytical results close to Keynes’s by following an approach inspired by Marx rather than by the neoclassical Marshallian tradition. We deal with these aspects in the third section.
Marx expressed the essential characteristic of the capitalist process of production and circulation with the formula
M is the amount of money capital advanced by capitalists to produce the amount C of commodities which, once sold, yield an amount of money M′ larger than M; M′ – M is the money profit.
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. Two relevant analytical issues stem from this.
On the one hand, Marx set out to analyze how the capitalist drive for profits can lead to crises, characterized by a general overproduction of commodities; on the other hand Marx also analyzed the conditions under which the capitalist thrust to produce for profits can give rise to an orderly process of production, circulation and growth.4 In both cases, at the core of Marx’s analysis there is the role of money.
This section is concerned with Marx’s theory of crises based on his rejection of Say’s Law, but we limit our attention to the problem of the possibility of crises rather than the explanation of their actual occurring. The reason of this is that we can find analogies between Marx and Keynes only with respect to this aspect; their explanations of actual crises are significantly different.
Marx dealt with the problem of crises by starting from criticizing Ricardo, who held that general overproduction crises are impossible, that is to say that Say’s Law holds. In Marx’s analysis 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 (Marx, 1968, p. 505). Aggregate demand for goods falls short of their aggregate supply.
The reason why the capitalist class can increase its propensity to hoard is that capitalist entrepreneurs produce commodities in order to make profits. Marx criticized Ricardo for abstracting from this essential aspect (Marx, 1968, p. 529). According to Ricardo, the production and sale of commodities generates an income which is either spent on consumption or saved. What is saved is, however, spent: it is invested to employ additional workers. In this context, money is merely a device to make the exchange of commodities simpler. Money income is never kept idle; people do not draw any utility from holding money idle.5
By allowing for the possibility that money is kept idle, Marx pointed out that a capitalist economy is essentially different from a barter economy. Say’s Law ceases to be valid and general overproduction crises become possible. Further, by pointing out that capitalist production is carried out in order to make profits, Marx explained why the capitalist class may wish to keep money idle. Whenever capitalist producers expect that production and investment are not profitable, they keep money idle and this causes overproduction of commodities.
In 1933, Keynes drafted several chapters of The General Theory where the critique of the classical doctrine and Say’s Law is based on the distinction between a co-operative economy and an entrepreneur (or monetary) economy, that is, the capitalist economy in which “we actually live”. In this context, Keynes explicitly referred to Marx and recognized that, starting from the formula M – C– M′, he had pointed out an essential characteristic of capitalist economies.
A co-operative economy, even though money is used for exchanges, is basically equivalent to a barter economy where money is only a “transitory convenience” used to buy a predetermined share of the output. If 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, the equality between aggregate demand and supply is still attained, provided that the sellers of pre-existing wealth use their proceeds to buy current output (Keynes, 1979, pp. 76–7). In other words, income may be spent on goods or saved but, nevertheless, what is saved is spent, i.e. it is invested.
For Keynes, classical economists could hold that Say’s Law applies and that full employment is ensured by assuming that capitalist economies behave as if they were co-operative economies. But capitalist economies are essentially different (Keynes, 1979, pp. 78–9). Capitalist entrepreneurs start productive processes to earn a monetary profit and not to produce more goods and employ more labor. If production is expected to be unprofitable, money is kept idle (Keynes, 1979, p. 82).
Money is not current output, so that if the demand for it increases, while the demand for current output declines, there will be a decrease in production and employment. The characteristics of money are such that buyers are not pressed to convert money into goods and entrepreneurs find it convenient to keep money instead of producing goods when they expect that demand will not be sufficient to make their production profitable.
It is in the description of how an entrepreneur economy functions that Keynes referred to Marx’s formula M – C– M′. Marx
pointed out that the nature of production in the actual world is not, as economists seem often to suppose, 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.
(Keynes, 1979, p. 81)
Thus, both Marx and Keynes criticized their respective predecessors for having treated capitalist economies as if they were essentially the same as barter (or co-operative) economies. Say’s Law applies in an economy in which money is only a medium of exchange, a “transitory convenience”. But in a capitalist economy money is also used as a store of value. The profitability of production and investment is the essential factor determining how money is used. If capitalists’ expectations concerning profitability are pessimistic, the demand for idle money rises while the demand for goods and labor decreases.
However, although Marx and Keynes started from similar criticisms of their predecessors, for a number of reasons they developed their analyses of the actual behavior of capitalist economies along different lines. The main difference between Marx and Keynes is that, for Marx, an imbalance between aggregate demand and supply inevitably gives rise to a general overproduction crisis whereas, for Keynes, it can also yield “underemployment equilibria.”6
Marx’s schemes of reproduction are one of the high points of his contribution to economic theory. They have attracted the attention of Marxist economists or with a strong interest in Marx and Classical economists.7
Marx’s schemes provide a relevant contribution in two main respects. First, though only through numerical examples, Marx determined the conditions under which a multisector economy can reproduce itself and grow without experiencing excess supply or demand of any produced good. Second, through his analysis of the role of money in the process of reproduction, Marx pointed out the importance of capitalists’ decisions concerning liquidity, which are crucial for the generation of the level of aggregate demand required to absorb the whole output and make the realization of monetary profits possible. Here, we do not deal with the determination of the conditions for the equality between supply and demand in each sector to concentrate on the macroeconomic aspects of reproduction and the role of money.8
At the aggregate level, an orderly capitalist process of simple or expanded reproduction must ensure that the capitalist class is able to realize the profits created in the process of production.9 In order to realize profits, the sale of the produced aggregate output must yield an amount of money M′ larger than the amount M that capitalists anticipated to start the production process. This requires that an additional quantity of money (M′ – M) is injected into the system.
Marx, in considering the possible sources of (M′ – M), concentrated on the necessity of a decrease in the liquidity preference of capitalists, who transform part of their money hoards into circulating money. Only the capitalist class owns the necessary additional quantity of money and the reason why it decides to dishoard part of its money is the necessity to finance its consumption and investment expenditures (Marx, 1956, pp. 338–9 and p. 425).10 This additional quantity of money flows back to the capitalist class at the end of the process of circulation, so that money hoards will be restored.
Thus, for Marx, the possibility for the economy to grow is contingent on the capitalists’ liquidity preference, which in turn depends on expected profits. If, because of pessimistic expectations about future profits, the capitalists’ liquidity preference is high and they decide to advance an additional quantity of money (M″ – M) ˂ (M′ – M), the level of aggregate profits would be negatively affected: aggregate monetary demand (M + M″) would fall short of aggregate supply (C′ = M′) and aggregate profits would decrease as their monetary value is (M″ – M) ˂ (M′ – M).
It is this aspect of Marx’s analysis of the process of growth that relates most directly to the Keynesian/Post-Keynesian approach. In particular, it relates to Kalecki’s analysis of reproduction and growth. Kalecki can be regarded as the natural trait d’union between the Marxian and Keynesian traditions of thought.11
Kalecki (1968) considers a three-sectors closed economy. The three sectors are vertically integrated, i.e. they produce final goods as well as all the intermediate goods and raw materials required for their production. The total value of the output of Sector 1, I, is equal to the value of gross investment plus the respective intermediate goods and raw materials. The total value of the output of Sector 2, CK, is equal to the value of consumer-goods for capitalists plus the respective raw materials and intermediate goods. The total value of the output of Sector 3, CW, is equal to the value of consumer-goods for workers plus the value of the respective raw materials and intermediate goods. The wage bill in the three sectors is denoted by W1, W2 and W3 respectively.
In the first two sectors, gross profits are given by
respectively. The third sector, after having paid wages to its workers, is left with (CW − W3), which is bought by workers of the other two sectors. Equality between demand and supply of the consumption good for workers requires that
Therefore, total profits are
Realized aggregate profits are determined by the capitalists’ expenditure decisions (investment and consumption). Were the capitalists to decide to spend less than (I + CK), the economy as a whole would experience a lower level of profits as well as a lower level of production and employment.12
If the economy has to grow from one period to the next, from where do capitalists take the funds to finance their increased investment and/or consumption?13 A problem of financing arises. The financing can be provided by the banking system. The increase in investment (and/or consumption) at the aggregate level is financed by banks, which become less liquid. At the end of the period, the loans are paid back and banks return to their initial liquidity position.
Banks play a crucial role in the process of growth of the economy. If banks have a high “liquidity preference” and do not lend to industrial capitalists, or if they lend less than it is needed to sustain a certain rate of growth, the process is necessarily stopped or slackened. Banks are capitalist firms as well; they may have a high “liquidity preference” if they expect that lending is not profitable enough or too risky.14
If we combine the industrial capitalists and financial capitalists into a “capitalist class”, we have that this class determines the level of its own income through its degree of liquidity preference and its decisions to invest and consume. The capitalist class as a whole finances its own income by accepting a decrease in liquidity, even though at the end of the process its initial liquidity position is restored and it will earn a higher level of profits. In other words, it is the capitalist class which must throw into circulation the amount of money required to make it possible to realize the higher level of profits, that is to say, the higher level of produced surplus. Kalecki’s analytical conclusions are very close to Marx’s.
Joan Robinson is the Keynesian economist who perceived most clearly the importance of Marx’s schemes and Kalecki’s developments for the Keynesian approach to macroeconomics and the theory of effective demand (see, for example, Robinson, 1951; 1965; 1966). She believed that had Keynes started from Marx, rather than orthodox economics, he would have avoided “a lot of trouble” (Robinson, 1965, p. 96) and obtained more general and robust analytical results, like Kalecki did.15 More recently, also other economists have dealt with the relationship between the Marxian/Kaleckian approach to growth and Keynesian economics.16
1 Joan Robinson (1973, p. ix) was convinced that Keynes “never managed to read Marx” and that, in any case, he “could never make head or tail of Marx” (Robinson, 1965, p. 96). More recently, Thweatt (1983) and Behrens (1985) have argued that Keynes’s acquaintance with Marx’s work was better than usually acknowledged.
2 In the years immediately following the publication of The General Theory, some attempts to compare Marx’s and Keynes’s economics in a systematic way were made; see, e. g., Fan-Hung (1939) and Alexander (1940). For more recent contributions, see Dasgupta (1983), Crotty (1985; 1986), Dillard (1984), Hein (2006) and Wolff and Resnick (2012).
3 Marx criticized Say’s Law in its classical version, whereas Keynes attacked the neoclassical version of the law. On the differences between the two versions of Say’s Law, see Sowell (1972) and also Sardoni (2011, pp. 47–50).
4 The problem of crises was analyzed by Marx, above all, in the second volume of Theories of Surplus-Value (Marx, 1968), where he criticized Ricardo’s theory. The study of the conditions for an orderly capitalist process of growth is carried out by Marx especially in the second volume of Capital (Marx, 1956) by using his well known schemes of reproduction.
5 For Ricardo, exchange through money is not conceptually different from barter (Ricardo, 1951, pp. 291–2).
6 See Sardoni (1987; 2011) for a detailed treatment of this aspect.
7 Among the more recent works on Marx’s schemes, Tsuru’s contribution in the 1940s (Tsuru, 1942) may be considered a classic, but see Olsen (2013) for a criticism of Tsuru’s views. Other works on Marx’s schemes are Brody (1970); Harris (1972; 1978); Okishio (1988) .
8 For a detailed treatment of the determination of equilibrium conditions see, e.g., Sardoni (2009).
9 Marx, as well known, analyzed the origin of the surplus value and profits from workers’ exploitation in the first volume of Capital (Marx, 1954).
10 In the case of simple reproduction, capitalists must advance only the amount of money required to finance their consumption.
11 For a more detailed examination of the relationship between Kalecki and Marx’s schemes, see Sardoni (1989).
12 On the determination of aggregate profits, see also Kalecki (1965).
13 In an economy that does not grow, past realized profits are used to finance capitalists’ consumption and current gross investment (equal, of course, to replacement investment), i.e. , with and . The capitalist class as a whole owns the required funds to finance its desired expenditure.
14 The crucial role of banks in the process of growth was emphasized also by Keynes, who wrote:
in general, the banks hold the key position in the transition from a lower to a higher scale of activity. If they refuse to relax, the growing congestion of the short-term loan market or the new issue market, as the case may be, will inhibit the improvement, no matter how thrifty the public purpose to be out of their future incomes.
(Keynes, 1973, p. 222)
Kahn, at the ‘circus’ where we discussed the Treatise in 1931, explained the problem of saving and investment by imagining a cordon round the capital-good industries and then studying the trade between them and the consumption-good industries: he was struggling to rediscover Marx’s schema. Kalecki began at that point.
(Robinson, 1965, pp. 95–6)
16 Trigg (2002; 2006) concentrates on the analytical relationship between Marx’s schemes, Keynes’s multiplier and Domar’s growth model. On the relation between Marx’s and Domar’s models, see also Lianos (1979). Bhaduri (1986) has written an introductory macroeconomics textbook based on Marx’s schemes and Kalecki’s analysis.
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