The Meaning of C-M-C versus M-C-M in Marx's Analysis It is in the discussion of his taxonomic framework that Keynes made the following comment about Marx's analysis of C-M-C versus 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,--though the subsequent use to which he put this observation was highly illogical. He 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) for money in order to obtain another commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M-C-M', i.e. of parting with money for commodity (or effort) in order to obtain more money. This is important for the following reason. The classical theory supposes that the readiness of the entrepreneur to start up a productive process depends on the amount of value in terms of product which he expects to fall to his share; i.e. that only an expectation of more product for himself will induce him to offer more employment. But in an entrepreneur economy this is a wrong analysis of the nature of business calculation. An entrepreneur is interested, not in the amount of product, but in the amount of money which will fall to his share. He will increase his output if by so doing he expects to increase his money profit, even though this profit represents a smaller quantity of product than before. (1979, 81-2) Keynes minimized Marx's distinction between C-M-C and M-C-M as merely a "pregnant observation." Later, A. C. Pigou would credit Keynes for being the first economist to bring together the real and monetary in a "single formal schema" (1950). Yet scholars of Marx's Capital and Theories of Surplus Value understand that the shorthand phrases C-M-C and M-C-M embody a concentrated synthesis of layer upon layer of economic analysis of precisely the contradictory interactions between the real and the monetary and between production and exchange. Indeed, some of Keynes' key insights into classical theory and capitalism's crisis potential bear a close resemblance to Marx's analysis. For Marx, one purpose of the capital circuits analysis was to demonstrate that classical theory misconceives capitalism as revolving around commodities (C-M-c), whereas a theory that better frames both capitalism's normal reproduction cycles and its contradictions revolves around money capital and money profit (M-C-M) (Kenway 1980; Crotty 1985; Panico 1980; Rogers 1989). What is less understood, however, is that Marx traced the possibility of stagnation and crisis in capitalism (M-C-M) to the ramifications of money's functions as a means of circulation, means of payment, and store of value in a system of "simple commodity production" (C-M-C), an exchange economy in which the production relations are unspecified or ambiguous. Moreover, within the conceptual framework of this exchange economy abstracted from specific class relations, Marx theorized the possibility of stagnation and crisis in terms that by 1933 had become important to Keynes: functions of money other than means of circulation (especially means o f hoarding, store of value, and unit of account), velocity of money, time, expectations, motivation of production, and illiquidity of fixed capital (Crotty 1985). After a synopsis of Marx's analysis of the C-M-C and M-C-M' circuits, this section will explore why in 1933 Keynes would incorporate Marx's capital circuits analysis and thus invite comparison of their methods of integrating real and monetary aspects of the economy. My purpose here is threefold: first, to articulate the similarities between Keynes' taxonomic critique of classical theory and Marx's analysis of money and capitalism's susceptibility to crisis; second, to suggest that, when he established a theoretical link to Marx in the 1933 draft, Keynes associated his analysis with a theory far more richly complex and elaborate than he realized; and, third, to explore aspects of conceptual and thematic consonance between variants of Post Keynesian economics that are open to class analytics and variants of Marxian economics that do not essentialize production relations and are open to the contradictory effectivities of money and finance. In volume 1 of Capital, Marx differentiated C-M-C from M-C-M as alternative sequences of processes and transactions, where C represents commodities and M, money. In the circuit C-M-C, an economic agent starts with a quantity of commodities (C), sells them for an amount of money (M), and then uses the money to purchase a quantity of another commodity. Metaphorically, Marx described the "metamorphosis" of the value embodied in commodities from a state of commodities to money and back to commodities. Presumably, the agent starts with more of the first commodity than desired or needed, and less of the second. However, in terms of embodied labor value, the first and second commodities are equivalent, and so both exchanges, C-M and M-C, are exchanges of equivalents. Therefore, C-M-C does not conceptualize any expansion of value, whether under exploitative conditions or not. In addition, money in C-M-C plays the strictly neutral role of medium of exchange. The circuit C-M-C may adequately describe the situation for a wage laborer, who sells the commodity labor-power in exchange for a money wage which in turn is used to purchase means of subsistence. (This situation corresponds to the "private consumer" in the last quoted passage from Keynes' 1933 draft. More on this follows.) But C-M-C inaccurately outlines the activities and motivations of an industrial capitalist, who starts with money capital (M), purchases labor-power and other productive commodities (C), puts these inputs to work in the production process, and then sells the produced commodities for money revenue (M). In contrast to the wage laborer, who sells in order to buy, the capitalist buys in order to sell; the wage laborer starts and ends with commodities, whereas the capitalist starts and ends with money. This is the basic distinction between C-M-C and M-C-M. To theorize exploitation and its centrality in capitalist production, Marx highlighted the production process (P) implicit in M-C-M. The resulting formulation, M-C...P... C'-M', outlines the "general circuit of capitalist production." It is in the production phase that the quantity of value contained in the productive commodities (C) becomes amplified ("valorized") into a larger quantity of value contained in the produced commodities (C'). The production process is the sphere where unpaid or surplus labor is performed and productive laborers are exploited. Marx used the augmented circuit M-C...P... C'-M' to convey that an exchange of equivalents may occur at the initial and final stages, M-C and C'-M', but also that wage laborers are exploited in the precise sense that the amounts of labor they perform and the value they create during p are larger than the value embodied by the goods they purchase with their wage. This is the most direct source of capitalist profit, according to Marx. In the crucial interval between M-C and C'-M', then, there occurs dual and simultaneous productions: produced commodities and surplus value. Marx argued that the failure of classical economics goes beyond the question of whether surplus value is created in capitalist production. As he copiously explained in Theories of Surplus Value, surplus value was invisible to classical theorists because they lacked the conceptual distinction between a good's usefulness in consumption ("use-value") and the value it commands in markets ("exchange-value"). Consequently, classical theorists also lacked the distinction between the actual labor performed and value produced by wage laborers (the unique use-value of labor-power) and the value commanded by their wage (the exchange-value of labor-power). Beyond the issue of surplus-value, classical theorists conflated the basic activities and motivations of capitalists with wage laborers who must sell something (labor-power) in order to secure their subsistence. That is, classical theorists missed a distinctive motivation of capitalists. Capitalists do not engage as such to maximize their possession of commodity capita l (indeed, excessive inventory capacity is a sign of inefficiency). Nor is their ultimate goal to accumulate productive capital (otherwise, for example, AT&T and Xerox would not have pared their operations in 2000 in search of their "core" business). Instead, a basic objective of capitalists is to maximize the difference between the M at the beginning of the circuit and the M' at the end, that is, the realized surplus value. In volumes 2 and 3 of Capital, Marx uses the M-C...P ... C'-M' circuit as a framework for a detailed analysis of the contradictions associated with (a) every transaction and phase of the general circuit, (b) the turnover rates of capital, (c) the distribution of surplus-value shares to secure conditions of surplus production and appropriation, and (d) the development of financial institutions and complex networks of credit-contracts. Within this capital circuits framework, Peter Kenway explored the congruence between Marx's and Keynes' theories of the crisis possibilities of capitalism. In "Marx, Keynes, and the Possibility of Crisis" (1980), Kenway analyzed a fundamental similarity in Marx's and Keynes' belief that a monetary theory of production--one in which money has operational importance regarding motives to produce--is necessary in order to theorize the possibility of crisis. In Kenway's view, Marx developed his theory of crisis potential in opposition to David Ricardo, who made two fundamental errors by (1) failing to distinguish between valorized commodities and mere products which embody only use-value and (2) failing to recognize that the contradictory need for commodities to undergo metamorphosis is a distinctive feature of capitalism relative to a barter economy. Keynes appeared to be in agreement with Marx, therefore, that the classical economists theorized an economic system lacking the fundamental characteristics of a monetary production economy, in which production is motivated by the desire for realized money-profit and not for use-values. Kenway concluded that at the "high point of possibility theory," Marx and Keynes emphasized the central role of production: its organization, the motivation for embarking upon it, the conditions which must prevail if its object is to be realized, and the determination of the aggregate level of production (Kenway 1980, 36). In Kenway's interpretation of Marx and Keynes, an adequate theory of capitalism's crisis "possibilities" must integrate money and capitalist entrepreneurial production in a manner that goes far beyond the issue of money neutrality. (2) In examining the common threads in Marx's and Keynes' analyses of capitalism's crisis possibilities, Kenway considered an economic system understood in terms of the circuit M-C-M'. Moreover, as Kenway argued, Marx's distinction between C-M-C and M-C-M' is consistent with Keynes' distinction between cooperative economy and entrepreneur economy, that is, a prereconciled money-neutral economy versus a monetary production economy. Indeed, Kenway shed important light on why Keynes thought it fitting to compare his taxonomic analysis to Marx's capital circuits analysis. However, what about the crisis potential in a C-M-C economy? What is the significance of money, separation of purchase and sale, and metamorphosis in a C-M-C economy, that is, in an economy that is not (yet) a production-for-money-profit economy? These questions have been addressed by James Crotty. In "The Centrality of Money, Credit, and Financial Intermediation in Marx's Crisis Theory" (1985), Crotty analyzed Marx's method of theorizing the rigidities and crisis potential engendered by the monetized and entrepreneurial aspects of commodity circulation considered in abstraction from production. (3) By so doing, he further elucidated what is implicated by Keynes' reference to Marx. In Crotty's interpretation, Marx traced capitalism' s crisis potential to the insertion of money as a medium of exchange into what would otherwise be a barter system and theorized how this crisis potential increases in complexity and potential severity with the multiplication of the functions of money and the development of the credit system and institutions of financial intermediation--in short, with the development of capitalism. Marx's analysis develops in three major phases: (1) the implications of money's function as means of circulation in the C-M-C circuit, (2) the additional implications of money's function as means of payment in C-M-C, and (3) the complications resulting from the contradictory unity of circulation and production embodied in the M-C-M circuit. In Marx's analysis, the insertion of money as a means of circulation into a barter transaction (C-C) does much more than alleviate the inconvenient, specialization-retarding, and costly necessity to establish a "double-coincidence of wants." Marx demonstrated that, even in a system of simple commodity production (4) (C-M--C) in which money functions as a means of circulation, the separation of sale (c-M) and purchase (M-C) in time and space implies the existence of a "network of mutual interdependence" which embodies two contradictions. First, while the performance of either sale or purchase can occur independently of the other, this independence is transitory, because sale or purchase--even in an economic system of simple commodity production--is somewhat meaningless except as its performance forms a link in a chain of exchanges within a production-exchange circuit. The situation in Marx's point is analogous to passing water from one firefighter to another in a bucket brigade: each exchange is meaningless un less it leads to further exchanges. Of course, the actual economic situation is more tenuous, because the exchanges in a bucket brigade are motivated by a unifying goal, whereas in even the simplest economy, the agents' motivations are more individualistic. Second, money functioning as means of circulation acts as a "tie that binds the economic agents" together, but the ties are potentially explosive and disruptive not only between any two agents engaged in exchange but also to the entire network. (5) In a critique of Say's law, Marx said in volume 1 of Capital, "No one can sell unless someone else purchases. But no one directly needs to purchase because he has just sold" (1977, 209). In chapter 3 of that volume, Marx drew out the theoretical implications of the nonnecessity of using money acquired through sale to make a purchase. To the extent that money can thus be withdrawn from circulation and held as a store of value, money functions as a means of hoarding. In addition, money so held constitutes wealth, and the length of time withheld until re-injection back into commodity circulation via use in purchase implies variable velocity. In an elemental sense, crisis can result if velocity--the time during which money "stands suspended between acts of exchange" (Crotty 1985, 53)--slows sufficiently to reflect a general overproduction or glut. Furthermore, the separation of purchase and sale introduces time as a significant variable, and time in turn logically implicates two additional aspects of simple commodity production. That is, if some period of time can elapse between the acquisition of money through sale and the spending of that money in purchase, then there can be a divergence between the value that producers at the time of production planning expect to recoup through sale versus the actual price received in market exchange. Second, this divergence implies a separation between two additional functions of money. Money as a measure of value functions to help commodity producers form expectations as to the value of their commodities when they reach market sometime in the future, while at the moment of market exchange money functions as a means of circulation. The separation of sale and purchase thereby introduces (1) expectations at the levels of planned versus actually realized value and (2) the expansion of implicit functions of money. In t he same stroke, Marx introduced commodity producers' expectations as an important factor implied by "the passage of time between the decision to produce and the sale of the product." (6) Still in chapter 3 of Capital, Marx said that the price of a commodity may express both the magnitude of value of i.e., the labor value embodied in the commodity and the greater or lesser quantity of money for which it can be sold under the given circumstances. The possibility, therefore, of a quantitative incongruity between price and the magnitude of value, i.e., the possibility that the price may diverge from the magnitude of value, is inherent in the price-form itself. This is not a defect, but, on the contrary, it makes this form the adequate one for a mode of production whose laws can only assert themselves as blindly operating averages between constant irregularities. (1977, 196) Before theorizing capitalism (M-c-M'), that is, still within a model of simple commodity production (C-M-c), Marx called attention to the lack of a precoordinating mechanism that could ensure a balance between commodity supplies and demands such that no hoarding would be needed and such that velocity would be anything less than its maximum rate. The fact of nonpurchasing, or hoarding, implies the possibility of crisis as a characteristic aspect of simple commodity production in contrast to a barter system. Moreover, Marx's point above can be made in terms of money's various functions: "If the value actually received at sale is greater than, equal to, or not much below expectations, reproduction need not be disrupted. But if conditions change substantially between the time that money acts as a measure of value and a means of circulation, a crisis could develop" (Crotty 1985, 54). All of these aspects--hoarding, wealth, velocity, lack of a precoordinating auctioneer-like mechanism, time, expectations--Marx conceptualized in the first three chapters of Capital, where he was establishing a theory of simple commodity production and circulation as a structural framework for theorizing capitalist production relations. The next step in the development of that framework, Crotty argued, is the incorporation of the means of payment function of money, which forms a conceptual link between credit, investment, price expectations, contracts, the illiquidity of fixed capital, financial fragility, and crisis (1985, 55). In volume 2 of the Theories of Surplus Value, which extends the analysis begun in Capital, Marx analyzed the implications of incorporating the means of payment function of money into the abstract model of simple commodity exchange. Money serves as a means of payment when, for example, a commercial contract is made between a producer-seller of a commodity and a buyer who initiates a purchase with a debt contract and later completes the purchase by making a money payment, thus amortizing the debt. In an exchange economy in which money thus serves as a means of deferred payment, money enshrouds the following contradiction. On one hand, money functioning as means of payment facilitates commerce, production, capital accumulation, market expansion, and general economic expansion. It does so in part by allowing sale and purchase to occur without simultaneous payment but merely with promises to pay in the future. On the other hand, this possibility has a potentially devastating negative side: the development of a web of interlocking commitments to pay and repay (1) within a certain time frame and (2) with sensitivity in the value/price matrix connecting (a) the value expected at time of production plan, (b) the price expected at time of purchase on credit, and (c) the price actually received at the time of payment. The last two prices reflect money's means of payment function. Crotty illustrated the resulting complexity as follows: I nstead of two separate acts required to complete circulation--C-M and M-C--we now have three--C-D; D-M; and M-D, where D stands for a debt contract. Agent A sells a commodity to agent B on credit; a contract, D, alienates his product. Agent B now must resell this commodity (or one produced using it as input) to some agent C in order to obtain the money needed as means of deferred payment to fulfill his contract with A. (1985, 58-59) The following diagram traces the exchanges described above (to avoid confusion, Crotty's agents A, B, and C will be replaced by X, Y, and Z): Figure 1. Agent X Agent Y Agent Z commodity debt contract C D Stage l D C M Stage 2 M C A's commodity or output produced with it Stage 3 M money as means of payment Without money functioning as means of payment, the commodity-for-money (C-M) exchange would take place in only one stage. The outcome of this simple exchange would be that agent X would end up with money (M) and agent Y with commodities (C). However, the operation of debt contracts allows agent Y to acquire (in stage 1) agent X's commodities (C) in exchange for a promise to pay in the future (D), where agent Y's ability to repay is hinged to that agent's ability to sell the acquired commodity (either as is or incorporated into another good) to some third agent Z (in stage 2). Agent X thus receives payment for the commodity (in stage 3) only after agent Z pays agent Y, who then can pay agent X as promised. By acquiring the means of payment function, money transforms a one-stage transaction (commodity-for-money) into a three-stage transaction. This transformation engenders a contradiction. The financial innovation of debt contracts lubricates commerce, of course, by allowing an industrial capitalist (agent Y), to acquire a key input from another industrial capitalist (agent X) with a debt contract rather than an up-front payment. The agent Y capitalist can now use that input in the production of another commodity, which when sold to consumers (multiple agents Z) raises the revenue from which to repay agent X. (7) The contradiction, however, is that the resulting web of commitments can ensnare both capitalists if the actual price at sale falls short of the expectations of either capitalist (or both), in which case agent X will be left holding a debt contract. Money as means of payment facilitates commerce, but only at the cost of increased time and complexity of circulation: "Thus, the degree of systematic dependence of each agent on all others is extended by the same conceptual phenomenon that lengthens the time it takes to circulate a given set of commodities" (Crotty 1985, 59). With the incorporation of money as means of payment into the exchange economy model, Marx argued, the risk rises that the network of reciprocal obligations can transform from a sturdy honeycomb to a house of cards if a significant number of contracts fail to be paid within the agreed upon price and time structure. Moreover, the more-or-less successful reproduction over time of the network of credit-contract obligations contradictorily increases both the size of the potential house of cards and the likelihood that the house of cards will fall apart, either partially or worse. The growing complexity of the credit-contract nexus is both a facilitator of economic expansion and a harbinger of the economy's spreading fragility: Future commitments build around any value structure which is maintained for some time; the longer the structure holds, the more extensive the web of interlocked commitments that build around it. Moreover, the longer a structure is maintained, the more confident agents become that it will continue to hold. Increased confidence, in turn, leads to longer time horizons on contracts and therefore to more restrictive conditions for crisis avoidance. (Crotty 1985, 60) In other words, reproduction validates past decisions and promotes confidence, which encourages further expansion of the credit-contract network. Time, history, and historic time enter center stage in Marx's theory of crisis. In the above scenario, an industrial capitalist (agent Y) begins a production cycle by acquiring an input on credit and would complete the cycle by successfully paying off the debt within an agreeable price and time structure. What begins as a basic complication--the requirement that at least two sales be achieved to close a debt-financed commodity exchange--can expand systemwide as reproduction cycles are linked together over time, thus creating the conditions of a financial and economic crisis: " C ontracts, especially credit contracts, link reproduction cycles together, making reproduction in one period depend on reproduction cycles that took place many periods past: reproduction is now hostage to its own history" (Crotty 1985, 64, emphasis added). To sum, in the first three chapters of Capital Marx theorized the susceptibility to crisis of a simple commodity exchange economy, conceptualized in abstraction from specific production or class relations. Marx demonstrated that when money functions as a means of circulation and a means of payment, it separates sale and purchase in time and space, and by doing so it takes on the additional functions of means of hoarding and store of value. Moreover, money in a simple exchange economy adds to a system's financial fragility by making it possible for a sale to be made without a simultaneous payment. The resulting nexus of contractual obligations depends for its reproduction upon the payment of debts according to an agreed upon framework of price and time; that is, if the prices eventually paid are less than those which would have warranted the prior production or if the payments are not made within the necessary time frame, then the result can be disruptions in the credit-contract network and crisis. On the basis of his analysis of simple commodity circulation and the possibility of crisis therein, Marx proceeded to develop an analysis of the capitalist relations of production in terms of the circuit M-C-M. This does not mean, however, that M-C-M completely supersedes C-M-C in capitalism. In fact, Marx theorized capitalism as a contradictory unity of the two circuits. That is, capitalism is conceived as a system in which economic agents are engaged in different but equally necessary modes of participation. Moreover, these different modes of participation in the economy are expressions of fundamentally different motivations and objectives. Returning to an earlier point, productive laborers sell their labor-power (C) to acquire income (M) with which they purchase their means of subsistence (C). Conversely, the buyers of this labor-power, the industrial capitalists, are in the business of transforming their money capital (M) into productive commodity capital (C, consisting of labor-power and the appliances a nd materials of production) and then selling the produced and valorized commodities (C') in order to realize the embodied surplus value (the delta M contained in M', where delta M = M' - M). Keynes understood this difference, which is precisely what he referred to in the provocative quotation in which he credited and immediately trivialized Marx. The "standpoint of the private consumer" corresponds to the case of "exchanging commodity (or effort) for money in order to obtain another commodity (or effort)." In contrast, "the attitude of business" is of "parting with money for commodity (or effort) in order to obtain more The firm is dealing throughout in terms of sums of money. It has no object in the world except to end up with more money than it started with. That is the essential characteristic of an entrepreneur economy. (Keynes 1973, 89) Marx demonstrated that classical theory conflates the motivations and challenges of utility-seekers engaged in C-M-C with those of profit-seekers engaged in M-C-M': Say's Law holds that a sale is invariably followed by a purchase of equal amount; in other words that there can be no interruption of the circulation C-M-C, hence no crisis and no overproduction ... U nder simple commodity production such an interruption seems unlikely; Say's Law transforms this into the dogma of impossibility. The correct thesis that crises and overproduction are unlikely under simple commodity production becomes the false thesis that crises and overproduction are impossible under all circumstances. By accepting Say's Law, sometimes explicitly and sometimes tacitly, the classical economists barred the way to a theory of crises; as a result their contributions to the subject were fragmentary, unrelated, and of small permanent value. (Sweezy 1970, 137). "No one recognized this more clearly than Marx," Paul Sweezy went on to say. (8) In the Ricardian version of Say's law, sellers always intend to purchase and money is only a medium of exchange. But, as we saw above, Marx showed that money separates sale and purchase, and hence the function of money as means of payment contains a potential role in crisis resulting from the fact that one does not have to buy just because she has sold. In addition, Marx theorized capitalism as a contradictory unity also of commodity circulation and commodity production. One is a condition of the other, in that profitable capitalist commodity production requires a monetized system of exchange and credit, while a monetary and credit system requires commodity production for profit. Moreover, this mutual constitution carries various and complex contradictions. As Crotty showed, Marx's analysis of simple commodity exchange creates the possibility of financial fragility and crisis. To this analysis Marx added an analysis of various forms of crisis more directly related to commodity production: (1) crisis stemming from disproportionality (in which the absence of an auctioneer or precoordinating mechanism results in disruptive mismatches between demands and supplies); (2) crisis resulting from a high rate of accumulation (which heats up wage rates and cools down profit rates); and (3) crisis associated with a falling rate of profit (in which a rising organic compos ition of capital squeezes the generation of surplus value). To see how the spheres of circulation and production are brought together by Marx, consider the following passage from Capital, volume 3, where Marx was discussing the consequences of a falling rate of profit: Then there is the added complication that the process of reproduction is based on definite assumptions as to prices, so that a general fall in prices checks and disturbs the process of reproduction. This interference and stagnation paralyses the function of money as a medium of payment, which is conditioned on the development of capital and the resulting price relations. The chain of payments due at certain times is broken in a hundred places, and the disaster is intensified by the collapse of the credit system. (Sweezy 1970, 152) To the Rescue or to the Abyss? The early 1930s were a crucial period for Keynes. In 1932 and 1933, he achieved major theoretical breakthroughs, including effective demand and liquidity preference (Skidelsky 1992; Clarke 1998). And in the midst of the political unrest during this period, Keynes regarded Marxism as an expression of idealism (i.e., compassion for those who suffered economically) and of a spiritual vacuum that inflicted the young: "What Marxism supplied was a language of moral disgust against bourgeois softness and Britain's decadence dressed up as science; communism, a call to action which fused personal and social salvation" (Skidelsky 1992, 516). However, Keynes could not take Capital seriously as an economic analysis. In a 1934 letter to George Bernard Shaw (Dec. 2, 1934), Keynes wrote: My feelings about Das Kapital are the same as my feelings about the Koran. I know that it is historically important and I know that many people, not all of whom are idiots, find it a sort of Rock of Ages and containing inspiration. Yet when I look into it, it is to me inexplicable that it can have this effect. Its dreary, out-of-date, academic controversializing seems so extraordinarily unsuitable as material for the purpose...I am sure that its contemporary economic value (apart from occasional but inconstructive and discontinuous flashes of insight) is nil. (Skidelsky 1992, 520) Nonetheless, it is difficult to believe that Keynes would have given Marx any credit for his "pregnant observation" in an offhand, unstudied manner. In the absence of evidence that Keynes in fact studied Marx, (9) however, we can only surmise that Keynes indeed found in Capital more than "flashes of insight." Perhaps he found a reasonable theory of stagnation and crisis potential, one constructed with concepts important to Keynes, including complexly and contradictorily functioning money, separation of purchase and sale, velocity of money, turnover rates of capital, real historical time, irreversible decision making regarding investment in long-lived and illiquid capital, motivation of production, advanced payment systems that support a credit-contract structure, and complex financial intermediation. Why, then, did Keynes use Marx's capital circuits apparatus in the 1933 manuscript, only later to omit the three-part taxonomy altogether? The evidence supports the view that, at least by the early 1930s, Keynes had found in Marx's work a serviceable analysis of money, credit, and the possibility of crisis. (10) Marx's analysis was particularly useful, as evidenced in the 1933 manuscript, for demonstrating the restrictiveness of classical economics compared with Keynes' general theory. Yet bringing his heuristic use of Marx to publication was problematic because Marx's analysis logically leads to a reckoning with capitalism's unmanageability. By withdrawing the favorable reference to Marx, Keynes the savior could attempt his uprooting of classical economics in a manner that avoids leading his fellow economists toward the abyss of capitalism's uncontrollable crisis-proneness--at least crisis-proneness as conceived in Marx's terms. Still, the correspondence between the theoretical objects in Marx's writings and in Keynes' 1933 draft chapters is striking. To repeat, Marx showed that by separating purchase and sale, money supports the nonnecessity of purchasing and the possibility of hoarding. Second, also by decoupling purchase and sale, money makes possible a divergence between the price expected at the time of production plan and real investment versus the price received on market. Along the way, Marx brought key objects onto the analytical stage: hoarding, money as asset, wealth, time, velocity, and expectations--all this by considering money as a means of circulation. By incorporating the means of payment function of money, Marx showed that the possibility of hoarding and price divergence engenders the possibility of systemic fragility, which may result as the contradictory potential for a self-supporting edifice of interlocking credit contracts to deteriorate into a pyramid of stacked shacks. For his part, Keynes was especially interested in drawing out two aspects of capitalism's monetized nature. First, money offers a refuge from participation in long-term real investment. Second, capitalists' principal objective is the expansion of capital; they want to end up with more money than they entered with. They do not care primarily about how they achieve this growth of capital--indeed, the methods seem to grow in variety daily. This variety means, however, that when making money through real investment, production, and sale--that is, by acting as industrial capitalists--becomes unattractive relative to alternative paths of money-making, capitalists have both the desire and the opportunity to cast their line in other waters. This includes expanding their position in short-term liquid assets. These shared objects bring into focus not only Keynes' reference to Marx in the 1933 draft but also the first footnote in The General Theory, in which Keynes announced that he would adopt, with modification, Marx's meaning of "classical" theory. Indeed, that footnote provides the only visible vestige in The General Theory of Keynes' analytical link to Marx. It is in this context that we should understand the comparable opposition of Marx and Keynes to Say's law, the appropriateness of "The Monetary Theory of Production" as The General Theory's original title, and Keynes' corrective QJE article of 1937. "Why would anyone outside a lunatic asylum wish to use money as a store of wealth?" This often quoted question from the QJE article (216) provides a rhetorical exclamation point to a clarification of arguments made in The General Theory, clarification necessitated by misreadings by J. R. Hicks and others. In P. Davidson's words, Keynes' theoretical analysis was immediately shunted onto a wrong track by the writings of Hicks, Samuelson, Mead and others who claimed to have the analytical key to explain Keynes' general system. The result was that Keynes' revolution was aborted almost as soon as it was conceived. (1994, 10) The misinterpretation centrally involved the investment decision, uncertainty, liquidity preference, and their collective implications for stagnation and unemployment. Moreover, as the taxonomic analysis of 1933 suggests, Keynes' basic problem with classical theory parallels Marx's: by conforming to the C-M-C cycle, classical theory implies that the circuit of production and exchange is closed and immune to disruption. For Keynes and Marx, the closed nature of the circuit is what is signified by Say's law, which Keynes expressed as follows: T he rewards of the factors of production must, directly or indirectly, create in the aggregate an effective demand exactly equal to the costs of the current supply, i.e. that aggregate effective demand is constant; though a want of balance due to temporary miscalculation as to the strength of relative demands may bring losses in certain directions balanced by equal gains in other directions, which losses and gains will tend in the long run to guide the distribution of productive resources in such a way that the profitability of different kinds of production tends to be equalised. (1979, 80) For both Marx and Keynes, Say's law depends upon the implicit role of money and the motivation of production. In contrast to C-M-C, M-C-M' conveys that capitalists are primarily concerned with the expansion of money, so that when the opportunities for production for profit are relatively unattractive (in amount, predictability, or both), capitalists will have a motive to postpone investment. Moreover, its store of value function gives money (i.e., short-term financial assets) the attribute of being a means of hoarding and thus of withdrawing money from the circulation of commodities and capital. In other words, understanding capitalism in terms of M-C-M' entails the recognition of the nonnecessity of investing in long-term capital assets. In addition, once it is regarded as an alternative asset to fixed capital structures, money gives capitalists a vehicle for postponing investment and waiting for improved investment opportunities. For Keynes, therefore, it would not be proper to hold a general view of the ca pitalist economy in which supply creates its own demand but rather one in which "expenditure creates its own income, i.e. an income just sufficient to meet the expenditure" (1979, 80). Whether or not this income is actually used to support a full-employment level of effective demand is an open, not predetermined, question." Finally, we can suppose that for Keynes a central analytical unit of analysis became the period that might be called a monetary production cycle, which begins with the firm's securing of credit and ends with the repayment of debt. Between these endpoints in the cycle, borrowed plus internal funds are used to purchase fixed capital structures, the purchased factory capacity is constructed and equipment installed and brought on line, current workers are retrained or new workers with the needed skills are hired, the inventory management system is adjusted, and so on--all this before the investment project can yield units of output and the firm can attempt to sell the output. We can understand Keynes' writings on long-term expectations and their effect on the investment decision and liquidity preference as an effort to draw economists' attention to the standpoint of entrepreneurs at the precipice of the decision, made prior to the commencement of the monetary production cycle, to take on additional debt to financ e real investment. (12) Hence "The Monetary Theory of Production" was appealing as a possible title for The General Theory. In effect, Keynes concurred with Marx regarding the contradictory nature of money functioning as a means of payment and unit of contracts. On one hand, credit money supports firms' capital expenditures in excess of their internal funds. On the other hand, debt-financed buying-in-order-to-sell (M-C-M) raises the stakes of firms' ability to make reliably accurate forecasts of the economic conditions that would warrant or frustrate the firms' decision to borrow funds and set the monetary production cycle in motion. Moreover, the stakes rise not only for the firm that must repay debts but also for the economic system made increasingly fragile by the growing network of monetary production cycles linking more and more firms. (13) That is, money as a means of payment connects one firm's ability to consummate its debt obligations to other firms' ability to engage in their own cycles of borrowing, investing, and repaying. To return to an earlier point, the resulting credit-contract network would grow in both scale and fragility. The contradictory nature of the monetary production cycle forms the context for Keynes' insights on expectations, uncertainty, and the investment decision. In particular, gaining knowledge of the conditions in a fictitious world of Keynes' long period (14) would be hard enough; forming expectations about conditions destined to change during the monetary production cycle would be so daunting that "animal spirits" must be mustered if any firm is to proceed with an investment project. This paper may shed new light on Keynes' evolving concern with employment, interest, and money. According to various historians of Keynes' thinking, in the Treatise he generally disfavored wage-cutting strategies to stimulate domestic competitiveness (Clarke 1998). Moreover, his concerns about persistent unemployment grew during the 1920s, partly because the unemployment rate in England exceeded 10 percent during most of that decade and the early 1930s. In Skidelsky's view, this greater concern over unemployment "led to a shift in analytical method" (1992,318). Indeed, from A Tract on Monetary Reform (1923) to The General Theory, Keynes' prime concern seems to have progressed from money neutrality to the operational significance of money in influencing aggregate output, income, and employment (Davidson 1994; Skidelsky 1992; Carvahlo 1992; Clarke 1998). It seems reasonable to understand Keynes' work on effective demand and liquidity preference in the context of his deepening concerns about unemployment. From t he end of The General Theory of 1936: The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated--and, in my opinion, inevitably associated--with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom. (381, emphasis added) In this single passage Keynes expressed his concerns about social unrest resulting from high and persistent unemployment, as well as his awareness of international political volatility, faith in idealism, and fundamental commitment to capitalist individualism. These comments should not obscure key theoretical themes connecting Keynes and Marx as differently motivated critics of classical theory. To wit, Marx's analysis of the functions of money in a system of simple commodity exchange and his analysis of the motivations of production in a capitalist economy are consonant with certain objectives important to Keynes: (1) to conceptualize classical economics as a system in which money plays a very limited role and capitalists' motivation of production is oversimplified and (2) to provide a theoretical foundation for the analysis of investment and liquidity preference in an entrepreneur or monetary production economy, in which the possible outcomes include stagnation and crisis. Notes (1.) The second postulate: "The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of labor" (Keynes 1964, 5). (2.) See Rogers 1989, especially chapter 7, for an explication of the required properties for a monetary analysis of capitalism and the significance of P. Kenway's analysis in this context. (3.) Contrary to many Marxist interpretations, Karl Marx's theory of capitalism is not reducible to a theory of production but rather is a complex combination of a theory of production and a theory of circulation. Marx meant to draw our attention to the sphere of production to counter the classical blindness to the appropriation of surplus value as the source of profit. Indeed, his most distinctive contribution to economics may be the analysis in Capital of the capitalist class process, the process of surplus-value production, appropriation, and distribution. Yet important contributions to our understanding of capitalism are to be found also in Marx's theory of circulation, which he begins to produce in part 1 of volume 1 as a theoretical framework for the analysis of production. For an antiessentialist interpretation of Marx consistent with J. Crotty's, see Resnick and Wolff 1987. (4.) Following Marx, Crotty referred to C-M-C as a model of "simple commodity production." As Crotty made clear, however, what Marx was analyzing was a system of commodity circulation. (5.) See Crotty 1985, 52 and 57. (6.) See Crotty 1985, 55. (7.) To be precise, the productive inputs acquired by the agent Y capitalist are included in the first C in the circuit M-C...P...C'-M'. The acquired inputs are used in production. P. The produced commodities, c', are then sold in the market for M'. Viewed from the perspective of the agent Y capitalist, this M' corresponds to the M in stage 2 in the diagram. (8.) P. Sweezy's classic text on Marxian economics is cited here in part to emphasize the theoretically elemental nature of (1) the C-M-C versus M-C-M distinction in Marx and (2) its invocation in Keynes' taxonomic distinctions. (9.) Allyn Abbott Young is an interesting possible link between Marx and Keynes. According to Perry Mehrling (1997), Young's lifelong project was to reconcile the operation of financial institutions and structures with the larger social goals of economic stability and growth, both domestically and internationally. This agenda to harmonize "the money interest and the public interest" resonates with various elements of Deweyan pragmatism (Mehrling 1997, esp. 6, 15-27, 54, 60, 65). Young shared with Marx and Keynes a deep commitment to integrating economic analysis within institutional, political, and historical contexts. In addition, he was apparently impressed by Marx's "exceptional treatment of money and credit" in volumes 2 and 3 of Capital (Mehrling 1997, 229-30), and he was an early supporter of Keynes' work on probability and uncertainty (Mehrling 1997, 29 and 231). Moreover, Young's theory of business cycles and crisis showed similarities to Marx and presaged Keynes in terms similar to the argument prese nted in this article. Specifically, Young attributed real crises to distortions in the structure of relative prices, more precisely "the difference between prices and cost of production in general in their period of advance" (Mehrling 1997, 42-43). Second, Young advocated for an international monetary standard on the grounds that such a standard makes possible economic calculation and "so supports the complex structure of contracts that link different businesses together" (Mehrling 1997, 55). Third, Young's theory of business downturns seems to combine Marx's disproportionality crisis and Keynes' concept of investment under conditions of uncertainty: "In his mature thought, Young traced aggregated fluctuations to mistaken business decisions that build up until the mismatch between the structure of productive capacity and the structure of demand causes a downturn in business" (Mehrling 1997, 72). (10.) In addition to Crotty and Kenway, others who illuminate the issue include F. Carvahlo (1992), P. Clarke (1998), C. Panico (1980), and R. Skidelsky (1992). (11.) R. Clower (1976) made a similar point by transforming Say's law into a more limited proposition that supply creates its own income (purchasing power), which may or may not generate sufficient demand to prevent net oversupply. In addition, the present view regarding Keynes' critique of Say's law is consistent with much of Post Keynesian thought; for prime examples, see Davidson 1978 and 1994, Dow 1996, and Minsky 1986, 1985, and 1975. (12.) See Panico 1980 for a systematic extension of the circuit M-C...P...C'-M' to include borrowing (at the beginning of the industrial circuit) and repayment (at the end), thus transforming the industrial circuit to M-M-C...P...C'-M'-M'. In this way, Panico highlighted Marx's analysis (in Capital, volume 2) of financial capitalists and their class relations with industrial capitalists. C. Rogers (1989) analyzed the significance of Panico's analysis in showing what Marx contributed toward defining the properties of monetary analysis. (13.) In volume 2 of Capital Marx thoroughly analyzed the contradictions inherent in the "turnover" of capital over successive production cycles. (14.) See Carvahlo 1992 for the meaning to Keynes of "long period" in contrast to "long run" or "long term." References Carvahlo, F. Mr Keynes and the Post Keynesians: Principles of Macroeconomics for a Monetary Production Economy. Brookfield, Vt.: Edward Elgar, 1992. Clarke, P. The Keynesian Revolution and Its Economic Consequences: Selected Essays. Northampton, Mass.: Edward Elgar, 1998. Clower, R. "Keynes and the Keynesians: A Theoretical Appraisal." In Macroeconomic Themes, edited by M. J. C. Surrey. Oxford: Oxford U. Press, 1976. Crotty, J. "The Centrality of Money, Credit, and Financial Intermediation in Marx's Crisis Theory: An Interpretation of Marx's Methodology." In Rethinking Marxism: Essays for Harry Magdoff and Paul Sweezy, edited by S. Resnick and R. Wolff. Brooklyn: Autonomedia, 1985. Davidson, P. Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-First Century. Brookfield, Vt.: Edward Elgar, 1994. -----. Money and the Real World. 2nd ed. New York: Wiley, 1978. Dow, S. The Methodology of Macroeconomic Thought. A Conceptual Analysis of Schools of Thought in Economics. Northampton: Elgar, 1996. Kahn, R. "Some Aspects of the Development of Keynes' Thought." Journal of Economic Literature 16 (June 1978): 545-59. Kenway, P. "Marx, Keynes, and the Possibility of Crisis." Cambridge Journal of Economics, no.4(1980): 23-36. Keynes, J. The General Theory of Employment, Interest, and Money. 1936. Reprint, London: Macmillan, 1964. -----. The Collected Writings of John Maynard Keynes. Vol. 29, The General Theory and After: A Supplement. Edited by D. Moggridge. London: Macmillan, 1979. -----. 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Press, 1975. Panico, C. "Marx's Analysis of the Relationship between the Rate of Interest and the Rate of Profits," Cambridge Journal of Economics 4(1980): 363-78. Pigou, A. C. Mr. J. M Keynes' General Theory of Employment, Interest, and Money. London: Macmillan, 1950. Resnick, S., and Wolff, R. Knowledge and Class: A Marxian Critique of Political Economy. Chicago: University of Chicago Press, 1987. Rogers, C. Money. Interest, and Capital: A Study in the Foundations of Monetary Theory. Cambridge: Cambridge U. Press, 1989. Skidelsky, R. John Maynard Keynes: The Economist as Saviour 1920-1937. London: Macmillan, 1992. Sweezy, P. The Theory of Capitalist Development. New York: Monthly Review, 1970.
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