[OPE-L:7406] Aoki on money II

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Sat Jul 06 2002 - 14:16:50 EDT

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

   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

   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,

   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
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,

   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

   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

   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.


   (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

   (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."


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