[OPE-L:7427] RE: Aoki on money II

From: A.B.Trigg@open.ac.uk
Date: Thu Jul 18 2002 - 04:10:33 EDT

I also found the Aoki piece very interesting. Can I try a question out on
you? Aoki argues that C-M-C, simple commodity production, is Marx's starting
point in the first three chapters of Capital, Volume 1. Now this is is a
closed system, a closed circuit of commodities in which there is an
equilibrium solution. I agree that once money is introduced in M-C-M' then a
more open system is introduced, but as a METHODOLOGICAL STARTING POINT a
closed equilibrium model is where Marx builds from.
Any thoughts on this Rakesh, or others, would be gratefully received, as

> -----Original Message-----
> From:	Rakesh Bhandari [SMTP:rakeshb@stanford.edu]
> Sent:	06 July 2002 19:17
> To:	ope-l@galaxy.csuchico.edu
> Subject:	[OPE-L:7406] Aoki on money II
> 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
> 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
> 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
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>    Crotty, J. "The Centrality of Money, Credit, and Financial
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