Rakesh. 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 always. Andrew. > -----Original Message----- > From: Rakesh Bhandari [SMTP:email@example.com] > Sent: 06 July 2002 19:17 > To: firstname.lastname@example.org > 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 > QJE > article of 1937. "Why would anyone outside a lunatic asylum wish to use > money > as a store of wealth?" This often quoted question from the QJE article > (216) > provides a rhetorical exclamation point to a clarification of arguments > made > in The General Theory, clarification necessitated by misreadings by J. R. > Hicks and others. In P. Davidson's words, > > Keynes' theoretical analysis was immediately shunted onto a wrong track > by > the writings of Hicks, Samuelson, Mead and others who claimed to have the > analytical key to explain Keynes' general system. The result was that > Keynes' > revolution was aborted almost as soon as it was conceived. (1994, 10) > > The misinterpretation centrally involved the investment decision, > uncertainty, liquidity preference, and their collective implications for > stagnation and unemployment. > > Moreover, as the taxonomic analysis of 1933 suggests, Keynes' basic > problem > with classical theory parallels Marx's: by conforming to the C-M-C cycle, > classical theory implies that the circuit of production and exchange is > closed > and immune to disruption. For Keynes and Marx, the closed nature of the > circuit is what is signified by Say's law, which Keynes expressed as > follows: > > T he rewards of the factors of production must, directly or > indirectly, > create in the aggregate an effective demand exactly equal to the costs of > the > current supply, i.e. that aggregate effective demand is constant; though a > want of balance due to temporary miscalculation as to the strength of > relative > demands may bring losses in certain directions balanced by equal gains in > other directions, which losses and gains will tend in the long run to > guide > the distribution of productive resources in such a way that the > profitability > of different kinds of production tends to be equalised. (1979, 80) > > For both Marx and Keynes, Say's law depends upon the implicit role of > money > and the motivation of production. In contrast to C-M-C, M-C-M' conveys > that > capitalists are primarily concerned with the expansion of money, so that > when > the opportunities for production for profit are relatively unattractive > (in > amount, predictability, or both), capitalists will have a motive to > postpone > investment. Moreover, its store of value function gives money (i.e., > short-term financial assets) the attribute of being a means of hoarding > and > thus of withdrawing money from the circulation of commodities and capital. > In > other words, understanding capitalism in terms of M-C-M' entails the > recognition of the nonnecessity of investing in long-term capital assets. > In > addition, once it is regarded as an alternative asset to fixed capital > structures, money gives capitalists a vehicle for postponing investment > and > waiting for improved investment opportunities. For Keynes, therefore, it > would > not be proper to hold a general view of the ca pitalist economy in which > supply creates its own demand but rather one in which "expenditure creates > its > own income, i.e. an income just sufficient to meet the expenditure" (1979, > 80). Whether or not this income is actually used to support a > full-employment > level of effective demand is an open, not predetermined, question." > > Finally, we can suppose that for Keynes a central analytical unit of > analysis became the period that might be called a monetary production > cycle, > which begins with the firm's securing of credit and ends with the > repayment of > debt. Between these endpoints in the cycle, borrowed plus internal funds > are > used to purchase fixed capital structures, the purchased factory capacity > is > constructed and equipment installed and brought on line, current workers > are > retrained or new workers with the needed skills are hired, the inventory > management system is adjusted, and so on--all this before the investment > project can yield units of output and the firm can attempt to sell the > output. > We can understand Keynes' writings on long-term expectations and their > effect > on the investment decision and liquidity preference as an effort to draw > economists' attention to the standpoint of entrepreneurs at the precipice > of > the decision, made prior to the commencement of the monetary production > cycle, > to take on additional debt to financ e real investment. (12) Hence "The > Monetary Theory of Production" was appealing as a possible title for The > General Theory. > > In effect, Keynes concurred with Marx regarding the contradictory > nature of > money functioning as a means of payment and unit of contracts. On one > hand, > credit money supports firms' capital expenditures in excess of their > internal > funds. On the other hand, debt-financed buying-in-order-to-sell (M-C-M) > raises > the stakes of firms' ability to make reliably accurate forecasts of the > economic conditions that would warrant or frustrate the firms' decision to > borrow funds and set the monetary production cycle in motion. Moreover, > the > stakes rise not only for the firm that must repay debts but also for the > economic system made increasingly fragile by the growing network of > monetary > production cycles linking more and more firms. (13) That is, money as a > means > of payment connects one firm's ability to consummate its debt obligations > to > other firms' ability to engage in their own cycles of borrowing, > investing, > and repaying. To return to an earlier point, the resulting credit-contract > network would grow in both scale and fragility. > > The contradictory nature of the monetary production cycle forms the > context > for Keynes' insights on expectations, uncertainty, and the investment > decision. In particular, gaining knowledge of the conditions in a > fictitious > world of Keynes' long period (14) would be hard enough; forming > expectations > about conditions destined to change during the monetary production cycle > would > be so daunting that "animal spirits" must be mustered if any firm is to > proceed with an investment project. > > This paper may shed new light on Keynes' evolving concern with > employment, > interest, and money. According to various historians of Keynes' thinking, > in > the Treatise he generally disfavored wage-cutting strategies to stimulate > domestic competitiveness (Clarke 1998). Moreover, his concerns about > persistent unemployment grew during the 1920s, partly because the > unemployment > rate in England exceeded 10 percent during most of that decade and the > early > 1930s. In Skidelsky's view, this greater concern over unemployment "led to > a > shift in analytical method" (1992,318). Indeed, from A Tract on Monetary > Reform (1923) to The General Theory, Keynes' prime concern seems to have > progressed from money neutrality to the operational significance of money > in > influencing aggregate output, income, and employment (Davidson 1994; > Skidelsky > 1992; Carvahlo 1992; Clarke 1998). It seems reasonable to understand > Keynes' > work on effective demand and liquidity preference in the context of his > deepening concerns about unemployment. From t he end of The General Theory > of > 1936: > > The authoritarian state systems of to-day seem to solve the problem of > unemployment at the expense of efficiency and of freedom. It is certain > that > the world will not much longer tolerate the unemployment which, apart from > brief intervals of excitement, is associated--and, in my opinion, > inevitably > associated--with present-day capitalistic individualism. But it may be > possible by a right analysis of the problem to cure the disease whilst > preserving efficiency and freedom. (381, emphasis added) > > In this single passage Keynes expressed his concerns about social > unrest > resulting from high and persistent unemployment, as well as his awareness > of > international political volatility, faith in idealism, and fundamental > commitment to capitalist individualism. > > These comments should not obscure key theoretical themes connecting > Keynes > and Marx as differently motivated critics of classical theory. To wit, > Marx's > analysis of the functions of money in a system of simple commodity > exchange > and his analysis of the motivations of production in a capitalist economy > are > consonant with certain objectives important to Keynes: (1) to > conceptualize > classical economics as a system in which money plays a very limited role > and > capitalists' motivation of production is oversimplified and (2) to provide > a > theoretical foundation for the analysis of investment and liquidity > preference > in an entrepreneur or monetary production economy, in which the possible > outcomes include stagnation and crisis. > > Notes > > (1.) The second postulate: "The utility of the wage when a given volume > of > labour is employed is equal to the marginal disutility of that amount of > labor" (Keynes 1964, 5). > > (2.) See Rogers 1989, especially chapter 7, for an explication of the > required properties for a monetary analysis of capitalism and the > significance > of P. Kenway's analysis in this context. > > (3.) Contrary to many Marxist interpretations, Karl Marx's theory of > capitalism is not reducible to a theory of production but rather is a > complex > combination of a theory of production and a theory of circulation. Marx > meant > to draw our attention to the sphere of production to counter the classical > blindness to the appropriation of surplus value as the source of profit. > Indeed, his most distinctive contribution to economics may be the analysis > in > Capital of the capitalist class process, the process of surplus-value > production, appropriation, and distribution. Yet important contributions > to > our understanding of capitalism are to be found also in Marx's theory of > circulation, which he begins to produce in part 1 of volume 1 as a > theoretical > framework for the analysis of production. For an antiessentialist > interpretation of Marx consistent with J. Crotty's, see Resnick and Wolff > 1987. > > (4.) Following Marx, Crotty referred to C-M-C as a model of "simple > commodity production." As Crotty made clear, however, what Marx was > analyzing > was a system of commodity circulation. > > (5.) See Crotty 1985, 52 and 57. > > (6.) See Crotty 1985, 55. > > (7.) To be precise, the productive inputs acquired by the agent Y > capitalist > are included in the first C in the circuit M-C...P...C'-M'. The acquired > inputs are used in production. P. The produced commodities, c', are then > sold > in the market for M'. Viewed from the perspective of the agent Y > capitalist, > this M' corresponds to the M in stage 2 in the diagram. > > (8.) P. Sweezy's classic text on Marxian economics is cited here in > part to > emphasize the theoretically elemental nature of (1) the C-M-C versus M-C-M > distinction in Marx and (2) its invocation in Keynes' taxonomic > distinctions. > > (9.) Allyn Abbott Young is an interesting possible link between Marx > and > Keynes. According to Perry Mehrling (1997), Young's lifelong project was > to > reconcile the operation of financial institutions and structures with the > larger social goals of economic stability and growth, both domestically > and > internationally. This agenda to harmonize "the money interest and the > public > interest" resonates with various elements of Deweyan pragmatism (Mehrling > 1997, esp. 6, 15-27, 54, 60, 65). Young shared with Marx and Keynes a deep > commitment to integrating economic analysis within institutional, > political, > and historical contexts. In addition, he was apparently impressed by > Marx's > "exceptional treatment of money and credit" in volumes 2 and 3 of Capital > (Mehrling 1997, 229-30), and he was an early supporter of Keynes' work on > probability and uncertainty (Mehrling 1997, 29 and 231). Moreover, Young's > theory of business cycles and crisis showed similarities to Marx and > presaged > Keynes in terms similar to the argument prese nted in this article. > Specifically, Young attributed real crises to distortions in the structure > of > relative prices, more precisely "the difference between prices and cost of > production in general in their period of advance" (Mehrling 1997, 42-43). > Second, Young advocated for an international monetary standard on the > grounds > that such a standard makes possible economic calculation and "so supports > the > complex structure of contracts that link different businesses together" > (Mehrling 1997, 55). Third, Young's theory of business downturns seems to > combine Marx's disproportionality crisis and Keynes' concept of investment > under conditions of uncertainty: "In his mature thought, Young traced > aggregated fluctuations to mistaken business decisions that build up until > the > mismatch between the structure of productive capacity and the structure of > demand causes a downturn in business" (Mehrling 1997, 72). > > (10.) In addition to Crotty and Kenway, others who illuminate the issue > include F. Carvahlo (1992), P. Clarke (1998), C. Panico (1980), and R. > Skidelsky (1992). > > (11.) R. Clower (1976) made a similar point by transforming Say's law > into a > more limited proposition that supply creates its own income (purchasing > power), which may or may not generate sufficient demand to prevent net > oversupply. In addition, the present view regarding Keynes' critique of > Say's > law is consistent with much of Post Keynesian thought; for prime examples, > see > Davidson 1978 and 1994, Dow 1996, and Minsky 1986, 1985, and 1975. > > (12.) See Panico 1980 for a systematic extension of the circuit > M-C...P...C'-M' to include borrowing (at the beginning of the industrial > circuit) and repayment (at the end), thus transforming the industrial > circuit > to M-M-C...P...C'-M'-M'. In this way, Panico highlighted Marx's analysis > (in > Capital, volume 2) of financial capitalists and their class relations with > industrial capitalists. C. Rogers (1989) analyzed the significance of > Panico's > analysis in showing what Marx contributed toward defining the properties > of > monetary analysis. > > (13.) In volume 2 of Capital Marx thoroughly analyzed the > contradictions > inherent in the "turnover" of capital over successive production cycles. > > (14.) See Carvahlo 1992 for the meaning to Keynes of "long period" in > contrast to "long run" or "long term." > > References > > Carvahlo, F. Mr Keynes and the Post Keynesians: Principles of > Macroeconomics > for a Monetary Production Economy. Brookfield, Vt.: Edward Elgar, 1992. > > Clarke, P. The Keynesian Revolution and Its Economic Consequences: > Selected > Essays. Northampton, Mass.: Edward Elgar, 1998. > > Clower, R. "Keynes and the Keynesians: A Theoretical Appraisal." In > Macroeconomic Themes, edited by M. J. C. Surrey. Oxford: Oxford U. Press, > 1976. > > Crotty, J. "The Centrality of Money, Credit, and Financial > Intermediation in > Marx's Crisis Theory: An Interpretation of Marx's Methodology." In > Rethinking > Marxism: Essays for Harry Magdoff and Paul Sweezy, edited by S. Resnick > and R. > Wolff. Brooklyn: Autonomedia, 1985. > > Davidson, P. Post Keynesian Macroeconomic Theory: A Foundation for > Successful Economic Policies for the Twenty-First Century. Brookfield, > Vt.: > Edward Elgar, 1994. > > -----. Money and the Real World. 2nd ed. New York: Wiley, 1978. > > Dow, S. The Methodology of Macroeconomic Thought. A Conceptual Analysis > of > Schools of Thought in Economics. Northampton: Elgar, 1996. > > Kahn, R. "Some Aspects of the Development of Keynes' Thought." Journal > of > Economic Literature 16 (June 1978): 545-59. > > Kenway, P. "Marx, Keynes, and the Possibility of Crisis." Cambridge > Journal > of Economics, no.4(1980): 23-36. > > Keynes, J. The General Theory of Employment, Interest, and Money. 1936. > Reprint, London: Macmillan, 1964. > > -----. The Collected Writings of John Maynard Keynes. Vol. 29, The > General > Theory and After: A Supplement. Edited by D. Moggridge. London: Macmillan, > 1979. > > -----. The Collected Writings of John Maynard Keynes. Vol. 13, The > General > Theory and After: Part I, Preparation. Edited by D. Moggridge. London: > Macmillan, 1973. > > -----. "The General Theory of Employment." Quarterly Journal of > Economics > (February 1937): 209-23. > > -----. A Treatise on Money. London: Macmillan, 1930. > > -----. A Tract on Monetary Reform. London: Macmillan, 1923. > > Marx, K. Capital: A Critique of Political Economy. Vol. 1. New York: > Vintage, 1977. > > -----. Theories of Surplus Value. Vol 2. Moscow: Progress, 1968. > > Mehrling, P. G. The Money Interest and the Public Interest: American > Monetary Thought, 1920-1970. Cambridge: Harvard University Press, 1997. > > Minsky, H. Stabilizing an Unstable Economy. New Haven: Yale University > Press, 1986. > > -----. "The Financial Instability Hypothesis: A Restatement." In > Post-Keynesian Economic Theory. A Challenge to Neo-classical Economics, > edited > by P. Arestis and T. Skouras. Armonk, N.Y.: M. E. Sharpe, 1985. > > -----. John Maynard Keynes. New York: Columbia U. Press, 1975. > > Panico, C. "Marx's Analysis of the Relationship between the Rate of > Interest > and the Rate of Profits," Cambridge Journal of Economics 4(1980): 363-78. > > Pigou, A. C. Mr. J. M Keynes' General Theory of Employment, Interest, > and > Money. London: Macmillan, 1950. > > Resnick, S., and Wolff, R. Knowledge and Class: A Marxian Critique of > Political Economy. Chicago: University of Chicago Press, 1987. > > Rogers, C. Money. Interest, and Capital: A Study in the Foundations of > Monetary Theory. Cambridge: Cambridge U. Press, 1989. > > Skidelsky, R. John Maynard Keynes: The Economist as Saviour 1920-1937. > London: Macmillan, 1992. > > Sweezy, P. The Theory of Capitalist Development. New York: Monthly > Review, > 1970.
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