[OPE-L] Fwd: Keynes and Marx

From: Dogan Goecmen (Dogangoecmen@AOL.COM)
Date: Tue Jan 02 2007 - 13:52:53 EST

some comments by Rakesh on Marx and Keynes.

attached mail follows:

Hi Dogan,
Would you kindly forward these comments on Marx 
and Keynes to OPE-L.  Thanks. Hope to talk about 
your views on Smith soon. Please forward the book 
to me if this is possible. Happy New Year.
Yours, Rakesh

A problem with the Keynesian  framework is that 
it very easily lends itself to right wing 
appropriation: there is no inherent reason why it 
could not be deployed to justify a Bush tax 
regressive, militarist stimulus over a Swedish 
type corporatism or an attempt to expand consumer 
demand. In fact Keynesian theory leaves one 
defenseless if in fact the former is more likely 
in a given conjuncture to be stimulative in a 
formalisitc logico-positivist sense.

The problem was recognized by Paul Crosser, State 
Capitalism in the Economy of the United States 
(New York: Bookman, 1960):

"The problem whether the flow of money for the 
stimulation of the economy is to be channeled 
into the production of nonwar goods or war goods 
does not enter the analytical pricture which 
Keynes offers: nor does Keynes tackle the problem 
whether the money is to be spent on
labor-intensive or capital-intensive industries. 
Keynes's theoretical position can therefore be 
invoked in regard to any  aspect of spending 
which is undertaken wth the direct or implied 
purpose of
stimulating production and employment. Those
who prefer government spending for public works can cite Keynes in
their favor, as can those who point to the greater economic
effectiveness of government spending for war goods production.

"Keynes's analysis is a purely formalistic logico-postivistic one
which is stripped of social economic content. His analytical
framework is therefore
of little help in a tract such as this which strives to assess the
impact of government spending and the resultant changes in the
structure of the economy and society of a given country." (p.36)

In his  brilliant early reaction to Keynesian economics Erich Roll
(1938) emphasized that social democratic or corporatist, left wing or
fascist policy could be justified from within the Keynesian
framework: To Keynes and his followers "the state is a mechanism
which can be used to influence the economic system according to one's
ideals. One can readily grant that the ideals of Mr. Keynes and his
followers are noble. But can their analysis offer an effective
opposition to those whose ideals are less exalted and whose policies
are abhorrent? It is clear that they cannot. Their approach uses
abstract categories which demagogy can use and fill with its own real
content. Sismondi and Proudhon used an analysis somewhat similar to
that of Mr. Keynes for Utopian, quasi-socialist purposes. Malthus
used it to defend the remnants of feudalism against capitalist
revolution. A progressive and reactionary purpose can find
support--or at least indifference--in an economic theory that is
confined to the sphere of circulation and that operates with
psychological concepts." p. 88

Amit Bhaduri has provided the best summary that I 
have yet read of the transition to neo liberalism 
The policy of demand management is also 
politically ambiguous, in so far as either the 
state or private business can be relied upon to 
undertake the necessary investment for expanding 
aggregate demand. Since the stimulation of 
private investment is an alternative route to 
managing demand, measures aimed at achieving 
this, for example reduced taxes on corporate 
profits or restraint on wages, become justifiable 
in the Keynesian framework. These measures 
constitute the case for a politically 
conservative style of demand management based on 
profit, and private investment driven economic 
expansion within the Keynesian intellectual 
traditionŠThe original underconsumptionist thesis 
of wage-led and consumption driven economic 
expansion, which argued essentially that a 'high 
wage' is beneficial to both classes, finds its 
antithesis in this case of profit and private 
investment driven capitalism. And, both are based 
on the Keynesian theory which assigns centrality 
to aggregate demand in determining output and 
employmentŠ Keynesianism in this wider sense also 
leaves ambiguous the economic basis of social 
democratic politics or the necessity of the 
welfare state, by accommodating different forms 
of cooperative capitalism. Helmut Schmidt, as the 
social democratic chancellor of then West German, 
articulated this conservative alternative by 
pointing out, 'The profits of the enterprises 
today are the investments of tomorrow, and the 
investments of tomorrow are the employment of the 
day after' (Le Monde 6 July 1976). It symbolized 
complete reliance on private industry, and its 
willingness to invest to solve the problem of 
unemployment, rather than creating jobs through 
direct expansion of public investment. The 
economic role of the nation state was thus 
circumscribed by the need to maintain, above all, 
a favorable climate for private investment. This 
view was an intellectual watershed. It marks the 
beginning of a new conservative era in advanced 
capitalist countries, when it becomes 
increasingly difficult to distinguish social 
democratic from conservative policies, in so far 
as the economic role of the state become directed 
towards strengthening the role of private 
business. According to this new conservative view 
of demand management, if cooperation between 
capital and labour is at all to be attained, it 
is better attained through the agency of private 
business, but not through direct state 
intervention, as the earlier version of social 
democracy had advocated. 

Because Bhaduri explains the accommodation of neo 
liberalism by social democracy in terms of 
Keynesian theory itself--that is, the transition 
did not require a theoretical break, and thus 
should not be considered a revolution or 
counter-revolution as does Moschonas--Bhaduri 
provides a foundation for the transition that 
Moschonas describes in excellent and exhaustive 
detail. Moschonas's phenomenologically rich 
descriptions deserve quotation at length. Here 
are some examples: "Šthe pursuit of policies of 
deregulation and competitive rigour by social 
democracy has, for the first time in its history, 
directly challenged what was most dear, hallowed 
and enduring in its ideological and political 
tradition: the socially and economically active 
role of the state, and the interests of the most 
disadvantaged groups in the population. In effect 
in its conscious and explicit adhesion to a 
moderately but clearly neoliberal mode of 
regulation, social democracy has made the 
decisive ideological leap: for the first time so 
openly and systematically , it has elevated the 
market and devalued the utility of the 
economically active stateŠFurthermore, in the 
race for competitive disinflation and rigour, the 
governmental left has, despite its social 
discourse, departed in practice from the defence 
of wage-earners, and particularly the 'poorest of 
the poor'. Social democracy has thus been 
transformed from a political force for the 
moderate promotion of equality within a 
socioeconomic system that is by definition 
inegalitarian, into a force for the moderate 
promotion of inequality in the face of forces 
that are even more inegalitarian In other words, 
it has been transformed from a force that has 
long since renounced its anti-capitalist vocation 
into a force that is even abandoning its 
anti-plutocratic vocation (as Vilfredo Pareto 
termed it)." P. 292-93 Also: "As our brief 
examination of the French and British cases has 
shown, the social-democratic art of laying on 
both registers--deregulation and a certain 
re-regulation; the market and the state--is far 
from having been abandoned. And there are good 
economic and social reasons for that. In this 
sense, the new politics of the social democratsŠ 
can be summarized thus: the 'economic state" 
withdraws in favour of the market and the 
'philanthropic' state timidly re-emerges to 
reduce social costs created by the marketŠ[T]he 
center of gravity in this tricky--and 
quasi-schizophrenic--game of accommodating 
contrary logics and influences weighs clearly and 
heavily in favour of liberalism. From this angle, 
the latest period may legitimately be considered 
that of 'accommodation to 'the preferences of 
capital'. In the round, the adoption of orthodox 
policies and tendential decentralization of the 
structures of wage bargaining have called into 
question four central pillars of the 
social-democratic approach: the policy of wage 
solidarity, which tended in the direction of the 
equality of wage labour, and hence working class 
unity; the policy of full employment, which has 
been definitively jettisoned, the policy of 
wealth redistribution in favor of labour (though 
social democracy's impact on the distribution of 
income between wages and profits was 
traditionally modest); and the policy of power 
redistribution in favour of the wage earning 
class and--above all--its trade union 
representation (inside  and outside the 
workplace). I am therefore obliged to observe 
that the adoption by contemporary social 
democracy of policies of neoliberal inspiration, 
and the crisis of tripartite, centralized 
coordination--a modus operandi largely (but not 
exclusively) specific to social democracy--have 
impaired the politico-economic originality of the 
social democratic alternative. It must equally be 
observed--drawing on Rand Smith's 
classification--that social democracy has passed 
from a 'market modifying" type of strategy to a 
market adapting strategy." p.200-201. See also 
pp. 160-61. Weir (1992) documents the shift in 
the US state from a moderate to less moderate 
instrument of inequality; her focus is on the 
retreat from the state's commitment to full 
employment policy.

This change in the role of the state from a 
welfare or Keynesian state to a punitive racial 
or Schumpeterian state is easiest to 
conceptualize if one starts from the simplest 
game theoretic version of the Keynesian theory:

Since Keynes had provided a story of the 
determination of national income, his main point 
may be made in terms of a game involving the 
investment decisions to be made by firms. A firm 
invests in anticipation of an expanding market. 
This growth is determined by the investment made 
by the other firms in the economy. Our firm must 
literally make a guess at the scenario to be, for 
it faces irreducible uncertainty. If one firm 
invests while the others do not, it will not even 
recover its capital expenditure. If all firms but 
one invest, the withholding firm loses out on a 
profit opportunity. In this game, each firm must 
perforce guess the likely behaviour of its peer 
group. Now, apart from the two situations 
described, there are two more to be considered. 
In the first, all firms invest. This, of course, 
is 'win-win', and of no interest whatsoever. On 
the other hand, no firm invests. This is 
disastrous for the economy! It is in having 
alerted the world to this possibility that 'The 
General Theory of Employment, Interest and Money' 
attains its significance.

Reformist Keynesians (Bhaduri's social democrats) 
simply thought that it was obvious that the best 
way to encourage investment is to brighten the 
prospects of final consumption through government 
job creation and income redistribution. 
Investment would follow consumption, so that the 
autonomous increase in final consumption would 
bring the economy to a higher employment 
equilibrium. At this point, even if the increase 
of the  national debt does offset the income 
directly created by deficit spending, new 
savings, resulting from increased income that 
results from the multiplier,  may in turn offset 
the national debt. In short, there is indeed the 
possibility that deficit spending can be financed 
out the savings it  has itself created. 
Keynesianism may thus allow central authorities 
to ensure that no adverse movements in the 
current monetary flow obtain and eventually 'ride 
the wave' created by sufficiently large positive 
shock to the economic system.  Social democracy 
would be good for not only the working class, 
especially the most vulnerable minority parts 
thereof, but also the entrepreneurial class as 
well. Since businesses make what they spend--they 
are their own source of demand--a higher level of 
investment would increase the profits for the 
class a whole. Though the working class (if only 
it were not racially divided) may have to impose 
social democracy upon the reluctant business 
class, the result would be a cooperative 
    Yet capitalist reactions to government 
deficit spending may be negative instead of 
positive. If for example the retreat of 
investment was not in fact preceded by a crisis 
of final demand--in Marxian terms this would 
imply that Department I or the means of 
production industries would face a sales crisis 
before Department II or the means of consumption 
industries--the best way to raise effective 
demand of which private investment is the most 
important component may be to increase the risk 
that the firms that withhold from accumulation 
will lose profit opportunities and thereby be 
without the increase in financial resources that 
is needed to stay in the competitive game. Once 
Keynesian is understood in terms of the game 
theoretic scenario above, one can easily justify 
(I think that I am the first to point out) the 
transition from social democratic to private or 
profit-led demand management. That is, in trying 
to increase the opportunity cost of not investing 
and accumulating, the state will attempt to whet 
the appetite for profit or unleash (as Keynes 
referred to it) "animal spirits" through 
regressive taxes and anti-labor legislation. 
After the failure of social democratic demand 
side management and full employment Keynesianism 
in the 1970s, the stage was set for the eventual 
transition in the function of the state from a 
welfare instrument to a class instrument:

It was no longer assumed that current investment 
is determined by either current or expected 
consumption. Hayek's interpreter G.R. Steele puts 
the point succinctly:
[while], of course, the relative magnitude of the 
demand for equipment of a particular industry 
will depend upon the demand for the product of 
that industry, it is certainly not true to say 
that the demand for capital goods in general is 
directly determined by the magnitude of the 
demand for consumer goods. 

       Quoting from Hayek's 1978 New Studies, Steele continues:
According to Hayek, a dependency of investment 
upon consumption can only apply to that 
investment in capital which replicates existing 
techniques; it cannot be relevant to 'investment 
which can increase productivity per head of 
worker by equipping a given labor force with more 
capital equipment'. Hayek's explanation is that 
this latter kind of investment is 'encouraged by 
low product (consumer good) prices (which makes 
it necessary to save on labour costs) and 
discouraged by high ones.'"

    Now this may indeed bend the stick too 
far in the other direction: it is one thing to 
say that investment can be undertaken independent 
of the strength of final demand, but it is 
another thing to say that a weakening of the 
latter may induce more of the former. Paul 
Mattick on the basis of Grossmann's 
interpretation of Marx however did not shy away 
from just this conclusion:
Through acceleration in accumulation, by 
perpetual reinvestment, the increasing production 
of final goods (which enter into consumption) can 
also find outlet in the general circulation. 
Under these conditions--when one part of capital 
sets a series of other capitals in motion, the 
capitalists can consume more, and the fully 
employed workers also have more to spend--the 
accumulation of capital is more impeded than 
stimulated by the growing mass of commodities, so 
that the boom already bears within it the seed of 
crisis. Production shifts to the consumer goods 
industry, which impairs the profitability of 
capital as whole. The fall of the average rate of 
profit thereby accentuated then leads to the 
weakening of the prosperity and finally to 
crisis. What this reveals is not simply a level 
of consumption too high in proportion to the 
requirements of accumulation but a shortage of 
surplus value resulting from the process of 
accumulation itself, which calls for the 
restriction of consumption if the going tempo of 
accumulation is to be maintained. If the amount 
of surplus value created in production was great 
enough to hasten accumulation even more, the 
increased consumption would be no hindrance to 
further accumulation but could grow together with 
it.  (70).

Here the increase in the ratio of profit to wages 
is seen as important to the revival of 
accumulation. Moreover, even if final demand is 
weakening, profit-hungry firms could indeed be 
induced to scrap old technologies and  invest in 
those processes that lower costs faster than 
prices are falling. Working from a modified 
Marxist framework, Robert Brenner seems to have 
reached the conclusion that the propping up of 
demand via debt, contracted by private and 
government actors, has forestalled the scrapping 
and reallocation of capital that may in fact be 
necessary for the resumption of strong investment 
and thus employment growth:

"But while the growth of debt...was helping to 
stave off depression, it was also slowing down 
that recovery of profitability which was the 
fundamental condition for economic 
revitalization. What the advanced capitalist 
countries needed to found a new boom was a 
rollback of that redundant manufacturing capacity 
and output which had resulted from the 
intensification of international competition and 
which had been made all the greater by debt 
creation--specifically the elimination of that 
great ledge of high cost, low profit means of 
production which stood in the way of the recovery 
of the aggregate rate of profit in mfg. The 
series of severe recessions that occurred form 
the end of the 1960s through the early 1990s 
constituted the world economy's main instrument 
for accomplishing this task, and they certainly 
did something to wipe out redundant productive 
capacity. But the increased demand created by 
rising debt tended to cut short the processes of 
destruction unleashed by recession, and more 
generally to soften the impact of competition. 
Higher cost/lower profit firms were thus able to 
long occupy economic positions that could, in the 
abstract, eventually have been assumed by more 
productive, higher profit, and more dynamic 
enterprises. But allowing the less productive, 
less profitable firms to go out of business by 
letting the business cycle take as a natural 
course would very likely have turned the long 
downturn, with its relatively serious but 
nonetheless limited recessions, into outright 
depression. Simply put, the preconditions for 
restoring the system to health was a 
debt-deflation, leading to what Marx called a 
"slaughtering of capital
values.' But since the only systematic way to 
achieve this was through depression, the only 
real alternative was continuing debt expansion , 
which contributed to both stagnation and 
financial instability."

Finally , for those investment projects that are 
meant to meet a long term trend even a drop in 
immediate consumption can be favorable as firms 
may decide that it is advantageous to build on 
the trend and thus take advantage of lower 
depression prices in materials, wages and 
possibly interest rates.  For such purely 
economic reasons, there seemed to be no 
compelling reason to boost final demand through 
humane provision of government jobs through 
deficit financing and the redistribution of 
income. The social democrat simply cannot count 
on demonstrating that the brightening the 
prospects of final demand will in fact be in the 
interests of private investors.  
The primary task of crisis management in a 
private market economy has to be the revival of 
investment, though people are often led to think 
the economy hinges on the recovery of final 
consumption since their own purchases are of 
consumer goods and official statistics make final 
consumption seem more important than it is in 
order to avoid double counting. About the latter, 
Mark Skousen has written
Šwhen one examinesŠthe Gross National Product, this
fundamental characteristic [in modern economies 
only a minor part of the community's resources is 
devoted to the production of consumption goods 
while most of the energies and equipment are 
applied to the production of intermediate goods] 
is completely lost--in fact, it appears as just 
the opposite. If one looks at a breakdown of GNP, 
consumer spending always appears as by the far 
the largest section of the economy. For example, 
in 1987, total personal consumption expenditures 
in the US come to $3, 012 billion, while "gross 
private domestic investment" totaled only $713 
billion and government spending amounted to $925 
billion. How does one explain this discrepancy, 
which shows consumer spending to be four times 
larger than capital expenditures? What is 
happening is that the gross private investment 
figures in GNP is not really a gross number after 
all. It is actually a net measure and purposely 
excludes 'intermediate goods' that are purchased 
to be used as inputs in producing other goods and 
services. It is a strictly value added figure... 
In short, the GNP data exclude the critical 
intermediate stages of production. Advocates of 
this traditional approach do so because, they 
say, they wish to studiously avoid double 
counting...Further, the net method (GNP) greatly 
exaggerates the role of consumption in the 
economy, giving the deceptive impression that 
most of the national output is in consumption 
goods rather than investment. Such thinking 
encourages economists and government officials to 
for the misleading idea that consumer spending, 
being the largest section of the economy, must be 
stimulated in order to get the economy out a 

The theoretical point was--to use Hayek's own 
metaphor--that the continuous flow of the river 
of investment can vary independently of the level 
of the tide (sales of final goods) at the mouth. 
The upper reaches of the volume of water is 
affected by the immediate flow of the tributaries 
to the mainstream (variations in new and 
replacement technology). In any given period 
there is no obvious correspondence between 
changes in the upper reaches and the sale of 
final goods; nor between the sale of final goods 
and employment. Moreover, as Marx first and Hayek 
later recognized, it is generally the case that 
in a slump the revival of final demand is an 
effect rather than a cause of revival in the 
upper reaches of the stream of production. On the 
chance that revival of investment could be 
stimulated by regressive tax relief and 
anti-labor legislation and even the allowance of 
a deep recession  there began (as Bhaduri 
intimated above) a concerted attack on the social 
activist state and the renascence of Social 
Darwinism --inequality and hardship were claimed 
to be "socially benign", the mitigation of 
hardship "socially inimical", the fortunate and 
the affluent were relieved of guilt as they 
understood themselves to be "natural 
beneficiaries of their own excellence."  The new 
Social Darwinism in public policy was coupled, as 
already suggested, with a  rediscovery of Hayek 
in the realm of economic theory.
    In the face of the argument that social 
democratic full employment policy and 
redistribution may not thus be the best means by 
which to induce investment in a private market 
economy, Keynesians were trapped by their own 
positivist framework,  for if it was simply a 
matter of turning whichever dials most 
effectively raised demand and the investment 
component thereof in particular, it was an 
empirical matter whether left wing demand 
management did the job better than private 
management or  Jessop's Schumpeterian workfare 
state.  The stagflation of the 1970s settled the 
argument in favor of the latter even as the 
former failed to lift the economy decisively out 
of its doldrums.

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