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Keynes Seminar
5 November 2008
Claudio Sardoni
University of Rome ‘La Sapienza’
Keynes, Marx and The General Theory
www.postkeynesian.net © PKSG 2008
Keynes and Marx
CLAUDIO SARDONI
SAPIENZA – UNIVERSITY OF ROME
Introduction
 Why Marx and Keynes?
 Both were convinced that, in their time, capitalism
had entered a new historical phase.
 Capitalism had ceased to be propulsive, i.e. able to
guarantee unprecedented economic growth.
What Keynes thought of Marx
 Keynes was not a scholar of Marx. His knowledge of
Marx’s economics was mainly based on secondary
literature.
 This did not prevent Keynes from issuing trenchant
judgements on Marx’s economics.
In The General Theory
 In The General Theory , the book which was to
1.
2.
3.
‘knock away’ Marxism, Marx is quoted only three
times.
The first has to do with the definition of ‘classical
economics’.
The “great puzzle of Effective Demand” had
vanished from economics since Malthus and only
kept on living furtively in the “underworlds” of
Marx, Gesell and Major Douglas.
The future will learn more from Gesell than Marx.
Before and after The General Theory
 In 1925: Marx’s Das Kapital is an “obsolete economic
textbook”, which is “not only scientifically erroneous but
without interest or application for the modern world.”
 In 1934: Keynes’s feelings about Das Kapital were the
same as his feelings about the Koran; its “dreary, out-ofdate, academic controversialising” was ‘extraordinarily
unsuitable’ to give inspiration to so many people and “its
contemporary economic value … is nil.”
 In 1942: Keynes had the feeling that he had before “that
he had a penetrating and original flair but was a very
poor thinker indeed.”
An exception
 There is a stage in the development of Keynes’s ideas
when he came rather close to Marx and his critique
of Say’s Law.
 In 1933, Keynes drafted several chapters of The
General Theory. There, he criticized Say’s Law in a
way that is close to Marx’s critique of the law.
The 1933 critique of Say’s Law
 Keynes’s 1933 critique of the classical doctrine and
Say’s Law is based on the distinction between a cooperative economy, a neutral economy, and an
entrepreneur (or monetary) economy, that is, the
capitalist economy in which ‘we actually live’.
 Keynes explicitly referred to Marx’s analysis and
recognised that the latter, starting from the formula
M - C - M', had pointed out the essential
characteristic of capitalist economies.
Cooperative and neutral economies
 A co-operative economy is basically equivalent to a
barter economy where the factors of production are
rewarded by a share of the real output. Insofar as factors
of production are rewarded in agreed proportions,
money is only a ‘transitory convenience’ which is used to
buy a predetermined share of the output.
 We have a neutral economy when some factors do not
use all their rewards to buy a share of current output but
employ part of them to buy a share of pre-existing
wealth. Full employment is still attained, provided that
the sellers of pre-existing wealth use, in turn, their
proceeds to buy current output.
Entrepreneur economies
 For classical economists Say’s Law holds because they
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

assume that capitalist economies behave as if they were
co-operative or neutral economies.
But capitalist economies are essentially different. They
are entrepreneur economies.
Capitalist entrepreneurs start productive processes in
order to earn a monetary profit, and not in order to
produce more goods and employ more labour.
Entrepreneurs direct money to production if they expect
that to be profitable (in terms of money).
If production is expected to be unprofitable, money is
kept idle. As a result, less employment is offered by
entrepreneurs.
M-C-M'
 It is in the description of how an entrepreneur economy
functions that Keynes referred to Marx’s formula 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 (…). He pointed out that
the nature of production in the actual world is not (…) a
case of C-M-C', i.e., of exchanging commodity (or effort).
That may be the standpoint of the private consumer. But
it is not the attitude of business, which is the case of M-CM', i. e., of parting with money for commodity (or effort)
in order to obtain more money.”
Marx’s analysis
 The objective of capitalist entrepreneurs is to
produce and sell goods in order to obtain more
money than they advanced to buy means of
production and hire workers. They produce in order
to make money profits (M – C - M').
 Two relevant analytical issues stem from this:
1.
2.
The schemes of reproduction.
Overproduction crises.
The schemes of simple and expanded
reproduction
 Marx studied the conditions under which the
capitalist thrust to produce for profits can give rise to
an orderly process of production, circulation and
growth.
 The analysis of social circulation was developed in
the second book of Das Kapital through the schemes
of reproduction.
Simple reproduction (1)
 The process at the macroeconomic level can be depicted
by using a slightly modified version of the formula M – C
– M'.
M – C … P … C' – M'
 The monetary value of C' must be M' > M and (M' - M) is
the monetary value of capitalists’ aggregate profits.
 M' > M is the amount of money which is required to
make it possible to sell all produced commodities at their
normal prices.
 At the end of the process the capitalist class draws from
circulation an amount of money M' larger than the
amount advanced.
Simple reproduction (2)
 Where does the additional money come from?
 It necessarily comes from the capitalist class itself
which throws money into circulation to finance its
consumption.
 Where do capitalists initially find the additional
money? Marx’s answer is that the additional money
is already in the hands of the capitalist class in the
form of money hoards.
 Aggregate profits are thus determined by capitalists’
consumption decisions which, in turn, imply a
decision to reduce their levels of money hoards.
Expanded reproduction (1)
 In expanded reproduction, not all the surplus may be
consumed. It is partly used to expand the scale of
production.
 Part of the additional money put into circulation [(M' - M)I]
is now spent on investment goods by capitalists and
another part [(M' - M)C] is spent on consumption goods.
 The value of total profits is
[(M' - M)I + (M' - M)C] = (M’ – M)
Expanded reproduction (2)
 The monetary value of aggregate profits is the same
as in the case of simple reproduction but profits now
depend on two sets of decisions by capitalists:
investment and consumption decisions.
 In general, aggregate profits depend on capitalists’
expenditure decisions.
Similarities and differences
 There are important similarities between Keynes’s
and Marx’s approaches.
 For both, capitalists’ decisions about profitability
and liquidity are crucial to understand the “world in
which we live”.
 However, there are also important differences.
Effective demand and general overproduction
crises (1)
 Crises were analysed, above all, in the second volume
of Theories of Surplus-Value .
 Both in simple reproduction and in expanded
reproduction, if capitalists decide to advance an
additional quantity of money (M'' - M) < (M' - M),
the level of aggregate profits is negatively affected.
 Aggregate monetary demand (M + M") falls short of
aggregate supply (C' = M') and either stocks of
commodities pile up or the prices of commodities
decrease.
 In any case, aggregate profits decrease.
Effective demand and general overproduction
crises (2)
 A general overproduction crisis is caused by an
increase in the capitalists’ propensity to hoard that
amounts to a shift of aggregate demand from
commodities to money.
“… the supply of all commodities can be greater than the demand for all
commodities, since the demand for the general commodity, money,
exchange-value, is greater than the demand for all particular
commodities, in other words the motive to turn the commodity into
money, to realise its exchange-value, prevails over the motive to
transform the commodity again into use-value.”
Crises and underemployment equilibria:
differences between Marx and Keynes (1)
 In Marx’s context, there are only two possibilities:
1. Capitalists’ decisions are such that the whole produced output is
absorbed and there is no market perturbation.
2. Capitalists’ decisions generate an insufficient level of demand to
absorb the whole output and, as a consequence, there is an
overproduction crisis.
 Marx did not contemplate the case in which firms as
a whole correctly forecast a lower level of aggregate
demand and they produce less than the maximum
output, so that no market perturbation occurs
(Keynes).
Crises and underemployment equilibria:
differences between Marx and Keynes (2)
 For Keynes, the level of production is a continuous increasing
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function of expected prices.
It is so because Keynes’s individual and aggregate supply
curves are derived from Marshallian microeconomics under
the hypothesis of short-period decreasing returns. Cost curves
and supply functions are continuously increasing in prices.
Firms’ expectations might be wrong and the actual level of
production might well be such as to have excess supply.
Keynes did not give much importance to this possibility. He
concentrated on the possibility that firms’ expectations,
although correct, produce underemployment equilibria.
In Keynes firms’ expectations always affect the level of output
directly. In Marx, expectations directly affect production only
if they become, so to say, “catastrophic”.
Conclusion
 Marx’s economic theory was a significant advance
from classical political economy. Marx contributed a
new approach to money and the rejection of Say’s
Law.
 Marx’s critique of Say’s Law is similar to Keynes’s in
1933.
 There are also important differences between Marx
and Keynes. They essentially depend on their
different backgrounds: classical for Marx;
Marshallian for Keynes.