Scientifically erroneous and without application to the modern world

Michael Roberts on Marx vs. Keynes and why Marx was closer to the truth

Michael Roberts

Michael Roberts is a financial economist who has worked in the City of London for over 30 years.  In his book, The Great Recession: a Marxist view, he forecast the global financial crash.  His latest book, The Long Depression (Haymarket 2016), looks at the causes of the continued stagnation in the world economy since 2009.

In 1926, John Maynard Keynes, already the most celebrated economist and political writer of his time, reviewed the competing ideas of conventional economics (which he called ‘laisser-faire’) and its revolutionary alternative (Marxism).  In his book, Laisser-faire and Communism, Keynes, a contemporary of the Bolshevik leaders Lenin and Trotsky, sought to dismiss the Soviet revolution that had shocked the ruling groups of the rest of the world just a few years before.

His attack was that: how could anything worthwhile come out of communism, based as it was on the ideas and theories of Karl Marx?  “How can I accept the [Communist] doctrine,” Keynes wrote, “which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world?”  And more: “Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values (Keynes, Laissez-Faire and Communism, quoted in Hunt 1979: 377).

Keynes was writing some 60 years after Marx’s Capital was first published.  As the 150th anniversary of the first publication of Capital approaches, can we agree with Keynes damning judgement of Marx’s ideas? Marx’s Capital was a critique of the political economy of his time but it is also a searing analysis of the nature of what we now call capitalism.  Based on a labour theory of value, Marx attempted to show how labour is exploited even though exchange in markets appears to be one of equality.  Above all, Marx’s analysis suggests that capitalism has irreconcilable contradictions that can only be overcome by the replacement of private production for profit with production for need through common ownership and control.

Keynes accepted the mainstream marginal utility theory

In contrast, to this ‘illogical and obsolete’ labour theory of value, Keynes accepted the mainstream marginal utility theory.  When this became the dominant explanation for prices of production in an economy, replacing the labour theory in the later 1870s, Engels remarked: “The fashionable theory just now here is that of Stanley Jevons, according to which value is determined by utility and on the other hand by the limit of supply (i.e. the cost of production), which is merely a confused and circuitous way of saying that value is determined by supply and demand. Vulgar Economy everywhere!” (22 MECW, vol.48, p.136).

Marginal utility theory quickly became untenable even in mainstream circles because subjective value cannot be measured and aggregated, so the psychological foundation of marginal utility was soon given up, but without abandoning the theory itself.  Thus Keynes continued to hold to a scientifically erroneous theory of prices, which was untestable while rubbishing Marx’s objective and testable theory of value based on labour time expended.

For Marx, the driver of capital accumulation is profit.  Profit calls the tune.  Marx explained in Capital and other works that there was an inherent tendency for profitability to decline over time and this downward pressure on profitability would eventually cause a fall in the mass of profits and a crisis and slump would ensue. Think of how a capitalist crisis caused by falling profits can be solved if Marx is right. The only way that it could be ended was if enough capitalists went bankrupt, enough old machinery and plant were close down and enough workers were laid off. Then eventually, the costs of production and investment would be sufficiently reduced to raise the profitability of production for those capitalists still surviving to start to invest again. After a while, however (maybe years, even decades), the law of profitability would again exert its power and the whole ‘crap’, as Marx called it, would start again. Thus we have cycles of booms and slumps.

In contrast, Keynes, denying that profits come from the unpaid labour of the production process, reckoned that it is overall ‘effective demand’ that causes crises, in particular slumps in investment and consumption that lead to reductions in employment, wages and profit. Who is right?  Keynesian theory would suggest that we just have to ‘manage’ the economy it starts slipping into recession and all will be well. This economic management would be: easy money at low interest rates and fiscal stimulus through increased government spending and budget deficits. Well, look what happened from the late 1960s, when Keynesian economics was all the rage and government management of the economy was the order of the day. Even President Nixon then declared that we are ‘all Keynesians now’.  By the end of the 1970s, the strategists of capital had ditched Keynes and opted for what we now call ‘neoliberal’ policies of cutting back on the size of government, privatising, weakening the trade unions, liberalising markets (including financial markets) and imposing tight monetary and fiscal austerity (or at least in part – austerity did not apply to defence and wars!). Why was this? It was because Keynesian policies had failed to avoid new crises, indeed, the biggest worldwide economic slump in capitalism since the war in 1974-75 and then a deeper and more damaging slump in 1980-2. How could there be these new crises if Keynesian economic management was in operation everywhere? Keynesian economics had no answer.

Keynesian policies could even delay the capitalist recovery

What could Marxist economics offer to explain the crisis of the 1970s where Keynesianism had failed?  Marx said that the key to understanding the capitalist mode of production lay in the nature of production to sell commodities on a market for profit. Profit was the key. Marx says: let’s start with profits. If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall. And it was not just the slumps of the 1970s.  If we analyse the changes in investment and consumption prior to each recession or slump in the post-war US economy, we find that consumption demand has played little or no leading role in provoking a slump. It is investment that is the crucial swing factor. Take the last Great Recession. A downward movement in corporate profits led investment and GDP by up to two years and the recovery in profits did likewise on the period after 2009. Policies designed to reduce interest rates, or even get some government spending going, namely Keynesian policies, would not avoid these slumps or even get recovery going. Indeed, more spending on welfare and unemployment benefits could drive up taxes and extra borrowing could drive up interest rates. And more government investment that replaced or encroached on private sector investment could be actually damaging to the profitability of capital. So Keynesian policies could even delay the capitalist recovery.

Indeed, the austerity policies of most governments are not as insane as Keynesians think. Keynesians say: why can’t the capitalist sector see that it is their interests for governments to spend more, not less, in a slump?  But neo-liberal policies follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labour movement so that profits can be raised. It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s or in current Long Depression. Only Marx’s economics could explain the 1970s, not Keynes. Indeed, in a way, the strategists of capital recognised that too. Their aim was to raise the profitability of capital at all costs as the only way out – not to revert to Keynesian ‘demand management’.

Actually, Keynes himself was not on the side of the workers in a solution to a slump. “In emphasising our point of departure from the classical system, we must not overlook an important point of agreement. … with a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated, so that, in general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages. Thus I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.” So cutting real wages was part of the solution to a slump for Keynes, just as it was with neo-liberal austerity measures.

Keynes also had a theory of declining profitability.  But he saw the decline of the rate of profit not as pointing toward a revolutionary transformation in the mode of production, but rather as representing a progressive softening in the antagonism between the capitalists and the working class.  As capital becomes “less scarce” relative to labour, the rate of profit will fall and real wages will rise. More of the total product will therefore go to the working class and less will go to the capitalists – inequality would decline. As the “scarcity-value” of capital dissipated, according to Keynes, economic growth would peter out. Interest rates would fall to zero or very close to zero, causing the gradual extinction of the hateful “money capitalists.” This would leave the industrial and commercial capitalists able to earn a little extra profit by taking on “entrepreneurial” risks.  Wages up, profits up - in a ‘stationary’ world of superabundance. In 1931, at the depth of the Great Depression, Keynes told his students at Cambridge University, many of whom were becoming attracted to the ‘obsolete’ theories of Marx, that they should not worry.  The Great Depression would pass: it was a ‘technical problem’ that could be corrected.  “I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race.” The long-term future under capitalism through an expansion of technology, and assuming no more wars (!) and population control, would be a world of leisure with a 15-hour week and superabundance for all, well before Marx’s 200th anniversary.  This is the opposite of what Marx predicted. Who was right?

 The level of poverty within ‘rich’ modern economies is still high

The evidence since Keynes dismissed Marx’s theories is that, far from finance capital being consigned to history, finance capital has never been more powerful globally; and inequality of wealth and incomes within national economies and globally has never been more extreme since capitalism became the dominant mode of production. Also, most people in the Western world are still working 40-hour weeks and the level of poverty within ‘rich’ modern economies is still high. In the rest of the world, unemployment, sweated labour and poverty are the modal experience. No world of leisure there. For Keynes, capitalism was the only possible system of human social organisation that delivered economic and political power to people like him. Marxism and communism was a threat to that belief. “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement?”

In Laisser-faire and Communism, Keynes concluded: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight”; while Socialism “is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.” As we approach Marx 200, the evidence tells the opposite. Marx was closer to the truth.

Three Favourite Texts on the Topic:

Paul Mattick Snr, Marx and Keynes: the limits of the mixed economy, Horizon Books Boston 1969
Geoff Pilling, The crisis of Keynesian economics; a Marxist view, Croom Helm, London 1987
John Maynard Keynes,The General Theory of Employment, Interest and Money, Macmillan, Cambridge, 1936