Socialist Studies Socialist Studies

Reconstituted Socialist Party of Great Britain (1991) Summer School Lectures - Marx and Keynes: What is at Stake?


During the current crisis and subsequent economic depression, with free market economics and its obsession with finance and banking capital in disarray, it was noticeable how quickly the ideas of Keynes were introduced by governments, their economic advisers and the capitalist media as soon as the word “Marx” was mentioned again. They had assumed, wrongly, that Marx and his revolutionary ideas had been buried under the rubble of the Berlin Wall. He hadn’t. And nor his ideas. You cannot bury a scientific understanding of social reality.

Here is Marx on economic crisis:

…capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation (WAGES, PRICE AND PROFIT in Selected Works Vol. 1 p. 440).

This is the economic reality denied by politicians and economists; capitalism acting destructively in accordance with its own laws.

Such was the global nature of the crisis and the sheer incompetence of economists to predict that it would occur that Marx’s face featured on the front cover of TIME MAGAZINE in Europe over the headline “What Would Marx Think?” (February 2009) although he was missing from the US edition so as not to frighten the readership there some of whom had come to think of George Bush as a “Socialist” and President Obama as a “Communist”.

Marx was being discussed seriously on the BBC with a renewed interest in his writings being reflected with more of his works being bought. The French President was photographed reading CAPITAL (THE TIMES 20 10 2008). Even the Vatican, who had once put Marx’s writings on their proscribed list of books the faithful could not read, came out in favour of Marx with Georg Sans, a German-born professor of the history of contemporary philosophy at the pontifical Gregorian University stating that Marx’s work “remained especially relevant today”. And the Cranfield University Institute of Management ran a YOU TUBE on-line lecture by a Professor Cliff Bowman on Marx and the Crisis which gets a D+ for effort.

However, by May of last year the FINANCIAL TIMES had hit back with a review article by Tony Barber on three books recently published books on Marx, Engels and Communism respectively. Barber conceded that capitalism was in its worse shape since the 1930’s and that some of the criticisms Marx made against capitalism are as valid today as they were 150 years ago but it he rejected the claim that Marx was to be “proved right after all”. (May 16th 2009).

All eyes were then turned to Keynesian stimulus policies of the Obama regime in the US and the Brown administration in Britain. What was important for the academic economists and government policy advisers was not what Marx but what Keynes would think about the current depression. Professor Robert Lucas, professor of Economics at Chicago University stated that Keynes is someone you need when you are in a “fox-hole”.

And true to form THE ECONOMIST opened up with an on-line debate between Professor Brad Delong and Professor Zingales “This House believes that we are all Keynesians now” (10. 03. 09). Marx was not going to get a look-in. and in September 2009 THE ECONOMIST invited Keynes’s biographer, Lord Skidelsky to tea to chat about his forthcoming book KEYNES: RETURN OF THE MASTER (ECONOMIST pod cast).

This comes as no surprise for those acquainted with the history of capitalist economics. Karl Marx inadvertently forecast much of the antagonism which would arise on the publication of his theories as they appear in CAPITAL.

In the preface to Volume I he said:

In the domain of Political Economy, free scientific enquiry does not merely meet the same enemies as in all other domains. The peculiar nature of the material it deals with, summons into the fray on the opposing side the most violent, sordid and malignant passions of the human breast, the Furies of private interest. The Established Church, for instance, will more readily pardon an attack on 38 of its 39 articles than 1/39th of its income (p. 92 Penguin ed.).

However, Marx could never have believed the scale of the ignorant opposition his theories aroused and the depths to which it has descended. Today, the gross misrepresentation of Marx’s theories continues unabated. This is in part due to lack of knowledge of the theories themselves, but mainly to the threateningly revolutionary effect his scientific enquiry has on modern capitalism. Only economic theories which are useful to the running of capitalism and which do not attack the private ownership of the means of production will gain support from the media manipulating “public opinion” and of course from the tame economists and other advocates who are paid to defend capitalism.

Yet without an understanding of capitalism and its contradictions provided by Marx writings we seem to be stuck in a trade cycle Groundhog Day. And with each recurring economic crisis out goes one set of economic policies to be replaced with a new set of policies which have already failed on previous occasions. With the demise of economic liberalism and the revival of Keynesianism history has merely repeated itself first as tragedy and second time as farce.

Keynes: Saviour of Capitalism?

In the 1930’s the economist J. M. Keynes turned his attention to two strands of economics. On the one hand the failure of the free market ideas to arrest the high levels on unemployment during the Great Depression. And second the growing interest in the ideas of Marx which stated that periodic high levels of unemployment were a fact of life under capitalism and if workers wanted to resolve this problem they would have to replace capitalism with Socialism.

Keynes believed his economic approach was the only one which could save capitalism from itself and win workers away from the ideas of Marx.

As early as 1925, Keynes had described Marx’s Capital as:

…an obsolete economic textbook, which I know to be not only scientifically erroneous, but without interest or application for the modern world” (A SHORT VIEW OF RUSSIA Hogarth Press p. 14).

In his 1938 paper to the Memoir Club Keynes made this strange remark. He claimed to have escaped the Benthamite tradition which had protected:

the whole lot of us from the final reduction absurdum of Benthamism known as Marxism” (JOHN MAYNARD KEYNES VOL. 1 R. Skidelsky p. 143).

Marx was no utilitarian; a boorish philosophy lampooned by Dickens’s in the character of Thomas Gradgrind in HARD TIMES. Marx had repudiated Bentham’s Utilitarian philosophy in The GERMAN IDEOLOGY as early as 1846 (pp 464-466 London 1965). In CAPITAL VOLUME 1 Marx’s attacks Bentham for reducing human relations to one of self-interest (ch 6. The transformation of Money into Capital p.280).

Marx also dismissed Bentham with reference to the fallacious “labour fund” as “that soberly pedantic and heavy-footed oracle of the “common sense” of the nineteenth century bourgeoisie” –a wonderful piece of invective. In fact Jeremy Bentham’s embalmed body can be seen in a cabinet pretentiously called an “auto-icon” in a corridor at University College London. The “oracle” deserves Marx’s remark to be appended to its enclosure.

The so-called Labour Fund or wage-fund was that a fixed amount was available to pay wages and workers should not form into trade unions or strike for higher pay. Marx showed the heart of the theory’s fallacy by pointing out that political economists, including Bentham, ignored all the important variables that determine the rate of accumulation (see A. Brewer A GUIDE TO MARX'S CAPITAL Cambridge University Press 1984 p70 -71) and I. I. Rubin A HISTORY OF ECONOMIC THOUGHT ch. 34 The Wages Fund pp 307 -312 Pluto 1989).

Marx showed, against Bentham and other defenders of capitalism, that the constituent elements of constant and variable capital in the process of capital accumulation were flexible and fluid and not fixed as the classical economists believed even though there were periodic blockages. (ch 24. The transformation of surplus-value into Capital pp758-761). The belief that Bentham led to Marx was just as absurd as the belief held by some other academics at the time that St Thomas Aquinas’s theory of a just price led ultimately to Marx’s Labour Theory of Value.

To use a phrase of Bentham’s, Keynes’s remark about Marxism being “the final reduction absurdum of Benthamism” was “nonsense on stilts”. Keynes remark is not only wrong but is wrong in the pretentious overblown manner of a charlatan and dilettante.

In the 1930’s many students, trade unionists and workers were beginning to read the works of Marx in the face of the failure of the prevailing economics of the time to say anything of relevance about the Great Depression.

A friend of Keynes at Cambridge, Julian Bell –a progeny of the Bloomsbury set- , who had become a “Marxist”, described in 1933 how the “more intelligent” of undergraduates had become “Communist, or almost Communists” under the impact of the world economic crisis and the subsequent depression.

Bell wrote:

In the Cambridge that I first knew in 1929 and 1930...As far as I can remember we hardly ever talked or thought about politics…By the end of 1933, we have arrived at a situation in which the only subject of discussion is contemporary politics, and which a very large majority of the more intelligent undergraduates are Communists or almost Communists… (Lord Skidelsky, J. M. KEYNES: THE ECONOMIST AS SAVIOUR VOL. II, “Keynes versus Marx” p515).

A similar view was held by Anthony Blunt who found at the time that all his Cambridge chums “had suddenly become Marxists” (loc cit p. 514).

Of course all these “Marxists” at Cambridge were supporters of Lenin and Stalin. They were under the illusion that Russia was Socialist when, of course, it was not. The capital-wage labour relationship existed there as did the workings of the law of value. Class exploitation took place with the working class in Russia producing more wealth than they received in wages and salaries. And there was no common ownership and democratic control of the means of production and distribution by all of society.

But the fact that Marx was being taken seriously among under-graduates and trade unionists alarmed the politicians and academics of the time. This included Keynes.

Keynes told his Bloomsbury friends that Communism was a “religion” and that “Marxism was the worst of all, and founded on a silly mistake of old Mr Ricardo…” (loc cit p. 517).

Of the intellectual and scientific status of Marx’s CAPITAL, Keynes wrote in a letter to G. B. Shaw that:

It’s dreary, out-of-date, academic controversialising seems so extraordinary unsuitable as material for the purpose…I am sure that its contemporary economic value…is nil” (loc cit p. 520)

In his letter to Shaw, in which Keynes compares CAPITAL to the Koran, he dares Shaw to re-read CAPITAL again giving the impression that Keynes himself had read the book.

Shaw had read CAPITAL in French as a hoop to jump through on wanting to join the Social Democratic Federation and had for many years propagated Marx’s Labour Theory of Value until being converted to the marginal utility nonsense of Jevons and Marshall (who had taught Keynes economics at Cambridge)..

There are no notes by Keynes that he actually read CAPITAL in depth. We know he read the MARX-ENGELS CORRESPONDENCE which would have given him some entry into Marx’s critique of political economy. But no detailed criticism of Marx by Keynes exists, only childish put-downs. In 1935, for example, he told students, “Marxism...was complicated hocus pocus, the only value of which was its muddle-headedness” (loc cit p. 523). A crass statement displaying all the intellectual rigour of a DAILY MAIL journalist.

Keynes claimed in a second letter to Bernard Shaw at the beginning of 1935 that his new theory would knock away “...the Ricardian foundations of Marxism” (loc cit p521).

He put his argument rather more logically during a series of lectures outlining his new theory in 1934. Marxism, he argued, was wrong because it accepted, as much as economic liberalism, that State intervention in the economy could not improve the workings of capitalism:

Keynes stated that:

The Marxists have become the ultra-orthodox economists. They take the Ricardian argument to show that nothing can be gained from (state) interference. Hence, since things are bad and mending is impossible, the only solution is to abolish [capitalism] and have quite a new system. Communism is the logical outcome of the classical theory (loc cit p. 511)

So what is the “Ricardian foundations of Marxism”. What in Ricardo’s Principles of Political Economy shows that “nothing can be gained from “State” interference” to prevent an economic crisis and trade depression? And what is its relation to the writings of Marx?

Besides some scattered remarks in the GENERAL THEORY, Keynes most sustained discussion of Ricardo is ESSAYS IN BIOGRAPHY (mercury Books 1961) where he comments on the Ricardo-Malthus correspondence.

Keynes wrote:

…the complete dominance of Ricardo’s for a period of a hundred years has been a disaster in the progress of economics… (p. 117).

And he went on to say:

If only Malthus, rather than Ricardo, had been the parent stem from which nineteenth-century economics preceded, what a much richer and wiser place the world would have been today!” (p.120)

That last sentence follows several long passages from Malthus’s side of the correspondence, which Keynes sees as putting forward ideas against the Ricardian orthodoxy.

For example Keynes quotes Malthus from a letter to Ricardo dated July 7th 1821:

We see in almost every part of the world vast powers of production which are not put into action, and I explain this phenomenon by saying that from a want of the proper distribution of the actual produce adequate motives are not furnished to continued production… But if it be true that an attempt to accumulate very rapidly will occasion such a division between labour and profits as almost to destroy both the motive and the power of future accumulation… must it not be acknowledged that such an attempt to accumulate… may be really prejudicial to a country (p.118-119).

On Marx, there is a passing reference in a footnote:

Marx, criticising Malthus, had held that over-population was purely the product of a capitalist society and could not occur under Socialism. Marx’s reasons for holding this view are by no means without interest, being in fact closely akin to Malthus’s own theory that ‘effective demand’ may fail in a capitalist society to keep pace with output” (p. 107-108).

But Marx explicitly rejected Malthus on this very point in his discussion of Say’s Law in the first volume of CAPITAL. Marx’s theory of crises was not about lack of effective demand. In fact he pointed out in CAPITAL VOLUME II that the wages of workers are actually increasing rather than falling prior to an economic crisis (see ch 20 Simple Reproduction where Marx states “It is a pure tautology to say that crises are provoked by a lack of effective demand or effective consumption” p. 486-7 Penguin ed 1992).

For Marx, capitalism never produces enough. It does not exist to meet human need but to make a profit for the owners of Capital. Marx criticises Malthus by reference to Sismondi pointing out that the latter, for all his faults is:

…particularly aware of the fundamental contradiction: on the one hand, unrestricted development of the productive forces and increase of wealth which, at the same time, consists of commodities and must be turned into cash; on the other hand, the system is based on the fact that mass of producers is restricted to the necessaries…” Marx, THEORIES OF SURPLUS VALUE Part III Moscow1975 chapter XIX Thomas Robert Malthus p. 56).

J. B. Say argued that a serious depression should not take place because "every seller brings a buyer to market": by which he meant that every producer of commodities who sells his products then has the cash with which he can at once buy other products and so keep industry busy.

Marx dealt with it in CAPITAL VOL. 1, Chapter III, section 2. He accepted Say's argument with, however, one qualification. He agreed that the sellers have the cash with which they can go at once out and buy some other commodity, but he pointed out that "no one is forthwith to purchase because he has just sold".

He may choose not to do so and if the interval of time between the sale and the purchase is too great, the result is "a crisis".

The question to be answered then is why this failure to buy commodities takes place.

Say has disregarded the fact that part of capitalist expenditure which is investment (as distinct from the capitalists' purchase of necessities and luxuries for personal consumption) has as its sole purpose making a profit, and if there is no prospect that a profit can be made the capitalist refrains from buying although he has the means to buy.

When the 1979 depression began the electrical company G.E.C. had what the Media called a "cash mountain" of £1500 million. Instead of using it to produce more electrical goods G.E.C. preferred to lend it to banks and the government (some cash was returned to shareholders).

Later on, in 1984, when unemployment was 3,200,000, other companies found themselves in a similar position. THE DAILY MAIL (30th Oct. 1984) reported "Companies have never had so much cash", and the FINANCIAL TIMES (10th Nov, 1984) said "Many companies are brimful of cash they can hardly find any use for".

Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do

When economic conditions improved and there were prospects of making a profit, companies were only too willing to invest.

In fact it was Keynes who argued that there is an overall shortage of purchasing power in capitalist society and that this is the cause of crises and depressions.

Keynes maintained that this overall shortage of purchasing power made it impossible to sell all the products of industry in the home market, hence the pressure to sell abroad. And that if home demand is increased by the adoption of his proposals pressure to export would disappear and thus remove a major cause of war.

Of course the poor lack purchasing power, but the poor and rich combined always have the purchasing power to buy all the products of industry which Marx showed in his illustrations of extended reproduction in CAPITAL VOLUME II (see ch. 21 Accumulation and Reproduction on an Expanded Scale pp565 -599 Penguin ed).

However, it must be remembered that capitalist production produces only for profit and the amount of commodities produced at any given time do not correspond with the real needs of the working class rationed, as they are, by the wages system.

The failure of some products of industry to find buyers, which produces a crisis, is not due to any overall shortage of purchasing power but it is due to the failure of capitalists to exercise their power to purchase commodities at an important time.

Engels and Ricardo

Before we turn our attention to Marx and Ricardo there is some useful remarks by Engels on Ricardo in the preface to the first German edition of Marx’s POVERTY OF PHILOSOPHY (Progress publishers 1976).

These remarks throw some light on Keynes’s assertion that he had undermined the “Ricardian foundations of Marxism”. For, to our knowledge, Keyes did not run a detailed critique against Ricardo’s Principles of Political Economy.

Engels states that both utopian and scientific Socialism links itself to the Ricardian theory of value. If there are any Ricardian roots leading to Marx then this is it.

Engels points out that the two important propositions put forward by Ricardo in his PRINCIPLES are the following;

1). That the value of any commodity is purely and solely determined by the quantity of labour required for its production (p. 10).


2) that the product of the entire social labour is divided among the three classes: landowners (rent), capitalists (profit) and workers (wages).

The utopian socialists had first embraced these two Ricardian propositions as early as 1821, some four years after the publication of the PRINCIPLES but soon were eclipsed only to be rediscovered by Marx when he was reading through the many texts relating to the Ricardian School prior to the publication of CAPITAL. Here are just a few of the books written by Ricardian Socialists; Hodgskin, POLITICAL ECONOMY (18270; William Thompson, AN ENQUIRY IN THE PRINCIPLES OF THE DISTRIBUTION OF WEALTH MOST CONDUCIVE TO HUMAN HAPPINESS (18240; T. R. Edmunds, PRACTICAL MORAL AND POLITICAL ECONOMY (1828) and LABOUR'S WRONGS AND LABOUR'S REMEDY (1839).

Engels pointed out that the application of the Ricardian theory gave an insight into “the origin and nature of surplus value” (p. 120 although it led to a utopian cul de sac. Utopian socialists argued that the entire social product should belong to the workers as their product on the grounds that they are the real wealth producers in society. The Ricardian socialists did not draw the revolutionary conclusions from Ricardo but rather couched their criticism of capitalism in terms of “justice”.

Another point Engels made in the Preface related to a technical problem in Ricardo’s theory where the value of commodities is determined by the labour required for their production. However, some commodities sell above and below their value with the consequence that the Ricardian law of value comes into contradiction with the law of the equal rate of profit.

Engels writes:

If the products of both branches of industry are sold at their values, the rates of profit cannot be equal; if, however, the rates of profit are equal, then the products of industry cannot always be sold at their values. This we have here a contradiction an antimony of two economic laws….(p.14).

Marx was to give a solution in the third volume of CAPITAL in relation to the question of the transformation problems and prices of production. Engels’ final point is against the Ricardian definition of value and why it was held in high esteem by the capitalist class of the time. Engels said this:

It (the Ricardian definition of value) appeals with irresistible force to his sense of justice. Justice and equality of rights are the basic pillars on which the bourgeois of the eighteenth and nineteenth centuries would like to erect his social edifice over the ruins of feudal injustice, inequality and privilege. And the determination of the value of commodities by labour and the free exchange of the products of labour, taking place according to this measure of value between commodity owners with equal rights, these are, as Marx has already proved, the real basis on which the whole political, juridical and philosophical ideology of the modern bourgeoisie has been built (loc cit p. 24).

Keynes did not attack this Ricardian root. It had already been smothered by the utility school of value at the turn of the 20th century because, as the Austrian economist, Frederich von Wieser told his students: “Ricardo leads straight to Marx and socialism”.

Marx and Ricardo

The foundations of Marxism are not Ricardo’s Principles per se but a critique of political economy. In fact much of Marx’s interest in Ricardo is in tracing the errors of Ricardo’s theory particularly around the question of workers selling their ability to work (labour power) as a commodity (see CRITIQUE OF POLITICAL ECONOMY pp 69-73 Kerr 1918).

Marx noted that the Theory of Value which had been developed by the Classical Economists contained many defects which needed to be resolved. Ricardo had given classical political economy its final shape and it was against Ricardo’s theory of value that critics, like J. B. Say, directed their fire. Although Ricardo and Say supported capitalism, Ricardo at least set out to understand commodity production and exchange for profit whereas Say was a mere apologist.

In his A CONTRIBUTION TO A CRITIQUE OF POLITICAL ECONOMY Marx turned his attention to the Theory of Value as it had come down to him in the section: Notes on the history of the theory of commodities.

The section is as important as the Preface which precedes it. In sixteen pages he dissects the theoretical framework of the Classical School as formulated by Petty, Smith and Ricardo and highlights four serious theoretical shortcomings seized upon by critics of Ricardo and offers solutions to each, all of which would be later developed in the three volumes of CAPITAL.

The first objection against Ricardo was the belief that Labour itself has exchange value and varied types of labour have different exchange values. However, if you make exchange-value the measure of exchange value it creates a vicious circle “by making exchange value the measurement of exchange value, because the measuring exchange value needs a measure itself” (p. 71).

Marx’s theory of wage-labour provided the answer.

In his theory of wage-labour Marx showed that Labour is an activity not a commodity. It is Labour-power which is the commodity the worker sells to the capitalist in exchange for a wage or a salary. Marx dismissed the “Price of labour” as being as irrational as a “yellow logarithm”. The value of a commodity depends on the quantity, not on the value, of labour embodied in the commodity. Ricardo was wrong in supposing that the wage is “the value of labour”.

The second objection against Ricardo was the view that if the exchange-value of a commodity equals the labour-time contained in it, then the exchange value of a working day is equal to the commodity it produces, or, in other words, wages must be equal to the product of labour. However, the opposite is true. So how does commodity production on the basis of exchange-value created by labour-time lead to the result that the exchange-value of labour is less than the exchange-value of the commodity produced.

Marx answered this problem in his analysis of capital.

Marx showed labour power is a commodity. It follows that the value of the worker’s capacity to work equals the quantity of labour required to produce the value of the commodities a worker and his family needs to produce and reproduce themselves. The difference between what the worker is paid as a wage or salary and the value of the commodity is surplus value. Marx’s discovery of surplus value led on to relative and absolute surplus value and capital accumulation; that is, capital in motion driven on by the class struggle.

Marx distinguished the different functions of the means of production and labour power in the creation of surplus value. In the production process the means of production are constant capital because they preserve and transfer value that was originally created by labour in its journey from raw material to finished commodity. Labour power is variable capital because it is the element in the production process that accounts for the creation of surplus value. The capitalist can vary labour time, the intensity of work and therefore the extraction of surplus value from the working class.

In a letter to Engels, Marx stated “Constant capital is that part of capital which consists of raw material and machinery. Variable capital that part which is exchanged for labour” (SELECTED CORRESPONDENCE, July 6, 1863 Marx-Engels, Moscow page 133).

The third objection against Ricardo was the theory that the law of supply and demand forces the market-price of commodities to fall or rise above their exchange-value. This allowed critics of Ricardo’s theory of value, like J. B. Say, to state that the value of commodities is determined not by the labour-time contained within them, but by the relation of supply and demand. Marx thought this was a strange conclusion. He said that it begs the question “how a market price based on exchange value can deviate from that exchange value…” (p.72).

Marx solved this objection by his theory of competition.

Generally, if profits in certain branches of industry are too high, capital is attracted to that industry, production is increased, prices fall, and profits follow. If profits are too low, capital flows out from that industry, production is decreased, prices rise, profits follow (see CAPITAL VOLUME III, Chapter IX Formation of a General Rate of Profit (Average Rate of Profit) and transformation of the Values of Commodities into Prices of Production and Chapter X Equalization of the Rate of Profit).

This is how an average rate of profit is formed with the consequence that the price of commodities conform to the quantity of social labour required to produce them. The average rate of profit ensures that each capital receives its equal share of the total surplus value produced by the social capital in all spheres of production

The Fourth and last objection against Ricardo was this: if exchange-value is the labour-time contained in the commodity why and how do commodities which have no labour possess exchange value, for instance land.

This objection was solved by Marx’s theory of rent.

Marx looked at two forms of ground rent; differential rent on all but the least productive land and absolute rent on all land. Ground rent is part of surplus value in agriculture and the other land-using activities. His analysis is set out in Part 6, Transformation of surplus-profit into ground rent in the third book of CAPITAL.

Marx clearly is not a “minor-Ricardian” for, in answering these four shortcomings in the work of Ricardo, he established the scientific grounding for a Labour Theory of Value and a scientific understanding of capitalism. Marx’s own Labour Theory of Value showed that the exchange values of commodities are set by the relative amounts of necessary abstract labour incorporated in their production.

Marx wrote; “the value of a commodity, therefore, varies directly as the quantity, and inversely as the productiveness, of the labour incorporated into it” (CAPITAL VOL 1).

There are, then, two parts of the labour theory of value that need to be understood to avoid any misconceptions. First, labour means necessary labour, i.e. the quantity of labour corresponding to current standards of productivity. The extra time taken by workers who are either inefficient or “lazy” is not productive in terms of exchange value. Second, skilled labour is more productive than unskilled labour as can be seen by a proficient bricklayer laying bricks compared to an apprentice.

These two points lead on to Marx’s discussion of the difference between value and exchange value. A commodity has a use-value and it also has value which is expressed in the market as “exchange-value”.

At the beginning of CAPITAL, Marx stated that a commodity, in “common parlance”, had a use-value and an exchange value. But later on he qualified this statement:

…the value of a commodity obtains independent and definite expression, by taking the form of exchange value. When, at the beginning of the chapter, we said, in common parlance, that a commodity is both a use-value and an exchange value, we were, accurately speaking, wrong. A commodity is a use-value or object of utility, and a value. It manifests itself as this two-fold thing that it is, as soon as its value assumes an independent form –viz., the form of exchange value. It never assumes this form when isolated, but only when placed in a value or exchange relation with another commodity of a different kind. When once we know this, such a mode of expression does no harm; it simply serves as an abbreviation” (CAPITAL VOLUME 1, Penguin, Ch.1, p.60).

Marx went on to show that exchange values are determined by values, not that they are proportional to values. Commodities have use value and value. Value can be considered qualitatively and quantatively. The magnitude of value is measured in units of socially necessary labour time. The form value takes in circulation is exchange value. Exchange value can be measured in terms of a universal equivalent, money. The money form of exchange value is the price of the commodity. And exchange value is determined by the magnitude of value.

Finally there is Marx’s most important contribution to understanding capitalism; surplus value. Surplus value is the difference between the exchange value of labour power and the use value of labour; it is the value added by the worker as the use-value of the worker’s mental and physical ability to work is expended with raw resources and the means of production. Marx defined surplus value as follows: M= money capital advanced, C + the commodity produced and M’ the increased money capital realised after sale.

Marx wrote:

The exact form of this process is therefore M-C-M’ where M’=M+?M=the original sum advanced plus an increment. This increment or excess over the original value I call surplus value. The value originally advanced, therefore, not only remains intact while in circulation, but adds to itself a surplus value or expands itself. It is this movement that converts it into capital” (CAPITAL VOL. 1 p. 71).

Marx’s other sustained critique of Ricardo’s political economy was in the second volume of THEORIES OF SURPLUS VALUE when he came to look at Ricardo’s theory accumulation. Not only did he show that Ricardo’s theory of accumulation was erroneous but that he failed to take into account that economic crises were contained within commodity production and exchange for profit; that is “the very nature of capital leads to crises” (p. 470) and were not the result of accidents in corn production or caused by external factors like war (see Ricardo’s Theory of Accumulation and a Critique of it ch XVII pp470-546)

And Marx’s crucial insight into capitalism, his theory of surplus value, is not predicated on Ricardo’s theory of political economy. In fact Marx criticized Ricardo in not taking his theory to its logical conclusion. Marx censured Ricardo for confusing the laws of surplus value with the laws of profit principally because Ricardo could never get outside “his bourgeois skin” (see THEORIES OF SURPLUS VALUE Chap 25 pp 425 vol. II). Surplus value was Marx’s unique discovery of how the working class was exploited as well as being the source of the capitalist’s unearned income of rent, interest and profit.

Marx’s guiding thread to his studies was his materialist conception of history which he set out in his preface to the CONTRIBUTION TO A CRITIQUE OF POLITICAL ECONOMY (1859). Marx’s critique of political economy was also informed by his political concept of the class struggle. It is, therefore, a mistake to see the foundations of Marxism as “Ricardian” but such a crass belief merely demonstrates Keynes’s own ignorance of Marx’s method and his unique understanding of capitalism.

If Keynes failed to undermine Marx his greatest failure was to believe that the State could offset the failure of commodity production and exchange for profit.

The Failure of Keynesianism

The Labour Party adopted Keynesianism as its new policy at its Annual Conference in 1944, in a Report on Full Employment and Financial Policy, which declared:

If bad trade and general unemployment threaten this means that total purchasing power is falling too low. Therefore we should at once increase expenditure…We should give people more money and not less, to spend

After the Second World War Keynesian doctrines were accepted by most economists, political parties and trade unions. Writing in 1957 (REMEDIES FOR INFLATION), the late Sir Harold Wilson stated that the Labour Party and all the other “major parties” were Keynesian.

As late as 1974, in spite of the compelling evidence that Keynesian policies had been an abject failure, the Tory M.P., Peter Walker called his Party “the party of Keynes and Disraeli”; while the Liberal M.P. John Pardoe said that the Liberal Party is “the party of Keynes and William Beveridge” (quoted from Inflation and Unemployment p 92 QUESTIONS OF THE DAY, The Socialist Party of Great Britain 1978).

Both Tories and Labour pledged themselves to maintain “full employment” defined in the Labour Party’s 1945 General Election programme as “Jobs for All”.

At first Keynesianism appeared to be working. In the years after the Second World War there was low unemployment. Both Labour and Tory governments claimed that this was evidence of the success of Keynesianism. However they overlooked two important factors; the first the repair of war damage and second two economic competitors; Japan and Germany, had been knocked out of the world market.

Low unemployment did not last. By 1955 unemployment had been on a sharp upward trend, each peak of unemployment rising to a higher level –to 747,000 in 1963, to above a million under the Heath government in 1972, and to 1,500,000 in 1976 under Callaghan’s Labour government, and to over 1, 600, 0000 in July 1977.

In 1979 the Callaghan government was voted out of office with unemployment higher than when they first came into power. Not because of the failure of the policies but because the Keynesian policies could have no effect on the way capitalism passes from one economic crisis to the next.

From a Marxian perspective the high levels of unemployment was not a result of the failure of Keynesianism but instead capitalism working normally in respect to the trade cycle.

However, non-Marxian critics of Keynes drew the erroneous conclusion that high levels of unemployment coupled with high inflation were a consequence of applying Keynes’s ideas and all that was needed was a new economic policy. THE TIMES told its readers that “unemployment…will decline as fast and as soon as we all forget Keynes...” (13.02.76).

The Failure of Economic Liberalism

For over thirty years the ruling economic orthodoxy that replaced Keynesianism has been economic liberalism premised on minimal state regulation, free trade and free markets. The doctrine became to be universally held by nearly all countries after 1989 following the collapse of the Soviet Union.

The engine room of this ideology was the US informed by economists like Milton Friedman, F. A. Hayek and a host of free market institutes like the Mises Foundation, The Cato Institute and The American Enterprise Institute. In short it was a return to the past.

The core belief of economic liberalism was the harmony of the market and that commodity production and exchange for profit leads to universal benefit. Monetarist policy of governments and Central Banks would ensure market harmony and stability.

Three crises later Monetarism was discredited but the free market ideas still dominated economic departments, and government policy, and the myriad of think tanks like the Adam Smith Institute and Institute of Economic Affairs.

So what went wrong; why is economic liberalism now in disarray?

Since the current economic crisis first broke, there has been an avalanche of books, giving reasons for what went wrong and offering solutions to put the economy on the right track again.

One such book is THE RETURN OF THE DEPRESSION ECONOMICS AND THE CRISIS OF 2008 (Penguin, 2008) by Paul Krugman, Professor of Economics at Princeton University and winner of the Nobel Prize in Economics. He is a supporter of Keynes, and has been highly critical of the Bush administration and the free market economics it has pursued.

Krugman starts his book with a historical overview of past depressions. The depression of the 1930s, for example, was once considered by economists as a “one-off” aberration, whose social destructiveness and negative political consequences would never return again, through Keynesian or monetarist policy. That was before the 1990s.

Professor Krugman reminds his readers of the economic slump in Asia which bore “an eerie resemblance to the Great Depression” of the 1930s (p 4). That economic crisis was immune both to the monetarist techniques of the bankers, and to government fiscal policy as advocated by Keynes.

Since the Asian crisis, there have been the ‘dot com’ crisis, the economic crisis in Argentina, and the long depression in Japan, where all types of economic policy were attempted by the Government to no avail.

Outside the Asian and Japanese economic depressions, economists in the US, bolstered by the collapse of the Soviet Empire, saw US capitalism as having solved all the problems of the economy.

Free trade, free market and economic liberalism: throughout the world: this was the common belief system held by the majority of economists, politicians and corporate executives.

This world view was stamped by the IMF and the World Bank on former Soviet bloc countries, the Latin American countries, notably Mexico, and the emerging capitalist countries like India. This economic dogma could not be challenged and any dissident was told “there is no alternative”.

In 2003, Robert Lucas, a professor at the University of Chicago, gave the presidential address at the annual meetings of the American Economic Association. He told the assembled economists:

... the central problem of depression-prevention has been solved, for all practical purposes”. (Krugman, p 9)

A year later, Ben Bernanke, a former professor who has since gone on to serve on the board of the Federal Reserve, in a speech entitled The Great Moderation (a sustained period of market equilibrium and growth), said that:

…modern macroeconomic policy had solved the problem of the business cycle” (ibid., p 10).

Economists claimed to have created conditions of market ‘equilibrium’ and continuous economic growth through policy instruments like the manipulation of the interest rate mechanism by central banks, allowing politicians like Gordon Brown to boast that there would be no more “boom and bust” on his watch.

Just to remind ourselves, here are three quotations from Brown when he was Chancellor of the Exchequer which will, no doubt, be etched onto his political tomb stone

In the 2006 budget, he said: "As I have said before Mr Deputy Speaker: No return to boom and bust".

Going back further, in his conference speech of 2004, he said: "No longer the boom-bust economy, Britain has had the lowest interest rates for forty years".

On 5 April 2000, in a speech to British Chambers of Commerce national conference, Brown said the government had established its new monetary framework "to avoid the historic British problem - the violence of the repeated boom and bust cycles of the past".

The ‘free market’ zealots in the well-endowed think-tanks and the City bankers and financiers could do no wrong. They were supposed to be the “masters of the universe” (ibid., p 119). Each year, they met at the exclusive World Economic Forum at Davos in Switzerland to be told how wonderful they were, at the splendid parties they threw for invited politicians and journalists.

The reality of capitalism, with its anarchy of production, and the inability of sellers to know whether or not there were buyers for their commodities, eventually pricked such overblown pretensions including those of Mr Brown.

Here is a comment from the economist Professor D. E. Ray:

Events of the last year (2008) have taught us that blindly believing that markets are unequivocally self-regulating and universally self-correcting does not reflect reality. We are finding that those beliefs, while true under certain theoretical conditions, come up short in the real world. POLICY PENNINGS, University of Tennessee, 27 February 2009

The huge intellectual project begun by Friedman, Hayek and others in the 1960s and 1970’s has met the same failure as Keynesianism in the mid 1970’s. Reality kicks into capitalist economic theory when the capitalist class starts to lose a sizeable portion of its wealth by having to bale out “the masters of the universe”. It was noticeable how quickly former supporters of the free market became born-again- Keynesians calling for more State regulation and vast sums of government money to support their own particular industry.

But to return to Keynes the return of his discredited policies was only history repeating itself again as farce.

With no apology to Keynes: “Keynesianism must always remain a portent to the historians of Opinion— how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history”.

The Triumph of Marx over Keynes.

The persistence of economic crises and depressions since the death of Marx demonstrates the soundness of his scientific understanding of capitalism and the intellectual poverty of academic economics.

Where does Marx come in? Would Marxism succeed to solve the problems caused by capitalism where the others have failed? The answer is no?

Marx’s approach was different. He showed that there is no economic policy whatever which will prevent capitalism from producing periodic economic depressions and unemployment.

Let us return to the TIMES MAGAZINE front cover. If you recall the front cover had the question: “What would Marx have said?

This is what Marx said:

The life of modern industry becomes a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation” (CAPITAL VOL. 1 ch. 25 The General Law of Capitalist Accumulation p. 785 Penguin 1990 edition).

It is important to keep clearly in mind that the “crisis” is quite distinct from the depression which comes after the crisis.

Keynes and the Keynesians said Marx had got it all wrong and that Marx theories were helplessly unscientific and they promised us that there would never be another depression if Keynes’s policy was adopted. So let us look at the facts.

Before Keynes came along there were depressions in 1875, 1921 and 1930. And after Keynes there were economic crises and depressions in the four successive decades; 1970 with Keynesianism, the 1980’s and 1990’s with monetarism and now in first decade of the 21st century with globalization, free markets and free trade.

All these crises and depressions displayed characteristics highlighted by Marx in CAPITAL irrespective of the economic policies pursued by the Labour and Tory governments in power at the time.

What happens in each phase of the trade cycle is this:

* “moderate activity”: In this phase capitalism is recovering from an economic depression. Production is increasing and capitalists are competing with each other for a share of the market. The market goes to the cheapest producers. Attempts are made to cheapen production through the introduction of labour-saving machinery which continually renders workers redundant and making them redundant.

* “Prosperity or boom”: In the period of boom, production is at its peak and the market seems to be limitless. Profits rise. Capitalists compete with each other to buy materials, machinery and scarce workers. Unemployment largely disappears. In this period wages rise and more workers are in employment.

* “overproduction”: Then comes “overproduction”: This was described by Marx as a “disproportions between different branches of industry”. It means that some industries, say steel or ship building or car manufacture or petrol have produced too much for their respective markets. It is not a general overproduction of all industries which is economically infantile and meaningless.

* “crisis”: Overproduction causes crisis. It is caused by those capitalists committed to buy raw materials and take on workers for which there are no markets for their commodities. It is not caused by an inadequacy of workers’ wages. The wages of the whole working class rise before a crisis enabling them to buy more consumer goods.

* “Depression”: Then comes the depression. It is caused by workers becoming unemployed and reducing their demand for consumer goods. Profits also fall and the wages of the working class also fall.

Then the cycle happens all over again.

The trade cycle is a telling example that capitalism cannot be controlled by economists and politicians and governments cannot anticipate demand. The trade crisis demonstrates the anarchy of commodity production and exchange for profit. And it presses home the Socialist case that capitalism not only cannot be run in the interest of all society but for social problems like unemployment to be resolved requires the workers to consciously and politically to replace capitalism with Socialism.

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