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On Marx and Keynes, the NAIRU and Say's Law, again

Many of the entries in this blog directly or indirectly deal with the relation between the old classical authors of the surplus approach and the more radical authors that followed after the Keynesian Revolution (see here, for example).  David Fields has pointed out this post by Michael Roberts on Marx and Keynes, from a Marxist point of view (after a debate with someone he refers to as left post-Keynesian).

This is not a bad post at all. The interpretation of Keynes given by the post-Keynesian author (in Roberts' description) is not the best, but it is one of the possible interpretations for sure. The unknown postie also correctly notes that:
"Keynes and Marx were united in their critique of Say’s law (that supply creates its own demand) as a common starting point for theorising about the possibility of insufficient effective demand and the realisation problem."
Which is important to emphasize, since some Marxists tend to have an attachment to Say's Law. In this respect the postie [again in Robert's description of what he said] is actually unfair to Marx and Ricardo, suggesting that:
"But he [Marx] did (like the other classical political economists) expected the economy to always tend towards full capacity utilisation even if he (like Ricardo) theorised about technological unemployment in an economy operating at full capacity utilisation."
Actually there is no indication that Marx or Ricardo suggested full capacity utilization. Ricardo's version of Say's Law does not require full employment, and there is no mechanism to bring investment to the level of full employment savings. Investment equals savings by definition, and it might be at a level with significant levels of unemployment and spare capacity. Reductions in the real wage or the rate of interest would not bring about full utilization of resources. That's a concept that appears only with Marginalism.

When Roberts comes to his argument, it starts with a discussion of Keynes' political position (saving Capitalism) rather than the analytical elements of his theory. Then he discusses the limits to Keynesian policies, which he narrowly defines as fiscal activism (note that this could have been the position of an Old or New Keynesian, defending fiscal activism on the basis of market imperfections). Roberts misses the radical component in Keynes analysis, which implies that market economies are NOT efficient in the allocation of resources, and that long-term equilibrium could imply unemployment (yes long-term equilibrium unemployment, not disequilibrium, and not short-term unemployment is Keynes' central proposition).

Further, Keynes' Principle of Effective Demand requires to be fully operational the abandonment of the neoclassical (Marginalist) theory of distribution, since variations of the rate of interest (or the real wage) do not lead to full utilization of capacity, and are compatible with a coherent recovery of the old and forgotten theories of the classical authors and Marx. So, complementing the postie, Keynes and Marx are united, not only the rejection of Say's Law, but also on the need for an alternative to the Marginalist theory of distribution, one in which conflict is necessary.

Keynes didn't get to this point, but understood the need of getting rid of the natural rate of interest concept. And that leads to an abandonment of the neoclassical theory of distribution per force.

Then Roberts gets to his main point. He says:
"Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall. 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."
This is a variation of the traditional Marxist theory of the business cycle. There are multiple versions, from Andrew Glyn profit squeeze to Goodwin predator prey (which by the way suggests full utilization of resources in his model in Marxo-Marginalist fashion), and many others. All rely, like Roberts above on the notion that the rate of profit (or the profit margin in Marglin and Bhaduri) drives investment.

In this case, high employment generates wage inflation which can increase the wage share of workers in output; but this will, in turn, reduce the profits of capitalists and thus reduce future investment and output, leading to a recession. The recession, in turn, reduces labor demand and employment and consequently leads to lower wage inflation or even deflation and reduces the wage share of workers. But as workers wage share declines, then profits increase and, with them, investment and a new boom starts.

There are a few problems with this view, the profit-led view of investment, discussed here before (and here). As mentioned before, from a theoretical point of view, it is difficult to justify why a firm would invest, even if the rate of profit is high, if demand is not growing. And, in reverse, why would a firm not invest, and increase its capacity, if demand is growing even if the rate of profit is relatively low. Wouldn't it make sense to keep pace with demand, rather than let the competition take advantage of expanding demand? From an empirical point of view (as noted here, and here) the accelerator principle rules the roost.

Finally, note that all of the profit-led based theories of cycles and growth are fundamentally dynamic Say's Law stories, in which savings, determined by profits determine the behavior of investment, and the system fluctuates around a level of output in which worker's bargaining power does not lead to inflation, or in other words stable inflation. That is the so-called Marxist version of the NAIRU (see my previous post on the late Andrew Glynn on the subject; for a relatively recent Marxist defense of the NAIRU see Pollin here; subscription required). As I noted before (and here) there are reasons to be skeptical about the Phillips curve and the NAIRU, in all their versions.

PS: Comment by Franklin Serrano, that I paste in full:

"In Marx there is indeed no indication of a tendency to full capacity utilization nor full employment of labour. But the author is right about Ricardo. Ricardo assumed Say's law which means that all that "demand is only limited by production", this DOES imply that investment is equal to and determined by full capacity savings as in Ricardo it is only capital (full capacity) not labor that determines potential output. Ricardo did NOT contemplate "spare capacity"  and yes his technological unemployment was based on the fully capacity output not generating enough jobs for the economy to get to full employment. You are right that in Ricardo investment does not adapt to full employment savings. But it does adapt if arbitrarily to full capacity saving."

Same issue brought up by PGB below. I conflated full capacity with full employment. Mind you, I suspect that this is what the post-Keynesian author referred in the post was doing, and hence my mistake.


  1. I disagree in a couple of points, may I say. First, one thing is to assume full capacity, and another thing is to assume full employment. That distinction is not always clear, it may be implicit, but in this discussion I think it's very appropriate. In the case of Marx and Ricardo, I totally agree that there is no full employment. Marx is probably the first author with a theory of structural unemployment, so your point is totally correct. However, I do agree with Claudio Sardoni in saying that both in Marx and Ricardo there is a tendency towards full capacity utilization. That is, in the case of Marx, because ultimately his escape from Say's Law was unsuccessful, in my view. He provided the elements for that escape, chief among them the schemes of reproduction, but he stood by the falling rate of profit, even if he noted the counteracting forces, and that is a profit squeeze theory, and therefore a Say's Law view (I agree with you on that). The NAIRU story has a lot of support in Marx's writings, and ultimately, and it is as well a Say's Law story. In my view, the first two who successfully escaped Say's Law are not Marx and Keynes, but Keynes and Kalecki. Whatever other merits Marx had, escaping Say's Law was not one of them, even though he did provide relevant elements for such enterprise.

    1. Hi PGB; sorry for the delay in replying. Yes full capacity is about the utilization of the means of production, and full employment is about labor. And that might be the source of my confusion. I would argue that in Ricardo there is a tendency to full capacity utilization, but not to full employment of labor.

  2. @Matías,

    I've checked, carefully, all the posts linked to here. I have to say, you drive a very good point.

    I'll guess (and, I repeat, it's only my guess) the point where some Marxists stumble is here:

    "Keynes says the crisis comes about through a lack of ‘effective demand’, namely an **unaccountable** fall in investment and consumption and this causes profits and wages to fall."

    I suspect these Marxists believe the above can only be explained by the mythical "confidence fairy" and the "animal spirits" BS (that's why the fall in investment is "unaccountable").

    Incidentally, I myself discussed the point below with one of them:

    "As mentioned before, from a theoretical point of view, it is difficult to justify why a firm would invest, even if the rate of profit is high, if demand is not growing".

    And the other guy, while very knowledgeable with the profit-driven view, could not give me an answer.

    If I had to pin-point the place where this confusion started, I'd put my finger on the discussion of Marx's schemata of reproduction. Particularly the simple reproduction one.

    1. Hi Magpie, yes, I think you're right, and in fact many post-Keynesians do adhere to something that looks like a confidence fairy.

  3. As far as I can see on theoretical grounds, Say's law only works in a very feeble way in complex economies. And yet during the 1800s (prior to when governments deliberately adjusted aggregate demand), economies actually recovered from recessions. I'm very puzzled by this.

    Ideas anyone?

    1. Not sure I follow. In all fairness I can see, other than in very limited theoretical grounds, where Say's law would work. It has very little applicability even in the early 1800s, I would say. Can you give me an example of what you have in mind?

  4. You're being far too generous with regards to this post. There are numerous errors. One of which you quote. Here:

    "Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall."

    In Keynes' conception wages will not typically fall because workers fix nominal, not real wages. That is even the case with the neo-Keynesians and New Keynesians. I know of literally no school with the name "Keynesian" that suggests flexible real wages.

    1. Yes, I'm being generous. But the point is that I'm trying to get the best possible interpretation of Marx. And the correct interpretation of Keynes which must deal with chapter 19 in which wages and prices are flexible is part of the post-Keynesian tradition.


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