Marx’s Capital – ‘scientifically erroneous and without application

to the modern world’?

by Michael Roberts
Paper to Hofstra symposium on 150 years of Marx’s Capital, April 6-7 2017
John Maynard Keynes reckoned Das Kapital was “an obsolete economic textbook which I
know to be not only scientifically erroneous but without interest or application for the modern
world.” Marx’s work was a ‘poor version’ of Ricardo and needed to be knocked away.

Was Keynes right about this? This paper will consider the logical consistency of Marx’s
value theory and its empirical relevance to modern capitalist developments. It will deal with
the differences of Marx’s theory as a critique of political economy to that of Ricardo and
Keynes.

In particular, the paper will consider the differences between the labour value theory of
Ricardo and Marx and the marginalist foundations of Keynes. It will also compare ‘the most
important law of political economy’, namely Marx’s law of the tendency of the rate of profit
to fall, to the explanations of changes in profitability offered by Ricardo and Keynes.

Empirical evidence will be provided to consider the relevance of Marx’s value theory and law
of profitability to developments in 21st century capitalism.

The paper is divided into four sections.

1. Labour theory of value versus marginal utility

2. Profit is unpaid labour or the marginal productivity of capital
3. Crises: falling profitability and profits; or lack of demand and ‘animal spirits’
4. The future: capitalism reformable or transient
“Scientifically erroneous and a poor version of Ricardo”

“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?

“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?

“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.” Keynes1

1.The labour theory of value versus marginalism

Was Keynes right about Marx’s economic theories, namely that they were “scientifically
erroneous” and “without interest or application to the modern world”. As we commemorate
150 years since the publication of Capital Volume One, do we agree with Keynes that Capital
is an “obsolete textbook” used as “turbid rubbish” in “red bookshops”.

Marx’s Capital is a critique of the political economy of his time but also a searing analysis of
the mode of production 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: goods for money; wages for labour. His theory of profit as unpaid labour
also leads to the view that it is profit that drives investment or the accumulation of capital not
‘scarcity’ or abundance. And his law of the tendency of the rate of profit to fall attempts to
explain recurring slumps in production and investment. It also suggests that capitalism has
irreconcilable contradictions that can only be reconciled by its replacement with a new mode
of production and social relations based production for need through common ownership and
control.

The labour theory of value was not Marx’s invention or discovery, as we know. The classical
economists, Adam Smith and David Ricardo, in the era of the rise of industrial capitalism,
first expounded it.2

I don’t propose in this paper to go over the whole history and genesis of the labour theory of
value. Suffice it here to compare the labour theory of value with that of mainstream
economics. Let us consider a very basic question: why does a car cost $10,000 and cup of
coffee just $1?3 The classical theory says that the value or price depends on the quantity of
time that it takes workers to produce all the elements that go into creating, supplying,
delivering and selling the car or the cup of coffee. Price or value can and should be measured
in the average labour time involved. 4

This was the view of the classical economists like Smith and Ricardo.5 Ricardo opens his
Principles with a section on value. “The value of a commodity, or the quantity of any other
commodity for which it will exchange, depends on the relative quantity of labour which is
necessary for its production, and not on the greater or less compensation which is paid for
that labour.” 6
The classical economists, as well as Marx, regarded the labour theory of value as a vital law
that governed political economy. Nature provides the materials, but it is labour that fashions
them into use-values and values. Nature provides us with materials for free, without any
value. It is human labour, through the expenditure of time and effort, that serves to create
values. Production, where nature is changed by the application of human labour, is of course
essential not only to our wellbeing but to our survival.

As physical things, commodities are incommensurate; inputs are transformed into different
outputs through the production process. Therefore, they must share some other property than
their physical form that allows their common measurement or exchange, the labour required
for their production. This was the original premise for and reason why David Ricardo
adopted a labour theory of value.

For the classical economists, the fundamental economic problem was not scarcity, for
commodities are manufactured and so not scarce, but rather distribution and production.7 This
must be so if there is a social division of labour beneath the physical production and
reproduction of things. The qualitative aspect of the labour theory of value means nothing if it
cannot determine the division of labour quantitatively or, more specifically, the actual
physical quantities of different inputs required to produce actual quantities of outputs. 8

But Smith held two contradictory theories of value. In places Smith holds to the idea that the
value of a commodity is determined by one thing and one thing alone: the quantity of labour
embodied in such a commodity. On many occasions, however, he proposed an adding-up
theory of value in which the various forms of revenue (wages, profits, rent) were held, in
their summation, to determine the value of the commodity. The conclusion of this latter
conception of value is, as Marx puts it, ‘that commodity value is composed of various kinds
of revenue, or alternatively “resolved into” these revenues, so that it is not the revenues that
consist of commodity value but rather the commodity value that consists of revenues’9. Here
Marx is raising precisely the same fundamental question as that involved in a critique of
Keynes: In the analysis of capitalism, does one begin from value and capital or from price
and income (revenue)?

For Marx, it was self-evident that the expenditure of labour power was the only basis of
value10. Marx delineated his difference with Smith’s value theory in this way: “If I define
the length of three straight lines independently and then make these lines ‘components’ of a
fourth straight line equal in length to their sum, this is no way the same procedure as if I start
with a given straight line and divide this for some purpose or other – ‘resolve’ it so to speak –
into three parts. The length of the line in the first case invariably changes with the length of
the three lines whose sum it forms; in the latter case the length of the three segments is
limited from the beginning by their forming parts of a line of given size.11
 TOTAL VALUE IN LABOUR TIME

ONE UNIT DIVIDED

WAGES PROFIT RENT
INTO THREE

THREE UNITS SUMMED

WAGES PROFIT RENT

TOTAL VALUE-
WAGES- = PLUS
PROFIT RENT
PLUS IN LABOUR TIME

Ricardo, unlike Adam Smith, attempted to use the law of labour value consistently. But he
provided no explanation of capital and no theory of surplus value.

TOTAL VALUE IN LABOUR TIME

ONE UNIT DIVIDED

WAGES PROFIT RENT INTO THREE

RENT AND WAGES

WAGES- PROFIT- RENT-PLUS SQUEEZE PROFITS
PLUS SQUEEZE

It's a biological explanation"Profits depend on high

or low wages, wages on the price of necessaries, and
the price of necessaries chiefly on the price of food."

For Ricardo, value could be divided into three destinations for distribution among classes;
wages to workers, rents to landlords and profits to capitalists. But the share going to profit
was not determined by class struggle between labour and capital, but between industry and
land. The landlord controls the subsistence of labour and thus wages rise because of
increased costs of production of food induced by higher rents, this squeezes profit. Profit
rises or falls according to the movement of real wages and not to the creation of value as
such.

For Marx, this was an inadequate explanation of value and price. For him, the essence of
process was to found in the socially necessary labour time to produce commodities during the
working day12.

TOTAL VALUE IN LABOUR TIME

PRODUCED BY 'LIVING LABOUR'

The working day X LABOUR

FORCE (3bn)
= TOTAL HOURS
OF LABOUR
DIVIDED INTO
VALUE OF
LABOUR POWER
PAID LABOUR = UNPAID LABOUR=
AND SURPLUS
VALUE OF SURPLUS VALUE =
VALUE
LABOUR POWER = PROFITS,INTEREST,
WAGES RENT

Thus we can measure objectively the value created in labour hours: the working day times the
number of labourers. The struggle over value then is not industry versus land (Ricardo) but
capital (surplus value) versus labour (value of labour power).13

Marx’s value theory is a great advance on Ricardo because he recognised the difference
between new value created from living labour and past value stored and consumed in
production from the means of production. Thus the value of output is c+v+s, not just v+s
(value-added) as Ricardo assumed.

TOTAL VALUE IS NOT JUST LIVING LABOUR

'Dead Living labour

labour'
(means of unpaid
paid labour labour
production - (variable
constant (surplus
capital) = V value) = S
capital) = C

Ricardo gets it wrong

Marx not a 'poor Ricardo' but a better one!

This advance by Marx enables him to show that value based on socially necessary labour
time can be reconciled or transformed into prices (of production), around which market prices
will fluctuate. All the classicals recognised that under competition in the market, capitalists
would direct investment towards sectors with higher profitability. Thus there was a tendency
for profitability to move towards an average, a continually moving average, but an average. 14
 The transformation:
Relative prices are determined by the cost of capital advanced in the
producttion period plus an average rate of priofit as reached through
competition among capitals

Sectors c v s TV c v p TP
1 80 20 20 120 80 20 49 149
2 60 30 30 120 60 30 44 134
3 50 40 40 130 50 40 44 134
4 40 70 70 180 40 70 54 164
5 20 80 80 180 20 80 49 149
TOTAL 250 240 240 730 250 240 240 730
ARP
0.5

Thus the values created in each sector and measured in labour time are modified through
competition into prices. The more efficient are able to gain more value than their workers
created from the transfer of value through the market. Marx’s solution of the transformation
of value into prices was attacked from the word go by mainstream economics, starting with
Eugene Bohm-Bawerk up to the critique of the so-called ‘neo-Ricardians’ of the 1970s. But
Marx’s solution has now been fully vindicated logically by recent work by Marxist
economists.15 Indeed, there is no transformation ‘problem’.

It is a different matter with mainstream explanations of value and price that Keynes accepted
in contrast to the ‘illogical and obsolete’ labour theory of value. Keynes accepted the
mainstream marginal utility theory behind the basic diagram of supply and demand as the
theory of price. The marginal argument is also supposed to be self-evident. As Stanley
Jevons put it: “Repeated reflection and enquiry has led me to the somewhat novel opinion
that value depends entirely upon utility…. If someone wants something badly, it has
considerable utility for that person; the more he wants it, the more he is willing to pay for it.
…Labour once spent has no influence on the future value of any article” 16

There are two lines, sometimes they are drawn slightly curved, one is called the supply
function the other the demand function. The demand function rests on the common sense
notion that if something is cheap, people will buy more of it, so it slopes down. The other
line, called the supply function is shown sloping the other way. What it purports to show is
that as more is supplied, the cost of each item goes up. But what determines whether the two
curves cross at $1 or at $10,000? There is no explanation, except through aggregating
individual marginal utility curves.17

But subjective value cannot be measured and aggregated, so the psychological foundation of
marginal utility was soon given up, but without abandoning the theory itself. “Utility” now
referred not to the subjective evaluations themselves but to their manifestations in market
demand. Utility, it was now held, concerned not so much a particular commodity as the
number of commodities among which the buyer would be pleased to choose. This ordering or
preference scale of the consumer’s was represented graphically by so-called indifference
curves.

Thus economists now distinguished between the absolute (cardinal) magnitude of utility and
the relative (ordinal) utility, which was represented in the preference scale. The concept of
marginal utility metamorphosed into that of the marginal rate of substitution, the rate at
which the quantity of one good must increase to compensate for the diminishing quantity of
another. Maximal want satisfaction could then be defined in terms of the marginal rates of
substitution between all pairs of goods. In other words, the buyer would so distribute his
money that all the goods he purchased were equally valuable to him, at which point his
choice behaviour would come to a satisfactory conclusion. Thus a price of a good is at a
certain level where an individual is ‘indifferent’ in his or her choice of purchase of it or
another good.

Then came revealed preference18, an equally failed project. Even worse, this concluded that
a price was at a certain level because the market revealed itself at that price. The price is
explained by the price!
As Engels summed it up: “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!” 19

As Paul Cockshott has argued, “a causal theory should be testable to see if it is true. For that
to work, the entities you use have to be measurable. But what testable predictions does the
neoclassical theory make about the structure of industrial prices in, for example, the US
economy? It can make none, since the supply and demand functions for the various
commodities are not only contingently unknown, but are in principle unknowable. The theory
says that the two functions uniquely define the price and quantity that will be sold on a
particular day, but there are infinitely many pairs of lines that could be so drawn as to
intersect at the point (q,p) in Figure 1. It is no good trying to look at how the prices and
quantities sold vary from day to day, since the theory itself holds than any changes in price or
quantity must be brought about by ‘shifts’ in the functions. So the theory is unfalsifiable. It
makes no specific operational predictions about prices and quantities. It is true by definition
and vacuous by definition. It is not even wrong.20

Fred Moseley points out that Keynes was aware of the problem. “After having noted that
“two incommensurable collections of miscellaneous objects cannot in themselves provide the
material for a quantitative analysis”, he comes up with a truly astonishing consideration: this
“fact…need not, of course, prevent us from making approximate statistical comparisons”. As
if two incommensurable quantities could be “approximately” measured and compared! They
cannot, either exactly or approximately. The reason for this “oversight” is that no physicalist
author can admit to this inconsistency for to admit that there is a problem of
incommensurability would mean to admit that the whole theory is built on quicksand.”21 So
Keynes stuck to a scientifically erroneous theory of prices and value and one which is
untestable while rubbishing an objective and testable theory of value based on labour time
expended.

In contrast, Marx’s value theory as expounded in Capital is both logical, testable and
supported by evidence. Cockshott and Cottrell22 broke down the economy into a large
number of sectors to show that the monetary value of the gross output of these sectors
correlates closely with the labour concurrently expended to produce that gross output:

“If the labour theory of value is correct, these ratios should be fairly narrowly distributed.
Using United Kingdom input-output data we tested the candidate “value bases” oil,
electricity, and iron and steel, and found correlations against price of 0.799, 0.826 and 0.576
respectively, as compared with 0.977 for labour.7 For one can focus on the ratio of aggregate
price to labour-content (or alternatively labour-content to price) across the sectors of the
economy.”

Anwar Shaikh did something similar23. He compared market prices, labour values and
standard prices of production calculated from US input-output tables and found that on
average labour values deviate from market prices by only 9.2 per cent and that prices of
production (calculated at observed rates of profit) deviate from market prices by only 8.2 per
cent.

And G Carchedi in a recent paper showed that the validity of Marx’s law of value can be
tested with official US data, which are deflated money prices of use values. He found that
money and value rates of profit moved in the same direction (tendentially downward) and
tracked each other very closely.24

2. Profits and production

The main message of Capital is that production of commodities is for profit. For Marx,
capitalism is a money-making economy. For Keynes, it is a monetary economy but one that
is production for useful things and services.

In Marx’s opinion, the tendency of the rate of profit to fall – a much discussed and disputed
question amongst the classical economists – was the single most important law of political
economy. This was so because it was understood that it was the rate of profit which
effectively regulated the process of capital accumulation. In other words, profit was important
not merely as one of several forms of income within the capitalist system but as the source
from which the means for the further accumulation of capital could alone come. In
commenting on Ricardo, Marx demonstrates the central importance which he attaches to the
profit rate and its tendency to decline, a tendency which Ricardo had himself sensed, if not
fully grasped.25

Marx’s general notion of the falling rate of profit. Marx divides the total social capital into
three broad categories: (1) constant capital (c), equivalent to expenditure on machinery, raw
materials and heat, light and power. This capital was deemed constant in that it merely
transfers the value embodied in it and cannot be the source of new value. (2) variable capital
(v), the expenditure by capital on the purchase of labour power, variable because it is the only
source for the expansion of value. (3) surplus value (s), the increment in value accruing to the
owners of capital. The rate of profit is given by surplus value over total capital: s/c + v.

Now as capital accumulates, there is a tendency for the constant capital to grow more rapidly
than the variable portion of capital: this is the expression in value terms of the improvements
in technology associated with capitalism throughout its history. The relatively rapid increase
in constant capital as compared with the variable element of capital Marx refers to as the
tendency for the organic composition of capital (c/v) to rise. Although an increase in the
organic composition of capital will normally produce an increase in the rate of surplus value
(s/v), or at least its mass (s), there are definite objective limits to such an increase, not least
amongst them the actual physical limit to available working-time. But unless s/v does rise
with sufficient rapidity to compensate for the increasing organic composition (c/v), then the
tendency for the rate of profit to fall will assert itself in an actual fall.
In the latter part of the 20th century, thanks to the work of several Marxist economists and the
availability of better statistics, evidence of the validity of Marx’s law of profitability has
accumulated.26 For example, here is a measure of the rate of profit in the post-war US
economy.

While for the marginalist approach, profitability is the result of falling ‘capital productivity’,
for Marx capital accumulation leads to rising labor productivity, i.e. by the shedding of labor
inherent in greater labor productivity. But since only labor produces value, a growing output
of use values per unit of labor contains a decreasing quantity of value and surplus value. The
correlation between labor productivity and profitability is thus negative, not positive as in
marginalism.

This has been empirically verified by G Carchedi27. In chart 11, tendentially, labour
productivity rises and the ARP falls.

US productivity (($1,000 per labourer) and profitability (percentage level)

450 25
400
350 20
300
15
250
200
10
150
100 5
50
00 0
1969

2002
1948
1951
1954
1957
1960
1963
1966

1972
1975
1978
1981
1984
1987
1990
1993
1996
1999

2005
2008
2011
2014

Productivity LHS ARP RHS

Even mainstream economics, using marginal productivity categories, reveal something

similar. Dietz Vollrath found that the ‘marginal productivity of capital’ fell consistently from
the late 1960s. Capitalism has become less productive ‘at the margin’. Marxist economics
explains this as due to a rising organic composition of capital (more technology replacing
labour) leading to a fall in the rate of profit (return on capital). Post the Great Recession, the
marginal productivity of capital rose because the share going to profit rose. In Marxist terms,
the rate of surplus value rose to compensate for the rise in the organic composition of
capital. Here’s Vollrath’s chart showing the time path in capital productivity from 1960 to
2013. If you remove the effect of rising profit share, the falling productivity of capital
continued (dotted line).

3. Crises
For Marx, the driver of capital accumulation is profit. Profit calls the tune. And the tendency
for the rate of profit to fall eventually exerts downward pressure on the mass of profits,
provoking an investment strike by capitalists and the downward spiral into falling output,
employment and spending.

In contrast, for Keynes, having denied that profits are the unpaid labour of the production
process, reckons that it is overall ‘effective demand’ that causes crises,; in particular slumps
in investment and consumption that lead to reductions in employment wages and profits.28
Demand calls the tune.

This brings us to Keynes’ macro identities. Which way round is the causal process of
economic growth? For Keynes, investment (demand) leads profits. But for Marx, profits
lead investment.
 • (NI) National income = (NE) national expenditure
• NI (Profits + Wages) = NE (Investment + Consumption)
• So Profit + Wages = Investment + Consumption.
• Now if we assume that wages are all spent on consumption and not saved, then
• Profits = Investment

For Keynes it is a fall in national income that will produce a drop in the level of employment.
But this merely raises a deeper, more fundamental question: what brings about the initial fall
in income? What is the inner (relatively hidden) source of this outer movement? It is this
question which, says Marx, any serious analysis of capitalism and its crises must seek to
answer. But it is a question ignored by Keynes and the mainstream.

Keynes does not even mention the movement of profit as relevant to crises. Much more
important for him was ‘human nature’, for “If human nature felt no temptation to take a
chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm,
there might not be much investment as a result of cold calculation29

As Paul Mattick says, “what are we to make of an economic theory, which after all claimed
to explain some of the fundamental problems of twentieth-century capitalism, which could
declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the
nerves and hysteria and even the digestions and reactions to the weather of those upon whose
spontaneous activity it largely depends’?30

Who is right? Well, again look at the evidence. 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.
Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital, to
use Keynes’s preferred terminology—as the main factor that determines the changes in the
phases of industrial cycle:

“Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency
of the rate of interest under the influence of the increased demand for money both for trade
and speculative purposes. At times this factor may certainly play an aggravating and,
occasionally perhaps, an initiating part. But I suggest that a more typical, and often the
predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a
sudden collapse in the marginal efficiency of capital.31

But Keynes’ theory of crisis assumes falling ‘marginal productivity’ due to the ‘abundance of
capital and on the psychological expectations of capitalist about the future. “We have seen
above,” Keynes wrote, “that marginal efficiency of capital depends, not only on the existing
abundance or scarcity of capital-goods and the current cost of production of capital-goods,
but also on current expectations as to the future yield of capital-goods. In the case of durable
assets it is, therefore, natural and reasonable that expectations of the future should play a
dominant part in determining the scale on which new investment is deemed advisable. But, as
we have seen, the basis for such expectations is very precarious. Being based on shifting and
unreliable evidence, they are subject to sudden and violent changes.” This is the best that
Keynes can do, limited as he is by marginalism.

Keynes saw the violent psychological swings in mood among the “entrepreneurs” as the basic
source of the extreme instability that is characteristic of a highly developed capitalist
economy. Keynes believed that the expenditures on articles of personal consumption and the
expenditures of the government are reasonably stable, but that the rate of investment,
determined by the expectations and moods of the industrial capitalists, is extremely unstable.

Indeed, the entire marginalist theory of value is subjective, while Ricardo’s and Marx’s
concept of labor value is objective. Typically, Keynes saw the problem in the “psychology”
of the capitalists rather than seeing the “psychology” of the active capitalists as reflecting the
very real objective contradictions of the capitalist system.

If Marx is right about the ultimate cause of crises, then in the depth of a slump, a rise in the
profitability of capital should deliver higher investment and higher real GDP and recovery
(the Marxist multiplier). If Keynes is right, then the movement in government spending to
compensate for the collapse in private investment and consumption should restore growth and
prosperity (the Keynesian multiplier).
What is the evidence? Below is a correlation between the movement in profitability of
capital in European economies between 2010-5 and economic growth. The overall
correlation is positive and very high in the most depressed EZ economies.

And here is a comparison between the impact of the Marxist and Keynesian multipliers in each
slump and recovery in post-war US.

US: Keynesian versus Marxist multipliers*

1.80
* Average real GDP growth as a Correlations:
1.61
1.60 ratio of average change in real Govt exp: -0.04
1.41 govt exp and as a ratio of change Net return
1.40 in net return on capital
on capital: +0.64
1.20
1.00 0.92 1.0
0.80
0.60 0.5 0.44
0.40 0.3
0.20 0.1
0.02 0.0
0.00
1971-80 1980-90 1990-00 02-07 08-14
ROP Govt exp

The correlation is strongly positive for the Marxist multiplier and non-existent for the
Keynesian multiplier, particularly in the recovery from the Great Recession.

4.The future of capitalism

When addressing an audience of his Cambridge University students in the depth of the Great
Depression in 1931, Keynes tried to convince them that, even though capitalism appeared to
be in its despond, all would eventually be well.

“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. Let us, for the sake of argument, suppose
that a hundred years hence we are all of us, on the average, eight times better off in the
economic sense than we are to-day. Assuredly there need be nothing here to surprise us.” 32

Growth

Was Keynes right about capitalism enabling global output to grow exponentially? Well,
assuming a generous 3% growth in real world GDP from now until 2030 (Keynes’s 100
years), something that many reckon will not be achieved, world GDP will be about $97trn
then. That gives a per capita level of $11770 compared to $1958 in 1940, or a rise of six
times. Not as much as Keynes forecast but…

As for the UK, GDP per capita is currently below four times the 1930 level of output. To hit
Keynes’ target, it has to double again in the next 15 years, to $80,000. The chances of this are
slim. Even if GDP per head grows as fast as it did between 1992 and 2008, it would still take
until around 2054.

Marx’s prognostication for capitalism, as expressed in Capital, was not so optimistic. He

expected poverty for the majority to remain, for capitalism to face regular and worsening
slumps; for inequality in wealth and incomes to remain and even worsen. The world would
not be better off for the majority who depended on labour power to for a living and who
would continue to toil to the maximum that capital could impose on them.

Toil or leisure?

In contrast, Keynes expected capitalism to create such an abundance of necessaries that the
working would be drastically reduced to a 15-hour week and using ‘leisure time’ would be
the problem of the future.

“for the first time since his creation man will be faced with his real, his permanent problem –
how to use his freedom from pressing economic cares, how to occupy the leisure, which
science and compound interest will have won for him, to live wisely and agreeably and well.”

Marx, on the other hand, expected toil to remain for those in work while a reserve army of
labour was maintained a whip of discipline on those at work and a stock of unused labour to
expand output when profitable.

Who was right? Back in 1930, the average working life of an American or Brit was about
100,000 hours. In 2015, it was about 100,000 hours! As for achieving full employment, the
number of people out of work around the world will hit 200 million in 2017, a new record
high. 33 Global unemployment is expected to rise by 3.4 million this year and by 2.7 million
in 2018, because the workforce is growing at a faster pace than jobs are being created.

A rise in wages or more inequality?

Like some other marginalists, Keynes 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 “labor,” 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.34 Therefore, according to the marginalists, as capital accumulation continues,
the working class will be progressively reconciled to the capitalists.35

Marx expected that the class struggle would continue between capital and labour of the value
created by labour power and given the ownership and control of the means of production,
capital would be able to increase its share at the expense of labour – thus the amiseration of
the working class.
Who was right? The recent evidence provided by the work of Thomas Piketty, Emanuel
Saez, Daniel Zucman and the late Anthony Atkinson shows conclusively increased inequality
of income globally.36

And Anthony Atkinson explains why. “In the old days, the mill owner owned the mill and
decided what went on [there]. Today, you and I own the mill. But who decides what goes on?
It’s not us. That’s the important difference. inequality has not always risen. The main
feature has been a growing concentration and centralisation of wealth, not income. And it
has been in the wealth held in means of production and not just household wealth”

The annual global wealth study from Credit Suisse complied by former UN economists
shows that just 1% of households own 50% of all global household wealth. So much for an
end to inequality and a growing share of wealth and income to the majority.
The euthanasia of finance capital

As the “scarcity-value” of capital vanishes, according to Keynes, economic growth would

peter out. Expanded reproduction would give way to simple reproduction. 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, who carry out the
labor of superintendence and who would be able to earn a little extra profit by taking on
“entrepreneurial” risks. On the other hand, Marx reckoned that finance capital would become
increasingly the form that capital would take as concentration and centralisation rose and
monopolies developed37.

Who was right? The growing power and influence of finance capital in the major capitalist
economies since Keynes predicted its demise is self-evident. According to the Swiss Federal
Institute of Technology study, a dominant core of 147 firms through interlocking stakes in
others together control 40% of the wealth in the GLOBAL network. A total of 737
companies control 80% of it all. This is the inequality that matters for the functioning of
capitalism – the concentrated power of capital.

So can we really agree with Keynes that “it is not the ownership of the instruments of
production which it is important for the State to assume. If the State is able to determine the
aggregate amount of resources devoted to augmenting the instruments and the basic rate of
reward to those who own them, it will have accomplished all that is necessary.”

Unlike Ricardo, who championed the boundless development of the productive forces—and
supported industrial capitalism precisely because of its tendency to develop the productive
forces without limit—Keynes looked forward to the end of the development of the forces of
production.

Keynes, who greatly admired Malthus, was afraid that any further development of the forces
of production would pull the rug out from under the feet of the capitalist class. Marx pointed
out that Ricardo was always willing to sacrifice classes and sections of classes if it meant the
further development of production—humanity mastering of the forces of nature. Keynes, in
contrast, wanted to sacrifice the development of production in order to preserve capitalist
class rule for its own sake.

“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, but that in itself
it is in many ways extremely objectionable. Our problem is to work out a social organisation
which shall be as efficient as possible without offending our notions of a satisfactory way of
life.” 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.”

That someone was Marx. For him “the whole economic shit ends in the class struggle,” and
he took pains during decades of work to demonstrate the transitory nature of capitalism. 38
For Keynes, “the class war will find me on the side of the educated bourgeoisie.” Marx was
on the other side.

Adam Smith was the economist of the transition to capitalism. David Ricardo was the
economist of the rise of capitalism. Keynes was the economist of the decay and decline of
capitalism. Marx was the economist of the future.
1
(Keynes, Laissez-Faire and Communism, quoted in Hunt 1979: 377).
2
Ät all times and places, that is dear which it is difficult to come at, or which it costs much
labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour
alone, therefore, never varying in its own value, is alone the ultimate and real standard by
which the value of all commodities can at all times and places be estimated and compared. It
is their real price; money is their nominal price only.” Smith [1974],Page 136
3
"It is admitted by everybody that demand and supply govern market price, but what is it
[that] determines supply at a particular price? cost of production." Ricardo, Notes on
Malthus, Works, II, E. S. Mason The Quarterly Journal of Economics Vol. 42, No. 4 (Aug.,
1928), pp. 684-696
4
Adam Smith. “Äs the exchangeable values of commodities are only social functions of
those things, and have nothing at all to do with the natural qualities, we must first ask: What
is the common social substance of all commodities? It is labour. To produce a commodity a
certain amount of labour must be bestowed upon it, or worked up in it. And I say not only
labour, but social labour. A man who produces an article for his own immediate use, to
consume it himself, creates a product, but not a commodity. As a self-sustaining producer he
has nothing to do with society. But to produce a commodity, a man must not only produce an
article satisfying some social want, but his labour itself must form part and parcel of the total
sum of labour expended by society. It must be subordinate to the division of labour within
society. It is nothing without the other divisions of labour, and on its part is required to
integrate them.”
5
https://www.marxists.org/reference/subject/economics/ricardo/tax/ch01.htm
6
D. Ricardo, Principles of Political Economy and Taxation, p.55, Penguin edition.
7
Hilferding noted that “value in the Marxist sense is an objective, quantitatively determined
magnitude” (1975 [1904]: 159).
8
If we consider commodities as values, we consider them exclusively under the single aspect
of realized, fixed, or, if you like, crystallized social labour. In this respect they can differ only
by representing greater or smaller quantities of labour, as, for example, a greater amount of
labour may be worked up in a silken handkerchief than in a brick. But how does one measure
quantities of labour? By the time the labour lasts, in measuring the labour by the hour, the
day, etc. Of course, to apply this measure, all sorts of labour are reduced to average or simple
labour as their unit. We arrive, therefore, at this conclusion. A commodity has a value,
because it is a crystallization of social labour. The greatness of its value, or its relative value,
depends upon the greater or less amount of that social substance contained in it; that is to say,
on the relative mass of labour necessary for its production. The relative values of
commodities are, therefore, determined by the respective quantities or amounts of labour,
worked up, realized, fixed in them. The correlative quantities of commodities which can be
produced in the same time of labour are equal. Or the value of one commodity is to the value
of another commodity as the quantity of labour fixed in the one is to the quantity of labour
fixed in the other.” Marx [1910],Section 6
9
Marx Works 11: 465
10
“Every child knows that any nation that stopped working, not for a year, but let us say, just
for a few weeks, would perish”, explained Marx. Broadly speaking, the things we need have
to be produced in certain quantities and then distributed according to the requirements of
society. This constitutes the economic laws of all societies, including capitalism. “And every
child knows, too, that the amounts of products corresponding to the differing amounts of
needs, demand differing and quantitatively determined amounts of society’s aggregate
labour”, continued Marx. 3. Letter from Marx to Kugelmann, 11 July 1868, MECW, vol.43,
pp.68-69.
11
ibid.: 383
12
“The reason for this reduction is that in the midst of the accidental and ever-fluctuating
exchange relations between the products, the labour-time socially necessary to produce them
asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself
when a person’s house collapses on top of him. The determination of the magnitude of value
by labour-time is therefore a secret hidden under the apparent movements in the relative
values of commodities.” Marx, Capital, vol.1 pp.167-8.
13
The best points in Capital, Marx wrote to Engels, “are 1) the twofold character of labour,
according to whether it is expressed in use-value or exchange-value (all understanding of the
facts depends upon this); and 2) the treatment of surplus-value independently of its particular
form of profit, interest, ground rent, etc Marx-Engels, Selected Correspondence,
Moscow, p.232.
14
“The reason for this reduction is that in the midst of the accidental and ever-fluctuating
exchange relations between the products, the labour-time socially necessary to produce them
asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself
when a person’s house collapses on top of him. The determination of the magnitude of value
by labour-time is therefore a secret hidden under the apparent movements in the relative
values of commodities.” Marx, Capital, vol.1 pp.167-8.
15
The history of this is long, starting with Robin Murray in the 1970s, G Carchedi in the
1980s, Alan Freeman and Andrew Kliman in the 1990s and culminating in Fred Moseley’s
summary of the transformation issue in his book, Money and Totality. For all references, see
http://www.brill.com/products/book/money-and-totality
16
Stanley Jevons, Theory of Political Economy, 1871, Chapter one., Macmillan 1888 3rd
edition
17
Among others it was notably Gustav Cassel who strove for the abolition of the marginal
utility theory because of its vicious circularity. Although the theory was supposed to explain
prices, prices were made use of in the explanation of marginal utilities. As business is
transacted in terms of measurable quantities, money and prices, in Cassel’s view the analysis
of those transactions required nothing but price concepts, so that economics had no need of
any theory of value. On the assumption that economic relationships are determined by a
general “scarcity,” Cassel saw the task of economics as the optimal adaptation of people’s
various wants to the insufficient means available for their satisfaction. The derivation of
prices from the scarcity of goods can of course only explain one price by another and leaves
the question of what lies behind prices unanswered. See Cockshott,
https://paulcockshott.wordpress.com/2016/07/23/not-even-wrong/
18
Revealed preference theory, pioneered by American economist Paul Samuelson is a
method of analyzing choices made by individuals, mostly used for comparing the influence of
policies on consumer behavior. These models assume that the preferences of consumers can
be revealed by their purchasing habits. Revealed preference theory came about because
existing theories of consumer demand were based on a diminishing marginal rate of
substitution (MRS). This diminishing MRS relied on the assumption that consumers make
consumption decisions to maximize their utility. While utility maximization was not a
controversial assumption, the underlying utility functions could not be measured with great
certainty. Revealed preference theory was a means to reconcile demand theory by defining
utility functions by observing behavior.
19
MECW, vol.48, p.136
20
Cockshott op cit
21
Moseley op cit
22
Cockshott, W.P., and Cottrell, A., 1997a. Labour Time versus Alternative Value Bases: A
research note, Cambridge Journal of Economics, 21, pp. 545-9. Cockshott, W.P., and Cottrell, A.,
1997b. The Scientific Status of the Labour Theory of Value. In: Eastern Economic
Association, Fourth mini-conference on Value Theory. Washington, DC, United States, April 3-6l.
Available at: <http://www.wfu.edu/~cottrell/eea97.pdf
23
http://www.anwarshaikhecon.org/sortable/images/docs/publications/political_economy/199
8/1-labthvalue.pdf
24
http://gesd.free.fr/carchedi815.pdf
25
“The rate of profit is the compelling power of capitalist production, and only such things
are produced as yield a profit. Hence the fright of the English economists over the decline in
the rate of profit. That the bare possibility of such a thing should worry Ricardo, shows his
profound understanding of the conditions of capitalist production ... what worries Ricardo is
the fact that the fundamental premise and driving force of accumulation should be
endangered by the development of production, Marx Capital III: 254.

26
See https://thenextrecession.files.wordpress.com/2011/11/the-profit-cycle-and-economic-
recession.pdf
27
Carchedi, http://gesd.free.fr/carchedi815.pdf
28
But see this. “Economic prosperity is…dependent on a political and social atmosphere
which is congenial to the average businessman.” “Unemployment, I must repeat, exists
because employers have been deprived of profit. The loss of profit may be due to all sorts of
causes. But, short of going over to Communism, there is no possible means of curing
unemployment except by restoring to employers a proper margin of profit.” Keynes,
“Proposals for a Revenue Tariff,” The New Statesman and Nation (March 7, 1931), reprinted
in Essays in Persuasion.
29
Keynes, General Theory p 150
30
https://www.marxists.org/archive/mattick-paul/1974/crisis/ch01.htm Keynes: (ibid.: 162)
31
This and all the following quotes from Keynes in this post are from chapter 22 of the
General Theory
32
Keynes, The economic possibilities for our grandchildren, 1930
http://www.econ.yale.edu/smith/econ116a/keynes1.pdf
33
Those are the findings of research by the International Labor Organization, an agency that
brings together governments, employers and worker representatives from 187 countries.
34
Keynes GT op cit, “Since the end of the nineteenth century significant progress towards the
removal of very great disparities of wealth and income has been achieved through the
instrument of direct taxation — income tax and surtax and death duties — especially in Great
Britain.”
35
Keynes GT op cit, For my own part, I believe that there is social and psychological
justification for significant inequalities of incomes and wealth, but not for such large
disparities as exist today. There are valuable human activities which require the motive of
money-making and the environment of private wealth-ownership for their full fruition.
Moreover, dangerous human proclivities can be canalised into comparatively harmless
channels by the existence of opportunities for money-making and private wealth, which, if
they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of
personal power and authority, and other forms of self-aggrandisement. It is better that a man
should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is
sometimes denounced as being but a means to the latter, sometimes at least it is an
alternative.
36
Thomas Piketty, see https://thenextrecession.wordpress.com/2015/12/14/kuznets-piketty-
marx-and-human-development/
37
That which is now to be expropriated is no longer the labourer working for himself, but the
capitalist exploiting many labourers. This expropriation is accomplished by the action of the
immanent laws of capitalistic production itself, by the centralization of capital. One capitalist
always kills many. Hand in hand with this centralization, or this expropriation of many
capitalists by few, develop, on an ever-extending scale, the cooperative form of the labour
process, the conscious technical application of science, the methodical cultivation of the soil,
the transformation of the instruments of labour into instruments of labour only usable in
common, the economizing of all means of production by their use as means of production of
combined, socialized labour, the entanglement of all peoples in the net of the world market,
and with this, the international character of the capitalistic regime. Along with the constantly
diminishing number of the magnates of capital, who usurp and monopolize all advantages of
this process of transformation, grows the mass of misery, oppression, slavery, degradation,
exploitation; but with this too grows the revolt of the working class, a class always increasing
in numbers, and disciplined, united, organized by the very mechanism of the process of
capitalist production itself. The monopoly of capital becomes a fetter upon the mode of
production, which has sprung up and flourished along with, and under it. Centralization of the
means of production and socialization of labour at last reach a point where they become
incompatible with their capitalist integument. This integument is burst asunder. The knell of
capitalist private property sounds. The expropriators are expropriated.” Marx Volume One,
chapter 32, https://www.marxists.org/archive/marx/works/1867-c1/ch32.htm
38
“As soon as this process of transformation has sufficiently decomposed the old society
from top to bottom, as soon as the labourers are turned into proletarians, their means of
labour into capital, as soon as the capitalist mode of production stands on its own feet, then
the further socialization of labour and further transformation of the land and other means of
production into socially exploited and, therefore, common means of production, as well as the
further expropriation of private proprietors, takes a new form”. Marx op cit.