Marx and Keynes on the state and crisis tendencies in capitalism 

The fundamental difference between the views of Karl Marx and John Maynard Keynes stems from their views on the nature of capitalist profits. For Marx, capitalist profits arise from an exploitation of the working class by capitalists, which is only possible because constant capital is privately owned. Keynes, on the contrary, believes that profits are possible because of the relative scarcityof capital-assets. The Marxian understanding that profits arise from exploitation, leads to the calling for an abolition of private property. On the other hand, the Keynesian understanding that profits are sourced in scarcity avoids any aversion to private property. From these different understandings arise two narratives of capitalist crisis: Marx’s version elaborates the inevitability of such crises due to inherent contradictions within the capitalist class struggle; and Keynes’ version explains the occurrence of crises as being the result of uncertain expectations. As is expected, each narrative ends differently. Marx undermines the possibility that the state can play a role in sustainably managing capitalist economies, whereas Keynes leaves us with the hope of a state-managed capitalism. The aim of this essay is to demonstrate that the differing views about capitalist profits that both Marx and Keynes hold, lead to incompatible views on crisis tendencies and the state.

Profits, according to Karl Marx, accrue to capitalists when they hire working-class (proletarian) labour-power to use their privately owned constant capital[1] for the production of commodities[2]. The reasoning behind this understanding of profits is observed in the following sequence. The proletariat are forced to sell their labour-power for a wage if they desire to subsist. The bourgeoisie seize this opportunity by hiring proletariat labour-power in order to produce commodities through the employment of their privately owned constant capital. These commodities are then sold by the bourgeoisie at prices which exceed the cost of producing them. The point to note is that the proletariat, unlike the bourgeois, did not have the advantage of being able to sell their commodity (labour-power) at a price that exceeded the cost of producing it. Thus, the bourgeoisie’s exclusive privilege of making a profit is possible only because the bourgeoisie have extracted surplus-value[3] that was produced by the proletariat (Marx 1894, p. 9). That is, the bourgeoisie did not recompense the proletariat for the full amount of labour-power that was provided. This extraction of surplus-value is what Marx calls proletariat exploitation. This exploitation, asserts Marx, is only possible because the bourgeois privately own constant capital. What is crucial to this understanding of profits is that the profit arises from within the production process. This is primarily what distinguishes Marx’s understanding from that of Keynes.

For John Maynard Keynes, profits accrue to capital-asset owners[4] if their capital-assets are relatively scarce. That is, a relatively scarce capital-asset will yield commodities that can be sold at supply prices that exceed the costs of production. The concept of capital-asset scarcity refers to the available yield of consumption goods (the supply) in relation with needs and desires (the demand) (Naldi 2000, p. 160). So, the greater the scarcity of a capital-asset, the less of an available yield there is in relation to needs and desires; thus pushing supply prices beyond production costs. Obviously, if a capital-asset is abundant, the opposite occurs, where available yields exceed needs and desires; thus pushing supply prices towards production costs. The crucial aspect of Keynes’ understanding of profits is that profit arises from within the circulation process.

It is important to notice that on Keynes’ account of capitalist profits, there is no mention of exploitation. This lack of attention to exploitation can be attributed, as Robert Skidelsky notes, to Keynes’ explicit rejection of “… the class basis of socialist politics.[5](Skidelsky 2010, p. 53)” In Volume 3 of Capital, Karl Marx refers to economists such as Keynes, who ignore the notion of exploitation, as ‘vulgar economists’ (Marx 1894, p. 133). Nevertheless, regardless of how Marx would have appropriated Keynes’ thought, it must be acknowledged that Keynes’ rejection of class distinctions fundamentally distinguishes him from Marx in relation to his understanding of capitalist profits. That is, Marx conceives of profits as arising from within the production process, whereas Keynes conceives of profits as arising from within the circulation process.

This difference between Marx and Keynes concerning the nature of capitalist profits is what sets them apart in their views on private property. Understandably, Marx is led to believe that the institution of private property is the means by which the bourgeois exploit the proletariat. Thus, as long as private property exists there is a class struggle between proletariat and bourgeoisie; each class struggling against the other in an attempt to further their own interests in society. On the other hand, Keynes’ explicit rejection of class distinctions and capitalist exploitation, leads him to see no problem in the institution of private property. And it is this difference (disagreement/agreement with the institution of private property) that separates Marx and Keynes in their respective understandings of capitalist crises and the state.

Capitalist crises[6], for Marx, are the manifestation of a contradiction that resides inherently within capitalist class struggle. This contradiction arises because the bourgeoisie’s extraction of surplus-value from the proletariat, done to gain a profit, has limited the consumption power that constitutes their capacity to realize those profits in monetary form. This contradiction is gradually realized through four main tendencies which, collectively, culminate in capitalist crises:

  1. Bourgeois competition;
  2. Declining tendency in the long-run rate of profit (DTLRP);
  3. Disproportionality; and
  4. Overproduction and underconsumption.

The motive for bourgeois production is ultimately to realize a profit. They maximize their surplus-value[7] extraction by increasing the intensity of labour-power and expanding the working day. However, the recognition of extractable surplus-value attracts other bourgeoisie capitalists to the industry, providing them with incentives to also hire labour-power. The increased demand for proletarian labour-power leads to an increase in wages which begins to impinge upon the amount of surplus-value that can be extracted by the capitalists. And so, the competitive pressures begin.

Capitalists begin to focus on innovative techniques that improve the productive capacities of a given amount of labour-power, so as to reduce the marginal costs of production, which allows the advanced capitalists to undercut their competitors with lower prices, increasing their market share, surplus-value extraction and thus profits. However, the initial increase in profits leads to a declining tendency in the long-run rate of profit (DTLRP). This occurs because in the long-run, innovative manoeuvres made by one capitalist are assimilated throughout the industry. The result of this is a supply price of commodities that is less than the initial supply price, even though it still exceeds the costs of production. Marx explains this phenomenon as being the result of a progressive cheapening of products, which comes about because of the smaller quantity of labour that adheres within them (Marx 1894, p. 146).

Constant capital[8] is accumulated in an attempt to produce more and more, though eventually, consumption limitations present themselves as a barrier to surplus-value realization. Capitalists continuously overcome this recurrent barrier by borrowing credit which provides them with the immediate monetary needs required for further capital expansion, without having to realize their profits. Meanwhile, in the aggregate economy, the problem of disproportionality arises, wherein industries that have relatively lower labour costs, provide larger innovative capacities, have a steady growth in demand and have lower levels of competition, tend towards overdevelopment. On the other hand, industries that have contrary characteristics tend to be left underdeveloped.

However, eventually, the impenetrable barrier of consumption limitations becomes manifest in an uneven spread of overproduction and underconsumption across the economy. And the productive boom ends when credit expansion has reached its outer limits; this triggers the onset of a crisis. The excess of production over possible consumption violently collapses under its own weight, forcing the devaluation of capital, the partial destruction of productive capacity, the reduction of produced output and the laying off of labour-power leading to increased levels of unemployment. This collapse in employment is the crisis which Marx claims was inevitable right from the beginning; because by exploiting the labour-power of the proletariat, the bourgeois have pulled the floor away from underneath their own feet by limiting the consumption power which is necessary to realize their profits.

Because exploitation is not the basis of Keynes’ understanding of capitalist profits, Keynes is led to an understanding of crisis that does not involve inherent contradictions in class struggle. Rather, crises, for Keynes, are a manifestation of the inescapability ofuncertain expectations when making decisions concerning the future. However, in order to understand how uncertain expectations allow for crises, the basics of Keynes’ theory of employment must first be explicated.

When employment increases, there will be an increase in total income, which would lead to an increase in consumption, but by a lesser amount than income[9]. Thus, employers would make a loss if they utilized the increased employment to satisfy the increased consumption. Therefore, Keynes points out, that “to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level (Keynes 1936, p. 26).” This is because if investment does not absorb the excess of total output over consumption, then employers will be making a loss, providing them with incentives to reduce employment.

This brings us to Keynes’ understanding of crisis. Obviously, any sudden drop in either the level of consumption or investment will lead to a sharp reduction in employment. But the typical crisis, Keynes claims, is constituted by a sharp fall in investment spending; and this occurs if there is a sharp drop in the inducement to invest. The question thus arises concerning the determinant of the inducement to invest. Keynes asserts that there is an inducement to invest if the marginal efficiency of capital (MEC) exceeds the interest rate. And in-turn, the MEC is constituted by (1) the existing scarcity/abundance of capital-goods, (2) the current production costs of capital-goods and (3) expectations concerning future yields of capital-goods. So, a crisis occurs when there is a sharp drop in the inducement to invest which occurs when the MEC is below the interest rate. But which of the three determinants of the MEC is responsible for the onset of a crisis? Keynes answers:

We have seen above that the 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… [T]he basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes (Keynes 1936, p. 197).

In other words, because of the uncertainty involved in expectations concerning the future, such expectations are liable to fall, suddenly and violently; in particular, during times of irrational optimism and speculation, as is seen during an economic boom. If this occurs, the MEC sharply falls alongside expectations, pulling it below the interest rate; destroying the inducement to invest; creating a gap between total consumption and income; thus resulting in increased unemployment. Uncertain expectations are the typical cause of crises because crises occur both suddenly and violently, in much the same way that changes in uncertain expectations occur.

It must be made clear that crisis, for Keynes, occurs because of uncertain expectations, not contradictions within class struggle. This difference in the understanding of crisis from Marx is possible because of Keynes’ rejection of the idea that the origin of profit is exploitation.

The focus now turns on possible solutions to crisis tendencies through state intervention. Marx rejects the possibility that the capitalist state would be able to reduce the impacts of crises because (1) he identifies contradictions in the notion that the capitalist state can serve the general interest; and (2) he asserts that the capitalist state merely intensifies crises, as it institutes private property which constitutes the existence of class struggle. On the contrary, Keynes is a strong advocate of the state and thinks it can play a role in managing capitalist economies because (1) he is optimistic about the possibility of rational reformers who act upon disinterested ideas rather than vested interests; and (2) he understands uncertain expectations to be the cause of crises which shatter the confidence of investors, which can and ought to be remedied in the short-run by state led investment.

Marx disagreed with the idea that the state serves the general interest by impartially standing over and above civil society – within which individuals pursue their own particular interests – enforcing regulatory rules concerning private property, legal contracts and the like. His critique served to expose both the formal and material contradictions within this model of the state. The formal contradiction manifests itself in the fact that the deputy is disconnected from his electors once elected, as he makes decisions regarding the public without their direct instruction. The material contradiction manifests itself in the fact that members of civil society, with particular interests, can be in some vague and naive manner, representative deputies of the general interest of society. By exposing these contradictions between a seemingly impartial capitalist state and civil society, Marx simultaneously illustrates the picture of a divided society, one in which “the functions of government are administrated against [civil] society” (Adam 2010). Going a step further in his critique, Marx points out that the capitalist state incidentally serves the interest of the bourgeois by reinforcing the private property relations which allow for the exploitation of the proletariat, enabling the possibility of surplus-value extraction. In A Critique of the German Ideology, Marx claims that the state is “nothing more than the form of organisation which the bourgeois necessarily adopt both for internal and external purposes, for the mutual guarantee of their property and interests” (Marx and Engels, 1932, p. 31). Yet, the fact that the state serves to guarantee bourgeois property and interests, must not be mistaken for the idea that the bourgeois instrumentally utilize the state in order to exploit the proletariat. Rather, Marx understands the capitalist state as the manifestation and expression of class-division and the dominance of bourgeois interests within society, which naturally arises from the institution of private property (Adam, 2010). Nevertheless, because the state incidentally serves the bourgeois interest by reinforcing private property relations, Marx comes to oppose it on the grounds that it enables and institutes the existence of proletariat exploitation, which accentuates the existence of a class struggle, thereby intensifying the inherent contradictions which ultimately lead to capitalist crises.

Keynes, in contradistinction to Marx, was an avid supporter of the idea that the state can serve the general interest by impartial decision making. Such confidence in the notion of a disinterested state was enabled by Keynes’ firm support for the possibility of rational reformers who followed disinterested ideas, rather than vested interests. According to Robert Skidelsky, Keynes adopted two key elements of liberalism; namely, “a commitment to truth and belief in the possibility of rational individual judgment” (Skidelsky 2010, p. 49). He then married these elements with his thought that in the long-run, it is ideas, not vested interests, which influence the decision making of practical people:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist… I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval (Keynes 1936, p. 241).

This optimism concerning the possibility of rational and disinterested leaders, was also noted by Dmitri Mirsky, who provided a Marxist interpretation of Keynes, claiming that “the intellectual aristocracy… not being directly involved with the production process, could consider itself outside or above class” (Skidelsky 2010, p. 54).

This leads us to consider, in light of Keynes’ confidence concerning the state, exactly what role the state can and ought to play in Keynes’ thought. Recalling Keynes’ understanding of employment and crisis, the occurrence of a crisis is typically due to a sudden fall in the MEC to a level below the rate of interest. This means that there is, for the initial level of employment (employment prior to the crisis), insufficient investment in order to cover over the excess of income over consumption. So employers have reason to lay off workers. Workers are laid off until the gap between income and consumption is absorbed by investment. And at this point, there will be no incentives for employers to either hire or fire employees. In addition, because the crisis has recently occurred, the confidence of investors will be low, thus fuelling low expectations about future yields of capital-goods. This will keep the MEC below the interest rate for an indefinite period of time after the crisis, and as Keynes pointed out, these conditions effectively constitute an equilibrium level of employment (equilibrium being a state where there are no incentives to change employment) that involves high levels of involuntary unemployment. This is where the rational and disinterested statesmen of Keynes’ thought step in. Because there is no inducement to invest in the private sector in the period after a crisis, Keynes maintained that it is the responsibility of the government to invest in wisely chosen public projects. The funding for this public or socialized investment is to be found in budget surpluses from the past, or through credit which can be repaid once a stable economic boom has become the result of such state actions. The mechanism by which public investment supposedly reduces the immediate impact of a crisis is called the multiplier effect. The multiplier effect is the chain of increases in consumption that arise from an initial increase in income. Over time, the increased levels of consumption and income will lead to the restoration of the MEC to a level that is above the interest rate[10]. And, following the private sector’s inducement to invest will be forces that may lead the economy back to full employment equilibrium. What is fundamentally crucial about Keynes’ understanding of the state is that it leaves open the possibility for a sustainable state-managed capitalism.

This essay has illustrated the two very different narratives of capitalism that arise from correspondingly different understandings of the nature of capitalist profits. On the one hand, Karl Marx conceives of capitalist profits as arising from proletariat exploitation, which is possible because the bourgeois class privately own constant capital. On the other, John Maynard Keynes conceives of profits as arising from the scarcity of capital-assets. The former understands profits as being the result of the productive process, whilst the latter understands profits as being the result of the circulation process. This fundamentally different understanding of profits leads Marx in the direction of class struggles, competition, overproduction and underconsumption and the inevitable crises that plague capitalist society. Whereas Keynes encounters in his economic journey the wonders of scarcity, uncertain expectations, rational and disinterested leaders and a hopeful future of state-managed capitalism. As such, it should be clear to the reader that these two narratives are fundamentally incompatible. If there were ever a way to discern a qualitative distinction between the attitudes of these two great thinkers, one would attempt to capture this difference as one that resides between Marx’s proletariat pessimism, and Keynes’ bourgeois optimism.

Dinesh Devaraj has just completed a dual bachelor of economics and arts and is about to undertake honours in philosophy at UQ.


[1] ‘Constant capital (c)’ is defined as the means of production, raw material, auxiliary material and tools of labour (Marx 1867, p. 143).

[2] Items produced for exchange.

[3] Surplus-value is defined as the amount of labour time produced by a worker which is unpaid for in wages (Marx, 1894, p. 9)

[4] The term ‘capital-asset owners’, not ‘bourgeoisie’, is used here because Keynes himself abstained from emphasising class distinctions.

[5] One reason for his rejection of socialist politics is that he felt class distinctions placed the educated and successful bourgeoisie in the reactionary camp (Skidelsky, 2010, p. 53); a mistake society ought not to make.

[6] The meaning of capitalist crisis has the same meaning for Marx and Keynes. Crisis is the sudden and violent substitution for an upward with a downward tendency in production and capital accumulation. So the crisis is characterised by a dramatic fall in profits, output and thus employment.

[7] Rate of surplus-value (s’) = s/v; rate of profit (p’) = s/(v +c); where ‘s’ is extracted surplus-value, ‘v’ is variable capital (labour-power) and ‘c’ is constant capital.

[8] The functional necessity of crises, for Marx, is to restore the profitability of production.

[9] This is because people only use a particular fraction of their income on consumption (the marginal propensity to consume).

[10] Because increased consumption and income provide the basis for positive expectations concerning future yields of capital-goods.

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