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From International Socialism (1st series), No.52, July-September 1972, pp.37-41.
Transcribed & marked up by Einde O’Callaghan for ETOL.
Marx and Keynes
by Paul Mattick
Merlin Press £1.70
The last few years have seen the return of the economic crisis to Western capitalism. Yet for a quarter of a century previously the system had expanded at a rate unprecedented since its youth; a fact which had led many socialists to believe that capitalism had undergone a fundamental change for the better, that there was no inherent difficulty in reforming a class society out of existence. This was all supposed to be due to the successful application by enlightened governments of a series of recipes devised by John Maynard Keynes. Yet not long before, marxists had been asserting that the system was in its dotage, that it was rotten right through, unable to provide the working class or even the petty-bourgeoisie with an acceptable standard of living. As Trotsky had put it:
‘There can be no discussion of systematic social reforms and the raising of the masses’ living standards, when every serious demand of the petty-bourgeoisie inevitably reaches beyond the limits of capitalist property relations and of the bourgeois state.’ [1]
If there were no possibility of reforms, then the only hope for the working class was the overthrow of the capitalist system in the socialist revolution. The impossibility of reforms formed an important part of Trotsky’s perspective for the construction of a revolutionary international.
The failure of Trotsky’s economic perspectives is not a matter which can be taken lightly by revolutionaries in Trotsky’s tradition. The long boom of western capitalism has given a new lease of life to reformism. The working class has been able to win real increases in its standard of living. One of the consequences of this has been the isolation of the revolutionary organisations from the working class. In this situation the development of a revolutionary perspective and the building of a revolutionary party depended on the estimates of the duration of the boom. There have been those who believed that the boom could not last at all and therefore cried wolf at every economic downturn, however slight. At the other extreme were those who believed that there was no reason ever to expect another major slump, and that the only limitation on the expansion of capitalism was the size of the earth’s resources. For these people the socialist revolution receded into a utopian vision.
The present crisis – the first major faltering in the boom on a world scale – allows us to assess both those positions as wrong. Yet we still have to have an assessment of the economic future. Are we to see another 25 years of uninterrupted growth? Is there going to be a catastrophic slump in the immediate future? The answers to these questions depend on our analysis of the causes of the boom and whether these are going to persist.
For this reason Paul Mattick’s book is very timely. The bulk of it consists of an exposition of Keynes’ contributions to economic theory, a statement of Mattick’s version of the marxian theory of crisis, and an examination of the modern capitalist system on the basis of the critique of Keynes. Mattick examines many matters of great interest to socialists: the Common Market, foreign aid and economic development in the colonial and ex-colonial world, and finally the relationship between the state capitalist countries of the Eastern bloc, their western competitors, and socialism.
The last section in the book, that dealing with state capitalism and socialism, is undoubtedly the weakest of all. Mattick quite correctly sees that the state and social system in ‘communist’ Russia is a variety of capitalism – indeed he characterises it as ‘Keynsianism’ in its most consistent and most developed form. [2] But for Mattick the Stalinist counterrevolution which buried the proletarian dictatorship is the natural successor to Bolshevism. There is no break in the historical development.
He can only assume that the Bolsheviks were aiming to build state capitalism in Russia. ‘Lenin’s marxian “orthodoxy” existed only in ideological form as the false consciousness of a non-socialist practice.’ [3] Indeed the Bolsheviks could only ‘see themselves as “Marxists” by assuming an engagement in two revolutions at once – the “bourgeois” revolution which created the capital-labour relations of modern industry and the “socialist” revolution, which prevented the determination and utilization of this development by private capital.’ [4] However ‘the “revolution in permanence” turned out to mean only the slow process of the consolidation and centralization of power in the hands of Lenin’s party.’ [5]
Indeed it is far from certain that Mattick sees the Russian revolution as being a workers’ revolution at all. There is no mention of Soviets or of the role of the working class in the revolution; merely the statement ‘the Russian democratic revolution yielded quickly to the Bolshevik dictatorship.’ [6] This is not an accidental omission from Mattick’s account. It is quite clear that he regards state capitalism as being the only possible outcome of a revolution in a backward country. [7] The theory of permanent revolution was simply an ideological veil thrown up by the Bolsheviks to justify their actions, as much to themselves as to the working class. The smooth transition from Lenin to Stalin, in which Mattick believes, has no place for the ideological struggle by the Stalinist reaction precisely over the question of the permanent revolution; nor for the Moscow trials and the virtual extermination of the Bolshevik leadership in 1917. As a result these facts, like the question of class power, are simply left out of the evaluation of the revolution.
The real meat of Mattick’s book is the economics – the marxian critique of Keynes and the examination of western capitalism. Unfortunately this section contains a great many shortcomings. Some of these are completely outrageous – ‘But profits can only be the difference between paid and unpaid labour.’ [8] – a comment that Mattick could not have made had he thought twice about it. Then there are some parts which can only be described as rather silly. Mattick regards ‘the capitalist system in all its phases and in all its details ... to be in a permanent condition of crisis. Depression is a precondition for prosperity, prosperity comes to an end in a new depression.’ [9] However the general tendency for the rate of profit to fall ‘comes to the fore only in periods of crisis.’ [10] This sort of thing illustrates a general tendency in the book: a great amount of impressive sounding verbiage ... signifying nothing. After stating Keynes’ theories Mattick goes on to examine the cycle of booms and slumps which characterised capitalism during most of its existence. His treatment is quite inadequate. He belongs to the school of thought which dismisses the realisation problem as trivial and assumes that it can be solved without leading to any major difficulties for the capitalist economy: ‘the various existing theories which categorize the problem as either underconsumption or the overpopulation of commodities ... only describe the externals of the capitalist crisis.’ [11] In fact he erects his theory on the ‘assumption that no realisation problem exists’ when ‘it is possible that a discrepancy between material production and value production can arise which will have to be overcome before accumulation can go on.’ [12]
What causes the crisis, according to Mattick, is the overproduction of capital in relation to the mass of profit available. In other words the economy reaches a stage where further investment results in proportionally less profits. This in itself does not help us much – we need to know what it is that has led the rate of profit to fall. Mattick would have us believe that the culprit is the rising organic composition of capital:
‘the turn from prosperity to depression can only be explained as a shift in value relations, that is as a shift from a sufficient to an insufficient profitability of capital ... As there was apparently no lack of surplus value during the phase of accumulation preceding the depression, the accumulation process itself, by altering the organic composition of capital must have led to a relative dearth of surplus value and produced the crisis.’ [13]
Capital accumulation is necessarily accompanied by continual revolutions in the technical basis of production. This leads both to a rising rate of exploitation and to a rising organic composition of capital. The two effects occur in such proportions that over time the rate of profit must fall. But the fall in the rate of profit due to this cause is, as Marx pointed out [14] a very slow process with many contrary trends. In fact the fall in the rate of profit through the rise in the organic composition of capital is a continuous background against which successive crises are caused by sharper drops in the rate of profit due to other causes.
Mattick is quite correct when he says that the turn from prosperity to crisis can only be explained by a shift in the rate of profit. However the mechanism for this shift cannot be a rise in the organic composition of capital – this is too slow a process. But it can be explained by a fall in the rate of exploitation due to increases in wages. During the boom, when all industries are expanding as fast as they can, employment reaches its maximum. With the decline in size of the reserve army of labour workers can, and do, win relatively large wage increases. As a result the rate of profit falls. As Marx put it, ‘crises are always prepared by precisely a period in which wages rise generally, and the working class actually gets a larger share of that part of the annual product intended for consumption.’ [15]
The reason why a fall in the rate of profit at the end of a boom results in a slump has to be found in the consequences of the fail in profits for investment. Investment falls as the rate of profit falls; this is partly because capitalists will not spend their capital if they do not expect a good return, and partly because a decline in the rate of profit means that there are less resources available for investment A fail in the rate of investment means a fall in the demand for machinery and other products of the capital goods sector of the economy, the sector Marx called department I. Overproduction in this sector means problems in realising the value of the product, possibly bankruptcies and throwing out of employment of a section of the workforce. The rate of profit will decline further; and in addition demand for consumption goods will fall as men are thrown out of work. This process will gain momentum until it develops into a full scale slump.
As a consequence of the overproduction of capital (ie overproduction in department I and underutilisation of capacity) overproduction appears in department II. The crisis thus appears to be one due to lack of demand by the working class; however its root cause is the fall in the rate of profit. But the fact that capitalists do have a problem of selling their goods means that they are placed in a dilemma: They cannot increase the income of the workers in order to sell their products, since this would further reduce the rate of profit. But neither can they force down the wages of the working class, because this would make worse the problem of overproduction. For Mattick overproduction is not really a problem. There would seem to be no real reason, according to his version of crisis theory, why fascism could not at least stave off the crisis for a considerable period by forcing down wages. Yet the Italian fascists cut wages by 10-20 per cent in October 1927. In spite of this Italy remained in the throes of a slump: unemployment climbed from 439,000 in January 1928 to 1,129,000 in December 1932. [16] Mattick does attempt to create what looks like an insoluble contradiction for the capitalist class – ‘existing capital is simultaneously too small and too large: it is too large in relation to existing surplus value and not large enough to overcome the dearth of surplus value.’ [17] This is simply not good enough – the capital could be made exactly the right size by forcing down wages and thus increasing the rate of exploitation if it were not for the realisation problem.
What converts the variations in the rate of profit into a cycle with a more or less definite period, according to Marx, is the lifetime of fixed capital. Mattick notes in passing that Marx held this theory but dismisses it without comment beyond that Marx ‘did not insist on the validity of this explanation. [18] Fixed capital – buildings, machinery etc. – has a long life time and is also very expensive. Investment in fixed capital is concentrated in the years of boom investment in the construction of new industries or the expansion of existing ones is very large compared with the increase in the output of finished goods. Following this is a period in which the output of finished goods rises rapidly at the same time as a decline in investment. During the crisis production declines catastrophically and investment stops, or may even give way to disaccumulation.
Profitability will be restored in the slump, partly by the forcing down of wages consequent on the increase in unemployment, partly by the elimination of the less profitable businesses, and by the destruction of capital. However production does not fully recover until there is a need to replace fixed capital. In other words the period of the cycle is determined by the lifetime of fixed capital.
The long term fall in the rate of profit acts upon the cycle: the general effect is to make successive booms shorter and weaker and successive crises longer and deeper, until at last the destruction wrought by the crisis is greater than the growth achieved during the boom. When this point is reached capitalism will have reached the limits of its development and truly be in its death agony.
Mattick’s explanation of the long boom of western capitalism is very weak. He begins by differentiating the economy into ‘a profit determined private sector and a smaller non-profitable public sector.’ [19] Government intervention in the economy through the public sector serves only to increase production:
‘While the end product of capital production is an enlarged capital, the “end product” of government fostered production is only an enlarged production ... From the point of view of private enterprise any production which the government commands falls in the sphere of consumption.’ [20]
The government through its spending provides a market for particular goods. Especially important in this respect are arms:
‘Capital was now “accumulated” in growing measure in the form of armaments. The armaments race led to an expansion of industry not because it was “profitable” in the regular sense of the term, but because an increasing part of profits could now be “realised” through government purchases.’ [21]
This is, of course, an important effect of government expenditure on arms. But it does not relate to Mattick’s theory of crisis – it will be recalled that Mattick regards the realisation problem as being peripheral to the crisis. The point about government demand, as far as Mattick is concerned, is that it is financed out of taxes (i.e. from expropriation from capitalists) and out of government borrowings. ‘The money borrowed by government puts productive resources to work. These resources are private property ... on loan to the government at a certain rate of interest. While production is thus increased its expense piles up as government indebtedness.’ [22] The increase in the national debt increases the amount of credit and thus may ‘postpone or mitigate a crisis.’ [23] Finance from taxes simply amounts to an expropriation from capital. [24] But for Mattick ‘the final product of induced production resulting from a long chain of intermediary production processes does not have the form of a commodity which could profitably be sold on the market.’ [25] Whence, it is deduced, ‘not only is this type of production non-profitable, it is made possible only through that part of total social production which is still sufficiently profitable to yield taxes large enough to extend government production by way of taxation. With the decline of profitability it becomes increasingly difficult to expand production in this particular way.’ [26]
Thus government intervention to stabilise the economy finds its limits in the decline of the profitable private sector compared with the ‘non-profitable’ public sector of government induced production.
‘Government induced production is begun because private capital accumulation is diminishing. Using this method diminishes private capital accumulation even more so non-profit production is increased. The addition in its turn diminishes private capital expansion further and so on. So long as the private sector dominates there is no way in indulging in non-profit production except at the expense of private capital’s profit production. The limits of private capital production are thus finally, the limits of government induced production.’ [27]
It is hard to understand exactly what Mattick means when he says that government induced production is non-profitable. Presumably he does not wish to imply that the workers in those industries have somehow succeeded in escaping from being exploited. Yet the mere fact of the ownership of capital by the state does not prevent it from being capital. Mattick holds that goods sold to the government are not commodities since they are not the sort of goods which could be sold on the open market. But exactly the same is true of goods made to special order for an ordinary capitalist. In the sense that their price is not determined by the ordinary mechanism of competition they are not ordinary commodities. But government contracts are normally costed on the basis of a ‘reasonable’ profit – and the case of Ferranti illustrates both that the production of Bloodhound missiles was profitable, and that governments tend to get upset about a profit being made which is too much above that normal in the industry.
In any event the idea that the stability rests to any great extent upon the expansion of credit does not hold water. If it were the case then one would expect credit to be a destabilising factor at the first sign of a downturn as existing loans were called in. Yet western economies have gone through a number of mild recessions – 1949. 1957 and 1963 for example – without any sign of this.
What, then, has caused the stability? We can indeed seek the answer in government expenditure, particularly expenditure on armaments. Arms expenditure has been very high in most of the advanced capitalist countries as a result of the Korean War and the subsequent Cold War and arms race. Indeed it has been estimated that arms expenditure amounted to something like half the amount of capital formation. [28] Directly and indirectly, arms have been responsible for technical innovation on an enormous scale. The application of arms technology to civil industry has been to greatly raise the productivity of labour, to raise the rate of exploitation. And at the same time it has provided a means whereby the obvious consequence of a rapid rate of technical innovation – a fall in the rate of profit due to a rise in the organic composition of capital – may be ameliorated.
The key to this effect lies in the transformation of prices into values. Prices differ from values because different industries may have high or low organic compositions. Since the rate of profit is s/c+v, and since labour power is the source of surplus value, it would seem that industries with a low organic composition would enjoy a higher rate of profit, given a constant rate of exploitation.
Since capital is free to move to the most profitable sector of the economy an adjustment takes place until the rate of profit is more or less equalised between all the sectors of the economy. The question is – what is the equalised rate of profit? We can tackle this problem if we divide the economy into 3 sectors – department I produces all capital goods, department II all wage goods, and department III all luxury goods (i.e. final demand that is paid for out of surplus value), x, y and z stand for the price per unit value in departments I, II and III respectively, r is the equalised rate of profit. So we can draw up an economy that looks like this:
|
I (c1.x + v1.y)(r + 1) = (c1 + c2 + c3)x |
If we now make m = r + 1, f = v/c and g = (c + v + s)/c we can rewrite this as:
|
I (x + f1.y)m = g1.x |
These are simultaneous equations which can be solved; the solution reveals that the equalised rate of profit:
|
r = |
f2.g1 + g2 − √ {(g2 − f1.g1)² + 4f1.g1.g2} |
− 1 |
|
|
||
|
2(f2 − f1) |
– a solution which is remarkable because it shows that the rate of profit is independent of the organic composition in department III. [29]
Armaments production is a part of department III. It is technologically very advanced – i.e. it has a very high organic composition. But, although this fact allows department I to increase in size relative to department II, it does not have the effect of lowering the average rate of profit. Another important effect of the arms economy has been to smooth out the cyclical swings in the economy. Arms is a significant part of the economy; because of its exceptionally high organic composition it forms a larger part of the demand for department I goods. But armaments spending is not subject to fluctuations in the same way as other industries producing for the open market. Arms production therefore acts as a cushion for department I, providing a market which is not subject to collapse in a crisis. For this reason the recessions since the war have been halted at an early stage without developing into full scale crises.
As a consequence of the smoothing out of the cycle into a ripple, investment in fixed capital has become more spread out, no longer concentrated into a short period of boom. This has further strengthened the economy against cyclical variations. Naturally this is not irreversible – the present crisis, which has seen a great slackening of investment, may contribute to putting fixed capital investment back into phase.
Since we cannot describe armaments production as being non-profitable, we cannot follow Mattick in seeing the limits of the stability as being determined by the expansion of the non-profitable public sector at the expense of the private sector. We can pick out a number of factors which limit the effectiveness of arms in stabilising western capitalism.
First of all, the amount of technological spin-off from arms to civil industry is bound to decrease as the gap between military (including space) technology and civilian industry gets wider.
Secondly, since some countries have been able to benefit from the boom without contributing to it in the form of massive arms budgets, they have been able to invest the resources which have been wasted in for example, Britain and the USA. They have thus been able to achieve a much greater rate of growth, and compete successfully in international competition. In general there has been a contradiction between the mediation of the arms economy within national economies and its mediation between them in the world market. [30]
Our prognosis for western capitalism must therefore be that the stability will continue to decline, not in a sudden catastrophic return to the thirties, but probably with the return of the business cycle. The Keynsian recipes have already proved to be incapable of dealing with the current recession; there is no reason to suppose that their effectiveness will suddenly improve.
Mattick’s account is that Keynesian recipes have been at least partly responsible for the stability, but that their effectiveness is necessarily limited. His errors derive essentially from his faulty analysis of the crisis. His book is therefore not recommended.
1. Trotsky: The Death Agony of Capitalism and the Tasks of the F.I.
2. Mattick, p.280.
3. Mattick, p.307.
4. Mattick, p.279.
5. Mattick, p.295.
6. Mattick, p.295.
7. Mattick, p.332.
8. Mattick, p.194. Whereas profits are unpaid labour, the difference between total and paid labour.
9. Mattick, p.83.
10. Mattick, p.98.
11. Mattick, p.94.
12. Mattick, pp.69-70.
13. Mattick, pp.70-71.
14. Marx: Capital, vol.III, pp.207-235.
15. Marx: Capital, vol.II, p.415.
16. S.B. Clough: Economic History of Modern Italy, pp.232-45; quoted by A. Nagltatti: From a wrong theory to wrong politics.
17. Mattick, p.68.
18. Mattick, p.73.
19. Mattick, p.151.
20. Mattick, p.118.
21. Mattick, p.135.
22. Mattick, p.151.
23. Mattick, p.132.
24. Mattick, p.161.
25. Mattick, p.154.
26. Mattick, p.161.
27. Mattick, p.188.
28. M. Kidron: Western Capitalism since the War, p.49.
29. This is von Bortkjewicz’s solution to the transformation problem. It may be found in Sweezy: The Theory of Capitalist Development, pp.115-125.
30. For a fuller discussion of the Arms Economy see Kidron, op. cit.
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