In this month’s post, I will take a look at Heinrich’s views on value, money and price. As regular readers of this blog should realize by now, the theory of value, money and price has big implications for crisis theory.

As we have seen, present-day crisis theory is divided into two main camps. One camp emphasizes the production of surplus value. This school—largely inspired by the work of Polish-born economist Henryk Grossman, and whose most distinguished present-day leader is Professor Andrew Kliman of Pace University—holds that the basic cause of crises is that periodically an insufficient amount of surplus value is produced. The result is a rate of profit too low for the capitalists to maintain a level of investment sufficient to prevent a crisis.

From the viewpoint of this school, a lack of demand is a secondary effect of the crisis but by no means the cause. If the capitalists find a way to increase the production of surplus value sufficiently, investment will rise and demand problems will go away. Heinrich, who claims there is no tendency of the rate of profit to fall, is therefore anathema to this tendency of Marxist thought.

The other main school of crisis theory puts the emphasis on the problem of the realization of surplus value. This tendency is dominated by the Monthly Review school, named after the magazine founded by U.S. Marxist economist Paul Sweezy and now led by Monthly Review editor John Bellamy Foster.

The Monthly Review school roots the tendency toward crises/stagnation not in the production of surplus value like the Grossman-Kliman school but rather in the realization of surplus value. The analysis of this school is based largely on the work of the purely bourgeois English economist John Maynard Keynes, the moderate Polish-born socialist economist Michael Kalecki, and the radical U.S. Marxist economist Paul Sweezy.

Kalecki’s views on markets were similar to those of Keynes. Indeed, it is often said that Kalecki invented “Keynesian theory” independently and prior to Keynes himself—with one exception. Kalecki, like the rest of the Monthly Review school, puts great emphasis on what he called the “degree of monopoly.” In contrast, Keynes completely ignored the problem of monopoly.

Needed, a Marxist law of markets

A real theory of the market is necessary, in my opinion, for a complete theory of crises. Engels indicated in his work “Socialism, Utopian and Scientific” that under capitalism the growth of the market is governed by “quite different laws” than govern the growth of production, and that the laws governing the growth of the market operate “far less energetically” than the laws that govern the growth of production. The result is the crises of overproduction that in the long run keep the growth of production within the limits of the market.

This, however, is not a complete crisis theory, because Engels did not explain exactly what the laws are that govern the growth of the market. Unfortunately, leaving aside hints found in Marx’s writings, Marxists—with the exception of Paul Sweezy—have largely ignored the laws that govern the growth of the market. This, I think, would be a legitimate criticism of what Heinrich calls “world view Marxism.” As a result, the theory of what does govern the growth of the market has been left to the anti-Marxist Keynes, the questionably Marxist Kalecki and the strongly Keynes- and Kalecki-influenced Sweezy.

Was Kalecki really a Marxist?

In his article “Marx, Kalecki, and Socialist Strategy,” published in the April 2013 edition of Monthly Review, John Bellamy Foster called Kalecki a “great Marxist economist.” For purposes of this blog, I consider any person who considers himself or herself a Marxist, or is widely considered to have been a Marxist, to be a Marxist. Using this definition of “Marxist,” Kalecki is a borderline case. There are considerable differences among Marxist economists as to whether Kalecki should be considered a Marxist. Many Marxist writers don’t consider Kalecki a Marxist at all, viewing him as more of a Keynesian. (1)

The present-day U.S economist Paul Krugman’s views have evolved leftward in recent years from a mixture of Friedmanism and pro-business neo-Keynesianism toward a radical form of Keynesianism that is now not that far from the Monthly Review school. Recently, Krugman, who has become very interested in Kalecki, wrote in his August 8, 2013, piece for the New York Times, “Kalecki was a declared Marxist (although I don’t see much of Marx in his writings).” From what I have seen of Kalecki’s writings, I agree with Krugman on this point.

As we saw in my post on Foster’s April 2013 Monthly Review piece, Kalecki’s views are very far from Marx’s on the relationship between wages and prices, for example. I see little evidence that Kalecki accepted and based his work on Marx’s theory of value and surplus value.

In fact, neither Keynes, Kalecki nor Sweezy based their theories of the growth of the market on Marx’s theories of value, money and price. These theories were simply beyond the comprehension of Keynes. Kalecki, as far as I can see, at best completely ignored Marx’s theories of value, money and price.

Paul Sweezy, in contrast, was a supporter of Marx’s theory of value and surplus value. However, in his “Theory of Capitalist Development,” first published in 1942, Sweezy specifically stated that he would not deal with Marx’s theory of money. This did not prevent Sweezy from attempting to develop a theory of crisis in that work, an attempt largely doomed because Sweezy did not deal with Marx’s theory of money and price. (2)

Sweezy (and co-author Baran) ignored Marx’s theory of money—and value theory in general—in “Monopoly Capital” as well. As a result, Sweezy in analyzing the laws that govern the growth of the market was not to go much beyond Keynes and Kalecki. This is why Sweezy is often considered to be a “Keynesian Marxist.”

It is certainly true, in my opinion, that the work of Keynes, Kalecki and Sweezy on markets is far superior to the work of modern “orthodox” marginalist economists. Nor of course should we deny the vast political differences that separate the pro-capitalist and pro-imperialist Keynes from the socialist Kalecki or the more radical socialist Paul Sweezy. Keeping this in mind, I think it is still possible to speak of a Keynes, Kalecki and Sweezy theory of the market.

Why can’t we just combine the Marxist theory of the tendency of the rate of profit to fall—which Heinrich rejects—with the Keynes, Kalecki and Sweezy theory of the market to achieve a complete theory of crises? The reason is that Keynes, Kalecki and Sweezy’s theory of the market is not really rooted in Marx’s theories of value, money and price. It is, in my opinion, simply inadequate as it stands.

Michael Heinrich’s contribution

In contrast to the lack of Marx in Kalecki, we see a lot of Marx in Heinrich. This is true even where Heinrich disagrees with Marx—for example, on the historical tendency of the rate of profit. The same is true of Heinrich’s theory of value, money and price. If Kalecki ever wrote anything on Marx’s value or monetary theory, I am unaware of it.

Heinrich, however, in his “Introduction” has quite a lot to say on these subjects. Indeed, he calls Marx’s theory of value a “monetary theory of value” in contrast to a “labor theory of value.” This raises the hope that Heinrich might develop, or at least provide hints of developing, a theory of the growth of the market that finally goes beyond the Keynes-Kalecki-Sweezy model. For example, Heinrich does not ignore Marx’s theory of money. For the first time in decades—maybe ever—Monthly Review Press has published a writer that deals with Marx’s theory of money seriously.

If Heinrich had done this correctly, he would have plugged a huge hole in the theory of the Monthly Review school and at least helped to lay the foundation of a truly Marxist theory of the laws that govern the size and growth of the market. A huge step forward would therefore be taken toward a complete theory of crises. This would be true even if Heinrich is wrong—like I think he is—on the tendency of the rate of profit to fall.

Heinrich on value

“[T]he commodity,” Heinrich writes, “is use value and value, value is an objectification of human labor, the magnitude of value depends upon the ‘socially necessary labor-time’ required for the production of a commodity. …” Does this pretty much summarize Marx’s theory of value? Heinrich doesn’t think so. “If that were actually all there is to it,” Heinrich writes, “then Marx’s value theory would not have gone very far beyond classical political economy.” (p. 44) I agree with Heinrich on this. If this were all there was to Marx’s theory of value, there would be little difference between the Ricardian and Marxist theories of value.

What is missing here, Heinrich correctly points out, is the concept of abstract labor. I believe that Marx’s concept of abstract labor is the biggest stumbling block to fully understanding Marx’s critique of political economy. If we fail to grasp the concept of abstract labor, as I believe Paul Sweezy pointed out somewhere, we end up reading Marx in a “Ricardian” way. We still have a powerful theory of value. But, as we know, Ricardo’s theory of value was incomplete, which enabled the post-Ricardian vulgar bourgeois economists to use the contradictions of Ricardian value theory to remove any labor-based theory of value from political economy altogether, bringing classical political economy to an end.

If we do not go beyond Ricardian value theory, we will not be able to fully answer the “neo-Ricardian” critiques of Marx. More importantly, on the basis of a purely Ricardian theory of value, we will not be able to really grasp the nature of money and price. And, therefore, we will not be able to develop a complete theory of crisis. Ricardo himself supported Say’s Law, after all, a mistake that flowed in part at least from the limitations of his theory of value, money and price.

Heinrich, therefore, appears to be off to a promising start in plugging a major hole in present-day Marxist theory—call it “world view Marxism” if you want. But does he deliver on his promises?

Concrete versus abstract labor, the great stumbling block

When it comes to distinguishing between abstract and concrete labor, the classical economists—or any other school of (bourgeois) economics—are of little help. In constructing his critique of political economy, Marx was generally able to build his critique on the discoveries of the bourgeois economists themselves. There was, however, one major exception: the distinction between concrete and abstract labor. There Marx had to turn to the philosophers, not to the economists. Marx, a philosophy major in college, had a great advantage here, because during his youth Germany was passing through a philosophical revolution.

The ancient idealist Greek philosophers—especially Plato (3) and Aristotle—created the concept of ideal forms. Every material object, according to the Greek idealists, is an imperfect copy of the ideal form that, according to the idealists, is the essence of reality.

This led to the idea that the material is inevitably an imperfect or corrupt copy of the ideal, at best. These ideas caused St. Paul and Christian theologians who followed him to conclude that the “present” material world is an evil copy of the true ideal heavenly reality. In contrast, the materialist philosophers, including Marx, held that the real is always the concrete—the material.

However, classification of objects and relationships—finding through abstraction the things that different objects belonging to a common class have in common—is a powerful and necessary tool for comprehending reality. Without abstraction, the world appears as a chaotic collection of unrelated objects and relationships.

The pre-Darwinian Swedish biologist Carl Linnaeus (1707-1778) created a classification system for living organisms that is used by biologists to this very day. Though Linnaeus, unlike Darwin, did not realize that all mammals are descended from a common ancestral species that lived sometime during the geological era scientists call the Triassic (252.2 ± 0.5 to 201.3 million years ago). Though not an evolutionist, Linnaeus realized it was possible to group mammals together in a common class.

For example, all animals that are classified as mammals produce milk to nourish their young. Of all the animal species on earth, no non-mammal nourishes its young with milk. (4)

Another example we can take from classical political economy itself. Adam Smith was able to group all human beings operating in a pure capitalist economy—itself an abstraction—into three social classes: the landlords, who live off rent; the capitalists, who live off profit; and the workers, who live off the wages of labor. Individual landlords, capitalists and workers as human beings differ in many ways from one another. But by abstracting everything about these individuals except the nature of their income—rent, profit or wages—Smith was able to group them into the three main social classes of modern capitalist society.

In sharp contrast, Smith’s present-day “neoclassical-marginalist” successors avoid this abstraction in order to conceal the class nature of modern capitalist society to which Adam Smith drew attention.

We can apply the same method of abstraction to classify human labor. Labor as a conscious activity—as opposed to the unconscious activity of social insects like ants and bees—is essentially unique to humans, at least as far as our planet is concerned. At most, we can find only embryonic forerunners of conscious labor in certain animals such as our closest relatives, the chimpanzees.

Therefore, all forms of human labor have something in common, just like all mammals have something in common. But just as there is no abstract “mammal” except in our thought, there is no “abstract labor” as such. All actual labor is concrete labor. However, whenever we write or speak about human labor without qualifying it, we are, whether we know it or not, using the category of abstract human labor. We are leaving out the differences that distinguish one act of living labor from all others acts of living labor. This as Heinrich points out can be done not only consciously by a giant of human thought like Karl Marx but unconsciously by all people engaged in the exchange of the products of their private labors.

“Abstract labor,” Heinrich writes, “is thus not a special type of labor expenditure, such as monotonous assembly-line labor as opposed to artisanal, content-rich carpentry.” (p. 49)

Can abstract labor be measured?

“[A]bstract [Heinrich’s emphasis] labor, Heinrich writes, “cannot be measured in terms of an hour of labor. …” (p. 50) Here, after a promising start, Heinrich stumbles badly. If it is true that abstract labor cannot be measured quantitatively, Marx’s theory of value is in deep trouble. For example, if we cannot measure abstract labor in quantitative terms, how can we say that the value of one commodity is greater or lesser than the value of another? In what sense can a diamond be more valuable than a candy bar?

In reality, we can measure both concrete labor and abstract labor in terms of some unit of time. What is true is that in any particular instance, a given amount of concrete labor measured in terms of time will almost certainly represent a different quantity of abstract labor, also measured in terms of some unit of time. But the total quantity of concrete labor in a commodity-producing society will in any given period of time still equal the total quantity of abstract labor. In failing to realize that concrete labor can be measured quantitatively in terms of time, Heinrich commits a grave error. It is at the root of all the other errors he makes in his analysis of value, money and price.

Is the magnitude of value determined in the sphere of circulation or in the sphere of production?

If, for the sake of argument, we accept Heinrich’s view that abstract labor cannot be measured in terms of time, how can we say then that a diamond is more valuable than a candy bar? True, if we measured the concrete labor that it takes on average to produce a diamond and the concrete labor it takes to produce a candy bar, we would certainly find that, on average at least, it takes a vastly greater quantity of labor to produce the diamond than the candy bar. But Marx and Heinrich both agree that the value of a commodity is not measured in terms of concrete but abstract labor.

“Value-constituting labor-time (or the magnitude of abstract labor),” Heinrich writes, “cannot be measured before, only during exchange. …” (p. 65) In other words, according to Heinrich we know just what every child knows, that a diamond is far more valuable than a candy bar because it has a higher price. To draw this conclusion, we don’t need economic science at all. Heinrich has now gone badly off track.

An important conclusion drawn by Marx in his writing on value is that you can’t have value without having a value form. Next to the question of concrete versus abstract labor, this has proven the most difficult aspect of Marx’s economic theory to grasp. How does Heinrich do here?

Human labor only takes the form of value in an economy based on the exchange of the products of private labor. The exchange of the products of private labor is only characteristic of a certain phase in the history of production where the products of human labor take the form of commodities.

The producers perform their labor independently of one another. They only come into contact with one another through exchange. Therefore, you cannot have value without exchange value. This much Heinrich understands, and when he understands things he explains them quite well.

Heinrich then reproduces in his “Introduction” Marx’s equation of the exchange 20 yards of linen equal one coat. The exchange value of 20 yards of linen is measured in terms of coats, in this case one coat. “The coat,” Heinrich writes, “counts of as an embodiment of value, but only within the form of [the] expression of value.” (p. 59)

The above sentence is an awkward expression at best. Heinrich has a great gift for explaining things clearly when he understands them. Therefore, when Heinrich resorts to difficult sentences like this, it is a warning that he is missing something. What is embodied value? Can there be such a thing as non-embodied value? No there cannot. Labor is a process, so there is indeed non-embodied labor, but there can be no such thing as value that is not embodied in a commodity or service.

The 20 yards of linen is being measured here not in terms of hours of abstract labor—value—but in terms of the use value of the coat—in terms of its exchange value, not its value. It is exchange value—not value—that the very material coat represents. Value must always take the form of exchange value—some specific commodity measured in terms of that commodity’s use value. (5)

The use value of every commodity has a unit of measurement that is appropriate for that specific commodity. With linen it is yards—or meters or some other unit of length. With gold it is troy ounces, grams, metric tons or some other unit of weight. With coats, it is the number of individual or discrete coats.

Therefore, the value of 20 yards of linen—or any other commodity, as far the producers engaged in exchange are concerned—is not measured in terms of abstract labor—the social, not the physical, substance of value embodied in a commodity, which is completely hidden from them—but in something completely different, the use value of a coat of given type and quality. Heinrich does understand Marx’s discovery that value must take the form of exchange value. So far so good. But he does not grasp that the exchange value of one commodity must always be measured in the use value of another commodity with a different use value.

In his “Introduction,” Heinrich reproduces in his book three equations of exchange from Volume I of “Capital”. First, 20 yards of linen equal one coat. Then 20 yards of linen equal 10 pounds of tea. Notice that, like the coat, tea is measured in a unit appropriate to its use value, in this case a unit of weight. Then 20 yards of linen are worth 40 pounds of coffee. Coffee also has a use value as its appropriate unit of measure—in this case as is the case with tea a unit of weight.

In principle, we can extend the list until the value of 20 yards of linen has been measured in terms of the use value of every commodity except linen itself, since the equation 20 yards of linen equal 20 yards of linen is a mere tautology.

“However,” Heinrich explains, “the expanded form of value is inadequate: the expression of the value of commodity A is incomplete and without closure.” (p. 60) Here, Heinrich is in good form again.

But what happens if we reverse our equations of exchange so that the left side becomes the right side. This, as Heinrich explains with his usual great clarity, is exactly what Marx does. 1 coat is worth 20 yards of linen. 10 pounds of tea are worth 20 yards of linen and 40 pounds of coffee are also worth 20 yards of linen. This looks very much like a price list, except instead of using some unit of currency like U.S. dollars, we are using a length of linen measured in a unit of use value that is appropriate for linen—in yards.

Marx calls this the “general form of value.” Marx then replaces the 20 yards of linen with an ounce of dazzling gold, and we get the money form of value. If we define dollars in terms of a weight of gold, we get the everyday form of value expressed in dollars and cents—that is, commodity prices expressed in units of currency, whether the units are dollars, euros, yen, Swiss francs, yuan or some other currency.

But Heinrich does not reproduce the equations in his book—or at least the English version published by Monthly Review Press. And there is a reason why Heinrich leaves Marx’s final equations out. The reason is his concept of “non-commodity money”—money that somehow represents value directly rather than through the use value of a special money commodity measured in terms of units appropriate to its use value, such as ounces of gold. We finally understand why Heinrich fails to clearly explain that the exchange value of one commodity must be measured in the use value of another.

Heinrich collapses

“Marx,” Heinrich writes, “could not imagine a capitalist money system existing without a money commodity, but the existence of such a commodity is in no way a necessary consequence of his analysis of the commodity and money.” And further, “But that the general equivalent must be a specific commodity was not proven by Marx, merely assumed.” (p. 70)

First, Heinrich fails to understand that abstract human labor (the social not material substance of value) can indeed be measured in the unit that is appropriate for it—some unit of time. He fails to see that the value of a commodity must be measured in terms of the use value of another commodity in a unit that is appropriate for that commodity—for example, the weight of some precious metal.

In fact, if we can follow Marx’s logic, we see that no matter how far the capitalist credit system develops, money in the final analysis must be an actual commodity with a unique use value that is measured in terms of the unit that is appropriate for that commodity’s particular use value. This explains why gold continues to exercise its seemingly mysterious power over capitalist production and why the financial press is so obsessed with fluctuations in the dollar “price of gold,” whether upward or downward.

Marx’s theory of value is, according to Heinrich, “a monetary theory of value [Heinrich’s emphasis]. …” (p. 63) Heinrich has reached a dead end. Indeed, the “monetary theory of value” is the most naive value theory of all. The very first thing we learn about commodities as small children—long before we learn the term commodity—is that they are valued in terms of money. Marx’s theory of value is therefore not a monetary theory of value but among other things a theory of monetary value.

For example, 20 yards of linen equal one coat. I can actually carry around the exchange value of the 20 yards of linen by simply carrying around—or even wearing—a coat. But what I cannot do is carry around, wear or deposit in a bank an hour of abstract human labor time that is not embodied in a particular commodity of a given use value. Therefore, there can be no such thing as an isolated commodity that has a value but no exchange value.

Secondly, with the development of commodity production long before it reaches the level of capitalism—generalized commodity production where labor power itself becomes a commodity—one or a few commodities inevitably emerge as universal equivalents—money. If it were otherwise, every commodity would have n–1 prices where n is the total quantity of commodities of a given use value and quality. With this understanding, we break though to the surface of economic life and see that commodities have and indeed must have a monetary value. And we understand exactly what money is.

Marx’s theory is therefore not a monetary theory of value but a theory of value that explains the everyday surface phenomenon of monetary value.

Heinrich goes so far as to lump together the incomplete but extremely powerful labor theory of value of the classical economists—especially Ricardo—with the marginalist theory of value. He writes, “Both the labor theory of value of classical political economy and the theory of marginal utility of neoclassical economics are pre-monetary theories of value.” (p. 64) For good measure, Heinrich alleges that the view that “value is already completely determined by ‘socially necessary labor-time’ is also a pre-monetary theory of value.”

While the view that “value is already completely determined by ‘socially necessary labor-time'” does not in itself explain all aspects of value, it is still far superior to the “marginal utility of neoclassical economists” (6), not to speak of Heinrich’s infantile “monetary theory of value.”

Crisis theory and Heinrich’s failure to understand Marx’s theories of value, price and money

In his “Introduction to the Three Volumes of Karl Marx’s Capital,” Heinrich could and perhaps should have ignored the question of crisis theory. Marx’s “Capital” was not designed to deal with crisis theory—a subject that lay beyond the work. Heinrich claims that late in his life Marx abandoned his plans to write separate books on landed property, wage labor, and the world market and crises. Instead, Heinrich believes, as the end of his life neared, Marx planned to incorporate all the other books he planned to write, with the exception perhaps of his planned book on the state, directly into “Capital.” This may have been at least partly the case. It does seem that Marx included a good deal of what might have gone into a separate book on landed property in Volume III of “Capital.”

But it is still true that there is no systematic treatment of crises in any of the three volumes of “Capital” or in Marx’s planned book on the history of political economy of which as far as we know he drafted only one part—a history of the theories of surplus value. Notwithstanding this, Heinrich does have quite a lot to say about crisis theory in his “Introduction to the Three Volumes of Karl Marx’s Capital.”

Because of the extreme importance of crisis theory for the fate of modern society, it is crisis theory that overshadows both Heinrich’s discussion of the theory of the tendency of the rate of profit to fall and his views on value and money. “Marx never ceased to develop his thinking on the phenomena of crises in capitalism,” the Monthly Review editors write in their introduction to Heinrich’s article on the rate of profit, “and never ceased to discard earlier formulations; for example, at the end of his life he was focused on questions of credit and crisis.”

Obviously, the editors of Monthly Review are interested in Heinrich because they think he has something important to say on crisis theory. Essentially, the editors are using Heinrich’s “refutation” of the TRPF to argue that the causes of crisis should not be sought in downward movements in the profit rate.

As we saw last month, Heinrich rejects Marx’s law of the tendency of the rate of profit to fall. Heinrich, if I understand him, accepted that in the late 1850s and early 1860s Marx believed that the tendency of the rate of profit to fall due to the rise in the organic composition of capital over time was the fundamental cause of crises.

But later on, Heinrich believes, Marx became increasingly doubtful that there was in fact any tendency of the rate of profit to fall over time. Marx, therefore, was moving toward a theory of crisis based on credit. This is why Heinrich thinks that Marx filled what became Volume III of “Capital” with observations on banking, interest rates and credit. At the end of his life, Marx believed, if we are to believe Heinrich, the roots of the periodic crises that hit capitalism are to be found in the sphere of credit. It is credit, Heinrich claims, that drives the expansion of the market, so if the market cannot keep up with rising production, the root of the problem must lie in the credit system.

In reality, Marx considered the view that the causes of crises are to be found in the sphere of currency and credit to be the most superficial theory of crisis of all.

Let’s look at various theories that purport to explain the relationship between the production of commodities and market demand.

1) One such theory is based on Say’s Law (of markets). It claims that it is the level of commodity production that determines the demand for commodities. In the final analysis, Say held, commodities are used to purchase commodities. Double production and, according to Say, you double demand.

A general overproduction of commodities is therefore impossible. At most, there can be partial overproduction of some commodities backed up by an under-production of other commodities. For example, there might be an overproduction of the means of production—Department I, the department that produces producers goods—compared to the means of consumption—Department II, the department that produces items of personal consumption.

This view is implicit in marginalism and is supported explicitly to this day by right-wing “neo-liberal” economists such as the Austrian school. Therefore, if crises occur they must involve some type of disproportionate production but never a generalized overproduction of commodities. The problem with Say’s Law is that it ignores the existence of money.

2) Next is what I will call the Keynes-Kalecki-Sweezy school. This school admits that due to the existence of money an overproduction of commodities is possible. Total spending—the market—can be divided into three parts: spending by the capitalists, spending by the workers, and spending by the government. Spending by workers is pretty stable. The workers are obliged to spend their entire incomes in order to live and raise the next generation.

The capitalist with their huge incomes, however, have to decide how much of their incomes to consume and how much to save or invest. This is where difficulties begin. The supporters of Say’s Law—liberal and neo-liberal economists—claim that every act of saving is also an act of investment—in Marxist terminology, productive consumption. For example, if I am a capitalist and save a lot of my income in a bank account, the bank will lend the money to another capitalist who will use the borrowed money to expand his or her business.

The same will be true if I invest a portion of my income in bonds or stocks.

The reason that is true, the economic liberals argue, is that this is exactly how the capitalists grow rich. Capitalists who do not invest every cent that they do not use for personal consumption are missing an opportunity to get richer. The economic liberals hold that no capitalist can behave that way without sooner or later being eliminated through market competition.

The Keynes-Kalecki-Sweezy school rejects this. It holds that it is quite likely that capitalists collectively will attempt to save more than they invest. The capitalists can always hold on to their money as opposed to spending it on either items of personal consumption or on capital goods. If the capitalist class for whatever reason behaves this way, there will either be overproduction—crisis—or stagnation. You get unemployed workers on one side and idle factories, mines and machines on the other.

Kalecki and Sweezy explained that monopolies are much more likely to attempt to “save” without “investing” than are small capitalist producers engaged in “free competition.” Therefore, both Kalecki and Sweezy held that with the growth of the centralization of capital the tendency toward crises and/or stagnation grows.

In contrast to Marx, however, the Keynes-Kalecki-Sweezy school believes that in theory it is quite possible to eliminate crises/stagnation without abolishing capitalism. The solution lies in the third part of total spending—government.

If the capitalists for whatever reason refuse to consume or invest sufficiently, the government should step in and increase its spending to whatever level is necessary to achieve “full employment” of both workers and machines. Therefore, even under the domination of monopoly capital, with its strong tendency toward crises and stagnation—excess capacity and unemployment—lack of demand is ultimately a technical problem that can be solved through a correct policy by the government. If there is a shortage of money, the “monetary authority” can always print sufficient additional money without causing dangerous inflation right up to “full employment.”

Therefore, government can always solve the problem of insufficient market demand and resulting mass unemployment as long as it is willing to do so. Kalecki and Sweezy believed that because the capitalists fear that government spending to achieve “full employment” will undermine their hold over society, the capitalists will use their vast political power to resist “full employment” policies. Keynes, Kalecki and Sweezy saw this resistance coming primarily from the money capitalists—or rentiers, as Keynes called them.

The rentiers alone have an economic interest in avoiding “full employment” policies because such policies tend to cause inflation, which though not dangerous overall does tend to erode the fixed incomes of those living off interest. In contrast, the industrial and commercial capitalists can potentially benefit from such policies because “full employment” means high sales and therefore higher profits. Also, inflation reduces real wages, which increases profits.

But because of their political fears, the industrial and commercial capitalists tend to be pulled along by the rentiers’ faction of the capitalist class. A political alliance between the workers and the industrial and commercial capitalists against the money capitalists around a “full employment” policy is therefore difficult to achieve but not entirely impossible, as the U.S. New Deal under Franklin Roosevelt showed.

3) The falling tendency of the rate of profit theory of markets, largely inspired by Marxist economist Henryk Grossman, with the main leader today being Andrew Kliman, agrees with the Keynes-Kalecki-Sweezy school that the capitalists may very well not spend enough money on personal consumption and investment to ensure the full employment of the workers and means of production.

But unlike the Keynes-Kalecki-Sweezy school, the Grossman-Kliman school believes that whether the capitalists invest sufficiently to achieve capitalist prosperity is determined by the rate of profit in terms of value—value as defined by Marx. Keynes did not accept Marxist value theory and almost certainly did not understand it. So the Grossman-Kliman school would have had no meaning to him. It is not at all clear to what extent, if at all, Kalecki understood or accepted Marxist value theory. Only Sweezy was a supporter of the Marxist theory of value. Therefore, unlike the Keynes-Kalecki-Sweezy school, the Grossman-Kliman school, whether it is correct or not, offers a specifically Marxist theory of crises.

If profits in value terms are too low, the Grossman-Kliman school reasons, the capitalists will hold on to their money, leading to the appearance of overproduction and/or stagnation as a secondary reaction. Crises are, therefore, not so much crises of overproduction, as Marx and Engels described them, but rather crises of profitability that take the form of crises of overproduction. Therefore, the Grossman-Kliman school believes, in contrast to the Keynes-Kalecki-Sweezy school, that if the rate of profit is high enough in terms of value, the capitalists will always invest productively the portion of the profits they do not use for personal consumption in order to generate still more profits.

It follows, according to the Grossman-Kliman school, that increasing government spending is not the solution to crisis/stagnation. The reason is that in a situation of deep crisis or stagnation, the rate of profit is already too low in value terms. If the government attempts to end the crisis/stagnation by increasing spending, it must sooner or later increase taxes to finance these increased expenditures or to service its debts if it resorts to deficit spending.

If the taxes hit the workers, no increase in demand will occur because the income that is taxed away would have been spent by the workers on consumer commodities in any case. If rising taxes hit the capitalists, they will only further reduce their investments, which will only worsen the crisis/stagnation.

The only way out of a major crisis/stagnation within capitalism, according to this school, is through a radical rise in the rate of profit in terms of value. This can be brought about either through the destruction and devaluation of a great mass of the existing constant capital or by a sharp rise in the rate of surplus value. The only alternative to this is to replace capitalism with socialism.

Therefore, any “popular front” or “New Deal” attempts to form alliances between the industrial and commercial capitalists and the workers around a program to end a crisis/stagnation through increasing demand is doomed to fail.

4) In this blog, I have been developing a fourth theory that does not reject the points made in numbers 2 and 3 above but consider them inadequate as they stand. Capitalist investment is indeed very unstable as the Keynes-Kalecki-Sweezy school points out and certainly depends on an adequate—from the viewpoint of the capitalists—rate of profit in value terms, as the Grossman-Kliman school holds. An adequate rate of profit in terms of value is therefore a necessary condition for capitalist prosperity and “low” unemployment.

However, in contrast to the Grossman-Kliman school, I don’t believe that production of surplus value is sufficient. In addition to producing surplus value, it is necessary to realize the surplus value in money terms on the market. And unlike the Grossman-Kliman school, I don’t believe that an adequate rate of profit in terms of value guarantees such a “happy” outcome.

The reason is that real money must ultimately be a commodity, and the quantity of money in terms of purchasing power is therefore ultimately limited by the quantity of real money in existence—gold bullion. Whether enough real money exists depends in turn on the profitability—both relative to all other industries and absolutely—of the gold bullion-producing industry.

This comes down to a relationship between market prices and the prices of production that equalizes the rate of profit in all branches of industry. The prices of production are themselves forms of exchange value—direct prices modified by equalization of profits—just as much as market prices are.

Like market prices, prices of production are ultimately measured in weights of precious metal—gold bullion. This is true whether or not a gold standard is in effect. In the absence of a gold standard, the units of currency—dollars, euros, yen, yuan and so on—represent fluctuating rather than constant amounts of gold bullion, the actual money commodity.

If market prices in terms of real money—gold—are below the prices of production, capital will tend to migrate toward gold bullion-producing industry. The real money supply will swell. Since periods of low commodity prices, measured in terms of the use value of the money commodity, tend to be periods of depression and mass unemployment, the rate of surplus value will rise in such periods boosting the rate of profit in value terms. In addition, the mass of constant capital in terms of price is, to a large extent, being devalued—ultimately reflecting a devaluation of the mass of capital in value terms.

Therefore—assuming revolution does not intervene—sooner or later a new economic boom will develop as profits in both value and monetary terms soar. As Marx put it, there are no permanent crises.

However, the boom when it comes will cause prices in terms of real money—gold—to rise. Sooner or later, market prices will rise above their prices of production. This will cause capital to flow out of the gold-producing industry, causing gold production to decline. This won’t lead to an immediate crisis, because first the velocity of turnover of the currency that represents gold bullion in circulation will increase, and then the expansion of the credit system system will allow the market to keep expanding for awhile.

But ultimately, the expansion of the credit system depends on the expansion of the quantity of real money. Sooner or later, a stagnation in the quantity of real money will lead to a contraction of credit and a crisis. The crisis followed by a more or less extended period of stagnation will be accompanied by a growing centralization of capital. Therefore, crises are exactly what Marx and Engels called them—crises of the overproduction of commodities relative to the ability of the market to expand.

Eventually, however, prices in terms of gold will fall below their prices of production in terms of gold, which will, combined with the destruction of real capital, both commodity capital and productive capital, and the rise in the rate of surplus value brought about by the pressure of mass unemployment on wages, lead to a situation where the demand for commodities exceeds their supply at prevailing market prices and the cycle will repeat. Capitalist production is therefore profoundly cyclical.

During the crisis, increasing government spending won’t work, because there is an acute shortage of cash, and government spending will only shift the overall inadequate level of demand towards some industries and away from others. However, after the crisis, government spending that is financed through borrowing can indeed increase total demand in the economy but risks a renewed outbreak of the crisis if it is done prematurely. Even if deficit spending is not done prematurely, if the economy recovers rapidly as a result of a deficit spending program, the next crisis will come all the sooner and be more violent.

Therefore, the capitalist class and the policymakers who serve it resist policies that threaten to “overheat” the economy. As a result, during the favorable phases of the industrial cycle, reforms can be won but only through hard class struggle with the capitalists. The workers would be little better off than the slaves of the ancient world if they did not take full advantage of the favorable stages of the industrial cycle. However, over time the recurring crises will tend to grow worse, making the transition to a socialist economy the only way out.

Heinrich on crisis theory

Heinrich admits that crises are inevitable, and so despite his false theory of money he rejects theory number 1 above, based on Say’s Law. Heinrich rejects number 3, the Grossman-Kliman school theory as well, because he does not believe in a downward tendency of the rate of profit. He would also reject theory number 4 because he believes that non-commodity paper money can replace real money as the measure of value of commodities. This leaves him with number 2, the Keynes-Kalecki-Sweezy school theory.

The Keynes-Kalecki-Sweezy school is, however, far from monolithic. Keynes was not a socialist of any kind and hoped his more realistic analysis of the capitalist economy—compared to traditional marginalism and supporters of Say’s Law—would help to prolong capitalism indefinitely. Unlike Kalecki and Sweezy, Keynes ignored the problem of monopoly. The growth of monopoly, after all, implies that the capitalism of “free competition” is evolving towards a higher form of society and that capitalism cannot go on forever as Keynes hoped it would. Therefore, it is not surprising that Kalecki and Sweezy, who were both socialists, emphasized the role of monopoly in their analysis while Keynes did not

Interestingly enough, though Heinrich is a socialist, his views are in crucial ways closer to Keynes than they are to either Kalecki or Sweezy, as we will see in our next and hopefully final post of this series.

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1 If Kalecki did declare himself a Marxist I would have to classify him as a Marxist as defined for purposes of this blog. Kalecki spent the last 15 years of his life in his native Poland when Poland was ruled by the avowedly Marxist-Leninist Polish United Workers Party, so Kalecki would have been under some pressure to describe himself as a Marxist in that period. I am not sure whether Kalecki ever described himself as a Marxist during the period when doing the work that has so influenced the Monthly Review school. If any reader of this blog has concrete knowledge of this, they should post a comment. In any event, I think we should judge economists not by whether they call themselves Marxists but to the degree their ideas conform to the realities of the capitalist system.

2 In the 1930s, when he was in transition from the marginalist theories he learned at Harvard to Marxism, Sweezy wrote quite a lot on price theory. He is even the discoverer of the “kinked demand curve” that was part of the attempt to extend marginalist price theory to the case of monopoly. This work of Sweezy’s, however, is rooted in marginalism, not Marxism.

3 Philosophy is divided into two great factions—the materialists and the idealists. The materialists believe that matter—and since Einstein matter-energy—is primary and that consciousness and mind ultimately derives from matter. The idealists, in contrast, view mind as primary and matter as secondary, derivative, and ultimately inferior.

The earliest Greek philosophers—sometimes called pre-Socratic philosophers—were materialists. But starting with Socrates, Greek philosophy made a great turn to idealism with Plato being the most consistent idealist among the ancient philosophers.

4 Birds like mammals are warm-blooded but don’t nourish their young with milk, while the Australian spiny anteater and duckbill platypus lay eggs but like all mammals nourish their young with milk.

5 I think Marx chose a coat to serve as the “equivalent”—or proto-money form of the commodity—precisely because coats would make a worse money than linen. Linen is far more homogeneous than coats are—just like abstract as opposed to concrete labor is. The point Marx is making is that in principle any commodity could serve as money, though linen would make a better money than coats, and the precious metals in general make better money commodities than linen because they can be melted down, divided and then recombined. Gold is a better money than other precious metals because it does not tarnish and can therefore be hoarded indefinitely without any change in quality.

6 The marginalists themselves were forced to give up the concept of marginal utility—though it is still used in some introductory textbooks—because it proved impossible to reduce utility to a homogeneous substance like Marx was able do with abstract labor.