Marx, Kalecki, and Keynes: Economic Theory Compared

Capital Accumulation and the Credit Cycle in Marx

Karl Marx viewed capital as comprising four asset classes: money, commodities, means of production, and the means of subsistence. Capital is accumulated in Marxist theory through a transformation process by which the means of subsistence and the means of production are turned into capital and the producers of goods into wage-laborers (Marx, 1867). This surplus value was assumed, however, to have a starting point, which both Marx and Adam Smith described as previous or primitive accumulation — capital that existed before any surplus value was generated. This capital must be consumed, as Marx felt that in the long run production could not be disassociated from consumption. Credit, however, could temporarily extend consumption beyond the capabilities of production. This would drive the price of goods higher, eventually causing crisis as production is ultimately forced to return to consumption levels (Mandel, 1995).

Marx believed that such crises were inherent in the capitalist system. The capitalist system, he argued, was dependent on the creation of surplus value. Credit facilitates the creation of new capital, spurring growth. Production, he determined, typically exceeds consumption. Overaccumulation is therefore cyclical: capitalist societies overproduce until the market is forced to endure a correction. Once the correction has occurred, the process of overaccumulation will begin again (Mandel, 1995).

To Marx, the business cycle was tied to the credit cycle, such that an expansion of credit would inevitably lead to higher levels of production, overaccumulation, and finally a crisis in which credit must tighten (Mandel, 2005). The expansion of credit results in an increase in the income of bankers, so Marx also predicted that an increase in bankers' incomes would centralize capital, precipitating crises (Argitis, 2003). These boom-and-bust cycles can be traced back to Marx's fundamental assumption about the capitalist system: that capitalist activity is inherently predicated on growth, but that it is almost impossible for growth in production to be matched by growth in demand, given that competition encourages producers to expand production independently of one another and therefore out of equilibrium with actual demand.

To Marx, the reserve army of labor was comprised of the presently unemployed pool of labor. Unemployment, Marx argued, is the natural result of the capitalist system, whereby producers have an economic incentive in capital accumulation to gradually reduce their workforce relative to their output. The surplus army of labor is thereby created. This army maintains a base level — the level of natural unemployment — but the total number in the reserve army fluctuates depending on structural circumstances in the economy.

The Reserve Army of Labor

As production expands and capital accumulates, companies that are performing well will need to expand. They can then draw upon the surplus army of labor. Laborers, unable to earn a living without work, compete for these jobs. The result is that the cost per unit of labor is held low. Without the surplus army of labor, companies would find it difficult to expand, since labor is one of the primary forms of capital that can be used to create wealth.

As the economy grows, the surplus army of labor shrinks. As it shrinks, wages increase, which in turn provides greater incentive to producers to either reduce their demand for labor or to pay more for it. Increased wages are passed along to the consumer in the form of inflation. Marx predicted, however, that in general the situation would work in the other direction. Increasing capital, he presumed, implied that producers were decreasing their staff sizes in order to become more efficient and accumulate more capital. To Marx, this means that an increase in capital accumulation equates to an increase in the size of the reserve army of labor and a corresponding decrease in wages, as the unemployed compete with one another for scarce jobs (Green, 1991). The reserve army, then, helps to keep costs down, allowing for the continued expansion of capital accumulation (Magdoff & Magdoff, 2004).

Kalecki built upon Marx's theories about effective demand. Marx argued that "deficiencies in aggregate demand are rooted in the normal workings of the capitalist system" (Sebastiani, 1989). Kalecki felt that he could improve upon this theory and provide proof to support it. Whereas Marx had emphasized the production of surplus value, for Kalecki surplus value was realized through the market. In addition, Marx saw surplus value as arising from conditions of exploitation, whereas Kalecki saw it as arising from conditions of the market (Ibid).

Kalecki's Adaptation of Marx on Effective Demand

Marx's political views colored his opinion regarding conditions of exploitation. His view of the capitalist system was that the means of production were inherently exploited in order to facilitate the accumulation of capital, and that this exploitation was ultimately responsible for the creation of surplus value. Kalecki's view removes the political overtones of Marx's theory, which he regarded as "metaphysical" and therefore irrelevant (Sebastiani, 1989). In Kalecki's view, the market is exploited — this need not refer specifically to the means of production but could involve any aspect of the market, including its structure. Marx believed that one needed to produce surplus value; Kalecki appears to have considered this view overly simplistic. Surplus value was something that could be captured by a firm through its market activities.

Like Marx, Kalecki rejected Say's Law and instead developed a model positing that aggregate demand induces a matching supply. This principle stood in contrast to Marx's theory of overaccumulation. Kalecki determined that producers attempted to meet demand. Marx may not have disputed this basic point, but in his view producers tended to overshoot demand in attempting to match it. This anarchic production is the cause of the economic shocks predicted by Marx (Shaikh, 1985).

Keynes developed a similar theory to Kalecki's; because the latter published in Polish, his work was most likely unknown to Keynes at the time. Keynes also held that demand fueled supply. Demand was prone to cyclical weakening, and this resulted in overproduction as Marx had described, beginning a cycle of economic contraction and increased unemployment.