MARX & MMT, PART 1 – Three Kinds of Macro Variables

I am interested in exploring what seems to be a basic compatibility between MMT (Modern Monetary Theory) and Marx. Compatibility of two theories, of course, does not require agreement, and there is no suggestion that either MMT proponents or Marxists will find a synthesis between the two approaches fruitful. Compatibility simply means that the two approaches are mutually consistent and that, if desired, the insights of both could be integrated into a unified understanding of the capitalist economy. At the same time, there is no claim that the idea of a connection is new. I have linked in the past to work by MMTers Randall Wray and Mathew Forstater concerned with various aspects of Marx’s theory, and Bill Mitchell has often noted in posts at billy blog an influence on his work of Marx. Suffice to say that, personally, I think a synthesis could prove worthwhile. Some MMTers may agree, some not, and likewise for Marxists.

So, the plan eventually is to work toward a synthesis of MMT and Marx. Before much MMT can be worked in, though, it seems important early in the series to deal with some preliminary matters. There is a lot of resistance to Marx. This is especially true when it comes to his theory of value. A lot of this comes down to how the theory is interpreted. Critics have sometimes labeled it metaphysical or considered it to be intractable or non-quantifiable in practice. Yet, when Marx’s theory is interpreted as it will be in this series of posts (in a way that is most aligned to the temporal single-system interpretation, or TSSI), there is nothing mysterious or ethereal about his approach to value.

The purpose of this post, and the next one to follow, is to spell out some simple correspondences between Marxist and non-Marxist macroeconomic variables. In this first post, it will not even be a matter of connecting Marx and MMT. The connections to be discussed apply to pretty much any approach to macroeconomics, including that of the mainstream. Most, if not all, of the connections discussed in this post have been explicitly dealt with before, at least in some form. Foley (1982) is an influential early example. (Full reference: Foley, D., 1982, ‘The Value of Money, the Value of Labor Power and the Marxian Transformation Problem’, Review of Radical Political Economics, Vol. 14, No. 2.)

No attempt is made at this point to explain the basics of Marx’s theory in detail. This will be done, to a degree, in a later post (part 3 of the series). For now, just enough detail will be provided to enable understanding of the macro connections discussed. Nor, in this post, is there any attempt to justify the particular interpretation of Marx that is adopted. Attention will turn to that matter in parts 4 and 5 of the series. The immediate intention is to give a sense of the practicality of Marx’s approach and the ease with which we can convert back and forth between Marxist and non-Marxist variables, and between monetary and real variables within Marx’s framework itself.

Definitions. Marx’s theory of value applies to commodity production. A ‘commodity’ is a good or service produced for exchange in a market. The ‘value’ of a commodity is the quantity of socially necessary labor that is needed to produce it. Labor only counts as socially necessary if it is performed with the average degree of intensity and proficiency currently attained in that line of production. Unless stated otherwise, ‘labor’ always refers to socially necessary labor.

Labor of an ordinary or basic kind is called ‘simple labor’. Skilled labor is called ‘complex labor’ and is treated as a multiple of simple labor. The easiest way to make this reduction is to compare the wages (defined to include non-wage pecuniary benefits) of different types of labor. If the average wage is three times the minimum wage, society is behaving as if an hour of average labor is worth three hours of simple labor. In this way, all labor can be reduced to simple labor. The reduction is social, made by society itself, rather than necessarily natural or technical.

A quantity of value can always be expressed in two equivalent and interchangeable ways. On the one hand, it can be expressed as a quantity of labor, measured in hours. On the other hand, it can be expressed as the equivalent amount of money, measured in a particular unit of account. In this series, dollars are assumed. The conversion factor for switching back and forth between the two ways of expressing value is the ‘monetary expression of labor time’ or MELT. The MELT is the monetary equivalent of one hour of socially necessary labor. Its dimensions are dollars per hour ($/hr). Its calculation will be considered later. Multiplying a quantity of labor by the MELT gives value in monetary terms. Dividing a monetary amount by the MELT gives value in labor-time terms.

At the beginning of a production period, capitalists must outlay an amount of value equivalent to the raw materials, plant and equipment – the ‘means of production’ – that will be used up in creating the commodity. Marx calls the amount of this outlay ‘constant capital’. It is constant in the sense that it only passes on its preexisting value (the value it already possesses upon entering production) to the value of final output. Capitalists also must outlay an amount for wages. This outlay is referred to as ‘variable capital’. It is variable in the sense that it makes possible a creation of new value that exceeds the value of variable capital itself. This is because workers, as the performers of socially necessary labor, are the creators of new value. When they perform more labor than is necessary merely to offset the wages they receive (‘necessary labor’), profit is left for capitalists in the form of ‘surplus value’, equal to the amount of ‘surplus labor’ performed. The question of why labor might be seen as the sole source of new value is left for a later post.

In relation to the labor process, Marx drew an important distinction between labor and ‘labor power’. In paying wages, employers purchase the labor power of workers — their capacity to work – for a period of time. At the micro level of an individual firm, the actual amount of value created will depend on the effort workers expend. If work effort increases in one firm relative to others, the workers in this firm will create more surplus value than if they had expended less effort. But if this greater intensity of labor is replicated economy wide, there will be no impact on the amount of value created, even though it results in the production of a greater mass of commodities. In aggregate, Marx argued that an hour of socially necessary labor “always yields the same amount of value, independently of any variations in productivity” (Capital, Vol. I, Penguin edition, p. 137).

Notation. In this series, a dollar sign will be used to distinguish monetary values from their labor-time equivalents. Call the monetary expression of labor time m. The monetary outlays for constant capital, variable capital and surplus value, respectively, can then be denoted $c = mc, $v = mv and $s = ms. Conversely, the labor-time equivalent measures are c = $c/m, v = $v/m and s = $s/m.

Since the new value created in production amounts to the simple labor time L performed by workers, it can also be stated that L = v + s and mL = $(v + s). Simple rearrangement of these expressions makes clear that surplus value is the amount by which labor performed in the period exceeds variable capital: s = L – v and $s = mL – $v.

The total value generated in production includes both the value transferred to final output from the means of production and the new value created by workers employed during the period. Total value expressed in labor-time terms equals the sum c + v + s, or in monetary terms $(c + v + s).

In the remainder of this post, we will be concerned only with measures and ratios relating to the new value created in the period.

Three Kinds of Macro Variables and their Interconnections

All macroeconomists are interested in both monetary and real variables. It may not be immediately obvious, but the monetary measures used by Marxists and non-Marxists are essentially the same, though differently named and framed. There are, however, two different kinds of real measures. On one level, we can think of the real in terms of physical quantities of goods and services – i.e. ‘use values’. Doing so helps to give us a sense of how living standards are progressing over time. For example, growth in real GDP – which is simply nominal GDP deflated by a price index – gives us an idea of how the mass of heterogeneous commodities is growing over time. It is not a perfect measure. But it is a lot better than nothing. On another level, we can think of the real in terms of quantities of labor time. Doing so helps to give a sense of the forces driving capitalist behavior. Unlike consumers, capitalists are not motivated by ownership of use values for their own sake. They are primarily motivated by profit. If surplus labor is the real basis of profit, as Marx argued, then analyzing value relations provides insight into the real basis of monetary profit. It also sheds light on the antagonisms between classes and within classes.

Marx, to a greater extent than non-Marxist economists, integrated these three kinds of macro measures into his analysis. All three have an important place in his theory. His analysis is explicitly monetary. There is a significant role for real use-value concepts such as productivity and the amassing of physical commodities when considering the evolution of living standards over time. And labor-time measures inform an understanding of the social forces driving capitalist accumulation. In Marx’s theory, monetary and real forces continuously interact to influence the dynamics of economic behavior under capitalism.

It may seem at first blush that the three kinds of measures are largely unrelated to each other, or that their interconnections are obscure. This is not at all the case. There are clear and straightforward quantitative connections between the monetary and the real. To see them, we just need to take advantage of a few basic macro concepts; namely, the MELT, average productivity and the general price level.

To avoid complications, assume in what follows:

1. a pure private closed economy;
2. no fixed capital;
3. all labor is simple and paid the same wage;
4. the level of productivity is taken as given;
5. the general price level does not change.

The MELT can be calculated from the previous period’s macroeconomic data using either Marxist or non-Marxist measures. Under the present assumptions:

MMT Marx 1 Eqn 1

Here, P is the general price level. Y is real output or real income. L is total employment expressed in hours of simple labor. Actually, in the present context, L is also expressed in terms of average labor. Due to assumption 3, simple and average labor amount to the same thing.

The level of productivity ρ is:

MMT Marx 1 Eqn 2

The above definitions of the MELT and average productivity imply the following simple relationship:

MMT Marx 1 Eqn 3

In future posts, knowledge of this relationship will sometimes prove useful. For now, it is simply noted in passing.

We already know that new value created in the period can be expressed in terms of money or labor time:

MMT Marx 1 Eqn 4

Conversions between the above monetary and labor-time measures make use of the MELT, as already discussed.

Real variables relating to use values are of an intermediate nature. They lie in a dimension somewhere between the monetary and labor-time dimensions. To convert value magnitudes into use-value measures, multiply them by productivity. To convert monetary amounts into use-value measures, divide them by the price level.

MMT Marx 1 Eqn 5

Marx’s real labor-time values are observable and measurable in much the same way as real variables pertaining to use values. The MELT is no more difficult to pin down than the average productivity of labor. It is true that once productivity and the general price level are allowed to vary over the period that the MELT will not be known for sure until after the period is completed, but the same can be said for real use-value measures.

To put it in a nutshell, we can:

• Calculate real labor-time measures by dividing monetary measures by the MELT or dividing real use-value measures by the level of productivity;
• Calculate real use-value measures by dividing monetary measures by the general price level or multiplying labor-time measures by the level of productivity;
• Convert back into monetary measures by multiplying real labor-time measures by the MELT or multiplying real use-value measures by the general price level.

In closing, it should be noted that when, later in the series, the state is introduced into the discussion, the connections considered above between Marxist and non-Marxist measures (such as New Value in Dollars = Nominal GDP) will not be so straightforward. By the same token, they will not be all that complicated either. In any case, the basic conversion factors – MELT, productivity, price level – will continue to apply in a straightforward way. This makes it very easy within Marx’s framework to switch perspective back and forth between monetary, use-value and labor-time measures.


9 thoughts on “MARX & MMT, PART 1 – Three Kinds of Macro Variables

  1. PeterC,

    I’m really, really impressed, as much for this post, as for the more ambitious series of posts.

    Because of that, before making any comments, I’ll give the post a complete and meticulous re-read and I might be posting questions in the next couple of days.

  2. Thanks, Magpie. Usually I wouldn’t make promises about future posts. I started working on something and it got far too long. I realized it would be necessary to break it up into parts and change the order round a bit. But there’s some material there for me to work from.

  3. Peter,

    First, let me say this: this is what I call an epic post. Very clear exposition. Thank you very much for all your effort.

    I remember Prof. Mitchell has — on occasion — used some of the equations you employ here.


    Just some quick questions, to check if I get the idea.

    A Toyota Corolla (more precisely, Toyota Corolla, Ascent Hatch, manual, glacier white, petrol) has a market price of AUD 19,790 (that’s the value of the Corolla in monetary terms). The current minimum wage is AUD 17.29/hour. Therefore, in terms of minimum wages, the Corolla has a value of 1144.6 hours of minimum wage labour: it takes a minimum-wage earner 1144.6 hours of work to pay for a Corolla. Would that be correct?


    GDP, measured in nominal dollars, is calculated by the ABS following three different approaches. Economists often focus on GDP calculated by expenditure and/or income. However, there is a third but equivalent approach, which is often forgotten; this approach is GDP by value added.

    GDP by value added resolves itself into compensation of employees (COE), gross operative profits (GOS), gross mixed income (GMI), plus indirect taxes minus subsidies. Leaving aside the smaller “indirect taxes and subsidies” component (i.e. assumption 1), and considering that GMI is still conceptually a mix of GOS and COE, one can say that by value added, nominal GDP is the sum of wages and gross profits (exactly as done here); subtracting capital consumption from GOS, we should have $v and $s, in Marxist terminology. Is that correct?

    Real GDP would give “an idea of how the mass of heterogeneous commodities is growing over time”, while L (in hours worked, not necessarily people employed) would give an idea of how much effort it takes to produce that mass of heterogeneous commodities.


    Finally, in the simplest, most general terms, the idea behind $s (surplus value as monetary profit) is something like this (given a constant cost of raw materials, overhead, depreciation, et cetera): with low productivity, the saleable product of v hours of labour is small, therefore, monetary profit $s is small; a larger productivity would increase both saleable product and profit (if the sales are realised). This is exploitation.

    I ask this because since Adam Smith net output has been divided into land rent, wages, and profits. That’s what Marx called the Trinity Formula. Currently, land rent is considered — rightly or wrongly — as part of profits, so this leaves us with two differentiated components: wages and profits.

    Mainstream economists insist that there is no relationship whatsover between wages and profits. Marxists insist there is: the one sketched above.

    Am I too badly mistaken or simplifying too much?


    Again, thank you so much for this. I’m looking forward for the rest of this series!

  4. Magpie, glad you found the post worthwhile.

    Your comments look good to me under the assumptions made in the post. Just some general remarks relating to the topics broached in each point.

    1. Yes, the market price of the Corolla divided by the minimum wage tells us how much simple labor is required to obtain a Corolla. As you know, the value of the Corolla will almost certainly differ from its price – like most commodity’s prices differ from their values – but according to Marx, in aggregate, the total price of all commodities will equal their total value.

    2. Re GDP etc. Exactly. Since we have assumed away depreciation by excluding fixed capital, nominal GDP = $v + $s. With fixed capital included, but other assumptions remaining, we’d say that Net Domestic Product (NDP = GDP – Depreciation) equals $v + $s. Later, there will be at least two major sources of complication. One is the state, which can produce goods and services that are included in GDP but are not commodities. Another is changes in productivity, which can alter some of the accounting relationships being considered, depending on the interpretation of Marx that is adopted. The TSSI values inputs at period t prices while output is valued at t + 1 prices. This creates a difference, for example, between real (price-deflated) NDP and price-deflated v + s (i.e. ($v + $s)/P). That is, Total Price minus Constant Capital will differ somewhat from GDP minus Depreciation, because in the National Accounts current prices are used in the nominal measure to be deflated. However, this kind of complication doesn’t arise under simultaneist interpretations because then input and output prices are the same.

    Actually, the TSSI introduces complications in quite a few ways. The MELT, for instance, becomes a bit trickier (not too tricky, though) once productivity is allowed to change.

    3. In your third point, you may be anticipating some of the complications just mentioned once the assumption of constant productivity is dropped.

    At the micro level of an individual firm it is clear that if productivity improves, the amount of new monetary value created by living labor in that firm will exceed $v to a greater extent than if productivity deteriorated or remained constant.

    At the aggregate level, though, we will be considering what happens when productivity for the economy as a whole increases. Marx argued that an hour of socially necessary labor “always yields the same amount of value, independently of any variations in productivity” (Capital, Vol. I, Penguin edition, p. 137). So, there is the idea that socially necessary labor, at the time it is performed, creates the same value now, in the past, in the future. If productivity in an individual firm rises, but it is only in line with the economy-wide average improvement, then it is just that the bar has risen for what counts as an hour of socially necessary labor.

    To be clear, what used to count as socially necessary labor, at the time it was performed, now counts for less, because productivity on average has improved since then, and dead labor still preserved in constant capital gets devalued over time as a result. But, in the past, when it was performed, that socially necessary labor added the same value as socially necessary labor does today.

    (Note: I have now added a paragraph to the definitions section of the post, summarizing the last part of this comment.)

  5. Thanks for the replies, Pete.


    Regarding point 2,

    It may be one of my peculiarities, but I find those accounting/operative details interesting. I was wondering would Gross/Net National Income be useful? Piketty, for instance, used Gross National Income.

    About the complications

    “two major sources of complication. One is the state, which can produce goods and services included in GDP but not as commodities.”

    That’s a complication mainstream economists share: GDP is supposed to value goods and services at market price. But government-produced goods and services (like defense, law and order, justice, infrastructure, scientific research and development, culture, sports, education, health) are not produced for sale in the market. The value added has to be imputed, often by labour cost.

    Similarly applies to domestic chores, parenting, voluntary work. Rent itself — which appears as a GDP item — is not what people understand, and is also imputated.

    Yes, I can understand the simultaneist approach having that particular advantage. 🙂


    Regarding point 3,

    You are probably right on the anticipating thing.

    I’m just over-excited by a couple of papers I’ve seen recently. One is a paper by Florence Jaumotte and Carolina Osorio Buitron (two IMF economists), which from a mainstream perspective, all but mention exploitation (I posted a comment in my blog [1]).

    The other is a paper by Olivier Giovannoni (What Do We Know About the Labor Share and the Profit Share? Part III: Measures and Structural Factors. Levy Economics Institute of Bard College, May 2014. Working Paper No. 805). Prof. Ruccio also seems excited by this paper [2].

    Giovannoni links a falling labour share with income inequality, in a way which — again, like the IMF economists, sounds quite Marxist. Prof. Ruccio linked to this chart:

    But I find this one more topical:

    [1] Union Power and Inequality: Australia.
    [2] Wage labor and capital—revisited


    “glad you found the post worthwhile”

    You are just being modest. This is a great post.

    Have a nice weekend!

  6. “Labor of an ordinary or basic kind is called ‘simple labor’. Skilled labor is called ‘complex labor’ and is treated as a multiple of simple labor. The easiest way to make this reduction is to compare the wages (defined to include non-wage pecuniary benefits) of different types of labor. If the average wage is three times the minimum wage, society is behaving as if an hour of average labor is worth three hours of simple labor. In this way, all labor can be reduced to simple labor. The reduction is social, made by society itself, rather than necessarily natural or technical.”
    Hmm. IIRC If you pay unskilled labor (workers) harder they work much harder, this does not apply to skilled labor (as much.) This is one of the reasons for the MMT JG. I can’t remember the studies, but have asked Neil W since he mentioned this at one point.
    So under MMT proposals, the wage gap between skilled and unskilled labor is reduced (and hence inequality), particularly if labor regulations are abolished and/or unions banned after introducing the JG (or JIG.)

  7. Good point, Bob. I remember Neil linking to the animation video a while back. Well worth a look for those who haven’t seen it.

  8. Why just on the level of analysis? Why not also on the level of real, radical, structural, and pro-worker reforms?

    I hope the last blog or two of this series addresses public policy.

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