Marx’s View of Production in Relation to MMT and Taxes

An effect of being trained in mainstream economics but then encountering alternative approaches is to experience a growing realization — or at least a creeping suspicion — that most of what has been taught is the opposite of the truth. Even when the story told contains some truth, it is likely to have been turned on its head. Thanks to Kalecki and Keynes, for example, it becomes clear that demand (spending) determines supply (income), including in the long run. Spending, in a monetary production economy, must come before production can commence. Thanks to Post Keynesians, it becomes evident that loans create deposits, not the reverse. There could be no deposit prior to the decision to extend the first private or public loan (unless through government spending). Thanks especially to Sraffians, it has been established that profit cannot be a remuneration for (marginal) productive contribution. We can conceptualize profit as unpaid labor (Marx) or due to ownership (Sraffians, Post Keynesians).

An observation due to Modern Monetary Theory (MMT) that sometimes meets with resistance, though in my view is convincing, is that government spending or lending is logically prior to the receipt of tax revenue or government borrowing. This is a recognition that, from inception, government must issue its currency (spend or lend) before reserve accounts can be debited.

I often ponder this and other aspects of MMT in relation to Marx. In this regard, a statement made by Yanis Varoufakis in a fascinating presentation recorded in May 2013 caught my attention. Here, I will use it as a springboard for a brief consideration of Marx in relation to MMT on the question of fiscal policy, without intending to imply that Varoufakis would necessarily agree with the interpretation (or with MMT, for that matter).

Toward the end of the first part of his presentation, Varoufakis sums up “some of the insights … Marx’s perspective has bequeathed us and which are essential in our struggle to make sense of the world we live in and to effect it” (21:27 – 21:45). The first of these insights is the one that particularly caught my attention:

We live in a society which is procuring the fallacy that wealth is privately created and then appropriated by taxation through the state, when Marx so beautifully explained to us — guided us to — the truth of the opposite, that wealth is collectively produced and privately appropriated. (‘Confessions of an Erratic Marxist’, 21:51 – 22:14)

This view of Marx seems not only consistent with MMT’s position on fiscal policy but perhaps goes a step further. For Marx, surplus value (profit) and wealth are produced and accumulated in accordance with a social relation (capital/wage labor) in the context of property rights and laws instituted and enforced by a collective entity, the state. The production process, which draws upon public infrastructure, requires cooperation to produce commodities whose values are quantities of socially necessary (not individual) labor. Marx explains this through his central distinction between labor, which cannot be commodified, and labor power, which is the capacity to expend effort in the labor process.

As Varoufakis observes in the lead up to the quoted statement (15:06 – 18:08), if labor could be truly commodified, workers would be reduced in effect to machines and, like machines, would have no capacity to vary their expenditure of labor power in response to conditions of employment or in rebellion. There would be no additional value to be had in extracting extra effort from workers, because, like machines, they would be automatons. And, therefore, like machines, labor would merely pass on its preexisting value (which, as a commodity, it could then possess) to the final commodity. Any capitalist who attempted to sell a commodity at a price above this mere transfer of preexisting value could only succeed at the expense of other capitalists. In aggregate, no surplus labor could be performed, and therefore no surplus value could be appropriated.

Because in reality labor cannot be commodified, capitalists are able to appropriate surplus value to the extent that they (or their agents in management) can wring labor out of workers in excess of that required to reproduce the working class. And since this is not certain, there is additional value to be had by succeeding in the struggle. And the greater the success, the greater the surplus labor that is performed. It becomes possible to drive workers beyond the point necessary for their own reproduction.

Since surplus value is the result of a collective, not private, effort, it makes no sense to speak of the state (the collective entity) as appropriating tax revenue that is first privately created. To the contrary, capitalist production is social. Capitalists privately appropriate part of what has been created collectively. Taxation is then simply a withdrawal of some of the collectively produced surplus value that subsequently flowed into private hands.

This implies not only that the state is without a revenue constraint (MMT) but that it does not require privately created surplus value and wealth to be produced before it can spend or tax, simply because privately created surplus value does not exist under capitalism. Value is produced collectively, and then distributed privately as wages, profits and benefits or withdrawn through the payment of taxes.

Nor is it true to say that collective production must necessarily take place before the government spends. This is just an aspect of the broader point, brought out by Kalecki and Keynes, that under capitalism decisions to spend are prior to production, and demand determines output.

9 thoughts on “Marx’s View of Production in Relation to MMT and Taxes

  1. Hi Peter,

    Was wondering what you meant by ‘Thanks especially to Sraffians, it has been established that profit cannot be a remuneration for productive contribution.’

    Do you have a post that goes into this point in more detail?

    Thanks,

    Tom (PS invitation still holds, is infinitely open-ended, if you would like to appear on the podcast)

  2. Hi Tom: What I had in mind was that the neoclassical attempt to explain distribution in terms of marginal productivity was discredited in the capital debates.

    Matias Vernengo — The Capital Debates: A Brief Introduction

    The classicals and Marx, of course, had already provided explanations of distribution along different, social lines. The capital debates lent support to their views.

    I really appreciate the standing invitation. When I feel comfortable that I know what I’m talking about on the connections, it will be wonderful to take you up on it. As my slow trickle of occasional posts on the topic may show, conceptually things are only coming together for me quite slowly, and in a roundabout fashion. I continue to think about it though.

  3. Actually, in the Chartalist view, taxes are logically prior to spending in that taxes create a legally necessary (enforceable) demand for currency that those subject to the tax must obtain from the issuer. This creates the need to exchange real resources with the issuer for the currency in order to be able to meet tax obligations and avoid the penalty for not doing so, which is at least confiscation. This is the basis for a modern monetary economy in a liberal democracy.

    Having settled the question of means, the question they becomes the morality. The legality question is already decided, so the question cannot whether taxes are legal, since they are imposed through a legal process and in modern nations this is constitutional, for example, US Constitution, article 1, section 8.

    The moral argument against taxation rests on the “natural right” to private property that some invent and then assert that “the state” has no right to abrogate that natural right, for example, basing their argument on Locke’s myth of the origin of private property in first use as the basis of enclosure of the commons.

    This argument might have some merit in the case of a state that arises by force and uses positive law as a means of applying that force. However, in a liberal democracy established by popular sovereignty and governed by it, the power of the state derives from the will of the people as they specify in the laws that they determine through the process they choose.

    Since the people determine the laws, they can choose to distribute rewards and punishments as they see fit to the degree that the society is a democracy based on popular sovereignty. To the degree this is not the case, then the law can be used to reward some interests over others and to punish other interests more than others, for example, though fiscal policy (spending and taxation).

    It is law and institutional arrangements that determine the distribution of wealth (“the surplus”) in a society rather than economics as generally conceived as a separate discipline, especially when predominant view of economics is fundamentally neoclassical economics, which assumes that an economy based on “free competition” is self-organizing and self-regulating through the operation of natural laws.

    Heterodox economics reveals how the fundamental assumptions of neoclassical economics do not hold in a modern monetary economy in a liberal democracy precisely because it is highly institutionalized and these institutions are to a great extent legal constructs assumed to be adopted by popular consent of the governed.

    The question really comes down to how the governed wish the surplus that is collectively created by a society to be distributed in that society. Where economics comes is is regarding the consequences of different ways of doing this. If marginalism cannot be shown to be be correct and there are many reasons to conclude it is not correct, then merit and just deserts cannot be justified on the grounds of marginalism.

    A problem here is that owing to the social dynamics in many societies, the fundamental assumptions of economic liberalism and marginalism are part of the collective mindset and appear to be intuitively correct. The challenge, then, is to present alternatives that are accessible to the public and come across as more intuitively obvious.

    For example, does it make sense start with “every man for himself” or “we’re all in this together” in that the fundamental argument is over whether individualism or community is basic to modern society and its dynamic. This is a pretty easy argument to win with most thinking people since they realize that the unit of society is not the individual but the family and that relationship are therefore fundamental socially. This leads into the systems approach to economic rather than the radical individualism of economic liberalism.

  4. Actually, in the Chartalist view, taxes are logically prior to spending in that taxes create a legally necessary (enforceable) demand for currency that those subject to the tax must obtain from the issuer. This creates the need to exchange real resources with the issuer for the currency in order to be able to meet tax obligations and avoid the penalty for not doing so, which is at least confiscation. This is the basis for a modern monetary economy in a liberal democracy.

    Agreed, Tom H. The imposition of a tax obligation (a societal action) is logically prior to government spending. Its imposition can induce supply of labor services or the supply of other resources, enabling government expenditure to take effect. That is the sense in which taxes drive money.

    The point of causation in the post, analogous to spending determining income, is that government expenditure or lending is logically prior to payment of taxes (withdrawal of income). The tax obligation, which has already been imposed, can’t be met before the currency in which it is owed is issued.

    The effects of the tax obligation and private property are analogous in some ways. For instance, just as the imposition of the tax obligation enables government spending to take effect (to induce, for example, a supply of labor services), the creation and enforcement of private property rights enables capitalist expenditure on wages to take effect (to induce a supply of labor services from those compelled to sell their labor power).

  5. “We can conceptualize profit as unpaid labor (Marx) or due to ownership (Sraffians, Post Keynesians)”.

    That’s an intriguing statement, not so much for the reference to Sraffians’ contributions to the theory of profit, which I acknowledge, but for the Post Keynesian reference.

    I suppose that you refer to Kalecki here; and I may be mistaken, but is there something else Post Keynesians have to offer on this specific subject?

    After all, their mark-up price theory seems in essence equivalent to Adam Smith’s “adding up” theory of value. In fact, at least neoclassicals consider the question of where prices, rent and profits come from and have attempted to “prove” their views. Their explanation may be crap, but at least those guys are conscious of their importance.

    Post Keynesians seem not to even consider the subject. After all, it’s “metaphysics”.

    ———-

    My other question is this: Okay,
    (1) “the state is without a revenue constraint (MMT)”,
    (2) “it does not require privately created surplus value and wealth to be produced before it can spend or tax”, and
    (3) “it is [not] true to say that collective production must necessarily take place before the government spends.”
    Don’t get me wrong: I’m not saying that’s uninteresting. What I am not sure I understand are its implications.

  6. Regarding the conceptualization of profit, I was just trying to include my preferred explanation (Marx’s) while acknowledging that most non-neoclassical economists in academia do not see aggregate profit as synonymous with surplus labor. Those who reject Marx’s three aggregate identities as holding in combination (due, for example, to a dual-system interpretation of Marx’s theory of value) are operating in a paradigm in which surplus labor cannot be regarded as synonymous with aggregate profit. Sraffians and Post Keynesians would almost all fall, I think, into that category. From such a standpoint, ownership remains as a possible conception of profit. Capitalists own the final output, so whatever they keep after payments to workers and tax payments remains with them as profit (courtesy of ownership). The actual source of the profit might be regarded as located in production (e.g. technology) or in exchange.

    Regarding the implications of the three points you mention, I think Yanis was rejecting the notion of taxation as an “unjust” burden imposed on the “rightful” recipients of income. He is pointing out that production is social and not due to the efforts of private individuals or enterprises independently of society itself. Value is embedded in the social context.

    Take two fictitious characters on a deserted island. They wake up one day and notice coconut trees. Who is entitled to collect and eat the coconuts? Both of them equally? Only one of them? If so, which one? None of them? A decision will be made either cooperatively or through coercive actions of one against the other. Suppose the physically stronger one of them takes control of the coconuts. (S)he says to the weaker one, “You can have half the coconuts you collect and I’ll have the other half.”

    The coconut goddess reveals herself from out of the shadows, imposes a tax on the profiteer denominated in her own currency and institutes regulation of wages and prices. To obtain the currency, the profiteer will need to sell some coconuts to the goddess in exchange for the currency. The goddess intends to keep the coconuts aside in case there are troublesome times ahead.

    The profiteer is outraged at this, perceiving the tax to be an unjust burden. The exploited one, however, sides with the goddess, feeling that the profiteer’s income has been socially constructed, is not a natural right and clearly is not of divine origin in view of the intervention of the goddess.

    The goddess is not reliant on prior production. She can set the production process in motion by demanding tax payments from the profiteer. She could place an order for coconuts, prior to the first round of production, and make an advance payment in her currency. The profiteer, given the social system, is in a position to hire the exploited one, who needs coconuts to survive, pay the minimum wage with currency, receive that currency back in exchange for coconuts, meet the coconut order placed by the goddess and pay in currency the tax obligation.

    Alternatively, the goddess could nationalize production, impose a tax on both characters and hire them to perform half the labor time each. On hearing this idea, both characters demand the right to vote. The goddess, a democrat at heart, agrees to put the proposition to periodic vote.

    For a while, the vote is locked fifty-fifty, and the status quo remains. But gradually the exploited one forgets how the present system came into existence and, susceptible to the profiteer’s wiles of persuasion, begins to see the present system as desirable or at least the only conceivable system. The vote becomes unanimous.

    Some time after that, tax cuts for the profiteer begin to find strong electoral support. Eventually, the tax itself comes to be widely regarded as an outrage and unconscionable burden on the job creator.

  7. “Regarding the conceptualization of profit, I was just trying to include my preferred explanation (Marx’s) while acknowledging that most non-neoclassical economists in academia do not see aggregate profit as synonymous with surplus labor.”

    Sure. I’m not criticising you. My question was this: other than Kalecki, do Post Keynesians have anything beyond the mark up thing? I’d be surprised if they did; but I’m no expert.

    About the second question: understood.

  8. Not that I’m aware of, but they generally agree with the Sraffian critique of the mainstream in the capital debates. That would seem to leave ownership or the institutional structure in general as determining the way in which profit is realized (Kalecki) and distributed. This does not explain the origin of profit. Of existing theories, it is only really Marx’s that gives an unambiguous answer on how profit is actually created (as opposed to realized), but to do so it needs to be interpreted in single-system (not dual-system) terms, and that has not been the preferred interpretation of most (though not all) academic heterodox economists.

  9. Thanks, Pete.

    “That would seem to leave ownership or the institutional structure in general as determining the way in which profit is realized (Kalecki) and distributed.”

    I am not sure what is included in the institutional bit, but I don’t think that is entirely correct. If I am not mistaken, Keynes never disowned the neoclassical views about profits (presumably, about rents and wages): for him capitalists did contribute to output (which justified an unspecified level of inequality).

    The more Keynesian among PKers seem to follow Keynes on that (and I’be surprised, too, if they actually saw much value in Sraffa, other than the tactical value in their fight against neoclassicals).

    To be fair, some modern Keynesian/PKers depart a little from Keynes’ position. These guys speak of profits in connection with the FIRE sector (say, Michael Hudson), swindling (Bill Black), and cronyism (Dean Baker).

    All of which is valuable, of course, and worthy of recognition. But not even these guys deny the idea of a non-parasitic profit.

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