Comments on Recent Marxist Claims about MMT and Incidentally Kalecki

This post concerns ten recent Marxist claims about MMT and one about Kalecki (a forerunner, in certain respects, of MMT). Some Marxists claim that:

  1. MMT fixates on the monetary, ignoring the real.
  2. MMT ignores social structure in favor of tweaks of the monetary system.
  3. MMT is incompatible with Marx on money.
  4. MMT falsely claims that fiat money changes the role and nature of money.
  5. MMT ignores the value of money.
  6. MMT-informed policy would destroy the value of money.
  7. MMT-informed policy would be inflationary.
  8. MMT-informed government spending would crowd out private investment.
  9. MMT supports a preservation of capitalism and opposes socialism.
  10. Government spending fails to stimulate private investment and employment.
  11. Kalecki is confused on causation between profits and capitalist investment.

This is a stylized list of claims that have appeared in various posts and articles written by Marxists. Claims (6) to (8) have also been made by non-Marxists. The chief motive for Marxist criticism seems to be a perception that MMT, in itself, somehow favors capitalism over socialism (claim 9), and so threatens to misdirect political energies on the left. There may also be a perception that MMT is incompatible with Marx and so poses a theoretical challenge to Marxism. These are misperceptions, in my view, for reasons to be explained.

Claim 1 – MMT fixates on the monetary and ignores the real

The idea that MMT ignores the real is a misunderstanding perhaps attributable to the name of the theory. In reality, MMT is ultimately concerned with the real. The MMT analysis of the monetary system serves to dispel various monetary illusions that cause many to imagine nonexistent financial constraints on what can be achieved in real terms. MMT makes clear that the only hard constraints on societies with currency-issuing governments are those linked to real-resource availability. It is opponents of MMT who typically get stuck on the monetary, believing that societies with currency-issuing governments face binding financial constraints well inside real-resource limits.

MMT suggests that a currency-issuing government has the capacity to command whatever real resources are available for sale in its currency. This capacity comes from its authority to compel acceptance of the currency, at least to the extent needed to carry out its policies. Government compels currency acceptance by imposing taxes and requiring their payment in the currency of issue. Firms wishing to operate within the currency zone have no choice but to seek revenue in the currency, and individuals desiring income and/or wealth at taxable levels are likewise compelled to accept the currency because income and wealth are assessed for tax purposes in the government’s nominated unit of account (which means that individuals cannot avoid incurring tax liabilities in the currency merely by eschewing the currency in their own income and wealth-generating activities).

By compelling currency acceptance, government can command real resources. The most a capitalist firm can do, if it opposes government policy, is to exit the currency zone. This, though unlikely in most cases (for reasons discussed below), will simply free up additional resources that government can command with its currency. Exit of recalcitrant capitalist firms should not concern those of us who wish to move the economy toward socialism and communism.

Some critics of MMT, whether Marxist or not, make quips about “a magic money tree” or “the creation of money out of thin air” or similar. These quips reveal a misunderstanding of fiscal and monetary operations. References to “the creation of money out of thin air”, for instance, reveal a misconception that the spending of a currency-issuing government sometimes involves something other than the issuance of currency. This is not the case. Every act of spending by a currency-issuing government creates ‘government money’ in the form of ‘reserves’ that are credited to accounts held by banks at the central bank. Without fail, government spending entails creation of reserves, just as tax payment always entails the destruction of reserves. Whether the funds created by government spending remain in reserve accounts or are subsequently converted into government bonds, the spending always creates ‘government money’ and, on the basis of MMT, the economic effect is the same.

Claim 2 – MMT ignores social structure and favors monetary tweaks

This criticism, like the preceding one, is off the mark. An implication of MMT is that currency-issuing governments have the capacity to utilize or enable the utilization of available resources along not-for-profit lines.

The central policy prescription of MMT – the only policy prescription that is inseparable from MMT rather than simply compatible with it – is the proposed job guarantee. In Marx’s terms, the job guarantee would be a step away from commodity production toward a system of directly social labor. To the extent that activity was located in the job guarantee sector, the program would extend the sphere of directly social labor (public sector and non-government not-for-profit activity) and somewhat modify the economy at the level of the mode of production. The job guarantee would also have an indirect impact on the sphere of commodity production, because capitalist firms would need to match or better the pay and conditions offered by the job guarantee.

The job guarantee would be a means of progressively broadening society’s conception of socially beneficial activity and, over time, provide a social basis for moving increasingly toward a system of directly social labor, not only in the job guarantee sector but through the broadening of public sector and non-government not-for-profit activity.

Since MMT, in itself, is neutral on the relative merits of alternative modes of production, an MMTer might be anywhere along the political spectrum. While some MMTers may wish to move the economy increasingly away from commodity production, others may be opposed. But there is nothing in MMT itself that is incompatible with Marxism or an intention to move the economy toward socialism and eventually communism.

As for “monetary tweaks”, MMT suggests that the fiscal capacities of currency-issuing governments are undiminished by the variety of voluntary self-imposed operational constraints they currently choose to have in place. For instance, whether the fiscal authority is required to auction debt to the private sector, is instead permitted to sell debt directly to the central bank, or instead does away with the charade of public debt issuance entirely and simply credits and debits ‘reserve’ accounts when spending and taxing, MMT suggests that the government’s capacity to spend is the same, and the economic impacts of that spending are the same. Mere “monetary tweaks” such as these – far from being the recommendations of MMTers – cause confusion for many but do not alter the real capacities of the currency issuer.

A passage from Marx that has been cited as supposed evidence against MMT is reproduced below. I have inserted numbering to aid references to the passage:

Can the existing relations of production and the relations of distribution which correspond to them be revolutionized by a [1] change in the instrument of circulation, [2] in the organization of circulation? Further question: Can such a transformation of circulation be undertaken [3] without touching the existing relations of production and [4] the social relations which rest on them? (Marx, Grundrisse, Notebook 1, ‘The Chapter on Money’, 1857)

This passage from Marx provides no grounds for a critique of MMT. There is nothing in it that is in disagreement with MMT. Taking each of the numbered points in turn:

[1]. [“Change in the instrument of circulation.”] MMT is not a recommendation to change the instrument of circulation. Rather, it clarifies the fiscal capacity that a currency-issuing government already possesses in the present monetary system utilizing the existing currency.

[2]. [“Organization of circulation.”] As just noted, MMT suggests that the various voluntary constraints currency-issuing governments erect (Treasury auctions, debt ceilings, etc.) in no way diminish their fiscal capacity. If these voluntary self-imposed constraints are thought to entail “[re]organization of circulation”, MMT is in agreement with Marx that a mere reorganization of circulation cannot revolutionize the relations of production and distribution.

[3]. [“Relations of production.”] MMT does not call for a “transformation” of circulation without altering the relations of production. MMT is, in part, an analysis of the existing monetary system. And this analysis suggests, when viewed from a Marxist perspective, that a currency-issuing government has, under the existing arrangements, the capacity to shape and re-shape relations of production. From a Marxist perspective, the most important aspect of this has already been noted, namely a currency-issuing government’s capacity to locate more activity outside the sphere of commodity production and therefore to promote an extension of directly social labor.

[4]. [“Social relations.”] From a Marxist perspective, a key implication of MMT is that a currency-issuing government already has the capacity to facilitate a change in “the social relations”. Above all, it shows that government can enable a social transition to a system dominated by directly social labor.

To the extent that commodity production remains, it is firmly under the terms set by currency-issuing government. The ‘invisible bond vigilantes’, for example, are powerless to impede a currency-issuing government’s fiscal capacity even under the unnecessary voluntary constraints that currently apply in many countries. Recent experience accords with this position. Despite the need to allow fiscal deficits to widen substantially at the outbreak of the pandemic, there was never a risk of currency-issuing governments losing control of interest rates on bonds they themselves issue so long as central banks (via appropriate secondary market operations) committed to keeping rates low.

[1]-[4]. MMT, in other words, does not contradict Marx’s claim that fundamental changes in the relations of production and distribution require more than a mere change in the instrument of circulation or its organization. MMT does not even call for a change in the instrument of circulation. It suggests, rather, that the means are already available to societies with currency-issuing governments in the event that they wish to move toward socialism and communism. What is lacking for now (in most countries) is widespread support for this transition and/or sufficient expression of such support through industrial and political channels.

Claim 3 – MMT is incompatible with Marx on money

In my view, Marx and MMT are compatible on monetary matters, but various differences in their definitions need to be kept in mind, above all that Marx and MMT mean different things by the term ‘money’.

For Marx, money as a social relation pertains to commodity production and only becomes necessary under commodity production. It becomes necessary, for Marx, because under commodity production a currency (or labor certificate) cannot directly represent social labor time, unlike when production involves directly social labor. The labor going into commodity production is made social, only indirectly, through the determination of the socially necessary labor going into the production of commodities in accordance with Marx’s ‘law’ of value. Since, from the perspective of the currency issuer, the currency does not require socially necessary labor for its production, the currency is not a commodity, and so does not itself have (marxian) value. Since it does not itself have value, it is not directly commensurable with commodities. The currency can only express the value of commodities, indirectly, by representing an amount of a particular commodity – the ‘money commodity’ – that serves as universal equivalent. Since, like all commodities, the money commodity has value, it is the equivalent of all other commodities when taken in the right proportions. And since the money commodity is commensurable with all other commodities, the currency, by representing an amount of the money commodity, can express the values of all commodities. Therefore, in Marx’s theory, money has a narrower domain than a currency. Money pertains only to commodity production, whereas a currency pertains to both commodity and non-commodity production.

MMT, in contrast, views money as a social relation based in debt. Since debt can apply whether labor is directly social or only indirectly social (as under commodity production), MMT’s notion of money is broader than Marx’s notion. But so long as the differences in naming convention are kept in mind, they cause no real difficulty (elaborated below).

If we adopt Marx’s definitions, MMT’s ‘money theory’ is instead a ‘currency theory’. If we adopt MMT’s definitions, Marx’s ‘money theory’ is instead a ‘commodity money theory’ in which ‘commodity money’ is a specific form of ‘money’ that develops as a precondition of commodity production. (More discussion of Marx and MMT on ‘money’ can be found here and here.)

Claim 4 – MMT suggests fiat money changes the role or nature of money

MMT, in my view, does not imply that the replacement of gold-backed money with fiat money changes the “role or nature of money” within the sphere of commodity production. Rather, MMT suggests that an institutional shift from gold-backed money to fiat money modifies the relationship between the currency issuer and the sphere of commodity production. It suggests that governments who issue their own non-convertible currencies ultimately are unconstrained by the law of value so far as operations in their own currencies are concerned.

Since Marx’s notion of money applies only to commodity production (and so only to conditions in which the law of value operates), and since the difference between fiat and gold-backed money concerns which activities are subject to the law of value, there is no contradiction between Marx and MMT when it comes to the latter’s consideration of the capacities of governments under the two different currency regimes.

Under fiat money, the activity of private for-profit firms is subject to the law of value. Non-government not-for-profit organizations are not fully subject to the law of value, but as financially constrained currency users they can be vulnerable to market pressures and may become reliant on support from the currency issuer. Currency-issuing governments, in contrast, are ultimately unhindered by the law of value when it comes to operations in their own currencies. The measure of control possessed by a currency-issuing government includes not only an unlimited financial capacity in the currency of issue but also a capacity to discipline – through fiscal, monetary, and other measures – the prices of commodities it chooses to purchase in ‘the market’.

Under a gold standard, the reach of the law of value extends not only to the activity of private for-profit firms and (to a lesser extent) non-government not-for-profit organizations, but also to government itself, so long as the gold standard remains in place. A government with the authority to tax can still act contrary to profit considerations, but its capacity to do so is financially constrained due to its commitment to convert the currency into gold on demand at a fixed rate. There is still the key difference that government can choose to go off the gold standard and exercise its prerogative to issue fiat currency, a choice that is not open to private for-profit firms or non-government not-for-profit organizations. Ultimately, currency-issuing governments need not be subject to the law of value (in their own currencies), but they may choose to be (as occurred when they submitted to the gold standard).

In an ultimate sense, ‘fiat money’ is perhaps a misnomer. It is a misnomer in that currency arrangements are ultimately at the discretion of the currency issuer. The fiscal capacity of a currency-issuing government can change under different institutional arrangements, so long as those arrangements are held in place, but ultimately a currency issuer can reassert its full authority with respect to the currency if and when deemed appropriate.

In short, MMT does not suggest that the “nature or role of money” differs within the sphere of commodity production depending upon the presence or absence of a gold standard. There is nothing in MMT to suggest that the functioning of the law of value will be fundamentally different, within its sphere of operation, depending on whether the currency is fiat based or tied to gold. MMT does suggest, however, that when currency-issuing government asserts its full authority – and does not, for example, tie itself to a gold standard – it is best positioned to shape and re-shape the sphere of commodity production. A currency-issuing government that exerts its full authority in this way can limit the scope of commodity production, and regulate what remains of it, impervious to market-based financial pressures. In contrast, a currency-using government is subject to market-based financial pressures unless and to the extent that the currency issuer exempts them from such pressures (as in the case, for example, of the European Central Bank purchasing the debt of member governments of the eurozone, which the ECB, as currency issuer, can do without limit).

Claim 5 – MMT ignores the value of money

In view of the weight given to currency value in the theoretical development of MMT, which underpins the macroeconomic rationale for the proposed job guarantee, this fifth critique is particularly unfounded.

Marx and MMT are in agreement that the value of money (including in Marx’s sense) can be regarded as an amount of labor time. MMT’s general definition of the value of the currency is “what must be done to obtain it”. Leading academic proponents of MMT have noted that this definition can be interpreted in terms of labor time. One approach is to note that, while the currency is not produced with labor from the perspective of its issuer, on average currency users can only obtain the currency by performing a certain amount of labor or commanding an equivalent amount of the labor of others. The labor time required, on average, to obtain the currency will be the value of the currency.

A Marxist approach consistent with MMT is to interpret the value of the currency as the reciprocal of the ‘monetary expression of labor time’. The currency’s value is then the amount of labor socially necessary to reproduce a currency unit’s worth of whatever commodity is taken to be the money commodity. Since this is a definition pertaining to commodity production, it can also be interpreted as the value of money in Marx’s sense.

Claim 6 – MMT-informed policies would destroy the value of money

MMT suggests that a currency-issuing government is in a position to manage, and ultimately determine, the value of the currency. The job guarantee is conceived as playing an instrumental role in this respect.

At the moment, the currency’s value is not fixed relative to any particular commodity. MMT suggests that a gold standard would be ill advised because, so long as it persists, it places a revenue constraint on government. A related aspect of a gold standard, which should be of concern from a Marxist perspective, is that it requires government to behave like a profit-seeking firm (like a commodity producer), and so works against the goal of moving toward a system of directly social labor.

While MMT does not prescribe a gold standard, it does suggest that the currency’s value should be anchored to a commodity so long as commodity production remains in place. The commodity standard of choice, however, should be one that will not impose a revenue constraint on the currency issuer. The currency, according to MMT, should be anchored to labor power which, in Marx’s theory, is treated as a commodity within the sphere of commodity production. MMT’s proposed job guarantee would, in effect, function as a commodity standard so far as commodity production is concerned.

Under the job guarantee, government would commit to converting currency into simple labor power at a policy-determined rate (the job-guarantee wage), on demand. Although job-guarantee labor would be directly social, the job-guarantee wage would set a benchmark that private for-profit firms would need to match or better in order to attract and retain staff. Since, in Marx’s theory, wage relativities tend to reflect labor complexity, the job-guarantee wage (on the basis of Marx’s own theory) would anchor the economy’s nominal wage structure. In combination with the public sector pay scale and the prices government pays for commodities, which ultimately can be disciplined through discretionary fiscal, monetary, and regulatory actions, the job guarantee would anchor the value of the currency.

A labor-power standard, as would effectively apply under a job guarantee, is much preferable to a gold standard. First, while a currency-issuing government always has the capacity to purchase whatever is for sale in its own currency, management of a currency’s value is served by government maintaining control over the prices at which it purchases commodities. A currency-issuing government can certainly commit to purchasing the willing labor services of otherwise unemployed workers at a policy-determined wage, but it cannot always purchase gold at a particular price unless gold is produced within the currency zone.

Secondly, for given distribution, price stability under a labor-power standard calls for nominal wage increases in line with productivity growth, whereas price stability under a gold standard requires a reduction in nominal wages whenever the growth in gold-sector productivity (a fall in the value of gold) exceeds average productivity growth in the rest of the economy. Any reduction in nominal wages has deleterious effects on the cohort of private debtors who are reliant on wage income (since contracts are typically specified in nominal terms). In general, price stability under a gold standard is served by productivity growth in a single sector – the gold sector – matching the average productivity of the rest of the economy. But it is quite easy for the productivity growth of a single sector to deviate significantly from the economy-wide average and undermine price stability.

Thirdly, if we consider Marx’s arguments in favor of designating a metal as money commodity, his arguments apply equally (perhaps more so) to labor power. Just as a metal is divisible by quantity, labor power is divisible by time. While a given quantity of metal always represents roughly the same use value, the use value of an hour of simple labor power (the value created through one hour of its expenditure) is absolutely invariant because, for Marx, an hour of socially necessary labor always constitutes the same value irrespective of variations in productivity (Capital, vol. 1, p. 137, Penguin, London). As standards of price, gold and labor power (and any commodity, for that matter) are equally well suited. As standard of value, labor power is probably superior for the reason that the average productivity of all sectors directly contributing to the cultural reproduction of labor power is likely to deviate less from the economy-wide average than will the productivity of the single sector directly contributing to the production of a metal.

Claim 7 – MMT-informed policy would be inflationary

MMT does not suggest that government should spend in an inflationary way. It suggests that spending should always be in sensible relation to the capacity of the economy to respond to demand at more or less stable prices.

MMT recognizes that government spending, like any other form of spending, adds to demand, and that the likely impact of spending on prices will depend on the circumstances. If there is spare capacity and underemployment, output can be expanded to meet the higher demand at given prices. There is competitive pressure on firms to respond in this way. But if the economy is at full employment, any increase in spending (from any source) will create price pressures. If the government wishes to increase its spending at this point, then, to prevent a bidding up of prices, it will need to raise tax rates or take alternative measures to dampen other components of demand.

When government spends countercyclically, it is unlikely to create undue price pressures. No MMTer (or any other economist, for that matter) would argue that the government should continue to increase its spending relative to taxes when the economy is already at full employment. There would be no point to that.

MMT suggests that the price level is ultimately a function of the prices government pays for goods and services. The reason for this is that the public sector pay scale, the job-guarantee wage if a job guarantee is introduced, and the prices government agrees to pay for commodities (remembering that government can always discipline these prices through discretionary macro policies and other means) determine nominal wages and prices for various goods and services that other firms competing under conditions of commodity production need at least to match to remain competitive. As already observed, this is not out of line with Marx’s theory, since Marx argued that wage relativities reflect labor complexity.

Claim 8 – Government spending crowds out private investment

In financial terms, MMT makes clear that crowding out is never an issue. Government spending never reduces the amount of finance available to the private sector both because government spending creates currency (and net financial assets) and because bank lending to the private sector creates deposits.

In real terms, MMT makes clear that crowding out is not an issue when the economy is inside real-resource limits. If, instead, the economy is up against real-resource limits, government has no need to lift its spending.

Some Marxist critics attempt to link the ‘crowding out’ claim to Marx’s law of the tendential fall in the profit rate. But on Marx’s own logic, his profit-rate law is inherent to the capitalist accumulation process itself rather than being inherent to government spending. It is private investment, especially when productivity enhancing, that tends to increase the organic composition of capital and depress the rate of profit.

Government spending (like other forms of autonomous spending that do not directly create for-profit private-sector productive capacity) actually supports profitability by underpinning higher rates of capacity utilization.

The crises that are functionally necessary to restore profitability, in Marx’s theory, are needed to reverse the effects of the private investment process itself and are not directly linked to other forms of spending.

Claim 9 – MMT supports capitalism / opposes socialism

MMT applies to any society with a currency, whether capitalist or socialist. MMT would also apply to lower form communism in which labor certificates replaced currency. In agreement with basic MMT principles, labor certificates would need to be issued before they could be used to purchase goods and services. The issuer would be unconstrained so far as operations in labor certificates were concerned, whereas users would be constrained. The constraints on the issuer would be real (and political), not financial in nature. The financial deficit (surplus) of the issuer of labor certificates would, by accounting identity, match the financial surplus (deficit) of the users of labor certificates. And so on. The applicability of MMT principles is very broad, in this sense.

MMT, as a macro theory, does not specify a particular theory of value. It neither requires nor precludes Marx’s theory of value. For this reason, it is possible to accept MMT and yet not think it necessary to transform society in a socialist direction. But for those of us who accept Marx’s theory, an acceptance of MMT is unlikely to lead to this conclusion.

In particular, if Marx’s theory of value is accepted and interpreted in a temporal single-system way (implying Marx’s profit-rate law applies), then MMT suggests two basic long-term policy alternatives. One is to preserve capitalism and permit the periodic crises functionally necessary to restore profitability while sheltering directly affected workers in the job-guarantee sector. The other is to move toward socialism, locating increasingly more activity in the public sector and/or supporting an expansion of non-government not-for-profit activity. For what it’s worth, I accept Marx’s theory, interpret it in a temporal single-system way, and prefer the second broad policy option: a move toward socialism and, eventually, communism.

While MMT in itself is basically apolitical, it is highly relevant to an understanding of how society could be moved in a socialist direction. It makes clear that we already have the technical means to commence that transformation. The political will is currently lacking, but the technical means are not. In particular, there is no need to dismantle the currency system before moving to a system of production based on directly social labor.

Here, as elsewhere, the charge that MMT privileges the monetary over the real is groundless. MMT suggests a socialist’s focus should be on reshaping the real – the amount and distribution of free time, the nature of work, how it is organized, its purpose, the way real resources are allocated and utilized, how the ecological crisis is to be addressed, and so on – rather than getting lost in monetary illusions and imagining that finance is somehow a barrier to doing what needs to be done.

Claim 10 – Government cannot stimulate private investment and employment

MMT suggests that a currency-issuing government can always employ anyone unable to find employment in the private sector. If the maintenance of full employment requires more people to be employed in the public sector, this should be of no concern to a Marxist. But MMT also suggests that government spending can help to stimulate private investment and moderate variations in private-sector employment. This does not mean, though, that policy can eliminate the inherent instability of private investment itself.

The implication of MMT that government spending can foster conditions generally conducive to private investment does not remove, if Marx’s profit-rate law holds, a functional need for crises to revive profitability. It simply means that so long as sufficient surplus value can be created in production, government spending will help to ensure demand is no obstacle to the realization of this surplus value in exchange.

In considering the likely effects of government spending on the capitalist accumulation process, I will briefly outline one explanation of private investment behavior that is compatible with MMT. In itself, MMT does not dictate one particular explanation of private investment behavior. Other explanations fully compatible with MMT are possible. (A fuller treatment of the argument presented here is provided in an earlier post.)

It seems clear that for capitalist investment to be feasible, two conditions must be met. There must be: (1) normal profitability acceptable to capitalists; and (2) adequate demand. Without (1), not enough surplus value can be created in production. Without (2), surplus value created in production cannot be realized in exchange. A capitalist will not invest (at least for long) unless both conditions are met.

In terms of causation, my view (following theorists of demand-led capitalist growth) is that the average rate of growth in a capitalist economy largely reflects the growth rate of the components of autonomous demand that do not directly create private-sector productive capacity Z, whereas fluctuations around the average rate are driven by fluctuations in private investment. An acceleration in the growth of Z directly and indirectly (through multiplier effects) increases income. Firms, operating with planned margins of spare capacity, expand production to meet the rising demand. In doing so, the rate of capacity utilization rises as does, other factors remaining equal, the actual rate of profit and profits. If the rate of utilization remains persistently above ‘normal’ (meaning above the rate at which firms intend, on average, to operate), then, provided the normal rate of profit is above the minimum rate acceptable to capitalists, there will be competitive pressure on firms to accelerate private investment in an attempt to adapt capacity to demand and restore the average rate of utilization to normal.

The accelerated private investment initially reinforces the rise in the rate of utilization, because private investment adds to demand. However, at a certain point, once new capacity comes on line, the change in the rate of utilization and then the rate of utilization itself both fall. There may be a slump in investment, even in the absence of a falling normal rate of profit, if utilization falls below normal.

Nevertheless, if Z keeps growing, eventually the rate of utilization rises again and the cyclical process repeats. These cycles are just the garden-variety medium-term cycles that do not seriously impede capitalist accumulation.

A more serious problem comes if, as Marx argues, the organic composition of capital rises during expansion. This causes the normal rate of profit eventually to fall below the minimum rate acceptable to capitalists. At that point, a crisis is functionally necessary to restore normal profitability. The crisis, when it hits, is likely to manifest as a financial crisis. But speculation, excessive private indebtedness, and other unsustainable behavior may be manifestations of the lack of profitability in production.

Government spending, as a part of Z, helps to determine the average rate of growth. It also helps, during crises, by ensuring that once normal profitability is revived (through capital devaluation), demand is no barrier to recovery.

In other words, the ‘demand led’ causation is predicated on a normal rate of profit minimally acceptable to capitalists. This does not remove the functional need for crises once the normal rate of profit falls below the accepted minimum.

The likelihood that capitalist firms will expand production and employment in response to rising demand, including in the context of a falling (though acceptable) rate of profit, is consistent not only with the ‘demand led’ causation outlined above but also with Marx who explicitly wrote:

A fall in the profit rate, and accelerated accumulation, are simply different expressions of the same process, in so far as both express the development of productivity. Accumulation in turn accelerates the fall in the profit rate, in so far as it involves the concentration of workers on a large scale and hence a higher composition of capital. … In this way there is an acceleration of accumulation as far as its mass is concerned, even though the rate of this accumulation falls together with the rate of profit. (Capital, Volume 3, p. 349)

In relation to capitalist employment, Marx wrote:

The number of workers employed by capital, i.e. the absolute mass of labour it sets in motion, and hence the absolute mass of surplus labour it absorbs, the mass of surplus-value it produces, and the absolute mass of profit it produces, can therefore grow, and progressively so, despite the progressive fall in the rate of profit. This not only can but must be the case – discounting transient fluctuations – on the basis of capitalist production. (Ibid, p. 324)

The continued expansion of capitalist production and private-sector employment lasts while profitability remains acceptable to capitalists.

It is of note that Kalecki identifies a similar profit-rate tendency. Kalecki’s ‘tragedy of investment’ – that investment is useful – refers to the fact that investment adds not only to demand but also to the capital stock, tending to lower the rate of profit. Just as Marx’s profit-rate law could be summed up, in a nutshell, by noting that surplus value (the numerator of the value rate of profit) is ultimately limited by total productive employment whereas total capital (the denominator) is not, Kalecki’s analysis can be summed up by noting that profit (the numerator of the price rate of profit) is limited by income whereas the total capital stock (the denominator) is not. Investment, by adding to total capital and the capital stock, tends to depress the rate of profit, other factors remaining equal, whether expressed in value or price terms. Since, in aggregate, surplus value equals profit, the analyses of Kalecki and Marx correspond quite closely in their macroeconomic implications, despite Kalecki’s apparent eschewal of value theory.

Claim 11 – Kalecki is wrong on causation

Some Marxists claim that Kalecki misses the significance of profits for private investment. They refer here to Kalecki’s result, in his simple two-sector model, that capitalist expenditures of the current period determine profit of the current period. If it is further assumed, for simplicity, that capitalists do not consume, then current investment determines current profit.

There are two aspects here: (1) the determination of current investment; (2) the determination of current profit.

On (1), Kalecki states that past profits are a determinant of current investment. On (2), he states that current investment determines current profit (in the simplest model with no capitalist consumption). There is no contradiction between these two statements because past profits, in Kalecki’s approach, are not the only determinant of investment in the current period.

(1) concerns the influence of past profits on current investment. In general, Kalecki argues that investment depends on the recent level of activity and changes in that level. Specifically, he argues that current-period investment depends positively on the past level of gross savings (a function of income and profits), the change in profits, and a trend term, and depends negatively on changes in the capital stock because of the depressing impact of capital accumulation on the rate of profit.

(2) concerns the influence of current investment on current profit. Kalecki argues, in reference to his simplest model with zero fiscal and external balances and no worker saving, that current profit is determined by capitalist expenditures (current capitalist consumption plus current capitalist investment). He argues, on the basis of his more general model, that current profit is determined by current capitalist expenditures, plus the fiscal balance, plus the external balance, minus working saving.

Kalecki’s rationale for (2) is based on agency. He observes that capitalists can choose how much to spend in the current period (including how much of past profits they wish to invest), but they cannot choose how much profit they make in the current period. (In the simplest model, if capitalists acted as one, they could choose both their expenditure and profit, but more generally they could not, because they do not directly control the government balance, the external balance, or worker saving). Since, by identity, with all variables pertaining to the current period, profit equals private investment, plus capitalist consumption, plus the government balance, plus the external balance, minus worker saving, and since capitalists have agency over private investment (and the other sectors have agency over their spending), Kalecki concludes that causation must run from current spending to current profit. This likewise means that causation must run from current spending to current income.

In short, the capitalist accumulation process Kalecki describes is a dynamic one. Past profit influences the current level of private investment which, in turn, influences the current level of profit.

Kalecki’s argument, incidentally, is not inconsistent with an observation that profits typically lead private investment over the business cycle. It is true that if investment were the only determinant of profit, Kalecki’s theory would imply contemporaneous movements in investment and profit. However, since investment is not the only determinant of profit – the latter also depending on the government balance, the external balance, capitalist consumption, and worker saving – profits can lead investment even though causation, for Kalecki, runs from current investment to current profit, and from spending to income. In particular, the tendency for government deficits to widen in slumps makes it likely that profits turn around before investment recovers. Likewise, the tendency for the government deficit to narrow in booms makes it likely that profits taper off before investment weakens.