The Monetary Circuit & Compatibility of Marx, Kalecki and Keynesian Macro

There appears to be a considerable degree of compatibility between Marx and various Kalecki- and Keynes-influenced approaches to macroeconomics. Compatibility, of course, does not imply that all these theoretical approaches stand or fall together. It simply suggests, to the extent that the compatibility exists, that it is possible to see them all as fitting within an overarching, open analytical framework. In this post, the compatibility is considered in relation to the private-sector monetary circuit of a capitalist economy.

The compatibility flows partly from the following three similarities in analytical approach:

  • Marx’s approach is arguably macro-founded. Rather than his macro being built upon micro-foundations, it is his micro that is subject to macro constraints and built upon macro-foundations. His micro analysis still plays a prominent role, but is consistent with certain realities operating at the aggregate level. A notable example is his argument that total surplus value, once created in production, is unaffected in magnitude by its distribution into various component parts. Kalecki- and Keynes-influenced approaches can also be considered macro-founded.
  • Marx analyzes a monetary production economy. This is true, also, of Kalecki and Keynes and their followers.
  • Marx’s analysis of the private monetary circuit of capital, as explored further by circuit theorists, is highly consistent with private-sector causation in Kalecki and Keynes and readily amenable to endogenous money (theorized in Post Keynesian Economics, or PKE) within a state money system (analyzed in Modern Monetary Theory, or MMT).

The private monetary circuit

Marx, in volume 2 of Capital, characterized the private monetary circuit as:

At the beginning of the process, capitalists advance a sum of money (M) (where ‘money’ can be taken to be in the form of cash and commercial bank deposits) to purchase means of production and labor power, both of which are available for sale as commodities (C). For Marx, money used specifically for the purposes of acquiring means of production and labor power is ‘capital’. Capital, in this view, first exists as a sum of money that is transformed into commodities to be used in production (P) to produce new commodities for sale (C’). Provided the amount of socially necessary labor performed in the sphere of production exceeds the value of labor power, there is surplus value which, if realized, results in capitalists receiving a monetary amount (M’) that is in excess of the initial advance of money capital (i.e. M’ > M).

The source of the money initially advanced could be created through private lending. Or it could be drawn from past savings. But if it is past savings, we know from MMT and PKE that these savings must be the result of previous money creation, whether through government spending or commercial bank lending. This entry point seems highly amenable to the integration of Marx with Kalecki- and Keynes-influenced macroeconomics.

Initiating the monetary circuit

The MMT and Post Keynesian analyses of state money and endogenous money, respectively, shed light on the initiating action that creates M, to be used as ‘money capital’ in the initial phase of the private monetary circuit.

In today’s state money systems, commercial bank deposits are promises to make available at par ‘government money’ (defined as cash plus reserves) either on demand or after some duration of time. The account holder may access the government money personally, in the form of cash, or require the bank, acting on his or her behalf, to possess sufficient reserves to ensure the final settlement of transactions.

If, in the past, government has spent more into the economy than it has withdrawn in taxes, there is an accumulation of net financial assets, which in aggregate amount to the sum of cash, reserve balances and outstanding government bonds.

Commercial banks can obtain reserves from the central bank in exchange for government bonds, and can obtain cash in exchange for reserves. If the banking system as a whole is short of reserves, the central bank stands ready to act as lender of last resort, on terms of its choosing.

The ultimate source of M, in other words, is government spending or lending, since this is what ensures commercial bank access to cash and reserves.

But the immediate source of M – the initiating phase of the private monetary circuit – is commercial bank lending.

The germination process begins something like the following:

1. Firms attempt to identify potentially profitable lines of production.

2. The production can be financed out of prior savings (e.g. retained earnings or new share issues) or by borrowing from a bank.

Prior savings, however, are the result of previous government spending or bank lending, so they don’t really explain M. Here, it will be assumed that the firm intends to take out a bank loan.

3. Firms apply for bank loans.

4. Banks evaluate the risks and rewards of prospective loans.

5. Banks lend in the cases deemed profitable by simultaneously creating a loan (the bank’s asset and firm’s liability) and a deposit (the bank’s liability and firm’s asset).

The newly created deposit does not constitute saving. Saving is the part of income not spent, and at this point no spending has occurred, and so no income has been created.

6. Firms draw down their deposits to purchase means of production and labor power (represented by C in Marx’s characterization of the monetary circuit). The spending goes to other firms and workers, simultaneously creating income and saving of an amount equal to the spending.

7. Banks that find themselves short of reserves either borrow from surplus banks or obtain the necessary funds from the central bank by exchanging government bonds for reserves or incurring an overdraft on their reserve accounts.

The rest of the circuit can now play itself out in the way envisaged by Marx. Living labor and material inputs are combined in production (P) to produce commodities (C’) of greater value than those that went into their production with the hope of selling the output for a greater monetary sum (M’) than was initially advanced.

Some macro correspondences between Marx and Kalecki

The whole purpose of the monetary circuit, when viewed from the perspective of capitalists, is to profit from the exercise. In Marx’s terms, this requires both the creation of surplus value in production and its realization in exchange. The main difference between Marxists and non-Marxists is that non-Marxists have in mind only money and physical quantities, whereas Marx and Marxists consider not only these but also monetary value as an equivalent for an amount of socially necessary labor time. So, while in non-Marxist economics there is a physical surplus (in Kalecki’s simplest two-sector model, it consists of investment goods and capitalist consumption goods), and a corresponding monetary surplus, there is no presumption that the monetary amount of total profit is connected to surplus labor (in fact, usually at least a tacit rejection of the idea).

But it seems clear that Marx’s theory of value provides a possible explanation of the real basis of profit. We only have to consider some of Kalecki’s macro ratios to get a sense of this compatibility.

Assume, for simplicity, a closed economy without fixed capital in which the government’s fiscal balance is always zero and all labor is performed in the private sector and ‘productive’ in Marx’s sense. These assumptions enable us to abstract from the distinction between ‘productive’ and ‘unproductive’ labor. (A brief note on how to account for this distinction can be found in the final section of an earlier post.) Assume also for simplicity that productivity is constant. This removes the need to date the various value and monetary magnitudes with time subscripts. Relaxing these assumptions would slightly complicate, but not alter, the basic macro correspondences about to be highlighted.

One aggregate measure considered by Kalecki is the markup:

This is easy to translate into Marx’s terms. Under our simplifying assumptions, nominal income is equal to net value added (variable capital plus surplus value) measured in monetary terms ($v + $s). The money wage bill is the monetary outlay on variable capital $v. Therefore:

In words, Kalecki’s measure for the aggregate markup is one plus the ‘rate of surplus value’ (also called the ‘rate of exploitation’).

A broader measure of the markup, which Kalecki called the ‘degree of monopoly’, takes account of the cost of raw materials:

In Marx’s terms, proceeds are total price. Materials cost is constant capital excluding depreciation. So, in the absence of fixed capital:

Kalecki’s degree of monopoly is therefore equivalent to one plus the rate of profit. The correspondence is somewhat modified once fixed capital is included because of different treatments of depreciation. (Kalecki includes it in surplus value, Marx in constant capital.)

Despite Kalecki’s eschewal of value theory, there is no reason, in principle, that the markup and degree of monopoly cannot be explained through Marx’s value analysis. For instance, Kalecki argues that the degree of monopoly reflects various institutional factors. These factors include the concentration of industry, the development of marketing and advertising strategies, the strength of trade unions and the ratio of overheads to prime cost (also known as variable cost). These institutional factors can just as easily be regarded as influencing the rate of surplus value (s/v) and the organic composition of capital (c/v). This becomes clear by decomposing Marx’s definition of the rate of profit as follows:

Since the degree of monopoly is one plus the rate of profit, we have:

As the above expression makes clear, Kalecki’s institutional influences on the degree of monopoly could be argued to work through their effects on the rate of surplus value and the organic composition of capital.

Lastly, consider Kalecki’s aggregate distributive relation, in which the wage share in income ω depends on the degree of monopoly k and the ratio of materials cost to money wages j:

It has already been observed that k, the degree of monopoly, is equal to one plus the rate of profit. The ratio j, materials cost divided by money wages, is the monetary equivalent of the organic composition of capital. Noting that the share of money wages in nominal income is the monetary equivalent of the share of variable capital in net value added, Kalecki’s distributive identity can be expressed in Marx’s notation as:

or, after cancellations:

To summarize Kalecki’s insights in Marx’s terms:

  • The aggregate markup depends on the rate of surplus value (s/v), sometimes expressed as the ratio of surplus labor to necessary labor.
  • The degree of monopoly depends on the rate of profit, which in turn reflects the ratios of surplus to necessary labor (s/v) and dead to living labor (c/v).
  • The distribution of value between workers and capitalists depends on the rate of profit (or degree of monopoly) and the organic composition of capital (or ratio of materials cost to money wages).

In short, the markup, degree of monopoly and distribution can all be analyzed in terms of Marx’s two key value ratios – the rate of surplus value and organic composition of capital.