Keynes and the General Theory

Really and truly I do not know how to thank the many friends who continue to visit this humble
site. At the risk of having the 'Krisis' book pillaged (only joking! and seeing how popular the
discussions of Keynes and "chumpeter have proved (but believe me# friends $ %iet&sche may be
a lot more difficult# yet he is far more significant in terms of reaching a criti'ue of the bourgeois
Rationalisierung!# I am consolidating here my notes on 'Keynes and the %eo$(lassics'# between
the )ctober Revolution and the %ew *eal. +ascinating stuff# I hope you agree.
Incidentally# we are now close to the ,--#---th visit "mall wonder we have shot up to the top of
most .oogle "earches on /0conomics1 and social theory (iao a tutti.
1. Theoretical Origins of the Crisis-State
The most important distinguishing mark of neoclassical economic theory is its pure
subjectivism. Under the pretext of championing individualism and contrasting
collectivism, the Neoclassical Revolution is an intransigent and powerful reaction to the rising
tide of working-class movements in Europe that contrast the rule of the bourgeoisie under the
banner of Socialism. The life-and-death problem for European bourgeoisies still tied to feudal and
dynastic aristocratic traditions of government is how to include the mass of industrial
proletarian workers that the First Industrial Revolution has spawned and concentrated
dangerously in urban industrial centres in which the interdependence of social labour
requires a level and intensity of political co-ordination that the old laissez-faire attitude theorized
by Adam Smith and the Anglo-Saxon liberalists simply cannot supply. The threat of socialist
revolution is present and growing by the hour. Imponent mass parties representing the rights of
labour are surging in every nation and demanding representation, even the opportunity to
govern in their own right (!) in the old parliaments that were previously the preserve of the
nobles and notables.
The French and American Revolutions have made a return to the old aristocratic order envisaged
by the Congress of Vienna absolutely untenable. When Napoleon declared to the ageing Goethe
that Nowadays, fate is Politics, what he meant was that the only way to prevent revolutions and
to preserve bourgeois public order is to integrate these vast labouring and dangerous classes
under the political banner of nationalism. The old European state armies cobbled together and
then disbanded at the whim of local princes will count for nothing and be ignominiously and
defnitively defeated and smashed by the new Napoleonic Grande Armee fghting with fervor
and ferce conviction for the ideals of Liberte, Egalite, Fraternite.
The Neoclassical Revolution stubbornly and cynically refuses to accept this new reality of the
Political. Not the Political of the old Classical Political Economy and of Liberalism in which the
equilibrium of the self-regulating market ensures simultaneously the ever-growing rational
growth of the wealth of nations, of their common-wealths, and at the same time preserve a
public sphere in which individuals may express their free political and religious and moral
opinions so long as these do not interfere with the operation of the free market now elevated
to a science governed by the economic laws mathematically formalized with increasing
accuracy and rigor by the neoclassical school from Gossen through to Menger and Jevons, and
then to the opposing extremes of mathematical formalism with Walras and of institutional
practice with Marshall.
Just as the real subsumption of the production process by the bourgeoisie requires the
accumulation of value the better to be able to combat the antagonism of workers to the wage
relation, so this growing intensifcation of the labour process to maximize proft entails the
rationalization of every aspect of social life at frst only those aspects connected with the
process of production inside the workplace, but later also those aspects of social conduct that
have to do with consumption and distribution and also with the supply of resources horizontally
and vertically for production. This process of rationalization proceeds with the quantifcation
and measurement of every aspect of individual and social life. Because the satisfaction of the
growing needs of the workforce is seen as the increase of wealth due to rationalization, both
Classical Political Economy and the Neoclassics see the discovery of mathematical relationships
between production and distribution of the product as vital to determining the most efcient
methods of production consistent with the most equitable distribution of the product. The
question for economics is to defne wealth, to describe its efcient distribution in proportion to
the contribution of the various factors of production.
In the best of his Essays In Biography, Keynes describes with a brilliant simile the peculiarity of
Marshalls approach to the mathematical methods to be applied to economics:
Jevons saw the kettle boil and cried out with the delighted voice of a child; Marshall too had seen the kettle
boil and sat down silently to build an engine. (pp.155-6)
For Marshall, Jevons has merely suggested a formal mathematical framework of interpretation of
a given social reality a concrete truth. But this framework must in no guise be mistaken for
a universal truth: it is merely an economic dogma because, as Marshall well knew, utility
itself is a purely subjective notion and, as such, far form leading to concrete truths, it may
well represent the height of irrationalism, it may amount to nothing more than sheer
metaphysical dogma. All one can do is to construct an engine, a tool or instrument for the
discovery of those regularities of social behaviour that can guide enlightened public policy.
While attributing high and transcendent universality to the central scheme of economic reasoning, I do not
assign any universality to economic dogmas. It is not a body of concrete truth, but an engine for the
discovery of concrete truth. (p171)
(Keynes himself in the General Theory will not renounce the reactionary irrationalism of
marginal utility theory: instead, he will compound it with his own brand of mysticism dragged to
the cynical depths of animal spirits and uncertainty and indeed of black magic as in his
strangely sympathetic portrait of Newtons arcane experimental practices in these Essays.)
The essential point to grasp here is that both theories of economics the neoclassical and the
socialist - take the factors of production as given: they difer only in how the actual output
ought to be distributed (socialism) and about the efects of political intervention on the
operation of the market (neoclassic). In both cases the economy is seen as a given set of
technologies and a given set of inputs that can only result in a given amount of output. In
this way, the early refection on economic science is locked out of the factory, as it were; it
does not scrutinize the process of production; like Marshall, the economic socialists (who form
in fact the vast majority of economists) are concerned not so much with the inequality of
income but rather with the inequality of opportunities. In other words, it is the interference
with the proper operation of the economy the production of goods and services and its fair
sale on the market that concerns economists: there is no notion on either the socialist or the
liberal side that the economy itself, the process of production, involves an impossible
exchange!
The economy therefore is seen as a mechanism that functions objectively in terms of inputs
and outputs whose quantity can be determined mathematically. The economy can function
automatically like a machine; it can be operated scientifcally, as in a laboratory experiment,
for the greatest good of the greatest possible number. The utility of the individual matches
therefore the implicit utilitarianism and egalitarianism of the Sozialismus: it is under this deception
that the workers movement will labour from its inception to the present day. Yet it is quite evident that
the economy does not operate automatically because it is subject to violent fuctuations and
investment cycles that shake society from booms of full employment and prosperity to busts of
high unemployment and depression. It is equally obvious that these deviations from what
ought to be an objective mechanism manageable scientifcally must be caused by some
interference that relates not to the process of production itself but rather to the distribution of
the industrial output.
The hiatus, the gap, lies between the moment goods are produced and the moment they are
purchased: the process of production itself is not even remotely put in question either by the
promoters of Socialism or by their bourgeois counterparts. The fact that the means of
technology utilized in production and the goods produced for consumption (and therefore also
the materials used for their production) may be the result of political antagonism, that they
may embody the antagonism of the wage relation, does not in the least surface among the
considerations of economic analysis either Classical or Neo-classical. But this hiatus that
leads to the frequent observable crises, to the cycle of boom and bust of capitalist industry, and
so of output and employment this hiatus has to do either with the excess of consumption on
the part of workers whose wages are excessive or else it is caused by the excess of investment on
the part of capitalists whose unusual profts lead straight to overproduction or
underconsumption on the part of workers whose money wages are insufcient to consume the
product. In either case it is the presence of money that clearly causes the distortions, the
discrepancies between production and consumption that cause the economy to sway from
excessive production to excessive consumption, with corresponding falls in proftability,
investment and employment.
In this framework of analysis of capitalist production and society, whether it is the Socialists who
condemn capitalism for its anarchical, unplanned excesses that cause misery for the
unemployed, or whether it is the laissez-faire liberals who blame political interference and the
misguided attempts by Socialist governments to interfere with the free market operation in
both cases all economists can agree that it is the presence of money as the veil, the
intermediary between production and consumption, that is as it always was from the dawn of
Christianity the root of all evil.
Two central features emerge then from the peculiar Weltanschauung that both Socialism and
Liberalism come to share at the end of the nineteenth century and at the beginning of the last one:
the frst is that the economy is a sphere of social activity that can function automatically and
that is governed by objective economic laws provided that these are allowed to operate freely;
the second is that the objective operation of the economy must be managed and planned
scientifcally by the State, for the Socialists, or, for the Liberals, it must be allowed to work
through the self-regulation of the market without interference from the State. The role of the State
to regulate the economy is achieved therefore through the monetary medium, either through
the control of the monetary mass and the interest rate, or else through social policy that
redistributes income between the social classes, or else still through direct intervention by the
State in the economy through policies aimed at bufering the extreme swings of the market
economy.
Neither in the Socialist vision of Economics, nor in the Liberal one is there any room for the State
as a rightful factor in economic analysis: for both political positions, the State remains
external to the operation of what is seen as a market economy whose only disturbances or
crises are derived not internally from production but externally through distribution
distribution that boils down ultimately to monetary factors, whether in terms of monetary
magnitudes or of monetary redistribution of income through fscal intervention by the State. The
idea of the State as an essential and necessary component of the economy was as foreign to laissez-
faire liberalism as it was to the most revolutionary members of the Linkskommunismus. True it is
that the Leninist faction of the Second International advocates a dictatorship of the proletariat.
But this dictatorship is the equivalent of changing the drivers of the same vehicle: the idea that
subtends all Socialist dogma from Proudhon to Social Democracy and Bolshevism is that the
proletariat will take over the capitalist machinery of production to run it in its own interests.
There is no suggestion that the social relations of production and, with them, both the means of
production and the products and the methods of consumption and distribution will change as
well! Even Lenins extensive pronouncements on the strategy and tactics of the revolutionary
party will limit themselves precisely to these strategies in favour of the skilled workers who
are being supplanted by machines and whose artisanal skills are lost to the universal
alienation of Taylorism (lampooned by Charlie Chaplin in Modern Times) and loss of totality
in the labour process that only the proletariat as the individual subject-object of history can
restore! (Lukacs) It was Lenin after all, and now the fact should not seem so surprising, who
stated that Politics is a concentrate of Economics.
Lenin has no doubts that his Bolshevik Revolution represents a leap too far such is the
backwardness of Russian capitalism that its economy will have to be upgraded to the level
of technical and managerial leadership of German industry (see his The Development of
Capitalism in Russia). But the October Revolution of 1917 will ofer Keynes as early as the
Versailles Treaty conference (cf. his explicit reference to Lenin in Economic Consequences of the
Peace) with the challenge that Leninism represents for Western capitalism: here is the frst and
most troubling epoch-making historical and social evidence of the fact that the economy cannot
be separated from society and that the Political in the fnal instance can destroy what had
seemed until then to be the economic laws of any social organization. (Absurd must have
seemed to Keynes the farcical attempts of Von Mises and Hayek to prove the impossibility of a
socialist economy (!) in response to Bolshevism, written as early as the late 1920s cf. Misess
book, Socialism and introduction by Hayek.)
We will look in more detail at the efect of the New Deal on Keyness General Theory in our next
piece. For now, let us end this discussion with the interesting parallel of the efect that the
Bolshevik Revolution had on the two highest exponents of bourgeois economics in the 1930s an
efect that was only to be reinforced by the advent of the Rooseveltian New Deal as a portentous
capitalist response to the Leninist challenge. Both Keynes and Schumpeter, in fact, who up until
that time had confned themselves to critiques of neoclassical theory that were more in the nature
of cosmetic improvements or corrections and who had shared unquestioningly the schema that
we have presented here of a capitalist economic mechanism independent of politics and the
State, following these two epochal revolutions in the institutional asset of the nation-state one
Leninist and the other Rooseveltian transformed their own theoretical approaches to include
precisely the possibility and indeed the inevitability of a fundamental role of the State, of the
Political, in the essential operation and functioning of any Economy. After the Red October and
after the Hundred Days, it seems, the old bourgeois illusion of the epistemological separation of
Economics and Politics of their homologation in separate spheres of social reality becomes
absolutely impossible. Lenin is quoted as saying, relates Keynes in the Economic
Consequences of the Peace (but the statement has never been corroborated), that the best way to
undermine a country is to debase its currency.
References2 http233www.scribd.com3doc3454-,64-30ssays$in$7iography (Keynes!
http233www.scribd.com3doc38,9:,54,3keynes$and$the$capitalist$theory$of$the$state (;his is an
almost literatim $ but strangely unacknowledged $ translation of a brilliant piece on Keynes by
Antonio %egri first published in )perai e "tato. ;he translation and some unauthorised intrusions
make the reading sound more /triumphalist/ than was even the original. 7ut it is a useful review
that some of you may wish to peruse.!
2. Science, Economy and Society
If the economy is a mechanism that connects a given quantity of inputs with a given
quantity of outputs, it is axiomatic that there must be a scientifc and mathematical way of
ensuring that this economy functions automatically and that can be obviously by
eliminating or avoiding any disturbances (external shocks) or interferences (political
measures and institutions) from infuencing or disrupting its operation. Crises therefore are not
internal to the economy, but entirely external. Indeed it can be said that if the economic laws
of the marketplace economy are kept in place, its reproduction will be in large part spontaneous
or automatic. And it is equally obvious that, for a society to reproduce, the aggregate savings
of the society must equal the aggregate investments: this, in a nutshell, is the meaning of Says
Law: it is what must obtain to ensure that the sought-after equilibrium of the economy is
attained, whether one adopts socialist or liberal policies.
Says Law is the tangential point that connects the socialist line with the liberal circle. And it is
Says Law the fundamental Law of Economics that makes possible the determination of an
economy that operates spontaneously and automatically if the laws of economics are
respected, in such a way that civil society, the Economy, can function entirely independently of
the Political, of the State, where the State is a negative State, like the economy a mere
machine or mechanism, confned to the protection of the self-regulating market and ensuring
that public opinion, the moral and religious persuasions of citizens, do not interfere with the
market and are confned to the public sphere of debate and deliberation. This homologation of
the Political free-dom, which allows citizens to exist as moral members of a dialectical public
sphere, and of the scientifc necessity of the Economical where the individual attends to his
self-interest according to his needs, as a bourgeois this homologation of the conventional
sphere of the Political and the hypothetical mechanism of the Economy is what unites both
Classical Political Economy and Neoclassical Political Economy.
In this schema, universally accepted before the Great Depression, the State is seen as a
nightwatchman state (in Lassalles phrase), as a State of Law, as the enforcer of laws that
protect the homologation achieved by the Political Economy for the efcient operation of the
economy in a free society. In this schema, the State plays absolutely no signifcant part, if it plays
any part at all, in the substantive functioning of the economy except as a guardian, except as
police, ensuring that the self-interests of the individual bourgeois are kept within the
ambit of the laws of the market so as to preserve life, liberty and estate. But this is precisely
where the homologation, the equi-valence of the Political sphere and the Economy breaks down. -
Because the self-interest of the individual market participants may not necessarily converge
or be consistent with the self-interest of other individuals. As Marshall had warned with regard
to Jevonss mathematical calculations of marginal utility, these assumed that the utilities of the
individual were compatible with those of other individuals within the sphere of exchange
defned and regulated by the market! Now, this assumption was mere economic dogma and
could in no guise lead to the certainty of concrete truth. The laws of economics presuppose
axiomatically the existence of a common utility between all market agents; they postulate the
existence of a Smithian enlightened self-interest whereby the self-interest of the single
bourgeois is somehow compatible with that of every other bourgeois at least in the sense that
they can co-exist. Even assuming the existence of economic laws, it is evident that the
agreement by all market participants to abide by them is dependent on the scientifc
rationality of individuals and on the existence of a civil society in which there is consensus to
be governed by a State, by political institutions, that will enforce the undisturbed operation of the
self-regulating market.
It is precisely the assumption in both Classical and Neoclassical economics of the axiomatic
necessity of the existence and of the spontaneous automatic operation of these institutions that
Keynes challenges from the very frst sentences of the General Theory.
I have called this book the General Theory of Employment, Interest and Money, placing the
emphasis on the prefx general. The object of such a title is to contrast the character of my arguments
and conclusions with those of the classical [1] theory of the subject, upon which I was brought up and
which dominates the economic thought, both practical and theoretical, of the governing and academic
classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the
classical theory are applicable to a special case only and not to the general case, the situation which it
assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics
of the special case assumed by the classical theory happen not to be those of the economic
society in which we actually live, with the result that its teaching is misleading and disastrous if
we attempt to apply it to the facts of experience. (p3)
Rightaway, Keynes invites his readers to reverse the order of analysis of classical (orthodox
bourgeois) economic science: the laws postulated by that science apply only as a limiting
point of the possible positions of equilibrium; they represent only a special case whose
characteristics happen not to be those of the economic society in which we actually live. Gone,
therefore, are the axioms of economic dogma; gone are the postulates of economic science
with its neat mathematical equations and its certainties of rigorous existence of
equilibrium. The only existence that is relevant is not that of mathematical equilibria, but the
ec-sistence of this society the economic society in which we actually live! There is no necessity
to these characteristics: they simply happen not to be those of the existential reality in which
we actually live. Life is not mathematics; concrete truths are not universal truth (Marshall).
Beneath the apparent automatic functioning of the market laws there lies a social reality that is
as complex as human existence, as meta-physical as the very metaphysics that neoclassical
economic science despises!
Just as Einstein had shattered the uni-versality of Newtonian physics, just as Nietzsche and
Heidegger had trans-valued the old values of Western metaphysics so now does Keynes turn
upside down or reverse the perspective of Neo-Kantian and Machian economics. Nothing is
absolute: everything is relative. To orient ourselves in this society we must ensure that the so-
called laws of economics that supposedly maximize the welfare of the society do not destroy
frst in the process of their theoretical operation the very society on which they are founded:
with the result that its teaching [that of orthodox economics] is misleading and disastrous if we attempt to
apply it to the facts of experience.
And the facts of experience teach us instead that there are forms of behaviour or institutions
that are peculiar to the economic society in which we live: not all or every (!) economic
society, then; only the one in which we live. And this economic society happens to be a
capitalist society. Society comes frst; economics later. If we wish to preserve this (!) society a
capitalist one we must then adapt existing institutions and adopt new ones that will ensure
the survival and reproduction of a specifcally capitalist society: we must prescribe the
institutions that can make up a society of capital! To insist with abstract economic laws, to
afrm their eventual triumph in the long run can lead only to the tearing of the fabric of
this society on which this economy is founded.
The celebrated optimism of traditional economic theory, which has led to economists being looked upon as
Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the
best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having
neglected to take account of the drag on prosperity which can be exercised by an insufciency of efective
demand. For there would obviously be a natural tendency towards the optimum employment of resources in
a Society which was functioning after the [p.34] manner of the classical postulates. It may well be that the
classical theory represents the way in which we should like our Economy to behave. But to assume that it
actually does so is to assume our difculties away.
Therefore, in the long run we are all dead does not mean (as many superfcially take it to mean)
that all things must pass! Keynes is saying instead that if we choose to adopt the long run as
an infexible mode of conducting capitalist society then, in that long run, we as capitalists, the
economic, capitalist society as we know it, in which we actually live.will die (!), and we, the
capitalists, will die with it. Keynes is not referring to mankind in general: he is addressing his
own class and this society, which is the only form of civilized society that he knows, that he can
conceive as worthy of inhabiting. That it is the survival of bourgeois society that Keynes had in
mind, that this was the context in which his famous maxim was uttered, is illustrated clearly and
dramatically by Hayeks direct response to the Keynesian subversion of the nature and content of
economic analysis, from science to virtual policy.
I cannot help regarding the increasing concentration on short-run efectswhich in this context
amounts to the same thing as a concentration on purely monetary factors not only as a serious
and dangerous intellectual error, but as a betrayal of the main duty of the economist and a
grave menace to our civilization.It used, however, to be regarded as the duty and the
privilege of the economist to study and to stress the long-run efects which are apt to be hidden
to the untrained eye, and to leave the concern about the more immediate efects to the practical man, who
in any event would see only the latter and nothing else.3 (Hayek, The Pure Theory of Capital, p,409).
(my emphases)
The polemic with Keynes is evident. In the long run, we are all dead, of course, but Hayek
hankers by spontaneous, long-term processes (he would refrain from saying natural, as in
the natural prices of long-term equilibrium) - processes that display the underlying logic of
human action, - an open-ended notion, to be sure, but one from which a pure logic of choice
may be distilled (the word used by Bohm-Bawerk in his tirade against the German Historical
School) a spontaneous order to be protected from the extrinsic short-term policies introduced by
interventionist governments and the disturbances that they cause, as displayed by the trade
cycle. To interfere with this pure logic of choice or science of choice is not only an
intellectual error, but a betrayal and a grave menace to civilization itself!
But it is alarming to see that after we have once gone through the process of developing a
systematic account of those forces which in the long run determine prices and production, we
are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business
man raised to the dignity of a science. Are we not even told that, "since in the long run we are all
dead", policy should be guided entirely by short-run considerations? I fear that these believers in
the principle of apres nous le deluge may get what they have bargained for sooner than they wish,
(p410, my emphases).
For Hayek, it is the Keynesian urge to interfere with the spontaneous order of social life as
encapsulated in the tenets of economic science that represents a nihilistic betrayal both of
science and of civilization. Keyness General Theory is the abandonment of reason for the very
short-run preservation of capitalist society an interference with those forces which in the
long run determine prices and production done in the name of a short-sighted philosophy
that can only compound and hasten (sooner than they wish) the decadence and decay and
decline of civilization, that is to say, of bourgeois society and its economy.
Keynes between Einstein and Heidegger: Uncertainty and
Relativity in The General Theory
Let us revisit that pivotal paragraph of Keyness magnum opus in which he seeks
to elucidate the meaning of its sweeping title:
I have called this book the General Theory of Employment, Interest and Money, placing the
emphasis on the prefx general. The object of such a title is to contrast the character of my arguments
and conclusions with those of the classical [1] theory of the subject, upon which I was brought up and
which dominates the economic thought, both practical and theoretical, of the governing and academic
classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the
classical theory are applicable to a special case only and not to the general case, the situation which it
assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics
of the special case assumed by the classical theory happen not to be those of the economic
society in which we actually live, with the result that its teaching is misleading and disastrous if
we attempt to apply it to the facts of experience. (p3)
Quite evident here is Keyness attempt to replicate with his general theory in
the sphere of social science the profound trans-formation that Einsteins general
relativity elaborated a full twenty years earlier between 1905 and 1917 -
operated on the Newtonian understanding of the universe that had prevailed in
the physical sciences from the middle of the seventeenth century. To be sure,
Keynes jumbles together here under the title of classical theory what are in fact
quite distinct economic theories, Classical Political Economy (Smith, Ricardo and
Marx) and Neo-classical Political Economy (Menger, Jevons and Walras) and he
does this all the better to emphasise the break with the past that he intends to
make just as did Einstein by going beyond the Classical physical science of
Newton as well as the Neo-classical or neo-empiricist one elaborated by Ernst
Mach.
My chief contention here is that it is impossible fully to understand the
revolutionary character of Keyness general theory without paying close
attention and com-prehending the undeniable parallels between his novel
understanding of society and Einsteins equally revolutionary redefnition of
the physical universe. The decisive diference between the theories of Keynes and
Einstein as against those of their Classical/Newtonian and Neo-
Classical/Machian counterparts is that these last remain profoundly
essentialist, that is to say, they interpret the world in terms of an objectively
true reality that is capable of being de-fned by means of com-prehensive
theories that link strictly and unequivocally scientifcally and truthfully the
objects of this reality to one another within the dimensions of space and time.
Both the Classical/Newtonian and Neo-classical/Machian theories of society and
of the physical world maintain, albeit with signifcant diferences, that it is
possible to com-prehend the cosmos coherently by assigning discrete ideas
to discrete things as well as to their mutual relations. This is known as the
ordo et connexio rerum et idearum whose truth is understood to be the adaequatio
rei et intellectus. The idea, the theory, is so strictly con-nected to the thing (the
objective reality it describes), it is so adequate to or co-herent with this
reality, it ex-plains this reality so completely, that it is intellectually
indistinguishable from it, and therefore objectively true.
Circulus Vitiosus - Classical and Neoclassical Theories of
Vale
The Labor Theory of Value approaches the question of Value from the standpoint of the
reproductive needs of a society, and then regards the total value produced by a society as the
sum of the incomes of its various social classes dependent on their ownership of the various
factors of production. The theory therefore starts with the notion of social labor required for the
reproduction of the entire society, and not with the atomistic relationship between individual and
good which is what marginal utility does. The echange value of a good is determined by the
amount of labor it contains mediated by the labor contained in the means utili!ed for its
production. "ut the price is conditioned by the fact that the distribution of the aggregate surplus
value across different sectors of industry with varying rates of eploitation must be distributed
according to an equali!ed rate of profit across all branches of capitalist industry. #ar$et prices
differ therefore from echange values because it is the mar$et that determines finally what labor
time was socially necessary for the production of each good sold on the mar$et. The mar$et
provides the social osmosis of capital in that it determines the distribution of the aggregate
surplus value according to a rate of profit that is equal the total amount of capital invested.
The circuitousness of this theory of value is quite apparent because it describes labor time as
socially necessary when in fact its social necessity is still determined ultimately by mar$et
forces by supply and demand. %s "ohm&"awer$ properly ob'ected to #ar(s version of the
theory by far the most refined &, it is sheer metaphysics to insist that mar$et prices can merely
regulate the equali!ation of the different surplus values etracted in different sectors of
production as an aliquot return or profit for the aggregate amount of capital invested, but cannot
determine what is the socially necessary labor time on which surplus value is calculated) *n
other words, even in #ar(s version of the labor theory of value, it is still the mar$et that
determines ultimately what production is socially necessary and what is not, and therefore also
what is the profit for each individual investment. *t is this contra&diction in #ar about the
possibility of an +equilibrium+ whereby total mar$et clearing prices and total +embodied value+ of
goods can be homologated and therefore +labor values+ be transformed into monetary prices that
"ohm&"awer$ attac$s successfully.
The difference with marginal utility theory rests on the fact that marginal utility starts with the
assumption that individuals already own the goods whose marginal utility will determine mar$et
prices and that these mar$et prices are merely a reflection of the marginal utilities relative to the
goods made available for echange on the mar$et) ,ut differently, the LTV starts with social
necessity to determine distribution and ownership whereas marginal utility starts with ownership
and individual choice or preferences to account for mar$et prices. *t then proceeds to eplain
the empirical behaviour of mar$ets through their prices by describing the psychological
motivations or 'ustifications for that behaviour. *t follows from this that whereas LTV loo$s at +input
costs+ to calculate the value or price of the +output+, marginal utility operates in reverse, giving
priority to the marginal utility of the finished product to calculate the marginal utilities of its
+inputs+.
-onsequently, the LTV is more concerned with the pro&duction of goods whose value depends on
the labor power or effort that goes into their production with distribution and ownership a
consequence of this process, whereas marginal utility is concerned with goods already in
eistence and owned whose echange is dependent on their scarcity. The LTV is a theory of
pro&duction whilst marginal utility is one of echange of e<isting resources that are legally
owned by individuals .endowments/.
0rom the foregoing it can be seen that both the LTV and #1T are metaphysical accounts or
eplanations of value because both treat value as some entity or substance that is
reflected in mar$et prices. The metaphysics consists in the fact that both -lassical ,olitical
2conomy and 3eoclassical Theory ultimately agree that it is the mar$et that decides what gets
produced and how social resources are allocated. "oth theories believe in the eistence of a
mar$et equilibrium at which the value of goods echanged in that mar$et and their component
factors or costs of production can be determined either ob'ectively in terms of socially necessary
labor time .in #ar(s version of the LTV/ or else sub'ectively in terms of individual marginal
utilities.
4ust briefly, the demonstration of the +metaphysical+ and therefore self&referential or tautologous
definition of value and price in marginal utility is illustrated clearly and inconfutably in this passage
from "ohm&"awer$5s =ositive ;heory of (apital6
In what follows I mean to inquire how prices are determined under the assumption
that all who take part in the exchange act exclusively from the motive of pursuing
their immediate economical advantage in it. The law which we shall arrive at in this
way I have already,*2 for very good reasons, called the fundamental law of the
formation of price. I am perfectly aware that, in practical life, this law does not
exactly obtain. or, although the motive of self!advantage is almost never absent,
and is almost always the most prominent motive, still, in price transactions, other
motives do very often get mixed up" such motives as humanity, custom, friendship,
vanity, or the influence of outside institutions, such as government taxation, union
regulations, boards for fixing wages, and the like, give them another direction than
that they would have taken if exclusively dominated by self-advantage. #uch
motives, indeed, scarcely ever get the upper hand of the other to the extent of
making us conclude an exchange which would cause us positive economic loss" but
they often make us decide to be content with a less amount of advantage than we
should have got in steadily pursuing our interests. $I%.&.2'
*t is entirely obvious that "ohm&"awer$ defines the purpose of echange in determining prices as
+the obtaining of immediate economical advantage+. "ut that begs the question of +what+
precisely determines +economic advantage+ or +self&advantage+ or, conversely, +positive
economic loss+)) The tautology consists in defining prices .the definiendum/ in terms of
+advantage or loss+ .the definiens/ which is then defined again in terms of prices)
The important difference for us here is that the Labor Theory of Value interprets value in terms of
effort of production whereas marginal utility loo$s at value in terms of want of provision. "y
ta$ing effort of production as its starting point, the LTV assumes that ownership of the pro&
duct is socially and politically determined and that labor provides the social synthesis that
needs to be validated by the mar$et in capitalist society and by planning under 7ocialism. "y
contrast, in starting from want of provision, marginal utility assumes that goods are already in
eistence and are already endowed to individuals, so that society by which they mean, the
mar$et mechanism as social synthesis or osmosis only decides the echange of the eisting
value between individuals.
Under the LTV, labor is the active part of Value (effort, labor power); under marginal
utility it is the passive part of value labor as want in sear!h of provision, labor as dis"
utility#
8e can see therefore how wrong #a 8eber was to believe that the ,rotestant wor$ ethic could
ever provide a specifically economic ethic or eplanation for the spirit of capitalism. *nstead.
8e will have to return to "ohm&"awer$ to be able to add time to the 3eoclassical theory of
value and only then we shall be able to return to 7chumpeter and 9eynes.
Keynes and the Wage Relation
The Money Wage as the Fundamental Unit of the Society of Capital
*n the long run, we(re all dead mar$s an important turning point in the intellectual prise de
conscience of the bourgeoisie6 capitalism is not the end of history: its economics does not
embody the truth it is not a revelation. -apitalism is a product of human history and, li$e all
historical artefacts, its time will come too. The only certainty is not that of the mathematical
equations of 8alrasian general equilibrium6 the only certainty this side of death is
uncertainty. 3othing is absolute, and nothing is infallible or imperishable. *f we wish to preserve
this particular form of economic society, we we the bourgeoisie) must ensure its survival6
and survival means reproduction, and reproduction means the co&ordination of economic activity
in a manner that remains fundamentally capitalist but that does not threaten the reproduction of
the society of capital, and that means reproduction of the wage relation. 3ow, reproduction of
the wage relation means ensuring a level of employment that is as close to full employment as
can be consistent with the reproduction of the wage relation.
This implies at least two things6 first, the wage must not be so high that wage labourers refuse to
alienate their living labour for capital to eploit on an epanded scale: and secondly that the wage
does not fall so low that the investment decisions of capitalists in terms of the future stream of
income in other words, the profitability of capital is not 'eopardi!ed by ma$ing formerly less
profitable investments become more profitable. *f the future of capitalism is to be secured, then
the profitability of current capitalist investment must also be secured. *ifferently put# the
>financial gearing1 of investment must be >geared1 in harmony or co$ordination with the
antagonism of the wage relation e<pressed >financially1# in monetary units# so that the >e<pected
future yield1 from present investment is compatible with the e<panded reproduction of living
labour and therefore with the wage relation
The implications of this reali!ation are absolutely enormous and astounding. 0irst among all
bourgeois economists, in a feat almost equaling the political analytical genius of a 9arl #ar,
9eynes perceives that the financial pyramid of finance capital must be trans&formed from a
casino capitalism into a co&ordinated and planned maintenance of output and employment by
using the money wage as the fundamental unit of calculation of the total final demand
.aggregate demand and, more specifically, effective demand/ of the capitalist
system regardless of what individual capitalists might decide or thin$) The very epectations of
individual capitalists, the animal spirits of private investors must be ad'usted socially,
collectively through the monetary medium through the fundamental unit of the money wage
so that a debt&deflation, a financial panic is politically avoided)) 8e, the bourgeoisie must
$now that, in the words of ,resident ;oosevelt in the *nauguration 7peech of 0ebruary <=>>6
%LL 82 ?%V2 T@ 02%; *7 02%; *T72L0)
Aeath is the only certainty. This side of death there is only uncertainty6 from ?eisenberg to
2instein to ?eidegger, 9eynes(s language and thought closely parallels the eistential crisis not
'ust of the bourgeois Individualitat that even 7chumpeter has abandoned with his obsolescence
of the entrepreneurial function, that 8eber had abandoned with his iron cage, that 3iet!sche
had prophesised with his 8ill to ,ower6 if the only certainty is death and this side of the long run
is uncertainty, then we need a point of reference the equivalent of a ?eideggerian Aa&sein, a
?ichtung, a beam of light, to show us the way in the world of being that has been obscured by
the 8ar and the Aepression. %nd that point of reference can be only the actual employment of
social resources, the anneation of the future, the control of the monetary bridge to the future,
& and that must pass through the control of the wage relation whose fundamental social
institutional epression is the money wage)
The Breat 8ar was the last 2uropean civil war. 4ust as in the <CDEs when Thomas ?obbes was
confronted with the 2nglish -ivil 8ar at the very dawn of bourgeois capitalist society, the only
answer to civil war is the abandonment of individual choice in the face of death (! in favour of
the establishment of a 7tate&#achine, of a Leviathan, that can stop us from fearing fear itself)
Let us leap without further ado to ,art Two of the Beneral Theory, the part on Aefinitions and
*deas. There it is) -hapter D on The #oney 8age, section **6
;hat the units# in terms of which economists commonly work# are unsatisfactory can be illustrated
by the concepts of the %ational *ividend# the stock of real capital and the general price$level2 $$
(i! ;he %ational *ividend# as defined by @arshall $p#%&' and =rofessor =igou# $(' measures the
volume of current output or real income and not the value of output or money$
income. $)'+urthermore# it depends# in some sense# on net outputABon the net addition# that is to
say# to the resources of the community available for consumption or for retention as capital stock#
due to the economic activities and sacrifices of the current period# after allowing for the wastage
of the stock of real capital e<isting at the commencement of the period. )n this basis an attempt
is made to erect a 'uantitative science. "ut it is a grave ob'ection to this definition for such a
purpose that the community5s output of goods and services is a non&homogeneous comple
which cannot be measured# strictly speaking# e<cept in certain special cases# as for e<ample
when all the items of one output are included in the same proportions in another output.
% measure) % measure) #y $ingdom for a measure) 4ust as 2instein found the speed of light as
the fundamental constant of the universe, 'ust as ?eidegger finds in death the lighting of Aa&
sein .being there/, so now does 9eynes need a measure, a unit, an indication of the level of
antagonism of living labour against the wage relation in a capitalist society that needs to trans$
form itself into a >society of capital1 in which >the control of growth becomes the growth of
control) "ut this must be a measure that is not indicated in real terms because it will be quite
impossible then to relate this measure to the specifically capitalist condensation of command
over living labour in terms of value, of echange value, and then utterly impossible to co&
ordinate this real measure with the financial pyramid of future income streams
from present investments. ;eal wages will never be able to tell us what the future relations of
political power between wor$ers and capital will be6 only the money wage can allow the 7tate to
act collectively and in aggregate to mediate and negotiate and buffer and co&ordinate the
political social antagonism that the wage relation generates.
4ust listen to 9eynes) ;ead carefully please)) "ecause the problem of measurement becomes
especially dire and diabolical where the command of capital over living labour through the wage
is concerned with the future) %t that level, the real wage cannot even remotely be used to
homologate and homogeni!e the levels of industrial antagonism across different branches of
capitalist production and across periods of investment) This can be done only .)/ in terms of a
measure that epresses value that is, the homogeni!ed epression of antagonism across
the aggregate monetary epression of social capital6
(ii! ;he difficulty is even greater when# in order to calculate net output# we try to measure the net
addition to capital e'uipmentA for we have to find some basis for a 'uantitative comparison
between the new items of e'uipment produced during the period and the old items which have
perished by wastage. In order to arrive at the net %ational *ividend# =rofessor =igou $%' deducts
such obsolescence# etc.# /as may fairly be called 'normal'A and the practical test of normality is
that the depletion is sufficiently regular to be foreseen# if not in detail# at least in the large/. "ut,
since this deduction is not a deduction in terms of money, he is involved in assuming that there
can be a change in physical quantity, although there has been no physical [p.39] change: i.e. he
is covertly introducing changes in value. #oreover, he is unable to devise any satisfactory
formula [1] to evaluate new equipment against old when, owing to changes in technique, the two
are not identical. I believe that the concept at which =rofessor =igou is aiming is the right and
appropriate concept for economic analysis. "ut, until a satisfactory system of units has been
adopted, its precise definition is an impossible tas$. The problem of comparing one real output
with another and of then calculating net output by setting off new items of equipment against the
wastage of old items presents conundrums which permit, one can confidently say, of no solution.
3ot only is there the problem of comparing one real output with another: but, more important,
there is the far greater problem of then calculating net output by setting off new items of
equipment against the wastage of old items when there have been +changes in technique+) 8e
will deal with this e<'uisitely "chumpeterian problem of /innovation/ later, which 9eynes .+the
father of stagnation+, completely overloo$s)/. 0or now, the problem is to bridge and
homogeni!e the political command of capital over living labour not 'ust across sectors of
capitalist industry, but also across periods of investment, between the present and the future)
%nd, as 9eynes says, only money can do that, and only the money wage can ground
institutionally the political command of capital. ?ere is 9eynes again6
In dealing with the theory of employment I propose, therefore, to make use of only two
fundamental units of quantity, namely, quantities of moneyvalue and quantities of
employment. !he first of these is strictly homogeneous, and the second can "e made
so. +or# in so far as different grades and kinds of labour and salaried assistance enjoy a more or
less fi<ed relative remuneration# the 'uantity of employment can be sufficiently defined for our
purpose by taking an hour's employment of ordinary labour as our unit and weighting an hour's
employment of special labour in proportion to its remunerationA i.e. an hour of special labour
remunerated at double ordinary rates will count as two units. Ce shall call the unit in which the
'uantity of employment is measured the labour$unitA and the money$wage of a labour$unit we
shall call the wage$unit.$('
8e will loo$ at 9eynes(s underlying assumptions on real wages net.
Keynes's Discovery of Society: From Science to
Uncertainty
The Breat 8ar of <=<D to <=<F shatters the illusions of the 2uropean 2nlightenment6 it is not
simply the ability of human beings to behave rationally, according to the methods and laws of
science, that is called into question: it is not merely the belief in a steady progress of humanity
toward peace and prosperity .it is the motto of the ?absburg %ustro&?ungarian 2mpire shortly
before its collapse/ again in the footsteps of science and technology that tragically confuted: it is
above all the very content of scientific rationality that is called into question nowhere more so
than in the sphere of economics. %lfred #arshall may have eemplified the faith reposed in
science before the 8ar6
+rom @etaphysics I went to 0thics# and thought that the justification of the e<isting condition of
society was not easy. A friend# who had read a great deal of what are now called the @oral
"ciences# constantly said2 /Ah If you understood =olitical 0conomy you would not say that./ "o I
read @ill's =olitical 0conomy and got much e<cited about it. I had doubts as to the propriety of
ine'ualities of opportunity# rather than of material comfort. ;hen# in my vacations I visited the
poorest 'uarters of several cities and walked through one street after another# looking at the
faces of the poorest people. %e<t# I resolved to make as thorough a study as I could of =olitical
0conomy. (@arshall 'uoted in Keynes# D0in7E# p,4:!
3othing epitomi!ed the ,anglossian optimism of pre&8ar 2urope than the eistence of the Bold
7tandard as a seemingly automatic regulation of global trade and industry. ?ere was spar$ling
proof of the harmonious convergence of scientific rigor and welfare maimi!ation. ?ere was
evidence of the automatic functioning of the self&regulating mar$et mechanism that could
reconcile in 7ay(s Law both the labour theory of value of -lassical ,olitical 2conomy and the
marginal utility theory of the 3eoclassics. The general equilibrium mathematically identified by
8alras uniquely brought together for economic analysis the form of mathematical scientific
precision with the content of utility maimi!ation for each individual economic agent.
9eynes perceives from the end of the 8ar that the peace and prosperity of the Bolden %ge had
been built on very sha$y foundations. 7ha$ier still and ominously dangerous for him is the
insensate credence of the victorious powers at the ,aris -onference of <=<= in their ability to
return to the old pre&8ar equilibria of the Bold 7tandard and the League of 3ations. To be sure,
the elements of his economic analysis to po$e irony at his derogatory critique of the
aiomatic character of neoclassical theory remain steadfastly neoclassical. "ut one historical
reality, an imponent presence upsets all the equilibria of the marginalist revolution for 9eynes6
the etreme implausibility of the equilibrium of savings and investment as a spontaneous self&
regulation of the mar$et mechanism the *nvisible ?and that decrees that supply creates its
own demand. 7ay(s Law would hold in the special case in which supply .investment/ and
demand .consumption/ could ad'ust instantly and seamlessly to variations in their respective
schedules. *n such a case, there would be not so much an equilibrium of quantities as rather a
harmony of information because the equilibrium would consist in the perfect matching of
demands .the informational equivalent of consumption/ and epectations .the mental
equivalent of investment/. *n such an economy all information relevant to production and
consumption schedules would be immediately and omnisciently available to all mar$et
participants in such a way that no discrepancy could arise between supply and demand6 supply
would ad'ust to $nown demand and demand would ad'ust to available supply.
0or 9eynes, here the neoclassical school has illicitly .ch.G, BT/ allowed the form of the science
to rationali!e the content of capitalist economic society, to 'ustify its conduct, to certify its
legitimacy. The error of all previous theories is that they fail to distinguish between form and
content6 the form serves merely as a warranty of the optimality of capitalist activity, of the reality
of bourgeois society) 4ust as did ?egel, for whom the philosophy of history is the history of
philosophy because whatever is real is rational and what is rational is real, so has economic
science illicitly become the scientific certification of present economic conduct and practice) *t is
not so much that the capitalist economy requires different scientific categories for its analysis)
9eynes insists that the tools of analysis are the same as those that can be used for any
economic society. "ut the actual wor$ings of the capitalist society are different from those of
other societies in the sense that the basic factors of production and distribution .Value and
,roduction/ wor$ differently in this society. 9eynes distinguishes between the tools of economic
analysis and the fabric of society6 the same scientific tools can be applied to different historical
economic societies that are made different by their institutional framewor$s. This is the
challenge that 9eynes throws against the postulates of the -lassical 2conomics6
@ost treatises on the theory of Falue and =roduction are primarily concerned with the distribution
of a given volume of employed resources between different uses and with the conditions which#
assuming the employment of this 'uantity of resources# determine their relative rewards and the
relative values of their products. ((h.5!
;he 'uestion# also# of the volume of the available resources# in the sense of the si&e of the
employable population# the e<tent of natural wealth and the accumulated capital e'uipment# has
often been treated descriptively. 7ut the pure theory of what determines the actual employment of
the available resources has seldom been e<amined in great detailG. I mean# not that the topic
has been overlooked# but that the fundamental theory $p#*' underlying it has been deemed so
simple and obvious that it has received# at the most# a bare mention.
That is the destiny of mathesis6 to be its own fulfillment. *f one defines, as did ;obbins and
?aye$ with their 7cience of -hoice, the available resources as given and therefore fully
employed, then it follows that economic analysis boils down to the mere mathematical selection
of the method of allocation and distribution of these resources consistent with the maimi!ation of
human welfare. "ut the problem, as 9eynes points out, is that the actual employment may well
not be full that there may be involuntary unemployment of the available resources not
because of some interference or disturbance or shoc$ eternal to a historical economic society,
but rather because of its very modus operandi, of the real institutional content of its behaviour)
The tas$ of economic analysis then cannot be to devise a mathematical description of an ideal
reality, a perfect state, a general equilibrium, and then to attribute all the evident flaws of this
reality to some disturbance or eogenous shoc$) The tas$ of scientific analysis is to register
these shoc$s as part and parcel of the economic system under consideration and then to
suggest changes to the current institutional asset to prevent these shoc$s from destroying the
peace and prosperity, the equilibrium of the economic society in question. %s 9eynes puts it
with a half&derisive tilt at economic science6
;he celebrated optimism of traditional economic theory# which has led to economists being
looked upon as (andides# who# having left this world for the cultivation of their gardens# teach
that all is for the best in the best of all possible worlds provided we will let well alone# is also to be
traced# I think# to their having neglected to take account of the drag on prosperity which can be
e<ercised by an insufficiency of effective demand. +or there would obviously be a natural
tendency towards the optimum employment of resources in a "ociety which was functioning after
the $p#%+' manner of the classical postulates. It may well be that the classical theory represents
the way in which we should like our 0conomy to behave. 7ut to assume that it actually does so is
to assume our difficulties away.
The ultimate goal for 9eynes is to preserve society economic society, bourgeois society. %nd it
is clear from the very first lines of the Beneral Theory that the ma'or, most imminent threat to the
eistence of bourgeois society is the involuntary unemployment of human resources of
labour. *t is this discrepancy between the available resources for employment and the actual
employment of those resources that threatens the stability and the very survival of capitalism
and of bourgeois society6 the question then is to establish why such a discrepancy eists. 2isting
economics assures us that any unemployment of available resources is either voluntary or
frictional, if it is not due to political interference with the self&regulating mar$et mechanism.
"ut provided this mechanism is allowed to operate freely, then full employment will return in the
long run.
Two concepts immediately demand 9eynes(s attention here6 one is the notion of long run, which
requires a certainty verging on faith in the ability of the mar$et to steer a society to peace and
prosperity, and the other is the assumption of the freedom of economic agents of
individuals. %nd once again it is the eperience of the Breat 8ar that confutes both these
credos of economic science. 0or the 8ar has destroyed all certainties, scientific and moral, all
faith in values and replaced them with one frightening certainty6 & the certainty of death. Aeath
with its finality is the only certainty and value that the 8ar has brutally confirmed. 3ot only is
the future of the long run not assured: not only is it uncertain and here uncertainty comes to
occupy a central role in 9eynes(s economic analysis. "ut also the freedom of choice on the part
of the individual that neoclassical theory and its marginal utility postulate implies a rationality
on the part of the individual in eercising his choice or his economic conduct a rational
freedom of choice that the very absurdity and irrationality of the 2uropean civil war and its near
annihilation of societies and civili!ation have quite simply demolished) *ndividuals act
neither independently of one another, nor rationally according to the scientific dictates6 economic
analysis itself, in see$ing to describe rigorously their behaviour and to prescribe their conduct
along scientific&rational lines, shows conclusively that there is no obvious ob'ective definition of
freedom or indeed of rationality)
3owhere is this more evident than in the determination of the wage. ?ere 9eynes notices a
crucial defect in all prior economic theories in the fact that they confuse money wages with real
wages. *f indeed the real wage could be defined strictly as the marginal product of labour,
then this marginal product could be quantified so that the quantity of employment could be
eactly equal to the quantity of employment required for the utility of the real wage to equal the
marginal disutility of labour given a physical and cultural requirement. "ut the problem is that the
wage is not paid in natura, in terms of physical product6 it is paid in money. 2ven if it were
paid in wage&goods, it would be impossible to determine what amount of wage&goods
represented and equaled the marginal product of labour given that such a marginal product
would have to be defined in terms of mar$et prices which, in turn, would have to stand for
physical quantities of the wage&goods concerned) The circuitousness of these definitions is
evident. 9eynes summarises it as follows6
At different points in this chapter we have made the classical theory to depend in succession on
the assumptions2 (,! that the real wage is e'ual to the marginal disutility of the e<isting
employmentA (5! that there is no such thing as involuntary unemployment in the strict senseA (4!
that supply creates its own demand in the sense $p#))' that the aggregate demand price is e'ual
to the aggregate supply price for all levels of output and employment. ;hese three assumptions#
however# all amount to the same thing in the sense that they all stand and fall together# any one
of them logically involving the other two.
The obvious contradiction is that the aggregate demand and supply prices to which 9eynes
refers must evidently refer to monetary entities and that the eistence of full employment
depends on their equality at all levels of output and employment. "ut for this to happen the real
wage must also be equal to the marginal disutility of eisting employment and here we have
illicitly switched from monetary magnitudes that can be aggregated, to real ones that simply
cannot be aggregated unless they are converted into monetary terms)
9eynes, however, does not directly confront this contradiction and vicious circle .it is in order to
avoid contra&diction that the definitions are circuitous/. *nstead, he see$s to show that these
postulates of the -lassical 2conomics do not correctly describe the reality of what in fact
happens to be the economy in which we live. 0irst of all, these classical postulates do not
describe at all properly the reality of the institutional behaviour of the wor$ers, acting as a class6
%ow ordinary e<perience tells us# beyond doubt# that a situation where labour stipulates (within
limits! for a money$wage rather than a real wage# so far from being a mere possibility# is the
normal case. Chilst workers will usually resist a reduction of money$wages# it is not their practice
to withdraw their labour whenever there is a rise in the price of wage$goods. It is sometimes said
that it would be illogical for labour to resist a reduction of money$wages but not to resist a
reduction of real wages. +or reasons given below (p. ,H!# this might not be so illogical as it
appears at firstA and# as we shall see later# fortunately so. 7ut# whether logical or illogical#
e<perience shows that this is how labour in fact behaves.
"ut even leaving this to one side, the most crucial ob'ection to the classical postulates is that the
very presence of money and of monetary aggregates determines a fundamental hiatus
between the present level of output and employment in the capitalist economy and the
epectations of what the aggregate levels of consumption and investment will be in the future %
chasm appears therefore in the predictability and regularity .the phrase used by 9eynes to
describe the statistical endeavours of 4evons/ of the functioning of the capitalist economy in
terms of what the agencies involved in the economy epect to happen in future. These
epectations are predominantly affected by uncertainty about the income streams that may be
derived in future from the investment made in the present. %nd these income streams are
determined by the propensity to consume. *t is the fact that this propensity to consume may fall
below the epectations of investors that causes the swings in the investment cycle that can lead
to downward spirals of disinvestment and deflation and turn into outright depression.
1ltimately, 9eynes attributes uncertainty to the fact that social life is unpredictable and
irregular, irrational and unfree, as the cataclysms of war and economic depression demonstrate
all too clearly. #oney is the institutional lin$ in capitalist economic society utili!ed to provide a
bridge between the present and the future. Het it is the eistence of money itself that provides the
institutional hiatus between present and future levels of output and employment. 3ever and
nowhere does 9eynes see$ to eplain why money eists and how it can eist in capitalism. The
need for an eplanation he simply and mysteriously con'ures away between the lac$ of realism of
the -lassical economics and the descriptive realism of his own corrections of their theoretical
framewor$. 0ar from being a Beneral Theory, 9eynes(s magnum opus is a very generic theory
full of brilliant institutional insights but lac$ing any intellectual and theoretical coherence. 1nli$e
his opponents in the %ustrian7chool, 9eynes(s intellectual $en and grasp of social theory and
philosophical analysis was far too narrow to allow him to tac$le the most fundamental theoretical
elements of economic theory.
*n the net intervention we will eamine how 9eynes mystified the political reality of the wage
relation that is at the centre of capitalism by camouflaging it though unwittingly with his
various categories of marginal efficiency of capital, propensity to consume, animal spirits,
the liquidity trap and his account of the rate of interest.
IIust a personal note to commemorate *r. Iain @acpherson# economic historian# of .onville and
(aius (ollege# (ambridge# who I learned today passed away this year. I can testify that over the
years I was the recipient of *r. @acphersonEs endless and spontaneous "cottish generosity# not
less than of his sincere and warm "cottish wit. I will miss him upon my return to (ambridge in a
few weeks# and I shall never forget him. Re'uiescat in pace.J
Market Choice and Economic Science - Money as 'Measure' of Social
Antagonism
In this series so far we have seen how money can play no role in bourgeois
economics because it is an institutional measure of the level of social antagonism
in capitalist society - not just between workers and capital, but also between
capitalists and, in the guise of exchange rates, between national bourgeoisies. The
antagonism between workers and capital is over the share of wages and profts in
total output, and that between capitalists is over the distribution of profts
amongst themselves. It is clear that because capitalism is based on the
exploitation of living labour, on its violent reduction to abstract labour that can
be "measured" fctitiously in terms of money (wages) which then represent
equally fctitious aliquot shares of "total output" - because of this violent
"political" need of capital to transmute magically what are use values (living
labour and social resources) into fctitious abstract values (monetary calculations
of social resources), capitalists must isolate and alienate individual workers from
one another and from the means of production so that the entire fction of the
"free market", based on "free labour" and "free choices", can be maintained!
But the social antagonism of the wage relation infects not just workers. Above all
it infects the capitalist class itself because the antagonistic "push" from workers
(expressed in wage and conditions demands) forces individual capitals (not
necessarily individual capitalists) into "competing" with one another not just over
the distribution of profts, but also (what amounts to the same thing) over the
distribution of the wage antagonism! In other words, each capital wants its own
workers to be paid less and the workers of other capitals to be paid more so that
they can consume more. The ideal for capital would be a pricing system in which
the money wage could refect as closely as possible the level of wage and social
antagonism in a particular area of production. The reason why this cannot be
done is quite simply that it is physically impossible to equate wages and
antagonism because they are two categorically diferent things. But capitalists
always try to mediate these potential conficts in terms of all sorts of "policies"
(incomes policy, investment policy, regulations over government spending,
employment, industrial and environmental policies, and so on). Internationally,
these inter-capitalist rivalries take the shape of disputes over trade and exchange
rate policies - which is what we are witnessing right now between the US and
China and Europe (Germany especially).
At a more theoretical level, we can see that capital always presents social activity
in a dichotomy: on one side is the total level of "inputs" (social resources) which it
claims are quantitatively and scientifcally "scarce" and "measurable"; on the
other are the "free choices" of consumers ("households") and investors ("frms")
which determine the "relative distribution" of this total pile of "inputs" according
to the "market price mechanism" - in terms of "supply and demand". We know
that this is pure fction because the "inputs" of an economy cannot be "priced"
independently of their "relative market prices", which we do not and cannot
know until "the market" (consumers and investors) decide by way of supply and
demand what those "prices" are going to be! In other words, the "absolute
constraint" of the "available inputs" can only be determined by the "free choice" of
market participants!!! Even Blind Freddie could see the glaring contradiction in
this proposition!
What we are arguing here is that bourgeois economics claims to be able to
determine "scientifcally" (through relative prices) the allocation of social
resources to various uses for production....by means of the "free choices" of
individual market participants! That this "miracle" is not possible is proven by
the fact that the capitalist economy - far from being "scientifcally" analysable and
"managed" - is prone to very violent cycles and crises that are the product of the
"undemocratic" manner in which the decisions about the allocation of social
resources are made! And the lack of democracy extends to more than just
workers, but to the entire society, including capitalists themselves whose
"fratricidal" rivalries are increasingly threatening world peace.
The upshot of this discussion is to show that the capitalist economy is
intrinsically antagonistic, and that this antagonism spreads from the base - the
violence of the reduction of living labour to abstract labour that can be rewarded
with dead objectifed labour through the money wage - to the very vertex of the
pyramid of sufering and exploitation that is capitalism. Because at the top of the
pyramid are extreme and very violent rivalries between capitalists about the
distribution of "profts", that is to say about who can appropriate the greatest
amount of "monetised" social resources with the least amount of antagonism
from workers and society! This is why all the national bourgeoisies in the world,
as the conficts among them mount, come to resemble a gang of bandits or a
band of robber barons - from the Chinese dictatorship to the Russian oligarchs,
from the Saudi sheikhs to the American plutocrats, from the Mexican narco-
trafcants to the French and Italian prima donnas, from the German descendants
of the pro-Nazi elite to....you name it. Cheers and good week-end.
Prices, Infation, and Confict in the Society of Capital
When we say that money "measures" the level of antagonism centring on the
money wage and "prices" generally, we mean that the capitalist system starts with
a "given" level of prices that represent a particular "balance" of forces in
particular "sectors" of capitalist enterprise. These various "balances" represent a
certain degree of "stability" in those sectors or industries. (Joan Robinson
famously sought to replace the concept of "equilibrium" with that of
"tranquillity" - which, although she may not have known it, was frst adopted by
the mediaeval humanist Marsilius of Padua to indicate the "health" of the "body
politic".) In other words, we accept the basic premise of "the New Institutional
Economics" that capitalism is a series of institutions that "regulate" politically the
efective functioning of the system. The "system" therefore is not one that owes its
"regularities" to "mechanical" and "scientifc laws" that link the various
"quantities" involved in the utilisation of social resources. Rather, these
"regularities" are the result of a current "tranquillity" that is always threatened by
the political and dynamic nature of the social antagonism that capitalism
engenders.
As Michal Kalecki realised, pricing in capitalist industry refects the "degree of
monopoly" (of control) that the various capitalist frms involved in a given sector
(economists would say "market") can command and that is subject to regulatory
checks from the collective capitalist, the State. That is why "price stability" is so
important to monetary authorities - because the faster prices change (in times of
high infation, for example, or because of supply or demand disruptions), the
harder becomes the maintenance of tranquillity in that sector and consequently
in adjacent sectors of industry. The concentration of capitals in key sectors of
capitalist industry is absolutely essential to governments for them to be able to
co-ordinate the economy as a whole. However much governments may condemn
monopolisitc behaviour and collusion in certain industries, the reality is that
capitalist industry would be impossible without "price leadership" or "price
fxing" - for the simple reason that "prices" can never be set by the mythical
"market" but rely instead on the pre-existing regulation of a particular "market".
Where new "markets" arise that afect the functioning of capitalist industry in
other sectors, the State intervenes to regulate them before they become
dysfunctional and pose "systemic risks" to the reproduction of the entire "society
of capital".
Of course, even the absence of infation may be problematic. This is what
happened with the Great Moderation: real wages were kept up and wage
infation down in the West through the ferocious exploitation of Chinese workers
by the dictatorship of the Communist Party of China with the complicity of
Western capital (chief among them Apple Inc., run by that "saint" and "genius"
Steve Jobs!). But what seemed like a period of "tranquillity" or "moderation" was
in fact occasioned by the disastrous expansion of credit to Western workers,
which kept up artifcially proftability for fnance capital as asset prices swelled
into a bubble - until it burst in 2007 and 2008! The disruption to the entirety of
capitalist industry was such that only enormous political intervention by Western
governments and their state machineries has managed to avert the collapse of
capitalist society. But the shock waves are still reverberating and it is proving to
be extremely hard to settle the intercapitalist rivalries about who should "pay" for
the crisis and the necessary "adjustments" in terms of the devaluation of
previously-infated assets and other price disruptions. Nowhere is this more so
than at the inter-national level, especially within the European Union where the
crisis has shown the limits of German domination of European industry.
So our next task will be to look at how the wage relation is reproduced through
the essential, pivotal "mediation" of the very means of production from which
living labour is "separated" by capital. This is where capitalist "entrepreneurship"
plays a vital role through technological and managerial "innovation" in ensuring
the perpetuation of the "command" of capital over workers. Yet it is also the area
of analysis in which the frst signs of the possible liberation of living labour from
the yoke of capital frst become visible.
Mr. Keynes and the Neo-Classics
The economic sphere of social life, and therefore that of economic analysis (literally, of
the reflective classification and interconnection of its component concepts),
concerns the production and exchange of wealth by and between human beings.
In the definition of wealth there are obviously subective and obective
considerations! the obective consideration is that the wealth of a society must
be reproduced (preserved and replaced) for the survival of its members" and the
subective element is that the needs of a society are not purely biological and
physiological but also psychological and cultural.
If we consider a society to be made up purely of atomic individuals, then it will be next to
impossible to wor# out the obective and subective needs that constitute the
wealth of a society, except as they are made visible by the observable conduct
of those individuals. In that case, the only possible goal of economic analysis
will be to describe as simply and comprehensively and predictably as possible
the pattern of exchanges between the individuals in a given society that must be
exclusively a mar#et society in which only the mar#et behaviour of those
individuals can inform us about their obective and subective needs, called
utilities, and not the other way around. This is the framewor# of $eoclassical
%conomics.
&onversely, if we ta#e an obective view of what the reproductive and subective needs
of a society are, then we will loo# for the type of resources that go into the
production of the wealth of the society ' whether these resources are
(uantifiable and measurable or else are dependent on cultural factors. The
identification of an obective measure of wealth was the aim of &lassical
)olitical %conomy from *mith to +ill, through ,icardo and +arx, and it found it
in labour. +arx thought that labour was too abstract a designation because its
measure could be given only by the political coercion of the labour mar#et so
that ultimately the fundamental measure of economic wealth was the socially
necessary labour time for the production of a given commodity.
The problem with this definition, ust as with the marginal utility of neoclassical theory,
is that only the mar#et can tell us what is socially necessary labour time
because only the mar#et can tell us what commodities are socially necessary to
be produced- &learly, therefore, both the subective definition of marginal
utility in neoclassic and the obective definition of value in the &lassics are
defective because they are circuitous in that they rely on the mar#et ' on what
is observable ' to explain what is observable- .ut no observation will ever
amount to and provide its own explanation, because explanations must be
expressed in terms that are significantly different from the mere recording of
the observation. (Indeed, the very means we employ to observe phenomena
are subect to definition because they already define what is observed and are
therefore not obective at all- This is a restatement of /eisenberg0s
Indeterminacy )rinciple in physics.)
*o the most fundamental problem for economic analysis is to measure the total wealth
of society both in aggregate and in particular in terms of the production of
goods and services that constitute that aggregate wealth. $ow, it is clear that if we
ta#e a subective approach to the definition of wealth as the neoclassic do, we
will never be able to calculate the aggregate wealth of society for the simple
reason that subective exchanges of goods and services between individuals
can be measured only in terms of a numeraire that can be constituted by any
of the goods and services exchanged in the mar#et simultaneously and as a
totality of transactions- (This is called 1alrasian e(uilibrium.) It is also clear that
such a general e(uilibrium contains no substantive definition of wealth but
can describe only a relative exchange that occurs simultaneously because all
exchange e(uations ((uantities exchanged and relative prices) must be #nown
before we can calculate all the relative prices in terms of a single numeraire (that
can be any one of the goods exchanged).
It is obvious that neoclassical economics can only describe a situation (one that is
timeless) of e(uilibrium ' can ascertain mathematically only the existence
of this e(uilibrium" but it cannot explain how an e(uilibrium is reached, nor
how an economy can get out of e(uilibrium" and it cannot explain how an
economy can return to e(uilibrium once it has gone into dis2e(uilibrium. The
very notion of dis2e(uilibrium is simply im2possible because we would have to
#now e(uilibrium relative prices before we could say that an economy was in
dis2e(uilibrium in the first place-
The &lassical )olitical %conomists instead approach economic wealth in terms of the
effort that is needed to reproduce a society on an expanded scale. This is a more
obective approach in that it see#s to explain mar#et prices and not merely to
observe or record them, and because mar#et prices are not determined by
subective evaluations (marginal utility) made at a microeconomic level, but
rather are determined by the macroeconomic needs of the totality of a society
regarded as an entity.
If indeed value is an obective entity so that it determines mar#et prices, then it is
obvious that it can be expressed independently of any one good or service on
the mar#et in terms of commodity money used (a) as a unit of account, (b) as a
means of exchange (as a universal e(uivalent), and (c) as a store of value, as
li(uidity.
.ut if no such value can be identified, as the neoclassics insist, then wealth cannot be
defined by effort or any other obectively determined (uantity, but rather by
subective utility which is derived from the goods and services exchanged on
the mar#et and from the goods and services (endowments) that go into their
production. In that case labour does not have utility but has dis2utility
because its effort is re(uired to ac(uire goods and services that can satisfy the
marginal utility of the wor#er. The essence of the $eoclassical ,evolution
consists in this! that labour is displaced from the central role it had in the
&lassics to a negative role! from the creator of value to the need for goods
with utility-
3nd money can serve only as a convenient medium of exchange that serves as a
to#en numeraire for the totality of mar#et exchanges occurring and calculated at
e(uilibrium. In such a case, money can only be a nominal or to#en entity with no
utility or value whatsoever except that of faithfully indicating e(uilibrium
mar#et prices in the real economy made up of individual exchanges at
e(uilibrium.
&onse(uently, the only way in which money can be non2neutral in a neoclassical
economy is if and only if there is an exogenous and arbitrary interference with
its e(uilibrium supply so that e(uilibrium mar#et prices and the exchange of
goods and services between individuals is distorted thereby ' with the result
that the economy is thrown into dis2e(uilibrium.
The (uestion therefore becomes how money as a mere to#en used to facilitate mar#et
exchange can actually affect the e(uilibrium of the neoclassical mar#et economy.
This is the essential problem that will occupy three of the greatest economists of
the early twentieth century ' 1ic#sell, /aye# and 4eynes. It may be said that
their answers differ depending on their understanding of the transmission
mechanism between the issuance of credit money and the regulation of interest
rates by central ban#s through the monetary base or the money supply, on one
hand, and the allocation of social wealth through its production and
consumption regulated by relative mar#et prices.
1e can say that the difference between 1ic#sell, /aye# and 4eynes is not at all, or not
mainly, in the philosophical or scientific understanding of economic analysis in its
fundamentals. Instead, their disagreement was over the effect that the creation and
availability of money (li(uidity) could have on the behaviour of the economy in
terms of the adustment of prices, of employment and of output.
This transmission mechanism has been the bane and despair of bourgeois economic
analysis and theory for the very simple reason that the bourgeoisie is forever
loo#ing for the paradise in which money becomes completely neutral, in
which it becomes a pure medium of exchange with no influence whatsoever on
the real economy. In other words, the bourgeoisie believes that there is a real
economy in which goods and services are exchanged freely between
individuals with no connection between them (pure competition) in accordance
with original endowments to which they have an unassailable legal right and
which they exchange until the marginal utilities of each of these endowments are
e(ual ' that is, the last unit of each endowment has the same differential
numerical value (relative price) in terms of an arbitrary good that is used as
numeraire (as unit of account). .ourgeois economics never explains how
individuals came to have the endowments they possess at e(uilibrium-
The chief aim of bourgeois economic analysis is to remove the antagonism, the conflict at
the very centre and motor and heart of capitalist society! 2 the wage relation. (1e
have already described this in an earlier entry.) .ut to do so it has to present
economic activity as a pure exchange between free individuals of their
legally held endowments to the existing goods and services, subectively
needed (even in the case of the physical reproduction of the individual, because
this reproduction is still left to individual choice) present in society. 3s we have
seen instead, capitalist society is founded on the coercion of living labour to
exchange itself for a portion of the goods and services that it produces in such a
manner that this exchange does not free living labour from the need and
coercion to continue to sell itself to capital, and in such a manner that capital can
lay claim, through the portion of the goods that are not claimed by wor#ers0
money wages, to even more living labour and social resources for the next round
of production-
The purpose of capital is therefore to reproduce the wage relation on an expanded scale
by annexing new living labour and social resources that are not under its
command yet and by increasing the potential command it has over living labour.
&learly, this means that capital and money2as2capital can only be understood
politically, as value, as political command, as will and control of the capitalist
over social resources, over wealth intended as all those goods and services and
resources that reproduce the wage relation. It is also obvious that this political
command occurs through the mediation of the satisfaction of human needs,
whether physiological or social ' none of which can ever be measured directly.
+oney therefore must be understood as money capital" and it cannot be
simply a means of exchange but must also be both a measure and a store of
value. .ut because value is not a (uantity that can be measured and is
instead a social relation, then we say that money cannot measure value but it
can be a social indicator, a symbol of the political effectiveness and
effectuality of the stability of the wage relation across the disparate sectors of
capitalist and social activity.
The next (uestion then becomes! how can such a system wor#, and how does it wor#
in practice5
http!!""".ne"yor#fed.org!research!epr!$%&'(n)!$%'*ed"a.html (%dwards and +ish#in on decline of
traditional ban#ing ' 6778)
http!!""".fa+.net!a#tuell!"irtschaft!"irtschafts"issen!+entral,an#en-,austellen-in-der-
monetaeren-oe#onomi#-((-./-/%.html (list of 3drian9*hin, .orio and other articles from :3;)
http!!""".ft.com!intl!cms!s!'!.**,*,fa-f,)(-((e'-,e,e-''(--fea,-$a.html0a1++(,2h31/45 (Tett0s
review in :T ' wea#)
http!!""".fa+.net!a#tuell!"irtschaft!,ruttoinlandsprodu#t-das-"esen-des-"achstums-
((-$)''%.html (+easuring <=) or growth)
http!!#rugman.,logs.nytimes.com!)'((!('!))!european-"age-update! (4rugman accepts wage
downward rigidity but excludes it from I*2>+ because it blames wor#ers for dise(uilibrium-)
http!!#rugman.,logs.nytimes.com!)'((!('!'$!is-lmentary!
http!!""".ft.com!intl!cms!s!'!$%%dcf(.-fa%*-((e'-,*'d-''(--fea,-$a.html0a1++(,2h31/45 (=e
<rauwe on need for %&. to act as >?>,)
The $eoclassics and 4eynes do not differ in any significant manner about the political
content of the categories used in neoclassical theory. In all significant respects, 4eynes
remains a neoclassical economist! his 1eltanschauung remains identical to that of the
negatives =en#en that lay the foundations of the $eoclassical ,evolution. <iven his
limited #nowledge and understanding of &ontinental thought, 4eynes had no cognition of
the epoch2ma#ing significance of those theoretical underpinnings and their ability to
shape, for better or for worse, our very conception of economic reality. .y this we mean
that 4eynes did not challenge the basic tenets and principles of neoclassical theory,
except in some practical respects that bring them closer to the reality of the
functioning of the capitalist economy. The essential difference between 4eynes and the
$eoclassics is that whereas the latter consider that the economy will always adust from
any external shoc#s to reach e(uilibrium in the long run, 4eynes ac#nowledges that
there are important institutional aspects of capitalism, such as money and asset contracts,
that profoundly affect the operation of the economy to a point where neoclassical
adustment may well result in the total political and social brea#down of society!
hence, in the long run, we are all dead.
There are two crucial aspects to 4eynes0s turn in the neoclassical approach to
economics! the first is that money and li(uidity, far from being neutral and therefore
not being able to have any long2term impact on the real economy, that is, on the
allocation of endowments in neoclassical theory, are actually extremely important as
signals providing information about the real state of the economy. In other words,
4eynes does not dispute that the capitalist economy fundamentally functions along the
lines of analysis suggested by neoclassical theory. 1hat he does dispute is that money
is neutral and therefore can have no real effect ' apart from first round effects ' on
the functioning of the economy. :or 4eynes, money is a bridge between present and
future" money provides the lin#, the (uantification of the use of physical resources in
a pro2ected income stream that will be paid as interest, in the future, out of future
real production. The first distinguo 4eynes moves against the neoclassic is therefore
that the existence of money and of legal instruments tying the physical production of
assets to their expected future monetary income streams crucially conditions the
operation of the real capitalist economy both in terms of the rigidity of prices in
various mar#ets ' mainly the labour and capital asset mar#ets ' and therefore also in
terms of the expected yield or interest or, more broadly, of the income streams
flowing from capital assets.
The second point is that the social structure and the structure of mar#ets may not be
flexible enough to adust to changes in expected economic conditions (uic#ly enough to
prevent a cascading collapse of the inverted pyramid of contractual obligations erected
from a more li(uid base to a less li(uid vertex, with the result that if the income stream
from leveraged assets is not reali@ed there will be wholesale li(uidation of those assets
with their prices not adusting downward (uic#ly enough to restore the ability of
borrowers to meet the contracted obligations based on the original estimate of that
income stream. *imilarly, and as a corollary, the losses involved in the firesale li(uidation
of assets ma#es the physical operation of those assets absolutely unprofitable, prompting
a hori@ontal and vertical collapse of the financial inverted pyramid with conse(uent
brea#down in the physical supply for other mar#ets and the generation of price instability
that threatens not ust the financial structure but the very reproduction of the economy
itself-
A=ur#heimB )ut differently, the economy of a given society may be seen as an
interdependent organic structure (rather than as a homogeneous mechanical structure
whose component parts are simple units that can be added and subtracted at will) that will
implode catastrophically once the price and contract system collapses. Interestingly,
4eynes is prepared to aggregate the capitalist economy in monetary terms (income,
demand, output, employment, interest), yet he is unwilling to discuss the differential
impact of interest2rate and money2supply policy by sector ' whereas /aye# does the
exact opposite. Ironically, it is /aye#0s approach that suggests greater systemic stability
of the price mechanism than 4eynes0s aggregate approach which therefore ma#es
monetary policy far more effective than /aye#0s precisely because its transmission
mechanism feeds through directly uniformly to all sector mar#ets. 1ith /aye#, it is the
sector mar#ets that need to adust to any shoc#s from changed expectations and monetary
policy can only interfere with this process of adustment" with 4eynes instead monetary
policy and money supply have direct and immediate impact on mar#ets, helping to
stabili@e prices (avoiding deflation) and holding up demand unless the economy falls into
a li(uidity trap, at which stage only direct state intervention through fiscal policy can
restore full employment e(uilibrium.
These aspects of 4eynes0s wor# are drawn (uite adroitly by +ins#y (&an CIt0 /appen
3gain5). =espite the fact that 4eynes (and +ins#y) presents a much more accurate
institutional analysis of how capitalism wor#s, he still obfuscates the centrality of the
wage relation in capitalism and the antagonism on which it is founded and presents
instead an economy that is motivated along neoclassical lines but that has institutional
features (money and contracts ' li(uidity preference ' price rigidity 2 decentrali@ed
decision2ma#ing in an interdependent organic society prone to crises of confidence)
that may result in underemployment e(uilibrium with excess of savings over
investment and with debt2deflation and with stagnation due to the li(uidity trap. =ebt
deflation in particular may result in deep depressions.
*o steeped in the worldview of neoclassical theory was 4eynes that his entire economic
approach may be said to rest on two basic dysfunctions of the capitalist economy
(dysfunctions that 4eynesians of all stripes have sought to correct by suggesting
appropriate policies of demand management and monetary and fiscal fine2tuning that
leave intact the entire scientific rationale of neoclassical theory). The first dysfunction
is that capitalist crises are due to underinvestment and li(uidity preference resulting
from the declining marginal utility of capital over time. This decline, in turn, leads to
underinvestment and therefore to lower aggregate demand which then results in the debt2
deflation downward spiral to which lower wages and unemployment are no answer
because they serve only to suppress aggregate demand further and because money wages
are stic#y downwards. The second dysfunction is that money introduces an element of
uncertainty created by the discrepancy between the expected returns of debt2leveraged
investment with contractually2agreed interest rates and the actual income streams that
may lead to widespread li(uidation and implosion of the inverted financial pyramid and
of physical production and employment, with #noc#2on effects on aggregate demand.
.oth these dysfunctions hinge on li(uidity preference or the aversion to ris# of capitalists
more intent on rent2see#ing behaviour, which is why 4eynes came to share the
money2less economy ideas of *ilvio <esell. Two obvious obections can be raised. The
first is that, as we saw from our study of *chumpeter, 4eynes completely overloo#s the
ability of capitalism to renew and re2invent itself in response to the antagonism of the
wage relation. The second is that 4eynes never examines the theoretical relation between
money and real economy in terms of wage2relation antagonism and therefore of the
creation of value and the reali@ation of profit as determining investment and
consumption levels in the capitalist economy, save to rely on incantations such as animal
spirits, beauty contests, bootstraps (regarding the determinant of interest rates),
uncertainty, bridge between present and future and a myriad other expressions more
remar#able for their conceptual vagueness than for any analytical merit.
AThe $ew =ealB
Keynes and the 6ise of the Society of Capital
4eynes0s fundamental motive for underta#ing the entire theoretical proect of the General
Theory is made (uite explicit in chapter DE of the wor#. The immediate and pressing need
is to avoid the implosion and collapse of the liberal parliamentary democracies that seem
now on an unavoidable course of conflict against the totalitarian dictatorships that have
sprouted across %urope as a direct result of the human hecatomb, destruction and
economic upheaval during and in the aftermath of the <reat 1ar. 4eynes0s chief target is
to maintain as near full employment as is possible for a liberal democracy with a *tate
that safeguards the private property rights of its citi@ens, for he is convinced that it is the
hopelessness and fear inspired by mass unemployment that foments the racial hatred and
imperialist aggression that these regimes ' whether fascist or communist ' exploit to
secure their supremacy. The aim is noble and admirable. .ut we must point out its
fundamental flaws in the interpretation of the basic historical categories of the capitalist
economy and therefore also the analysis of its operation.
The <eneral Theory is remar#able at least in one respect as the first monumental attempt
to conceptualise the capitalist economy as a Monetary Economy in which the overall co2
ordination of the system of production based on the wage relation affects every aspect of
social life and indeed the very reproduction of society. In other words, 4eynes ta#es
conscience of the fact that we have passed from a capitalist stage in which industrial
capital is only a part of social reproduction to one in which capital has finally assumed
the role of social capital through the real subsumption of all or most relevant and vital
aspects of social reproduction. The passage from the competitive capitalism of the :irst
Industrial ,evolution from 6FEG to the early 67
th
century to the phase of what *chumpeter
calls trustified capitalism or social capital (prophesied by +arx, but note
*chumpeter0s gracious ac#nowledgement of his astounding foresight) with the *econd
Industrial ,evolution starting in the 6HIG0s after the <reat &risis ' this trans2formation
of capitalist industry and society as a direct conse(uence of a <reat &risis is what
inspired *chumpeter to write his own Theorie, and has been accepted almost universally
by historians as a clear periodisation of the development of global capitalism.
4eynes ta#es conscience of this trans2formation of capitalist society, but unli#e
*chumpeter (who called 4eynes the father of stagnation) he does not see the
innovative side of capitalism, its revolutionary and trans2formational meta2morphoses!
4eynes sees only this growing discrepancy or dislocation between the immediate
productive decisions and choices of free individuals, on the one hand, and the
growing and vital dependence of economic activity ' or output and employment, as he
calls them ' on the monetary considerations of a vast and fast2growing intense networ#
of financial intermediation between ban#ers and financiers and bro#ers and investors,
and then finally savers, whose vital functioning depends almost entirely not ust on the
expectations of future income streams or yields from present investments, but also on
the absolute need to ensure that these expectations do not turn negative and then,
given the financial pyramid of proections on expected yields or profits, do not
trigger a financial implosion, a panic that Irving :isher had already described (67JG) as
a debt2deflation to describe the <reat &rash of 67D7.
Thus, 4eynes notices a great dis2connection, a dis2location and dis2crepancy ' a
disintermediation ' possible between the present and the future caused by the imponent
overwhelming growth of finance capital (what *chumpeter called the control room of
capitalism, and a subect that had already attracted wor#s by /obson, /ilferding and
>enin on the theme of Imperialism). ?f course, money and finance themselves are a
bridge between the present and the future (ch.D6 of <T), but this does not prevent them
also from being the reason for their own existence! )ut differently, although money and
finance are instruments that allow the capitalist to see# to plan the future by
abstracting, by divorcing himself from the present act of physical production, at the
same time money and finance catastrophically separate the activity of human beings
from their investment decisions. *ocial capital, as it were, connects every aspect of
social life to the expanded reproduction of capital ' but at the same time it subects the
sociability of human existence to the terrific threat of possible collapse by ma#ing
social reproduction dependent on the antagonism of the wage relation, by substituting the
investment decision based on future profitability for the productive decision based
on the organic proection of democratically2agreed future needs of a non2antagonistic
society-
To sum up, what 4eynes is first to reali@e in the <eneral Theory is that the very survival
of capitalism depends on bridging the gap or chasm or hiatus introduced by money and
finance between present production and future profitability! This is the awesome tas# of
the <eneral Theory! 2 first, to show theoretically the need for the decisive sei@ure of the
future by the bourgeoisie through the *tate2)lan, and second to lay out a strategy of
political transformation of capitalist institutions that reflect the political transformation
occasioned by the transition from private or competitive or mercantile capitalism ' to
the much more imponent and ominous surge of social capital into finance capital and into
the society of capital. The role of the *tate2)lan will be decisive in all this. ?f course,
4eynes the Treasury official, .ursar of 4ing0s &ollege, &ambridge, cannot say this in so
plain a fashion. /e needs to disguise his language" camouflage his ideological tools" sell
his strategy. Thus, he casts his discourse, he mimetises his concepts with the old leopard2
s#in of $eoclassical Theory! nowhere more so than where the wage is concerned. $ext,
we will see how he does this.
Keynes and the Wage 6elation The Money Wage as the Fundamental
Unit of the Society of Capital
In the long run, we0re all dead mar#s an important turning point in the intellectual prise
de conscience of the bourgeoisie! capitalism is not the end of history" its economics
does not embody the truth ' it is not a revelation. &apitalism is a product of human
history and, li#e all historical artefacts, its time will come too. The only certainty is not
that of the mathematical e(uations of 1alrasian general e(uilibrium! the only certainty
this side of death is uncertainty. $othing is absolute, and nothing is infallible or
imperishable. If we wish to preserve this particular form of economic society, we '
we the bourgeoisie ' must ensure its survival! and survival means reproduction, and
reproduction means the co2ordination of economic activity in a manner that remains
fundamentally capitalist but that does not threaten the reproduction of the society of
capital, and that means reproduction of the wage relation. $ow, reproduction of the
wage relation means ensuring a level of employment that is as close to full employment
as can be consistent with the reproduction of the wage relation.
This implies at least two things! first, the wage must not be so high that wage labourers
refuse to alienate their living labour for capital to exploit on an expanded scale" and
secondly that the wage does not fall so low that the investment decisions of capitalists in
terms of the future stream of income ' in other words, the profitability of capital ' is
not eopardi@ed by ma#ing formerly less profitable investments become more
profitable. If the future of capitalism is to be secured, then the profitability of current
capitalist investment must also be secured. Differently put, the financial gearing of
investment must be geared in harmony or co!ordination with the antagonism of the
wage relation expressed financially, in monetary units, so that the expected future
yield from present investment is compatible with the expanded reproduction of living
labour and therefore with the wage relation!
The implications of this reali@ation are absolutely enormous and astounding. :irst among
all bourgeois economists, in a feat almost e(ualing the political analytical genius of a
4arl +arx, 4eynes perceives that the financial pyramid of finance capital must be
trans2formed from a casino capitalism into a co2ordinated and planned maintenance
of output and employment by using the money wage as the fundamental unit of
calculation of the total final demand (aggregate demand and, more specifically, effective
demand) of the capitalist system regardless of what individual capitalist might decide or
thin#- The very expectations of individual capitalists, the animal spirits of private
investors must be adusted socially, collectively through the monetary medium '
through the fundamental unit of the money wage ' so that a debt2deflation, a financial
panic is politically avoided-- 1e, the bourgeoisie must #now that, in the words of
)resident ,oosevelt in the Inauguration *peech of :ebruary 67JJ! 3>> 1% /3K% T?
:%3, I* :%3, IT*%>:-
=eath is the only certainty. This side of death there is only uncertainty! from
/eisenberg to %instein to /eidegger, 4eynes0s language and thought closely parallels the
existential crisis not ust of the bourgeois "ndividualitat that even *chumpeter has
abandoned with his obsolescence of the entrepreneurial function, that 1eber had
abandoned with his iron cage, that $iet@sche had prophesised with his 1ill to )ower! if
the only certainty is death and this side of the long run is uncertainty, then we need a
point of reference ' the e(uivalent of a /eideggerian =a2sein, a #ichtung, a beam of
light, to show us the way in the world of being that has been obscured by the 1ar
and the =epression. 3nd that point of reference can be only the actual employment
of social resources, the annexation of the future, the control of the monetary bridge to
the future, 2 and that must pass through the control of the wage relation whose
fundamental social institutional expression is the money wage-
The <reat 1ar was the last %uropean civil war. Lust as in the 6FEGs when Thomas
/obbes was confronted with the %nglish &ivil 1ar at the very dawn of bourgeois
capitalist society, the only answer to civil war is the abandonment of individual choice
in the face of death $!% in favour of the establishment of a *tate2+achine, of a >eviathan,
that can stop us from fearing fear itself-
>et us leap without further ado to )art Two of the <eneral Theory, the part on
=efinitions and Ideas. There it is- &hapter E on The +oney 1age, section II!
That the units, in terms of which economists commonly wor#, are unsatisfactory can be
illustrated by the concepts of the $ational =ividend, the stoc# of real capital and the
general price2level! 22
(i! ;he %ational *ividend# as defined by @arshall $p#%&' and =rofessor =igou# $(' measures the
volume of current output or real income and not the value of output or money$income. $)'
+urthermore# it depends# in some sense# on net outputABon the net addition# that is to say# to the
resources of the community available for consumption or for retention as capital stock# due to the
economic activities and sacrifices of the current period# after allowing for the wastage of the stock
of real capital e<isting at the commencement of the period. )n this basis an attempt is made to
erect a 'uantitative science. "ut it is a grave ob'ection to this definition for such a purpose that
the community5s output of goods and services is a non&homogeneous comple which cannot be
measured# strictly speaking# e<cept in certain special cases# as for e<ample when all the items of
one output are included in the same proportions in another output.
3 measure- 3 measure- +y #ingdom for a measure- Lust as %instein found the speed of
light as the fundamental constant of the universe, ust as /eidegger finds in death the
lighting of =a2sein (being there), so now does 4eynes need a measure, a unit, an
indication of the level of antagonism of living labour against the wage relation in a
capitalist society that needs to trans!form itself into a society of capital in which the
control of growth becomes the growth of control- .ut this must be a measure that is
not indicated in real terms because it will be (uite impossible then to relate this
measure to the specifically capitalist condensation of command over living labour in
terms of value, of exchange value, and then utterly impossible to co2ordinate this real
measure with the financial pyramid of future income streams from present investments.
,eal wages will never be able to tell us what the future relations of political power
between wor#ers and capital will be! only the money wage can allow the *tate to act
collectively and in aggregate to mediate and negotiate and buffer and co2ordinate the
political social antagonism that the wage relation generates.
Lust listen to 4eynes- ,ead carefully please-- .ecause the problem of measurement
becomes especially dire and diabolical where the command of capital over living
labour through the wage is concerned with the future- 3t that level, the real wage
cannot even remotely be used to homologate and homogeni@e the levels of industrial
antagonism across different branches of capitalist production and across periods of
investment- This can be done only (-) in terms of a measure that expresses value '
that is, the homogeni@ed expression of antagonism across the aggregate monetary
expression of social capital!
(ii! ;he difficulty is even greater when# in order to calculate net output# we try to measure the net
addition to capital e'uipmentA for we have to find some basis for a 'uantitative comparison
between the new items of e'uipment produced during the period and the old items which have
perished by wastage. In order to arrive at the net %ational *ividend# =rofessor =igou $%' deducts
such obsolescence# etc.# /as may fairly be called 'normal'A and the practical test of normality is
that the depletion is sufficiently regular to be foreseen# if not in detail# at least in the large/. 7ut#
since this deduction is not a deduction in terms of money# he is involved in assuming that there
can be a change in physical 'uantity# although there has been no physical $p#%,' changeA i.e. he
is covertly introducing changes in value. @oreover# he is unable to devise any satisfactory
formula $(' to evaluate new e'uipment against old when# owing to changes in techni'ue# the two
are not identical. I believe that the concept at which =rofessor =igou is aiming is the right and
appropriate concept for economic analysis. "ut, until a satisfactory system of units has been
adopted, its precise definition is an impossible tas$. The problem of comparing one real output
with another and of then calculating net output by setting off new items of equipment against the
wastage of old items presents conundrums which permit, one can confidently say, of no solution.
$ot only is there the problem of comparing one real output with another" but, more
important, there is the far greater problem of then calculating net output by setting off
new items of e(uipment against the wastage of old items- The problem is to bridge
and homogeni@e the political command of capital over living labour not ust across
sectors of capitalist industry, but also across periods of investment, between the
present and the future- 3nd, as 4eynes says, only money can do that, and only the
money wage can ground institutionally the political command of capital. /ere is
4eynes again!
In dealing with the theory of employment I propose, therefore, to make use of only two
fundamental units of quantity, namely, quantities of moneyvalue and quantities of
employment. !he first of these is strictly homogeneous, and the second can "e made so.
+or# in so far as different grades and kinds of labour and salaried assistance enjoy a more or less
fi<ed relative remuneration# the 'uantity of employment can be sufficiently defined for our
purpose by taking an hour's employment of ordinary labour as our unit and weighting an hour's
employment of special labour in proportion to its remunerationA i.e. an hour of special labour
remunerated at double ordinary rates will count as two units. Ce shall call the unit in which the
'uantity of employment is measured the labour$unitA and the money$wage of a labour$unit we
shall call the wage$unit.$('
1e will loo# at 4eynes0s underlying assumptions on real wages next.
In the chapter on The )ostulates of &lassical %conomics, 4eynes sets out (uite
successfully to demonstrate the flaw in *ay0s >aw ' that supply creates its own demand
and that therefore there cannot be any involuntary unemployment ' on the ground of the
discrepancy that exists between the postulate that aggregate supply e(uals aggregate
demand in terms of money prices, whereas the employment of labour is expressed in real
terms! the utility of the real wage at e(uilibrium e(uals the marginal disutility of labour.
1e noted above how 4eynes simply fails to tac#le the problem of how real (uantities
can be aggregated or homologated in terms of marginal units constituting the
marginal product of labour and how indeed this marginal product can then be
homologated or e(uiparated with the notion of marginal disutility of labour.
Try as one may, it will never be possible to achieve such a monstrous feat except by
means of the most fantastic leap of the imagination closer to certain forms of insanity
than to any process of ratiocination. 4eynes never (uestions for a single instant what is
the most basic tenet or postulate of marginalism and neoclassical theory.
To ma#e matters worse, 4eynes never does even so much as (uestion the neoclassical
postulate of labour as a homogeneous substance that can be (uantified at least in
terms of its marginal product and then of its marginal disutility. :or if by labour
we intend the living activity of human beings, it is evident that no amount of
measuring will ever turn such living labour into a substance that can be measured in
terms of its potential marginal product- >iving activity is a pure human reality that
cannot be e(uiparated with its product except through the most absurd reduction (or
transmutation)- Indeed, the very fact that such a reduction is politically possible is
indicative not of the measurability of living labour but of its repressive abuse and
alienation by the powers interested in enforcing ' more or less violently ' such perverse
reduction. The measurement of human living activity can occur only by abstracting
fictitiously, and that means violently, through the coercion of human activity, from its
subective form of expression and also from its mode of obectification, that is to say,
through the alienation or separation of living labour from the obect of its exertion
without which it is a pure and sterile concept, a mere figment of the imagination, a pure
fantasy.
3nd this obect0 from which living labour is separated forcibly by capital is not solely
the individual tools and raw materials to be used in production, in the obectification of
living labour. :irst and foremost is the separation of living labour from its being
intrinsic part of social labour, that is, of being absolutely inseparable from the process
of social labour without which it would be utterly meaningless. That is what the
wage achieves" that is its real purpose! to slice and divide the living labour of wor#ers
into separate individual labours ' separate from both the means of its obectification
and from their sociality so as to be absurdly measured and compensated as
individual separate labours-
4eynes abectly ac(uiesces in this absurd exercise, culpably lending credence to what
must surely be the most repugnant theoretical myth in the horrific history of bourgeois
supremacy. .ut this is not the end of the unseemly mystification in which 4eynes
engages with arguable degrees of complicity with the marginalist counter2revolution of
the neoclassical school. 4eynes also fails to (uestion the very notion that the utility of
the real wage can be commensurate with the marginal disutility of labour. <iven that
there is no such entity as abstract (uantifiable labour except as a criminally violent
imposition of the bourgeoisie of its command over living labour, it follows that living
labour as the living activity of human beings simply cannot have a disutility. /uman
living activity can be either free in the sense that it constitutes the obectification of
autonomously determined human abilities or else it can be the obect of more or less
violent imposition. It is totally insensate to spea# of the disutility of labour ' because
once we define labour properly for the only manifestation it can assume ' that of living
activity ' then it becomes apparent how disutility, whatever that expression may mean,
cannot even remotely be applied to such living activity-
To compound 4eynes0s absurd ignorance of even the most basic theoretical appreciation
of human reality and social meaning, 4eynes thoughtlessly accepts the e(uation of
living labour (and its absurdly attributed disutility) with the utility of a real wage
made up obviously of the products of human living labour. 3gain, it is impossible to
attribute to the pro2ducts of living labour ' the obectification of living labour, what we
call dead labour ' any utility however marginally measured. The very act of
e(uating dead labour with living labour is an act of violence so vile and violent that any
and every decent human being ought to detect it the instant that this gross
misapprehension is exposed-
It is absolutely obvious from the foregoing analysis that no conclusions of any sort can be
drawn form 4eynes0s analysis and internal criti(ue of the postulates of classical
economics. 3s we have argued, 4eynes evades the insuperable scientific and analytical
difficulties posed by this phantasmagoric neoclassical theoretical framewor# by
concentrating his analysis on monetary aggregates of supply and demand that transpose
his entire analysis to the level of overall political command through the monetary
medium. >et us see how. A+oney wageB
!he #insky #oment$ %ow &aul 'rugman (ell Into %is )wn
*iquidity !rap
This paper by 9rugman and 2ggertsson .both of ,rinceton 1niversity & though the latter currently
at the 3H 0ed/ offers a clear illustration of what we have been arguing here is the utter and
complete stupidity of even the most enlightened bourgeois economists. 8e have already
eamined 2ggertsson5s +,arado of Toil+ .search this site/, so we will not trouble with that
particular specimen of eemplary idiocy.
4ust ta$e a loo$ at this, friends, and tell us if ,aul 9rugman is not the greatest imbecile south of
the ?udson ;iver)
?ere is the paper6 http6KKwww.scribd.comKdocKD>GDDE=LKAebt&Aeleveraging&and&the&Liquidity&
Trap&%&0isher&#ins$y&9oo&approach
%nd here is the incriminating evidence.
9rugman .and 2ggertsson, who is the 'unior clown in this comedy s$etch/ starts with a +general
equilibrium model+ .which we will call +the #uddle+/ in which in an economy at equilibrium there
are two $inds of producers, +the impatient+ and +the patient+ producers. 3ow, anyone will tell you
that what 9rugman means is that +the impatient producer+ is really +the greedier+ capitalist who
wants to ma$e more +profits+ by +borrowing+ social resources .it should be +money+, but 9rugman
is still fumbling with +natural interest rates+)) 7o this is a barter economy after all)/ from the
+patient+ capitalist, who is either less greedy or less a speculator than the +impatient+ one. ?ere is
9rugman6
,.*ebt and interest in an endowment economy
*magine a pure endowment economy in which no aggregate saving or investment is possible, but
in which individuals can lend to or borrow from each other. 7uppose, also, that while individuals
all receive the same endowments, they differ in their rates of time preference. *n that case,
+impatient+ individuals will borrow from +patient+ individuals. 8e will assume, however, that there
is a limit on the amount of debt any individual can run up. *mplicitly, we thin$ of this limit as being
the result of some $ind of incentive constraint: however, for the purposes of this paper we ta$e
the debt limit as eogenous.
3ote how 9rugman substitutes +individual+ for +capitalist+ & this tendency is precisely what we
have been eposing in our series on +@rigins of "ourgeois *ndividualism+. 7o in other words for
9rugman the +motive+ for capitalist investment is not the political need of capitalists to retain and
epand command over the living labour of wor$ers & that is, to accumulate capital & but rather a
simple matter of +difference in patience+) 8ell done, ,aul) * always thought you were a great
friend of wor$ers)
The second thing to notice .most important/ is that 9rugman ta$es +the debt limit+ for the
+impatient capitalist+ as +eogenous+. *n other words, 9rugman cannot see a +limit+ to the amount
of debt that +impatient+ capitalists can +borrow+ from the +patient+ ones & for the simple reason that
his +economy+ is an unreal one in which +debt+ is quite simply a +quantity+ that can epand
indefinitely and infinitely on a nominal basis depending on the +patience+ of individual capitalists)
*f indeed +debt+ is only a matter of more or less +patience+, then .'ust as with 9eynes5s +animal
spirits+/ there is indeed no +limit+ .political or material/ to the amount of +debt+ that capitalists can
+lend + or +borrow+ to one another))
%nd that is why 9rugman simply +must+ ma$e +the debt limit...eogenous+ because his general
equilibrium economy is one that is built on psychology and not on the real needs of real wor$ers
and capitalists confronting one another over the use of social resources)
3ow, because the debt limit is +eogenous+ & because +debt+ for 9rugman is merely a
psychological matter as vapid and imaginary as 9eynes5s +animal spirits+ & it follows that this
+debt leveraging+ could proceed forever ad infinitum were it not for.....you guessed it)/ an equally
eogenous +deleveraging shoc$+))) % +#ins$y #oment+ in which both the lender .+patient
capitalist+/ and the borrower .+impatient capitalist+/ finally realise that theirs is sheer +speculation+
and that the +profits+ they anticipated from production are not going to materialise because there
is only so much that you can squee!e out of living labour and then turn into more political
command .what we call +value+/)) ?ere is 9rugman again)
G. ;he effects of a deleveraging shock
8e have not tried to model the sources of the debt limit, nor will we try to in this paper. -learly,
however, we should thin$ of this limit as a proy for general views about what level of leverage on
the part of borrowers is +safe+, posing an acceptable ris$ either of unintentional default or of
creating some $ind of moral ha!ard.
The central idea of debt&centered accounts of economic instability, however, is that views about
safe levels of leverage are sub'ect to change over time. %n etended period of steady economic
growth andKor rising asset prices will encourage relaed attitudes toward leverage. "ut at some
point this attitude is li$ely to change, perhaps abruptly an event $nown variously as the 8ile 2.
-oyote moment or the #in$sy moment.
G
*n our model, we can represent a #ins$y moment as a fall in the debt limit from A
high to some lower level Alow, which we can thin$ of as corresponding to a sudden reali!ation
that assets were overvalued and that peoples( collateral constraints were too la. *n our fleible&
price economy, this downward revision of the debt limit will lead to a temporary fall in the real
interest rate, which corresponds to the natural rate of interest in the more general economy we(ll
consider shortly.
"ut rather than a +#ins$y #oment+, 9rugman is having a +dumb episode+ because nowhere does
he eplain why our dear capitalists should have....+a sudden realisation that assets were
overvalued+)))))
% sudden realisation))) ???eeellloooo ,aul) Hou are a patented #@;@3) 3o) H@1 are the +8ile
2. -oyote+ in this caricature of intellectual rigor that you have engaged in here)) @f course,
9rugman, li$e the perfect bourgeois economist he is, has not even realised that he has fallen into
the most abysmal trap or bottomless canyon .li$e 8ile 2. -oyote/ simply by admitting that the
mysterious +sudden realisation+ is based on the +fact+ that +assets were @V2;&V%L12A+))
"ut ,aul, 8?%T A@27 +@V2;&V%L12A+ #2%3MM *t means that the whole business of
+borrowing+ and +lending+ has 3@T?*3B to do with +patience and impatience+ and 2V2;HT?*3B
to do with V%L12, with ,;@0*T)) "ur value and profit represent precisely the +command+ of
capital over living labour & which is what you wish to avoid tal$ing about))
+ddendum to 'rugman on #insky #oment
$ow that our review of 4rugmanMs treatment of Nthe +ins#y +omentN has umped to the
top of the N<oogle *earchN list, let us reflect a moment on the significance of 4rugmanMs
monumental lapse of reasoning s#ills. Oou will recall that 4rugman begins his article
with an Nendowment economyN. 3n Nendowment economyN is the basis and foundation 2
the very raison dMetre 2 of all bourgeois economics because it NassumesN that NindividualsN
in a society NstartN operating in that economy with a NgivenN set of NendowmentsN. This
means that bourgeois economics takes for granted what any Neconomic scienceN even
remotely worthy of the name should e<plain-- 3nd that is how and why the NeconomyN that it
analyses reaches the stage where individuals have NendowmentsN and how and why these
NendowmentsN are measured. If one begins with the assumption that *teve Lobs was
endowed with NgeniusN, it follows that everything he did in his rotten life was...NgenialN-
.ourgeois economics assumes what it needs to e<plain! and that is 2 how and why certain
/individuals/ in the economy it analyses have ac(uired their endowments
In this regard, one must immediately ac#nowledge the heuristic superiority of the $ew
Institutional %conomics (from &oase to 1illiamson through =ouglass $orth and =emset@
2 also reviewed on this site 2 ust search using NsearchN facility) because at least it
acknowledges that capitalist NendowmentsN have a lot to do with Nthe institutions of private
property of capitalismN, which allows to in(uire about how, when and why NindividualsN
came to be either NcapitalistsN or Nwor#ersN and not ust NindividualsN-
.ut 4rugman has not even reached this NcriticalN point. /is Ngoody2goodyN, Nconscience2
of2a2liberalN type of NhumanismN has not reached that far. Instead, he starts with
NindividualsN who are either NpatientN (lenders) or NimpatientN (borrowers). .ut the
(uestion we must as# is! 2 /patient/ or /impatient/ for what55-- 1/3T I* IT that these
NindividualsN are striving for5 1/O do they Nlend and borrowN5 1/3T do they Nlend
and borrowN5 3nd then it turns out that they are Npatient or impatientN....T? +34%
),?:IT*--
*o. 1/3T these NindividualsN lend and borrow is....&3)IT3>- &apital that is NinvestedN
in the hope that it will realise NprofitsN out of which both the patient lender and the
impatient borrower will be able to accumulate more value or capital 2 which is the entire aim
of the game-- 3nd more Nvalue or capitalN means more political control and command
over living labour and over social resources---
This is the bit that )aul 4rugman does not wish to admit or ac#nowledge 2 unless we
NextractN it from his mouth ust li#e a dentist would extract one of his teeth- (Oou see, all
these )rinceton professors li#e to sound NenlightenedN, and so they throw us NrabbleN
some crumbs of wisdom while they indulge in their Nenlightened divine serenityN- 2 1ell,
we say N)i#es to that-N) .ut 4rugman simply NhasN to confront this problem 2 and he
does, as we saw, when he ac#nowledges that Ndebt2deleveragingN (or :isherian debt2
deflationary! Nshoc#sN occur when our dear Npatient and impatientN capitalists Nsuddenly
realiseN (shoc# and awe--) that the assets they have been investing in 2 and therefore the
capital they have lent and borrowed, respectively 2 are....(wait for it-)....?K%,2
K3>P%=-- ?K%,2K3>P%=-- (This is the so2called N+ins#y +omentN or N1ile %.
&oyote +omentN. :or the incorrectness and self2contradictory nature of +ins#yMs
underconsumptionist approach, search our site for N+ins#yN.)
.ut hang on a minute, )aul-- )rofessor-- $obel )ri@e NgeniusN-- 1hat is this new NthingN
you mention! K3>P%55-- ?ur answer is what 4rugman will never admit or allow! Kalue
is political command and control (historically and institutionally ac(uired 2 not
NendowedN--) on the part of capitalists over social resources that allow them to reproduce
and expand their political command over the living labour of yours truly, P*
1?,4%,*--
In our next intervention we will loo# at how this Nendowment economicsN is presented to
us as a Nscience of choiceN in the Nsociety of capitalN.
,apital +nd !echnology !oward an +lternative Individuality
As we just saw in our ferce but devastating short critique of Krugman and Eggertsson below,
bourgeois economics simply does not allow us even to mention the notion of "proft" or
(worse still) "value". Because in bourgeois economic "science" there is no concept, let alone
explanation, of "value and proft", even "progressive economists" such as Paul Krugman have
to present capitalist crises as the result of "exogenous shocks". In other words, the present
crisis of the capitalist "system" is not and cannot be due to the social antagonism intrinsic to
the wage relation and therefore "endogenous" (indeed at the very "core and centre") of
capitalism. Instead, any "crises" must be the result of "disturbances" that are external to the
"market mechanism" because this mechanism is seen as a simple "distributive device" for the
pure exchange of "endowments" that "individuals" possess at the start of the "exchange".
Note here how bourgeois economics pre-supposes the existence of "endowments" prior (!) to
the beginning of the market exchange that will determine and fx the relative "prices" of the
goods to be exchanged on the market in accordance with the "free choice" of the "individual
consumers".
The most fundamental and imprescindible condition for the existence of capitalist social
relations of production, of the capitalist "system", is that there be workers that provide the
living labour for the capitalist to exploit and that these workers be absolutely "free from" (!)
any social or other "bond or link" from either the means of production or the pro-duct of
living labour itself. Note how this "freedom" is defned in purely "negative" terms: the
workers are "free from" all links and bonds and "rights" that may interfere with their
"alienating" or "selling" their living labour - their "positively free living activity", which is the
birthright of every human being - to the capitalist "individually" (not as a "class" or in union
with other workers through "social labour"). That is why capital understands "freedom" in
this purely "negative" sense - as utter destitution, as absolute poverty -, and also
"individualism" in this purely formal sense, of the human being totally separated and
alienated both from the means of production ("endowments" he does not possess) and from
the pro-ducts of his living labour - which he can only purchase as a "free consumer" on the
"free market".
But how "free" is the worker as a "consumer" in choosing to re-purchase from the capitalist
the pro-duct of his own living labour which now, in the form of a "money wage" paid to him,
stand in opposition to him as an alien power that is "dead, objectifed labour"? Let us recall
that the worker is not "free" to decide what he produces in the labour process or when or
how. This is because "before" the worker gets to re-purchase the pro-ducts of his living
labour it is the capitalist (!) who decides what the worker can "consume" (the product) and
how he produces it (what means of production in the shape of machinery and technology
are utilised in the production process) and how the worker "consumes" the product of the
worker's living labour. (That utter beast that went by the name of Steve Jobs is perhaps the
most illustrious and horrid recent example of how the capitalist completely arrogates to
himself the right to make all these decisions - all the while exploiting millions of workers in
China and winning accolades for being such a "genius" in the process!)
So, not only is the not worker "free" to decide "what" he produces; he is not therefore "free" to
decide "how" he produces! And that is because (remember) the means of production - the
machinery and technologies and materials used in production - are all "owned and
designed" by the capitalist!! This is a point of paramount importance! The whole notion of
"the captain of industry", of the "entrepreneurial spirit", of "capitalist innovation" from
Schumpeter onwards depends on this! The reason why the capitalist - the entrepreneur -
must retain control over the process of production is that the ability of capital to retain its
violent command and usurpation over living labour depends on what is produced and how and where
and when it is produced!!!
Put diferently, the process of production, which includes both the "technologies" and the
"products" that are ultimately produced for the "free choice of consumption" of the worker,
must be controlled by the capitalist because they are of fundamental importance in
determining the degree of control and command that the capitalist has and retains over the living
labour of the worker!! Clearly, therefore, the entire concept of "innovation", of "creative
destruction" developed by Joseph Schumpeter occupies a central role in the delineation and
specifcation of a "Will to Power" on the part of capitalists against workers and - more
precisely - in the "isolation" of living labour as the aggregate of "individual labours". It
stands to reason that technologies and products that tend to emancipate living labour
(workers) from the command and control of the capitalist - through the labour process and
the "mode of consumption" - will be utterly deleterious to the reproduction of the capitalist's
command over workers, in the workplace and in society at large!!
This thoroughly political and antagonistic aspect of capitalist industry is something that
bourgeois economists wish to hide and to mystify with their dual trickstery in terms of, frst,
presenting the capitalist production as a "system" that equates mathematically or homogenises
"quantities" or "existing realities" with one another; and, second, presenting the decision-
making process of production as a function of subjective, individualistic "consumer choice"
freely expressed in the marketplace, as if these decisions and choices that are ineluctably
incommensurable could ever allow us to quantify (through market pricing) those existing
realities that are in fact heterogeneous and incommensurable! What is in-com-mensurable
(subjective choices) can never be used as a measure of anything else! The quantities of
economic science are never physical quantities: they are prices! But prices apply
only to subjective choices (the market mechanism) and can never measure the use or
distribution of physical quantities!
One of the salient points we must make in this presentation is that the capitalist must always
present the decision-making unit of the wage relation not as a "group of capitalists" utilising
the full power and violence of State machinery against "individual workers", but rather -
because of the essential need of capital "to isolate" workers individually - as decisions made
also by "individual capitalists". The obsession of capitalist society, of the bourgeoisie, with
the deifcation of "the free individual", of "the personality" - from Steve Jobs to Lady Gaga -
lies entirely in this essential need. Were the bourgeoisie to encourage any form of social
solidarity, any form of alternative "individuality", it would be digging its own grave because
it would undermine the ground on which the wage relation stands!
In an imminent intervention we will seek to inquire into the possible "alternative
individualities" that we can develop to oppose the rule of capital and to dissolve the wage
relation.