The Limits of the Mixed Economy. Paul Mattick 1969



Despite its highly abstract character, Marx’s capital analysis has proved to have great predictive power. The actual course of capital accumulation followed its general outline of development. Indeed, the course of capital development as predicted by Marx has never been denied; other explanations merely state the reason for this trend differently. Keynes offers one of these explanations. He explains the “long-run” trend of capital production differently, but his description of the trend itself and of observable crisis conditions differs from Marx’s only in the terminology employed. It boils down to the simple statement that investments depend on profitability, current and expected, and that investment tend to decline with a declining profitability.

In contradistinction to latter-day Keynesians, Keynes himself discerned a direction and a goal for capitalism. He described the “end” towards which capital formation was tending as the loss of its “scarcity-value,” and he thought this goal attainable within one or two generations. “I feel sure,” he wrote, “that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment, in short, as in the case of short-lived goods, just cover their labor costs of production plus an allowance for risk and the costs of skill and supervision.”[1]

Keynes did not like to think of capital as being “productive.” He held that the “only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without it, having become less productive – at least in the physical sense.”[2] Keynes’ reluctance to speak of capital as “productive” and his expectation and acceptance of a declining profitability in the course of the diminishing scarcity of capital could hardly please unsophisticated capitalists; it has even disturbed some of his disciples.[3] The notion of profit as a yield from scarcity is, however, only another form of the doctrine of the “productivity” of capital: neither concept provides an explanation of the origin of profit, nor both serve as apologies for the fact of exploitation.

According to Marx, the “demand for capital” is a demand for profits. And this demand for the exploitation of labor increases constantly, increasing the faster the more rapidly capital accumulates. From this point of view, Keynes’ statement that “the demand for capital reaches its limits with the increase of the stock of capital to a point where its marginal efficiency has fallen to a very low figure,” makes no sense. For the increasing supply of capital is not identical with a falling demand for capital, i.e., for profits. To assume that the demand for capital is limited by the increasing stock of capital is to assume that capitalism is not capitalism but a system of production employing the profit-motive solely for the purpose of increasing the means of production so as to bring profit-production to an end. In reality, of course, the means of production are increased in order to raise or maintain a given profitability.

Assuming with Keynes that capital abundance abolishes “excess yields” such as interest, it follows that this abundance also reduces investments. What at first was the capitalist dilemma – the lack of investments – becomes the great blessing of capital abundance. In Keynes’ view, this merely means that “the demand for capital has reached its limits.” A period of mere reproduction replaces one of accumulation; in short, that system of production with which economic theory concerned itself from Marx to Keynes has ended.

In order, then, to lead his theory to its “logical conclusions,” Keynes boldly accepts the implications of the marginal theory for the “long-run” trend of capital production, and forces his theory beyond the boundaries of capitalism. That this vision of a productive apparatus large enough to satisfy social needs to the extent that no further significant capital expansion seems desirable lies beyond the horizon of capitalism is borne out by Keynes’ own statement that “if capital becomes less scarce, the excess yields will diminish without it having become less productive – at least in the physical sense.” The physical side of capitalism, however, is just that aspect of this mode of production which contradicts its motivation, the drive for exchange-value, profit, and accumulation.

Whether capital is scarce or abundant, in Marx’s view, capital production must be profitable in order to be carried on. A persistent decline of profitability implies a slowing rate of accumulation, a crisis condition which can be overcome only through the resumption of an accelerated rate of capital expansion. The disappearance of “excess-yields” – whatever that may mean – spells not the end of capital scarcity but the end of capitalism. The relatively stationary state of capital abundance projected by Keynes, where the “demand” for capital does not exceed the production requirements of waste and obsolescence and where the profits square with the consumption needs of entrepreneurial skill and supervision, cannot be reached within the frame of private capital formation. The capitalist reproduction process is always an accumulation process. This does not exclude periods of “simple reproduction,” or even of temporary decline; but a stationary and simultaneously prospering capitalism did not enter Marx’s vision.

Although Keynes considered it his “practical judgment and not a theoretical imperative” that even in “mature” capitalism the emphasis should be on capital formation instead of on consumption, he saw the reversed emphasis as a possibility for the not too distant future. And because of this possibility, he thought it a “sheer lack of intelligence” to presume that it required radical solutions to end the disparity between the actual and the potential performance of the economy. Socialism, which in his definition, meant state-ownership of the means of production, he thought quite superfluous; for ownership itself is of no importance once it is possible to control the rate of investment. He was convinced that “a somewhat comprehensive socialization of investments will prove the only means of securing an approximation of full employment,” but “this need not exclude all manners of compromise and of devices by which public authority will co-operate with private initiative.”[4] Only experience would show, he thought, “how far the common will, embodied in the state, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume.”[5]

Dogmatic proponents of the private enterprise system not only view Keynesianism as the theory of the transformation of a “free” into a partly controlled capitalism, but look upon this transformation as the beginning of the end of capitalism itself. They see a radical return to a marker-determined economy, at whatever social cost, as the only way of escaping the emerging “new serfdom” of the totalitarian society. They may be right, but totalitarianism was the last thing that Keynes was willing to support. Though he admired the Nazi State for having devised a means of producing and maintaining full employment, he thought that the same thing could be achieved under existing British institutions, since he saw no necessary connection between a society’s economic policy and its political structure. As regards the Russian system, he “did not think that it contains, or is likely to contain, any piece of useful economic technique which we could not apply, if we chose, with equal or greater success in a society which retained all the marks ... of British bourgeois ideals.”[6] All that Russia contributed to economics is a demonstration that centralistic control can bring about a balanced growth of the economy. This did not depend on bolshevism, but on centralistic controls, which could be made even more effective under the auspices of the more advanced economic techniques of the Western world.

Keynesianism, in its liberalistic interpretation, reflects the degree of laissez-faire still possible in “mature” capitalism. It represents a “type of hybrid system,” in which “the essentials of capitalism – consumers’ sovereignty, freedom to invest, and liberty to choose occupations – can be preserved.”[7] For Keynes the choice between a controlled and a “free” economy no longer existed; there was only the choice between different sets of controllers. As one of Keynes’ disciples expressed this, “fascism is the form that our capitalist society will acquire, unless we are successful in bringing about Keynesian reforms or a socialist economy.”[8] Keynes realized, of course, that an appeal to reason was not enough to make all capitalists fit themselves cheerfully into the new situation and he considered it the duty of government to save the reluctant ones from their own folly. He thought that the government’s usurpation of the regulatory function would not affect the entrepreneurial role. In his view there was nothing wrong in the sphere of production; but communal savings were better collected and invested by the government than by private capital. Centralizing control of the amount of economic activity in the hands of the government was the only way to overcome capitalist inertia.

Bourgeois economic theory saw in the economy’s lack of conscious organization a specific form of “order” – the automatic by-product of market exchange, a “law of value” which regulated the economic aspects of life. And, indeed, for periods of time, relatively stable market situations induced economic behavior to follow conventional patterns and the law of the market seemed to produce a definite kind of order. During periods of steadily-advancing capital formation the market mechanism functioned without serious difficulties. Periods of crisis were overcome with relative ease, and as the profits of the capitalists were largely re-invested, their number small compared to the laboring population – turned their possibly luxurious life into an economically uninteresting fact. From a capitalist point of view, the situation could well appear to be directed by an ordering, though invisible, hand.

War and long-term depression ended this idyllic belief and led to increased government control of the economy. And what at first appeared to be a special situation, an emergency, became the general situation, so that the partial subordination of private to national and governmental interests took on a rather permanent character. With this the economists’ functions began to change. They could now suggest practical policies and speculate about the effects of various government interventions upon one or another or all of the aspects of the economy. However, “social experiments” are rather hasty answers to the pressing political problems which themselves determine the kind of actions taken. The form of their execution may vary in the test of experience, but the problems that arise in capitalism and the “solutions” for these problems are generally clear and obvious. This is why no economic policy has thus far been suggested which did not make its debut before the “theory behind it” was formulated. All the monetary and fiscal policies suggested by Keynes had already been employed at different times by various governments to safeguard themselves and the society over which they presided. By bringing the changed capitalist practice of his day into the frame of economic theory, Keynes supported the expanding governmental control both practically and ideologically.

Under laissez-faire conditions, capitalists feel no need to accept responsibility for the social consequences of their activities, and they have no way of discerning whether they affect the whole of society negatively or positively. To them “applied economics” signifies no more than the desire to buy cheap and sell dear. The actions of workers, too, are conditioned by their desire to sell their labor-power at the highest possible price. For them “applied economics” exhausts itself in the wage-struggle. Nevertheless, the struggle between capital and labor performs “regulatory” functions by determining the degree of exploitation and thus affecting the rate of capital expansion. The fetishistic “self-adjustability” of the economy is here partly lost to the simple, open struggle between men and men. With the extension and intensification of this struggle, the economically-manipulated part of the economy grows. But as the “manipulation” serves particular interests, the increasing organization implied therein only enlarges social disorganization. And this growing disorganization can be immunized only by a still faster rate of accumulation, so that a weakening of the market-fetishism on the one hand strengthens the fetishistic attitudes with regard to accumulation on the other.

From the point of view of capitalist society as a whole, market distribution is always a class-distribution of commodities. Labor and surplus-labor, whatever its productivity, are finally reducible to lengths of time. So much time in terms of products, or products in terms of time, falls to the individual worker or to the individual capitalist; so much to social capital or to the working class as a whole. What falls to the individual worker need not be enough to reproduce his labor power; what falls to the individual capitalist need not be enough to sustain him in his social position. What falls to the working population, however, must be enough to reproduce it, and what falls to the capitalist class must be enough to reproduce the social structure. As regards the social reproduction process, a certain quantity of social labor that enters the market in commodity-form enters it, so to speak, “unnecessarily,” since the market can only complicate the inescapable and proportionally definite requirements of the reproduction process. Because the reproduction process controls the production process, it is only surplus-labor time – incorporated in commodities beyond the need of simple reproduction – which is not “predetermined” by the material requirements of a social production that secures the maintenance of a once-established level of production under given, definite social relationships.

In the course of capital concentration, more surplus-value comes to be divided among relatively fewer enterprises, a process by which the market loses some of its functions. When the market mechanism ceases to “square” supply and demand by way of capital expansion, it complicates the formation of an average rate of profit, which is needed to secure the simultaneous existence of all necessary industries regardless of their individual profit rates. The average rate of profit, as will be recalled, implies the “pooling” of surplus-value so as to satisfy the physical needs of social production which assert themselves by way of social demand. Capital stagnation, expressed as it is in a defective demand, hinders an increasing number of capital entities from partaking of the social “pool” of surplus-value in sufficient measure. If their continued existence is a social necessity, they must be maintained by government subsidies. And if the number of unemployed constitutes a danger to social stability, they, too, must be fed out of the declining “pool” of surplus-value. Control of surplus-value becomes essential for the security of capitalism, and the distribution of profits becomes a governmental concern.

From a theoretical point of view it is a matter of indifference whether the necessary division of value and surplus-value and the necessary distribution of the latter occur on a “free” market or on a market manipulated by government authority. In practice, of course, it makes all the difference to those capitalists who stand to lose by the “proper” functioning of the “system as a whole.” For government concern with profit distribution interferes with the profitability of specific enterprises, extra-profits may be taxed away and some businesses may be ruined while others are aided by governmental favoritism. So long as it is not clear which capital entities will be favorably affected by governmental control, all tend to object to controls as such. But as soon as it is evident that governmental controls mean security and expansion for some capital entities at the expense of others, the capitalist front against governmental controls is broken.

Although there is no necessary connection between Keynes’ theoretical reasoning and the “applied economics” of today, the “mixed economy” is a fact and demands justification in economic terms. Government interventions in the depressed economy were at first merely supposed to act as “pump-primers” for renewing the flow of private economic activity. Public work expenditures and welfare-payments were supposed to create new income which would, in turn, generate additional economic activity. The idea was formalized in the so-called “multiplier effect” introduced by R. F. Kahn. Estimates were made as to the repercussions to be expected from an increase in “effective demand” due to government-financing; they varied from a doubling to a five-fold increase in the initial investment in the form of new income. These assumptions, however, elude factual verification. In theory, which discounts the indiscernable counteracting influences of capitalism’s private sector, they appear convincing. Actually, these estimates are based on too many “ifs” to say anything definite about the effects of govern mental spending. It was then freely admitted that the notion of the “multiplier is no magic formula which will enable us to predict with any degree of accuracy just what the influence of public investment will be. By assigning different weights to various factors, one might conclude either that public investment will have tremendous income-creating effect or that it will have, on balance, a negative effect on employment and income.”[9]

However, as government depression policy did increase employment to some extent, it may be said that the Keynesian theory proved itself in a general way wherever it was employed and to the degree in which it was applied. The American New Deal is a case in point, even though Keynes himself expressed dissatisfaction with Roosevelt’s vacillating policies. Bourgeois supporters of Keynesian economics hope to see them so “developed and applied as to involve only a slight and safe and useful departure from strict laissez-faire, or use of governmental power to influence total spending and demand in the economy and keep it in better balance with the total, potential output of all goods and services. ”[10] In this view, it is the function of government to secure the existence and welfare of private enterprise. Aside from the overall effect of governmental money and fiscal policies, depressed industries are to be helped along with special credit facilities. Public works are to be constructed with an eye to the needs of private capital – roads for the automobile industry, airports for the aircraft industry, and so forth. Along with preferential treatment for new investments there should also go an increase in the propensity to consume by way of social security legislation as an instrument of economic stability.

A mixed economy presupposes that a substantial portion of its total productive capacity is owned and controlled by private capital. Since government funds proper can come only from taxation or from possible profits out of government-owned industries, additional funds must be borrowed from private capital. Debt-financing is supposed to bring forth a general increase in “effective demand.” This is not “effective demand” in a capitalist sense, for the capitalist market has no demand for public works, welfare, and armaments. It has of course a demand for the various intermediary commodities used in government-induced production. But this demand would be non-existent were it not for government purchases. The costs of government-induced production, as well as the profits accruing to private capitalist suppliers, are paid out of taxes or borrowed money, i.e., out of funds from capitalism’s private sector. This simply means that the government avails itself of means of production that belong to private capital and supports workers from privately owned resources. The borrowed funds are only monetary expressions of the government’s power to set unemployed resources to work. The rising national debt indicates that this power has only temporarily been granted and for a price, i.e., interest paid to the bondholders.

While the “end-product” of capital production is an enlarged capital, the “end-product” of government-fostered production is only an enlarged production. The productive apparatus which government-induced production calls into being can function only on the government’s behalf. Though it is nominally in the hands of private capital, it can be fully used only at government command. And from the point of view of private enterprise, any production which the government commands, whether in the form. of public works, welfare, or armaments, falls in the sphere of consumption. In effect, then, government-fostered production reverses the usual procedure of capital accumulation. Instead of expanding production at the expense of consumption, in a process where consumption increases more slowly than capital accumulates, it expands production with the help of consumption, though it is “consumption” in the form of public works and armaments.

Up to now government-induced expansion of production in the mixed economy has led to full employment only by increasing the “effective demand” for products not directly consumable, whose value cannot be “realized” through the capitalist circulation process. Insofar as this has been accomplished by way of deficit-financing, it has led to a steady increase in the national debt. Monetary inflation diminished and often repudiated the debt at the expense of private capital. But even under non-inflationary conditions, the interest paid on the national debt and its final redemption has to come out of private production. As the funds spent by government yield no profits they also cannot yield interest. Of course, since the “nation as a whole” stands behind the national debt, it is possible that interest will be paid and bonds redeemed if the national income rises faster than the national debt. All this means is that sufficient new wealth must be created by new and additional production to take care of old obligations.

1. The General Theory, p. 375.

2. Ibid., p. 213

3. Joan Robinson, for instance, remarks that Keynes’ idea “that labor is the sole factor of production,” cannot be justified by the fact “that he found it possible to reckon output in terms of wage-units.” Keynes could do so, she says, “because he was chiefly interested in analyzing short-run situations, in which capital equipment is given, so that real output is correlated with employment.” However, “as soon as output per man, at a given level of employment begins to alter, the wage-unit ceases to measure real output.” Though she agrees with Keynes that “the owning of capital is not a productive activity,” she thinks it more cogent to say “that capital, and the application of science to industry, are immensely productive.” An Essay on Marxian Economics, pp. 21-27.

4. The General Theory, p. 378.

5. Ibid., p. 377.

6. J. M. Keynes, Laissez-Faire and Communism, p. 130.

7. S. E. Harris, Saving American Capitalism, New York, 1950, p. 369.

8. L. R. Klein, The Keynesian Revolution, p. 167.

9. D. Dillard, The Economics of John Maynard Keynes, p. 12.

10. O. H. Taylor, The Classical Liberalism, Marxism, and the Twentieth Century, Cambridge, 1960, p. 118.