Bill Mitchell: (Modern) Marx eta MTM (2)

Sarrera gisa, ikus Bill Mitchell: Marx eta MTM (1)


(Modern) Marx and MMT – Part 2


(i) Sarrera gisa

This is Part 2 of my analysis of the way that fundamental ideas in Modern Monetary Theory (MMT) are totally consistent with a reasonable interpretation of Marx’s work. The motivation to clarify these issues came after I spoke at an event last weekend in the UK and shared a panel with a critic who claimed that Marx’s work established that MMT is wrong to assume that unemployment is a monetary phenomenon (insufficient spending) and that government spending can do anything about it. The claim was based on a view that Marx thought that capitalist firms have some unique logic that if they decide not to produce no amount of sales orders will induce them to expand production even if they have massive excess capacity (‘machines lying idle’) and a huge pool of idle labour to draw upon. No reasonable reading of Marx’s work would lead to that conclusion. In this part, we will consider what Marx thought about crisis and some later developments of his reproduction schemes, which make it clear that effective demand drives capitalist output, which conditions their employment decisions.

(ii) Krisi teoria

Crisis theory

Marx considered that the capitalists are driven by a desire to accumulate capital which raises the inevitability of crisis (recession in the modern parlance).

While many people might have some sketchy idea of what Marx wrote in this context, and Marx himself, certainly wrote a lot about the topic, the fact remains that he did not present a fully developed theory of capitalist crisis.

Marx’s main aim was in showing that the claims by Jean-Baptiste Say and David Ricardo that general overproduction was impossible because there were unlimited wants and that production (supply) would always generate the capacity (demand) to absorb it.

At the time, there were theorists who conjectured that a lack of spending (effective demand) would create crisis because production would not be sold and capitalists would respond by reducing output and employment.

I am thinking of people like – James Maitland, 8th Earl of Lauderdale – whose major work in 1819 – Inquiry into the Nature and Origin of Public Wealth – argued that the state of the fiscal position (deficit or surplus) had a direct impact on economic activity (in the way we now understand this relationship).

He was rather prescient in that regard.

Others like Thomas Malthus and – Jean Charles Léonard de Sismondi – emphasised demand as the source of crisis.

Sismondi emphasised what became known as – underconsumption theory – which conjectured that competition between capitalists maintained wages at low levels, that, in turn, undermined the purchasing power of workers in an environment where capital expanded production in order to expand profits and increase their capital.

Others (such as the work of the idealist Robert Owen) also focused on the way low wages predisposed the system to demand deficiency and crises.

Marx sought to separate himself from these ‘bourgeois’ writers although he did write in – Capital Volume III (p.347) – that:

The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.

But I can equally find tracts in Marx which downplay the impact of low purchasing power among workers for the potential for crisis.

He considered it a “sheer tautology to say that crises are caused by the scarcity of effective consumption” (p.250) (Capital Volume II).

By which he meant that even if workers were given a wage boost to enjoy higher consumption, the dynamics that drove the mismatch previously would reassert themselves such was the inner logic of Capitalism.

What Marx wanted to focus on was the contradictions in the process of capital accumulation, which he considered was the primary motivation (and logic) of the system.

Producing to satisfy consumption needs of the masses was not the driving force although one can obviously see it as a necessary aspect of the accumulation process.

Marx considered the accumulation process would lead to an excessive build up of capital which would suppress the rate of profit and it was this dynamic that generated the crisis.

But, we need to be careful in unpicking the logic here.

Yes, the struggle to maintain rates of surplus value production (which is the basis of monetary profits) was paramount and led to all sorts of innovations – moving cottage industry under one roof (the rise of the factory system); the introduction of shop floor supervision; time and motion analysis (Taylorism) etc.

Yes, the owners of capital control production and employment and their expectations of future returns dictate the rate at which the capital stock accumulates over time.

In this context, I am reminded of the work of Robert Rowthorn, who in his essay – Inflation and Crisis (1980: 133) – wrote that:

Capitalists control production and they will not invest unless they receive a certain ‘normal’ rate of profit. If wages rise too rapidly, either because of extreme labour shortage or because of militant trade unionism, the rate of profit falls below its ‘normal’ level, capitalists refuse to invest, expansion grinds to a standstill and there is a crisis.

So when assessing the role of trade unions in any historical period we have to be cognisant of the logic of the union as an institution and the limits on its effectiveness within the conflictual relationships that define capitalism.

Rowthorn (1980: 134) summed up:

A strong and militant trade union movement may force up wages and resist wage cuts even in the face of high unemployment. In a boom situation this may squeeze profits and bring expansion to a premature end, whilst there is still a large surplus of labour; and in a depression it may delay recovery by reducing profitability. This may sound like a condemnation of the trade union movement, but it is not. It is simply stating the obvious fact that, so long as capitalists control production, they hold the whip hand, and workers cannot afford to be too successful in the wages struggle. If they are, capitalists respond by refusing to invest, and the result is a premature or longer crisis. To escape from this dilemma workers must go beyond purely economic struggle and must fight at the political level to exert control over production itself.

(Reference: Rowthorn, R. (1980) Capitalism, Conflict and Inflation: Essays in Political Economy, Lawrence and Wishart, London.)

But equally, when considering the causes of crises, we cannot avoid focusing on the realisation issue because it was through market exchange that capitalists were able to realise the surplus value they had expropriated in the production process by exploiting their workers into the monetary form of profit.

In this context, the capitalists, in pursuit of more sales, run the risk of overproducing relative to the purchasing power of consumers, which then means the surplus value they have produced cannot be realised back into a monetary form.

A lack of sales driven by a deficiency in effective demand (desires to consume backed by cash) then damages the rate of profit as capitalists are forced to discount their production and/or go broke.

Either way, a crisis occurs and the reproduction process (of capital) is disturbed.

So at this stage we can accept the view that for Marx, crises were endemic to the logic of capitalism – its inner contradictions.

Which means that they would repeat even if policy changes could restore the equilibrium (temporarily).

But we can move on from that.


typically begin with Keynes’ General Theory (1936) in explicating the principle of effective demand, the essential elements underpinning the critique of Say and the modern understanding of involuntary unemployment in a monetary capitalist economy can be found in Marx, particularly in his 1863 work – Theories of Surplus Value.

This complements the argument above.

Focusing on – Chapter 17 – we find various discussions about the Classical (Ricardian) denial of the possibility of generalised overproduction and how that erroneous view is based on the idea that products exchange against products.

This is at the heart of Classical neutrality which ultimately is the modern version of the claim that fiscal and monetary policy cannot favourably alter real conditions (output and employment) in the economy.

In Chapter 17, Marx’s critique of both Say and Ricardo highlights why the use of “barter economy” examples is deeply flawed. A monetary economy has dynamics that are not captured in a barter world where products exchange against products directly.

If we mapped the current conservative (neo-liberal) position (and most of mainstream economics) back into the classical propositions that Marx was attacking we would find the correspondence to be close to 100 per cent in terms of concepts and implications.

The existence of a circuit breaker in the form of idle money stocks (recognising that money is more than a means of exchange but also an independent form of commodity) led Marx to conclude that there was the possibility of stagnation (defined as a conflict between purchase and sale) – (see Theories of Surplus Value Vol 2, Chapter 17, paras 710-711).

Interestingly, in TSV (Vol II, Ch XVII, para 712) Marx also anticipated the modern distinction between nominal and effective demand which lies in the understanding of the real contribution of Keynes.

Marx noted that in denying the possibility of a general glut, Ricardo appeals to unlimited needs of consumers for commodities and any particular saturation would be quickly overcome by increased demands for other commodities.

He then (TSV, Vol II, Ch XVII, para 712) rhetorically asked for an explanation of the connection between ‘over-production’ and ‘absolute needs’ and indicated that capitalist production and quotes Ricardo’s denial of the “possibility of a general glut in the market”:

Too much of a particular commodity may he produced, of which there may he such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art. Some would consume more wine, if they had the ability to procure it. Others having enough of wine, would wish to increase the quantity or improve the quality of their furniture. Others might wish to ornament their grounds, or to enlarge their houses. The wish to do all or some of these is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means, but an increase of production …

Marx retorted:

Could there be a more childish argument? It runs like this: more of a particular commodity may be produced than can be consumed of it; but this cannot apply to all commodities at the same time. Because the needs, which the commodities satisfy, have no limits and all these needs are not satisfied at the same time. On the contrary. The fulfilment of one need makes another, so to speak, latent. Thus nothing is required, but the means to satisfy these wants, and these means can only be provided through an increase in production. Hence no general overproduction is possible.

What is the purpose of all this? In periods of over-production, a large part of the nation (especially the working class) is less well provided than ever with corn, shoes etc., not to speak of wine and furniture. If over-production could only occur when all the members of a nation had satisfied even their most urgent needs, there could never, in the history of bourgeois society up to now, have been a state of general over-production or even of partial over-production. When, for instance, the market is glutted by shoes or calicoes or wines or colonial products, does this perhaps mean that four-sixths of the nation have more than satisfied their needs in shoes, calicoes etc.? What after all has over-production to do with absolute needs? It is only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production—over-production as such in relation to the absolute need or the desire to possess commodities. In this sense there is neither partial nor general over-production; and the one is not opposed to the other.

Note the reference to the capitalist market being “only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production-over-production as such in relation to the absolute need or the desire to possess commodities.”

I urge you to read the whole section in Theories of Surplus Value because its wisdom lies at the heart of the modern problem of high unemployment and stagnant growth. Keynes didn’t offer much more than you can find in this work by Marx.

In 1953, Joan Robinson published – An Open Letter from a Keynesian to a Marxist – which was a note to New Zealand Marxist economist Ronald Meek, where she writes that:

I was a student at a time when vulgar economics was in a particularly vulgar state. There was Great Britain with never less than a million workers unemployed, and there was I with my supervisor teaching me that it is logically impossible to have unemployment because of Say’s Law.

Now comes Keynes and proves that Say’s Law is nonsense (so did Marx, of course, but my supervisor never drew my attention to Marx’s views on the subject).

Which shows that the essential characteristics of effective demand were in Marx, well before Keynes.

As we move through history, the scholars that followed Marx clearly understood that effective demand was a causal factor in determing unemployment and recession.

(iii) Rosa Luxembourg

The Russian economist – Mikhail Tugan-Baranovsky – argued that the Marxian reproduction process could be rendered ‘harmonious’ if the distribution of income could be rendered compatible with an expanding social production.

In his 1901 book on business cycles – Studien zur Theorie und Geschichte der Handelskrisen in England – he wrote (page 25):

Die angeführten Schemata mussten zur Evidenz den an sich sehr einfachen Grundsatz beweisen, welcher aber bei ungenügendem Verständnis des Prozesses der Reproduktion des gesellschaftlichen Kapitals leicht Einwände hervorruft, nämlich den Grundsatz, dass die kapitalistische Produktion für sich selbst einen Markt schafft. Ist es nur möglich, die gesellschaftliche Produktion zu erweitern, reichen die Produktivkräfte dazu aus, so muss bei der proportionellen Einteilung der gesellschaftlichen Produktion auch die Nachfrage eine entsprechende Erweiterung erfahren, denn unter diesen Bedingungen repräsentiert jede neuproduzierte Ware eine neuerschienene Kaufkraft für die Erwerbung anderer Waren.

His views were, of course, avowedly non-Marxist despite his claim to be working within that tradition

A contemporary, who was very much operating within the Marxian tradition was the Polish economist – Rosa Luxemburg – who George Feiwal described in his classic work (1975) – The Intellectual Capital of Michal Kalecki – as “one of Marx’s most brilliant, original, and unorthodox followers” (p.56).

American Marxian economist – Paul Sweezy – called her the “queen of the underconsumptionists” in his 1942 classic – The Theory of Capitalist Development – a book I read over and over when I was a young student in the 1970s.

Feiwal considers that Marxists had really “neglected the underconsumption element in Marx’s theory” and “treated Luxemburg as a heretic”.

Luxemburg clearly brings together the two points – that capital seeks to accumulate more by producing more surplus value and it requires mass consumption to be sufficient to ensure that surplus value is realised as monetary profit.

In her only work on economics (1913) – The Accumulation of Capital – she extended Marx’s discusion on reproduction by suggesting that Marx’s focus on a closed system was an error.

Here is the 1951 – English Translation – in PDF.

She wrote (p.155):

The flaw in Marx’s analysis is, in our opinion, the misguided formulation of the problem as a mere question of ‘the sources of money’, whereas the real issue is the effective demand …

She quotes Marx (Capital, Vol II, page 202):

But the commodity-capital must be turned into money before its reconversion into productive capital and before the surplus-value contained in it is spent. Where does the money for this purpose come from?

Which indicates that Marx realised that the accumulation of capital could only proceed if there was adequate spending.

Rosa Luxemburg’s contribution was to identify that capital would seek and find new markets to absorb surplus production, which might be underdeveloped nations or sectors within the advanced nations that were not structured as capitalist production processes, such as “peasant agriculture”.

A most important sector in that latter regard was the government sector.

She wrote (page 466):

Further the multitude of individual and insignificant demands for a whole range of commodities, which will become effective at different times and which might often be met just as well by simple commodity production, is now replaced by a comprehensive and homogeneous demand of the state. And the satisfaction of this demand presupposes a big industry of the highest order. It requires the most favourable conditions for the production of surplus value and for accumulation.

She uses the example of what we now refer to as the military-industrial state to demonstrate how “government contracts … [are] … free of the vagaries and subjective fluctuations of personal consumption” and provides “the most favourable conditions for the production of surplus value and for accumulation.”

Now, I know a lot of the hard-core Capital Vol II lot dismiss Rosa Luxemburg as a failure and for trying to usurp the Master.

But one person saw what she was doing and that person was Polish economist – Michał Kalecki.

(iv) Michał Kalecki

One could hardly dismiss him as a heretic or an irrelevance.

While Keynes denied Marx was useful at all, Michał Kalecki came up with a much richer account of the dynamics of effective demand by starting with Marx’s reproduction schema.

He praised Rosa Luxemburg’s observations about government spending in his 1966 book – Studies in the Theory of Business Cycles: 1933-1939.

He added analysis of the ‘income effect’ that would accompany the capitalist response to increased government contracts.

He argued that fiscal deficits would result in expanded production if there was excess capacity, whereas taxing workers would undermine effective demand in times of crisis.

In his 1945 article in the Oxford Economic Papers (No. 7, pp.83-92) – Full Employment by Stimulating Private Investment? (JSTOR link via library) – Michał Kalecki was very explicit about the role of government spending in stimulating the economy.

He wrote that (page 83):

In current discussions the view is frequently advanced that full employment may be maintained by stimulating private investment. The stimuli in question may be ‘cheap money’; the reduction of income tax; or subsidies to firms undertaking investment (which may be given, for instance, by deducting from taxable profits the full amount of new investment, or a percentage of it, etc.). The purpose of this paper is to show that to maintain full employment these measures must be applied not once only – as the authors of the proposals in question seem to assume – but cumulatively.

Pedantic Marxists believe that capitalist investment has its own logic and will not respond to government stimulus.

Kalecki, a modern Marxist, thought otherwise.

The fundamental problem being addressed is the deficiency of effective demand.

He considered two scenarios:

1. Promoting a return to full employment by stimulating private investment.

2. “solving the problem of full employment … [by] … the direct creation of effective demand by the Government through public investment or through subsidizing mass consumption.”

I would add a third – direct job creation in the public sector.

In the first case, he demonstrated that the government had a range of policy options available to stimulate private investment – tax cuts, subsidies, interest rate cuts etc.

To offset any tendency for the rate of profit on the expanded capital stock to fall and thus offset the possibility of a crises (so very Marxian), Kalecki wrote (page 87):

if effective demand adequate to secure full employment is created by stimulating private investment the devices which we use for it must cumulatively increase to offset the influence of the falling rate of profit

So the policy design becomes important.

To motivate the second case, and this is important in terms of the allegations from last Sunday’s panel, Kalecki noted that if the private firms were not in a position to generate the growth in productive capacity in order to move the economy back to full employment, then the simple solution was for the government to step in, using state-owned enterprises, and extend the reach of public provision into areas that the non-government sector deemed to be unprofitable.

Kalecki wrote (p.88):

In this case the Government would undertake construction of objects which do not fall into the sphere of private enterprise, and thus do not compete with private capital equipment …

He said “full employment is achieved because the budget deficit makes good the amount by which” private investment “fall short” of the desired level.

In an earlier paper – Three Ways to Full Employment (1944) – Kalecki talked about slum clearances and the expansion of state housing as good examples of the activities that the state might pursue in this context.

Kalecki went further (1945: 92):

If private enterprise – even after the Government intervention has guaranteed to it markets sufficient to cause full utilization of its resources – is unable to fulfil the task of supplying new equipment at the rate required by the increase in population and productivity of labour, then State-owned factories should be built to fill the deficiency in private investment

So the basis of a very progressive and modern policy agenda.

And that would obviously include direct job creation which would bring unemployment down to its irreducible minimum (frictional).

As an alternative, Kalecki wrote (1945, p.88):

the Government would increase mass consumption by granting family allowances, old-age pensions, etc., by reducing indirect taxation, and by subsidizing the prices of necessities. In either case the additional expenditure (or the fall in revenue) would be financed without increasing the existing taxes so that the rise in public investment and subsidized consumption would not be offset by the fall in private investment and unsubsidized consumption; the resulting budget deficit will have the same repercussions upon employment as a rise in private investment with a balanced budget.

What we learn from these works is that Kalecki was building his notion of effective demand on previous insights that Marx had provided.

There was never any question for Kalecki that governments could increase fiscal deficits and stimulate economic activity – either directly or through the stimulus of private production.

He was somewhat uncertain about the politics but not the economics.


(1) The criticism that MMT is wrong because it disregards the Marxian view that increased government spending will really not stimulate employment and output really relies on a pretty skewed reading of Marx and those that followed.

(2) I consider it to be incomprehensible for one to draw that sort of conclusion.

(3) I have read as much Marx as anyone over my career.

(4) And it is clear that capitalist firms will respond to increased sales demand by producing goods and services.

(5) If they think the demand is stable they will invest and build productive capacity if they are currently at full capacity.

(6) And if they decide for any reason not to respond, then the government can always employ and produce itself.

1 Ikus

Iruzkinak (3)

  • joseba

    MMT and Embedded Marxian Value

    Bill Mitchell has just posted the first instalment in a two-part series on Marx and MMT. I was unaware of that while preparing the body of this post, but some of what follows bears incidentally on the topic. Bill Mitchell’s series is in response to a Marxist on the panel at one of his presentations who apparently cited Marx’s theory as proof that government, through its spending, is powerless to do anything about employment in a capitalist economy. The phenomenon of some Marxists being more neoclassical than Austrian and others more Austrian than neoclassical is not new, but it is unfortunate from a Marxist perspective. It leads, in practice, to uselessness at best and policy prescriptions that are more right wing than the proposals of the right wing at worst.
    A first question that arises when encountering such Marxist claims of government impotence is why a self-identifying Marxist, presumably hoping for the end of capitalism, would care if government spending happened to be incapable of bolstering private-sector for-profit employment? Or, if the Marxist means that government is incapable of bolstering employment in general, a second question is, if that is so, then how would government be capable of bolstering employment in any other type of economic system, such as socialism or communism?
    A likely answer to the latter question is that the Marxist thinks government is currently dependent on private-sector for-profit firms for its “spending money”. As MMT makes clear, this is not the case when it comes to currency-issuing governments.
    The implications of MMT do not violate Marx’s theory, only the claims of the more-neoclassical-than-Austrian and more-Austrian-than-neoclassical Marxists. The particular focus of the present post – unlike Bill Mitchell’s series – is Marx’s theory of value and, more specifically, his ‘law’ of value. Marx’s law of value, in which commodity production only occurs on the basis of profitability, and profitability derives from surplus labor, is compatible with MMT. However, Marx’s law pertains only to the sphere of commodity production, a sphere that is embedded in a broader socio-institutional context. In a modern monetary system, the context in which commodity production takes place is shaped by currency-issuing government.

     Compatibility of Marx and MMT

    From an interview published in the Morning Star:
    Ben Chacko: “So MMT accepts the labour theory of value?”
    Bill Mitchell: “Nothing we have done in Modern Monetary Theory, a macro theory, is inconsistent with it. That’s not to say that MMT is Marxist or of Marxist origin: of the core developers most don’t come from Marx, I’m the only one who does, they mostly come out of Keynes. But MMT is not inconsistent with Marx.”
    MMT in itself does not presuppose a particular theory of value. Competing theories could be accommodated within it. Marx’s theory, in which abstract labor is the substance of value, is one approach compatible with it. This compatibility is evident in the way MMT approaches currency value. In broad terms, MMT defines the value of the currency as “what must be done to obtain it”. As Wray and Tcherneva (page 15) note, the measure of “what must be done” can be specified in labor time. In Keynes’ terms, the value of a currency unit will be an amount of ordinary labor, with hours of special labor converted into equivalent amounts of ordinary labor. In Marx’s terms, the value of a currency unit will be an amount of simple labor, with hours of complex labor converted into equivalent amounts of simple labor.
    One approach, consistent with both Marx and MMT, is to define the value of the currency as the reciprocal of the monetary expression of labor time (MELT). The MELT is the amount of nominal value resulting from an hour of simple labor. The MELT’s reciprocal is the amount of simple labor required to generate a currency unit’s worth (e.g. a dollar’s worth) of nominal value. For Marxists who like to think in terms of a commodity theory, the value of a currency unit, when defined as the reciprocal of the MELT, can be understood as the amount of labor socially necessary to reproduce a currency unit’s worth of whatever commodity is designated as the ‘money commodity’.
    Within the sphere of commodity production, labor-power, according to Marx, is treated as a commodity. I have suggested previously that, in a modern monetary system permitting commodity production, labor-power rather than a metal is the most suitable candidate for ‘money commodity’. While there is no commodity standard at present, MMT’s prescribed job guarantee would, in effect, institute a ‘labor-power standard’ in which a currency unit exchanges at a policy-determined rate with simple labor-power, on demand. This rate of exchange – the job-guarantee wage – would anchor the economy’s nominal wage and price structure. The value of the currency can then be understood as the amount of simple labor required for the social reproduction of a currency-unit’s worth of the commodity labor-power. A currency unit, by serving as the equivalent of this one commodity, is able to serve as the equivalent of all commodities, in different quantities. Since commodities as products of labor have value, and the currency unit is the equivalent of each commodity, taken in the right amount, the currency unit represents value. This is what is needed, in Marx’s theory, for a currency to express (marxian) value and serve as universal equivalent.
    Importantly, MMT applies to the economy in its entirety, not merely to the sphere of commodity production in which Marx’s ‘law’ of value (above all, the profit motive) operates. Although commodity production is a major sphere at present, it exists within a broader social and institutional context. Marxian value relations – in particular, the law of value – will be determining within the sphere of commodity production, but not, ultimately, outside that sphere. The sphere of commodity production itself will be shaped from the outside by the institutional context. From the perspective of MMT, a currency-issuing government is ideally positioned to shape the context in which commodity production takes place and to place limits on it.
    Socially embedded marxian value

    MMT sheds light on the capacities of currency-issuing governments. A currency-issuing government establishes demand for the currency by imposing taxes denominated in it. Government also acts as guarantor of the banking system, which it can either run itself or delegate to agents in non-government. The government’s nominated currency is required for final settlement of transactions. A consequence is that bank deposits are ultimately promises to deliver currency on demand or at a specified point in time and to have sufficient balances in exchange-settlement accounts.
    Since at least some (and, at present, many) economic functions are delegated to non-government, there are both public and private sectors. While the latter is subject to regulation, governments at present do not widely impose direct price controls on private-sector entities (though they could, if they wished). Instead, most private-sector prices are left to the discretion of the firms involved, with some exceptions (an important one typically being a legislated minimum wage).
    Governmentt hires a fraction of the working-age population and commits to particular money-wage payments. Others desiring employment have to find it in the private sector. Introduction of a job guarantee would modify the institutional context in which commodity production takes place but not alter fundamentally the way the law of value plays out within the sphere of commodity production.
    So long as public sector employment in combination with other not-for-profit activity does not exhaust the entire workforce, there is a potential role for commodity production. From a Marxist perspective, this production will be subject to the law of value and so only occur when expected to be profitable.
    A question that arises is the extent, if any, to which government and the public sector – and not just the private sector – are subject to Marx’s law of value.
    On the basis of MMT, it is clear that currency-issuing governments will be unencumbered by the law of value so far as operations in their own currencies go, but that currency-using governments, at least so long as they remain currency users, will ultimately be constrained by it. Even currency-using governments, so long as they have the authority to tax, do have considerable capacity to act along not-for-profit lines. But since they need to obtain the currency before they can spend, they ultimately depend upon tax revenue, profit of public sector corporations, borrowing, or assistance from the currency issuer. Unlike a currency issuer, for whom savings in the currency of issue have no significance, a currency user does have reason to save in the currency, as it can be a source of initial finance for future spending. Whereas a currency-issuing government is constrained only by real resources (what is available for sale in its own currency) and politics, and is impervious to market pressures, a currency-using government is constrained to the extent that the currency issuer leaves it in this predicament. Of course, in the case of a currency-using national government (such as a member government of the eurozone), the predicament is voluntary, and could be changed by reintroducing a national currency. For lower level governments, the predicament is not of their own making (unless they are permitted by higher levels of government to issue their own currencies).
    The currency issuer in relation to commodity production

    A currency-issuing government can commit to whatever nominal wage rates it deems appropriate for public sector employees. As currency issuer, government is also in a position ultimately to govern real public sector wages. But the government’s control over real public sector wages is not as direct as its control over the sector’s nominal wages because the government, at present, does not widely subject the private sector to direct price controls. Nevertheless, government ultimately can govern real public sector wages because it holds the levers of demand management – fiscal and monetary policy – including if it so chooses the automatic stabilizing properties of a job guarantee.
    In a situation of runaway private-sector nominal wages and prices, in which private firms are enticing workers out of the public sector with better job offers, government does not need to compete on wages in order to retain sufficient staff. Rather, it can tighten fiscal policy (through a discretionary raising of taxes and/or cutting of spending) to discipline private-sector wages and prices. Conversely, if private-sector wages and prices are depressed, government can relax fiscal policy. In more normal circumstances, automatic stabilizers (preferably including a job guarantee) will be sufficient.
    Private-sector wages, for their part, are influenced to an extent by public-sector wages because of the need of private firms to offer competitive pay and conditions. In any event, private-sector wages are ultimately subject to the government’s application of fiscal and monetary policy.
    In the final analysis, then, policy determines (though not directly or in any precise or easily foreseeable way) the real wage, and therefore the distribution of income between wages and profits. As historical examples, policies of the neoliberal era have underpinned an increase in the rate of surplus value. Before that, policies of the immediate postwar era underpinned real wages growth in line with productivity growth. In the context of a rising organic composition of capital (at least in the US, see Andrew Kliman’s 2011 study, The Failure of Capitalist Production, page 133), this translated into a decline in the rate of profit.
    A currency-issuing government’s capacity to influence the real wage is not in any necessary conflict with Marx’s analysis of commodity production: the real wage, for Marx, is socially determined. Nor does the government’s influence over the sphere of commodity production necessarily preclude the working of Marx’s law of value. It just means that if the law operates, it does so within a context shaped by government policy, including the terms on which the currency is issued, the system of laws and regulations put in place, fiscal policy, monetary policy, and administrative policy.
    Government sets the basis for profit making by defining and enforcing property rights and establishing a viable currency. It defines the scope for profit making through legislation. It actively creates opportunities for profit making through provision of infrastructure and the setting of economic priorities and incentives. For instance, by establishing and maintaining a system of laws, government creates opportunities for law, accountancy and consultancy firms. By funding basic research and, if it chooses, other forms of research, it opens up possibilities for the application of new technologies in the sphere of commodity production. By investing in the construction and maintenance of public roads, government creates opportunities for car manufacturers, construction companies, businesses situated near the roads, and so on. More generally, public infrastructure creates opportunities for many kinds of businesses. By opening land for the development of suburbs, investing in public transport systems, or investing in public hospitals, government creates opportunities for a construction industry, many kinds of tradespeople, and the providers of many kinds of products and services. Through the public provision or guarantee of public access to health care, government creates employment opportunities for doctors, nurses, administrators, and other medical practitioners. By guaranteeing public education, business has at its disposal a more educated workforce. By encouraging socially beneficial activities or curtailing environmentally destructive activities, government shapes what is profitable and what is unprofitable for the private sector to undertake.
    Government itself, of course, ultimately can only operate within the limits permitted by society as a whole. It is really society that is prior to the law of value, and ultimately society (whether consciously or otherwise) that is determining macroeconomic outcomes. It is because society itself is prior to the law of value that a currency-issuing government, whether acting in good faith as society’s agent or in bad faith, is likewise prior to the law of value. To the extent that the law of value is permitted to hold sway, ultimately it does so because society permits it.
    Related posts

    Marx and MMT:

    Marx & MMT, PART 1 – Three Kinds of Macro Variables
    Marx & MMT, PART 2 – The Markup, Exploitation, Currency Value and MELT
    Marx & MMT, PART 3 – Marx’s Conception of Labor and His Aggregate Equalities
    Marx & MMT, PART 4 – The TSSI and Marx’s Aggregate Equalities
    Marx & MMT, PART 5 – Why a Single System & What Did Marx Say?
    Marx & MMT, PART 6 – The Temporal MELT

    Interpreting MMT’s definition of currency value in a Marxist way:

    Currency Value in Terms of Socially Necessary Labor
    Currency Value Interpreted as the Reciprocal of the MELT
    Marx & MMT – Currency Value and its Relationship to Price Stability
    Currency Value, Productivity, and a Currency’s Command over Use-Values

    A potential path to socialism or communism, in light of Marx and MMT:

    Currency Acceptance, Currency Value, and Transcending Capitalism
    Fiat Money is Logically Prior to Capital
    Money and Paths to a Post-Capitalist Society
    Fiat Money Socialism vs Lower Form Communism
    MMT is NOT a Theory of State Capitalism

    The monetary expression of labor time:

    Melting Some Marx into MMT
    On Estimating the Monetary Expression of Labor Time in a Temporal Framework

  • joseba

    Marx, MMT, and a Currency’s Expression of Labor Time

    For Marx, a currency’s representation of the labor performed in commodity production is indirect, mediated through a ‘money commodity’. The reason for this is that labor performed in commodity production is not directly social but only made so, indirectly, according to the ‘law’ of value under which the concrete properties of diverse labors are abstracted from and the amount of labor socially necessary to produce each commodity is determined. Since the currency, at least from the standpoint of the currency issuer, does not require labor for its production, the currency itself is not a commodity and so does not in itself have (marxian) value. Instead, the currency expresses value indirectly by representing a commodity that does have value – the money commodity – which serves as universal equivalent. The indirect determination of social labor time within commodity production contrasts with the direct determination of social labor time when production is not for market. In the latter case, a currency (or labor certificates) can directly represent social labor time, because the labor is directly social.

    The currency’s representation of labor time

    A footnote in the first volume of Capital clarifies Marx’s reasoning:

    The question why money does not itself directly represent labour-time, so that a piece of paper may represent, for instance, x hours’ labour, comes down simply to the question why, on the basis of commodity production, the products of labour must take the form of commodities. This is obvious, because their taking the form of commodities implies their differentiation into commodities [on the one hand] and the money commodity [on the other]. (Penguin, London, 1976, p. 188)

    A currency (as implied by the reference to a piece of paper) cannot directly represent labor that is performed “on the basis of commodity production”. That is, the currency cannot directly express the values of commodities (i.e. marxian value).

    But this limitation in a currency’s capacity directly to represent labor time does not apply in the case of labor that produces non-commodities. When labor is directly social, the currency can (and does) represent labor time directly. In the case of directly social labor, there is no need for the relationship between the currency and labor time to be mediated through a money commodity.

    A clear explanation of the issue is provided by David Adam. In the following passage, he quotes Marx’s ‘Critique of the Gotha Programme’:

    [In lower form communism] [t]he labor expended on products does not, in Marx’s words, “appear any more as the value of these products, one of the material properties that they possess, because now in contrast to capitalist society, the labour of individuals will no longer be a constituent part of the total labour in a roundabout way, but will be a part of it directly.”

    Adam (endnote 11) also quotes a relevant passage from the Grundrisse (Penguin, London, 1993, p. 171):

    Marx writes that under communal production there “would not be an exchange of exchange values but [rather an exchange] of activities,” and that “the exchange of products would in no way be the medium by which the participation of the individual in general production is mediated.”

    Relating to MMT

    It is worth relating this to MMT, because it helps to make clear why Marx’s notion of a money commodity causes no real difficulty, either for an MMTer wishing to take Marx seriously or for a Marxist wishing to take MMT seriously.

    In the sphere of commodity production, workers sell their labor power as a commodity, whereas outside this sphere they engage in directly social labor.

    MMT’s proposed job guarantee would, on the one hand, employ directly social labor and, on the other hand, influence the sphere of commodity production by instituting what would, in effect, constitute a ‘commodity standard’ in which labor power functioned as the money commodity. Just as under a gold standard government stood ready to convert gold into currency on demand at a policy-determined rate, under a labor-power standard (the job guarantee) government would stand ready to convert simple labor power into currency on demand at a policy-determined rate (the job-guarantee wage).

    It is important, here, to keep in mind the distinction between labor and labor power. From the standpoint of the job guarantee sector, a job guarantee would actually function as a ‘labor standard’ in which the currency directly equated a currency unit to an amount of social labor time. In contrast, from the standpoint of commodity production, the job guarantee would have an effect similar to a ‘labor power standard’, because the program’s wage would set a rate of exchange between labor power and the currency that firms operating under conditions of commodity production would need to match or better to attract and retain staff.

    In this way, the job-guarantee wage would strongly influence the average wage paid for simple labor power within the sphere of commodity production, because workers, rather than selling their labor power as a commodity, would always have the option of working in the job guarantee program instead.

    Since, in Marx’s theory, wage differentials tend to reflect labor complexity, the job-guarantee wage would influence the entire nominal wage structure. In combination with the prices government pays for commodities – which the government can discipline, if necessary, through fiscal and monetary policy – the job-guarantee wage would influence all nominal wages and prices.

    This is one way of understanding the MMT claim that the job-guarantee wage would anchor the ‘value of the currency’. If MMT’s broad definition of currency value – summed up as “what must be done to obtain it” – is interpreted in terms of labor time, the value of the currency is the amount of labor time represented in a currency unit. This amount of labor time is influenced by government policy, most effectively through introduction of a job guarantee. This influence is due to the impact government policy has (and a job guarantee would have) on nominal wages and prices in the sphere of commodity production.

    Society’s choice over how to determine labor time

    So long as commodity production remains a part of the economy, labor power remains commodified to that extent, and in that sphere the currency as a representation of the money commodity expresses social labor time only indirectly through the working of the law of value. In other modes of production – including job-guarantee activity, public sector activity, and non-government not-for-profit activity – labor-power is decommodified and the currency’s expression of social labor time is direct.

    The capacity of government to undertake or support activity along non-commodity lines will depend on its status with respect to the currency. While a currency-using government will be limited in this capacity by tax revenue, borrowing and/or any assistance it receives from the currency issuer, a currency-issuing government faces no revenue constraint and is limited only by the resources available for sale in its currency and any political constraints. Such a government is impervious to market-based financial pressures so far as operations in its own currency are concerned.

    To the extent that a currency-issuing government permits commodity production, it does so on its own terms. Through its authority to tax and require payment in the currency of issue, it can compel currency acceptance at least sufficient to carry out its policy agenda. Firms operating under conditions of commodity production, so long as they wish to remain active in the currency zone, have no choice but to seek profits in the currency of issue, since tax payments must be made in it.

    On the question of preferred mode of production, MMT in itself is agnostic. An MMTer who wished to retain capitalism might regard a firm’s threat to exit the currency zone or go on “investment strike” in protest over government policy to be a political constraint on policy, at least if s/he deemed the threat credible (in most instances, it would not be). But for an MMTer who desired socialism or communism, a firm’s threat to cease operation within the currency zone would not be of concern. This would simply free up resources for use along non-commodity lines, which a currency-issuing government always has the capacity to enable.

    A currency-issuing government’s capacity to enable production along non-commodity lines is a potential path to socialism and communism – if that is the political will and effectively expressed – and, in my view, it is the most important implication of MMT.

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