Review of Political Economy, 2015

Vol. 27, No. 2, 134 153, http://dx.doi.org/10.1080/09538259.2015.1010706

Marx and the Development of Critical

Political Economy
MASSIMO PIVETTI
University of Rome La Sapienza, Rome, Italy

(Received 30 September 2012; accepted 15 December 2012)

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ABSTRACT Although relevant analytical developments were provided over time by the
critique of economic theory, they did not succeed in inhibiting the occurrence of a full-
fledged revival of the neoclassical interpretation of capitalism. The development of
critical economics and its capability of checking the influence of the dominant
economic culture have been especially prejudiced by the failed integration between the
analyses of Marx and Keynes. Following Keynes, once the inducement to invest had
been singled out as the central question for the explanation of output levels, one should
have promptly acknowledged that on this very question Marxs analysis was
significantly richer and more relevant than Keynessthe richness and relevance of the
former ultimately resting on the great attention Marx dedicated to the complex question
of the influence of income distribution on the capitalists incentive to invest. It is
argued in the article that through the study of this influence Marx succeeded in putting
together the essential elements of a critical theory of effective demand, based on the
principles and mechanisms that govern the distribution of income between profits and
wages.

1.
Starting from Marx, the critique of economic theory has contributed in no small
way to analytical developments, albeit with greater or lesser degrees of complete-
ness and consistency of purpose. Among them, attention should be drawn, in my
view, to the following as perhaps the most relevant ones for our understanding of
capitalism: (i) the importance variously attached to money and monetary phenom-
ena for the explanation of the real magnitudes and phenomena of the system; (ii)
the acknowledgment of the effective existence of demand limits to output,
ultimately due to the independence of investment expenditure from current
money income; (iii) the interpretation of income distribution in terms of the

Correspondence Address: Massimo Pivetti, Dipartimento di Scienze Giuridiche, Istituto di

Economia e Finanza, Universita di Roma La Sapienza, Piazzale Aldo Moro 5, 00185 Rome,
Italy, Email: massimo.pivetti@uniroma1.it

# 2015 Taylor & Francis

 Marx and the Development of Critical Political Economy 135

parties relative strength, with the connected antagonistic concept of capitalist

society and (iv) the decisive influence attributed to income distribution on the
capitalists incentive to invest and on technological change.
Notwithstanding the fact that the relevance of these insights into the working
of the system is hardly disputable in the light of advanced capitalisms historical
record, one could not affirm that over the last 30 years they have succeeded in inhi-
biting the occurrence of a full-fledged revival of the neoclassical interpretation of
capitalism. Nor could one say that the presence of numerous and significant con-
nections between the analyses of Marx, Keynes and Sraffa have produced any true
reciprocal strengthening and integration, such as to give body to a sufficiently
developed and shared critical point of view, at least capable of containing the
influence of the dominant economic culture. It is as if, between the contributions
of the three main critics of economic theory, a sort of short circuit had occurred
which blocked the progress of critical analysis, eventually facilitating the theoreti-
cal restoration we have been witnessing over the last 30 years.
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In reality, as far as the connection between Marx and Sraffa is concerned, one
should perhaps more appropriately speak of a case of silence assenttoday an
easily understandable case, I believe, in the light of the Sraffa manuscripts
conserved at the Wren Library of Trinity College. They reveal how Sraffa was
convinced that Marx and his use of classical political economy had caused the
marginalist shift.1 It is therefore not surprising that, being of course keen to
obtain from the profession the attention that his critique of economic theory
deserved, Sraffa avoided indicating Marxs analysis as the foundation of his criti-
cal reconstructive work on the theory of value, alongside the standpoint of the old
classical economists. With the theoretical restoration of the last three decades, the
marginalization of Sraffas work eventually arrived in any case, but for about
20 years his critical contribution had succeeded in occupying center stage in the
international theoretical debateprobably thanks also to its having been almost
completely misunderstood by the Marxists.
The development of critical economics, however, has been especially preju-
diced by the failed integration between the analyses of Marx and Keynes, the two
authors who, albeit on the basis of completely different theoretical premises, have
contributed more than any other scholars to our understanding of the functioning
of the capitalist system, and whose writings are more directly relevant to the four
points indicated at the beginning of this article. When one tries to pick out which
aspects of Keyness attitude toward Marx may have chiefly hindered the succes-
sive integration of their respective analyses, what one is confronted with is, in my
view, essentially a case of general incommunicability between two cultures.

2.
At the beginning of January 1935, Keynes wrote to George Bernard Shaw that
with his new book the way of reasoning in the economic field was going to be

1
Cf Sraffas manuscripts classified as D/3/12/47, D3/12/4 2, D3/12/4 2(1) and D3/12/4 10 in the
archive of his papers at the Wren Library, Cambridge.
 136 M. Pivetti

largely revolutionized, and that, in particular, the Ricardian foundations of

Marxism will be knocked away (Keynes 1982, 42). This statement does not
lend itself to an easy interpretation. It is worth pausing a little while on it, to try
to find out which limits and uncertainties in Keyness views on Marx may have
had an especially negative impact on the further development of critical theory.
We shall then proceed with the question of the integration between the chief exist-
ing critical contributions.
It is well known that Keynes, following Marshall, did not distinguish between
the classical and the marginalist theoretical approaches. In the first footnote to the
General Theory, he includes in the Classical school the followers of Ricardo,
those, that is to say, who adopted and perfected the theory of the Ricardian econ-
omics, including (for example) J.S. Mill, Marshall, Edgeworth and Prof. Pigou. In
particular, according to Keynes, classics and marginalists would have shared the
same view as to the question of demand limits to production. Hence, the Ricar-
dian foundations of Marxism destined to be knocked away by the new theory
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would in fact be nothing else but the notion of the absence of demand limits,
and to anyone somewhat familiar with Marxs analysis it would then appear
quite natural to interpret the statement contained in the letter to Shaw as if
Keynes was actually saying: when my new theory has been duly assimilated, it
will become clear to everybody that neither Marx nor myself have anything in
common with Ricardo, since we both reject Says law.
The validity of such an interpretation would seem to be corroborated by what
Keynes writes at the beginning of Section III of Chapter 3, the very chapter dedi-
cated to the principle of effective demand. After having pointed out that the idea
that demand can safely be neglected is a basic idea of Ricardian economics, upon
which all that has been taught for more than a century is founded, he stresses that
after Ricardo [t]he great puzzle of Effective Demand vanished from economic
literature. The issue, Keynes (1936, 32) noted, is not once mentioned in the
works of Marshall, Edgeworth and Pigou, from whose hands the classical
theory has received its most mature embodiment. The great puzzle of effective
demand, Keynes adds, could only live on furtively, below the surface, in the
underworlds of Karl Marx, Silvio Gesell or Major Douglas (Keynes 1936, 32).
Thus, here there is, on the central theoretical question of Keyness analysis, a
clear acknowledgment of Marx, albeit mitigatedbut to our eyes, not
Keyness2by Marxs association with Gesell and Major Douglas. A second
acknowledgment of Marx, also concerned with the demand limits on output,
points in the same direction. In some preparatory notes for The General Theory,
Keynes (1933, 81) refers to the pregnant observation made by Marx (but
Keyness reference to Marx is second hand) that the attitude of business in the
actual world, unlike that of the private consumer, is not a case of C M C ,
that is, of exchanging commodity (or effort) for money in order to obtain

2
Keyness conviction that the future will learn more from the spirit of Gesell than from that of Marx
(Keynes 1936, 355) may be regarded as a lamentable aspect of that incommunicability referred to at
the end of the previous section.
 Marx and the Development of Critical Political Economy 137

another commodity (or effort), but is a case of M C M , that is, of parting with
money for commodity (or effort) in order to obtain more money.
Unfortunately, however, other passages in Keyness writings seem to contra-
dict these acknowledgments, and, with them, the possible interpretation just put
forward of his statement concerning the Ricardian foundations of Marxism. On
p. 355 of The General Theory, he speaks of an acceptance on the part of Marx
of the classical hypothesesin primis, he seems to suggest the hypothesis that
there are no demand limits to output. And in fact, in a text written only a few
weeks before the letter to Shaw, the following propositions can be found which
go in the same direction as the passage of The General Theory just referred to:
The strength of the self-adjusting school depends on its having behind it almost
the whole body of organized economic thinking and doctrine of the last hundred
years. . . . The essential elements in it are fervently accepted by Marxists . . . So
much so, that, if Ricardian economics were to fall, an essential prop to the intel-
lectual foundations of Marxism would fall with it (Keynes 1934, 488; italics
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added).3
Keynes seems therefore to ascribe to Marx the acceptance rather than the rejection
of the classical hypothesis represented by Says law. It follows that with the
statement contained in the letter to Shaw of 1935, Keynes can hardly be saying
that he will succeed in showing how Marx has nothing to do with Ricardo;
rather, what it would seem that Keynes wishes to say is that if the Marxian critique
of laissez-faire is based on the acceptance of Ricardos standpoint, then knocking
away the Ricardian foundations of Marxs theory will amount to one and the same
thing as knocking away the Marxian critique itself.

3.
But in spite of Keyness convictions and his rather contradictory efforts to distance
himself from Marx, the two authors analyses have a few remarkable elements in
common, as has already been pointed out in the past by several authors (See in
particular Fan-Hung (19391940), Alexander (1939 1940), Robinson (1942),
Kenway (1980), and the Dillard (1991), Sardoni (1991), Rotheim (1991) and
Sebastiani (1991)). The chief common elements may thus be summarized:

(1) Both Marx and Keynes reject the thesis that the level of total monetary spend-
ing generated by any given aggregate output will automatically be sufficient
to buy that output at its normal pricesat the prices, that is to say, that allow
the remuneration of capital employed in production at the normal rate of
profit.

3
But even within this passage contradictions are not lacking. Between the sentence quoted above in
italics and the last sentence of the passage, Keynes writes: Indeed, Marxism is a highly plausible
inference from the Ricardian economics, that capitalist individualism cannot possibly work in prac-
ticean observation which might have been acute and have represented one more important
acknowledgment of Marx, but for its having been rendered incomprehensible by its sharp contrast
with both what precedes it and what follows it.
 138 M. Pivetti

(2) For a given aggregate output to be sold at normal prices, it is necessary that the
investment outlays decided by capitalists, or by their agents, equal in value the
portion of that output which is not absorbed by consumption outlays. For both
authors, nothing ensures that this condition is met.
(3) For both Marx and Keynes the characteristics of the economic systemfirst,
the fact that each productive process is aimed at obtaining more money than
that employed in it (M C M , with M . M, in Marxs symbolism)are
such that output levels corresponding to the full utilization of available pro-
ductive resources tend to generate levels of aggregate monetary spending
that are not sufficient to absorb those output levels at normal prices; it
follows that for both authors the normal state of the economy is characterized
by the presence of a more or less wide gap between potential and actual output.
(4) Finally, both authors tend to regard the rate of interest as an essentially mon-
etary phenomenon, determined independently of the return on capital
employed in production.
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4.
The fundamental Marxian distinction between the conditions of the production of
surplus-value, materialized in the surplus-product, and those of its realization, is
sometimes formulated by Marx himself in terms which suggest that, rather than
being a problem of realization of the surplus-value that the system can produce,
it is a problem of realization of the surplus-value the system has produced
that is, that the question being discussed is that of a surplus-value, which is first
produced and which then must be sold.4 So Marxs analysis of demand seems
sometimes to take output as given, and hence not to be aimed at explaining its
actual level.
It should however be observed, in this respect, that when what is being dis-
cussed is the question of demand limits to output, it is perfectly natural to start by
reasoning in terms of a given output. Indeed, the problem is whether income is
entirely spent or not: first therefore comes output and the monetary incomes gen-
erated by it, which, once earned, may then be entirely spent on commodities or
not. The case is different when the problem of activity levels is approached, not
from the side of demand limits to output, or of the causes of reductions in the
overall level of production, but from that of the causes of increases in output: pur-
chases of commodities which do not constitute expenditure of current monetary
income, but are financed, for example, by credit. Now even if, all in all, it is
clear that for Marx saving does not determine investment, in his writings the

As soon as all the surplus-value it was possible to squeeze out has been embodied in com-
modities, surplus-value has been produced. But this production of surplus-value com-
pletes but the first act of the capitalist process of production. . . . Now comes the
second act of the process. The entire mass of commodities, i.e., the total product . . .
must be sold. . . . The conditions of direct exploitation and those of the realization of
surplus-value . . . are separated logically as well as by time and space (Marx 1894, 244;
emphasis added).
 Marx and the Development of Critical Political Economy 139

former seems often to set the maximum limit of the latter, in the sense that his
reasoning seems to proceed as if it were impossible to accumulate more than
what has already been produced and has not been absorbed by consumption.
Again, therefore, first comes the production of surplus-product and then comes
its realization, which may well fail to take place entirely should the capitalists
decide not to invest all the excess of the surplus-product (of their profits) over
what they choose to consume. For Marx, in sum, the portion of surplus-product
that is not consumed is not necessarily invested, but must, we can say, pre-exist
for the capitalists to be able to buy it and commit it to the growth of capital.
It goes without saying that the step forward made by Keynes concerns this
very point, and is represented by his concept of investment as autonomously deter-
mined (more generally, by the consideration of aggregate demand components
that are completely autonomous). Investment, for Keynes, does not depend on,
nor is limited by, a pre-determined level of current income and saving; on the con-
trary, both income and saving depend on and are limited by the amount of invest-
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ment decided by entrepreneurs. The new fundamental notion is that of effective

demand, as a magnitude which has a unique equilibrium value: the value of the
aggregate demand function (the proceeds which entrepreneurs expect to receive
from each given volume of output) at the point where it is intersected by the aggre-
gate supply function (the aggregate supply price, or total cost including normal
profits, of the corresponding output). Given the relationship between consumption
and aggregate income, this equilibrium value depends precisely on the amount of
current investment. Thus, thanks to his concept of autonomously determined
investment decisions, Keynes puts himself in the position not only to reject,
with Marx, the thesis that any given output will always tend to generate the invest-
ment outlays plus the consumption outlays necessary to equal its cost, but he can
also (i) determine the equilibrium level of output; (ii) show how this will depend
on the capitalists incentive to invest, given the communitys propensity to
consume and (iii) show that it may well entail an underutilization of existing
productive capacity along with unemployment of labor.
But once, following Keynes, the inducement to invest is acknowledged as
the central question for the explanation of output levels, we should promptly add
that on this very question Marxs analysis is, on the whole, significantly richer and
more relevant than Keyness. Though there is no doubt that Keyness writings
contain propositions which are relevant for the development of non-orthodox con-
cepts on accumulationI am referring especially to his reiterated conviction that
the savings of the rich have a negative impact on capital formation5the fact
however remains that Keyness analysis of the inducement to invest centers
round his marginal efficiency of capital schedule, which, as we know, through
the neoclassical synthesis, etc., has eventually led to the actual restoration of

5
Propositions such as the growth of wealth, so far from being dependent on the abstinence of the
rich, as is commonly supposed, is more likely to be impeded by it, or the growth of capital
depends not at all on a low propensity to consume but is, on the contrary, held back by it
(Keynes 1936, 372 373), occur frequently not only in The General Theory but also in Keyness
earlier and subsequent writings.
 140 M. Pivetti

the orthodox causal relationship between saving and investment, at least with
respect to long-period analysis (see on this also below, Sections Ten and Thirteen).
The richness of Marxs analysis, and its relevance for the development of criti-
cal political economy, rests instead on the great attention he dedicates in his writings
to the complex question of the influence of income distribution on the capitalists
incentive to invest. It can be affirmed that through the study of this influence he suc-
ceeds in putting together the essential elements of a critical theory of effective
demand, ultimately based on the principles and mechanisms that govern the distri-
bution of income between profits and wages. I shall argue in what follows that by
substantially reasoning on the basis of the distinction between normal rate of
profit and actual rate of profit, Marx helps us more than any other author to bring
into focus the different and contrasting channels, technological change included,
by which income distribution determines the incentive to invest and activity levels.
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5.
A good starting point from which to proceed to try to bring into focus the main
relationships between income distribution and activity levels one may derive
from Marxs analysis is supplied by a few aspects of his standpoint on crises. Natu-
rally, explaining the crisis and explaining activity levels in conditions of normal
functioning of the economy do not amount to the same thing, and it is the latter
explanation that we are chiefly concerned with here. However, in every theory,
the two explanations are quite strictly connected, so that from either one of them
insights can always be derived for a fuller comprehension of the other.
Marx argues that [f]or a crisis (and therefore also for overproduction) to be
general, it suffices for it to affect the principal articles of consumption, and he is
convinced that
[t]he ultimate reason for all real crises remains the poverty and restricted con-
sumption 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. (Marx 1861 1863b, 505, 517 524, 1894,
484).
The restricted consumption of the masses causes the crisis whenever it results in
an excessively large gap between the output that the system is capable of produ-
cing and the output the market is capable of absorbing at normal pricesin
essence, whenever underutilization of capacity in the principal sectors of the
economy exceeds certain limits. According to Marx, the restricted consumption
of the masses constantly tends to hinder the realization of the output that the
system can produce, thereby periodically causing the crisis, because, on the one
hand, it is accompanied by the capitalists frugality and thrift (Keyness
money motive), which also keeps their consumption within limits,6 while, on

6
[The capitalist] is always enjoying wealth with a guilty conscience, with frugality and thrift at the
back of his mind. In spite of all his prodigality he remains, like the miser, essentially avaricious
(Marx 1861 63a, 282).
 Marx and the Development of Critical Political Economy 141

the other, it cannot be compensated for by the accumulation of real capital.

Indeed, Marx (1894, 305) states that constant capital is never produced for its
own sake but solely because more of it is needed in spheres of production
whose products go into individual consumption.
So demand for consumer goods determines the quantities produced by the
respective industries, which determine, in turn, the quantities of capital goods
demanded by them; the limitations of consumption, and the ensuing tendency
toward capacity underutilization in the consumer goods industries, restrict the
demand for capital goods, thereby also impeding that sectors actual production
from corresponding to its potential. For Marx, in other words, a chronic underu-
tilization of available productive powers tends to establish itself, which limits
the very growth over time of the systems productive potential.
According to this standpoint, the capitalists incentive to invest would
essentially depend on the rate of utilization of productive capacity verified
on the market: investments are encouraged or discouraged depending on
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whether that rate is high or low. It would then seem that for Marx the mag-
nitude governing the expansion (or the contraction) of productive capacity is
the actual rate of profit, that is, the rate of return on the value of capital
employed in production which, for a given situation of technique and a
given real wage, varies with the rate of utilization of available productive
capacity. In fact, however, Marx denies, as we shall see presently, that any
circumstance capable of raising the actual rate of profit, through a higher
rate of utilization of available capacity, is bound to increase the incentive
to invest and the quantities demanded of capital goods. But before considering
this most relevant point of the Marxian analysis of accumulation, it is worth
focusing on the chief cause of the chronic underutilization of a societys pro-
ductive powers.

6.
We have seen how for Marx the limitations of consumption, by also limiting the
demand and the production of capital goods, are at the basis of the tendency
toward overall underutilization as well as of failed developments of the
systems productive potential. The limitations of consumption reflect, in turn,
principally the fact that the consumer power of society:
is not determined either by the absolute productive power, or by the absolute con-
sumer power, but by the consumer power based on antagonistic conditions of dis-
tribution, which reduce the consumption of the bulk of society to a minimum
varying within more or less narrow limits. . . . [T]he more productiveness develops,
the more it finds itself at variance with the narrow basis on which the conditions of
consumption rest. It is no contradiction at all on this self-contradictory basis that
there should be an excess of capital simultaneously with a growing surplus of popu-
lation. For while a combination of these two would, indeed, increase the mass of
produced surplus-value, it would at the same time intensify the contradiction
between the conditions under which this surplus-value is produced and those
under which it is realized (Marx 1894, 244245).
 142 M. Pivetti

The fundamental channel through which, in Marxs analysis, antagonistic con-

ditions of distribution continuously generate in capitalism a conflict between
the productive power of society and its consumption power is the tendency of
real wages to rise less than the productivity of labor. Marx in fact maintains
that the rate of surplus-value rises hand in hand with the increasing productivity
of labor even when real wages are also risingthat is, [t]he latter never rise pro-
portionally to the productive power of labor (Marx 1887, 566).7 Real wages tend
to rise less than labor productivity essentially because the transformations that
save labor by increasing its productive power continuously feed, by the techno-
logical unemployment associated with the investments by which they are intro-
duced, the formation of an industrial reserve army, whose chief effect is
precisely that of checking the rise in wages (more on this in Section Eight below).
Now, given the capitalists propensity to save, and reasoning in terms of
labor-value, for any given level of overall employment each rise of the rate of
surplus-value raises the ratio of aggregate income (wages + profits) to consump-
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tion. But with the rise of this ratio, the ratio of the available stock of capital to con-
sumption also rises (relative to the level of the capital/consumption ratio that
would be associated with a constant rate of surplus-value, in conditions of
normal utilization of productive equipment and with the methods of production
in use). A portion of productive equipment thus tends to remain idle, and the
incentive to invest is correspondingly weakened. In sum, in this view, the expan-
sion of productive capacity is checked by the negative impact on the actual rate of
profit of a rising rate of surplus-value. It follows that the tendency of real wages to
rise less than the productivity of labor can be singled out, in Marxs analysis, as the
chief cause of the chronic inability of the market to absorb the entire output that
the system would be capable of producing, and of the ensuing negative impact on
the growth of its productive powers.

7.
Since workers consumption is restricted by their poverty, higher real wages might
be able to sustain the incentive to invest and capital formation through higher
utilization rates of available capacity and higher actual rates of profit. Marx
rejects this possibility, because of the presence of this

7
The fourth part of the first volume of Capital is substantially dedicated to the rise over time of the
rate of surplus-value. If the real wage rate tended to rise proportionally to the productivity of labor
and thus the rate of surplus value did not increase over time, then the tendency of capital to rise in
relation to the quantity of labor employed through labor-saving transformations would imply a
falling rate of profita phenomenon actually dealt with at length by Marx in the third volume of
Capital, but only as a tendency opposed or neutralized by counteracting influences and hence
not effectively to be found in the reality of capitalism (cf Marx 1894, 233, 239). In any case, con-
sidering the weight that the rise of the rate of surplus value bears in Marxs analysis, it is rather sur-
prising that so much relevance has been attributed within Marxist literature to the Marxian law of
the falling rate of profit, obviously based on the assumption that the rate of surplus-value is constant
or rises over time proportionally less than the organic composition of capital. On this question see
also Dobb (1940, ch. 4), Sweezy (1942, 138 148), Robinson (1942, 35 39).
 Marx and the Development of Critical Political Economy 143

[c]ontradiction in the capitalist mode of production: the labourers as buyers

of commodities are important for the market. But as sellers of their own
commoditylabour-powercapitalist society tends to keep them down to the
minimum price. [Changes in income distribution favourable to workers
cannot solve the conflict between the production potentials and the consumer
requirements] of a society in which the vast majority are always poor and must
always remain poor (Marx 1893, 320; italics added).
Let us pause on these propositions which point out, in my view, the primary
importance that the Marxian analysis of accumulation attaches to the normal
rate of profit.
For what reason, according to Marx, must the working class remain poor, so
that the capitalist society tends always to keep the price of labor-power to its
minimum, in the given historical conditions? The fundamental reason springs,
of course, from the inverse relationship between normal profit and the real
wage rate: the lower the latter the higher the rate of return which can be obtained,
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at normal levels of capacity utilization, on the value of capital invested in pro-

duction with the standard techniques (i.e. on the basis of the socially necessary
quantity of labor). This is the rate that for Marx measures the profitability of
investment on which the formation of new capital dependsthe magnitude
indicated in his writings as the stimulating principle of capitalist production,
the fundamental premise and driving force of accumulation (Marx 1894, 259).
It would be difficult not to share Marxs belief that it is the normal rate of
profit that is the fundamental regulator of capitalist accumulation. This because
when some new capacity is being installed, the investor naturally expects that it
will be utilized at normal rates, so that the relevant magnitude when evaluating
the profitability of this or that investment project is indeed the normal rate of
profit, that is, the rate that each rise in the wage necessarily reduces. It should
then also be taken into account that changes in income distribution in the
workers favor, for the very fact of reflecting changes in the two classes
respective powers, inevitably bend the capitalists expectations to pessimism
(they undermine the state of confidence, Keynes would say)unless, due to
the presence of exceptional conditions, a situation of relative prosperity of
the working class has lasted long enough to accustom capitalists to the
change in power relations and a lower normal rate of profit (more on this in
Section Fourteen).
In the light of the distinction between actual and normal rate of profit, the
contradiction in the capitalist mode of production pointed out by Marx that
we have just recalled may be expressed by saying that both the poverty and a rela-
tive prosperity of the working class tend to exert a negative impact on accumu-
lation. The former checks the expansion of productive capacity because, as
indicated in the previous section, it tends to depress actual profit on the value of
existing capital; the latter discourages the formation of new capital because it
depresses the normal rate of profit, and, with it, the expected profitability of any
investment projectmore generally, because it negatively influences investors
expectations. Marx appears to be firmly convinced that the fundamental regulator
of capitalist accumulation is the normal rate of profit, and hence that the positive
effects on the incentive to invest of a more rapid growth of wages and aggregate
 144 M. Pivetti

consumption always end up being more than compensated for by the negative ones
caused by a reduced degree of exploitation of labor-power and a reduced normal
profitability of investment.8 In Marxian analysis of capitalism, in sum, the pres-
ence of demand limits to production reflects a restricted consumption capacity
of the masses which is incurable.

8.
The working class must thus remain poor in order for the incentive to accumulate
to remain strong over timein order for the normal rate of profit, that is to say, to
keep itself as high as possible. But how do we account for the fact that the working
class does tend to remain poor? Marxs standpoint on this is well known and we
have already referred to it in Section Six above, while speaking of the effects on
accumulation of a rising rate of surplus-value. The persistent poverty of the
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working class is fundamentally the result of the continuous reproduction,

through labor-saving transformations, of a relative surplus-population or indus-
trial reserve army (Marx 1887, 589). If, on the one hand, accumulation increases
the demand for labor, on the other, the process constantly sets free a part of the
working population by methods which lessen the number of labourers employed
in proportion to the increased production (Marx 1887, 593). More precisely,
while the formation of new capital is not accompanied by a proportional increase
in the demand for labor, the replacement of the old capital constantly feeds tech-
nological unemployment:
On the one hand, the additional capital formed in the course of accumulation
attracts fewer and fewer labourers in proportion to its magnitude. On the
other hand, the old capital periodically reproduced with change of composition,
repels more and more labourers formerly employed by it (Marx 1887, 589).
And the mass of unemployed laborers constantly presses through their compe-
tition with the employed ones, thus holding in check their demands for higher
wages.
It is this pressure exerted by the industrial reserve army on the active army of
laborers that governs the course of wages over time. Though always present, it is
lesser or greater, depending on whether accumulation is more or less rapid, as well
as on the concrete forms taken by the process of accumulation. What normally
impedes the persistence of a situation of relative prosperity of the working class
is precisely the reaction of the capitalists-investors to the lowering of the normal
rate of profit, sooner or later brought about, in periods of rapid accumulation, by
rising wages. It is a question, for Marx, of a double reaction: the slow-down in

[C]rises are always prepared by precisely a period in which wages rise generally and the
working-class actually gets a larger share of that part of the annual product which is
intended for consumption. . . . It appears, then, that capitalist production comprises con-
ditions . . . which permit the working-class to enjoy that relative prosperity only momen-
tarily, and that always only as the harbinger of a coming crisis (Marx 1893, 415).
 Marx and the Development of Critical Political Economy 145

the quantitative enlargement of capital is accompanied by the acceleration of its

qualitative change, that is, by an accelerated introduction of labor-saving trans-
formations. It is especially this latter aspect of the reaction of capitalists to the
rise in wages that attracts Marxs attention. His analysis of the matter forms a
picture of technological change and its linkages with income distribution very
different from that to which we grew accustomed through the neoclassical tradition.

9.
According to the Marxian analysis of accumulation, technological change contrib-
utes to the determination of the distribution of income, but is, in turn, largely gov-
erned by it. As we have just seen, in fact, changes in normal distribution between
profits and wages should be regarded as the chief determinants of technological
change. In particular, major labor-saving transformations can, according to
Marx, be traced back to the rises in real wages that occur in situations of rapid
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accumulation and high levels of employment, when power relations between

the two classes become more favorable to workers. Technological change, in
other words, is mainly viewed as the outcome of the effort, on the part of capital-
ists-investors, to sustain the rate of profit. The relevance that Marx attaches to
income distribution as a determinant of technical conditions of production, then,
allows us to regard their explanation as substantially internal to his analysis of
accumulation and the development of the capitalist system.9
By contrast, neoclassical theory does not provide any explanation for the
state of technology and its changes over time. The state of technology is one of
the determinants of income distribution, but the latter does not impact on the
former. Changes in the state of technology fall, so to say, from the sky. They
are indeed able to cause unemployment, but only temporarily, just for the time
necessary for the system to adjust to the new equilibrium position. In the new equi-
librium a different distribution of income is likely to prevail, because of the
change in factors relative scarcity brought about by technological change.
What happens, instead, if starting from an equilibrium position there occurs an
arbitrary rise in the wage rate, relative to the price for the use of capital in pro-
duction? According to the neoclassical standpoint, total capital employed in the
economy must rise in proportion to labor, but no change in technologythat is,
no change in any of the sectoral production functionsis necessary for this to
come about. The assumed rise in the wage rate, in other words, does not cause
any shift in the neoclassical demand functions for factors; the rise in the ratio of
capital to labor which the wage increase tends to bring about in the economy as
a whole is simply the result of movements along those functions.

9
Ricardo also seems to have regarded the effort to maintain the normal rate of profit as high as poss-
ible as the main cause of technological progress. In his analysis, however, the lowering of the rate of
profit that capitalists try to hold in check by the introduction and improvement of machinerythat
stimulates, in particular, the development of technical knowledge in agricultureis the result of the
rise in wages brought about by the rise in the price of necessities that follows the expansion of agri-
cultural production, in turn made necessary by the growth of capital and population (cf Ricardo 1821,
120, 395; see also Ricardos letter to McCulloch of 29 May 1820, in Ricardo 1951).
 146 M. Pivetti

In the neoclassical framework, as in Marx, technical progress tends to be

labor saving. But, differently from Marx (and, more generally, from the classical
approach), this does not find an explanation within the theory itself. It is rather a
postulatean assumption functional to the neoclassical explanation of the equili-
brium rate of profit in terms of the relative scarcity of capital. This point is far from
secondary for the critical standpoint.
According to neoclassical economics, saving by the richest members of the
society, the capitalists, benefits also its poorest ones, the laborers. By making
the capital of the nation relatively more abundant, saving by the richest
members of the society increases the marginal product of labor and hence real
wages. This is the case, however, only to the extent to which the formation of
additional capital through saving is not accompanied by labor-saving technologi-
cal advancements that keep capital relatively scarce;10 that is to say, workers may
not benefit from accumulation if the demand function for capital shifts rightwards.
But this is precisely the effect of technical progress postulated by the neoclassical
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theory. From this, it is then easy to deduce that any fall in the marginal pro-
ductivity of capital that is brought about by a more rapid increase in the capital
stock than in the available supply of cooperating factors will be compensated
for, over the long run, by shifts in the demand function for capital due to techno-
logical and organizational progress. In sum, without the a priori conviction that
inventions tend to increase the marginal productivity of capital, it would be diffi-
cult, in the light of the neoclassical explanation of distribution in terms of factors
relative scarcity, to reconcile the fact that capital has long accumulated at a rapid
rate with the fact that its rate of return has shown no persistent tendency to fall (on
this see Stigler 1947, 327).

10.
Keynes, too, offers no explanation of technological change, and he believes that
inventions tend to increase the marginal productivity of capitalthat is to say,
that technological progress affects the position of his marginal efficiency schedule
of capital. This has significantly facilitated the eventual rejection of his concept of
the rate of interest as a monetary phenomenon, and the restatement of the tra-
ditional real forces of productivity and thrift as the ultimate determinants of
the equilibrium rate of interest.
He in fact bases his critique of the traditional theory of interest, on the one hand,
on the idea that, at least in the more advanced capitalist economies already well
equipped with capital, the full-employment rate of interest is very low, and on the
other, on the notion of a limited downwards flexibility of the actual rate, due to a
high interest elasticity of the liquidity preference schedule and the rightwards
shifts the schedule would most likely undergo if the monetary authority tried to over-
come the obstacle represented by its high interest elasticity through immoderate
increases in the quantity of money. The problem is that the neoclassical postulates,

10
In Wicksells words, The capitalist saver is thus, fundamentally, the friend of labour, though the
technical inventor is not infrequently its enemy (1901, 146).
 Marx and the Development of Critical Political Economy 147

from which the form and the position of Keyness investment function are derived,
leave hardly any room for maintaining that the full-employment rate of interest, even
in economies very well equipped with capital, must be very low or next to zero. So if
a full-employment rate of interest actually existed, as maintained both by the neo-
classical economists and by Keynes, and if in normal conditions, on the basis of
their shared theoretical premises, that rate need not be as low as Keynes surmises,
then it is difficult to see why a modest measure of persistence and consistency of
purpose by the monetary authority (Keynes 1936, 204) should not generally be
able to bring the rate of interest down to its full-employment level and keep it
there (see Garegnani 1979, 7879; Pivetti 2010, 7883).

11.
Given the necessary long-run connection between interest and profit, the notion of
the rate of interest as an autonomous magnitudea conventional monetary
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phenomenon, determined from outside the system of production (Sraffa 1960,

43)is incompatible with any real explanation of the normal rate of profit, be
it of classical or neoclassical derivation (see Pivetti 2001). The just recalled
outcome of the Keynesian revolution well illustrates this incompatibility for
the case in which economists continue to reason about distribution along neoclas-
sical lines, that is, in terms of the relative scarcity of the factors of production. By
contrast, within the classical-Marxian framework, where distribution is
approached in terms of a surplus which is arbitrarily divided between workers
and capitalists according to their relative strength, only a concept of the rate of
profit as the residual distributive variable can be regarded as incompatible with
a monetary theory of interest. Marxs views on the interest profit relationship
provide us with a clear illustration of what has just been said, and it is therefore
convenient for us to start from his standpoint in order to highlight the role of a
non-orthodox notion of interest in the explanation of activity levels.
Like Keynes, Marx was led by the unprejudiced observation of facts to believe
that circumstances enter into the determination of the rate of interest, which have
nothing to do with those that govern in his analysis of the normal rate of profit.
For Marx, there is no such a thing as a natural rate of interest, and [t]he
average rate of interest prevailing in a certain country cannot be determined by
any law. The fact that many borrow without any view to productive employment;
the existence of a developed credit system; the discount rate policy of the Bank of
England and the direct influence exerted by the world market in establishing the
rate of interest; finally, the fact that [c]ustoms, juristic traditions, etc. have . . .
much to do with determining the average rate of interest are the socioeconomic
and institutional circumstances which, according to Marx, combine to militate in
favor of an autonomous determination of the rate of interest (cf Marx 1894,
360 367). The point is, however, that Marxs autonomous determination of the
rate of interest is accompanied by a marked weakening of the connection
between this variable and the normal rate of profit, since the latter still depends
in his analysis on the real wage ratethe independent or given variable, in both
the classical and the Marxian analyses of distribution between wages and profits.
In fact, the only connection between interest and profit, according to Marx, lies
 148 M. Pivetti

in the fact that the latter would constitute the maximum limit of interest, while
within that limit the average rate of interest prevailing in a certain country (as dis-
tinct from the continuously fluctuating market rates) could take any level whatso-
ever (Marx 1894, 362 363). To a very large extent, then, in Marxs analysis the two
rates appear capable of being determined independently from each otherhardly
an acceptable view, in the light of the concept, supported by Marx, of a positive
profit of enterprise as a normal phenomenon. Let us turn to this question briefly
(for a more detailed discussion, see Pivetti 1991, ch. 7).
Marx regards the rate of the profit of enterprise as a residual magnitude,
which, for a given normal profit, is high or low in inverse proportion to the
rate of interest (Marx 1894, 379). But if it is acknowledged that profit must nor-
mally exceed interest, since, as Marx himself maintains, to represent functioning
capital is not a sinecure, like representing interest-bearing capital (Marx 1894,
380), then the thesis that the rate of the profit of enterprise is high or low in
inverse proportion to the rate of interest lacks foundation. Profit of enterprise
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cannot be high or low independently of the elements of risk and trouble that
justify its existence. Competition among firms in each production sphere will
cause it to tend toward an adequate or normal level, determined by any real or
fancied disadvantage the productive employment of capital in that sphere may
present, relative both to interest-bearing capital and to the other productive
employments of capital. If profits of enterprise did not cover objective elements
of risk and trouble, or elements regarded as objective by the majority of inves-
tors, it would be hard to escape the conclusion that profits of enterprise must tend
to be nil, since competition between the producers would tend to equalize profit
and interest. In sum, Marxs views on the relationship between interest and
profit appear on the whole not to be consistent with the premises for the existence
of profits of enterprise as a permanent phenomenon.

12.
The autonomous determination of the rate of interest plus the concept of profit of
enterprise as a component of normal production costs lead to a notion of the
normal rate of profit as a magnitude which is arrived at in each sphere of pro-
duction by adding up two autonomous componentsthe money rate of interest
and the normal profit of enterprise. This interpretation does not imply any weak-
ening of the connection between interest and profit. The latter moves in sympathy
with the former in the long run, but the causal connection linking them goes in the
opposite direction to that maintained by both the classical tradition and the neo-
classical one: lasting changes in the money rate of interest are the cause, not
the effect, of changes in the normal rate of profit. Once the normal profit of enter-
prise in each sphere of production has been taken as given, in that it is determined
separately from both the rate of interest and the rate of profit, attention must be
focused on the rate of interest in order to be able to explain the distribution of
income between workers and capitalists. As in Marx and Keynes, the rate of
interest is not regarded as governed by a pre-determined normal profitability of
capital; it is rather conceived as a policy variable, a conventional monetary
phenomenon which is not subject to any general law. The fact is then taken into
 Marx and the Development of Critical Political Economy 149

account that the direct outcome of wage-bargaining is a certain level of the money
wage, while the level of the real wage prevailing in any given situation is the final
result of the whole process by which distribution of income between workers and
capitalist is determined. Given money wages and production techniques, any
lasting change in the rate of interest is bound to cause, by the competition
among firms within each industry, both a change (in the same direction) in the
general level of prices and a change in relative prices; so that the real wage,
while rising or falling in terms of any commodity, will rise or fall to a different
extent for each different commodity. I have already dealt with all these matters
in several works of mine, in which I tried to develop Sraffas well-known sugges-
tion (see Pivetti 1991, 1999, 2001, 2004b).
What is especially worth stressing here is that there is no contrast between the
explanation of distribution just referred to and the Marxian explanation centered
on the respective powers of the combatants (Marx 1898, 402). An explanation
of distribution based on such powers requires, first of all, an analysis of the
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social-institutional channels through which they actwhich should permit us,

in turn, to identify the distributive variable on which they discharge themselves
in the first place, in each concrete situation; and second, that the main factors
upon which those powers depend are selected and discussed. Now, the view
that the course of the rate of profit is governed by that of the rate of interest is
clearly connected with the former of these two questions, whose solution consti-
tutes the chief aspect of the problem. Monetary policy and wage-bargaining come
out of it as the main channels through which class relations act in determining dis-
tribution, and they are seen as tending to act primarily upon the profit rate, via the
money rate of interest, rather than upon the real wage as maintained by both the
classical economists and Marx. For the connection with the Marxian standpoint,
the most relevant point in the monetary explanation of distribution is that it
views interest-rate policy decisions it as subject to a wide range of constraints,
with which the respective powers of the combatants are strictly intertwined.

13.
Finally, it is worth signaling how the monetary explanation of distribution places
the whole question of the real effects of monetary phenomena and monetary policy
under a light that is quite different from the Keynesian perspective. It can be
affirmed, in fact, that the chief limits of Keyness analysis of capitalism derive pre-
cisely from the role that he assigns to the rate of interest in the determination of
activity levels. With his marginal efficiency of capital schedule he ultimately
reduces all the shortcomings of the system to the presence in it of obstacles, of
an essentially monetary nature, that would make it difficult to keep the rate of
interest on long-term loans at a sufficiently low level.11 From his analysis of the
inducement to invest, Keynes is led to believe that through a consistent and

11
In this respect, Joan Robinson (1942, 56) herself observed that It would be hard to maintain that all
the disasters of unemployment are due to some impediment which prevents the rate of interest from
falling fast enough and far enough to fend them off.
 150 M. Pivetti

persistent cheap-money policy it might be possible to bring down the rate of profit
to zero (except for the reward of enterprise) within a single generation or so.
Capital would in fact cease to be scarce, he argues, if the money rate of interest
could be made to fall as fast as the marginal efficiency of capital corresponding
to full-employment rates of accumulation (cf Keynes 1936, 220 221, 374
377). In sum, Keynes arrives at the view that in principle a situation might even-
tually come about in which the entire net product of the economy would accrue to
the workers (apart from any allowance for risk and the like), and that this would
occur without any social revolution, but as a natural result of the fact that capital
would have ceased to be scarce. Undoubtedly, this concept of a euthanasia of the
rentier could hardly be more distant from Marxs standpoint on the limits and the
future of capitalism.
Alternatively, on the basis of the notion of the rate of interest as the regulator of
the ratio of prices to money wages, which through this ratio governs the behavior of
normal profit, it will have to be acknowledged that the influence of the rate of inter-
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est on activity levels exerts itself through income distribution, and is therefore much
more complex than that postulated by a neoclassical or Keynesian investment
demand schedule. A priori one can only affirm that a low-interest policy, through
its impact on the distribution of income between profits and wages in the latters
favor, contributes to sustain the societys propensity to consume. It is then princi-
pally through this route that a cheap-money policy is capable of exerting a positive
influence on output and employment.12 Much more problematic, as I have tried to
argue in the previous sections with reference to Marxs analysis, is the question of
the influence of distribution on the incentive to invest. A priori we can certainly
admit the possibility of situations in which the negative impact on the incentive
to invest exerted by a fall in the normal profitability of investment is compensated,
or more than compensated, by higher actual profit ratesthat is, by higher rates of
utilization of the capacity already installed, resulting from the rise in wages and con-
sumption, or by investment decisions aimed at restoring normal profitability to its
original state by the introduction of new techniques. The point, however, is that
there is no functional relationship that allows us to establish, as a general rule,
the direction of the influence of persistent changes in interest rates on the incentive
to invest. In other words, the impact of changes in income distribution on the incen-
tive to invest may be either expansionary or recessionary, and it will have to be dis-
tinctly assessed in each case.

14.
A case which is certainly worth considering, in the light of the Marxian analysis of
accumulation and technical change, is that of the historical record of advanced
capitalism over the first 30 years following the Second World War. That

12
Low interest rates are likely to sustain the propensity to consume also through their effects on the
burden of household debt, the prices of fixed interest securities and most ordinary shares, and the
value of houses. Both a lower burden of debt and higher stock exchange and home prices will posi-
tively affect the willingness of large sections of the public to purchase goods and services in general.
For the recent US experience in this regard, cf. Pivetti (2004b).
 Marx and the Development of Critical Political Economy 151

experience seems at first to contradict the central point of Marxs interpretation of

capitalist development: the tendency of real wages to rise less than the pro-
ductivity of labor, that is, the rise over time of the rate of the surplus-value,
through the constant reproduction of a relative surplus-population. In those
three decades, the outcome of the capitalists double reaction to rises in wages
does not appear to have systematically been that indicated by Marx. Even in the
face of rises in wages capable of negatively affecting the normal rate of profit,
neither slow-downs in the quantitative enlargement of capital nor accelerations
in its qualitative change succeeded in impeding the persistence of a situation of
relative prosperity of the working class.
The fact is that in the course of those 30 years the double reaction of capi-
talists pointed out by Marx was not the decisive factor behind the behavior of the
surplus-population. Decisive factors were instead the demand management pol-
icies then pursued by the governments of the major capitalist countries, precisely
with a view to checking rises in unemployment. Those policies did neutralize the
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effects exerted on the industrial reserve army by the capitalists reaction to rises
in wages, which consequently could not only match the rises in labor productivity,
but also succeeded, over certain time spans, in changing distribution in the
workers favor. Rises in wages, in sum, were not allowed to be answered by
rises in unemployment; hence they lasted, thereby sustaining consumption
growth. Sustained growth of consumption in turn provided for a sustained
demand for capital goods. The results are well known: a 30-year period of very
high average growth rates of GDP and output per capita, more than twice as
high as their value for the last 30 years.
In practice, over the 30 years following the Second World War, the positive
effects on actual profit rates of rising wages were not neutralized by the rise in
unemployment that they tend to bring about through the slow-down of the quanti-
tative enlargement of capital and the acceleration of labor-saving technical
changes. Thanks to full-employment policies, the Marxian mechanism had sub-
stantially been blocked, which, by hindering a lasting prosperity of the working
class, tends to constrain the consumer power of society, and, with it, the very
growth over time of the systems productive potential. That experience, however,
was the outcome of exceptional historic conditions (see Pivetti 2004a). It was essen-
tially the outcome of the necessity for advanced capitalism to prove itself capable of
overcoming its chief historical shortcomingsunemployment, enormous dispar-
ities in the distribution of wealth and income, widespread povertywhich made
it vulnerable to Communism, especially in Western Europe, in a situation in
which the Soviet Union had won the war and the alternative social system was dis-
playing great capabilities in many fields.
In the last chapter of The General Theory Keynes (1936, 374) acutely
observes that:
it is not necessary . . . that the game should be played for such high stakes [a high
prospective level of profit] as at present. Much lower stakes will serve the
purpose equally well, as soon as the players are accustomed to them.
This is certainly true. It is not easy, however, to imagine in which conditions lower
prospective levels of normal profit might last long enough to accustom the
 152 M. Pivetti

players to them. The conditions of challenged capitalism of the first 30 years

following the Second World War constitute, in my view, the most significant
example we have of the type of absolutely exceptional conditions that are required
for a situation of relative prosperity of the working class to persist. From this per-
spective, we can conclude that the experience of the so-called golden age of capit-
alism does not contradict in any way Marxs analysis of the normal working of the
system.

Acknowledgements
An Italian version of this paper was presented at the Conference Marxismo oggi
organized by Bruno Jossa and Giorgio Lunghini for the Societa Italiana
degli Economisti, Turin (Fondazione Luigi Einaudi), 4 5 March 2005. I
wish to thank the editor of Il Ponte for the kind permission to republish the
paper in English and two anonymous referees of this journal for comments and
Downloaded by [UQ Library] at 09:36 15 June 2015

suggestions.

Disclosure statement
No potential conflict of interest was reported by the author.

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