Michael Roberts and the Critique of Keynesianism

Image: Markus Spiske


Comments on the writings of the Marxist blogger

It is well known that Michael Roberts, the world's best-known Marxist blogger, constantly fights to differentiate, showing his superiority, what he calls Marxist economic theory from other economic theories, in particular, from that which underlies Keynesianism and the post-war period. keynesianism.

On June 17, 2021, it published another text in this regard: Profits set the tone (i.e., Profits call the tune). As their arguments have some problems, they can also be criticized to make them more suitable. At first, what he said important in this post on his blog is reproduced. The next recession.

Roberts' writing

I have argued in many posts that “profits set the tone” in the pace of capitalist accumulation. What I mean is that changes in earnings (and profitability) over time will lead to changes in firms' investments – not vice versa.

Profits are fundamental to capitalist investment, not “effective demand” as Keynesians argue, or changes in interest rates or the money supply as monetarists and the Austrian school argue. I strongly disagree with the post-Keynesian view that profits are a “residue” generated by investment. I disagree with what the Keynesian-Marxist Michal Kalecki said when he said that “capitalists earn what they invest, while workers spend what they earn”.

Yes, workers spend what they earn from paid work, that is, they consume a lot and save little; but capitalists do not “earn” profits from their investments in capital (means of production and labor). This theory denies Marx's law of value that only work produces value and surplus value (profit) for the capitalist. Transforms profit into a “gift of capital”; that is, profits come from investments made by capitalists. However, it may happen that there are profits generated from the exploitation of the workforce, but capitalists are unable to invest them. In fact, this is what is currently seen as the excessive expansion of “fictitious capital” at the expense of productive investment.

Recently, in an article in the Financial Times, additional evidence was presented that earnings set the tone. Ian Harnett, co-founder and chief investment strategist at Absolute Strategy Research, a macro-financial research firm, has shown that global business investment in the “means of production” tends to track global earnings growth. Harnett's study was not confined to the United States, the country that has provided the descriptive statistics for most of the empirical work done so far.

In the chart below, he measured the annual change in global non-financial sector investment against depreciation. In fact, its indicator indicates the new investment that exceeds that needed to replace outdated equipment and depreciated facilities. The chart shows, with data from the 1990s onwards, that the growth or reduction of profits in the corporate, non-financial sector, generated responses in the same sense in investments in fixed capital: profits set the tone.

Comments on Roberts' text

There are several considerations that need to be addressed in order to arrive at a fair assessment of Michael Roberts' arguments. The first refers to the methodological perspective that unites the theoretical current under criticism, a current that has a certain heterogeneity.

It is necessary to start by noting that Keynes and Keynesians in general do not think of themselves as critical theorists, but as theorists concerned with the management of the capitalist system. Thus, they are centrally concerned with economic policy – ​​and, as a result, do not usually focus on the mode of reproduction of social relations. It focuses on the most changeable economic phenomena in the short term, taking as data those that are more stable and only change significantly in the long term. Keynes himself wrote in his General Theory – and the best Keynesians know this too – that his work takes as given “the social structure, including the forces which determine the distribution of national income”. It is quite evident that they know perfectly well what these forces are.

In sequence, it is necessary to ask if Keynesianism does not treat the rate of profit as a variable that determines the behavior of the economic system of capital in the short and long term?

If Keynesians and post-Keynesians follow Keynes himself, they have to agree that investment does depend on the rate of profit. Well, this author made it clear in his major work that "the owner of wealth (...) what he really wants is his probable income". Furthermore, he also said that “the creation of new wealth depends entirely on its probable yield reaching [at least] the established level of the current rate of interest”. It is clear, therefore, that investment is considered in this theory as an increasing function of the positive difference between the profit rate and the interest rate.

Now, this current of thought usually takes as given what Keynes called the “marginal efficiency of capital” – that is, the expected rate of profit for possible new investments –, mainly with regard to its technological determinations. But this current also believes that this variable depends on “long-term expectations”, which concern “future income from capital goods”. This shows that the rate of profit, even without the emphasis of Marxism, is indeed a very important variable in Keynesian economic theory.

And the level of this rate, as the best Keynesianism well knows, depends crucially on the “class struggle”, seen mainly as a struggle for the distribution of income between wages and profits – but also between these portions and interest, rents, etc. . Of course, this level also depends on the product-capital ratio, which, as we know, tends to reduce in the long term, tending to lower the rate of profit. If this technological determination appears as an ineluctable consequence of capitalist development, the question of the level of the real wage, as is also known, always appears as a very fundamental question in all Keynesian theory. If, for example, the real wage becomes higher in the capitalist economy, it will reinforce effective demand on the one hand, but reduce the profitability of capital on the other.

This author, now a classic, also judged that the probable return on capital depends in practice on the current return. By convention, capitalists use what they observe in the present to think about the future. As is known, the distant future holds uncertainties and is, in fact, unpredictable. "The essence of this convention - although it doesn't always work so simply - is to assume that the existing business situation will continue indefinitely unless you have concrete reasons to expect a change."

Although Keynes does not endorse the theory of value as abstract labor and thus the exploitation of labor power, he wrote that he accepts "the pre-classical doctrine that everything is produced by labor". Here, he welcomed the labor theory of value from Smith, Ricardo and others because he deemed it necessary “to take the unit of labor as the only physical unit” necessary for his “economic system, apart from the units of money and time”. In this way, it is evident, exploitation is at least implicit – even if repressed – in his understanding of this system.

Thus, it is not quite correct that Keynes and part of his followers take profit as a “gift of capital”. On the contrary, he declared that one should not “say of capital that it is productive”. Justifying profit with the (false) argument that capital is scarce – something that is supposed to be suppressed in the course of the development of capitalism –, he thought it better to say something anodyne, that is, that “it provides, in the course of its existence, an income surplus over its original cost.

Now, it is clear that many Keynesians are not loyal to Keynes on these crucial points. Many even adopt the neoclassical theory of production – though not all. Having advanced this reservation, it is necessary to ask: why do Keynesians in general, when dealing with economic growth, concentrate their analytical efforts on effective demand? Now, a complete answer to this question requires several considerations. The first of them points to the fact that Keynesian theory analyzes the capitalist system centrally from the sphere of circulation – and not from the production of goods.

In this sense, it is necessary to see that the Kaleckian statement according to which “capitalists earn what they invest (in fact, “what they spend” according to the original expression), while workers spend what they earn” is not a denial of the theory of value work. It says nothing about the production of value or even about the proportions in which it is distributed.

In fact, Kalecki's saying presents a paradox inherent in the process of making goods. See: for workers it is true that they “spend what they earn” both from the microeconomic perspective and from the macroeconomic perspective, however, this is not true for capitalists: from the microeconomic perspective, they also spend what they earn, but from the perspective macroeconomic a reversal occurs. Why? Because capitalists can hoard, that is, they can prefer liquidity as the Keynesians say. If an important portion of the owners of money do this in the economic conjuncture, a part of the value of the goods that were taken to the markets will not be realized.

So now we come to the more difficult theoretical question of explaining investment itself. Keynesians assert, as is well known, that investment determines saving – and not the other way around. Now, as we now also know, if this statement is correct, it is nothing more than a quasi-taulology: if income is the sum of consumption and investment, but also the sum of consumption expenditure and savings, it follows that Saving equals investment. Well, saving in this sense is the same as non-consumption. The statement is not configured as a pure tautology, because it says more than that, it points to a causal relationship.

The Keynesian and Kaleckian statement – ​​it should be noted – says nothing about the real foundation of investment. In fact, as should have been clear, it is not current savings that finance current investment. Such a balance of flows should not deceive the unwary. This illusion comes from a modeling that ignores the real temporality of capital accumulation. It is a superficial and misleading representation of how the economic system works. By prioritizing the problem of how to manage effective demand from a theoretical point of view, macroeconomists end up hiding how investment is actually nurtured.

To really understand how investment is fed, it is necessary to move from the sphere of circulation to the sphere of commodity production. It is through the circuit of capital that the link between surplus value (profit) and capital accumulation is understood.

It may seem surprising, but Keynesians in general suffer from atrocious anguish in the face of the malfunctioning of capitalism. Well, this one always brings with it an existential threat. They want to make it survive in a fruitful way and, therefore, privilege the possible future in relation to the past, already past. Thus, they stress the fact that current investment depends, to a large extent, on retained and accumulated profits in the past. They thus seal the connection between exploitation, the appropriation of surplus value in the form of profit, and investment. And this trivial fact probably remains in the unconscious of Keynesian theorists.

And this concealment operation occurs because they include such profits in the concept of aggregate savings of society as a whole, later considering it as a stable fraction of income – independent, therefore, of the interest rate. Keynes himself called this mystifying assumption the “fundamental psychological law”, a law that supposedly governs the decision to share income between consumption and savings and that holds for economic agents in general. As this operation, moreover, transforms investment into an autonomous variable of effective demand, the understanding of capitalism is distorted.

The critical picture presented here is not complete if it is not explained now why in the capitalist economy, in fact, there is a certain degree of autonomy of investment in relation to the funds accumulated in the past. As Anwar Shaikh teaches, the invention of fractional reserves – that is, the rule according to which bank deposits no longer need to be fully covered by retained funds – made it possible to create temporary and ex nihilo of purchasing power.

Private banks can create new deposits by providing credit to economic agents in general. In doing so, they allow, according to Shaikh, a “faster expansion of investment in relation to savings, as well as a faster expansion of consumption in relation to income”. Now, this advance of investment in relation to current savings occurs only ex-ante since it should be covered by income growth ex post.

In this sense, Keynes' decision to abandon the classical theory of interest to adopt a new one that he himself formulated seems correct. Before him, in the strict field of economic theory, it was often assumed that the interest rate was determined by the supply and demand of loanable funds, which came from pre-existing savings – influenced, therefore, by the interest rate level. . In the theory of Keynes and the Keynesians, the interest rate is determined through the supply and demand of credit money, which is issued by private banks, based on state money.

Having said all this, it seems necessary to add that effective demand can have a “marginal” influence on the profit rate because it affects, to a certain extent, the level of use of productive capacity. Moreover, in an alternative theory, the interest rate can indeed also “marginally” influence the savings rate observed in the economic system as a whole. For the level of retained earnings to finance investment can be influenced by the interest rate. However, it seems difficult to admit that such short-term effects play an important role in determining the behavior of the capitalist economy in the long term, even though the latter is in fact a compositional succession of short terms.

And this calls for a return to Michael Roberts' text. The study on which it is based also shows that global investments have fallen following the secular fall in the rate of profit observed after the end of World War II. He takes this as confirming evidence for a thesis found in The capital: “profit is the sting of capitalist production” in the short and long term. For, the accumulation of capital, in the last analysis, feeds on the total profits that are realized in the evolution of production; first, part of these profits are transformed into financial resources, but later, they are used to finance new effective investments.

Returning to Roberts' text

If the theory is right, the decline in long-term profitability should produce a secular decline in private investment – ​​and the data collected by Harmett bear this out. His study shows that new investment relative to depreciation has declined globally from a multiple of 2 in the 1990s to less than 1 today. In other words, annual global investment is now less than what is needed to replace impaired fixed assets.

* Eleutério FS Prado is a full and senior professor at the Department of Economics at USP. Author, among other books, of Complexity and praxis (Pleiad).



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