Marx, Keynes and the possibility of crisis

Abstract

This paper is the product of two apparently unconnected lines of enquiry. The first is of the nature of a puzzle. In explaining his theory of effective demand, Keynes laid great emphasis on the need for a theory of the demand for output as a whole. In this theory, simple manipulations of aggregate variables yield results which appear quite extra ordinary compared with those of orthodox economics. Why does a treatment based on aggregate variables produce such different conclusions from the orthodox one, which looks at the component parts of that aggregate ? The second is one of exposition. Ricardo was a strong supporter of the argument which sought to show that a capitalist economy would not suffer a general glut of commodities. In Theories of Surplus Value Marx challenges Ricardo's argument by showing that it overlooked the very features of a capitalist economy which introduce the possibility of some form of breakdown in the first place. From this is distilled Marx's theory of the 'possibility of crisis' which high lights the elements within a capitalist economy from which a breakdown could develop. The paper explains what this theory is about, draws attention to its limitations and traces Marx's argument and the development of 'possibility' theory which underlies it. The interest of possibility theory is that it provides an answer to the Keynesian puzzle. It shows why the level of aggregate demand is important, though it is itself quite separate from Keynes' theory of effective demand. The sixth section of the paper explains the link. Keynes of course did not need possibility theory to justify a theory of aggregate demand and in the seventh section we seek out his justification. The final section delves a little further into the writings of Marx and Keynes in an attempt to highlight the problem posed by aggregate demand. It is concluded that Marx and Keynes occupy substantially the same ground on the question of the nature of the problem, though their treatment of it and of the way the system responds is entirely different.