Posted by: Dirk | March 14, 2018

A Post-Keynesian comment on “Marx’s “Capital”‘ (6th ed.)

Having read through the book to see whether it can be used for teaching purposes (still undecided), I found a passage there that misrepresents “Keynesianism”. Here it is:

Even in Keynesian economics (and for Keynes himself), where monetary factors are specifically introduced, the rate of profit – represented by the marginal efficiency of capital – is equal to the rate of interest. While short-term expectations might lead to a disequilibrium value of the rate of interest, underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate.

Both of these statements are, in my view, plain wrong. The place to look for Keynes’s thought is the General Theory, and he was very clear about these issues. Regarding the first statement – the current rate of profit equals the current rate of interest – there is a quote from Keynes (1936, ch. 11) that is directly relevant:

The schedule of the marginal efficiency of capital is of fundamental importance because it is mainly through this factor (much more than through the rate of interest) that the expectation of the future influences the present. The mistake of regarding the marginal efficiency of capital primarily in terms of the current yield of capital equipment, which would be correct only in the static state where there is no changing future to influence the present, has had the result of breaking the theoretical link between to-day and to-morrow. Even the rate of interest is, virtually,[7] a current phenomenon; and if we reduce the marginal efficiency of capital to the same status, we cut ourselves off from taking any direct account of the influence of the future in our analysis of the existing equilibrium.

So, the marginal efficiency of capital includes expectations about the future! It hence cannot equal the current rate of interest. If it would, there would be equilibrium in the sense that yield of the asset is the same as the cost of financing it. This is neoclassical thinking where no profit results. Keynes made it clear that expected yields (the marginal efficiency of capital) are above the rate of interest so that investment is carried out. The issue is discussed at length in chapter 17. In my view it is a gross representation to claim that “the rate of profit […] is equal to the rate of interest” in Keynesian economics and for Keynes himself.

In chapter 17 we also find very clear statements of Keynes regarding the natural rate of interest:

In my Treatise on Money I defined what purported to be a unique rate of interest, which I called the natural rate of interest — namely, the rate of interest which, in the terminology of my Treatise, preserved equality between the rate of saving (as there defined) and the rate of investment. I believed this to be a development and clarification of Wicksell’s “natural rate of interest”, which was, according to him, the rate which would preserve the stability if some, not quite clearly specified, price-level.

I had, however, overlooked the fact that in any given society there is, on this definition, a different natural rate of interest for each hypothetical level of employment. And, similarly, for every rate of interest there is a level of employment for which that rate is the “natural” rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment. Thus it was a mistake to speak of the natural rate of interest or to suggest that the above definition would yield a unique value for the rate of interest irrespective of the level of employment. I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment.

I am now no longer of the opinion that the concept of a “natural” rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis. It is merely the rate of interest which will preserve the status quo; and, in general, we have no predominant interest in the status quo as such.

This debunks the idea by the authors (Ben Fine and Alfredo Saad-Filho) that “underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate”. As Keynes said: “it was a mistake to speak of the natural rate of interest” and he no longer thinks that the concept “has anything very useful or significant to contribute to our analysis”.

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Responses

  1. […] week, I posted an article about Ben Fine’s excellent book about Marx’s Capital. I criticized two points that were […]


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