Excellent presentation on functions of money other than as a numeraire. rb 1. Magazine & Journal Articles Aoki, MasatoTo the Rescue or to the Abyss: Notes on the Marx in Keynes.(John Maynard Keynes' General Theory of Employment, Interest, and Money) Journal of Economic Issues v35, n4 (Dec, 2001):931 (24 pages). COPYRIGHT 2001 Association for Evolutionary Economics ********** The General Theory of Employment, Interest, and Money of 1936 is missing a line of argument that is prominent in an earlier draft. In the 1933 draft, John Maynard Keynes used a taxonomic framework to differentiate the classical theory of capitalism from his general theory. The taxonomy showed that, depending upon how money and the motivation of production are incorporated, an economic regime's market-clearing results will be either ensured or merely possible. In contrast to the "co-operative" economy of classical theory, the "entrepreneur" economy described by Keynes' general theory can achieve not only market clearing as a possible outcome but also stagnation and instability. In discussing the taxonomy, Keynes commented: "The distinction between a co-operative economy and entrepreneur economy bears some relation to a pregnant observation made by Karl Marx,--though the subsequent use to which he put this observation was highly illogical" (1979, 81). Keynes proceeded to refer specifically to Marx's distinction between C-M-C and M-C-M, that is, between (1) selling commodities (C) for money (M) in order to purchase other commodities and (2) buying commodities with money in order to obtain more money. This article explores a tension that haunts the theoretical development leading to The General Theory. The tension is partially engendered by an aspect of common cause between Keynes and Marx. Specifically, the rhetorical task of persuading political economists to rethink capitalism's inherent stability requires a refutation of classical theory's thin concepts of money and the monetized nature of capitalist production. The antithesis is provided, of course, by the opposed political agendas: Keynes sought to theorize capitalism's instability in order to find effective policy controls, while Marx aimed at showing that this instability is fundamentally beyond control. This article examines the dissonant synthesis or unstable compound formed in the 1933 draft by Keynes' taxonomic argument and hit-and-run reference to Marx's capital circuits analysis. When we analyze the manners in which Marx and Keynes opposed classical theory, we can see significant similarities in their treatment of money, the motivation of production, and the conditions of crisis potential. Focusing on these objects, the three sections of this article summarize Keynes' taxonomic argument, describe Marx's capital circuits analysis, and analyze the similarities between Keynes' heuristic taxonomy and Marx's critique of classical economics. While its objective is to analyze the Marx in Keynes, the article provides indirect support for the view that the taxonomic framework and its theoretical linkage to Marx were eschewed in The General Theory of 1936 so that Keynes "the savior" could protect his "fellow economists" from a theory that logically leads to the abyss of capitalism's basic unmanageability. Keynes' Taxonomy of Economic Systems We should not judge a book by its cover, we are told. But sometimes the title is instructive, especially when it changes from draft to draft. Before publication in 1936 as The General Theory of Employment, Interest, and Money, the 1933 version bore the shorter title The General Theory of Employment, perhaps revealing a political economist's prime concern. Even earlier, Keynes originally considered "The Monetary Theory of Production" as the title for his general theory of capitalism. This section summarizes the theoretical distinctions Keynes made with the taxonomic analysis of 1933. This summary may shed light on why "The Monetary Theory of Production" made sense as a possible title. It also may illuminate the theoretical link to Marx that Keynes created with his seemingly odd reference, the meaning of which is the topic of sections 2 and 3 below. More than a theoretical curio, Keynes' reference to Marx puts in sharp relief Keynes' view that the classical-neoclassical tradition failed to theorize essential fe atures of capitalism: the complex functions of money, the motivation of production, and their combined implications for stagnation and crisis in an economy in which investment decisions are time-bound, uncertain, and consequential if wrong. Chapter 1 The general theory According to Sheila Dow (1996), in the published General Theory Keynes deliberately chose the rhetorical strategy of confronting the received classical wisdom in a strong form rather than as a straw man. Hence Keynes' approach was to argue that persistent unemployment is theoretically possible by minimally modifying the "classical postulates." This rhetorical approach is reflected in the organization of book I of the published version: Book I Introduction Book I Introduction Chapter 2 The postulates of the classical economics Chapter 3 The principle of effective demand In contrast, the first section of The General Theory of Employment of 1933 develops "The Relation of the General Theory of Economics to the Classical Theory." With this section title Keynes announced that his would be a typological or taxonomic approach to understanding classical theory as a limited case of general possibilities. Book I of the 1933 draft is organized accordingly: Book I The relation of the general theory of economics to the classical theory Chapter 1 The postulates of the classical economics Chapter 2 The distinction between a co-operative economy and an entrepreneur economy Chapter 3 The characteristics of an entrepreneur economy In chapters 2 and 3 of the 1933 manuscript, Keynes built the critical foundation for his alternative theory by locating the classical economy within a range of three economic systems. Each system is populated by rational decision makers whose choices are constrained by the discipline of markets and rules of private property. Keynes' taxonomy consists of the following species, each with alternative names: 1. Cooperative Economy, or Real-Wage Economy 2. Neutral Entrepreneur Economy, or Neutral Economy 3. Entrepreneur Economy, or Money-Wage Economy Within this taxonomy, Keynes located the "capitalism" of classical economics in the first category of the cooperative economy (at worst) or the second category of neutral entrepreneur economy (at best). By cooperative economy Keynes meant a barter economy "in which the factors of production are rewarded by dividing up in agreed proportions the actual output of their co-operative efforts" (1979, 77). That is, there is an agreement struck by factor suppliers as to the distribution of aggregate output, and this agreement is reached prior to production. The cooperative aspect extends beyond conjoint productive activity according to both a social and minute division of labor. In Keynes' meaning, this type of economic arrangement is "cooperative" in that the composition of aggregate output--the what and how much of production--is determined by the group of factor suppliers as an antecedent to production. The essential characteristic of a cooperative economy is that, as a precondition of production, the factor suppliers must cooperate in determining the distribution of that output as the certain reward to the factor suppliers. The essential point is that by whatever roundabout methods every factor of production ultimately accepts as its reward a predetermined share of the expected current output either in kind or in terms of something which has an exchange value equal to that of the predetermined share. (1979, 77) This characteristic is not fundamentally altered by possible modifications. One such modification is the use of a token money which provides only a "temporary convenience": It is not necessary that the factors should receive their shares of the output in kind in the first instance--the position is substantially the same if they are paid in money, provided they all of them accept the money merely as a temporary convenience, with a view to spending the whole of it forthwith on purchasing such part of current output as they choose. (1979, 76) Also secondary to the feature of predetermined production and distribution is the existence of wealth in excess of current production: Nor is it necessary that current output should comprise the whole of wealth-the position is still substantially the same if the factors of production swap their wage in respect of current output for other forms of wealth, provided that those with whom they swap intend to employ the whole sum forthwith to purchase some part of current output. (1979, 77) Finally, the particular usefulness of the universal wage good would not alter the basic characteristic of a cooperative economy: It may even be the case that the supply function of a factor, in terms of what it can produce, varies according to the value of what it can produce in terms of something which it cannot produce. (1979, 77) In a cooperative economy, aggregate output must equal aggregate income (however paid), and aggregate output must equal aggregate demand. By implication, actual output must equal the "potential," or full-employment, level of output. Overproduction is therefore impossible, even in the short run. So is involuntary unemployment. In a neutral entrepreneur economy, money performs a specified function, as the form of payment to the factors, but it is made to yield the same market-clearing and full-employment results as a cooperative economy. This result is due to the operation of a crucial "mechanism" that brings into alignment the aggregate levels of production, factor income, and demand and thus ensures the prereconciled results of the cooperative economy: The second type of economy in which factors are hired by entrepreneurs for money but where there is a mechanism of some kind to ensure that the exchange value of the money incomes of the factors is always equal in the aggregate to the proportion of current output which would have been the factor's share in a co-operative economy, we will call a neutral entrepreneur economy, or a neutral economy for short. (1979, 78) The neutral entrepreneur economy resembles a Walrasian general equilibrium economy in which a tatonnement mechanism ensures a market-clearing relative price matrix. Accordingly, money functions primarily as a medium of exchange such that all the money received as income is spent purchasing the predetermined baskets of goods and services. Most notably, money is stripped of its store-of-value function. Finally, the entrepreneur economy, or money-wage economy, is Keynes' "third type, of which the second is a limiting case, in which the entrepreneurs hire the factors for money but without such a mechanism as the above" (1979, 78). The only and crucial difference between the entrepreneur economy in general and its particular "neutral" variant is the entrepreneur economy's lack of the special built-in mechanism (e.g., the heuristic tatonnement process of general equilibrium theory) ensuring the all-market-clearing results of the cooperative economy. With reference to this taxonomy of economic systems, Keynes argued that the cooperative economy is "the simplest case of a society in which the presuppositions of the classical theory are fulfilled" (1979, 77). But they would also be fulfilled in a society of the type in which we actually live, where the starting up of productive processes largely depends on a class of entrepreneurs who hire the factors of production for money and look to their recoupment from selling the output for money, provided that the whole of current incomes of the factors of production are necessarily spent, directly or indirectly on purchasing their own current output from the entrepreneurs. (1979, 77, emphasis added) In other words, according to classical theory capitalism conforms to the outcome of the cooperative economy but uses money as the means of paying factors. Therefore, "capitalism" in classical theory is what Keynes defines as the intermediate type, the neutral entrepreneur economy. The classical theory... as exemplified in the tradition from Ricardo to Marshall and Professor Pigou, appears to me to presume that the conditions for a Neutral Economy are substantially fulfilled in general. (1979, 79) Thus, classical theory envisions a system that combines a monetary system of factor payment and commodity exchange with a special "mechanism" that ensures total market clearing at full employment. In Keynes' view of his economics contemporaries, "the greater part of the classical analysis has been usually applied without compunction or qualification to an entrepreneur economy" (1979, 79). Why? Keynes identified two keys. The first lies in the different conceptions of the motivations of production in the entrepreneur economy in which "we actually live today": The law of production in an entrepreneur economy can be stated as follows. A process of production will not be started up, unless the money proceeds expected from the sale of the output are at least equal to the money costs which could be avoided by not starting up the process. In a real-wage and co-operative economy there is no obstacle in the way of the employment of an additional unit of labor if this unit will add to the social product output expected to have an exchange value equal to 10 bushels of wheat, which is sufficient to balance the disutility of the additional employment. Thus the second postulate of the classical theory is satisfied. But in a money-wage or entrepreneur economy the criterion is different. Production will only take place if the expenditure of pounds sterling 100 in hiring factors of production will yield an output which it is expected to sell for at least pounds sterling 100. In these conditions the second postulate will not be satisfied, except in the limiting case of a neutral economy. (1979, 80). (1) We should note two points about Keynes' illustration. First, the cooperative economy scenario is described in terms of a quantity of output (wheat), whereas the entrepreneur economy scenario emphasizes that the entrepreneur is concerned about monetary, not real, values. Keynes' point is that the marginality conditions expressed in monetary terms do not necessarily imply anything about the real marginality conditions, "except in the limiting case of a neutral economy" in which a mechanism ensures the proper alignment between the two. Second, in a cooperative economy, the distinction between actual and expected is rendered meaningless by the predetermined and prereconciled nature of the cooperative system, whereas this distinction is of paramount importance in a monetary, entrepreneur economy which lacks the prereconciling mechanism. The second key to classical theory's limited applicability lies in its failure to comprehend "the fluctuations of effective demand": Effective demand may be defined by reference to the expected excess of sale proceeds over variable cost (what is included in variable cost depending on the length of the period in view). Effective demand fluctuates if this excess fluctuates, being deficient if it falls short of some normal figure (not yet defined) and excessive if it exceeds it. In a co-operative or in a neutral economy, in which sale proceeds exceed variable cost by a determinate amount, effective demand cannot fluctuate; and it can be neglected in considering the factors which determine the volume of employment. But in an entrepreneur economy the fluctuations of effective demand may be the dominating factor in determining the volume of employment; and in this book The General Theory of Employment of 1933 , therefore, we shall be mainly concerned with analyzing the causes and consequences of fluctuations in effective demand interpreted in the above sense. (1979, 80) To sum, in terms of his taxonomy of economic systems, Keynes argued that classical theory misconceives capitalism as behaving like a system of prereconciled quasi-barter, in which money plays a strictly exchange-facilitating role, and not like a nonprereconciled system of risk entrepreneurship, in which money plays a complex part: as capital; as speculative hoard and store of value; as the medium of factor payment, exchange, and realization; and as the means of debt repayment. To make this argument Keynes developed the taxonomy so that he can emphasize the importance of the special prereconciling mechanism that would be necessary--in the manner of a deus ex machina--to make real world capitalism behave in the manner conceived by classical theory. He ended this section with the following paragraph: Thus the classical theory fails us at both ends, so to speak, if we try to apply it to an entrepreneur economy. For it is not true that the entrepreneur's demand for labor depends on the share of the product which will fall to the entrepreneur; and it is not true that the supply of labor depends on the share of the product which will fall to labor. It is these fundamental divergencies at the outset which make it impracticable to start with the classical theory and then, at an advanced stage of the argument, to adapt its conclusions to the vagaries of an Entrepreneur Economy. (1979, 83)
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