Marx Meets Keynes in the Classroom: Teaching a Simple Model of Modern Capitalism

ABSTRACT

This paper presents a pedagogical model of the way modern capitalism works, which can be taught by using one single graph. Specifically, we extend earlier research by introducing features of the monetary theory of production [Graziani 1994. La Teoria Monetaria Della Produzione. Montepulciano: Editori del Grifo; Graziani 2003. The Monetary Theory of Production. Cambridge: Cambridge University Press] and distribution [Pivetti 1991. An Essay on Money and Distribution. London: Macmillan] into an existing model of the principle of effective demand [Andini 2009. ‘Teaching Keynes’s Principle of Effective Demand Within the Real Wage Vs. Employment Space.’ Forum for Social Economics 38 (2–3): 209–228.]. The resulting framework can be used for teaching a number of relevant economic propositions, which are consistent with the Marxian/Keynesian tradition in political economy. Among these, it is argued that both labour exploitation and ‘final finance’ loans play a fundamental role for the capitalist system to be money-profitable on aggregate.

KEYWORDS:

• Employment
• wage
• money
• finance
• capitalism

JEL CLASSIFICATIONS:

• B22
• E11
• E12
• E40

Acknowledgments

The author is grateful to Monica Andini, Steve Fleetwood and two anonymous referees for their very useful comments and suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The work of Augusto Graziani, also known as the theory of the monetary circuit, is related to that of other ‘circuitists’, such as Alain Parguez, Bernard Schmitt and Frédéric Poulon. It has inspired the studies of younger scholars such as Marc Lavoie, Louis-Philippe Rochon, Mario Seccareccia, Marcello Messori, Riccardo Bellofiore, Giuseppe Fontana and Riccardo Realfonso, among many others. A recent special issue of Metroeconomica, in honour of Augusto Graziani, testifies for the renewed interest in the monetary theory of production.

2 The work of Massimo Pivetti is embedded in the Italian Sraffian tradition, which includes economists such as Pierangelo Garegnani, Giancarlo de Vivo and Fabio Petri. It has inspired the research of younger scholars such as Aldo Barba, Sergio Cesaratto, Roberto Ciccone and others.

3 Since the focus of the paper is on modern capitalism, money is conceived here as neither backed by gold nor by any other real asset. It is a scriptural liability issued by a bank, which is accepted as a means of final payment ultimately because of the enforcement of the law. Wray (2015) presents a similar view, stressing the role of taxation enforcement.

4 As we want to model the simplest monetary circuit one can think about, and consistently with the role of rentiers attributed to financial capitalists in Section 2, we assume that financial capitalists do not invest (they just need a ‘charter’, which they already have) and thus they do not borrow from their own banks to invest. Their income (interests) is in part spent in consumption goods and in part saved as bank capital. Allowing for financial capitalists to borrow from their own banks in order to fund autonomous consumption would be an unnecessary complication.

5 The idea that firm investment is funded by bank credit is in line with Seccareccia (1988), Rochon (2005), Rochon (2009) and Cottin-Euziol (2013), among others.

6 Note that $I_0$ does not include the nominal value of the unsold real production. It is the nominal value of the real output, to be used as a means of production, that is actually sold, the payment being made by the buyer using bank-borrowed money.

7 Our definition of ‘final finance’ is different from that of the original monetary theory of production, where the ‘final finance’ corresponds to the monetary savings that workers provide to firms in exchange for firm-issued financial assets (Graziani 1994, p. 82).

8 The author stresses the long-term nature of the loans issued by banks to finance firm investments and the fact that they are typically reimbursed in several periods.

9 Since this paper is supposed to be a pedagogical device, it seems important to clarify the reason why the mark-up can be seen as an indicator of labour exploitation. Let us consider expression (2(2) ${\left(\frac{w}{P}\right)}^{\ast }=\frac{a}{1+\mu }$(2) ). If a worker, on average, produces 6 units of product (i.e. real labour productivity a is equal to 6 units of product) and the real wage he/she earns, on average, is equal to 4 units of product, then the mark-up is, on average, equal to 0.5 and average exploitation is 2 units of product. If the mark-up increases to 1, then the worker earns 3 units of product and exploitation becomes 3 units of product. If the mark-up goes to 0, then the worker earns 6 units of product and there is no exploitation.

10 The model does not change much with proportional taxes on gross incomes and with imports depending on after-tax incomes. The aggregate demand becomes $AD=(c_w-m_w)(1-t_w)wL+(c_{\pi }-m_{\pi })(1-t_{\pi })(PY-wL)+C_0+I_0+G_0+X_0$, where $t_w$ and $t_{\pi }$ are wage and profit tax rates, respectively, and $m_w$ and $m_{\pi }$ are marginal propensities to import of wage and profit earners, respectively. All the new model equilibria can be easily derived.

11 If $X_0-M_0>0$, i.e. the current account is positive, then the rest of the world is living above its means, i.e. foreign residents are borrowing from country residents.

12 A limitation of the model is that only ‘initial finance’ interests (paid by firms to banks) are considered.

13 The internet address is https://fred.stlouisfed.org/

14 In addition, the government can never become insolvent, to the extent that its debts are expressed in the currency of which the government is the monopoly issuer.

15 If the central bank controls the nominal interest rate, as assumed in the most recent versions of the neoclassical synthesis where the LM curve is absent, and there is a monetary-policy rule, an increase in the nominal interest rate causes a leftward shift of the AD curve, the downward-sloping curve of the AD-AS model represented in the price vs. real output space. Thus, the price level decreases.

16 In particular, Pivetti (1991, p. 22) argues that ‘a prolonged fall in interest rates causes a fall in prices relative to the wage level, and thereby brings about a lower rate of profit and a higher real wage; whilst a prolonged rise in interest rates will rise the rate of profits, and thus reduce the real wage’.

17 The internet address is https://www.bls.gov/lpc/special_requests/tableb10.xlsx

18 Pivetti (2004) uses the interest rate on 10-year government bonds in the United States as a proxy for the interest rate in his theory. We do not follow this approach because our model looks at the role played by the interest rate on bank loans. However, the level and the evolution over time of the interest rate on 10-year government bonds are very similar, in the United States, to the level and the evolution over time of the bank prime loan rate. So, a comparison between our model and Pivetti's theory is robust to the choice of the interest-rate proxy.

19 Finding a good proxy of the interest rate on bank loans is a difficult task. In addition, a fundamental ingredient of any theory or model is the hypothesis of ceteris paribus, which does not hold in the real world.

20 The verb ‘set’ may not be the most appropriate because in many countries, including the United States, the overnight rate is the result of an equilibrium in the overnight market where banks borrow and lend central-bank reserves. What we mean is that the central bank is able to affect the market and obtain any given overnight rate as a market equilibrium.

21 Perhaps, a better name for this rule would have been the Zero Nominal Policy Rate (ZNPR) rule.