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DeLong Smackdown Watch: Rakesh Bhandari Accuses Me of Oversimplifying Marx Edition

He is, of course, correct. It is impossible to write about Marx at all without oversimplifying him.


Lecture: Seven Sects of Macroeconomic Error, Part II: Rakesh Bhandari said...

I need to study this post a bit more, but I think there is fundamental problem with Marx's theory of crisis not mentioned here.

Keynes spoke of the declining marginal efficiency of capital, Marx spoke of the falling rate of profit. Economists today speak of the capital/output ratio; Marx focused on what he called the organic composition of capital.

Keynes considered investment the most volatile element of effective demand, and so did Marx.

However Marx thought that the investment levels would fall short of full employment and periodically low enough to create a crisis not due to an inexplicable loss of confidence in the future but because profitability on new investments had already begun to fall off. This would then create excess capacity.

For Marx this was ultimately because the organic composition of capital or capital/output ratio had become too high and profitability on new investments insufficient to overcome the liquidity preference.

For both Marx and Keynes the situation cannot be overcome by lower wages, even lower real wages.

But what Marx did not understand is that autonomous government expenditures can create the demand with which excess capacity can be worked down with minimal losses and reduced unemployment, preparing the way for new investments embodying technological progress by means of which the capital/output ratio can be reduced, profitability restored, and investment levels raised.