What Is The Role Of The Reserve Army Of Labor Marx? How Would You Gauge Marx's Approach In Relation To The Theories Of Effective Demand Developed By Kalecki And Keynes?

1751 words - 8 pages

What is the role of the reserve army of labor Marx? How would you gauge Marx's approach in relation to the theories of effective demand developed by Kalecki and Keynes?

Throughout economic theory, there are various responses to the creation and subsequent role of unemployment and the wage rate. In Karl Marx’s theory, unemployment, or the ‘reserve army of labour’, is necessary for capitalism to regenerate itself, and is also what determines the wage rate. For John Maynard Keynes and Michael Kalecki, unemployment is caused by the failure of effective demand. This essay will first demonstrate Marx’s approach to employment through the study of the reserve army of labour and the cyclical ...view middle of the document...

Under competitive conditions, capitalists cannot simply raise prices due to a general increase in wages. Instead they look to labour saving devices, creating impetus for technical change, which then generates technological unemployment. Not all firms will succeed in implementing the change, so their bankruptcies will add to the reserve army of labour. This restoration of the reserve army will reduce the general wage rate and accumulation will pick up again with increased concentration of capital. Thus Marxist economics sees crises as temporary, since inherent forces like a large reserve army of labour will keep wages low and set off another period of capital accumulation (Sardoni, 1987, p.5).

In contrast, Keynes and Kalecki identify the main determinant of employment as the level of effective demand. For Keynes, the propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wages. Keynes sees that the level of income is the key determinant of consumption (Kriesler, 1997, p.305), and this in turn generates more income for members of society, through the multiplier effect. For a reduction in money wages to lead to increased employment, as Marx suggests, it would have to do so by increasing effective demand. But Keynes notes that the fall in money wages is likely to produce a fall in the propensity to consume (Kriesler, 1997, p.307). On the other hand, when employment is increased and aggregate real income is increased, Keynes argued that the psychology of the community is such that aggregate consumption is increased, but not by as much as income. This means that savings increases more than investment (Keynes, 1936, p.30). If the demand for investment goods by capitalists just compensates for the reduction in demand for consumer goods due to savings, then there will be no problem of effective demand. All goods produced will be absorbed, either by consumers purchasing goods to satisfy their needs or by capitalists purchasing capital goods that can be used in producing more commodities in the future (Argyrous, 2003, p.174). However this particular relationship, which corresponds to the assumptions of classical theory, will only exist when, ‘by accident or design’ (Keynes, 1936, p.29), a certain amount of net investment is undertaken so as to bring total effective demand to the level of full capacity utilisation. If the propensity to consume and the rate of new investment result in a deficient effective demand, the level of employment will fall short of the supply of labour potentially available at the existing real wage (Keynes, 1936, p.31). The economy may find itself in stable equilibrium at a level below full employment.
Marx’s approach is in keeping with the classical assumption that capitalists save and automatically invest all of their profits due to the pressure of competition (Sardoni, 1987, p.4). If the reserve...

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