Net capital investment is equal to capital accumulation. Keynes conflates net investment with the expenditure on means of production. Because he accepts Smith's absurd dogma that the value of total output resolves entirely into revenues, he also continues the error of Smith and Ricardo, which saw all such capital accumulation as also being equivalent to an expansion of variable-capital. If all value resolves entirely into revenues, then clearly the value of additional capital, including means of production, as well as means of consumption, must also resolve entirely into revenues, and thereby, into the new labour required for their production. Of course, for Keynes who also adopts the neoclassical theory of value, not the classical labour theory of value of Smith and Ricardo, he does not describe it this way, because, for him, new value is created also by the other factors of production, land and capital, their marginal revenue product, being returned to them as factor incomes.
Keynes also recognised that for such net investment to occur, there must be a surplus product, which means that this surplus product is not consumed unproductively, but productively. In other words, contrary to Say, Keynes argues that whilst income equals expenditure, a portion of this expenditure is not consumption, C, but Investment, I. Total Income (Y) = Total Expenditure, but expenditure is now constituted as C + I. I is funded from saving, i.e. the portion of income not consumed. Keynes also recognised that this means that I is a function of Y, but not in this year, but the previous year I(t) = f(Y[t-1]). Assuming, that the marginal propensity to consume is less than 1, i.e. that there is some saving from income, then there will be investment. The consequence of the investment is that the economy expands, so that National Income expands, but rising income means a greater mass of savings and of investment, even with a constant marginal propensity to consume, driving a further expansion of the economy and so on.
But, as Hansen says, the equality of saving and investment does not mean that a condition of equilibrium exists. To arrive at this condition of equality, increased saving means increased investment, but this investment can take the form of unplanned increases in inventories. In other words, unsold commodities pile up in inventories. Such “investment” does not at all lead to an expansion of the economy and revenues, or even to its maintenance at existing levels.
Marx's analysis of net investment/expanded reproduction is set out in Capital II, Chapter 21. Marx too sees investment/accumulation as a consequence of saving, and so of previous output and incomes. Unlike Keynes, who disguises the real nature of these “savings”, as profits, i.e. forced saving by workers, appropriated by capital, Marx makes clear that the process is one of the hoarding of profits, used by capital to consume productively rather than unproductively.
“It is evident that both the investments of capital in the numerous lines of industry constituting class I and the different individual investments of capital within each of these lines of industry, according to their age, i.e., the space of time during which they already have functioned, quite aside from their volumes, technical conditions, market conditions, etc., are in different stages of the process of successive transformation from surplus-value into potential money-capital, whether this money-capital is to serve for the expansion of the active capital or for the establishment of new industrial enterprises – the two forms of expansion of production. One part of the capitalists is continually converting its potential money-capital, grown to an appropriate size, into productive capital, i.e., with the money hoarded by the conversion of surplus-value into money they buy means of production, additional elements of constant capital. Another part of the capitalists is meanwhile still engaged in hoarding its potential money-capital. Capitalists belonging to these two categories confront each other: some as buyers, the others as sellers, and each one of the two exclusively in one of these roles.”
(Capital II, Chapter 21)
When we look at the process of differentiation of the peasantry, it involves precisely this behaviour. As peasants/small producers direct more of their production to the market, the better placed peasants/small producers are able to hoard a certain amount of the money they receive, rather than using it to finance their unproductive consumption. When this money hoard reaches a certain level, they can use it not as money-currency, but as capital. They can use it as a buyer-up of commodities (merchant capital), paying at below market value, and selling in more distant markets at market value, thereby appropriating part of the surplus value of the less fortunate small producers. They may use the hoarded money as loanable money-capital (interest-bearing capital), lending to peasants and other small producers who require currency, and so obtaining a portion of their surplus value, and even necessary labour, in the form of interest. When some of those other small producers can no longer subsist, they can use this hoarded money to buy up their means of production, converting it into productive-capital, as they now employ the ruined small producers as wage labourers, and extract surplus value directly from their labour.
Looking at accumulation in Department I, therefore, considering the previous scenario given in relation to simple reproduction, its output value is still 6000, but now it does not consume the whole 1000 of surplus value unproductively in the form of consumer goods. It accumulates some of this 1000, as additional means of production. But, to do so, assuming no change in the technical composition of capital, it must also employ additional labour, in the same proportion, 4:1. If it accumulates 500 of the 1000, it takes 400 of its own output, and adds it to the 4000 of existing constant capital. It employs additional labour of 100, so that its variable-capital rises to 1100. With the same rate of surplus value, this labour will now produce a surplus value in the next period of 1100, meaning that half of this can be accumulated, equals 550.
If we examine the position in relation to individual firms in Department I, however, there is no reason, why they will not continue to sell all of their output to Department II, because, in reality, the process is one mediated by money, not direct exchanges of commodities. A steel producer in Department I, may sell all their output to Department II firms, obtaining money in exchange. Say this amounts to £6,000, of which £1,000 is surplus value. But, now, the steel producer is under no compulsion to spend all of this £1,000 of surplus value on consumer goods. They save £500 of it, for the purpose of creating a hoard, so as to accumulate capital. That means that if we continue to make the assumptions pertaining to simple reproduction, used in Chapter 20, there would be an inevitable disproportion, and the under-consumption of consumer goods, by Department I, would lead to an equivalent overproduction in Department II, even though, it produced on the same basis as before. It would have overproduced commodities to the extent of £500.
“In other words, a portion of the commodities of B (II), and indeed prima facie a portion without the sale of which he cannot reconvert his constant capital entirely into its productive form, has become unsaleable. As far as this portion is concerned there is therefore an over-production, which, likewise as far as the same portion is concerned, clogs reproduction, even on the same scale...
Hence, if we survey the entire social reproduction, which comprises the capitalists of both I and II, the conversion of the surplus-product of A (I) into virtual money-capital expresses the impossibility of reconverting commodity-capital of B (II) representing an equal amount of value into productive (constant) capital; hence not virtual production on an extended scale but an obstruction of simple reproduction, and so a deficit in simple reproduction. As the formation and sale of the surplus-product of A (I) are normal phenomena of simple reproduction, we have here even on the basis of simple reproduction the following interdependent phenomena: Formation of virtual additional money-capital in class I (hence under-consumption from the view-point of II); piling up of commodity-supplies in class II which cannot be reconverted into productive capital (hence relative over-production in II); surplus of money-capital in I and reproduction deficit in II.
Without pausing any longer at this point, we simply remark that we had assumed in the analysis of simple reproduction that the entire surplus-value of I and II is spent as revenue. As a matter of fact however one portion of the surplus-value is spent as revenue, and the other is converted into capital. Actual accumulation can take place only on this assumption. That accumulation should take place at the expense of consumption is, couched in such general terms, an illusion contradicting the nature of capitalist production. For it takes for granted that the aim and compelling motive of capitalist production is consumption, and not the snatching of surplus-value and its capitalisation, i.e., accumulation.”
(ibid)
In other words, starting from the assumptions of simple reproduction, as set out in the schemas set out in Chapter 20, is wrong, because they are based on all revenue being consumed unproductively. That starting point must be an economy in which there is a dynamic disequilibrium, precisely because it is geared to the expansion of the means of production, in anticipation of an increase in demand, arising from an expanding economy, as described in Marx's response to Ricardo in Capital III, Chapter 39.
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