Review of Political Economy, Volume 12, Number 4, 2000

Marx Inside the Circuit: discipline

device, wage bargaining and
unemployment in a sequential
monetary economy
RICCARDO BELLOFIORE1, GUGLIELMO FORGES DAVANZATI2
& RICCARDO REALFONZO3
1
Department of Economics, University of Bergamo, piazza Rosate 2,
I-24129 Bergamo, Italy; 2Department of Philosophy, University of Lecce,
via Stampacchia, Palazzo Parlangeli, I-73100 Lecce, Italy;
3
Faculty of Economics, University of Sannio, piazza Guerrazzi 1,
I-82100 Benevento, Italy

The aim of this paper is to show that Marxian labour theory of value can be consistently
interpreted in terms of the monetary circuit model, where Ž rms need initial Ž nance to
start production and where the money supply is endogenous. In contrast to the recently
revived Marxian monetary models, in particular the New Interpretation, it is argued here
that although the money wage is bargained for on the labour market, the real wage is
determined by Ž rms’ choices, since Ž rms autonomously determine the structure of
production and hence real consumption for the working class as a whole. This does not
mean that Ž rms are able to set the real wage without economic and social constraints.
Starting from our circuitist reading of the labour theory of value and distribution, a
model is developed in order to determine the level of employment and income distri-
bution, on the assumptions that (i) the industrial reserve army affects wage bargaining
and labour effort and that (ii) workers react to the failure of their expectations on the
real wage by reducing their work intensity. In this context, it is shown that Ž rms may
increase their share of proŽ ts over time only be means of innovations.

1. Introduction
Until the mid-1970s, interpreters of the Marxian labour theory of value and
distribution paid scant attention to the theory’s monetary foundations (the most
important exception being de Brunhoff, 1976 [1967]). Since then, the situation
has changed. Two lines of thought can be detected in the more recent literature.
One stems from the so-called ‘New Interpretation’ of the labour theory of value
(Duménil, 1980; Foley, 1982; Lipietz, 1982). Foley, in particular, has stressed
the relation between money and labour time as encapsulated in the ‘monetary
expression of labour’. The insight here is that money represents labour time
ISSN 0953-8259 print/ISSN 1465-3982 online/00/040403-15 Ó 2000 Taylor & Francis Ltd
404 Riccardo BelloŽ ore et al.

because capitalist production is production for the market; commodities are

exchanged against money on the commodity market. This approach is based on
a novel (re)reading of Marx on exploitation, on the value of the labour power,
and on the transformation problem.
The second line of thought is less well known in the English- speaking
world, and is represented by French and Italian circuit theorists of money
(Cencini & Schmitt, 1976a, 1976b; Graziani, 1997a [1983], 1997b [1986];
BelloŽ ore, 1989; BelloŽ ore & Realfonzo, 1997). These authors have emphasised
that capitalist production has to be Ž nanced. This Ž nance is credit-money that
gets lent by banks to Ž rms at the beginning of the monetary circuit 1. According
to this view, the privileged access to money capital lets capitalist Ž rms decide
the composition of output. As a consequence, the net product may be divided
into the goods that are made available to workers (wage goods) and those that
are not (proŽ t goods)—or, what amounts to the same thing, the homogeneous
good produced is partly appropriated by the capitalist class adding a mark-up to
its costs of production. The appropriation of surplus by the capitalist class is
interpreted here as the necessary outcome of the sequential and monetary nature
of the capitalist process 2.
In what follows, we present an argument further, developing a circuitist
version of the Marxian analysis. Our primary concern is not interpreting Marx’s
text, or even of clarifying the methodological differences between Marx and
other heterodox authors. Rather, the aim of this paper is to reach Marxian
conclusions from a monetary reading of the capitalist process along the lines of
Wicksell, Schumpeter and Keynes’s Treatise on Money. For this reason, we
leave aside the controversial issue of the transformation of values into prices,
and we concentrate instead upon the twin (and, in our view, still debatable)
topics of the most appropriate way to frame exploitation and deŽ ne the value of
labour power in a capitalist economy. Our approach will result in a determi-

1
These authors propose a new approach to the Marxian theory of money. According to this
interpretation, Marx endorsed the view that money is a commodity (albeit a very ‘special’ one), when
he introduced money as the ‘universal equivalent’ in the Ž rst chapters of Capital, Vol. 1. In these
chapters, Marx presupposed generalised commodity exchange; in Vol. 1, he also showed that
commodity exchange is general only when production is capitalist. Capitalist commodity production
requires anticipated monetary Ž nancing. In Vol. 1 Marx seems not to realise that Ž nance for production
cannot be rigorously analysed within a money—commodity perspective, but that it rather necessitates
a theory of money as a symbol. There is a problem here, at the heart of Marx’s theoretical construction.
In Capital, Vol. 3, however, when Marx analyses in detail interest-bearingcapital, credit and Ž ctitious
capital, and the working of the banking system, he hints at the view of money as a purely social symbol
and of banks as ex nihilo creators of money. For this new interpretation, the most promising
perspective is that of integrating a non-commodity theory of money into the Marxian labour theory
of value. Although critical of the money-commodity side of Marx’s writings, this perspective fully
recognises that most of his conclusions were valid in the institutional context he lived in (see Graziani,
1997b [1986]; Realfonzo & BelloŽ ore, 1996; BelloŽ ore, 1998).
2
Capitalist appropriation of the surplus in monetary form could be accommodated in the circuit
framework with a bank Ž nance of investment demand. Since, however, this bank Ž nance would remain
inside the Ž rm sector, and would almost immediately reimbursed to banks, we argue that from a
‘macro’ or ‘class’ perspective of the capitalist circuit it is more rigorous to consider the surplus as
appropriated in physical terms by the capitalist class, and shared between Ž nancial capital and
industrial capital.
 Marx Inside the Circuit 405

nation of the level of employment and income distribution where the industrial
reserve army affects wage bargaining and labour effort, and where workers react
to the failure of their expectations on the real wage by reducing their work
intensity, so that Ž rms may increase the share of proŽ ts over time only by means
of innovations. The paper is organised as follows. Section 2 compares the circuit
interpretation of Marx with the New Interpretation while sketching out a simple
version of a Marxian circuit. Section 3 draws its inspiration from Marxian
analysis of the role of the industrial reserve army in determining workers’
bargaining power. A ‘discipline effect’ of unemployment on wages and worker
effort is used to show some possible equilibria in the labour market. Section 4
analyses some possible strategies for Ž rms that must set their prices, taking
account of the reaction of workers. Section 5 offers some general conclusions.

2. Marx, the Circuit Approach and the New Interpretation

Three fundamental propositions made by the New Interpretation are relevant for
a circuitist reading of Marx. The Ž rst is deŽ nitional: the ‘postulate’ according to
which the aggregate money value added expresses nothing but the expenditure
of living labour in production. The second is theoretical: the central concept in
the Marxian view of the economic process can be found in the circuit of money
capital. Value moves from the advance of money capital to buy the means of
production and labour power, to the production of a new value added, to its
realisation back into money, with the selling of the product on the commodity
market. The third is methodological: the starting point of Marx’s inquiry about
the capitalist process is the system as a whole, the aggregate of all social
production. Thus, the determination of value as the property of the whole mass
of net commodity output is prior to the determination of individual prices. At
this macro level it is possible to deŽ ne the ‘monetary expression of labour’ as
the ratio of the net national output at current prices to the total direct (produc-
tive) labour newly expended within the period.
From these propositions, some important conclusions may be drawn. The
inverse of the monetary expression of labour, sometimes called the ‘value of
money’, tells us how much labour time a monetary unit represents. This latter
ratio allows us to translate any nominal magnitude into the labour ‘represented’
by that given amount of money. In the cycle of money capital, wages are
advanced in monetary terms; only afterwards, with the expenditure of the wage
bill on the market for goods, are they realised in commodities. According to the
New Interpretation, the labour equivalent of the money wage is measured by
multiplying the money wage to the value of money; this product, of course,
gives nothing but the wage share of national income. Since the ‘value’ of the
aggregate of newly produced commodities is assumed to remain the same
whatever the price rule, subtracting the wage bill from the money value added
we get the surplus value in the form of (gross) money proŽ ts; and this latter
divided by the monetary expression of labour gives us the (gross) proŽ t share in
the national income. The New Interpretation deŽ nes the rate of surplus value as
the ratio between the gross proŽ t share in national income to the wage share in
national income; or, to put it in slightly different terms, as the labour ‘repre-
406 Riccardo BelloŽ ore et al.

sented’ by money gross proŽ ts over the labour ‘represented’ by the money wage
bill. Supposing a Ž xed money wage, the New Interpretation says that when
workers vary their consumption choices, there is no change in the rate of surplus
value 3 as expressed in terms of ‘represented’ labour; but there is a change in the
ratio between the labour ‘embodied’ in goods bought by capitalists and labour
embodied in goods bought by workers (which is the older deŽ nition of the rate
of surplus value) for the basket of goods consumed by workers’ changes (see
Foley, 1982).
The circuit approach to Marx accepts the three fundamental propositions
above. However, the argument is developed in a different way—going, so to
speak, in reverse order, and arriving at different conclusions. The point of
departure is the ‘macro’ holistic formulation of the Marxian analysis of the
origin of the capitalist surplus. ‘Macro’ here means something more than the
mere aggregate of social production: it refers to the separation between labour
and means of production, and so to the class structure of capitalist society and
to its consequences for the composition of real output. According to the circuitist
interpretation of Marx, a truly macro-class analysis of capitalist society must
begin considering only three agents: the monetary capitalists (nowadays, the
banks); the industrial capitalists (the Ž rm sector as a whole); and the wage
workers (households for conventional macroeconomics). It is obvious that in a
coherent macro-monetary framework all exchanges within the Ž rm sector may
be ignored because they are internal transactions. The class divide between
entrepreneurs and workers is due to the fact that the former have access to
money and may then undertake a productive activity and earn a proŽ t, whereas
the latter are obliged to sell their labour power to gain the money needed to buy
consumption goods and ensure their reproduction 4. Bank provision of liquidity
to Ž rms gives the entrepreneur ‘command’ over living labour—namely, the
power to determine the level of activity and the allocation of the labour force,
with no other constraints than those set by social con ict (on these constraints,
see Sections 3 and 4).
From this standpoint, the source of a surplus value cannot be detected in the
act of buying and selling among Ž rms, for in inter-Ž rm trade, any proŽ t for an
individual Ž rm would be paralleled by an equivalent loss for another Ž rm,
leaving no gain for the Ž rm sector as a whole. The valorisation of capital may
result only as the consequence of some ‘external’ exchange. The only exchange
external to the capitalist class in the capitalist monetary sequence is the purchase
3
We prefer to use the label ‘rate of surplus value’ rather than the standard ‘rate of exploitation’. The
latter conveys the idea that exploitation is restricted to surplus labour (and surplus value). In our view,
however, the extraction of surplus labour (and of surplus value) is the necessary consequence of the
fact that the whole of living labour is forced and abstract-alienated labour within production.
Exploitation is the personal and impersonal imposition and control that affects living labour in its
entirety. This interpretation is the one defended by BelloŽ ore & Finelli (1998).
4
Of course, in Marx, the class divide exists before and independently of the rules governing the access
to money, insofar as it depends on the ownership of the means of production. According to Marx,
it is because they are capitalists that they have access to bank Ž nance. However, if one does not want
to explain the access to credit with the ownership of commodities before explaining how commodities
are produced, it is right to assume that the class divide depends on access to bank credit. According
to this view, it is because they have access to bank Ž nance that they are capitalists.
 Marx Inside the Circuit 407

of labour power at the opening of the circuit. Thus, the use of labour power
during the circuit is the only source of new value added. The asymmetry
between wage workers and entrepreneurs in respect of their access to money is
important for another reason: while workers are only free to decide how to
divide their money income between nominal consumption and nominal saving,
Ž rms are able to decide autonomously the division of output between proŽ t
goods and wage goods (or the share of the homogeneous good they will earn as
gross proŽ t), and hence the real wage for the working class. By subtracting the
labour embodied in the given basket of goods appropriated by workers from the
living labour expended by workers, we arrive at a residue (namely, surplus
embodied labour) that explains, and adequately measures, the whole capitalist
surplus.
The different direction of this argument gives a different meaning to similar
theses, and also accounts for some dissimilar conclusions. The New Interpret-
ation’s postulate that the total value added in a commodity-producing society
expresses the total social labour time expended on the circuit view, becomes the
unavoidable result of the macro-monetary and class standpoint taken by Marx—
namely, a consequence of the argument about the capitalist process as a
monetary sequence. Moreover, the macro reading of the cycle of money capital
does not entail in the New Interpretation, as it does on the circuit approach, the
initial abstraction from monetary transactions among Ž rms. (As a result of this
abstraction, initial Ž nance demand by Ž rms to banks can be reduced to the wage
bill needed to set production going.) Finally, the essential analytical choice made
by circuitists—namely, that of distinguishing banks (as producers of money)
from Ž rms (as the privileged users of money)—is responsible for the idea that,
although the individual worker may have freedom to choose on the commodity
market, the working class as a whole is compelled to consume a given real
basket decided by Ž rms. The key role attributed by the circuit approach to
money as the driving power of capitalist production, as well as the emphasis laid
on the differential access to (bank) money that discriminates between workers
and entrepreneurs, explains why the circuit interpretation of Marx maintains
what may appear, at Ž rst sight, a more traditional view of the rate of surplus
value (as the ratio between the labour embodied in proŽ t goods over the labour
embodied in wage goods). This view is not due to any underestimation of the
monetary nature of the capitalist process. Quite the contrary. It is precisely
because the capitalist process is a monetary sequence, opened by banks granting
liquidity to Ž rms in order to advance money wages to workers, that the capitalist
class is able to decide autonomously the real composition of output irrespective
of worker choices. (We abstract, at present, from the workers’ reaction function.
This is analysed in Section 4 below. )
To clarify this issue further, let us refer to the model of the monetary circuit
developed by Graziani (1990, 1994). Three classes of agents are supposed—
banks, which produce money; Ž rms, which on the basis of their access to bank
money, produce commodities; and workers, who supply labour power. The
circuit of the capitalist economy may be divided into the following logical
phases, which go from the opening to the closing of the circuit (sequential
process)—(a) banks create money in order to satisfy Ž nance demands by Ž rms
408 Riccardo BelloŽ ore et al.

for production purposes (initial Ž nance), and Ž rms acquire labour power; (b) the
production process takes place; (c) workers spend their income on wage goods
and securities (Ž nal Ž nance), and Ž rms repay the initial debt contracted to the
banks. In this model, Ž rms have exclusive access to bank credit. By making
loans to Ž rms, banks create money. Money is pure credit, a symbol without any
intrinsic value. Without money, Ž rms could not buy labour power and the
production process could not start. That is why bank decisions about loans are
the logical starting point of deposits and why the potential credit created by
banks is theoretically unlimited 5. Firms could concede whatever money wages
workers demand. In fact, banks could Ž nance any money wage bill. Assuming
a propensity to consume equal to one, Ž rms would always get back the money
wage bill and repay the banks (interest apart). Since Ž rms have decided how
many workers to hire and where to employ them, they have also Ž xed the real
consumption of the working class (and thus the proŽ t). In fact, bargaining
between Ž rms and workers on the labour market concerns only the money wage.
Since workers have given expectations about the price level, the advance
payment of money wages determines an expected real wage. In spite of this, the
actual real wage will be known by workers only on the commodity market.
The real wage expected by workers may be different from the real wage
independently settled by Ž rms.
Limiting ourselves to this bare skeleton of the circuit picture of the working
of the capitalist economy (where there is no control by workers over effort and
a given industrial concentration ratio), it may appear as if bankers and
entrepreneurs together were able to reduce workers’ real wage to a minimum
level. Hence, the real wage bill arising out of Ž rm strategies will have no
benchmark in a ‘subsistence’ notion. Marx followed a different path in his
argument. Although he was aware of the power of capitalists in determining
what workers will receive as the real reward for their labour power, Marx
preferred to assume that workers were granted the traditional standard of
consumption to which they were accustomed, and which may be interpreted as
the cost of production of labour power (see Rowthorn, 1980 [1979]).
Marx, who surely was the most prestigious forerunner of modern monetary
circuit theory, adopted this view, which was tantamount to taking the real wage
as given at the opening of the circuit, for three reasons. First, he wanted to
analyse the origin of the capitalist surplus by weeding out the doubt that the
extraction of surplus labour is due to some ‘injustice’ against workers. The
assumption that workers receive what they have reason to expect suited this
purpose. Second, the assumption allowed a determination of surplus value as
surplus labour in production, once the possibility of a realisation crisis is ruled
out. Given historical (and technical) conditions, it is actually possible to
ascertain the labour embodied in wage goods before production, and so it is

5
This is true also for the individual bank if one makes the further assumption that all banks expand
loans at the same pace. In this case the banks’ debt—credit relationships will be perfectly offset. It
is necessary to stress that the assumption that bank credit will not be converted into non-bank money
does not represent a restrictive case; on the contrary, it is the case with no exogenous institutional
constraints (see BelloŽ ore, 1985, 1992: Realfonzo 1998).
 Marx Inside the Circuit 409

possible to calculate the surplus labour embodied in proŽ t goods before the
exchange on the commodity market; if all commodities produced are sold,
necessary labour and surplus labour are socially validated. No doubt, the
nominal shape of these magnitudes will change according to the accounting
scheme (values or prices) that is adopted. But the hidden reality of production
as the place where the capitalist surplus has its origin remains the same,
irrespective of the determination of relative prices. Thirdly, Marx thought that
the working class may in uence wage determination (mainly) through their
action upon the length, the intensity, and the conditions of work.
In Section 3 and 4 we relax the Marxian assumption that the real wage
expected by workers equals the actual real wage. By so doing, we show the
conditions under which surplus value exceeds workers’ traditional standard of
consumption, and the conditions under which maximising behaviour by Ž rms
does not lead them to exploit workers above this standard. This allows us to
show that the Marxian assumption is also consistent with rational behaviour by
Ž rms given the existence of class struggle, and to explain why Marx took
technical progress to be the fundamental means of increasing surplus value over
time.

3. The Discipline Effect and the Level of Employment

In this section, we determine the level of employment and income distribution
in a sequential monetary economy, according to the theoretical framework
described above 6. We make the following assumptions.
(a) There are n homogeneous Ž rms, producing consumption goods in non-
perfectly competitive markets, and Ns homogeneous workers. The aggregate
production function is Q 5 p N, where Q is output, p is average labour
productivity and N is employment.
(b) Workers expect a price level pe equal to that of the previous period; the
average money wage depends on the industrial reserve army: the higher the
level of unemployment, the lower worker bargaining power, the lower the
average money wage. The average money wage varies from a minimum,
higher than zero, to a maximum value, which obtains when there is full
employment.
(c) Labour intensity depends on the industrial reserve army: the higher the level
of unemployment, the higher labour productivity. It varies from a minimum,
greater than zero, to a maximum, corresponding to the maximum labour
intensity workers can provide. 7
(d) Firms determine the average price of consumption goods by adding a
mark-up [1 1 q] to the unitary cost of production (with q . 0). It is assumed
that Ž rms maximise proŽ ts under the constraint given by the reimbursement

6
A Post Keynesian development of this model, with the further assumption of a ‘high wages effect’,
is presented in Forges Davanzati & Realfonzo (2000).
7
Marx used the term ‘labour productivity’ to denote three means to extract surplus value: the
lengthening of the working day, the increasing of the productive power of labour, and the intensifying
of the work rate. In what follows, unless otherwise stated, we concentrate on the last of the three.
410 Riccardo BelloŽ ore et al.

of initial Ž nance to banks. 8 ProŽ ts are gained in real terms.9 The industrial
concentration ratio determines the maximum mark-up Ž rms can obtain
[1 1 q*] (Dutt, 1987; Lavoie, 1992). However, as we show in Section 4,
because of worker reaction to the failure of their expectations and because
of the behaviour of Ž rms over time, the mark-up may be lower than its
maximum level.
We deŽ ne the ‘value of labour power’ (i.e. the hours of socially necessary
labour to produce the historically determined subsistence wage) as the expected
real wage in the case where the economic process has repeated itself for a
number of periods without any alteration in monetary and real variables (so that
workers have always found their expectations conŽ rmed in the market for
goods).
Assumption (b) can be justiŽ ed on the grounds that each worker perceives
the threat of dismissal as effective in so far as unemployment is high. The
strength of this Marxian effect of the industrial reserve army over worker
bargaining power is normally dependent on (i) the degree of replaceability
among workers; and (ii) how costly it is for each worker not to be hired (or to
be Ž red). As workers become less replaceable, and/or as they perceive dismissal
to be less costly (for example, because of greater unemployment beneŽ ts), their
bargaining power grows and, for a given level of employment and for a given
expected level of prices, the average money wage grows. Since banks can supply
limitless credit, there is no limit to money wage increases or to the money wage
bill.
Assumption (c) can be justiŽ ed by the usual argument that being con ictual
is very costly for a worker when the industrial reserve army is large, since Ž rms
can easily replace workers. This means that it is more convenient for workers to
be more cooperative when unemployment is high. We call this mechanism the
‘discipline effect’.
Given assumptions (a) and (c), Ž rms face two kinds of production func-
tion—the technical (or exogenous) production function, and the socially deter-
mined (or endogenous) production function. The technical production function,
Q 5 p N, gives a relationship between employment and maximum output. More
precisely, it shows the maximum output that can be obtained for a given level
of employment (given the technology) assuming that labour intensity is maxi-

8
For the sake of simplicity, we exclude the payment of interest to the banks.
9
This assumption raises two questions, which should be taken into consideration here. First, are Ž rms
able to obtain money proŽ ts? As shown above, in the basic circuit approach (describing a closed
economy with no government expenditure), Ž rms in the aggregate can only obtain the wage bill they
advanced to workers (wN) and, as a result, it is impossible for all Ž rms to obtain money proŽ ts. This
would be possible for the individual Ž rm, if Ž rms were not homogeneous (i.e. if they used different
production functions). However, it does not happen in the economy described here due to assumption
(a). Secondly, why do Ž rms prefer physical surplus (with no money proŽ ts) to no money proŽ ts (with
no physical surplus)? The question is not trivial, since maximisation of real proŽ ts presupposes that
non-sold production is employable in productive uses. In effect, Ž rms can use the stock of goods they
accumulated in at least two different ways–part of it can be appropriated by capitalists as consumption
goods (i.e. capitalists personal income) and part of it can be appropriated by banks as the
reimbursement of the interest bill (which, for the sake of simplicity, in this model is equal to zero).
 Marx Inside the Circuit 411

mum (i.e. workers fully cooperate). The endogenous production function, Q 5 p

[N]N (where N is the level of employment), shows the relationship between
employment and the level of output produced for each value of labour intensity
that Ž rms can extract from workers. Since, as employment grows, labour
intensity decreases (d p /d N , 0), the endogenous production function shows
decreasing returns. In our analysis, the endogenous production function is the
relevant production function for Ž rms. In fact, actual production depends on
labour intensity and output is always lower (obviously except when N 5 0) than
the maximum level technologically feasible.
Let us now determine the equilibrium level of employment. In choosing the
level of employment, each Ž rm Ž nds it convenient to Ž x q 5 q*. The reason
Ž rms do not compete by reducing prices is that (as assumed above) they
maximise real proŽ ts under the constraint of repaying initial Ž nance to banks. On
the other hand, they cannot raise q over q* because, given the industrial
concentration ratio, this strategy would cause sales to fall and not allow them to
repay monetary debt.10 Re-writing (for the sake of simplicity) the endogenous
production function as f(N), the proŽ ts function (for the individual Ž rm and for
Ž rms in the aggregate) becomes:
P5 f(N) 2 (w/p)N 5 f(N) 2 [p /(1 1 q*)]N (1)
and the equilibrium condition is:
f9 (N) 5 f9 (N)/(1 1 q*) (2)
Since, by assumption, q* . 0, Ž rms maximise proŽ ts when f9 (N) 5 0. If the
maximum level of output corresponds to a level of employment lower than the
labour supply Ns, the employment that maximises proŽ t will be lower than full
employment. Furthermore, the amount of unemployment depends on the strength
of the discipline effect—the more rapidly workers reduce their effort, the larger
the industrial reserve army that maximizes proŽ t.
Let us suppose that the economic process repeats itself for a number of
periods t 2 1 without any alteration in real and monetary variables. In this case,
the expected real wage is conŽ rmed on the market and (as assumed above) it
indicates the value of labour- power. In other words, the general level of prices
resulting from Ž rm decisions equals that expected by workers, so that there are
no in ationary pushes. This condition expresses monetary equilibrium , which is
10
This result depends on the assumption that Ž rms act in non-perfectly competitive markets, so that
goods are not perfect substitutes. In the case where workers buy Ž xed proportions of the n goods
produced by Ž rms, each Ž rm faces a demand curve with unitary elasticity (wN/n), where n is the
number of Ž rms). Of course, wN/n is exactly the initial Ž nance the individual Ž rm received and it
is what it must reimburse to banks (interests apart). Furthermore, it is plain that workers do not buy
at every level of price of the single good: in particular, up to a certain p*a 5 w/p (1 1 q*) further price
increases of the good a will lead the Ž rm to lose its customers. In a sense, p*a can be regarded as
the reservation price for workers buying the single consumption good a. Every price level in the range
between p 5 w/p and p 5 w/p (1 1 q*) gives the individual Ž rm the same level of money proŽ ts, equal
to zero. This maximum price level (which allows the individual Ž rm to obtain wN/n) is, in turn,
affected by the degree of monopoly, in the sense that the higher it is, the less workers can substitute
goods, the more the individual Ž rm can raise prices without losing customers (i.e. the higher p* will
result).
412 Riccardo BelloŽ ore et al.

the level of employment that brings agreement between worker demands and
Ž rm decisions. In the period t it could happen that the maximum mark-up
determines a level of prices different from that expected by workers (for
instance, because of an external shock on the production function, or even
because of a change in the industrial concentration ratio). If the maximum
mark-up q* leads to a level of prices higher than that expected by workers, there
would be a decrease in the real wage below the expected level. In Marxian
terms, this means that the price of labour-power (the labour embodied in the real
wage, which the worker actually consumes) is lower than the value of labour-
power. In this case, the rate of surplus will be higher than the situation where
labour- power was paid at its value (see BelloŽ ore & Realfonzo, 1997). In Fig.
1, the line w/pe indicates the expected real wage, which is, by assumption,
positively dependent on the level of employment. The lines p and w/p in the
upper panel respectively indicate the relationship between labour productivity
and employment and between the actual real wage and employment for a given
mark-up (1 1 q*). Worker expectations are conŽ rmed when w/pe 5 p /(1 1 q*).
This happens in E*, which is assumed to be the level of equilibrium employment
in the t 2 1 periods. The real wage corresponding to E* can be conceived as the
historically determined subsistence wage. In the lower panel, production func-
tions are represented. N* is the level of employment that maximises proŽ ts.
Theoretically, N* might be greater than, or less than or equal to E*. If (as in Fig.
1) f9 (N) 5 0 at a level of employment greater than E*, prices and wages will
increase non-stop, and worker expectations will be systematically dashed. It is
possible to maintain that, after a number of production periods, the value of
labour- power will establish itself at the value of the actual real wage and
monetary disequilibrium will disappear. In graphic terms, this means that the
w/pe function shifts to the right. It is plain that this analysis—which excludes any
reaction by workers to this ‘overexploitation’ —falls outside Marx’s view since,
in his opinion, it is class con ict in production, and not bargaining in the labour
market, that determines distribution shares.

4. Workers’ Reaction Function, Firms’ Temporal Horizon and In-

come Distribution
The conclusions of Section 3 are restricted to the assumption that both the
individual Ž rm and Ž rms in the aggregate have no reason to set the mark-up at
less than the maximum. However, in Ž xing the mark-up, Ž rms must consider
how workers would react to any difference between the actual real wage and the
expected real wage. Here, it is reasonable to assume that workers will reduce
labour intensity in the subsequent production period when the actual real wage
is lower than the expected real wage. We call this phenomenon the ‘workers’
reaction function’ and assume that it operates only when the actual real wage is
lower than the expected real wage (never the reverse).11 In a sense, the workers’

11
The workers’ reaction should be regarded as a collective reaction, which can occur for two distinct
reasons. First, the reaction may be caused by intentional actions against Ž rms’ strategies, i.e. by social
con ict. Second, reductions in labour intensity may also be caused by the deterioration of the quality
 Marx Inside the Circuit 413

Fig. 1.

reaction function expresses the intensity of class struggle, because reductions in

labour intensity re ect the existing con ict over distribution. And the severity of
the reaction (given by reduction of work rate for a given negative difference
Footnote 11 continued

of the workforce, an unintentional outcome of Ž rm behaviour. In both cases,the neoclassical argument

(that if workers shirk, pushing their marginal product falls below the real wage, they will be Ž red)
does not apply, since when all workers reduce labour intensity Ž rms cannot replace the shirkers with
more productive workers.
414 Riccardo BelloŽ ore et al.

between the actual real wage and the expected real wage) is a sign of their power
to affect income distribution.
Furthermore, let us assume that Ž rms foresee worker reactions exactly, and
that the maximum mark-up determines a positive difference between the
expected real wage and the actual real wage. Under the assumption that a rise
in prices over the expected prices determines a reduction in labour intensity, the
price strategies of Ž rms are also affected by their temporal horizon. The Ž rst case
is when Ž rms live in the economy for only one period (‘hit and run’ strategy).
Precisely because they are not concerned about what will happen in the
following production period, Ž rms will Ž nd it convenient to Ž x the mark-up at
its maximum level (see Section 3). As a result: (i) the difference between the
actual real wage and the expected real wage will be at its maximum; and (ii) the
difference between the aggregate proŽ ts and the wage bill will be the maximum
according to the industrial concentration ratio, or, in other words, income
distribution will be most unequal.
However, these results are purely theoretical, since in practice at least one
of the following assumptions must be true: (i) if the economy considered is the
world economy, it is unrealistic and inconsistent with the workings of a
capitalistic economy (where capitalists aim to accumulate for indeŽ nite periods)
to imagine that each of the existing Ž rms endures for only one production period;
(ii) if the economy under consideration is a single open economy, all the existing
Ž rms should be perfectly mobile, both technically (i.e. they could produce the
same goods and sell them everywhere) and economically (i.e. other things being
equal, the cost of transferring the production process elsewhere is lower than the
cost of reduced effort deriving from worker reactions). More speciŽ cally, the ‘hit
and run’ case can be conceived as an interpretation of the dynamics of
economies with a large number of mobile Ž rms (multinational corporations,
above all). The result is consistent with the view that the spread of multinational
capital has contributed to income inequality and lower living standards (see
Crotty et al., 1995).
A second case is when Ž rms maximise the amount of real proŽ ts in an
inŽ nite temporal horizon. In so doing, they must respect worker expectations
about real wages. In fact, if Ž rms Ž xed a level of prices greater than that
expected, in the ensuing production period workers would react by reducing their
labour intensity. As a consequence (because of the assumption that Ž rms cannot
raise labour intensity by increasing real wages) proŽ ts would decrease in all the
inŽ nitely many successive production periods. This implies that intertemporal
proŽ ts maximisation leads Ž rms to obtain constant proŽ ts over time12. It follows
that output, the real wage bill and employment must be constant. To determine
the equilibrium employment, let us rewrite the proŽ ts function as:

P5 f(N) 2 w/p(N)N (3)

where w/p 5 w/p(N), because the expected real wage (which, by assumption, is
12
Note that the individual Ž rm Ž nds it always convenient to Ž x a mark-up consistent with workers’
expectation independently of other Ž rms’ behaviour.
 Marx Inside the Circuit 415

positively dependent on employment) must be equal to the actual real wage. The
equilibrium condition is now
f9 (N) 5 w/p[1 1 h ] (4)
where h is the elasticity of the real wage with respect to employment. The
conclusion is that labour demand is lower when the mark-up depends on the
workers’ reaction function. In fact, in equation (4), f9 (N) . 0 in equilibrium
because h . 0, while in equation (2), f9 (N) 5 0. In this case, since Ž rms Ž nd it
convenient to avoid worker reactions in all the inŽ nite periods of their temporal
horizon, labour power will always be paid its value. Class con ict allows
workers to obtain their customary real wage and the level of the industrial
reserve army expresses the social cost workers pay not to allow capitalists to Ž x
prices so as to get the maximum mark-up consistent with the industrial
concentration ratio. Monetary equilibrium expresses an equilibrium in the
bargaining power of Ž rms and workers.
Firms can obtain greater proŽ ts over time (even with a worker reaction
function) only by introducing technological changes that increase labour produc-
tivity through a rise in its productive power. If the aggregate production function
shifts up, the consequent increase in output leads to an increase in proŽ ts for
every value of the mark-up. In other words, Ž rms can increase proŽ ts while
respecting worker expectations about the real wage. As ‘R&D structures’
provide new capital-intensive techniques, (in the long run) higher levels of
labour technical productivity and higher proŽ t levels result. A consequence of
this outcome is that Ž rm behaviour over time can affect the path of technological
change. In general, technological change will be driven by the length of Ž rms’
temporal horizon; the more Ž rms that are interested in future proŽ ts, the more
the ‘R&D structures’ will be engaged in Ž nding new capital-intensive tech-
niques.
In the model presented here, prices and income distribution are primarily
affected by the temporal horizon of Ž rms. In the extreme case, where Ž rms are
interested only in one period of production, worker reactions are ineffective, and
the general price level will be determined only by the industrial concentration
ratio—the higher the industrial concentration, the more the individual Ž rm (and
Ž rms in the aggregate) can raise prices. At the other extreme, where Ž rms have
an inŽ nite temporal horizon, worker reaction is fully effective and, in Ž xing
prices, Ž rms must reduce them below the maximum value consistent with the
industrial concentration ratio. In this case, worker expectations about their real
wage directly affect prices because, since Ž rms are interested in future proŽ ts,
Ž rms give workers the real wage that they expect to receive. In a sense, this is
a case where what workers expect to receive determines what they actually do
receive.

5. Concluding Remarks
The Marxian labour theory of value can be set out consistently in terms of a
model of the monetary circuit, where Ž rms need initial Ž nance to start pro-
duction and the money supply is endogenous. Unlike the recent revival of
416 Riccardo BelloŽ ore et al.

Marxian monetary models, in our circuitist reading of Marx the money wage is
bargained on the labour market while the real wage is determined by Ž rm
choices. However, as shown above, this does not mean that Ž rms can set the real
wage without constraints. Firm power is limited both by competition and, above
all, by worker reaction. When a worker reaction function is considered, one
Marxian simplifying assumption—that worker expectations are conŽ rmed on the
market—follows from the maximising behaviour of Ž rms.
Several conclusions may be drawn from the model presented in this paper.
First, unemployment is more likely to occur the more the discipline effect
in uences labour intensity. This is because the more labour effort increases when
unemployment grows, the larger is the industrial reserve army that Ž rms need to
get the maximum level of proŽ ts. This happens independently of Ž rms’ temporal
horizons. Secondly, given the workers’ reaction function, unemployment is more
likely to occur the higher the elasticity of the real wage with respect to
employment. This is because the higher this value, the stronger is worker
bargaining power for a given level of employment. This will lead to lower
equilibrium employment. Finally, the rate of in ation and income distribution
are affected by the temporal horizons of Ž rms. The more Ž rms are concerned
about their long-run proŽ ts, the lower the in ation rate will be, and the less
unequal income distribution will be.

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