Forthcoming in L.-P. Rochon and S. Rossi (eds), Encyclopedia of Post-Keynesian
Economics. Edward Elgar
State – role of
David M. Fields
Capitalism does not embody a social system that harmonizes individual interests in the
process of promoting collective social welfare, as mainstream economics contends. Rather,
the kernel of truth lies in an inherently unstable historical evolution of antithetical social
relations. The role of the State manifests the socio-political problematic in which the
contradictions of class conflict are continually fought out. The question is how? By way of
fiscal policy, the role of the State defines the nature of economic organization (Campbell,
1993). The means by which the State has the magnitude to perform this duty is regulated by
the power of central bank policy (Vernengo, 2018). The State installs a macroeconomic
configuration to make capitalist investment outcomes less uncertain and more predictable
(Pressman, 2006), that is, a system of stabilization (Kaldor, 1938).
As a premise, let us abstractly demonstrate Karl Marx’s process of capital accumulation,
whereby M – C (LP, MP) – P – C' – M'. This chain captures the capitalist procedure of
producing an economic surplus, realized by capitalists who possess a monopoly over the
means of production (MP). Workers are forced to sell their capacity to produce, namely
labour power (LP), and obtain wages for sustenance. Capitalists invest money (M) to buy
productive inputs (C), in the form of LP and additional MP. The actual process of economic
production (P), in which commodities (C') are produced, constitutes the combination of LP
and MP in order to ensure a net profit (M') for the capitalists in the market sphere of
commodity circulation, which depends on the level of effective demand.
Since capitalism presupposes its “own legal relations, form of government, etc.” (Marx,
1973, p. 242), the fundamental concern is under what conditions a particular historically-
specific institutional structure (McDonough, 2011) fosters the capacity for the capitalist
process, as described above, to be reproduced. To ensure a suitable social surrounding,
what is requisite is steady macroeconomic coordination.
James O’Connor’s (2002) The Fiscal Crisis of the State exhibits a crucial integrative fiscal
sociological framework. The model denotes that a State’s fiscal dimension is subdivided
into three categories, which correspond to Marx’s reproductive schema:
1. Social capital expenditure (constant capital) consists of expenditures on capitalist means
of production that include physical economic infrastructure, research and development,
and outlays on various forms of investment that enhance the productivity of labour
2. Social consumption expenditures (variable capital, that is, living labour), which consists
of allocations devoted to training services, housing, education, health, and various
forms of social insurance;
3. Social legitimization expenditures, which are outlays to legitimate the capitalist social
structure and serve as a source of aggregate demand management, that is, surplus
capital absorption (Baran and Sweezy, 1966).
The specific elements of public spending, which condition the level of economic stability
for capitalists to make reasonable calculations about expected rates of return on investment,
are acutely made apparent.
The State assumes the responsibilities for maintaining capitalist economic growth and
social stability. In the long run, however, the assumption is that fiscal policy becomes
“more and more out of proportion to the requirements of capital accumulation. [...] [T]here
is a tendency for the level of State ‘waste’ to expand more rapidly than the capacity of the
system” (Wright, 1993, p. 159). The increasing pertinence of fiscal policy outweighs the
State’s capacity to finance it through tax receipts, especially if social consumption and
legitimization expenditures take more of the State’s fiscal outlays. The impression is that
balanced budgets should be enshrined, to allow for ‘sound finance’ to prevent potential
fiscal crises as a result of excessive government deficits ensuing hyperinflation (Block,
What is missing is the extent to which the central bank provides a guarantee for State debt
(Knapp, 1924, pp. 299–303), which delivers a secure financial asset to allow for credit
conditions to propel capitalist investment (Fields and Vernengo, 2013). By providing a
guarantee for State debt, the central bank allows the State to use budget deficits to stimulate
economic activity. This process of ‘monetization’ could lead to inflation, but only under
very specific conditions, whereby expansionary measures lead to overheating as a result of
an already established position of durable full employment.
The appearance of public deficits is not necessarily a sign of fiscal precariousness, but the
workings of an institutionalized accounting process that ensures the State’s fiscal solvency
to ensure capitalist stability. Concerns over public deficits should be a matter of what
degree to reach a sustainable position of capital accumulation, which ultimately rests on the
nature of monetary policy (see Lerner, 1943; Domar, 1944).
Capitalism; Effective demand; Fiscal policy; Monetary policy; Social classes.
Baran, P. and P. Sweezy (1966), Monopoly Capital: An Essay on the American Economic
and Social Order, New York: Monthly Review Press.
Block, F. (1981), “The fiscal crisis of the capitalist State”, Annual Review of Sociology, 7,
Campbell, J.L. (1993), “The State and fiscal sociology”, Annual Review of Sociology, 19,
Domar, E. (1944), “The ‘burden of the debt’ and the national income”, American Economic
Review, 34 (4), pp. 798–827.
Fields, D. and M. Vernengo (2013), “Hegemonic currencies during the crisis: the dollar
versus the euro in a cartalist perspective”, Review of International Political Economy, 20
(4), pp. 740–59.
Kaldor, N. (1938), “Stability and full employment”, Economic Journal, 48 (182), pp. 642–
Knapp, G.F. (1924), The State Theory of Money, London: Macmillan.
Lerner, A.P. (1943), “Functional finance and the federal debt”, Social Research, 10 (1), pp.
Marx, K. (1973), Grundrisse, London: Penguin.
McDonough, T. (2011), “Social structures of accumulation: a ‘punctuated’ view of
embeddedness”, American Journal of Economics and Sociology, 70 (5), pp. 1234–47.
O’Connor, J. (2002), The Fiscal Crisis of the State, New Brunswick, NJ: Transaction
Pressman, S. (2006), “Economic power, the State, and post-Keynesian economics”,
International Journal of Political Economy, 35 (4), pp. 67–86.
Vernengo, M. (2018), “Classical political economy and the evolution of central banks:
endogenous money and the fiscal–military State”, Review of Radical Political Economics,
50 (4), pp. 660–7.
Wright, E.O. (1993), Class, Crisis and the State, London and New York: Verso.