How would Karl Marx agree and/or disagree with John Keynes criticisms of Capitalism? and why?

Karl Marx would be pissed off that this guy was stealing his ideas, watering them down for general consumption, and getting famous for this sell-out.

Keynes declining demand theory comes straight out of Marx, except he pretended for political reasons that this type of depressionary decline is only temporary. This is horseshit and everyone at the time knew it, because they knew their Marx, but it was politically necessary, because the classical economics literature did not accept anything related to Marx. In order to get published, you had to assume that the Pareto ideal economic equilibrium was where markets were always going.

Market equilibrium is the situation where all production is competitive, all salaries are competitive, and there is more or less full employment and full production, and all the people working can collectively purchase all the goods they collectively manufacture. This ideal means that all corporations are making zero profits (beyond the amount they need to pay to insure their risk, pay their debts, and provide return on their capital investment), all employees are making roughly the same salary (or else they would switch jobs), and all entrepreneurs and sporadic workers are only making as much more than regular employees as would justify their risk or lean years (or else more people would become entrepreneurs). In equilibrium, the mean salary is just the amount required to purchase all industrial output, at peak capacity.

This market equilibrium is a hopeless fantasy when you look at real markets. Even allowing for corrections to ideality, you predict slight fluctuations, a Gaussian distribution. But it's always a huge tail. This means that there is never market equilibrium in industrial economies.

But people don't usually care about how much the market looks like a textbook market, so long as there is growth. I care. The textbook ideal efficient market is like a dream.

From 1929-1933, the intrinsic industrial capacity of the US didn't change a whole lot, but industrial output collapsed, and factories were sitting idle. Somebody had to address the obvious facts.

Marx had already noted that when there is a pool of unemployed workers, the market wage can collapse from the ideal equilibrium value, where the workers can purchase all industrial output, to subsistence level, due to competition from unemployed workers. The reason is simply that the workers are supposed to be charging a competitive price at full employment to have market equilibrium, and when there is a pool of unemployed, they are instead forced to take the minimum wage which will keep them better off than the unemployed, which is subsistence. Drastically low wages mean that the workers can't purchase the full industrial output, and industrial production collapses.

Contrary to what Keynes says, this is a stable situation, it never corrects itself. The reason is that the industrial capacity already exists to absorb the workers, they are not idle because their labor cannot be used, but simply because the demand has slackened due to the symmetry breaking in the market--- there is a spontaneous segregation which produces workers which compete with the unemployed and earn little more than subsistence (in the absence of government intervention, like minimum wage and maximum working time), and other workers who can siphon off large swaths of industrial profit into their pockets.

You can see this symmetry breaking in extremely simple models of economic production, which appear nowhere in the economics literature, where this is considered crazy-talk. You can make up an economy of 10 firms with 10,000 workers in equilibrium, and suddenly perturb this economy by adding 100 unemployed workers. The correct equilibrium market response is to expand capacity to absorb the 100 workers, but if there is a time delay to expand the capacity, there is an instability: the 100 unemployed workers drive the 10,000 workers salary down to subsistence by competition, the workers can't buy the output of the factories anymore, and the factories close or sit idle, because you broke the equilibrium. The unemployment grows to huge levels, and it stays that way forever, because there is no capital for expansion, nor would anyone expand, because there are no consumers to purchase the output of the expansion, they can't even purchase all the goods you could be making now!

This instability model is the basis of the classic Marxist prediction for the collapse of capitalism, and it matches the great depression. One should conclude that Marx's model is accurate, the economic equilibrium is not stable to unemployment rising, and the system can fail to find the classical equilibrium permanently.

Economists wanted to match the real world, but they didn't want to agree with Marx. So Keynes made the following bullshitty but plausible sounding explanation for the observations, which kept the main idea: during deflationary times, the workers salaries, for some reason, can't reach proper equilibrium, because they psychologically won't accept wage-cuts, which he claimed would fix the unemployment problem. So the market temporarily contracts because the unemployment rises, and the too-few employed workers have too little money to produce the approrpriate demand.

The part of this that is correct is just the same as what Marx said. The part that is wrong is where it differs from Marx. This is not a temporary glitch--- the market will never ever find equilibrium again in these circumstances (you can do the experiment, it has been done in certain parts of the third world, and in the presence of an underclass, the underclass is stable, and the economy develops among a separate class which can charge prices for labor on an entirely different scale). Keynes's argument for taking action anyway, despite the fact that this problem would ostensibly fix itself, was that "in the long run, we're all dead".

The fix that follows from this watered down hogwash is basically a milder form of the fix proposed by Marxism, government intervention to prop up demand, so as to increase the purchasing power of workers to buy the products the industrial economy can produce. This is what was done, and the situation improved--- economic growth is restored when the government expenditures compensate for the loss of demand.

But the reason for the low wages is not properly understood in Keynsianism. The real reason is Marx's: in the presence of a pool of unemployed people, there is class separation, and for the lowest classes, wages are driven to subsistence by competition. The only people making money are those that have some sort of leverage to charge monopolist's prices for their labor, and these form a distinct social class from the workers, and the class structure keeps market equilibrium permanently, not temporarily, out of reach.

This doesn't mean that the traditional fix that Marxists advocated is a good one.