In 2011, Leo Panitch wrote a piece, The Left’s Crisis, examining the Left’s response to the present crisis. He noted the Left’s response could be broken into two types: “irresponsible” and “fundamentally misleading”. In the irresponsible group, he puts those who called on Washington to let the banks fail, which, he asserted, gave no thought to the consequences of such an event. In the fundamentally misleading group he put those who called for tighter regulation of banks, which he asserted are already the most regulated in the world market.
Keynesian economic policies don’t work, but fighting for these policies will?
Guglielmo Carchedi’s essay on the so-called Marxist multiplier has me bugging. He is handing out bad advice to activists in the social movements and telling them this bad advice is based on Marx’s labor theory of value. The bad advice can be summed up concisely: Keynesian policies do not work and cannot work, but the fight for these policies (as opposed to neoliberal policies) can help end capitalism:
From the Marxist perspective, the struggle for the improvement of labour’s lot and the sedimentation and accumulation of labour’s antagonistic consciousness and power through this struggle should be two sides of the same coin. This is their real importance. They cannot end the slump but they can surely improve labour’s conditions and, given the proper perspective, foster the end of capitalism.
Frankly, Carchedi’s advice is the Marxist academy’s equivalent of medical malpractice. (For the record, Michael Robert’s has his own take on the discussion raised by Carchedi’s essay.)
Tags: budget deficit, capital, debt, Depression, economic policy, Employment, falling rate of profit, financial crisis, great depression, Guglielmo Carchedi, inflation, Karl Marx, Keynesian economics, Marxism, neoliberalism, political-economy, unemployment
Based on what I have described of Bernanke’s policy failure so far, is it possible to predict anything about the future results of an open ended purchase of financial assets under QE3? I think so, and I share why in this last part of this series.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, exchange rates, Federal Reserve, Federal Reserve Bank, financial crisis, great depression, immiseration thesis, inflation, international financial system, International Monetary Fund, Jens Weidmann, Karl Marx, monetary policy, Money, overproduction, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
I stopped my examination of Bernanke’s approach to this crisis and the problem of deflation after looking at his 1991 paper and his speech in 2002. I now want to return to that series, examining two of his speeches this to discuss the problems confronting bourgeois monetary policy in the crisis that began in 2007-8.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, Federal Reserve, Federal Reserve Bank, financial crisis, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Moishe Postone, monetary policy, Money, national economists club, overproduction, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
The world market had been shaken by a series of financial crises, and the economy of Japan had fallen into a persistent deflationary state, When Ben Bernanke gave his 2002 speech before the National Economists Club, “Deflation: Making Sure “It” Doesn’t Happen Here”. Bernanke was going to explain to his audience filled with some of the most important economists in the nation why, despite the empirical data to the contrary, the US was not going to end up like Japan.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, Moishe Postone, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis, william white
So I am spending a week or so trying to understand Ben Bernanke’s approach to this crisis based on three sources from his works.
In this part, the source is an essay published in 1991: “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”. In this 1991 paper, Bernanke tries to explain the causes of the Great Depression employing the “quantity theory of money” fallacy. So we get a chance to see this argument in an historical perspective and compare it with a real time application of Marx’s argument on the causes of capitalist crisis as understood by Henryk Grossman in his work, The Law of Accumulation and Breakdown.
In the second part, the source is Bernanke’s 2002 speech before the National Economists Club: “Deflation: Making Sure “It” Doesn’t Happen Here”. In this 2002 speech, Bernanke is directly addressing the real time threat of deflation produced by the 2001 onset of the present depression. So we get to compare it with the argument made by Robert Kurz in his 1995 essay, “The Apotheosis of Money”.
In part three, the source will be Bernanke’s recent speech before the International Monetary Fund meeting in Tokyo, Japan earlier this month, “U.S. Monetary Policy and International Implications”, in which Bernanke looks back on several years of managing global capitalism through the period beginning with the financial crisis, and tries to explain his results.
To provide historical context for my examination, I am assuming Bernanke’s discussion generally coincides with the period beginning with capitalist breakdown in the 1930s until its final collapse (hopefully) in the not too distant future. We are, therefore, looking at the period of capitalism decline and collapse through the ideas of an academic. Which is to say we get the chance to see how deflation appears in the eyes of someone who sees capitalist relations of production, “in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself…”
This perspective is necessary, because the analysis Bernanke brings to this discussion exhibits all the signs of fundamental misapprehension of the way capitalism works — a quite astonishing conclusion given that he is tasked presently with managing the monetary policy of a global empire.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
We have to change the terms of the debate on jobs and debt. We need to insist a job is nothing more than wage slavery and we don’t need Washington’s effort to create more of it by adding to this wage slavery even with more debt slavery. It is not like we have to argue existing jobs need to go away; why is Washington creating more of them, when existing hours can be reduced to solve the problem of unemployment rather than more debt?
2. Monetary Policy, or what happens when a hyperinflationary collapse of the dollar is NOT the worst possible outcome
The media is abuzz with speculation following the Federal reserves announcement of quantitative easing version 3.0. This version calls for the Federal Reserve to pour unlimited quantities of currency created out of nothing into the market, buying up worthless assets on a monthly basis to the tune of $40 billion per month. The result could be the printing of nearly a half trillion dollars in new, freshly produced, token money being forced into the economy every year until further notice.
The implications of this monetary insanity can be understood simply by reading the opinions of any number of economists and market watchers who are very delicately raising the spectre of a Zimbabwe style hyperinflation. Still subdued but growing talk of such an event has moved from the periphery of “financial advisers” and gold bugs into the mainstream argument of some pretty staid experienced players.
Take, for instance, a recent comment by Art Cashin, a veteran of the stock market who has probably seen every high risk moment in the market since well before Nixon closed the gold window in 1971, up to and including witnessing the market plunge 25% in a single day in 1987. Cashin oversees the management of more than $600 billion in assets and is not given to losing his head over every minor fluctuation in the S&P 500. A market crash is not Cashins concern, however — he fears hyperinflation. Cashin notes Weimar Republic hyperinflation did not burst out all at once, but was preloaded by continuous money printing that only made its way into the market over time:
“It (the inflationary spiral) was in fact delayed for a couple of years. But once it started, it could not be taken back. So here in the United States and in the European Union, there are very few, if any, signs of inflation because people are so concerned (that they are hoarding money).
“[You] will have to keep an eye on the velocity of money. Watch figures like, here in the United States, the M2 (figure), and see if it begins to grow through velocity, and get very cautious at that point. There are some potentially eerie parallels (today vs the Weimar Germany era). The United States trauma was unemployment and deflation (in the 30s), but in Germany in the 20s, it was money that ruined an entire society.”
Events are not yet to the point where Cashin is advising his clients to take their worthless fiat currency and sell it for gold, silver and other precious commodities, but he is suggesting there is such a heightened level of potential for a monetary catastrophe at present to warn people should begin to look for indicators of hyperinflation in the data:
“I think you are certainly at a ‘flashing yellow alert.’ You have in place a variety of things that could begin to react somewhat domino-like. As I said, there are measures and items that the listeners (and readers) can look for themselves. Look at, what is the growth in the money supply, M2? It comes out every week.
If [the M2 measure of the money supply] begins to grow rapidly, then the money that the Fed has created will be seen as moving through the system. That will create the high risk of accelerated inflation, and perhaps, God forbid, runaway inflation.”
Even if we discount Cashin’s argument as just another example of fringe hysteria, Zero Hedge recently explained, there are voices within the Federal Reserve’s own research department that echo Cashin’s argument:
Yes, it is ironic that the Fed is talking about “common sense”, we know. But the absolute punchline you will never hear admitted or discussed anywhere else, and the reason why the Fed can no longer even rely on its models is that…
Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters. This is an unsettling finding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.
In short: the Fed’s DSGE models fail when applied in real life, they are unable to lead to the desired outcome and can’t predict the outcome that does occur, and furthermore there is no way to test them except by enacting them in a way that consistently fails. But the kicker: the Fed’s own model predicts that if the Fed does what it is currently doing, the result would be “explosive inflation.”
You read that right: if Bernanke does what he not only intends to do but now has no choice but doing until the bitter end, the outcome is hyperinflation. Not our conclusion: that of Smets and Wouters, whoever they are.
And these are the people who are now in charge of everything.
Is there anything worse than a hyperinflation for capitalism?
The warnings by Cashin and the writers at Zero Hedge suggest Bernanke’s Federal Reserve is engaged in an extremely risky gamble on a policy that could lead to the dollar replacing Kleenex as the preferred method of catching sniffles during cold and flu season. I think it is safe to say the Fed would not be undertaking this gamble just to move unemployment a few points. A high risk gamble on this scale with the world’s reserve currency clearly hints what is at stake is likely much worse than a mere outburst of hyperinflation.
So what is worse than a hyperinflation of the dollar? What threat could there be to capitalism right now that risks reducing the dollar to a worthless piece of scrip with no purchasing power whatsoever? How about, a hyperdeflation, an inverse condition where all prices instead of going to infinity and beyond go to zero?
But there is a big problem with this argument: There is not a single recorded instance of hyperdeflation in history, we are told, and logically it cannot happen. Zero Hedge remarks on the question in a caustically titled post “The Monetary Endgame Score To Date: Hyperinflations: 56; Hyperdeflations: 0″:
We won’t waste our readers’ time with the details of all the 56 documented instances of hyperinflation in the modern, and not so modern, world. They can do so on their own by reading the attached CATO working paper by Hanke and Krus titled simply enough “World Hyperinflations.” Those who do read it will discover the details of how it happened to be that in post World War 2 Hungary the equivalent daily inflation rate of 207%, the highest ever recorded, led to a price doubling every 15 hours, certainly one upping such well-known instance of CTRL-P abandon as Zimbabwe (24.7 hours) and Weimar Germany (a tortoise-like 3.70 days). This and much more. What we will point is that at no time in recorded history did a monetary regime end in “hyperdeflation.” In fact there is not one hyperdeflationary episode of note. Although, we are quite certain, that virtually all of the 56 and counting hyperinflations in the world, were at one point borderline hyperdeflationary. All it took was central planner stupidity to get the table below, and a paper with the abovementioned title instead of “World Hyperdeflations.”
The Cato Institute’s paper presents a very powerful empirical argument against the case for deflation and hyperdeflation. Unfortunately it rests entirely on two fallacies that are hidden in its very title: First, hyperdeflation has nothing to do with the fate of any fiat currency, even the world reserve currency, the US dollar. A hyperdeflation is not the death of any particular currency nor even a series of currency collapses — it is the death of money itself.
The second fallacy in the Cato paper will take a bit longer to explain and once explained will show why it is so important to every anarchist, libertarian and Marxist.
Can there be such a thing as a hyperdeflation?
A hyperdeflation might possibly be defined as a situation where prices of commodities declined even as the supply of money increased. As the Cato Institute paper explains — there is no recorded instance of a hyper-deflation in the historical record. Of course, mild and even very severe deflations did occur several times up until the Great Depression; but history has many more examples of hyperinflations, as the Cato paper argues.
The problem with the Cato paper, however, is that its argument rests on the “quantity theory of money” fallacy — which according the Wikipedia states “that money supply has a direct, proportional relationship with the price level.” Which is to say, the Federal Reserve can force prices to increase — create inflation — if it increases the quantity of currency in circulation. In fact, this theory is wrong. The prices of commodities do not depend on the quantity of money in circulation, but on the quantity of socially necessary labor time required for their production. And here, at least theoretically, the case against hyper-deflation falls apart.
Here is the problem at the end of capitalism’s life: If the Marxist writers Moishe Postone and Robert Kurz are correct, the socially necessary labor time of commodities now have two distinct and contradictory measures: its labor time as a simple commodity and its labor time as a capitalistically produced commodity — yielding two quite different potential prices.
To put this in simpler terms, the price paid in a store for a typical commodity like an iPhone is mostly a reflection of the costs of economically wasted labor. The iPhone itself takes very little direct labor to produce, but, if its production is to be profitable, the accumulated costs of waste within the economy requires a massive mark up in the price you pay for it at the checkout counter.
What is this waste? Well, one source is the overhead created by the costly burden of government at present. Since the government doesn’t produce anything, its entire cost is borne by the rest of society. If, for instance, government accounts for about 50% of GDP, this means every product has a 100% markup just to pay for the operating expense of federal, state and local government. So about half the cost of your iPhone goes to cover things like drone attacks on Afghanistan civilians or corn subsidies to agribusiness. These cost don’t appear anywhere unless it comes directly from your wages in taxes, but even in this case the costs must be passed on in commodity circulation and will accumulate there in the costs of each commodity.
So every commodity essentially has two prices: the one that you pay at the checkout counter, which includes all the wasted economic activity in society, and the other, hidden, true price, which is the actual direct cost of producing to commodity. Surprisingly, this latter price is now only a negligible fraction of the total price of an iPhone, a pair of shoes, or even an automobile — the overwhelming bulk of the price of every product you buy consists of the hidden costs of economic waste within society that has accumulated over the past eighty years.
This is why, as I discussed in part one of this series, it now takes as much as seven dollars of debt, or even more, to create a single dollar of wages through fascist state economic policies designed to create jobs. Simply put, this internal discordance in the price of every commodity is a hyperdeflation weapon of mass destruction just waiting for a triggering event. What is making the Federal Reserve risk even the total collapse of the dollar on an insane gamble is the fact that this implosion can be triggered by the mildest hint of deflation. To prevent this event, the Federal Reserve must restart the failed system of debt accumulation that crashed in the financial meltdown of 2008.
Anarchists, libertarians and Marxists have a chance to put sand in the gears of the fascist state and bring it down along with the entire mode of production. All it requires is for us to change the debate over jobs and debt — opposing both Federal Reserve monetary and Washington fiscal policy aimed at expanding still further the system of wage slavery through policies designed to promote economic waste and debt.
But we can do this only if we are willing to take capital and the state head on by demanding an immediate reduction in hours of work until everyone who wants to work has a job, along with the elimination of all public and private debts, and abolition of all taxes.
Tags: Barack Obama, budget deficit, Depression, economic policy, Employment, Federal Reserve, financial crisis, political-economy, shorter work time, shorter work week, stupid economist tricks, Stupid progressive tricks, stupid Washington tricks, The Economy, Trickle Down Economics, unemployment, Wall Street
As a contribution to Occupy Wall Street’s efforts against debt, I am continuing my reading of William White’s “Ultra Easy Monetary Policy and the Law of Unintended Consequences” (PDF). I have covered sections A and B. In this last section I am looking at to section C of White’s paper and his conclusion.
Back to the Future
It is interesting how White sets all of his predictions about the consequences of the present monetary policies in the future tense as if he is speaking of events that have not, as yet, occurred. For instance, White argues,
“Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom/bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities.”
It is as though White never got the memo about the catastrophic financial meltdown that happened in 2008. If his focus is on the “medium run” consequences of easy money that has been practiced since the 1980s, isn’t this crisis the “medium run” result of those policies? Why does White insist on redirecting our attention to an event in the future, when this crisis clearly is the event produced by his analysis.
Tags: Bailout, debt, Depression, economic collapse, economics, fascist state economic policy, Federal Reserve, Finance, financial crisis, Hyman Minsky, inflation, international financial system, Krugman, monetary policy, political-economy, qe3, qu, quantitative easing, Quantitative easing and debt, stupid economist tricks, Wall Street Crisis, william white
To Mr. Tsipras of the Greece party, Syriza,
I read your letter to Angela Merkel today the Guardian and was not impressed. Frankly, I expected a guy who just might be running Greece next year to have a better argument than the one you gave. You stated:
As Angela Merkel visits Athens on Tuesday, she will find a Greece in its fifth consecutive year of recession. In 2008 and 2009, the recession was a spillover from the global financial crisis. Since then it has been caused and deepened by the austerity policies imposed on Greece by the troika – of the International Monetary Fund, the European Union, the European Central Bank – and the Greek government.
These policies are devastating the Greek people, especially workers, pensioners, small businessmen and women, and of course young people. The Greek economy has contracted by more than 22%, workers and pensioners have lost 32% of their income, and unemployment has reached an unprecedented 24% with youth unemployment at 55%. Austerity policies have led to cuts in benefits, the deregulation of the labour market and the further deterioration of the limited welfare state that had survived a neoliberal onslaught.
Yes. The financial crisis and austerity is taking its toll on Greece, but is that piglet Merkel unaware of this? Is she living in a cave? She knows exactly what the toll is on the population — she intends that austerity take that toll. So whining about it like some emoprog is not helpful in the least.
What the fuck are you prepared to do about it?
It is nice to know that Syriza, “respects the ordinary European taxpayer who is asked to shoulder loans to countries in distress, including Greece.” The question, however, is how Syriza proposes to end this burden, since Greece is now Europe’s AIG — a convenient pass-through account for a backdoor bailout of Europe’s banking system. In this shell game, Greece gets all the blame and the banksters get all the fucking money. How do you propose to end this fucking shell game?
And what are you offering to Greece as an alternative to participating in this monstrous scam?
What would you do different?
Europe, you state, “needs a new plan to deepen European integration”, but how does your idea of integration differ from the idea of removing fiscal control completely from the Greece state and handing it to an as yet undetermined new authority? Moreover, how does this differ from “neoliberalism” agenda that is already stripping European nation states of fiscal and monetary sovereignty?
You had a lot of rhetoric about placing priority on the needs of workers, pensioners and unemployed but — really — what does this mean? Do you or do you not intend to let the banks fail? Please, spare us all the Leftist rhetoric about “placing priority on the blah blah blah…”, and “popular struggles radically blah blah blah…”
I mean, really ARE YOU GOING TO LET THE FUCKING BANKS FAIL OR NOT! And if you let them fail, how do you propose to protect the Greece public from the effects of the financial system’s collapse? All in all, your message to Merkel is meaningless trash and bizarre given the fact you will actually have to run the country shortly.
Let me say this to you: the European Left are just a bunch of pussies. To put it in the words of Mobb Deep, an American rap group:
“You’re all up in the game and don’t deserve to be a player.”
The muthafuckas behind the crisis have been running Europe since the days of Rome. Do you seriously believe you are going to appeal to their humanity? These muthafuckas slaughtered 1,000,000 Iraqis — you think they care about Greece suffering? Frankly, Mr. Tsipras, I can’t understand it. Folks on the European Left think there are rules and keep calling for the ref. You are dumb fuckers. Let’s here what the guys behind the scenes think of your rules:
“That’s not the way the world really works anymore. We’re an empire now, and when we act we create our own reality.” –Spokesperson for the Bush administration
If that is not enough, Draghi told you today what the rules are:
RULE NUMBER ONE: “Revitalizing the cycle of debt is crucial to recovery.”
RULE NUMBER TWO: “It is necessary to reassure banks over the quality of their assets.”
What part of “Fuck You” don’t you folks on the European Left get? You just let that horrid little fucking piglet waltz into Greece like she is visiting one of the provinces. And your only fucking response is,
“This plan will succeed only if popular struggles radically change the balance of forces. These struggles have started already and have led to the rise of left and resistance movements throughout Europe. They keep alive democracy, equality, freedom and solidarity, the most important values of the European political tradition. These values must prevail. Otherwise Europe will regress to a dark past we thought gone for ever.”
What fucking balance? What fucking plan? Holding your fucking dick in your hand and jerking furiously is not a fucking plan. These muthafuckas got a plan for Greece — and it ain’t “democracy, equality, freedom and solidarity”.
Where’s your fucking plan, Mr. Tsipras? Frankly, you will be dead or in hiding six months after you take office; so whatever the plan, it better be quick, painful as hell for capital and irreversible. That means, no matter what, you kill the banks first, and divide their carcasses among the population — you have to keep Germany, France, Britain and the US busy trying to save those fuckers on Wall Street, while you wipe out unemployment. It only takes two steps to do this:
- Renounce all Greece’s debt, public and private, and
- reduce hours of work by half.
Those two moves will immediately trigger the collapse of stock and bond markets world-wide and send those fuckers scrambling. You have to make these fuckers think they are staring into the face of GOD — and that she is pissed beyond all belief. Your aim should be a 1000 point loss on the SP500 the first fucking day in office.
Then you immediately turn to the question of producing contagion — the crisis cannot be limited to Greece; it must spread to Spain and Portugal, Ireland and Italy. Every time they think things can’t get any worse, you have to fuck them again. If a big stick will work in this situation, then you have to use a fucking sledgehammer.
Getting rid of public and private debt is absolutely critical to killing the banks — not one bank should survive anywhere. So, repeat after me
- RENOUNCE THE DEBT,
- SLASH HOURS OF LABOR,
- CREATE CONTAGION
That’s a fucking plan.
We have to change the terms of the debate on jobs and debt. We need to insist a job is nothing more than wage slavery and we don’t need Washington’s effort to create more of it adding to this wage slavery even with more debt slavery. It is not like we have to argue existing jobs need to go away; why is Washington creating more of them, when existing hours can be reduced to solve the problem of unemployment rather than more debt?
1. Fiscal policy, or how to create one job on Main Street by borrowing five jobs from Wall Street
In 2011, a congressman made the argument that Obama’s stimulus program had produced jobs at the cost of $278,000 per job. Although the charge was nothing new, it made its rounds on the conservative GOP talking points circuit, and even ended up in the congressional record. This number, of course, was so outrageous by any measure of efficiency that it had to be analyzed by what we might call “clear thinking persons with no agenda”, i.e., the news media.
One “news source” in particular known for its ability to vet these things is PolitiFact.com, and it went after the congressman’s charge. PolitiFact established that the congressman, a Republican, was deliberately distorting facts against Obama’s stimulus program.
At $666 billion, the bill was estimated by the White house to have “saved or created” between 2.4 to 3.6 million jobs. What the congressman did, was employ the low end of the number of jobs “created or saved” and apply it to the total of the bill.
The Obama administration responded that this was unfair, since the money went to more than just creating jobs, it also invested in infrastructure, energy, education etc. Which is an odd response, since obviously the administration included those “investments” in its estimate of jobs “created or saved”. The Associated Press made the further argument that,
“Any cost-per-job figure pays not just for the worker, but for the material, supplies and that workers’ output — a portion of a road paved, patients treated in a health clinic, goods shipped from a factory floor, railroad tracks laid,”
So what AP is stating is that a job created by economic stimulus must account not just for the labor power directly expended, but also the constant capital used up in the course of this expenditure. But then AP performs an almost unnoticed sleight of hand and counts everything twice. So we count the money spent to build a road in terms of wages and materials, then we count the road as a finished product; we count the wages and material employed to build a clinic, and then we count the clinic as an operating concern.
Once we remove the misleading double counting from our calculation in the argument in the AP version of this story, how this differed from what the congressman said, is unclear. Indeed his criticism was later refined by one conservative media outlet this way:
“He says he never said that $278,000 per job went to salaries, but ‘rather that each job has cost taxpayers $278,000.’”
Five dollars of debt to produce one dollar of wages
So what the worker actually receives of the $278,000 spent to create her job is one thing, and the cost of creating that job is another. Assuming the worker received an average hourly wage of around $19, she would have an annual wage of $38,760, minus taxes. But to receive this $38,760 minus taxes in wages, the taxpayer must pony up $278,000 minus the taxes paid by the worker.
Which is to say, it roughly takes about 7 dollars of spending to create 1 dollar worth of wages using fiscal stimulus. Moreover, this fiscal stimulus must be newly created money, through debt, and, therefore, created out of nothing. If we take the administrations preferred figure of $185,000 per job, this still amounts to 5 dollars of new debt to produce 1 dollar of wages.
Between the GOP and the Democrats, then, there is agreement that it takes somewhere between $5 and $7 of debt to create $1 of wages. For some reason, despite the general validity of the congressman’s claim, PolitiFact.com decided it was not true on a technicality:
“Contrary to Dewhurst’s statement, the cited cost-per-job figure was not aired by the Obama administration. At bottom, his statement leaves the misimpression that the money went solely for jobs rather than a range of projects and programs, including tax breaks. We rate his claim False.”
There is, of course, another way of looking at this from the point of view of Wall Street banksters. From their point of view, it only takes 1 dollar of wages to create 5 dollars of new debt. Since the banksters are only interested in the accumulation of debt, which sits on his book as an asset, this is a fine ratio.
If the fascist state wants to create one job, it has to borrow the equivalent of five jobs to create this one job. The accumulation of the public debt outruns the income of the members of society who must eventually pay off the debt with their income. For every dollar they get in increased income, their debt obligation increases by five dollars. They must work to pay off this debt, requiring a further extension of wage slavery beyond what is required just to satisfy their needs.
Since after the housing market meltdown citizens can no longer be relied upon to accumulate this debt on their own (they have all become subprime borrowers) the state now takes on this obligation on their behalf, and raises the funds to service it by slashing their retirement and health benefits, reducing their access to public services like education, and inflating the prices of commodities by depreciating the currency.
This is how the scam works, folks!
You vote for Obama and the Democrats, and they mortgage your life and labor to banksters. They call this mortgaging of your life “progressive fiscal policy”, and sell it to you as a benefit.
However, since the congressman hails from the GOP, an avowed political opponent of the democrat president, he failed to add this additional fact: The argument does not change if, instead of democrat spending, we substitute GOP tax cuts, except that tax cuts are even more inefficient at “creating jobs” than fiscal spending. With GOP tax cuts, as the research suggest, the actual relation between the debt accumulated and the jobs created is aimless and dispersed and rather a bit more difficult to assess. Rather than aiming at some specific form of wage slavery as the democrats do, GOP tax cuts aim solely at subsidizing all wage slavery.
Tax cuts only have some definite targeted effect to the extent they increase the deficit and the flows of state expenditures into the coffers of banksters. While both spending and tax cuts result in a massive expansion of the public debt, in general, the less targeted the accumulation of the public debt, the more it directly favors only the banksters, who, in any case, underwrite this debt. The question is only one of degree, not result.
With democrat spending, the accumulation of debt takes a specific form — a road, a school, or an industry. It is targeted, and, therefore, can be more precisely applied, no matter that is still wasteful. What’s more, as Democrats and Republicans alike already know, the produced product can now be renamed the Obama Bridge-Tunnel Highway to Nowhere, or the Obama Elementary School, or the Obama Green Energy Research Park, or, as is always inevitable, no matter which party incurs the debt, the USS Obama.
If the outrageous cost of creating unnecessary jobs by fiscal policy is staggering, just wait until I next explain what knowledgeable insiders are saying about the cost of the Federal Reserve’s monetary policy.
Tags: Barack Obama, budget deficit, Depression, economic policy, Employment, Federal Reserve, financial crisis, political-economy, shorter work week, stupid economist tricks, Stupid progressive tricks, stupid Washington tricks, The Economy, Trickle Down Economics, unemployment, Wall Street
Here is an interesting chart from Zero Hedge: In data going back to 1980, employment for younger workers aged 20-24 has never increased in the month of September — that is, it has never increased until this year:
I know what you are thinking: the data provided by Washington is a fraud. I am going to show why, even if we take that chart on its face value as genuine, Washington is completely fucked. I am going to subject the entire category “employment” to an analysis using Marx’s labor theory of value. By “employment”. of course, I mean wage slavery; which means, although it is commonly treated as a good, it is actually an evil. But, I intend to treat this “employment” on its own terms, as it is commonly held a some sort of social good.
Let’s begin with this morning’s non-farm payroll report — 114,000 net hires in the economy and an unemployment rate of 7.8%. Both of these numbers are, of course, cooked beyond all credibility, but this is not the point. It doesn’t get us any closer to the actual situation to state (as the GOP will, no doubt) that Washington cooks the unemployment numbers. Dems cook the books when they control Washington, the GOP cooks them when they are in control.
Washington has always cooked the numbers — now the numbers are burnt beyond all recognition.
(First a note about this morning’s serving of cooked data: According Mish Shedlock, the minimum net new hires needed just to keep the unemployment rate flat is 125,000 per month. Last month there were 114,000 net new hires, however the unemployment rate declined from 8.1% to 7.8%. So, before you Obama voters celebrate, you should be aware than the economy did not even provide enough new hires to offset people coming into the labor force looking for jobs.)
Compulsory employment growth and inflation
It is the labor force participation rate that is most revealing in the numbers. The labor force participation rate (the blue line in the chart provided by Calculated Risk below) peaked in 2000-2001 and has been on a slow decline since that recession. From a high of just over 67%, that rate has now fallen to about 64% in this report. This reverses a trend of increasing participation in the labor force — folks actively seeking work — that goes back at least to 1962, according to the data available to me. Since 1962, in other words, as a general rule each year has seen more people trying to get a job than the year before. This trend higher reverses in the 2001 recession, and as a general rule, each year fewer people are participating in the labor force.
Why is this reversal in labor force participation important to analysis? Well, let’s look at this statement by President Truman in 1950 speaking of the military buildup that commenced with the start of the Cold War:
“In terms of manpower, our present defense targets will require an increase of nearly one million men and women in the armed forces within a few months, and probably not less than four million more in defense production by the end of the year. This means that an additional 8 percent of our labor force, and possibly much more, will be required by direct defense needs by the end of the year.
These manpower needs will call both for increasing our labor force by reducing unemployment and drawing in women and older workers, and for lengthening hours of work in essential industries. These manpower requirements can be met. There will be manpower shortages, but they can be solved.”
Following World War II, Washington set it as a priority that the labor force should steadily increase each year, in order to siphon off a portion of this growth for its military expansion. This goal was secretly given legal form as National Security Council Report 68. The goal of “full employment” was made the primary labor policy of Washington in 1946 and renewed in 1978.
“Full employment” in this case should be understood as full employment of labor power resources. In other words, it was the policy of the United States to seek full employment of its labor power resources for its strategic national ends. This “full employment” policy was sold to Americans as Washington’s commitment to providing a job to everyone who needed a job.
Which is fine and dandy, except at the same time, Washington was deliberately debasing the currency, driving up prices, and forcing more folks (particularly women) into the labor force to compensate for falling consumption, and moreover, forcing people to work well past their retirement. So what at first appears to be a benign policy, even an commendable agreement between Washington and its citizens that it would do everything in its power to create jobs, turns out to be a policy of forcing every person under its domination to look for work.
Children barely off the breast were abandoned to daycare warehouses, so mothers could find work just to pay for daycare; even substitute formulas for the breast were devised, so children could grow up attached to a rubber substitute for their mothers; essential functions within the home like child-rearing were thus commodified. And this, in turn, led to its own set of social ills, as women were assaulted by their bosses, discriminated against in their careers and under-paid — as the nation was convulsed with real or imagined terror of child abuse in day care centers. A generation of children were now referred to as “latch-key kids”, and teenage pregnancies proliferated. The elderly went back into the work force and became greeters at Wal-Mart, as people delayed or altogether gave up on the idea of retirement, unable to amass sufficient savings to stop working. Taking care of the elderly itself became a commodity sold as nursing home care.
Still, labor force participation increased despite these horrors.
Compulsory employment growth and debt: the hidden relationship
Hand in hand with this goes the ever increasing accumulation of consumer debt that working folk used to compensate for stagnant wages, despite the fact that each family was working more hours than their parents had. And all of these ills, which list could be extended almost indefinitely, appeared to have no cause other than the individuals themselves. If someone ended up working in a Wal-Mart at 70, it was because they had not saved enough; if a woman abandoned her child to day care, it was because she or her husband had not spent enough time in college; if teenagers were now getting pregnant at 13, it was because the morals of society were collapsing.
No one looked at Washington and said, “You fuckers are responsible for this!” And, if by chance, someone did say this, it was only in the form: “You democrat fuckers have tied up the economy with your regulations”; or, “You Republican fuckers have crippled Washington to the point that government can’t provide enough stimulus to create full employment.”
No matter what the policy advocated — tax cuts or spending increases — there was always someone to assure us it would create jobs and pay for itself with “increased economic growth”. Through most of the period from at least 1980 until now the growth of employment has always been proportional to the increase in debt. From 1980 until at least 2006, the savings rate of American declined until it went negative entirely in 2004-2005. It is particularly interesting that the saving rate actually touched near zero just as the labor force participation rate reached its peak.
The problem with the latest employment figures, however, is not to be found in the effects of a rising participation rate on working families, either in the form of social ills or the accumulation of debt. It is that, no matter these ills and no matter the accumulation of debt, total hours of labor must increase — the fate of capitalism depends on this growth.
But, it is not increasing.
Why compulsory growth of employment is necessary for Washington
Capitalism is a mode of production where the employment of labor power must constantly increase, no matter what the consequences. This mean, the duration of labor must constantly rise, a duration that is a function of the number of workers times their hours of work. Washington and the political parties always directs our attention to the unemployment rate, which figures are usually cooked, but, what really matters for Washington, is not the unemployment rate, but the duration of the social working day. At least this seems to be what is relevant, from the standpoint of Marx’s theory.
According to the date I have access to, social labor day has fallen only four times in the last 36 years: briefly in 1991 and again in 2001, and in a sustained way from 2007 to 2009. In other words, since this depression began in 2001, the total hours of work has fallen 3 years between 2001 and 2009. The response to this fall the first time, was the Bush tax cuts, Paul Krugman calling for a housing bubble to replace the NASDAQ bubble Bernanke’s speech on deflation, and Alan Greenspan being asked to retire from the Fed.
The second and third times the total social labor day shrank, coincided with the collapse of the financial system and Fed monetary policy.
This argues that this measure of economic activity is more significant than the hype over non-farm payroll numbers would have you believe. Such an argument might be said to be based entirely on coincidence, were it not itself based on the arguments of Postone and Kurz. They suggested the social labor day must constantly expand if existing relations of production are to be maintained.
What is more, each writer comes to this conclusion from different premises, i.e., different and contradictory notions of value. Postone’s argument suggests that the total labor time of society must expand despite the contraction of socially necessary labor time in the forms of value and surplus value; while Kurz suggests the increasingly fictional quality of credit, of fictional claims to future profits, requires the constant expansion of total labor time of society. In either case, Postone in 1993, and Kurz in 1995, using different notions of value, argue the total labor time of society must increase. And when, in fact, this total labor time actually did not increase, first a depression was triggered, then a financial collapse.
But, I hear you: ‘I am still not convinced by the evidence — it could, after all, be a really good scientific wild-assed guess on the part of those writers.’
Good point! Evidence suggests each writer, Postone and Kurx, was familiar with the writings of the other — so this could be just another instance of group-think. Instead of just going from Postone and Kurz to the empirical data, we need to go from Postone and Kurz back to Marx’s argument to establish a logical chain of reasoning, and figure out if, in fact, these guys were just making a wild guess.
In Marx’s argument, capitalism is not just a system of commodity production; it is a system of surplus commodity production, of the production of surplus in the form of commodities, of the production of surplus values. As a system of commodity production that aims always at the production of surplus value, capitalism relentlessly aims toward self-expansion beyond its given limits — as Marx put it, it employs existing value to create surplus value. Both Postone and Kurz employ this argument to uncover the absolute necessity of capitalism, at a certain stage in its development, to produce a sector consisting entirely of superfluous labor. In fact, Marx himself hints at just this result in volume 3, when he writes:
“If, as shown, a falling rate of profit is bound up with an increase in the mass of profit, a larger portion of the annual product of labour is appropriated by the capitalist under the category of capital (as a replacement for consumed capital) and a relatively smaller portion under the category of profit. Hence the fantastic idea of priest Chalmers, that the less of the annual product is expended by capitalists as capital, the greater the profits they pocket. In which case the state church comes to their assistance, to care for the consumption of the greater part of the surplus-product, rather than having it used as capital.”
Marx is clearly suggesting the unproductive consumption of the total social product becomes increasingly necessary when he closes with the wry comment:
“The preacher confounds cause with effect.”
Still later, Marx decries the result of this process:
“In the first place, too large a portion of the produced population is not really capable of working, and is through force of circumstances made dependent on exploiting the labour of others, or on labour which can pass under this name only under a miserable mode of production.”
Which is to say, a growing mass of workers makes its living by subsisting on the surplus value of the productively employed population. So, for me at least, there is a clear line beginning with Marx, through the argument of Postone and Kurz, that is expressed graphically below in the empirical data on the social labor day:
This decline is far more significant than the manipulated data foisted on the population of voters this morning. It suggests there is a real material dysfunction in fascist state economic policy that cannot be altered with a set of misleading stats. Beyond the convenient and willful ignoring of the shrinking labor participation rate, and the mass of unemployed no longer counted, the data suggests a situation that cannot be repaired by confidence tricks designed to keep the two parties in power.
Almost a fifth of the population is now permanently locked out of the labor force — the highest on record — according to Zero Hedge calculations:
If hours of labor do not expand at a sufficient rate to sustain existing relations of production, the entire Ponzi scheme must collapse. This process has probably already begun, which explains the insanely desperate actions of the Federal Reserve over the past month.
Tags: budget deficit, Depression, economic collapse, Federal Reserve, financial crisis, Karl Marx, Moishe Postone, NSC-68, Occupy Wall Street, recession, Robert Kurz, unemployment, value theory, Wall Street
Since Occupy Wall Street appears to be undertaking a concerted push toward addressing the growing debt servitude of the mass of working families to Wall Street banksters, I thought it might be interesting to understand how the Federal Reserve is now doubling down on a policy of manufacturing an even greater debt burden for working families under the guise of stimulating the economy.
Comments and suggestions for improvement to this post are welcomed.
Tags: Bailout, debt, Depression, economic collapse, economics, fascist state economic policy, Federal Reserve, Finance, financial crisis, Hyman Minsky, inflation, international financial system, Krugman, monetary policy, political-economy, qe3, quantitative easing, Quantitative easing and debt, stupid economist tricks, Wall Street Crisis, william white
5. The recovery of capitalism is no longer possible
Kurz’s overall analysis of the crisis that emerged full blown in 2008 consists of four fundamental bullet points:
First, in the course of capitalist development Marx’s theory states there is a rising composition of constant capital to variable capital; this rising composition of capital compels an increasing dependence of productive capital on interest yielding capital, i.e., on debt.
Second, this rising composition of capital is also a declining ratio of variable capital to constant capital that compels the total capital to find new outlets. This dependence can, at first, be satisfied through outward expansion into new markets, but ultimately can only be met by the growth of an unproductive service (or tertiary) sector.
Third, based on the above two developments, there is an increasingly paradoxical (self-contradictory) dependence of productive capital on profits derived from debt of the non-productive sector that consists entirely of a dependence of productive capital on fictitious claims to its own future profits.
Fourth, this third paradoxical, self contradictory, dependence can only be resolved ultimately through the dependence of this entire increasingly fragile structure of accumulation on the consumption and debt of the fascist state.
In the first instance, the increasing dependence of the total social capital on the state is made necessary by the fact that the state becomes essential to the expansion of the total social capital into new markets through the means of imperialist wars and predations. But, this dependence really only comes into its own when the state becomes the consumer and debtor of last resort. In the final analysis the growth of a non-productive sector must be dependent on the growth of the fascist state as consumer of last resort. And this latter, if it is to maintain existing commodity production relations, must be dependent on expansion of the public debt. This is true because only the state can decide what serves as money within its territory and what means are used to pay its debts. It can, therefore, pay its debts with “money” it creates out of nothing, simultaneously “satisfying” this debt and evaporating its value.
Tags: ex nihilo currency, financial crisis, Karl Marx, Keynesian stimulus, Labor theory of value, Money, Occupy the Marxist Academy, political-economy, Robert Kurz, shorter work time, the Fascist State, THE GREAT DEPRESSION, transcendence of capitalism
4. The Necessary Parasitism of Fascist State
In a recent interview, Saint Paul Krugman gave us this gem of bourgeois economic theory:
SPIEGEL: More stimulus also means more debt. Many European nations, as well as the US, are already drowning in debt.
Krugman: I’m not saying that I don’t ever care about debt, but not now. If you slash spending, you just depress the economy further. And, given the low interest rates and what we now know about long-run effects of high unemployment, you almost certainly actually even make your fiscal position worse. Give me a strong-enough economic recovery that the Fed is starting to want to raise interest rates to head off inflation — then I become a deficit hawk.
Saint Paul tells us in a depression such as the one we are now experiencing it is impossible to pursue the sort of austerity currently being visited upon the EU without rushing headlong into calamity. Better, he says, we should expand the debt of the already bloated public sector still further and worry about the consequences later. It never occurred to the interviewer from Spiegel to ask Saint Paul why the growth of capitalist economies is now chained to the debt of the public sector.
Not surprising, Robert Kurz had a few ideas on that subject.
Tags: Agustín Bénétrix, Barry Eichengreen, ex nihilo currency, financial crisis, Karl Marx, Keynesian stimulus, Labor theory of value, Miguel Almunia, Money, Robert Kurz, the Fascist State, THE GREAT DEPRESSION
3. A society suffocating under the manufacture of overwork
If you are a regular reader of this blog, you are familiar with one of my favorite quotes by that buffoon of fascist state economic policy, Larry Summers, who, in response to a question posed by a reporter on reducing hours of labor as a solution to the horrific unemployment that emerged in the aftermath of the so-called financial crisis, gave this response:
“I think we got the Recovery Act right,” Larry Summers, the president’s chief economic adviser, said in an interview. “The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”
Rather than reducing legally mandated hours of work by even one hour, and thereby reducing the need for wasteful and expensive fiscal stimulus by the fascist state at a cost of hundreds of billions of dollars in new public debt, Summers declared the incoming Obama administration was committed to creating more work, compelling more production and inducing more wage slavery, even if this commitment plunged society into bankruptcy. No matter what the cost, unemployment would only be met by an attempt to expand wage slavery still further.
Not one member of the Marxist academy made an attempt to explain why this obviously insane policy was nevertheless considered to be a necessary one by Washington.
I want to recommend everyone read John Weeks’ paper, “The theoretical and empirical credibility of commodity money“, because he presents a key to the analysis of neoclassical economic theory that unlocks its inner logic. I missed the juicy goodness of his argument in my first read because I have an aversion to mixing math with social criticism. However, in his math Weeks uncover why money is not a commodity-money in neoclassical theory, and why it cannot be a commodity-money.
Weeks tries to make sense of a troubling rejection by neoclassical economic theory to admit to the obvious internal consistency of Marx’s commodity-money theory:
Th[e] theoretical superiority of commodity-based monetary theory has had little practical impact because of a perceived empirical absurdity of the commodity money hypothesis.
I came to my understanding of fascist state issued fiat money based on one closely held idea that neoclassical economics is not irrational, capitalism is. Yes, capitalism is as irrational as it has been declared by Marxists to be, however no one but an idiot would buy into the neoclassical argument unless it made sense in the context of fascist state economic policy. Since capitalism itself is irrational, a rational person looks like an idiot when he buys into its propositions; on the other hand, accepting the irrationality of capitalist relations of production as the basis for formulating fascist state economic policy is rational.
Tags: Andrew Kliman, Bailout, commodity money, Depression, economic collapse, economic policy, ex nihilo currency, ex nihilo money creation, Federal Reserve, financial crisis, Fred Moseley, Frederick Engels, Henry Paulson, Jonh Weeks, Karl Marx, Marxism, MELT, monetary policy, neoclassical economics, noeclassical money theory, otma, stupid economist tricks, The Commune, Wall Street Crisis
(Or, more importantly, why should anarchists, libertarians and Marxists be as well)
So, has any reader of this blog heard that economists have conceded Marx was right after all? Have you at any time during the past 40 years heard an economist admit that Marx was correct in his transformation argument? I am really confused by this, because although Paul A. Samuelson declared Marx’s labor theory of value irrelevant in 1971, it is still being studied by BIS economists today. If I told you Marx’s theory was being studied by economists because Samuelson was a bald-face liar and a practiced dissembler, you would probably just yawn.
Of course, he was lying — he’s an economist. Economists are paid to lie and distort reality. They are employed by Washington not to explain economic processes, but to obscure them. To call an economist a bald-face liar, is simply to state he is breathing — nothing more.
But, to understand why Samuelson was lying, and why it was necessary that his lie stand unchallenged for forty years, we have to figure out the problem posed by Marx’s so-called “transformation problem”.
Marx’s transformation problem could be called the “paradox of capitalist price”, and we could state it thus:
Simple commodity price is an expression of the value of the commodity, but capitalist profit is the expression of surplus value wrung from labor power. To realize the surplus value wrung from the worker, the realized price of the commodity in the market has to include both the quantity of value created when it was produced plus a quantity of surplus value wrung from the unpaid labor time of the worker — capitalist price is the cost of producing the commodity plus the capitalist’s profit.
However, in the classical labor theory of value, the price of the commodity can only express the value of the commodity alone, not surplus value. Thus, for the price of the commodity to include both its value and a quantity of surplus value wrung from the worker, the capitalist price of the commodity must, of necessity, exceed the value of the commodity. The law of value is thus violated by the realization of capitalist surplus value — capitalist prices of commodities must always exceed the socially necessary labor time required to produce them.
The realization of capitalist profit violates the basic rule of classical economic theory: equal exchange of values in the market — but, as we shall see, this is far from a merely theoretical violation.
Now, Marx provides a number of caveats that work to stabilize the capitalist process of production — he called them “countervailing tendencies”, and they include things like the export of capital, etc. If we ignore all of these countervailing tendencies, however, the result is that prices of commodities must rise above their values, or alternatively money must exchange for these commodities below its value. (By money, I mean here only commodity money, i.e., gold or some other metal.)
What must occur when this happens is that money fails to circulate — the economy experiences a so-called credit, or financial, crisis. So, Marx’s labor theory of value explains why the dollar was debased in 1933 by the Roosevelt administration. It explains why your currency today is worthless pieces of paper or dancing electrons on a computer terminal. Marx’s transformation predicts and explains the debasement of the dollar and all other currencies on the planet.
Given this, how does Samuelson say Marx’s theory has no market predictive power? Because he was an economist — not a scientist, but a propagandist on behalf of the fascist state. I thought we already answered this — are you paying attention?
Eventually, Marx’s labor theory of value stated, gold could no longer serve as money because its function as measure of value conflicted with realization of the surplus value wrung from you — the unpaid labor time you work in addition to the value of your wages. At a certain point, the realization of surplus value — converting this surplus labor into profits — becomes incompatible with commodity money. Prices can only increase to reflect the average rate of profit if the currency is removed from the gold standard.
Samuelson once famously declared Marx’s theory could not explain the American and European economies between 1937 and 1971 — but, I just did, so fuck Samuelson!
Moreover, Marx’s transformation states you now work as many as 36 more hours per week than is necessary. The labor theory of value shows 90 percent of the current work week is being performed solely to maintain the rate of profit. Another way to understand this: essentially the labor time that is necessary under a regime of capitalist prices is about ten-fold that needed if capitalism is abolished.
On the other hand, maintaining such a long work week is the sole cause of inflation in our economy — it is labor wasted on a vast scale. This is why in this crisis the sole concern of Washington has been to maintain or increase the rate of inflation. The conversion of surplus value into profits demands the constant increase in the total hours of labor by the working class. While the unpaid labor time of the working class is the sole source of surplus value, the realization of this surplus requires still more unpaid labor time.
Based on the above, we can make four general statements — which can be empirically substantiated — about the implications of Marx’s labor theory of value and the paradox of capitalist prices. If these turn out to be true, Marx’s theory is vindicated and anti-statists have a weapon with which to change the terms of political debate.
If Marx is right, we should be able to prove:
- prices have generally increased faster than value for the past 40 years — this implies not simply that there was inflation, but that this inflation did not in any way result from an increase in the value of commodities, but increased despite a general decline in the value of commodities.
- total hours of work have increased faster than was socially necessary for the past 40 years — this implies the additional hours of work per person did not result from any cause necessary from the standpoint of social needs, but despite growing social needs.
- total employment has increased faster than productive employment in the past 40 years — this implies the employment of labor has become less efficient over time,despite increased addition of labor saving techniques to production. It also suggests growth has been in those part of the economy where productivity is impossible to measure.
- total output has increased faster than total wages in the past 40 years — this implies output has increased most rapidly in precisely those commodities that do not enter into the consumption of the working class.
Basically, these four general statements come down to one thing with regards to the great mass of society: In the past 40 years, people have had to work more hours, and more of them have been forced to work, even as they have become poorer. We should, in other words, be able to demonstrate beyond question that labor no longer adds any value to the economy, and the increase in output, in hours of work, and in additional jobs, does not increase the living standards of the great mass of society. The more work performed, the greater the increase in poverty.
The “paradox of capitalist price” is the paradox of more work for less real income. The paradox suggests only those measures which reduce the size of government can increase the living standards of the mass of working people. Of course, because, this argument is counter-intuitive — since, theory is only necessary when things are not as commonsense suggests they should be — making this argument requires it be buttressed with considerable empirical support from the anti-statist community.
Moreover, Marx’s labor theory of value has an additional aspect which recommends it even over what I just stated. Since, in Marx’s labor theory of value, socially necessary labor time is the material barrier to the realization of a classless, stateless society — which has been the avowed aim of communists for nearly two hundred years — his theory is also the concrete measure of the extent to which the productive capacity of society has developed to make this aim a realistic possibility. Contained in the labor theory of value is also the material measure of the possibility of society to immediately achieve a stateless and classless society on the basis of the principle of “each according to his need.”
I think every anarchist, libertarian and Marxist should understand Marx’s transformation of surplus value into profits and the paradox of capitalist prices, because in it is the entire argument against the existing state, and all the ugly mess bound up with it.
Tags: bank for international settlements, bieri, Bohm-Bawerk, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, labor theory, monetary policy, necessary labor, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis, werner sombart
In reality, there was nothing in Bohm-Bawerk’s argument to be disproved. Bohm-Bawerk had indeed cited the essential contradiction at the core of capitalism. His problem, however, was to imagine the contradiction to be a defect of Marx’s theory, and not a fatal flaw laying at the heart of the capitalist mode of production itself.”
Bohm-Bawerk had inadvertently confirmed the rather grim future arrived at by Marx’s theory: Capitalism would kill the so-called free market, and in so doing, would destroy itself. It was, as Marx argued, creating its own gravediggers, a mass of directly social laborers who did not need it, and would see it as an impediment to their very survival, owing to obstacles it put in the way of its own operation.
By the 1970s, economists finally were forced to acknowledge there was in fact no inconsistency in Marx’s argument. Marx had, just as Bohm-Bawerk accused him, arrived at a theoretical description for why prices, although resting on the socially necessary labor time required to produce commodities, nevertheless appeared to reflect the prices of production of these commodities and not their labor times. It was not, as Werner Sombart feared, that from Marx’s labor theory of value “emerges a ‘quite ordinary’ theory of cost of production”, but precisely that Marx’s theory predicted from the first that the value of commodities must appear in the form of prices of production.
Moreover, Marx had demonstrated his proof almost in real time, so to speak, in front of his audience in a painstakingly detailed series of volumes — subject to the critical purview of his opponents. He had, as it were, made the elephant in the room — socially necessary labor time — disappear before the disbelieving eyes of his skeptical audience. It was a performance so dramatic and unprecedented, it took decades for the skeptics even to figure out what they had just witnessed with their own eyes.
The acknowledgement of Marx’s triumph took the form of a paper by Paul A. Samuelson, and was couched in the form of the complaint echoing that leveled against Marx by Sombart, as previously quoted by Bohm-Bawerk :
“…if I have in the end to explain the profits by the cost of production, wherefore the whole cumbrous apparatus of the theories of value and surplus value?”
Taking a cue from Sombart, Samuelson, in a paper titled “Understanding the Marxian Notion of Exploitation: A summary of the So-Called Transformation Problem Between Marxian Values and Competitive Prices”, introduced his so-called erasure method arguing,
It is well understood that Karl Marx’s model in Volume I of Capital (in which the “values” of goods are proportional — albeit not equal — to the labor embodied directly and indirectly in the goods) differs systematically from Marx’s model in Volume III of Capital, in which actual competitive “prices” are relatively lowest for those goods of highest direct-labor intensity and highest for those goods of low labor intensity (or, in Marxian terminology, for those with highest “organic composition of capital”). Critics of Marxian economics have tended to regard the Volume III model as a return to conventional economic theory, and a belated, less-than-frank admission that the novel analysis of Volume I — the calculation of “equal rates of surplus value” and of “values” — was all an unnecessary and sterile muddle.’
Samuelson gave a simple straightforward explanation of his “erasure method”:
I should perhaps explain in the beginning why the words “so-called transformation problem” appear in the title. As the present survey shows, better descriptive words than “the transformation problem” would be provided by “the problem of comparing and contrasting the mutually-exclusive alternatives of `values’ and `prices’.” For when you cut through the maze of algebra and come to understand what is going on, you discover that the “transformation algorithm” is precisely of the following form: “Contemplate two alternative and discordant systems. Write down one. Now transform by taking an eraser and rubbing it out. Then fill in the other one. Voila!
For all his genius, Samuelson argued, Marx had produced a theory which offered no greater insight into the social process of production than was already present in the form of mainstream economics. It could, for this reason, be entirely ignored.
Ignored also, however, would be the entire point of Marx’s “unnecessary and sterile” detour: namely, to demonstrate in comprehensive and theoretically ironclad fashion why the capitalism mode of production is doomed.
This only deepens the mystery of David Bieri’s interest in a theory routinely dismissed by economists as, at best, a vestigial remnant of classical political-economy. Why would this former bureaucrat of the Bank for International Settlements still be reviewing an obscure technical problem of a long dead theory?
Tags: bank for international settlements, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
In the previous blog post, I argued that in each of the three great capitalist catastrophes of the 19th and 20th Centuries — the Long Depression, the Great Depression and the Great Stagflation — economists scurried to bone up on Marx in an effort to understand practical problems of state economic policy confronting them at the time.
Naturally, the connection between these catastrophes and interest in Marx intrigued me, since this guy Bieri is now interested as well. If Bieri were just another Marxian economist I could understand his interest but his connection to the BIS and Bankers Trust, London intrigued me. Bankers Trust, one of the many institutions with which Bieri has been associated, is not exactly your typical local community credit union. It was up to its neck in the dirty dealings that led to financial crisis, and has long been implicated with equally shady dealings in the market in general. Here is what Wikipedia has to say about it:
“In 1995, litigation by two major corporate clients against Bankers Trust shed light on the market for over-the-counter derivatives. Bankers Trust employees were found to have repeatedly provided customers with incorrect valuations of their derivative exposures. The head of the US Commodity Futures Trading Commission (CFTC) during this time was later interviewed by Frontline in October 2009: “The only way the CFTC found out about the Bankers Trust fraud was because Procter & Gamble, and others, filed suit. There was no record keeping requirement imposed on participants in the market. There was no reporting. We had no information.” -Brooksley Born, US CFTC Chair, 1996-’99.
Several Bankers Trust brokers were caught on tape remarking that their client [Gibson Greetings and P&G, respectively] would not be able to understand what they were doing in reference to derivatives contracts sold in 1993. As part of their legal case against Bankers Trust, Procter & Gamble (P&G) “discovered secret telephone recordings between brokers at Bankers Trust, where ‘one employee described the business as ‘a wet dream,’ … another Bankers Trust employee said, ‘…we set ‘em up.”
Perhaps I am just being a tad paranoid, but when a guy with these kinds of connections starts sniffing around dusty old volumes of Capital just before the outbreak of the financial crisis of 2008, I begin to wonder what’s up.
But, I’m getting ahead of myself, am I not? I have not yet even explained what all the fuss is about. This tale begins with a little known simpleton scribbler, whose name is probably unfamiliar to anyone outside of the field of economics: Eugen von Bohm-Bawerk.
Tags: bank for international settlements, bank of international settlement, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, london school of economics, monetary policy, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
I’m reading, “The Transformation Problem: A Tale of Two Interpretations”, by David Bieri.
According to his profile,
David studied economics at the London School of Economics and international finance at the University of Durham (UK). In 2006, he started his Ph.D. studies in SPIA.
From 1999 until 2006, David held various senior positions at the Bank for International Settlements, most recently as the Adviser to the General Manager and CEO. From 2002 to 2004, he held the position of Head of Business Development in which capacity he was responsible for new financial products and services and reserve management advisory for central banks. From 2004 to 2005, David worked as an economist in the BIS’ Monetary & Economics Department.
Prior to joining the BIS, David worked as a high-yield analyst at Banker’s Trust in London and in fixed-income syndication at UBS in Zurich.
What caught my attention is the notable resume of this author, which is quite unlike that of the typical Marxian economist. High-yield analyst, central bank bureaucrat, mainstream economist? This is not the sort of person you will find at your local Occupy campsite.
Why, I wondered, is the Bank of International Settlement interested in an obscure technical problem of Marx’s theory? So, I decided to give the paper a read.
Tags: Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, political-economy, recession, stupid economist tricks, unemployment, Wall Street Crisis
FOFOA’s argument against modern money theory can be summarized as follows:
A staggeringly massive hyperinflationary event is already latent in the global economy. The dollars currently in circulation only retain their purchasing power because of the function of money as medium for the circulation of commodities. Modern money theory, which proposes the fascist state faces no monetary constraint on spending in excess of its ability to tax or issue debt, is making an argument for monetary policies that will only exacerbate the latent hyperinflation already present in the economy. The problem posed by hyperinflation, “too little money”, is not mitigated when the state creates new currency out of nothing. Rather, the case is the reverse: emitting new dollars does not create additional purchasing power; it simply dilutes the purchasing power of the dollars already in circulation, adding to the implosive potential of the inevitable hyperinflationary event.
According to FOFOA, the hyperinflationary event has been held back so far by the self-interested action of Europe, Japan, and China; who have recycled their dollars back to the US to buy its debt over the past thirty years. This recycling of dollars into US debt has supported the purchasing power of the dollar, but it has reached its limit. The dollar is now suffering a credibility crisis among US creditors, that must lead to an effort by these creditors to exchange their dollars for real, not fictional, assets. With the US’s creditors losing faith in the stability of dollar purchasing power, and boycotting the purchase of US debt, the US is actually engaged in wholesale creation of dollars out of nothing to fund its operations, driving the dollar into actual hyperinflation.
This latter scenario, the impending and irreversible loss of dollar credibility, is where FOFOA badly stumbles in his argument against the advocates of modern money theory.
Toward the end of his case against the modern money school, FOFOA offers this insight into Wiemar Republic hyperinflation, and what he argues is the basis for the coming hyperinflation set to be unleashed in the dollar system:
As the German Mark fell, there was “not enough money” to pay the debt. And with a little inflation, there is “not enough money” to buy our necessities from abroad.
Hyperinflation, FOFOA argues, is commonly described as a rapid rise in the general price level — an incredibly sharp burst of inflation where the prices of commodities increase a hundred-fold, even a thousand-fold, as a result of a rapid depreciation of the purchasing power of the currency. But, hyperinflation can also be thought of as a sudden implosion — collapse — in the supply of money in relation to the prices of commodities. A situation emerges where there is “not enough money” to pay for commodities. FOFOA quotes writers who made this observation during the time of Wiemar Republic Germany in the 1920s:
“In proportion to the need, less money circulates in Germany now than before the war.” (Julius Wolfe, 1922)
“However enormous may be the apparent rise in the circulation in 1922, actually the real figures show a decline.” (Karl Eister, 1923)
The phrase, “not enough money”, is ironic precisely because, using FOFOA’s definition of money, it appears the deficiency could be resolved by simply printing more dollars. If dollars were money, it would be reasonable to expect a shortage of money as existed in the financial crisis of 2008 could be remedied by going to a computer terminal and crediting the accounts where this lack of money was most acute. In fact, as FOFOA explains, this was exactly what the monetary authorities attempted:
…Mervyn King made headlines saying “the UK was suffering from a 1930s-style shortage of money.”
“There is not enough money. That may seem unfamiliar to people.” he told Sky News. “But that’s because this is the most serious financial crisis at least since the 1930s, if not ever.”
However, as FOFOA explains simply printing more currency does not and cannot fix a hyperinflation; instead, the hyperinflation is exacerbated by such actions:
It should be obvious from this video that Mervyn King, at least, does not get that expanding the base which debases the economy’s money is not the best response to “not enough money.” You don’t have enough money, so you make what you’ve got worth less? Perhaps he meant the monetary base is too small for the credit clearing system. He did, after all, reference the 1930s rather than the ’20s. But, sadly, that’s not the case because he clearly said “we are injecting 75 billion (with emphasis reminiscent of Dr. Evil) pounds directly into the British economy.” But in King’s defense, he’s doing no different than the Fed or the Reichsbank
FOFOA makes the argument printing currency does not resolve the problem of too little money, but only dilutes the existing stock of currency already in circulation. Obviously, for this to be true, dollars, pounds, euros and rubles must not be money, but tokens of money. However, using this same reasoning, it becomes clear that “too little money” cannot be the basis for his prediction of a future hyperinflation of the dollar: there has been no money in the world economy since the dollar was debased from gold in 1971.
To approach this another way: in 1971 one dollar had the official definition of 1/35th of an ounce of gold. A commodity having the price of one dollar had the exchange value equal to this same 1/35th of an ounce of gold. When Nixon took the dollar off the gold standard, one dollar had the official definition of zero ounce of gold. A commodity having a price of one dollar had no exchange value whatsoever. Effectively, the dollar was worthless, and the country was plunged into an actual hyperinflation, where no dollar price, no matter how high, sufficed to express the actual money price of a commodity. One billion dollars could be entered in a computer terminal and credited to the account of a seller without paying even a vanishingly small fraction of the actual price of the commodity in ounces of gold.
It is interesting in this regard that no seller of commodities immediately demanded gold in exchange for her commodities, and refused any amount of dollars, no matter how great, in return for her commodity. In the case of the Weimar Republic, Zimbabwe, and the confederate money of the American Civil War, two price systems quickly sprung up — one denominated in the official currency, and another — or many — in “sound” money. The Wikipedia explains that, in the case of Zimbabwe, dollars and euros circulated in the economy as money, quickly displacing the Zimbabwe dollar as medium for the circulation of commodities. Eventually the government had to recognize its currency was not money:
The use of foreign currencies were legalised in January 2009, causing general consumer prices to stabilise again after years of hyperinflation and price speculation. The move led to a sharp drop in the usage of the Zimbabwean dollar, as hyperinflation rendered even the highest denominations worthless.
On 2 February 2009 the Zimbabwean dollar was redenominated once more, at the ratio of 1,000,000,000,000 ZWR to 1 ZWL. The third dollar was expected to be demonetised on 1 July 2009, but the complete abandonment of local currency was hastened by the decline in overall consumer usage of local currency in favour of other currencies, helped by the legalization of the use of hard currencies in January 2009.
The dollar was effectively abandoned as an official currency on 12 April 2009 when the Economic Planning Minister Elton Mangoma confirmed the suspension of the national currency for at least a year, but exchange rates with the Zimbabwean dollar were maintained for up to a year afterwards. The current government of Zimbabwe said that the Zimbabwean currency should only be reintroduced if the industrial output was 60% or more of its capacity, compared to the April 2009 average of 20%.
If hyperinflation is defined as a lack of sufficient money in circulation, I think it is safe to say we have been experiencing it at least since 1971, when the dollar was debased from gold. If it is defined as an incredibly sharp burst of inflation where the prices of commodities relative to the value of these commodities increases to astronomical levels, we can also date it to 1971, when, owing to the debasement of the dollar, the value expressed in any dollar price was zero. What has to be explained is why, despite the dollar’s evident lack of value, commodity sellers have not abandoned it in favor of a money capable of expressing the value of their commodities, or, failing this, reverted to simple barter, as occurred in every previous episode of hyperinflation.
Hyperinflation can either be thought of as too little money in circulation or the rapid increase in the currency prices of commodities in relation to their values. FOFOA wants to accuse the advocates of the modern money school with setting the global economy on a course to a catastrophic hyperinflation; yet, by both definitions of hyperinflation he uses we have been living in a hyperinflationary monetary regime for forty years now. A worthless debased currency characteristic of hyperinflation has served as the medium of circulation for four decades without resulting in the sort of monetary disaster he predicts.
FOFOA has an explanation for this, a synopsis of which I present in the extensive excerpt below:
The US has enjoyed a non-stop inflow of free stuff including oil (a trade deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s, following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a tailspin. Because the US dollar was the global reserve currency, this was bad news for the global economy. If the dollar had failed then, without a viable replacement currency representing an economy at least as large as the US, international trade would have ground to a standstill.
Europe was already on the road to a single currency, but it still needed time, decades of time. So at the Belgrade IMF meeting in October of 1979, a group of European central bankers confronted the newly-appointed Paul Volcker with a “stern recommendation” that something big had to be done immediately to stop the dollar’s fall. Returning to the US on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy.
Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China’s admission into the WTO in 2001.
Then, sometime around 2007 or 2008, the dollar’s Credibility Inflation peaked. The growth of the “economy’s money” (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA’s dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.
Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base. Sure, China still wants to sell her goods to the US, but she’s no longer supporting the price stability of the last 30 years by recycling the dollar base expansion back into USG debt.
Essentially, FOFOA’s argument is that the dollar has not collapsed because commodity sellers need it to serve a medium for the circulation of their commodities. Although the dollar is incapable of serving as the material to denominate the value of their commodities, the dollar is more than adequate to serve as medium of circulation for commodities. While the first function — denominating value — requires money in the material form of a physical commodity like gold; the second function — medium of circulation — requires only a token of money, currency.
FOFOA is making the perfectly reasonable argument that so long as the dollar is required for the circulation of commodities within the world market, it can perform the function of medium of circulation without difficulty. However, once the circulation of commodities is interrupted, and money must step forward in its own physical body, shit is going to hit the fan on a scale never before seen in human history.
It turns out my first reaction to FOFOA’s post, Moneyness, was the correct one: the Moneyness of the dollar is to Money what Stephen Colbert’s Truthiness is to Truth, i.e., NOT.
To really understand the significance of FOFOA’s pure concept of money, I will compare it to Karl Marx’s and classical political-economy’s view of money. In the latter view, value drives and determines price; while in FOFOA’s pure concept of money, price is wholly indifferent to value. Marx argued the price realized by the sale of a commodity in any exchange was, at root, a function of the duration of socially necessary labor time it takes to produce it. The realized price of the commodity included the wages paid to the worker plus a quantum of unpaid labor time realized as profit by the capitalist. However, because this is a social process, and the actual exchange is heavily influenced by imbalance between supply and demand and many other factors, a direct connection between the price and value of a commodity in a given transaction could not be established in any obvious fashion.
FOFOA’s view of money can best be understood by an analogy:
Suppose we could take a snapshot of all the economic activity taking place simultaneously in the entire economy at this very moment; and reproduced this snapshot as a 500 piece puzzle. In this puzzle, the total value of all of this economic activity contained in this series of transactions can be thought of as the size of the puzzle taken as a whole. The dollars making up this activity can be thought of as the individual pieces of the puzzle — each piece would represent one dollar.
According to FOFOA’s argument, if we doubled the number of pieces from 500 to 1000, this would not change the size of the puzzle itself; it would just mean each piece of the puzzle represented a smaller portion of the underlying economic activity. Likewise, if we reduced the number of pieces from 500 to 250, each puzzle piece would represent a larger portion of the total puzzle without changing the total puzzle size. In FOFOA’s pure concept of money, you can increase the number of puzzle pieces (dollars) without increasing the size of the puzzle itself. The thing serving as money has no real relation to the underlying value it represents. The value represented by a single dollar is simply a function of the number of dollars in circulation. By contrast, Marx and classical political-economy held the relation between the pieces of the puzzle and the entire puzzle were more or less fixed. So, the only way to increase the number of pieces (dollars) in the puzzle (economy) was to increase the total size.
Insofar as we are discussing how the present dollar is used as money, I think FOFOA’s argument is dead on target. However, from the point of view of classical political-economy, his argument amounts to a statement that the dollar is not money — our economy is essentially moneyless! If FOFOA is correct, once the gold standard was abolished, the dollar was no longer money, because it is incapable of expressing the values of commodities in a transaction. And, in this argument, Marx would agree with him completely. Marx actually makes FOFOA’s argument in Capital, when discussing how the currency can come to be detached from the real value underlying it:
The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly-fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.
Marx appears to be in full agreement with FOFOA on the issue of the dollar: when the currency is debased from a commodity money (e.g., gold), prices would no longer have any fixed relation with the value of the commodities — the essential link between values and prices, established not by the currency itself, but by the commodity for which the currency serves as a token, would be broken. Far from being the case that Marx is right and FOFOA is wrong, for Marx to be right about money, FOFOA’s pure concept of money has to be right about the dollar.
So, if our economy is essentially moneyless, what explains the persistence of exchange, prices, and the dollar? I think this persistence clearly has nothing to do with the role of money in expressing the value of the commodity in an exchange. Once we realize FOFOA’s pure concept of money is not, as he alleges, “the same concept that first emerged thousands of years ago”, but a thoroughly modern notion of money arising about the time of the Great Depression, it becomes obvious that if the dollar does not express the values of commodities, this must be because value itself no longer exists.
Value and money
I admit, the idea that value doesn’t exist in our economy is quite absurd on its face, and you would be wise to dismiss it out of hand as just another of the silly statements I am prone to make in my posts. However, before you do, consider FOFOA’s own argument:
‘Money’ is a “unique unit” that we use as a kind of language for expressing the relative value of things other than money.
In FOFOA’s argument money is not a thing in itself, but a thing which expresses something other than itself — namely, value. Marx makes an argument very similar to FOFOA in his own discussion of money, where the thing serving as money is described as a pledge to a certain definite quantity of value:
As materialised labour-time gold is a pledge for its own magnitude of value, and, since it is the embodiment of universal labour-time, its continuous function as exchange-value is vouched for by the process of circulation.
In Marx’s argument, as in FOFOA’s, money expresses the value of an object — this much they agree on. But, there are significant dissimilarities as well: in Marx’s argument, money is gold or another commodity, while in FOFOA’s argument, money is merely a token — a piece of paper or dancing electrons on a computer terminal, a way of keeping an account of transactions. However, while the distinction seems to hinge on what serves as money, the actual distinction is the definition of value itself: What constitutes the value of the commodity that is expressed by the thing serving as money? What is value?
As I stated in the first post, unfortunately FOFOA offers no definition of value of his own, so I am at a loss to restate it and compare it to Marx’s definition. However, the Wikipedia offers a number of different and conflicting definitions of value that more or less seem to capture what is expressed in FOFOA’s pure concept of money. The one most obviously expressing FOFOA’s pure concept of money is this one:
In neoclassical economics, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply. Many neoclassical economic theories equate the value of a commodity with its price, whether the market is competitive or not. As such, everything is seen as a commodity and if there is no market to set a price then there is no economic value.
In this definition of value, the value of the commodity is its money price. The price of the object is simply the money name we give to its underlying value: if a house sells for $3000 in 1950, its value is $3000; if, in 2010, the same house is resold for $300,000, the value of the house, despite 60 years of wear and tear, is now 100 times what it was new. In each case, value is simply another way of referring to the price of the house in the form of the existing unit of account. Why does the value of the house change in the interim between 1950 and 2010? Aside from the influences of supply and demand and other factors, the units of money in which the value of the house is denominated has undergone a depreciation, such that, despite 60 years of wear and tear, its market value has increased 100 times.
In other words, if the neoclassical definition of value is “accurate”, as an independent category of political-economy value no longer exists — there is only the currency price of the good.
So, how does the neoclassical definition of value fit Marx’s argument? In Marx’s definition, value is the socially necessary labor time required to produce a commodity. This labor time is measured not by the time required by any particular individual producer to create his commodity, but the social average production time required by all the competing producers. Moreover, these individuals have no idea what the market is for their goods. It is not until these individual producers come to the market with their commodities and offer them for sale do they get an inkling as to the actual demand for the commodities they have produced.
In Marx’s definition, value is the blind result of many isolated acts of production by individuals who do not know and cannot know either the time required to produce their particular commodities, or the actual demand in the marketplace for the commodities they produce. The only means they have of ascertaining these two important bits of information is transmitted to them solely through prices of the commodities themselves. Although they create the value of their products as they create the products themselves, the producers have no clue as to the quantity of value they created prior to offering them for sale in the market.
The value of any commodity, Marx argues, can only be expressed through the act of exchange as exchange value. And, it can only be expressed in the form of a money that can serve as “a pledge for its own magnitude of value”. This is because, under conditions where the innumerable private acts of individual production form the basis of production, only through money can these millions of individual acts of production spontaneously organize themselves into social production.
Value cannot be expressed without money, but, more importantly, the value created by these millions of individual acts of production must be expressed in the form of money. Money is the blind expression of millions of individual producers seeking to turn their private act of production into a socially valid and universally recognized object. The millions of producers do not merely create the values of their respective commodities, they also spontaneously create the money object that serves as the socially valid medium to express this value — it simply one of the many objects they created as commodities spontaneously emerging as the money object.
In Marx’s theory, the same process that accounts for value also accounts for the commodity serving as money. Money does not simply express value, it is the product of value creation itself — the spontaneous creation of millions of individual producers. It is not the state that creates money, but society. If money does not exist, it is safe to assume value doesn’t either.
And, just in case you were not paying attention, that means the dollar is not a natural creation of market forces.
I am now reading FOFOA’s Moneyness, an epic length blog on the history of money. I was lured into reading it by the title, which I stupidly misinterpreted as tongue in cheek on the order of Colbert’s Truthiness. In fact, it is an attempt to bring his view on money to an analysis of the current global monetary crisis.
FOFOA begins this extended treatment of the crisis with a tangle of questions, all of which are centered on the nature of money itself:
Is gold real money? Or is money whatever the government says it is? Or is it whatever the market says it is? Is silver money in any way today? Are US Treasury bonds money? Is real money just the monetary base? Or is it all the credit that refers back to that base for value? Is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?
Is money really the actual medium of exchange we use in trade? Or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value? Should the reference point unit itself ever be the medium of exchange? Some of the time? All of the time? Never? Is money a store of value? And if so, for how long? Is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else? Or is it simply a shared language for expressing those changes?
To answer these questions, and so set the context of his argument on the present crisis, FOFOA offers a history lesson on what he calls the pure concept of money from the pre-capitalist period. Tracing money back to these roots, FOFOA argues, is necessary because our present concept of money has been corrupted by a long period of conflict between advocates of easy money policies — who favor a debased currency like the dollar — on the one hand, and advocates of hard money policies — who demand a return to some sort of commodity money (gold, or some other commodity) — on the other.
FOFOA admits he cannot really get back to a pure concept of money, but he attempts to construct a close substitute, based, he says, on archeological findings and etymology (with a judicious application of his own predetermined notions):
If we look at the specific etymology I highlighted, we are pretty close to the pure concept which I will confirm from a couple different angles. ‘Money’ is a “unique unit” that we use as a kind of language for expressing the relative value of things other than money. The modern example would be “dollar”. Not “a dollar,” not a physical dollar, but the word “dollar” as it is used to say a can of peas costs a dollar, or my house is worth 100,000 dollars, or you owe me a hundred dollars. If you give me two grams of gold you won’t owe me a hundred dollars anymore. You don’t have to give me actual dollars. That’s just the unit I used to express the amount of value you owed me. That’s the pure concept of money.
According to FOFOA, money is simply a common unit of account that we use to express the relative value of things. With it, we can compare, for instance, the value of a can of peas to the value of a house, because we can use some socially valid accounting unit to express their respective values.
It is unfortunate for his argument that FOFOA does not define the thing being expressed by money — value — at this point, preferring to leave it hanging out there simply as “the thing money expresses”. This is very damaging to his argument at the outset, because we have no way of knowing the attributes of value which logically must be shared by the can of peas, the house and money. Thus, it is difficult to actually ascertain whether money can actually play this critical role in society, as he argues it does.
The attributes of value present in the two items must also be present in the thing which expresses them. Even if we assume money is only a conceptual tool — a language for expressing this value — this conceptual tool presupposes there is something to be expressed through money. Is this value being expressed also conceptual like the money; or, is it a material thing like the can of peas? How do we know a house has 100,000 times the quantity of value contained in one can of peas?
“Because that’s what the prices paid for them says”, FOFOA seems to argue.
Without a theory of value it would seem impossible to have a theory of money, but FOFOA offers none in his argument. Suppose value referred to weight; would it not be necessary to have our money denominate units of weight measure? Would it not be necessary for actual money to come in some fixed weight unit, fraction, and multiple of this weight measure so that during a transaction we could be sure we were getting 1/100,000th of a house in our can of peas, not 1/200,000th of a house.
Likewise, if money is needed to express the value of a can of peas, is it not necessary that this money have actual value of its own? How is the actual money material to express the value of all else besides money if it has no definite value of its own? We can arbitrarily state one unit of value is to be called a dollar, but how is this relationship insured? How can we be sure that a dollar will, in fact, purchase this unit of value in our next visit to the grocery? FOFOA offers no ideas on these and other critical questions.
Next, FOFOA tells us a dollar is money only because we reference it when expressing the relative value of things. He emphasizes money is a product of our conceptions; but the actual material we use as money — e.g., the dollar — is money only because we use it to denominate the relative values of things. If we began using something else when denominating the relative values of things, this new thing would now be the money.
We could be using seashells as money. If we were, then all the seashells available for trade would be the monetary base. That’s the base to which I would be referring when I said you owed me one hundred seashells. A single seashell would be the reference point, the unique unit, but the whole of all available seashells would be the base around which money flowed. You could pay your debt to me with either an item that I desired with a value expressed as 100 seashells, or with 100 actual seashells. So if the total amount of seashells available (the monetary base) suddenly doubled making them easier for you to come by, I’d be kinda screwed. Of course I’d only be screwed if the doubling happened unexpectedly between the time I lent you the value of 100 seashells and the time you paid me back.
Of course, this begs the question: since money is only a concept, why does it need an independent material body? We don’t seem to need an independent material to express the concepts succulent and foul. According to FOFOA, money itself is only a language to express the relative values of things; however, for reasons FOFOA does not explained, this language needs an independent material form. It is not enough to have a common language to express relative values of objects, this language needs an independent common material form. Moreover, the common material form this concept takes is not actually the money, but a mere material referent or pointer. The material object employed as money is just a referent pointing back to our money conception.
Finally, FOFOA offers nothing to explain money in terms of its actual functions: Why does production take the form of objects with value? Why do we compare the values of these commodities? When did such comparison making arise in human history? What natural or social forces caused it to emerge? Certainly commodity production and value comparison is not hard wired in our DNA — so where did it come from?
These questions demand an answer, because later in his post, FOFOA is going to be making arguments against the modern money school that assumes he has answers to them. Arguments like “Hyperinflation is bad” — an argument that just printing money is ultimately disastrous. But, why is hyperinflation disastrous if money is only a concept, a mere language for expressing the relative values of objects other than money? How does adding zeroes to the material that only expresses a conception not like simply switching to yen from dollars to express relative values of things?
Money is a concept, a symbol of value; but, as FOFOA indicates with his dire prediction, it is much more than this.
With all of my objections and questions regarding FOFOA’s basic argument, you probably think I fundamentally disagree with him on the gist of his outline — but you would be completely wrong; I fully agree with his description. Insofar as he has simply outlined his ideal form of money, he has described our present dollar system in an adequate fashion. The problem is not that FOFOA’s description of money is wrong, but that, as a practical matter, he is correct in almost every detail but one: the dollar is not money.
To understand why it is not money, we need only recognize that the monetary system FOFOA describes has only existed in one other place and time in human history: the Soviet Union and other now-defunct centrally planned economies of the so-called socialist bloc. There money was not money as it emerged in history, but a political or administrative tool for enforcing the domination of the party-state over the productive activities of members of society. Far from being the object that became money as the term is properly used — an independent expression of the relations of production and exchange within existing society, and a ruling power over those relations — money in the Soviet Union, and in the world market today, is an instrument for enforcing the despotic will of the state, no different in this regard from the corporate budget which enforces the will of a single capitalist over his enterprise.
What FOFOA describes is not money; it is the expression of the despotic rule of the fascist state.
I have been critiquing Barry Eichengreen’s unprincipled attack on Ron Paul and his demand for a return to the gold standard, but, so far, I have danced around the real question posed by this vicious hit piece. Eichengreen’s argument is not about whether or not Ron Paul’s ideas can be compared to the insanity of Glenn Beck, nor is it even about the criticism of the Fascist State proposed by the argument of Frederick Hayek, who plays in this venal attack only the role of betrayer — Ron Paul having based his argument on many of the insights of Hayek, is ultimately betrayed by him when the latter dismisses
the possibility of a return to the gold standard.
Hayek concedes, in other words, to the necessity of totalitarianism.
Ron Paul, having been deserted by Hayek, even before he begins his career as a politician, is left alone in the company of Glenn Beck, who (Beck) is trying to foist gold coin on you at an astounding markup. The implication of this being that if Ron Paul is not himself in cahoots with Glenn Beck, he is just another hopeless sucker to be played. Just another miser looking for a place to safely store up his accumulated wealth from the predations of the investment banksters.
All of this is nothing more than an attempt at misdirection, a ploy to distract you from asking the important question:
What is money?
Ask this question to Ron Paul, and he will tell you gold is money — honest money, not a fiction of money as is ex nihilo currency. When Ron Paul asked Fed Chairman Ben Bernanke if gold was money, the Chairman tried his damnedest to avoid giving a straight answer. The chairman knows that money can perform two useful functions: universal means of payment in an exchange, and store of value. Even if gold is not recognized as the official standard of prices in a country, it can still perform exceptional service as store of value. And, in this function, it entirely fulfills the definition of a money – moreover, it fulfills this function better than any other commodity. And, it certainly fulfills this function better than currency created out of thin air.
Yes. Gold is money. But, of course, that is not the question I am asking:
“What is money?”
Not what thing can serve as money, but what is money itself. No matter what serves as money, or the functions of money it fulfills; what is money itself, i.e., the functions to be filled by the things?
Simply stated: Gold is money, but money is not gold.
People always make this silly argument: “Why can’t dogs, or sea shells or emeralds be money?” Yes. Within limits, anything can serve as money; and, this fact makes the thing serving as money appear entirely accidental and arbitrarily established. So, for instance, whether gold or dancing electrons on a Federal Reserve terminal is money seems simply a matter of convenience and fit.
But, the real questions raised by this is why anything serves as money? That is, why money? This question appears to us entirely irrational. We take the existence of money for granted, and therefore, argue not about money itself, but the things to be used as money. Eichengreen wants us to believe the question, “What thing should serve as money?”, has no deeper significance but for a handful of scam artists and marks like Glenn Beck and Ron Paul. A fifty dollar gold coin (worth some $1900) is inconvenient for daily purchases; we should use dancing electrons on a Federal Reserve terminal.
But, why do we have to use anything at all when it comes time to fill up the SUV for a trip to the corner store? Why isn’t the gas free? In other words, what is money doing coming between us and the things we need?
“Because”, the economist Barry Eichengreen will tell us, “there is not enough of stuff to go around.” Well, how does Barry know this? Does he have some insight into how much of one or another thing is produced in relation to demand for that thing? No. He doesn’t. The function of money is to tell us which things are in shortfall relative to demand because those things have a price in the market place. Prices presuppose the existence of scarcity; of a relation to nature marked by insufficiency of means to satisfy human want. Money is not an attribute of a fully human society, but the attribute of a society still living under the oppressive demands of nature.
So, the question,
“What is money?”
really comes down to
“What is scarcity?”
And, this can now be answered: it is insufficient means to satisfy human needs. But, this answer is still insufficient, because we really have no way to know directly if scarcity exists, right? What we know is the things generally have a price, and we infer from this that things must be scarce. But, this too is a fallacy like “gold is money = money is gold”. I stated that prices presuppose scarcity — but I must now correct myself. Scarcity of means to satisfy human needs is necessarily expressed by prices, but prices do not of themselves necessarily express scarcity of means.
Catelization, monopoly pricing, false scarcity and the Fascist State
We know, for instance, near the turn of the 20th Century, certain big industries learned they could maintain artificially high prices on their products by creating entirely artificial scarcities. We know also how this expertise was put to use and the reaction of society to it. Or, at least, we think we do. Folks like Joseph Stromberg, Murray Rothbard, Paul Baran and Paul Sweezy tell a much different story than the official record. That alternative narrative is summed up brilliantly by Kevin Carson in his work here.
But merely private attempts at cartelization before the Progressive Era–namely the so-called “trusts”–were miserable failures, according to Kolko. The dominant trend at the turn of the century–despite the effects of tariffs, patents, railroad subsidies, and other existing forms of statism–was competition. The trust movement was an attempt to cartelize the economy through such voluntary and private means as mergers, acquisitions, and price collusion. But the over-leveraged and over-capitalized trusts were even less efficient than before, and steadily lost market share at the hands of their smaller, more efficient competitors. Standard Oil and U.S. Steel, immediately after their formation, began a process of eroding market share. In the face of this resounding failure, big business acted through the state to cartelize itself–hence, the Progressive regulatory agenda. “Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.”
In fact, these folks argue, cartelization and monopoly pricing wasn’t very successful until the state stepped in at the behest of industry to organize them. Carson again:
The Federal Trade Commission created a hospitable atmosphere for trade associations and their efforts to prevent price cutting. (18) The two pieces of legislation accomplished what the trusts had been unable to: it enabled a handful of firms in each industry to stabilize their market share and to maintain an oligopoly structure between them. This oligopoly pattern has remained stable ever since.
It was during the war [i.e. WWI] that effective, working oligopoly and price and market agreements became operational in the dominant sectors of the American economy. The rapid diffusion of power in the economy and relatively easy entry [i.e., the conditions the trust movement failed to suppress] virtually ceased. Despite the cessation of important new legislative enactments, the unity of business and the federal government continued throughout the 1920s and thereafter, using the foundations laid in the Progressive Era to stabilize and consolidate conditions within various industries. And, on the same progressive foundations and exploiting the experience with the war agencies, Herbert Hoover and Franklin Roosevelt later formulated programs for saving American capitalism. The principle of utilizing the federal government to stabilize the economy, established in the context of modern industrialism during the Progressive Era, became the basis of political capitalism in its many later ramifications. (19)
But, there’s a problem with this cartel argument by Austrians, like Hayek and Mises, and Marxist-Keynesians, like Baran and Sweezy: Following Rudolf Hilferding, they describe prices realized by cartelization as “tribute exacted from the entire body of domestic consumers.”
The “monopoly capital” theorists introduced a major innovation over classical Marxism by treating monopoly profit as a surplus extracted from the consumer in the exchange process, rather than from the laborer in the production process. This innovation was anticipated by the Austro-Marxist Hilferding in his description of the super profits resulting from the tariff:
The productive tariff thus provides the cartel with an extra profit over and above that which results from the cartelization itself, and gives it the power to levy an indirect tax on the domestic population. This extra profit no longer originates in the surplus value produced by the workers employed in cartels; nor is it a deduction from the profit of the other non-cartelized industries. It is a tribute exacted from the entire body of domestic consumers. (64)
The problem with this theory is this: if we assume a closed system where the wages of the working class are the overwhelming source of purchasing power for the goods produced by industry, with prices of commodities more or less dependent on the consumption power of the mass of workers who produce them, these workers are unable to buy what they produce. The problem cited by Marx that the consumption power of society is an obstacle to the realization of surplus value is only intensified by cartelization.
Cartelization, even if it could be achieved in one or two industries, could not be the principle feature of any closed economy. Moreover, Marx’s theory predicts as productivity increased, and the body of workers needed to produce a given output shrank, this imbalance worsens. Even with the full weight of the state behind it, monopoly pricing would result in the severe limitation of the consumption power of society. This wholly artificial limitation on the consumption power of society would be expressed as a reduced demand for the output of industry and generally falling prices. So, in any case, the attempt to impose a general scarcity on society through cartelization alone must, in the end, fail miserably.
At this point it is entirely necessary to again ask the question:
“What is money?”
But, this time, not in the fashion we previously addressed it,
“Why is money coming between us and the things we need?”
We now can ask it in the form Barry Eichengreen wants us to consider it:
“What thing should serve as the money?”
As we just saw, cartelization must fail, even if it is sponsored by the state, owing to the artificial limits on the consumption of society. The limited means of consumption in the hands of the mass of workers must place definite limits on the demand for the output of industry.
But, what if — and this is only a silly hypothetical — another source of “demand” could be found within society? What if, out of nowhere, government should suddenly find itself in possession of a previously untapped endless supply of gold? What if, no matter how much of this supply of gold was actually spent, the gold coffers of the state remained full to the bursting point. Indeed, what if, for every bar of gold the state spent, 2 or 3 … or one thousand bars took the place of the spent gold?
In this case, the consumption power of society lost by cartelization and monopoly pricing could be made up for by judicious Fascist State spending, for instance on the military or building out an entire highway system or leveling the industiral competitors of entire continents in a global holocaust or pursuing a decades long Cold War/War on Terror/War on Democracy, to offset the limited demand of society. Since all gold bars look pretty much the same, no one need know that the state had a secret vault that produced gold as needed. No one need know that gold had lost its “price” as a commodity, because it was so incredibly abundant as to exceed all demand for it.
Which is to say, no one need know that in gold-money terms, all other commodities, including labor power, were essentially being given away for free.
The only people who would know this would be the men and women who managed the vault. And, since they were getting a cut of every bar spent into circulation, they could be relied on to keep this a tightly held secret.
“What is money?”
Is it gold, a commodity in limited supply, and requiring a great deal of time and effort to produce? Or, is it the dancing electrons on a computer terminal in the basement of the Federal Reserve Bank in Washington, DC? Is it real gold, available in definite limited quantities? Or, is it “electronic gold”, available in infinite quantities? The first choice makes it impossible for state enforced monopoly pricing and cartelization; the second makes it entirely possible.
So far as I know, I am the only one making this argument — Marxist or non-Marxist. But, it is the entire point of Ron Paul’s campaign. It is what makes his campaign a potentially revolutionary moment in American society. Of far greater importance than he imagines, because, like any petty capitalist, he is only looking for a safe place to store his wealth. The radical potential of a demand for the return to the gold standard, even from the mouth of this petty capitalist, this classical liberal is a dagger aimed directly at the heart of the Fascist State, and of its globe-straddling empire.
Tags: Austrian Economics, Barry Eichengreen, Depression, ex nihilo pecunaim, Federal Reserve, financial crisis, gold, Hayek, international financial system, Joseph Stromberg, Karl Marx, Kevin Carson, Libertarianism, monetary policy, Money, Murray Rothbard, Paul Baran, Paul Sweezy, political-economy, Ron Paul, Rudolf Hilferding, Tea Party, Wall Street Crisis