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
As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. I am now reading the late Chris Harman’s “The rate of profit and the world today”, written in 2007, just prior to the big crash. This is part two of my examination.
Before we go any further, let me reiterate one thing: In Marx’s theory, the law of the falling rate of profit is not expressed in “stagnation of economic growth” directly or indirectly. The so-called “stagnation thesis” appears no where in the body of Karl Marx’s works on the capitalist mode of production spanning more than 40 years. Nor does it appear in any of Frederick Engels works on the same subject spanning nearly fifty-five years. It is not even an indirect result of the laws of motion of the capitalist mode of production. Moreover, in addition to the idea of “stagnation“, no Marxist can point to a single reference in the collective body of work by these two writers — together amounting to a century of research and publication — where either the terms “financialization” or “globalization” appear.
So, why the fuck are Marxist academics trying to explain these nonexistent phenomena? I think the answer to that question is simple: they are trying to explain stagnation, financialization and globalization because they can’t explain this:
Tags: Absolute Over-Accumulation, capitalist booms, Chris Harman, debt, Depression, economic growth, economic policy, fascist state political economy, Frederick Engels, great depression, Great Stagflation, Karl Marx, Keynesian economics, Marx, neoliberal, neoliberalism, otma, political-economy, rate of profit theory, stagnation, The Commune, The State
As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. I am now reading the late Chris Harman’s “The rate of profit and the world today”, written in 2007, just prior to the big crash.
Harman appears to be one of a group of the influential Marxist thinkers in the last quarter of the 20th Century, and especially the period leading to this crisis, who helped refocus Marxist academic attention to Marx’s rate of profit theory. In this paper, to some extent an outline of his book, published in 2009, on the same topic in the middle of the crash, Harman presents the result of his research on the rate of profit and offers some ideas to explain his findings.
In Harman’s view Marx’s argument that the rate of profit falls over the life of capitalism has far reaching implications because it argues capitalist crises result, not from some sort of failure in the mode of production, but from its successes:
The very success of capitalism at accumulating leads to problems for further accumulation. Crisis is the inevitable outcome, as capitalists in key sections of the economy no longer have a rate of profit sufficient to cover their investments. And the greater the scale of past accumulation, the deeper the crises will be.
For some reason Harman does not follow up on this very interesting argument — if in fact capitalism’s crises are not a sign of failure but a sign of success, this indicates capitalist crises themselves should not be the focus of attention when studying the mode of production.
Crises are no more than a interval during which the mode of production resolves the contradictions produced by its previous successes. As such, these crises cannot be the reason why Marx labeled the mode of production a relative, historically limited, form of development. While the recurrent crises of increasing scale demand our attention because they momentarily bring economic activity to a near standstill these crises in no way are the source of processes leading Marx to his conclusion regarding the fate of the mode of production.
The conclusion resulting from this realization are pretty staggering: for all of its social consequences, the depression of 2001 is not the harbinger of the demise of capitalism, but an interval during which the mode of production prepares for its further expansion. This may explain why Marxists, when looking at the recurrent explosions of capitalism, see no reason why they cannot continue indefinitely.
They are looking at the wrong thing.
Tags: Absolute Over-Accumulation, capitalist booms, Chris Harman, debt, Depression, economic growth, economic policy, fascist state political economy, Federal Reserve Bank, Frederick Engels, great depression, Great Stagflation, Karl Marx, Keynesian economics, Marx, neoliberal, neoliberalism, otma, political-economy, rate of profit theory, stagnation, The Commune, The State, zero growth
As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. This is the final part of my critique of Andrew Kliman’s “Neoliberalism, Financialization, and the Underlying Crisis of Capitalist Production” (PDF).
As can be seen in the chart above, most bourgeois economists look at fascist state economic data and conclude we are experiencing nothing like the sort of economic event that occurred in the Great Depression. The Great Depression was just that — a depression — while what we are experiencing is perhaps a more severe than normal recession generated in the aftermath of a financial crisis. For the bourgeois economist this description of the situation may or may not be entirely satisfactory.
For anyone attempting to understand the fascist state economic data using Marx’s theory of the capitalist mode of production it is less than worthless — it can turn Marx’s theory into a useless glob of shit that describes nothing — least of all what is occurring within the capitalist mode of production.
Tags: Absolute Over-Accumulation, Andrew Kliman, capitalist booms, debt, Depression, Depressions, Dominique Levy, economic growth, economic policy, fascist state political economy, Federal Reserve Bank, Frederick Engels, Gerard Dumenil, great depression, Great Stagflation, Karl Marx, Keynesian economics, Marx, Michael Roberts, neoliberal, neoliberalism, otma, political-economy, rate of profit theory, The Commune, The State, zero growth
I have been reading David Harvey’s “Organizing for the Anti-Capitalist Transition” (2010). Harvey’s theory of the current crisis differs somewhat from the other Marxists I have been following. I actually rather enjoyed reading Harvey because he is simple to read without being simplistic like Wolff’s and Resnick’s piece. Harvey gave this originally as a talk to the World Social Forum in 2010,
Harvey opens his talk by stating boldly:
The historical geography of capitalist development is at a key inflexion point in which the geographical configurations of power are rapidly shifting at the very moment when the temporal dynamic is facing very serious constraints. Three percent compound growth (generally considered the minimum satisfactory growth rate for a healthy capitalist economy) is becoming less and less feasible to sustain without resort to all manner of fictions (such as those that have characterized asset markets and financial affairs over the last two decades). There are good reasons to believe that there is no alternative to a new global order of governance that will eventually have to manage the transition to a zero growth economy.
I liked his argument here, but, I think, he could have clarified things by explaining what he meant by “three percent compound growth…” Growth is one of those terms from bourgeois economics that has been adopted into the lexicon of Marxism as a category without critical examination. When Harvey then proposes that “compound growth” must sooner or later give way to “zero growth”, he unwittingly injures his own argument.
Tags: David Harvey, Depression, economic growth, economic policy, Fascist State, fascist state political economy, great depression, Great Stagflation, Keynesian economics, neoliberal, neoliberalism, otma, political-economy, The Commune, The State, zero growth
The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers — proletarians. The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over.
Frederick Engels, Socialism: Utopian and Scientific
I am now reading John O’Connor’s “Marxism and the Three Movements of Neoliberalism” (PDF)
O’Connor proposes what he calls a “Marxian conceptual and empirical framework for understanding the disparate research on neoliberalism”. As with Saad-Filho’s work, John O’Connor’s is deeply flawed and is not in any fashion based on Marx’s theory of the Capitalist mode of production. Rather than an exercise in historical materialist analysis, O’Connor serves up a rehash of progressive nostalgia for a mythical pre-1970s Keynesian social compact, combined with a laundry list of ideological and policy crimes by the Neoliberal world order. We end with no more understanding of this thing, Neoliberalism, within the context of history, than we did at the beginning. O’Connor fails the essential test of the historical materialist critique of the capitalist mode of production.
If Neoliberalism is simply an ideological, policy, or governance construct, why is this construct the necessary form of ideology, policy and governance at this stage of development of the mode of production?
Fascism and the Myth of Keynesian Social Accommodation
For some strange reason, O’Connor arbitrarily begins his narrative in 1950 — completely bypassing a decade of depression ending in world war . He wants us to ignore this catastrophe and the war of redivision of the planet that ended in the destruction of much of Europe and Japan — 80 million dead and the productive capacity of Europe and Japan laying in ruins. He also wants us to ignore the rise of the fascist state and the debasement of currency that made that war possible. This allows him to portray the period roughly from 1950 to 1974 as a “Golden Age of Capitalism” following Glyn and Hosbawm.
Completely ignoring the fact that Europe and Japan lay in ruins at the end of the war — and, therefore, that any measure of post-war expansion begins from a base determined by this previous horrific loss of productive capacity — O’Connor tells us the “post-war economic boom was exceptional in capitalist history for its explosive growth, high profits, technological innovation, and reliance on government policy.” This last thing “reliance on government policy” is the kicker, because O’Connor is now going to use it as a crutch to get him to 1974. The “Golden Age” was made possible by two things: class accommodation at home and state involvement in the accumulation process. We don’t get any critical look at this so-called class accommodation nor state involvement in the accumulation process. In fact, both are filler material, placed there solely to let O’Connor to segue into the “crisis” of 1974-82. With this filler material O’Connor can stuff in the typical myth-story about a “Golden Age”” which he finds already present in our national political discourse.
Gone is the Great Depression, the debasement of the currency and the rise of the fascist state, the catastrophic wars of the 30s and 40s, US aggression in Korea, and a series of other police actions and coups, the red scare, the arms race, the Suez incident, Vietnam and the horrors of the United States’ Southeast Asian murderous rampage. What was blood red in reality, becomes a hazy faint shade of pink in O’Connor’s make-believe world of “I Love Lucy”. At some point, someone is going to have to call Marxists out on their patriarchal, racist, elitist, Anglocentric, rewrite of history. Frankly, the shit is just fucking unnerving — there was no “Golden Age” of capitalism! For John O’Connor, Saad-Filho, Richard Wolff and the rest of the Marxist Academy to continue referring to this myth is just bizarre!
The period under question begins not in 1950, but in 1929 with the collapse of capitalism world-wide, from which capitalism never recovered. Rather, all industrial states stepped in as the national capitalist and immediately imposed a continuous wage reduction regime across the board on their respective working classes in a ruthless act of class warfare. Then each fascist state turned on its neighbors and slaughtered everyone they could get their hands on in an orgy of bloodletting. It wasn’t enough to kill them — NO! — they then leveled their cities, destroyed their factories and productive capacity, and stole their resources to starve them out.
You want to see the “Golden Age” of Keyesianism — just look at World War II. Thanks to Lord Keynes the United States was able to devote 40% of its GDP to slaughter and pillage, and still have “economic growth”. In the United States alone 1500 factories were built from scratch to murder strangers — not feed them and ourselves. Sixteen million men were withdrawn from all productive labor and sent to murder, fully outfitted and fed by American industry — the same American industry which, just months earlier, could neither hire nor feed them — that’s your fucking Keynesian “Golden Age”, bitches.
The insult to the 100 million dead in two global wars of redivision cannot be worst than out of the mouth of a Marxist who states, as John O’Connor does, “the USA and Britain took steps to ensure that a stable liberal world order was recreated”.
The Second Great Depression
Having used this “Golden Age” of capitalism as a crutch to get him to 1974, O’Connor misses the beginning of the crisis in the 1960s. Had he done the least bit of analysis on the period 1929 to 1950 he might have noticed a little event called debasement of the currency. With this debasement, and the devaluation of wages by 70% that accompanied it, American capitalism went through an expansion phase. That expansion was not just fueled by the devaluation of wages, but also the war expenditures of World War II and the absorption of a hefty section of post-war Europe and Japan into the newly emerging fascist American Empire. This expansion phase comes to a head not in 1974, but in the mid-sixties with the collapse of the London gold pool in 1968 (pdf) , which facilitated manipulation of gold bullion price and allowed the US to share in the extraction of surplus value wrung from the European and Japan working classes — the so-called “exorbitant privilege”, a term coined by the French. (Of course, since Marxists are MARXist in name only, they have ignored the implications of the French critique.)
The crisis begins in the mid-sixties with a run on US gold reserves, and culminates in the collapse of Bretton Woods, and the end of dollar convertibility for settling international obligations. But this is just its superficial expression — what really happened is that the new productive capacity of Europe and Japan came online. For a period this overaccumulation was disguised by the murderous war on Vietnam and the swelling of American domestic spending to stem protests. But all of this comes to a head with the opening moments of the Second Great Depression of the 20th Century — the Great Stagflation. This depression triggers the collapse of Bretton Woods and the end of dollar convertibility by the Nixon administration. And it occurs not in 1974 but years earlier, although the actual expression of this crisis in unemployment is itself triggered by the massive inflation that occurs as Washington tries desperately to spend its way out of the contraction. Those of a certain age will remember Nixon declaring fatuously, “I am now a Keynesian in economics”.
The attempt to slow the contraction by a massive expansion of government spending ultimately fails and the Federal Reserve has to choke off credit in the midst of a depression to slow the inflation of prices. Nixon is gone, Gerald Ford is running around handing out “Whip Inflation Now” (WIN) buttons, and the Fed is trying to douse inflation with unemployment. None of this has any effect on the depression, however, which continues unabated for the next five or six years — in other words Keynesian economic policy is overcome by the growing productive capacity of society and the dissolution of nation-state economic management begins.
Only at this point do we finally reach O’Connor’s dating of the initial emergence of what eventually becomes neoliberalism — the crisis has, by this time, gone on for nearly a decade.
Neoliberalism and the Demise of the Nation State
The easiest way to understand neoliberalism is to understand exactly what the fascist state accomplished that can now only be accomplished by its demise. The success of the fascist states rested on what O’Connor terms a “distinct structural, institutional, and class foundation.”
This state led monopoly capitalism, as described by Fine and Harris (1979), was marked by the socialization of economic activity, in which the state took an active role in the accumulation process. Economic socialization helped offset the unproductive costs of accumulation and the reproduction of the labor force (Gough and Eisenschitz 1996). Through a wide variety of non-market mechanisms, the state balanced the social nature of production with the private appropriation of capital.
Okay, I admit I haven’t a clue what this means — so I am going to parse it.
“State led monopoly capitalism” appears to be some sort of a distinction from the state-as-capitalist — a concept that is apparently alien to Marxists. What role does the state play in this “state led monopoly capitalism” – clearly it is not the capitalist, so is it leading the capitalists? So how is it leading them? And to where? Well, it appears to be leading them toward some “socialization of economic activity” — which is clearly not socialism, but “socialization”. Which is to say, the capitalist accumulation process, having grown beyond the control of various forms of private management, must at some point fall under the direct management of the state. How does this work? Well, the state takes “an active role in the accumulation process”.
Okay, now I am stumped. What exactly is “an active role in the accumulation process”?
O’Connor tells us that it “helped offset the unproductive costs of accumulation and the reproduction of the labor force”. So what are these unproductive costs of accumulation and the reproduction of the labor force? Clearly by “the reproduction of the labor force” O’Connor can only mean wages and (perhaps) a meager provision of public education and a national health system. Can the state add to wages, educate, or cure illness? Not likely, since it is a bloated parasite on society, it can’t even put a chicken in a single pot. Since the state creates nothing, and produces nothing, it can only “offset … the reproduction of the labor force” by driving wages down. Perhaps I got this wrong; perhaps the state can magically whip up a subsidy for wages by creating food, clothing, and shelter out of nothing. I am not as educated as fucking Marxists Academics, but it seems to me all O’Connor is suggesting is that the state devalues labor power!
Of course, I could be wrong. Maybe Obama is feeding the working class from that victory garden over at the White House.
And what are the “unproductive costs of accumulation”? How does the fascist state “offset” these costs pray tell me? Frankly, I have never heard of the term “unproductive costs of accumulation” before I read this paper — the term appears nowhere in Marx. Nowhere in three fucking volumes of Capital does Marx ever mention an animal going by the name of “unproductive costs of accumulation”. Even if we assume the state plays some role in offsetting these mysterious costs, there are only two classes for the distribution of the social product of labor: workers and capitalists. If the state is “offsetting the unproductive costs of accumulation” for the capitalists, it has to be taking it from the working class.
So when I parse O’Connor’s argument, “Economic socialization helped offset the unproductive costs of accumulation and the reproduction of the labor force”, I only get two things out of it: “devaluation of the wages of the working class” and “more devaluation of the wages of the working class”. Since I am not a Marxist, you probably can understand why I come to that ‘absurd’ conclusion. If I were a Marxist, I could invent another phantom source of value for the state to redistribute as wages and profits.
Once we get past the silliness about the Keynesian “Golden Age” of capitalism, it is clear neoliberalism is not in the least a switch from social accommodation between capital and wage labor to coercive competition as O”Connor argues, but simply an intensification of systematic impoverishment of wage labor, for which Keynesian state policy was, by the 1960s and 1970s, insufficient to realize. This does not in the least require any modification of Marx’s labor theory of value, nor any special explanations. It simply requires us to grasp national capitals behave just like privately owned capitals, but with grim consequences for both national sovereignty and national fiscal/monetary policy. Which means these national capitals, although for a time appearing quite permanent features of economic analysis, were always transitory and subject to the very same laws as determine the capitalist mode of production generally: equalization of the rate of profit, concentration and centralization of capital, overaccumulation, falling rate and mass of profit, a growing superfluity of capital, a growing mass of workers who fill the ranks of the industrial reserve, etc.
What is distinct about these national capitals, however, is the constitution of purely national political class struggles. The political contest between any class of wage laborers and their national capital is fought out within the context of a nation-state form that is rapidly approaching extinction. Already countries very close to the core of Europe have been stripped of their national sovereignty, not to mention peripheral nations. And the more these nations lose their sovereignty, the more indifferent they become to both their domestic working class and domestic capitalist class.
Tags: Depression, economic policy, Fascist State, Federal Reserve Bank, great depression, Great Stagflation, John O'Connor, Karl Marx, Keynesian economics, neoliberalism, otma, political-economy, The State
So, I got feedback from three people who, in one way or another, say they don’t understand my last post on my conversation with Andrew Kliman. One person posting on Reddit, complained it was too dense; another wondered if I was advocating a return to the gold standard; a third person, who I asked to read it and give me feedback, began to have difficulty with it about halfway through it. Specifically that person had difficulty understanding my discussion of the “transformation problem”.
This is three more examples of my “tin-ear”, which expressed itself in my disagreement with Andrew. I have not been able to explain “my point” in a way that is not abstract, or explain the relevancy of the various statements I make to real events within society. Part of this is because I am a “Marxist” in the same way I could be considered a “Darwinist” — I am not an expert on either. The theory makes sense to me, and I accept it as a reasonable explanation for how the world works.
But, if someone argued a eugenics distortion of Darwin, I could not argue against that person by quoting Darwin. And, if someone argued a Keynesian distortion of Marx, I probably could not argue back using quotes from Marx. Until recently I was more a leninist than a “Marxist”; having read a lot of Lenin, but little more of Marx himself than the Communist Manifesto. And, neither of them had I read for more than two decades.
What got me interested in Marx again was my interest in reducing hours of work, and being handed a copy of Moishe Postone’s, “Time, Labor and Social Domination“. (PDF) Until I read that book, I considered reduced hours of work a nice idea for relieving the stresses of overwork and providing a little more vacation time, but not much else.
By the time I got to the end of it, I realized everything I had understood about communism was complete garbage.
To this day, I’ll bet I understand less than 25 percent of Postone’s argument; but it was enough to convince me getting rid of labor was not just a neat idea, but the entire point of the social revolution. I never knew this before I read Postone’s book — and it was very difficult for me to understand it even after I read it. But once armed with the idea when I returned to reading Marx again (really for the first time), evidence of this idea was all over his writings.
So, when I made the rather innocent suggestion to Andrew Kliman that he take a look at gold, I was pushing an agenda. And, that agenda can be framed by the question:
“Is the dollar really money?”
However, behind the innocent question is the entire point of the social revolution: the abolition of labor — in Marx’s sense of the term, that is, productive activity that creates value.
For several years now Fred Moseley, who I mentioned in my last post, has sponsored as small gathering of Marxists to discuss what money is. The question is typically framed as,
“Can the dollar do what gold does?”
Within Marx’s theory, of course, the dollar can do some of the things gold or another commodity money can do. For instance, it can serve as medium for circulation of commodities, for the purchase of the commodities we use every day. And, according to Marx, even when gold serves as money in an exchange, it is just like the dollar — a mere token of money.
Everyone at these gatherings seems to agree on that dollars can work just as well as money to buy groceries, but the controversy is whether it can act as measure or store of value;
and, thus, whether it can serve as the standard of prices of groceries.
But, framing the question this way is backward. It is not whether dollars can do what gold can do, but can gold do what dollars can do? The real question here is:
“What can dollars do that gold can’t do?”
The answer to that question is staggering: gold cannot under any normal circumstance represent a quantity of labor time that is not socially necessary.
Gold, in other words, cannot represent labor time that is wasted, unproductive, and does not create value. Marx insists on this limitation in his theory:
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.
The limitation on gold is that it cannot express labor time expended by society that is materially unnecessary to the satisfaction of its needs. Marx’s theory does not work if this argument is thrown out. If dollars were a pledge for their own value in stead of completely worthless scrip, dollars would be money — but they do not have value and cannot stand as a pledge for the value of anything else. So, what does this mean for society?
It means gold cannot serve as money in a society where there is a lot of unnecessary, wasteful, and unproductive work. Eventually, the circulation of gold in such an economy will halt, and a credit crisis will ensue. I believe this is exactly what happened in the Great Depression, and is why the dollar was debased from gold.
Fred Moseley disagrees and argues dollars can represent socially necessary labor time. As I quoted Moseley previously, he states:
…money does not have to be a commodity in Marx’s theory, even in its function of measure of value. The measure of value does not itself have to possess value. Inconvertible paper money (not backed by gold in any way) can also function as the measure of value. In order to function as the measure of value, a particular thing must be accepted by commodity-owners as the general equivalent, i.e. as directly exchangeable with all other commodities.
I want to state for the record that Moseley’s argument is neoclassical economics masquerading as Marx’s theory. I want to call Fred Moseley out on this, because it is not Marx’s theory. To assume worthless dollars can serve as measure of value, is to assume the value of a good is its price. As the Wikipedia states:
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 Marx’s theory, the price of a commodity expresses the value of the commodity but is not identical with it. In neoclassical economics price and value are the same thing. However, this is not just a geeky debate over the interpretation of something a dead guy wrote 150 years ago. It has real world consequences: the neoclassical identity of the value of a commodity with its price basically states everything with a price tag is socially necessary! So, if you want to recruit Guatemalan teenagers under the DREAM Act to kill Afghan mothers, the labor time required to do this is necessary because it has a price. Marx’s theory, on the other hand, states the purchasing power of gold can only reflect labor time that is actually socially necessary and killing Afghan mothers is not socially necessary by any stretch of the imagination!
The difference in the quantity of labor time dollars can represent and the quantity of socially necessary labor time gold can express is the sum total of superfluous labor time of society, that Postone deduced from Marx’s theory. Postone writes:
The difference between the total labor time determined as socially necessary by capital, on the one hand, and the amount of labor that would be necessary, given the development of socially general productive capacities, were material wealth the social form of wealth, on the other, is what Marx calls in the Grundrisse “superfluous” labor time. The category can be understood both quantitatively and qualitatively, as referring both to the duration of labor as well as to the structure of production and the very existence of much labor in capitalist society. As applied to social production in general, it is a new historical category, one generated by the trajectory of capitalist production.
Until this historical stage of capitalism, according to Marx’s analysis, socially necessary labor time in its two determinations defined and filled the time of the laboring masses, allowing nonlabor time for the few. With advanced industrial capitalist production, the productive potential developed becomes so enormous that a new historical category of “extra” time for the many emerges, allowing for a drastic reduction in both aspects of socially necessary labor time, and a transformation of the structure of labor and the relation of work to other aspects of social life. But this extra time emerges only as potential: as structured by the dialectic of transformation and reconstitution, it exists in the form of “superfluous” labor time. The term reflects the contradiction: as determined by the old relations of production it remains labor time; as judged in terms of the potential of the new forces of production it is, in its old determination, superfluous.
I did not invent this; Postone deduced it from Marx’s discussion of superfluity of labor time. It is on page 374 of his book.
What this implies, as I stated to Andrew, is that eventually the price of every single commodity in our society is far higher than its value! Or, to put this another way: the labor time exchanged for every single good in dollars must be greater than the socially necessary labor time required to produce it in gold. Although, on the surface, I appear to violate Marx’s law of value, in fact this “violation” is necessary to posit the existence of superfluous labor time. I have, in fact, no more violated Marx’s law of value, than he does by saying capitalism is doomed — a declaration that requires the actual, and not simply theoretical, overcoming of the law of value.
It is true, Marx states the value of a commodity expresses the labor time socially necessary for its production. And, it is true to state there is an equalization of the rate of profit. But, to imagine these two laws sit together tanning themselves under a bright Caribbean sun, in loving embrace is a fantasy. They are antagonistic forces, each seeking to overthrow the other, and engaged in a life or death struggle within Marx’s theory. Marx declares, the law of the average rate of profit must win out, and thus destroy itself along with the law of value. Social labor in the form of capital, wins out over the market, only to destroy the very premise of its own existence.
What practical bearing does this have on the struggle today?
The practical bearing is that it makes the rift between Marxism and anarchism moot. If, my reasoning here can stand up to challenge, almost all labor time in our society is unnecessary. But, the entire difference between Marx and Bakunin consisted of the necessity for labor owing to the relatively low development of the capitalist mode of production in the late 19th Century and does not apply to us today. Marx’s criticism of the Gotha program was all about necessary labor time, as well. However, if, as gold measure of GDP suggests, at present almost all labor time expended in our society is superfluous, the higher stage of communism is immediately or almost immediately attainable. Which, itself implies the state can be done away with in its entirety. The state is, and has always been, nothing more than the necessity for labor imposed by one section of society on another. Even the proletarian dictatorship is nothing more than making necessary labor a compulsory requirement for everyone in society — including the former owners of property.
If labor at this point is almost entirely superfluous, so is compulsory labor for any and all.
For this reason, it is obvious why creating work has become the over-riding preoccupation of the fascist state. Without more hours of labor in ever increasing quantities, the entire edifice of class society must collapse. Without fascist state economic policy to “promote job growth”, the state itself cannot exist. In the final analysis, directly or indirectly, the growth of the state is the only means to keep capitalism alive. The fight against the state, on the one hand, and the fight against capital, on the other, comes down to the fight against overwork. It comes down to freeing society forever from the burden of labor, and the stultifying impact of being treated as draft animals.
Superfluous labor time is the expenditure of human labor that does not create value; that does not, directly or indirectly, satisfies human needs. Unnecessary labor neither produces things that satisfy real human needs or the things necessary to produce those things. We can, as an example, point to military expenditures, subsidies for agribusiness (to be really concrete). But, superfluous labor is far more nuanced than just these gross and obvious examples: the entire state apparatus — more than 50% of GDP — falls in this category. As does the entire financial industry.
My list cannot be exhaustive, since the point is that what is necessary must be decided in association by the members of society together. And this association has an incentive to minimize necessary labor to its smallest amount since absolute freedom only begins where necessary labor time ends.
In association, there is altogether different incentives with regards to hours of labor: instead of finding work to do, people have incentive to minimize labor. A communist political program, I think, would call for an immediate reduction of hours of work by some definite amount — say, 20 percent — and would encourage people to figure out what expenditures of labor time beyond this are also not necessary, in order to further reduce hours. Because the incentive of society is to end all necessary labor and enjoy free time to pursue whatever interest we want.
Unlike bourgeois politicians, communists can genuinely run on a platform of really smaller government and mean it. Communists are the only politicians who can really get elected promising a government that does less, and spends less — and can actually realize this promise in practice. This turns the entire debate on government spending and deficits on its head in a way that is unexpected by the two fascist parties. Moreover, it is a demand that cannot be duplicated or co-opted by bourgeois politicians in either party.
Now, if you cannot make a communist program out of that, and appeal to the mass of society, you just don’t deserve to call yourself a communist. Anarchists and Marxists can continue playing their silly little sectarian games with each other, or they can actually accomplish something. If you are not focused on getting rid of the state, capital and wage labor, you might as well shut the fuck up, stop writing your useless books, and get the fuck out of the way.
Because, frankly, you’re just using up precious oxygen.
Tags: Andrew Kliman, Bohm-Bawerk, boom and bust, contraction phase, Depression, devaluation of the dollar, Executive Order 6102, Federal Reserve Bank, Fred Moseley, gold measure, great depression, history of the great depression, Moishe Postone, monetary policy, Paul Samuelson, recession, roosevelt administration, state monopoly, transformation problem
Well, I have just about had enough of my conversation with The Andrew Kliman, so I thought I would try to assess what it accomplished, instead.
My ‘tin-ear’ with Andrew began after a conversation with @skepoet on twitter about the odd divergence between gold and dollar measures of economic activity since the Great Depression of the 1930s. The dollar measure of US GDP has risen almost uninterrupted since the end of the contraction phase of the Great Depression; while the gold measure of GDP rose from 1934 to 1971, then fell until 1980, rose again from 1980 to 2001, and has been falling since.
Interesting enough, the gold measure of GDP exhibits a classic pattern of boom and bust typical of the economy prior to the Great Depression, but the dollar measure of GDP shows an almost disturbingly smooth continuous upward sweep, until the most recent difficulties of 2008. What I find most interesting about the two measures of economic activity is that, until 1933, both gold and the dollar measures of GDP exhibited the same behavior. However, this identical pattern broke down in 1934.
What accounts for this sudden divergence?
Tags: Andrew Kliman, Bohm-Bawerk, boom and bust, contraction phase, Depression, devaluation of the dollar, Executive Order 6102, Federal Reserve Bank, Fred Moseley, gold measure, great depression, history of the great depression, monetary policy, Paul Samuelson, recession, roosevelt administration, state monopoly
(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
A quick note to slap down the standard progressive interpretation of the impact of the Bush tax cuts on the economy. Sorry folks, there is no real empirical support for your position.
Progressives who praise the Clinton era job creation performance versus Bush era job creation performance, and link this to Clinton tax increases versus Bush tax cuts, overlook two things that lead to the wrong conclusion: First, the Clinton job performance came during a time of a general economic expansion, Bush’s performance came during a general contraction. This fact is lost in the data because the data employs dollars as measure of economic activity and so masks the depression that began in 2001. If you discount the dollar denominated economic data using the price of gold, the contraction clearly shows up beginning in late 2000.
The second thing overlooked with this comparison is that Clinton era job creation (not “Clinton job creation” or “Bush job creation” — the two men created nothing) was exactly the wrong policy. The Clinton era succeeded in creating jobs, true. But it was creating jobs into the face of rising imports from China and other low wage nations and a general glut of capital on the world market. The depression did not appear suddenly because of the Bush tax cuts, but resulted in a too long social work day leading into the Bush era. To put this another way, the Bush era’s poor legacy creating jobs was a legacy of the Clinton era’s success at creating too much superfluous work.
The Bush tax cuts came in response to this, which was already evident as he began his term, and was his justification for the tax cuts. Progressives don’t want us to remember why Bush demanded the tax cuts, but some of us do not have such a short memory. This is not a whitewash of the Bush tax cuts; clearly they failed entirely to stop the depression from emerging and gaining steam — but they did not create the depression. Nor, were they responsible for poor job creation during the Bush and Obama years. It was already baked into the cake by overaccumulation of capital.
For those who are interested, as proof of my argument, I include the chart above showing GDP as measured by gold between 1929-2009. In the chart you can see clearly the three depressions that occurred over those years: 1929-1934, 1970-1981, and 2001-present.
The problem is not, and has never been, Republican anti-tax policies versus Democrat social spending policies — both are a sideshow to chronic overaccumulation of capital. Tax policy cannot fix this.
“…the more does it actually become the national capitalist, the more citizens does it exploit.”
In the first part of the series, I made three critical assumptions about present political-economic relations.
First, in 1929, Capitalism suffered a general breakdown, brought on by absolute over-accumulation — absolute over-production. This crisis, known popularly as the Great Depression, occurred in every major industrialized nation in the world market, and constituted a global over-accumulation of capital that was irreversible. It took the form of a great mass of unemployed workers, side by side with a mass of unemployed means of production and subsistence.
Second, the fascist states which emerged from this economic catastrophe took the form of the ‘political rule of the proletariat over itself’, effected through its suffrage in the nations where it formed the largest class.
Third, the only alternative solution to the breakdown of capitalism and the “political rule of the proletariat over itself” was and remains the reduction of labor hours.
I also attacked the “Marxist theory of the state” and argued this “theory” is, in fact, not supported by Marx’s critique of capitalist society. So far as I can determine, not a single point of Althusser’s 1970 statement of the ‘Marxist theory of the state’ is found either in Marx’s or Engels’ writings of the state. While it is true, Althusser agrees with historical materialism that the state is an organ of class rule, this simplistic description of the state is ahistorical and does not satisfy the historical materialist description of the capitalist mode of production as a distinct historical stage in the development of the forces and relations of production.
Althusser’s statement can be applied to any epoch of human civilization, and to every known mode of production. It does not explain what of the capitalist state is specific to the capitalist mode of production and the social relations within society that are founded on this mode. What is specific to the state under the capitalist mode of production is not merely, or even primarily, that it is an instrument by which the ruling class imposes its will on society: in the writings of Marx and Engels, the state under the capitalist mode of production is “essentially a capitalist machine,” that displaces and renders the capitalist class itself superfluous to the mode of production and functions as the national, i.e., social, capitalist.
Althusser treats the state as an ahistorical category, not as a real thing situated in the capitalist epoch. The state is reduced to an instrument of repression, which appears in the capitalist epoch already in its complete and unchanging form. Essentially, Althusser recycles Duhring’s argument on force and dresses it in 20th Century “Leninist” clothing. While he does not go so far as Duhring and Anarchism to give force the determining role in historical development, he treats the state itself as essentially unchanged by the material changes in society.
This essentially static view of the state can not help us understand our present condition, as it throws no light on existing social relations.
In the second part of the series, I examine Lenin’s and Kautsky’s argument that the class conflict takes place completely within the bounds of a commercial transaction and confirm it as agreeing with my understanding historical materialism. The recognition by Lenin and Kautsky of the limits of the purely economic struggle — of the struggle with the capitalist over the terms and conditions of the sale of labor power, however, is converted by Leninism into an argument that the proletariat is incapable of carrying out its historical mission of burying capital without theory. And, since the proletariat is not “the bearer of theory”, into an argument for a vanguard party.
The argument for a Leninist vanguard party on these grounds, however, is a non-sequitur, since, despite the limitations of the economic struggle, historical materialism insists the working class abolishes capital based on empirical comprehension of their circumstances — not on a theory purporting to describe these circumstances.
Marxists take Kautsky’s and Lenin’s arguments completely out of context of the capitalist mode of production itself, and abstracted from the impact the mode of production has on the state. Although the conflict between capitalist and wage laborer is essentially a commercial conflict, Engels description of the State shows how the capitalist (as personification of the relationship) is progressively displaced by the state as Capital develops. The marginalization of the capitalist does not resolve — overcome — the class conflict; rather, it converts it into a directly political struggle. Which is to say, the worker to assert her purely commercial interests in the class conflict, must also assert her political interest against the state.
If, on this basis, historical materialist investigation of the Fascist State refutes the arguments of the Marxists who trace their thinking to Lenin, still more clearly does it refute the European Social-Democrats who, having thrown Marx and Engels out the window entirely, propose to tinker with existing relations to render capitalism more humane. This latter gang of opportunists aspire to nothing more than perfecting the Fascist State as the social capitalist.
Against both failed variants of this tradition, we demand not a new brand of sectarian organization, nor reform of politics, but the abolition of the state.
While the historical task of the worker is simplified by the convergence of Capital and the State power and the emergence of the Fascist State, it is obvious this fascist state rests on universal suffrage of the proletarian majority. To put it bluntly, in her political activity the worker constitutes the very machinery of exploitation against which she fights. Her commercial interest as a seller of labor power, sparks her political activity to ensure this sale is consummated; the terms and conditions of this sale, and the prerequisites of these, figure as this or that economic policy of the fascist state. On the other hand, the enlargement of the state, its increasingly pervasive economic role, is no more than the expansion of the state as social capitalist and must lead to the ever increasing exploitation of the worker. The more she struggles to realize political relations to satisfy her requirements as a seller of labor power, the more indifferent the State becomes to her needs as a human being.
This must lead to two results that I can think of:
In the first instance, what was once concealed beneath purely monetary relations must become increasingly obvious to the proletarians: that their activity is the enlargement of an alien power standing over against them. As the state becomes the social capitalist, what was previously only a theoretical derived conclusion regarding the relationship between capital and wage labor is made explicit and comprehensible to the worker.
In the second instance, the increasingly comprehensible relation between capital and wage labor appears, not in its commercial form, but in the form of increasing antagonism to the fascist state, and to its role as social capitalist, stated in a political form, i.e., as demands against the state. However, expressed in this purely political form, it is now the empirical expression of a radical critique of all existing relations.
(I want to clarify that I am discussing certain writers, while withholding judgement on their overall work. It is not my intention to assert they were wrong in their time and place, only that their arguments have been taken out of context by what is currently referred to generally as “Marxism”. Moreover, by “Marxism” I include the body of work that traces its origins to both the Soviet experience and to Western Social-Democracy.)
Convergence of the economic and political conflict in society
In the first part of this series, I introduced some fundamental assumptions about 21st Century society. I also took issue with the Marxist theory of the state, as elaborated by Louis Althusser in his 1970 work, Ideology and Ideological State Apparatuses. Now, I want to sketch out my understanding of the historical materialist conception of both the State and Capital, in order to trace the error in the ‘Marxist theory of the State’ back to its likely roots.
The nexus of the relation between the two appears to arise just before Lenin and his work, What is to be Done. In chapter II of this book, Lenin quotes Karl Kautsky on the relationship between Marxist theory and the practical economic struggle of the working class:
“Many of our revisionist critics believe that Marx asserted that economic development and the class struggle create, not only the conditions for socialist production, but also, and directly, the consciousness of its necessity. And these critics assert that England, the country most highly developed capitalistically, is more remote than any other from this consciousness. Judging by the draft, one might assume that this allegedly orthodox Marxist view, which is thus refuted, was shared by the committee that drafted the Austrian programme. In the draft programme it is stated: ‘The more capitalist development increases the numbers of the proletariat, the more the proletariat is compelled and becomes fit to fight against capitalism. The proletariat becomes conscious of the possibility and of the necessity for socialism.’ In this connection socialist consciousness appears to be a necessary and direct result of the proletarian class struggle. But this is absolutely untrue. Of course, socialism, as a doctrine, has its roots in modern economic relationships just as the class struggle of the proletariat has, and, like the latter, emerges from the struggle against the capitalist-created poverty and misery of the masses. But socialism and the class struggle arise side by side and not one out of the other; each arises under different conditions. Modern socialist consciousness can arise only on the basis of profound scientific knowledge. Indeed, modern economic science is as much a condition for socialist production as, say, modern technology, and the proletariat can create neither the one nor the other, no matter how much it may desire to do so; both arise out of the modern social process. The vehicle of science is not the proletariat, but the bourgeois intelligentsia: it was in the minds of individual members of this stratum that modern socialism originated, and it was they who communicated it to the more intellectually developed proletarians who, in their turn, introduce it into the proletarian class struggle where conditions allow that to be done. Thus, socialist consciousness is something introduced into the proletarian class struggle from without [von Aussen Hineingetragenes] and not something that arose within it spontaneously [urwüchsig]. Accordingly, the old Hainfeld programme quite rightly stated that the task of Social-Democracy is to imbue the proletariat (literally: saturate the proletariat) with the consciousness of its position and the consciousness of its task. There would be no need for this if consciousness arose of itself from the class struggle. The new draft copied this proposition from the old programme, and attached it to the proposition mentioned above. But this completely broke the line of thought…”
Kautsky’s statement concerns the formation of consciousness under the capitalist mode of production. In it he proposes a dual track model of communist consciousness, where the direct conflict between wage labor and capital coexists side by side with, but separately from, the understanding of the implication of this conflict. The worker is engaged in the direct struggle, the intellectual brings to her a consciousness of the implications of her struggle — the need for her to assume control of the state.
In chapter III of the above book, Lenin imports Kautsky’s statement into his argument against what would later become the Mensheviks in Russian communism. However, we now have a problem: societies do not imagine themselves into existence. (I got this statement from somewhere, but can’t remember who, perhaps the Marxian writer Chris Cutrone) This is, in my opinion, a restatement of the fundamental historical materialist assumption — material conditions first, ideas second.
Kautsky’s statement, therefore, violates a fundamental assumption of historical materialism — its most important assumption. Perhaps a correction is in order: he does not directly violate this assumption, since he is only talking about Marx’s theoretical conclusion. As a theory, he may be correct, but communism cannot possibly rest on general acceptance of a theory. Which is to say, communism, as a real movement of society, must have been inevitable even if Marx had not discovered it. If the science had advanced no further than, say, Ricardo or Hegel or St Simon, the emergence of communism would still occur.
Discovering this inevitability, of course, was science, and this is a product of the intelligentsia — but not the historical process itself. The result is, if all communists were to disappear tomorrow, this process would still unfold according to its own logic. Communists are superfluous to it — a fifth wheel. We can no more change the outcome than can Ben Bernanke over at the Federal Reserve Bank.
I tried this argument out at Kasama.org and (after having a collective seizure) they asked me if this was true why was I a communist? More importantly, Why was Marx a communist? Why did he organize the working class movement? I had no real answer for this at the time.
I do now, because a tweep, @yelbley, asked how I would explain 1929 from a materialist perspective.
I think it was because Marx saw 1929 coming, and the implications of the Event — Engels actually stated it explicitly. At a certain point, both knew, the State would have to seize control of the entire machinery of production. Whether this ended in a social revolution, or what I now call the Fascist State would depend on the “political consciousness” of the class. How much of the theory of its own material condition it had absorbed would decide the outcome — not the final outcome, but the intermediate outcome.
That was the Event that should have seen the Paris Commune reborn on a global stage — a form for the proletariat to work out its final liberation — a liberation, not just from wage slavery, but from labor itself.
Marx was notorious for not talking about the future, only the immediate was important — because he was not given to making blueprints. The world did not need another utopian system — it only needed to understand its actuality and the process inherent in it. In Volume 3, however, and Engels in “Utopian and Scientific Socialism” we get a glimpse into the implications of his theory.
The fact is, in historical materialism properly understood, the Proletarian never even realizes she is a wage slave. As individuals, they act exactly like any other commodity seller, like small commercial players. The worker sells her one commodity over and over again and the conflict with the capitalist over the terms of this sale falls completely within the bounds of commercial rivalry.
Lenin explicitly states this idea in chapter III of What is to be Done; he argues that the trade union fight alone is insufficient for the development of a communist consciousness among the working class:
“The overwhelming majority of Russian Social-Democrats have of late been almost entirely absorbed by this work of organising the exposure of factory conditions. Suffice it to recall Rabochaya Mysl to see the extent to which they have been absorbed by it — so much so, indeed, that they have lost sight of the fact that this, taken by itself, is in essence still not Social-Democratic work, but merely trade union work. As a matter of fact, the exposures merely dealt with the relations between the workers in a given trade and their employers, and all they achieved was that the sellers of labour power learned to sell their “commodity” on better terms and to fight the purchasers over a purely commercial deal. These exposures could have served (if properly utilised by an organisation of revolutionaries) as a beginning and a component part of Social-Democratic activity; but they could also have led (and, given a worshipful attitude towards spontaneity, were bound to lead) to a “purely trade union” struggle and to a non-Social-Democratic working-class movement. Social-Democracy leads the struggle of the working class, not only for better terms for the sale of labour-power, but for the abolition of the social system that compels the propertyless to sell themselves to the rich. Social-Democracy represents the working class, not in its relation to a given group of employers alone, but in its relation to all classes of modern society and to the state as an organised political force. Hence, it follows that not only must Social-Democrats not confine themselves exclusively to the economic struggle, but that they must not allow the organisation of economic exposures to become the predominant part of their activities. We must take up actively the political education of the working class and the development of its political consciousness. “
What does Lenin’s statement imply about the empirical relation between these two great classes of capitalist society, and for the mode of production itself?
The capitalist as buyer of labor power confronts the worker as seller; and, later, the worker as buyer of subsistence commodities confronts the capitalist as seller. Both poles of this relationship rests on the successful exchange of labor power for wages. The sale of labor power appears, in the first instance, as the direct result of the exchange of labor power for wages. And, the sale of labor power appears, in the second instance, as the condition for the exchange, as means of purchase in the form of wages for commodities.
Historical materialism states that labor power has undergone a change between the first instance and the second instance. This change is both qualitative: labor power is consumed and this consumption turns it into various useful objects — shoes, cars, etc. But, there is also a quantitative change: the value of the latter — shoes, cars, etc. — is greater than the former — the initial labor power.
Empirically, however, it appears otherwise: while a qualitative change has taken place, there has been no quantitative change. This is because all the quantitative change has taken place outside the purview of the commodity sellers — outside of exchange.
Everything which, from the standpoint of the law of value, appears as a necessary result of the improvement in the productivity of social labor, appears to the society of commodity sellers in its inverse form: theoretically, there is creation of surplus value, but, empirically there is “not enough money in circulation”. Society is constantly threaten by overproduction and crises.
The entirety of the reality of the material relations of production is hidden behind money, not only from the capitalist but also the worker. Both classes are fucking clueless. And, they are engaged in this meaningless, never-ending, commercial squabble over terms of a filthy transaction. But, as repulsive as the relationship is, they are both trapped in it: without it, the capitalist cannot be a capitalist, while the worker starves.
The reproduction of the relation, the purchase/sale of labor power, is their entire, and intimately shared, basis for existence. And, as Engels shows, and many writers like Kevin Carson recount, the relationship becomes increasingly dependent on the state. Now let’s look again at the quote from Engels, I referred to in the previous part of this series:
But, the transformation — either into joint-stock companies and trusts, or into State-ownership — does not do away with the capitalistic nature of the productive forces. In the joint-stock companies and trusts, this is obvious. And the modern State, again, is only the organization that bourgeois society takes on in order to support the external conditions [my emphasis] of the capitalist mode of production against the encroachments as well of the workers as of individual capitalists. The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers — proletarians. The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over. State-ownership of the productive forces is not the solution of the conflict, but concealed within it are the technical conditions that form the elements of that solution.
What Engels is predicting here is an Event: that impending convergence of the purely commercial relation between the wage worker and the capitalist over the purchase/sale of labor power, with the incremental expansion of state management of the process of production itself. Stated simply: in 1880, Engels was predicting that the purely commercial conflict between the two great classes would be converted by the convergence with increasing state control over production into a directly political struggle — into a direct fight against the national — i.e., social — capitalist, the state.
In 1929, capitalism enters its end-stage, and becomes absolutely dependent on the State. The state, in turn, becomes the fascist state, representing not capitalist or worker, but Capital — the relationship itself. And, this happen 50 years after Engels wrote these words:
“The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist…”
From the moment this process culminates, the capitalist class is a side-show, lacking any real role in production beyond clipping coupons. Everything is being managed by the state. The fight against capital is now immediately political — expressed directly in the conflict with the state itself.
There is a massive black hole in the center of Marxism that cannot be ignored, since it touches on the question of social revolution itself. That question can be posed this way: What happened to the Soviet Union? But, the better formulation is this:
Why didn’t the Great Depression touch off a revolution in the West?
Numerous explanations of this failure have been offered by commentators of every variety within and without Marxism. During the Great Depression, it is clear, capitalism suffered an irreversible breakdown due to absolute over-accumulation. And, it is also clear that effective control over the state was already in the hands of the proletarian majority through its suffrage. Moreover, as now, the solution to the general crisis of capitalism was already obvious, and universally recognized: reduction of labor hours.
The principal explanations now fashionable within Marxism deny one or more of these facts. They propose: There is,
- no general crisis; or,
- no effective control over state power by the proletariat; or,
- that reduction of hours of labor will not work.
Every one of these explanations violate the assumptions of historical materialism.
If you deny there is a general crisis of capitalism, you are making the argument there can be absolute over-accumulation in one country leading to export of capital to the less developed regions of the world market, but there cannot be absolute over-accumulation in the world market itself. And, since Lenin’s theses on imperialism is entirely based on the concept of global over-accumulation, you have to reject his conclusions. Not too mention a materialist explanation of the more than 130 million dead in two world conflicts and the numerous conflicts following this.
If you want to deny universal suffrage of the proletarian majority is the sufficient condition for its effective political rule you must then impose conditions on this rule other than those that stem from its material position in society. You must then deny Marx’s thesis that the proletariat’s historical mission stems from who they are, not what they think. This position, as in the “Bolshevik model”, denies the capacity of the proletariat to empirically determine their own role in history.
Lenin advances the “Bolshevik Model” in “What is to be Done.” Which, I think, is a reaction to social-democratic reformism. No matter what the cause, this idea becomes embedded in Marxism so firmly that it has been enshrined as the concept of “vanguard party”. Anarchists rightly ridicule this by pointing out Marxism leads either to reformist social-democracy or despotic Leninism.
On the other hand, Marxism borrows from the argument of Anarchists like Noam Chomsky that, somehow, the effective power of the proletariat is a manufactured consent — the working class is indoctrinated. Their leaders are bribed, their organizations are co-opted, and their reality is hidden from them by deceptions spread in the media.
Finally if you deny reduction of hours of labor is the only solution to the general crisis of capitalism you can’t explain the fascist state. The fascist state emerges simultaneously in all industrial nations during the Great Depression despite their numerous historical differences. It clearly emerges as the political response to the general crisis, which is nothing more than massive unemployment a glut of productive capacity and intense competition between national capitals over division of the world market.
But, absolute over-accumulation is just accumulation of capital that can no longer function as capital that cannot expand its own value through exploitation of labor power, cannot realize the surplus value extracted as profit. It takes the form of a mass of superfluous means of subsistence, means of production, and idled workers, who are now available for war.
This surplus of mean of subsistence, means of production and idled workers is produced during the period of the social work day beyond that required for the wages of the productively employed population. Absolute over-accumulation simply means the work day can’t be longer than that needed to satisfy the material requirements of the laborers.
I think, any attempt to explain why the Great Depression did not end in a social revolution must begin with these assumptions. This explanation must, at the same time, account for the failure of the Marxist-Leninist model of revolution. The first failure is only the second failure presented in another form.
We can probably best begin to account for what happened during the Great Depression by examining the flaws in the Marxist theory of the state. For this, I want to use Althusser’s 1970 work, Ideology and Ideological State Apparatuses.
Althusser has this formulation of the ‘Marxist theory of the state’ (the quotation marks are his, not mine):
To summarize the ‘Marxist theory of the state’ on this point, it can be said that the Marxist classics have always claimed that (1) the state is the repressive state apparatus, (2) state power and state apparatus must be distinguished, (3) the objective of the class struggle concerns state power, and in consequence the use of the state apparatus by the classes (or alliance of classes or of fractions of classes) holding state power as a function of their class objectives, and (4) the proletariat must seize state power in order to destroy the existing bourgeois state apparatus and, in a first phase, replace it with a quite different, proletarian, state apparatus, then in later phases set in motion a radical process, that of the destruction of the state (the end of state power, the end of every state apparatus).
The problem with this statement by Althusser of the ‘Marxist theory of the state’ is that it is a fantasy; and is not historical materialism. To figure out why, we have to work backwards in Althusser’s formulation — from (4) to (1)
With regards to (4), I have never encountered the formulation in Marx or Engels that the workers replace the bourgeois state apparatus with their own. In fact, I have never encountered Marx or Engels speaking of any state apparatus but the present bourgeois state apparatus. And, their verdict on this, based on the Commune, was definitive: It must be broken.
Not reformed, not replaced, not refurbished — broken.
What made the proletarian state power different from all preceding forms is that this apparatus itself was abolished at the outset. The Anarchists of the Commune replaced it with a working body combining both deliberative and executive functions. Marx could have differed with this, but he explicitly did not — he endorsed it.
With deliberative and executive functions combined, there is no state apparatus as distinct from state power. But, the present state consists of this division — of a useless legislative body and power concentrated in the executive. Since, there was no stand-alone executive in the Commune, the idea that the state is destroyed only in later phases is complete bunk. For this reason, Marx referred to what Anarchists created in the commune as no longer a state.
This has to be empasized: Marx looked at what the Communards created and said it was NOT a state.
And why was this: because the Anarchists had abolished the historical division between the executive and deliberative functions of the state. The new society was itself both the deliberative body and the means for executing its decisions. In both the Soviet despotic and the Western democratic forms of proletarian rule, we find exactly that this division is not done away with.
In (3), Althusser argues that the objective of the class struggle is to wield the state apparatus as a function of class objectives. But, as early as 1845, in The German Ideology, Marx described the proletariat as a class which was not a class, but the dissolution of other classes. In 1851 work, Reflections on Money, he explains how money relations conceal relations of production and classes.
Both classes shop the same stores, pay the same prices for the same goods — the only apparent difference is the amount of money in their wallets. While material relations of production determine society, these relations are buried deep beneath purely monetary ones. Given that, for the proletariat, it is not a class in any real sense, and given that its relation to other classes is concealed from it how is historical materialism to conclude that the proletariat wields state power as a function of its class objectives?
Since all interests are only interests in the exploitation of labor under given relations, how is labor itself to express such an interest? Against what class is this interest to be expressed other than itself?
In (2), Althusser expresses the opinion that state power and state apparatus must be distinguished. So, how are we to do this? Until the Commune had state power ever been exercised in any other form than through the state apparatus? Was there a discovery in 1970 of some epoch in which the state power of the ruling class was exercised directly and not through an apparatus?
Althusser is wrong on this, I think.
Throughout history, state power has consisted of an armed body of men to enforce the domination of the existing ruling class. This special interest, which having raised itself to position of the general interest, must become the objective of all special interests seeking to impose themselves on society as the general interest. The competition between classes over control of this apparatus only expresses the fact that the history of society is the succession of one after another special interests.
In (1), Althusser defines the state as “the repressive state apparatus”. But, Engels, in his 1880 work, Socialism: Utopian and Scientific, is already describing the state as much more than this: “The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital.”
If the crises demonstrate the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishments for production and distribution into joint-stock companies, trusts, and State property, show how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalist has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange, where the different capitalists despoil one another of their capital. At first, the capitalistic mode of production forces out the workers. Now, it forces out the capitalists, and reduces them, just as it reduced the workers, to the ranks of the surplus-population, although not immediately into those of the industrial reserve army.
But, the transformation — either into joint-stock companies and trusts, or into State-ownership — does not do away with the capitalistic nature of the productive forces. In the joint-stock companies and trusts, this is obvious. And the modern State, again, is only the organization that bourgeois society takes on in order to support the external conditions of the capitalist mode of production against the encroachments as well of the workers as of individual capitalists. The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers — proletarians. The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over. State-ownership of the productive forces is not the solution of the conflict, but concealed within it are the technical conditions that form the elements of that solution.
Already, under the pressure of the capitalist mode of production, the state was undergoing a profound transformation. The state was not eclipsing the two great classes in bourgeois society, but coming more to function as the social capitalist.
This is my final installment on the hyperinflationists section of theories of the current crisis for now. As I find in any good examination of a theory out there, I come away from this one with a better understanding of some of the problems of capitalism under conditions of absolute over-accumulation. The hyperinflationist argument forced me to confront several problems from the standpoint of the law of value, including, world market prices versus existing prices; ex nihilo currency and price behavior; definitions of price deflation, inflation and hyperinflation; definitions of depressions and recessions; the purchasing power of ex nihilo currency; and the rivalry between the monetary policies of the various nations states in relation to the Fascist State.
One of my conclusions from this examination is that FOFOA, properly understood, should not be in the hyperinflationist camp. I have no idea why he is advocating for dollar hyperinflation, since he, more than any other writer in the hyperinflationist camp, realizes the relationship between the purchasing power of an ex nihilo currency and the circulation of commodities. In 2010, he wrote:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!
Fekete says backwardation is when “zero [gold] supply confronts infinite [dollar] demand.” I am saying it is when “infinite supply of dollars confronts zero demand from real, physical gold… in the necessary VOLUME.” So what’s the difference? Viewed this way, can anyone show me how we are not there right now? And I’m not talking about your local gold dealer bidding on your $1,200 with his gold coin. I’m talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.
Don’t let the term “backwardation” throw you. It is one of those insider terms among commodity traders, which, for our purpose, can be safely ignored, since it adds nothing to FOFOA’s essential argument. What FOFOA is saying in this excerpt is that the purchasing power of an ex nihilo currency rests on the willingness of gold owners to accept it as means of payment in exchange for their commodities. Unfortunately, FOFOA limits his argument to gold and misses the significance of his insight. This is because, for reasons previously mentioned, he articulates the viewpoint of the petty capitalist, who, unable to operate independently, must of necessity hand his meager wealth over to Wall Street investment banksters if it is to operate as capital, or, failing this, accept the depreciation of its dollar purchasing power, or, convert it to a hoard of useless gold.
There is, however, no reason to limit FOFOA’s insight to gold. Having been displaced in circulation as money, gold is simply another commodity whose particular use value is that it serve as a store of value. It is excellent in this regard, but broccoli is excellent as a vegetable, while gold is not. The specific quality of gold is its limited use as mainly a store of value, and, in this regard, it has few substitutes, while broccoli has many substitutes. This, however, should not blind us to the fact that it is now an ordinary commodity like any other. The true significance of FOFOA’s insight is that the purchasing power of any ex nihilo currency is directly a function of the willingness of commodity owners to accept it in exchange for their commodities.
If commodity owners are unwilling to accept an ex nihilo currency in exchange for their commodity, or prefer another currency in exchange for their commodity over that particular currency, its purchasing power will quickly fall toward zero — hyperinflation. This is precisely what happened in the case of the Zimbabwe dollar, which was undermined not only by the profligacy of the state, but also, by the preference of commodity owners for dollars and euros as a result of this profligacy. As FOFOA knows, the dollar is not likely to suffer such a fate, since its purchasing power rests on the fact that it is accepted for any commodity on the world market, and, consequently, is “undervalued” against all other ex nihilo currencies. Even if the purchasing power of a single ex nihilo dollar falls, the purchasing power of the total sum of dollars in circulation is not affected — it is still “undervalued” in relation to all other ex nihilo currencies, and must be undervalued as long as the total quantity of all other currencies is greater than zero.
By the same token, FOFOA’s insight demonstrates why, despite the constant depreciation of a single ex nihilo dollar, the sum of existing prices within the world market must be higher than world market prices denominated in dollars. No matter the depreciation of a single ex nihilo dollar, the sum of world market prices must fall toward world market prices denominated in dollars. Thus, the monetary policies of other nations is determined by the monetary policies of the Fascist State. Any nation wishing to pursue a so-called loose monetary policy, as Zimbabwe did, must find its ex nihilo currency displaced by dollars as commodity owners demand dollars in place of the national currency. On the other hand, the “tightening” of monetary policy by other nations cannot save these national currencies, since such “tightening” only leads them to the same fate as gold itself — they are withdrawn from circulation in a deflation of prices.
The end result, in either case, is the demonetization of all ex nihilo currencies except the dollar, and the equalization of the sum of prices within the world market with world market prices denominated in dollars. Hyperinflation and deflation do occur, but they occur in every other ex nihilo currency except the dollar.
From John Williams and FOFOA, I better understand the likely consequence of Fascist State economic policy — the front-loading of a series of events leading to the collapse of ex nihilo currencies by the fall of the sum of prices within the world market to the price level imposed by the dollar. This is because, as opposed to the deflationists, the hyperinflationists show the Fascist State will not sit by and let its dominant position be threatened by mere accounting identities. It will defend that position even at the expense of all other currencies. FOFOA is clearer on this point than Williams, but Williams implies it as well.
Paradoxically, FOFOA’s argument lends support, not for the hyperinflationist camp, but Modern Monetary Theory (MMT). His insight confirms the assumptions of the modern money theorists that the Fascist State faces no external constraint on its expenditures, since all ex nihilo currencies are only worthless dancing electrons on the computer terminals of central banks. The question raised by Fascist State expenditures is not its effect on national accounting balances, but the effect of these expenditures on other ex nihilo currencies. The accelerated spending of the Fascist State drives all of these currencies out of existence.
I look forward to examining this in a similar survey of modern money theory at another time.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, Modern Monetary Theory, political-economy, recession, stupid economist tricks, The Economy, unemployment
In a recent post, Deflation or Hyperinflation, FOFOA begins the meat of his argument with investment adviser Rick Ackerman (who, until recently, predicted this present crisis will end in a debt deflation) by directly addressing Ackerman’s core deflationist argument, which originally was set forth in a 1976 book by C.V. Myers, The Coming Deflation:
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
FOFOA’s response to the deflationist argument was both simple and fatal for the deflationist argument:
Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized…
What the deflationist miss, says FOFOA, is that Washington will never accept the collapse of its failing economic mechanism. It will create whatever quantity of ex nihilo dollars it takes to socialize the losses of financial institutions, pension funds, etc. — even if this threatens the viability of global financial system and the dollar itself.
Like FOFOA, I want to begin this post by directly addressing the core argument of both camps, that this crisis must end either in the deflation or hyperinflation of dollar prices, or both. As FOFOA has argued, the present crisis will likely end in both hyperinflation and deflation at the same time. I agree with this analysis, but I disagree with his targets. Both hyperinflation and deflation of prices will occur, but they are likely to hit every ex nihilo currency on the planet except the dollar. If other currencies survive at all, they will do so only as boutique items marketed to private collectors, like their predecessor, gold. The deflationary/hyperinflationary hit will be not just socialized, but globalized as well.
Is this argument true? I don’t know for sure. To be honest, there are so many variables in the current crisis that any attempt to make a firm prediction must end in embarrassment for someone — a whole lot of “someones”, in fact. But, let’s assess the probabilities determining the outcome of this crisis using Marx’s Law of Value, rather than Austrian economics:
Zero divided by zero equals ?
To be absolutely clear at the outset, there is no difference between the fundamental facts underlying the dollar and the fundamental facts underlying all other national currencies — they are all worthless and possess infinitely more purchasing power than their actual value. From the standpoint of the law of value, any exchange rate between any two ex nihilo currencies is meaningless, since it is merely the ratio between one object that is entirely worthless and another object that is entirely worthless. For the past decade, the purchasing power of the euro has risen against the dollar despite the absolute worthlessness of either currency. The Zimbabwe dollar is collapsing into hyperinflation, but not so far as to actually represent in circulation its actual value — a Zim$1.00 note has exactly the same value as a Zim$1,000,000,000.00 note (and exactly the same value as a one hundred dollar bill for that matter).
Likewise, prices denominated in any ex nihilo currency are meaningless, since they can never rise to actually reflect the values of the commodities which the ex nihilo money denominates. An increase in the purchasing power of an ex nihilo currency would, in any case, conceal the utter worthlessness of the currency. And as to the fall in the purchasing power of any currency, it suffices to state no matter how far the purchasing power of Zimbabwe dollars fall, Zimbabwe dollar denominated prices of commodities never reflect how worthless the currency really is.
What both the hyperinflationist camp and the deflationist camp need to explain is why, despite the absence of value of all ex nihilo currencies, no major currency was put back on the gold standard after Washington closed the gold window in 1971? Why was gold, despite its value as money, relegated to the basements of major central banks or the private collections of hoarders? Why was it necessary for all major trading nations to remove a commodity standard for the general price level from the world economy? The questions answer themselves: a commodity standard for the general price level is incompatible with an economy founded on capitalist social relations at this stage of its development — absolute over-accumulation. The rather stunning fact presented by gold is this: if prices of commodities were denominated in gold, no commodity would be “worth” the gold standard price quoted for it, i.e., the purchasing power of gold as money would be below its value as a commodity — a situation previously found only during over-production of commodities is now a permanent feature of the capitalist mode of production. It is this situation that initially drove gold from circulation as money, that compelled it to strip off its monetary form.
Without understanding this piece of the puzzle, it is not possible to understand the nature of the present crisis, which, despite appearing as the product of a massive accumulation of worthless debt threatening all existing currencies, is actually the cause of this accumulation of fictitious capital. It is futile to try to understand the current crisis by comparing the attractiveness of various existing or imagined alternative ex nihilo currencies on the world market, since each is worthless, and are as prone to sudden and unexpected hyper-depreciation of their purchasing power as the dollar — and which, moreover, owe their role as money to the fact the gold has ceased to be able to function as money. Since there is nothing about the currencies themselves that set them apart from each other or from the dollar, predictions about their respective fates as currencies must rest, not on the respective attraction of the currencies themselves, but solely on the material relation between respective national states — we must ignore the apparent differences in the purchasing powers of various ex nihilo currencies and delve into the actual economic relations between and among the various states.
World market prices versus existing prices
No matter the differences in the exchange rate between dollars and all other currencies, the following conditions hold: on the one hand, world market prices are denominated in dollars, while, on the other hand, the total sum of present prices throughout the world market as a whole are determined by the ratio of the total sum of currencies of every nation to the total quantity of commodities in circulation throughout the world market. If the dollar was the only currency in circulation there would be no difficulty with regards to world prices and existing prices — they would be identical. However, if we have two currencies — we will call them ex nihilo dollars and an ex nihilo “Rest of the World Currency” (rotwocs) — the situation is changed. Although the dollars and rotwocs are identical — i.e., both are worthless — in circulation the effect on the total sum of world market prices is the ratio between all ex nihilo currency in circulation (X dollars plus Y rotwocs) to the total quantity of commodities in circulation throughout the world market.
Despite this fact, world prices are determined by dollars alone, and under the following circumstances: the dollar is not accepted for all commodities because it is world reserve currency; rather, the situation is precisely the opposite: because it is universally accepted in exchange for any commodity, it is the world reserve currency. This means the dollar’s purchasing power is absolute, while the purchasing power of the rotwoc is only relative — the rotwoc can purchase any commodity whose price is denominated in rotwocs, but to purchase a commodity denominated in dollars, it must be exchanged for dollars before the transaction can be completed. If we assume the world market is divided into two zones — a dollar only zone and a combined dollar/rotwoc zone — of equal size, it is obvious that the existing stock of dollars can readily serve as means of purchase in the entire world market, while the existing stock of rotwocs can serve as means of purchase only in the rotwoc zone. The purchasing power of the stock of dollars is, therefore, twice that of the stock of rotwocs, i.e., there are twice as many commodities available to be purchased by dollars as there are by rotwocs.
It should be obvious now that the sum total of all other ex nihilo currencies provide no additional purchasing power to global demand — they are entirely superfluous. On the other hand, the dollar actually exchanges with all other ex nihilo currencies at a rate significantly below its purchasing power throughout the world market — even against ex nihilo currencies that are, at any given moment, appreciating in purchasing power against it. Since the purchasing power of any ex nihilo currency is not inherent in the currency itself, but depends solely on the total quantity of commodities available to be purchased by it, it follows the purchasing power of the ex nihilo dollar is not limited to the commodities available to be purchased in the dollar zone alone, but all commodities that are available to be purchased by it throughout the world market.
On the other hand, it should be equally obvious that the total sum of prices in the world market must be above world market prices. Since world market prices are here determined solely by the ratio of the total sum of ex nihilo dollars in circulation to the total sum of commodities in circulation within the world market, but the actual sum of prices is determined by the ratio between total sum of dollars in circulation plus the total sum of all other currencies in circulation (x dollars plus y rotwocs) to the total sum of commodities in circulation, any quantity of non-dollar national currencies in circulation above zero results in prices that are above world market prices.
The endpoint of this crisis
The question is how all this works out in the crisis as it is now unfolding. While I don’t have a crystal ball, I will attempt to outline a likely course.
As we have seen in this crisis, no matter how profligate the Fascist State is in its spending on a massive global machinery of repression, and on socialization of the losses of incurred by the failed economic mechanism, the more expenditures it undertakes, the greater the pressure on other national monetary authorities to tighten their own monetary policies in response — to impose naked austerity on their citizens, to further constrain domestic prices in the face of rising global prices. Rising global prices translate into a falling rate of profit in the non-dollar states. To offset this falling rate of profit, the domestic labor forces of the various non-dollar states must be squeezed still further, and the resultant surplus product exported. The profligacy of the Fascist State and the austerity regime of these non-dollar states are only two sides of the same process, feeding on each other, each reinforcing the other.
The two do not merely reinforce each other, however, they also act to make their opposite insufficient in resolving the crisis. Insofar as the profligacy of the Fascist State increases, the pressure on the non-dollar states toward domestic austerity increases, and with this also increases its exports. Insofar as exports increase, global overaccumulation is intensified and the world market settles even more deeply into depression. But, as we have already seen, with an ex nihilo currency regime depressions are now associated not with deflation of prices, but the inflation of prices — so actual prices rise still faster in response to domestic austerity.
A straight-line assumption of the crisis indicates constantly rising world market prices, combined with increasing austerity and monetary policy contraction of non-dollar states. However, living processes do not move in a straight line; in any event non-dollar currencies are likely to experience an existential endpoint — separately, or in groups — since the collapse of any one of them involves fewer complications than replacement of the dollar as world reserve currency. Moreover, replacing the dollar with another currency does not solve the problem that these non-dollar currencies are superfluous. Non-dollar currencies are likely finished; nothing in this crisis appears to offer them another fate.
The question provoked by the above is not “What is the fate of the dollar?” Nor, is it, “What is the fate of non-dollar currencies?” Rather, the real question posed by my analysis is this:
“Why should any of these worthless currencies survive?”
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, political-economy, recession, stupid economist tricks, The Economy, unemployment
I know I promised to examine John Williams’ argument that hyperinflation hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. I will return to this point. But, before I do, I want to respond to Neverfox, who asked me to evaluate the argument of the writer FOFOA’s theory of the imminent hyperinflation catastrophe:
To summarize the argument of John Williams: The economy is spiraling into a severe depression of the 1930s or 1970s type. To meet its various present public obligations, future promises, and prop up the economic mechanism — which, for the moment, we can call debt-driven economic growth — the Federal Reserve is forced to monetize Washington spending. This monetization is itself producing a collapse in the credibility of the dollar. Sooner or later this loss in credibility will result in the outright rejection of the dollar as world reserve currency, triggering a hyperinflationary depression. In the course of this hyperinflationary event, lasting about six months or so, the dollar will become worthless.
To a great extent, although differing on some subtle points with Williams, FOFOA throws light on Williams’ own thinking. In FOFOA’s description of events, the hyperinflation event is front loaded with the essential dry tender: the accumulation of fictitious assets denominated in dollars over an 80 year period produced as a by product of the economic mechanism — debt fueled economic expansion. The event is triggered by a collapse of debtors’ ability to make good on their debts. This, in turn, is followed by an attempt by the Fascist State to rescue the financial institutions on whose books the fictitious assets reside, which produces a loss of confidence in the currency and its rejection as world reserve currency. It is only at this point, government begins printing money to survive and pay its obligations, generating the onset of extremely rapid price increases and the core hyperinflation event..
A deflationary episode can, and probably will, proceed the actual hyperinflation of prices. The hyperinflation episode does not invalidate the arguments of those who predict a deflationary depression; in fact, the hyperinflationary episode will in all likelihood start out as a deflationary episode. Those predicting a deflationary depression, however, miss the response of the Fascist State. Moreover, the deflation does occur just as those who predict deflation assert; only the deflation takes place in gold terms, not dollar terms. Expressed in gold terms, it is a deflation; however, in dollar terms, it is a hyperinflation. FOFOA believes the difference between a deflation measured in gold and a deflation measured in dollars is key to understanding the hyperinflation that is imminent:
“What’s the difference between a deflation denominated in gold versus dollars?” Well, there’s a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.
A deflation imposes an extremely heavy burden on debtors, requiring them to repay their debts with ex nihilo denominated debt whose purchasing power is increasing, and which, therefore, requires increasing amounts of effort to repay. By contrast, a hyperinflation reduces the burden of accumulated debt by depreciating the purchasing power and burden of ex nihilo denominated debt. In the thinking of those predicting deflation, as the debt bubble of the last 80 years bursts, the Fascist State will find it impossible to reflate the debt bubble and will be forced to accept deflation. Thus, a full scale debt deflation depression is in the offing.
FOFOA argues that while it is not possible to reflate the debt bubble, the Fascist State can save the paper assets of financial institutions that are the fictitious claims on these debts. Decades of debt fueled growth has swollen dollar-denominated assets held by these institutions to fantastic dimensions. FOFOA argues the Fascist State will not and cannot let these institutions fail because it is merely the political expression of these financial institutions. The aim of Fascist State intervention is not to save the debtors — which it cannot do even if it wanted to — but, as events of the last three years show dramatically — the Fascist State aims to save the the assets of these institutions. FOFOA quotes another writer from whom he derives his own name, FOA:
hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
The process of actual hyperinflating prices begins with the attempts to monetize bad debts — to socialize the losses of big capital — not with money printing; the money printing only begins in earnest once monetization of bad debt leads to a loss in the credibility of the dollar.
…it is the US Govt. that will make sure this becomes a real Weimar-style hyperinflation when it forces the Fed to monetize any and all US debt. And as dollar confidence continues to fall, that’s when the debt must go exponential just to purchase the same amount of real goods for the government. One month the debt will be a trillion, the next month it will be a quadrillion just to buy the same stuff as the previous month. How long will this last? Less than 6 months is my guess.
According to FOFOA, on the balance sheets of the failed banks there now is more than enough reserves to fuel a sudden burst of hyperinflating prices should society suddenly lose confidence in the dollar. As this base is pulled into circulation by a general demand for goods in the face of rising prices, the Fascist State will be forced to begin printing money to cover its own obligations. Each month the amount of ex nihilo dollars needed to fill the same demand for government spending increases, and with this increase, the amount of new ex nihilo money created will increase. This compounding growth in the supply of ex nihilo currency will provide added impetus to the explosion of prices. The explosion of prices will not be contained short of a new monetary regime in which assets and debt are somehow tied to gold.
The problem is that the present monetary system, in FOFOA’s view, is that lending and saving both take the same form — either a gold backed system or an ex nihilo money system. FOFOA argues money lent out inevitably dilutes the value of money being saved, since they both come out of the same pot:
The problem is that the expanding money supply due to lending always lowers the value of a unit of currency. Even if it is gold. If I loan you a $1 gold money, you now have $1 gold and I have a $1 gold note. The money supply has just doubled, and the value of $1 gold just dropped in half.
This is a fact of money systems. We can try to get rid of it by outlawing lending, but that is like outlawing swimming in the summertime, or beer drinking.
The solution is quite simple. And I didn’t come up with it. The problem is that at the point of collapse, some of the savers are wiped out, whether gold money or fiat. Think about those at the back of the line during the bank runs of the 1930′s. They didn’t get their gold. They lost their money.
Today we don’t have this problem anymore. The guy at the back of the line gets all his money, it’s just worthless in the end. We solved the problem of bank runs (bank failures) but not the problem of value.
This problem, which is often referred to as debt deflation, is inherent in the prevailing monetary system, and will lead to financial crises even if the United States went back to a gold-backed dollar. He proposes instead to bring gold back into the money system, but within strict limits: split the functions of store of value and credit into two separate monetary systems — ex nihilo for lending, and gold for saving — so that ex nihilo currency lent out will indeed be diluted, but the gold-backed value of saving will freely rise to express this dilution:
The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.
I don’t want to get into the weeds on this proposal by FOFOA, since it is entirely beside the point of the examination of non-mainstream theories of the current crisis, and, in any case, a non-sequitur from the standpoint of capital. But, he inadvertently touches on a salient point for my examination: suffice it to say, capital is not and cannot be thought of as the accumulation of gold or any other commodity. It is the process of self-enlargement, or self-expansion, of the capital initially laid out in the capitalist process of production. At any given moment, this capital can take the form of money-capital, fixed and circulating capital, wages, and final commodities, but it is not identical with any of these momentary identities — it is relentlessly converted from one form to another constantly — both serially, and simultaneously in what, over time, comes to resemble a vast cloud of interrelated transactions — as it passes through the process of self-expansion. FOFOA’s proposal imagines the point of self-expansion is precisely what it is not: to assume the form of a hoard of gold — or any other store of value. This is true only insofar as we are thinking of capitals that are no longer capable of functioning as capitals — that are incapable of acting on their own as capitals, owing to the ever increasing scale of capitalist production, which renders these petty capitals insufficient to function on their own as capitals. Unable to operate on their own, they must be placed at the disposal of larger agglomerations of capital in order to continue functioning as capital, resulting in great stress for their owners, who now have to turn their otherwise lifeless hoards over to giant vampire squids of the Goldman Sachs type or cease being capitals at all.
This is, in part, what Marx meant by the concentration of capital, which is not simply the concentration of ownership of the means of production, but also the concentration of owners of capital who can continue to operate independently as capitalists. The existence of even very large savings does not permit these owners to operate independently as capitalists, given the scale of productive undertaking now required. Marx described the process 150 years ago:
A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.
FOFOA’s proposal seems to confirm my identification of the social base of the hyperinflationist camp: a motley collection of petty speculative minnows, who are desperately trying to avoid the predation of the very biggest financial sharks and vampire squids — not to mention the Fascist State itself, which represents the interests of these predatory vermin. The hyperinflationists as a group imagine the dollar has reached the end of the line. They imagine this will lead to a revaluation of gold and the creation of a new monetary system to replace the dollar, driven by the dissatisfaction of the majority of the planet with the monetary policies of the United States.
So, we need to move on and examine this thesis.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
Even if we assume John Williams’ prediction of a hyperinflationary depression turns out to be correct — and the global economy is plunged into an apocalyptic nightmare as prices rise with blinding rapidity, while economic activity shudders to a standstill — his argument for this outcome is so defective as to merely represent the chimes of an otherwise broken clock for the following reasons:
First, his prediction rests on mere accounting identities, and assumes the Fascist State can be counted on, or forced, to observe these accounting identities. As a counter-argument, I offer the historical evidence of Washington’s behavior over the past 80 years, when it routinely ignored whatever accounting identities as were forced upon it by circumstances and left the rest of American society and the global population as pitiful bag-holders of worthless ex nihilo currency. Williams offers no argument why the Fascist State will act differently in this crisis. In all likelihood, Washington will effectively renounce its debts and continue business as usual — leaving China and other exporters to absorb the impact.
Second, Williams does not understand hyperinflation. His definition of hyperinflation is entirely defective, because he doesn’t realize ex nihilo currency is not made worthless by hyperinflation; rather, it is already a collection of worthless dancing electrons on a computer terminal in the Federal Reserve Bank. Ex nihilo currency was worthless the moment the Fascist State debased the token currency from gold in 1933 and 1971. Hyperinflation and inflation are not the more or less sudden depreciation of money, but the more or less sudden depreciation of the purchasing power of an already worthless money.
Third, Williams does not understand depression, and in particular the Great Depression. Depressions are produced by the overproduction of capital — whether this overproduction is momentary or persistent. They are characterized by a general surfeit of commodities, fixed and circulating capital, and a relative over-population of workers. These are periodic occurrences, owing their genesis not to simple fluctuations of economic activity, but to constraints imposed on consumption by the necessity that all productive activity is carried on, not with the aim of satisfying human needs, but for profit. All depressions result in the sudden devaluation of the existing stock of social capital, of the existing stock of variable and constant capital, which is the absolute precondition for the resumption of self-expansion of the total social capital.
Before the Great Depression, this last point always meant a rather pronounced and sudden deflation of prices. After the Great Depression, this devaluation is accompanied, not by a sudden and spectacular collapse of prices, but a sudden and spectacular explosion of prices. The event itself has not changed — it is still a devaluation of the total social capital. What has changed is the expression of this devaluation in a general fall in the price level. I argue the source of this change was the debasement of national currencies during the Great Depression.
What the three points made above tell me is that Williams and the growing community of hyperinflationists do not understand ex nihilo money; they do not understand how prices behave under an ex nihilo regime; and, finally, they do not understand why ex nihilo money was a necessary result of the Great Depression. They are an odd collection of petty speculative capitalists concerned only with preserving their “wealth” through what are likely to be very interesting times.
Understanding ex nihilo money
Like money in general, ex nihilo money, is not simply a “thing” — a currency without commodity backing — rather, it is a social relation that appears to us in the form of this thing. It is a social relation that takes the form of worthless currency because this social relation itself can only take the form of things. The social relation, of course, is a global social cooperation in the act of labor. Since, this social cooperation does not by any means result from conscious decisions of the members of society and proceed with their conscious direction, the requirements of this social cooperation impose themselves on the members of society as necessities — as the law of value, as the value/prices mechanism.
What is peculiar about ex nihilo money as a form of money is that the relation between value and price has been completely severed — the two most important functions of money have devolved on entirely different objects. By debasing the currency from gold money’s function as standard of price was completely severed from its function as measure of value. This much is acknowledged by the hyperinflationist, who place the blame for this separation on the Fascist State; however, historical research shows impetus behind this separation did not first appear as a matter of State policy, but as a matter of financial common sense.
Every depression begins with money exchanging for commodities below its value, or, what is the same thing, with the prices of commodities at their apex for the cycle. Prices near the top of the cycle rise to unsustainable levels, and the competition to dump commodities on the market under favorable price conditions gets fairly intense. Everyone is optimistic about the economic outlook, profits expand, credit flows freely, workers are hired, factories furiously churn out commodities around the clock, the stocks of goods begin to pile up in the warehouses. And, then, BOOM! — depression erupts just as wages, prices, profits and interest are at their highest, and the purchasing power of money is at its lowest.
As the disorder spreads, profits and prices collapse, credit is choked off, debtors default, factories grind to a halt, millions of workers are laid off… yadda, yadda, yadda — we all know the drill. Side by side with this disorder, money is with drawn from circulation. Gold money disappears into hoards, as capitals attempt to avoid the worst of the devaluation of the existing social capital. The competition at this point is not to see who can sell the most commodities, but who can avoid taking any of the losses that the social capital as a whole must suffer. While this total social capital must take the hit, which capitals actually take this hit is a matter of entirely other circumstances.
As Marx put it:
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.
How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.
The total social capital is devalued; and, this devaluation takes place both in terms of the values of the capital — prices fall, etc. — and by a winnowing out of the players — some definite portion of the total social capital is pushed out of productive activity altogether. Capitals go bankrupt, factories are shuttered, the reserve army of the unemployed expands. At the lowest point in the ensuing depression, prices and profits have fallen to their lowest point in the cycle, while the purchasing power of money is at its highest point in the cycle. Assets can be snatched up at bargain basement prices, labor power can be had for a wage below its value. If the capitalist has survived the wash out, he stands to accumulate on a prodigious scale, since unemployed productive capacity is just laying around collecting dust.
There was one problem with this scenario during the Great Depression: the economy hit this point and just laid there like the decaying carcass of a beached whale; the condition for the “‘sound’ operation of capitalist production” were never restored, money just sat in hoards as investors, waiting out the crisis for better times, clung to their useless gold stocks for dear life. There was, as usual, a general over-accumulation of capital, i.e., an overproduction of commodities, an excess of fixed and circulating capital, and an excess population of workers, but these excesses were rather persistent. As with any general over-accumulation, it was not a matter of “consumer confidence” returning, but the necessary actual devaluation of the existing total social capital. Absent this devaluation, attempts to increase production would merely result in an over-supply that further forced down prices and profits. Under these circumstances, a portion of the existing stock of commodity money could not circulate until the devaluation of the existing stock of social capital had taken place.
So, it was not the Fascist State that expelled gold from circulation as money; rather, because gold money could no longer circulate as money, the Fascist State was forced to replace it with ex nihilo currency. The Fascist State debased the currency from commodity money, because the circulation of commodity money had already halted. This action was no American exceptionalism, however; within a short period of time all industrialized nations went off the gold standard domestically.
I want to emphasize an extremely important point here, a point that is vital to understanding the present crisis: going off the gold standard did not simply convert money into a worthless, debased, token — entirely fictitious from the standpoint of the law of value — it also changed the behavior of prices, i.e., the behavior of the purchasing power of the currency itself. On this basis alone the Fascist State could take control of the social process of capitalist production.
The behavior of prices under ex nihilo money
Ex nihilo money is not commodity money, it is not token money, it is not fiat money — it is an altogether different animal entirely. For instance, under a commodity money regime an over-accumulation of capital produced falling prices during depressions, while the purchasing power of the commodity money rose. As I will show, ex nihilo currency inverts this relation after the Great Depression — now prices denominated in the debased ex nihilo currency rise as economic activity contracts, while the purchasing power of the ex nihilo currency falls.
So far as I know, there is no instance of a commodity money suffering a hyperinflation. Hyperinflation does not render a currency worthless; rather, the currency is immediately rendered worthless during debasement from a commodity that can serve as standard of price. Debasement can result in hyperinflation, but hyperinflation is not the necessary result of debasement. Hyperinflation must be defined as the extreme and rapid depreciation of the purchasing power of a currency that is already worthless, that already has been debased. Historically, while hyperinflation follows the debasement of the currency from gold, not every debasement of currency from gold has led to hyperinflation. Hyperinflation is historically associated not with commodity money per se, but with ex nihilo currency.
Here a distinction must be made between money — the commodity which performs the function of universal equivalent — and ex nihilo currency, which has no relation to commodity money at all. While this ex nihilo currency can replace commodity money in circulation like token money under certain definite circumstances, what makes it different from token money is that it has no definite relation with a commodity that serves as money — it is not “honest” money, i.e., tokens whose purchasing power is held within limits governed by the laws governing the circulation of commodity money. However, like the circulation of tokens of money, ex nihilo currency is subject to certain laws, the most important of which is it can only represent in circulation the value of the commodity money it replaces.
When we speak of the purchasing power of ex nihilo money, we are in fact only referring to the quantity of commodity money this ex nihilo currency actually represents in circulation. In this case, the commodity money on which I base my discussion is gold; so, the purchasing power of an American ex nihilo dollar represents the quantity of gold having a price of one dollar. If gold has a price of $22.67 an ounce, the purchasing power of one ex nihilo dollar is equal to the value of 0.044 ounce of gold; if gold has a price of $1525, the purchasing power of an ex nihilo dollar is equal to 0.0006557 ounce of gold. If the price of gold falls from $800 per ounce to $250 per ounce, the purchasing power of ex nihilo currency has risen from 0.00125 ounce of gold to 0.004 ounce of gold. If the price of an ounce of gold rises from $250 to $1525, the purchasing power of ex nihilo currency has fallen from 0.004 ounce of gold to 0.0006557 ounce of gold.
In any case, the purchasing power of ex nihilo currency refers only to the quantity of gold that would otherwise be in circulation circulation had not it been replaced by ex nihilo currency. It does not refer to the purchasing power of ex nihilo currency in relation to any other commodity. But, the quantity of gold in circulation at any point is not given — at one point it may be higher, while at another point it is lower. If, despite these fluctuations, the amount of ex nihilo currency in circulation is unchanged, it will, in the first case, represent more commodity money, and, in the latter case, represent less commodity money. The purchasing power of the ex nihilo currency will rise or fall with the fluctuation of economic activity which it denominates in itself. Since, when actually in circulation, the currency of commodity money is only a reflex of the circulation of commodities — rising and falling with this circulation — the purchasing power of the ex nihilo currency will only represent this quantity of commodity money irrespective of the absolute quantity of ex nihilo currency in circulation.
The circulation of commodity money is only a reflex of the circulation of commodities. Assuming the value of commodities and the velocity of money are fixed, when the circulation of commodities increases, the quantity of commodity money in circulation must increase. When the circulation of commodities decreases, the quantity of commodity money in circulation must decrease. Consequently, a fixed quantity of ex nihilo currency will represent a larger or smaller quantity of commodity money respectively as economic activity expands or contracts. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is increasing, the purchasing power of this fixed quantity of ex nihilo currency must increase. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is decreasing, the purchasing power of this fixed quantity of ex nihilo currency must decrease.
The supply of commodity money and the supply of ex nihilo currency are not the same thing. While the circulation of commodity money is naturally driven by economic activity, the amount of ex nihilo currency available to circulate is always dependent on the State issuance of ex nihilo currency. Moreover, once ex nihilo currency is in circulation, it will tend to remain in circulation. Thus, while the quantity of commodity money in circulation rise or falls with the circulation of commodities, the purchasing power of the ex nihilo currency replacing commodity money tends to increase or decrease with the circulation of commodities instead. For this reason, ex nihilo currency presents us with the paradox that prices tend to fall as economic activity increases and rise with the fall in economic activity.
If all else is given, we are forced to the following conclusion regarding the purchasing power of ex nihilo currency :
- the purchasing power of ex nihilo currency rises during periods of economic expansion, i.e, a given quantity of ex nihilo currency can purchase a greater sum of values. This is precisely the opposite of what we would expect from commodity money. While,
- the purchasing power of ex nihilo currency falls during periods of economic contraction, i.e, a given quantity of ex nihilo currency can purchase a smaller sum of values. Again, this is precisely the opposite of what we would expect from commodity money.
The behavior of prices are the inverse of what we would expect if ex nihilo currency behaved like commodity money. With commodity money, we should expect to find commodities being over-valued during expansions and devalued during periods of contraction. But. with ex nihilo currency, we find instead that commodities are devalued during expansions and over-valued during periods of contraction. Prices denominated in ex nihilo currency fall during expansions and rise during contractions.
When an economic contraction takes place, the sum value of commodities in circulation falls; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money too must fall. A given supply of ex nihilo currency now represents the value of a smaller quantity of commodity money. The values expressed by commodity prices fall, or, what is the same thing, a given value is expressed in higher ex nihilo currency prices. On the other hand, when an economic expansion takes place, the sum value of commodities in circulation rises; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money must rise as well. A given supply of ex nihilo currency now represents the value of a larger quantity of commodity money. The values expressed by commodity prices rise, or, what is the same thing, a given value is expressed in lower ex nihilo currency prices. The result is that, absent a commodity to serve as standard of prices, prices denominated in an ex nihilo currency will tend to rise during periods of economic contraction, but fall during periods of economic expansion.
Moreover, in a pure ex nihilo money economy where no commodity serves as standard of prices, prices of commodities are subject to disturbances in the ratio of the existing supply of ex nihilo money in circulation and the quantities of commodities in circulation that are denominated in the ex nihilo currency.
- Should the quantity of commodities in circulation suddenly increase, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly decrease. Should the quantity of commodities in circulation suddenly decrease, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly increase.
- Should the supply of ex nihilo money in circulation suddenly increase, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly rise. Should the supply of ex nihilo money in circulation suddenly decrease, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly fall.
In either case, the sum of prices are not related to the sum of values of commodities, but only to the ratio of the sum of ex nihilo money to the sum of commodities in circulation. In fact I question whether money exists at all. Insofar as money function as a measure and store of value, it cannot circulate within society; insofar as is circulates within society and serves as a standard of prices, it cannot be a measure of value. What is left after the debasement of money is money, the social relation, irretrievably broken.
Actually, we’ve been in a depression since 2001
Whatever the outcome of the present crisis, John Williams’ prediction rests on such a defective theory of money and ex nihilo price formation that his prediction is useless to us. Ex nihilo money appears to allow the formation of so-called monopoly pricing in the economy. By restricting production, monopolies can, in fact, pad their profits, even as society descends into abject scarcity and want under an ex nihilo monetary regime. Rising prices during a depression is not a defect of an ex nihilo monetary regime, but the way prices would be expected to behave under that regime as capital is devalued. From the standpoint of the capitalist mode of production, inflation of ex nihilo prices is to be expected, and is the expression of the mode’s attempt to establish the sound basis for its future operation.
When I look at gold prices, I find evidence that the economy actually has been in a depression since 2001. According to my figures, gold prices bottomed in 2001 at around $271.04, and have been rising steadily for most of the decades after this. This is the first time gold prices have risen so consistently since the 1970s great depression/great stagflation. It follows from this that Williams’ depression, at least, has nothing to do with a hyperinflation of prices itself. At the same time, hyperinflation, in his model, does not coincide with a depression, but hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. To this we will turn next.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
I am examining economist John Williams prediction of an imminent hyperinflationary depression published in March, 2011. Williams’ prediction appears to rest on a rather questionable hypothesis that this hyperinflationary depression is made inevitable by mere accounting identities — that is, by the logic of book-keeping, which suggests the Fascist State will be unable to stop a spiral into depression by depreciating the purchasing power of the US Dollar. Efforts to depreciate the dollar, Williams argues, will lead the world to reject the dollar as world reserve currency; setting into motion a series of events leading to it becoming worthless.
I am a bit skeptical on this point for no other reason than I saw the fate of Argentina when it could no longer pay its bills in 1999. I am forced to ask, since the US had not the slightest sympathy for Argentina in 1999, why would it have any sympathy for its own creditors in 2011? Indeed, Washington showed no hesitation in 1933 when it came to dispossessing society of its gold stocks, nor did it hesitate to close the gold window and renounce its obligations under the Bretton Wood agreement in 1971.The Fascist State sets the rules; there is nothing in the historical record to suggest it observes these rules except when those rules favor it.
Nevertheless, I want to give Williams the benefit of the doubt on this. So, I will continue to examine his argument.
Williams on Deflation, Inflation, Hyperinflation and Prices
Williams assumes the standard definition of inflation: a general rise in the prices of commodities. As is typical of this view, he completely neglects both consumption and production of commodities in his definition of inflation. He further defines hyperinflation as a particularly virulent form of inflation where prices rise multiple — hundreds or thousands — times a normal inflation.
Inflation broadly is defined in terms of a rise in general prices usually due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to consumer goods and services, not to the pricing of financial assets, unless specified otherwise. In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently in Zimbabwe, where the pace of hyperinflation likely was the most extreme ever seen.
As is the standard thinking on the issue, Williams believes the most significant force behind dollar hyperinflation is the creation of money ex nihilo by Washington, not over-accumulation of capital. While inflation is a moderate expression of the chronic tendency of states with fiat currency to live beyond their means, hyperinflation is only an extreme expression of this chronic tendency.
The historical culprit generally has been the use of fiat currencies—currencies with no hard-asset backing such as gold—and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.
Excessive money creation takes the form of spending by the state that is otherwise unable to borrow from or tax society to the extent needed to fund its operations. In this case, the chief causes identified by Williams are unfunded promises in the form of social programs like retirement, health care and the social safety net, combined with the costs of bailing out the failed economic stabilization mechanism. (Missing, of course, is any reference to either service on the existing public debt, or spending on a massive global machinery of repression.) The point, however, is pretty much unoriginal: inflation begins with government spending, not over-accumulation of capital.
Deflation is simply defined as the opposite of inflation, i.e., “a decrease in the prices of consumer goods and services, usually tied to a contraction of money in circulation“; Hyperinflation is an “extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless.” Thus all three — inflation, deflation and hyperinflation — are merely state driven monetary phenomenon; the result of changes in the supply of money in circulation within the economy provoked by state spending. The source of the changes in the money supply are said to be state monetary and fiscal policy.
However, with regards to hyperinflation, Williams adds one additional, critical, definition, not with regards to prices, but with regards to the currency itself: it becomes worthless. In Williams’ opinion, the currency becomes worthless as a result of rapidly escalating prices. However, both logically and historically the case is precisely the opposite: prices escalate rapidly because the currency is already worthless — because it has already been debased from gold or another money commodity. With the currency debased from gold, prices became a creature of state monetary and fiscal policy pure and simple. Moreover, with the currency worthless as a result of its debasement, prices and their movements no longer transmit meaningful information about market conditions as is generally assumed to be the case.
Williams on Recession, Depression and Great Depression
Williams outlines a similar set of definitions with regards to recession, depression and great depression.
Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor… Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%. On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II—as officially reported —have been recessions.
Williams defines recessions, depressions and great depressions by levels of economic activity. In contrast to his previous definitions for inflation, deflation and hyperinflation, he focuses not on price, but actual output of goods and services. In discussing inflation, deflation and hyperinflation, Williams makes no reference to the general level of production and consumption of commodities; likewise, when discussing recessions, depressions and great depressions, he makes no reference to the general level of prices. But, both recessions and depressions are associated with definite changes in the level of prices in the economy. Historically, depressions clearly have been associated with deflations, or a general fall in the prices of commodities; while recessions clearly have been associated with inflation, or a general rise in prices of commodities.
The significance of this association is revealed if we assume great depressions are associated with hyperinflations — a hyperinflation not understood in the sense of breathtaking annual increases in the price level, but with the currency becoming worthless. Is there a basis for making such an equivalence? Remember, Williams asserts that historically hyperinflation is associated with fiat currencies — currencies that are not backed by some commodity that serves as a standard for prices. These are also currencies that can be created ex nihilo by the state. He associates hyperinflation not just with the general price level rising at a fantastic rate owing to the inability of the state to pay its obligations, but with the nature of the money used to pay those obligations — that is, with the fact that these currencies are not backed by gold or another commodity. It is important to remember in this regard that the US and all industrialized powers debased their monies during the Great Depression. But, just as important, the US also reneged on its obligation to pay its international debts in gold in 1971 — thus imposing on other nations a world reserve currency that was as worthless abroad as it was domestically.
For whatever reason, writers like Williams confuse the issue by treating debasement of the currency and hyperinflation as one and the same thing. In actuality, debasement of the currency — that is, the separation of the currency and gold — has been the signal monetary event of the post-Great Depression period. Hyperinflation — the rapid collapse of the purchasing power of a debased currency — is an entirely rare event. It is not rapidly rising prices that render money worthless, rather, because the money in question is already worthless prices can, under certain circumstances, rise at a fantastic rate.
How is this related to recessions and depressions? Before the Great Depression, and the debasement of the currency, depressions usually resulted in deflations. During the Great Depression, however severe and unprecedented deflation was interrupted by the debasement of all major currencies. In this debasement currency was rendered worthless, i.e., without any definite relation to a commodity which might serve as a standard for the general price level. The definition of worth being simply the dictionary definition of an equivalent in value to a sum or item specified, i.e., a specific quantity of gold or some other money commodity. Gold gave token currency its worth, that is, gave it some definite equivalent to other commodities which could be expressed as prices of those commodities in units of the money. After the Great Depression, and the 1971 abrogation of the Bretton Wood agreement, with money having no definite worth, depressions are now associated not with rapidly falling prices, but with rapidly rising prices — a condition that has been labeled recession.
The economic picture is cleared up once we realize the general price level is irrelevant for analyzing depression-type events after the dollar was debased. Precisely because money was rendered worthless by its debasement, prices, after this debasement, provide little useful information on the actual state of the underlying economy. Prices, at this point, are serving an altogether different function: they are an instrument of state economic policy. On the other hand, hyperinflation of prices does not lead to a worthless currency; instead, the debasement of the currency is a necessary precondition for hyperinflation.
Williams’ historical examples of hyperinflation
While a debased, worthless, currency can lead to hyperinflation, it is obvious that every debasement of the currency does not end in hyperinflation. Today, almost all national currencies are debased, yet hyperinflation occurs only rarely in history. Moreover, the extraordinary hyperinflations of history do not result primarily from the profligacy of the state. The United States, for instance, is by far the most profligate state in history — accounting for nearly half of all military spending. What triggers hyperinflations are definite economic circumstances in addition to this state profligacy.
The economic conditions leading to hyperinflation can be seen most clearly if we compare the current economic environment to historical examples of hyperinflation cited by Williams. Williams’ examination of examples of hyperinflation suffer from defects along the lines of his examinations of inflation/deflation and recessions/depressions. However, while he overlooks obvious connections in the latter cases, in the case of historical examples of hyperinflation he overlooks obvious differences.
Williams recounts the case of the Weimar Republic:
Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors—particularly France—as well as to face loss of territory. From Foster (Chapter 11):
By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments.
During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.
The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires.
Germany suffered defeat in a war that left it exhausted and stripped of territory, population and productive capacity by the victors to pay for reparations; it was the scene of intense class conflict and intense economic dislocation. The hyperinflation of the Weimar Republic Germany, therefore, began not with absolute over-accumulation of capital — with overproduction of commodities and a surfeit of labor power — but decidedly the reverse: a massive loss of productive capacity — a loss the government then tried to paper over, without success, by issuing worthless paper. The government sought to stabilize the economy by printing money to offset these crippling economic losses. The subsequent explosion of prices occurs not merely because the Weimar Republic sought to paper over a disaster, but because it was not possible to paper over such catastrophic material losses with money printing. The lesson of the Weimar Republic is obvious: while debasement of the currency can artificially inflate the purchasing power of state issued token currency, it must ultimately fail in an explosion of prices if the state attempts to paper over real material losses.
Where in this litany of disaster are conditions similar to those faced by the United States? Despite Williams’ assertion that, “The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation…“, in fact, the two have nothing in common. While Germany was systematically stripped of its productive capacity, the US is experiencing capital flight caused by decades of debt-driven inflationary domestic policy, including not only social spending “to assuage social discontent,” but also thoroughly wasteful and excessive national security expenditures and a failed economic stimulus mechanism.
Moreover, it is not merely a question of foreign investors propping up the dollar. While Germany’s ex nihilo currency was not considered money beyond its borders, the dollar is the world reserve currency; commodities world wide are priced in dollars. At the same time, the United States accounts for a quarter of global consumption demand, and this demand takes the form of ex nihilo dollars exclusively. The global producers of commodities are facing severe over-accumulation of capital and insufficient money-demand for their output. They are looking precisely for currencies with the sort of excess money-demand that is typical of inflation driven growth economies. The question is not whether trillions of dollars of social wealth denominated in dollars can withdraw from the dollar in time should there be a crisis; rather, we have to wonder if any exit from the dollar is possible or probable.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment