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Inflation, the negative rate of profit, and the Fascist State (Part six)

April 26, 2011 Leave a comment

I need to digress for a moment to set everything I have discussed so far regarding inflation in the context of the world market. As will become clear, it is difficult, if not impossible to discuss inflation without taking into account the relation between the two. Inflation, as I have argued, can be understood as the chronic secular rise of prices for commodities, yet, it can also be understood as the chronic fall in the general level of consumption in an economy over a period of time. These two expressions of inflation do not simply exist as poles of a definition of inflation, but first and foremost as poles of the actually existing relation of production within the world market — a chronic, secular rise in prices of commodities on the one hand, and a chronic fall in the general level of consumption — of wages — on the other.

Inflation and the faux political battle over Austerity

One way to begin this is to look at the current faux political struggle unfolding in Washington over deficit spending by the Fascist State, since this faux struggle touches on one of the most glaring expressions of the imbalances within the world market. So, let’s examine the argument of the advocates of Austerity from the standpoint of Marx’s labor theory of value:

According to these sober persons, the United States must pay its debts. Since it must pay its debts — for instance, the US owes China $3 trillion — it must contain spending to a level consistent with this goal. Of course, the statement that the United States owes China $3 trillion is a non-sequitur in relation to domestic spending and taxes, since the US doesn’t pay China with revenues raised through taxes. It creates the money out of nothing. If China is concerned about getting its money, a faceless bureaucrat at the Treasury simply goes to a computer terminal and enters a 3 followed by 12 zeroes into an account designated by China. Now the PRC has its $3 trillion and we need not talk about Austerity. They get what we promised them: $3 trillion, and nothing more.

As the economist advocates of Modern Monetary Theory argue, this process is no different than what occurs when you withdraw cash from your savings account at the bank or transfer cash from your savings account to your checking account. US treasuries are simply China’s own savings account.

Now, what does China do with the $3 trillion? They have absolutely no domestic use for it, since the yuan serves as the domestic currency, not dollars. The PRC could use the money to import wage commodities to raise the material standard. But if they had any intention of doing this, the $3 trillion would not have been loaned to the United States in the first place. The PRC could also use the money to import capital commodities to increase the rate of domestic economic growth. However, even if they used the money this way. it would only result in more exports and even greater trade surpluses denominated in dollars. We have to assume that China has absolutely no use for the dollars — that the dollars are excess capital, which, since the PRC has no use for it, ends up being lent to the United States. And, since the United States can create as many dollars as they want, they have no use for it either.

The $3 trillion is valueless. And, if it is valueless, this implies all the crap they sold us is valueless as well. China sold us all this crap knowing we were giving them valueless dollars in return. We must assume they exchanged these commodities for American ex nihilo dollars because it couldn’t be sold otherwise. Since the crap was valueless unless they sold it to us for equally valueless dollars, the terms of the trade were met. Crap for crap; superfluous commodities, which, therefore, are not commodities at all, since they have no value, exchanged for a quantity of ex nihilo money that also has no value.

But, by the same token, the savings from austerity sought by the Austerians to repay China must also be valueless, since it consists entirely of these same ex nihilo dollars. Which implies that current expenditures by the Fascist State are also valueless, since the money spent domestically is the same as that to be paid to China. The money isn’t valueless because we owe it to China, it was valueless already — just as China’s crap is valueless unless it is sold. Whether it is used to repay China or spent on National Health Care, the money is completely valueless. Which means, not only is all that crap in China valueless, national health care is valueless as well. You cannot buy something with nothing unless that something is also nothing, i.e., has the same value as your means of purchasing it.

On the other hand, health care is definitely something, but so are socks made in China and sold at WalMart. By saying a thing exchanged for nothing must be nothing as well clearly has nothing to do with whether it is useful or necessary. The socks are useful, and so is an annual checkup. But, when exchanged for valueless dollars, they must also be valueless. It is not a question of whether these valueless dollars will go to pay China or to pay for health care.

The real question is why all of these useful goods continue to circulate in the form of commodities despite the valuelessness of the money? If we removed the valueless money from the equation entirely and allowed the goods to move as society demanded, nothing will have changed. Which is to say, if the goods were free, from the standpoint of value, nothing has changed. The fact that money serves as an intermediary in exchange here has no impact on the value of the things. Rather money is announcing, “These things for which I am exchanged have no value themselves. They, like me, are valueless in an economic sense, and, therefore, are no longer actually commodities.”

The absurdity of ex nihilo money

The absurdity is apparent: Money in this case only expresses that, from the standpoint of the law of value, there is no need for money. But this monetary expression takes the form of a valueless money. The sheer stupidity that money expresses its own superfluousness is already given in ex nihilo money. At the same time, this absurdity can only arise because, as a practical matter, the superfluousness of money appears absurd itself. Or, what is the same thing, a society founded on exchange of commodities has nevertheless come to be dominated by directly social production. This directly social production, for which exchange of commodities is entirely absurd, must nonetheless appear in the form of exchange – fictitious exchange. To accomplish this fictitious exchange requires a money form that is itself fictitious — ex nihilo money.

Although the exchanges taking place are fictitious, and use a currency that is entirely fictitious, the need for these fictions are real. The premise of all these fictions is that completely social conditions of production are nevertheless split up among the members of society. On the one hand, this division presupposes exchange of commodities, yet, on the other hand, this commodity exchange is entirely superfluous to the production of these commodities. The conflict between the conditions governing exchange and those governing production must be resolved; and they are, by fictions. But this “resolution” of the conflict between the conditions of exchange and the conditions of production can only intensify the antagonism between the two, and develop it to its most extreme limit.

Every nation attempts to resolve the conflict between the conditions of production and the conditions of exchange by issuing its own ex nihilo money. However, the limit of any nation to issue ex nihilo money rests on its ability to export more than it imports. According to Paul Krugman (2010) a nation can issue ex nihilo money only if it can run an export surplus and accepts a depreciation of its money. Moreover, in a flexible exchange rate system the export surplus becomes possible because issuing the ex nihilo money itself creates a tendency toward this depreciation of its currency. Thus, in a flexible exchange rate system, creating money ex nihilo produces a tendency toward export surpluses by depreciating the purchasing power of the ex nihilo money. The creation of fictitious money depresses the ability of the community to consume what it produces; it reduces the ratio of domestic consumption to domestic production — increased export is realized through the relative impoverishment of the community.

Since, in Krugman’s 2010 model every nation seeks a trade surplus by impoverishing itself — i.e., by reducing the portion of domestic production that is consumed domestically — who is consuming all of this now excess crap? Krugman’s 2010 model implies either the existence of a designated importer nation, or, the planet ends up with massive quantities of unsold excess commodities. What role does this designated importer play? If every other nation is running a trade surplus, the designated importer must run a trade deficit equal to the total surplus commodities produced by all the other nations. i.e., equal to the sum of excess capital in the form of excess commodities.

If the designated importer nation is running a chronic and growing export deficit, how does it pay for these imports? This designated importer has a fictitious currency every other nation must accumulate as payment for its exports. By law, only the State can create ex nihilo money. The responsibility of creating sufficient quantities of fictional money falls to it. The creation of ex nihilo money, however, is nothing more than the creation of fictitious profits — to the penny. If this creation is accomplished by issuing public debt, this public debt amounts to the fictional profits of private capitals. By increasing the public debt the owner of the world reserve currency can print money and buy all the crap. On the other hand, there is a tendency for the excess capital of the world market to be denominated in the world reserve currency.

However, since we are dealing with an actual material conflict between the conditions of production and the conditions of exchange under condition of absolute over-accumulation of capital, this conflict doesn’t disappear. It now appears as poles of international trade in the form of many net exporters on one side, who are accumulating fictitious dollar assets, and a net importer on the other side, who is accumulating a growing public debt; thus, the excess capital of the world market is increasingly denominated in the world reserve currency. This division of the world market into many net exporters and a single net importer has consequences for ex nihilo money creation itself: The capacity to grow export surpluses by creating ex nihilo money does indeed increase, but this increased capacity is only true for the designated importer nation. The export surplus nations actually end up with less capacity to create ex nihilo money, even as the designated importer nation gains in this capacity. Eventually, the export surplus nations must absolutely constrict their respective money supplies to contain inflation — producing, as a consequence, a growing surplus population of starving laborers. Although this conclusion is obvious, Krugman has not a hint of it in his 2010 paper.

Ex nihilo money, labor time, and the World Market

The problem is that directly social production abolishes the law of value, while exchange takes place only on the basis of this law. Under the capitalist mode of production, production is only undertaken with the eye to profit, i.e., to realization of surplus value. Yet, under conditions of absolute over-accumulation of capital, no additional surplus value can be realized, i.e., the profit rate is zero, if not negative. If the fiction of profits could not be maintained, production would cease entirely. To maintain this fiction, you need fictitious money.

To put this another way, under conditions of over-accumulation, directly social production limits the total labor time of the community to socially necessary labor time. And, what is the measure of this socially necessary labor time? Here is the somewhat surprising answer:

Socially Necessary Labor Time = Value = Wages.

Under conditions of over-accumulation of capital, the absolute limit of total socially necessary labor time is the value of the wages of the working class. Any value created in addition to this necessary limit — i.e., surplus value — cannot be realized as profit — it is wasted (or, superfluous) labor time. Profits realized under this regime must, by definition, be fictitious; hence the fiction of ex nihilo money.

If the production of surplus value no longer takes place, profit can be “realized” through exchange only on condition there is a continuous and pervasive unequal exchange of values within the world market. If labor power cannot be exploited to create surplus value, it must be constantly and artificially devalued — that is, purchased at a price below its actual value. This artificial (purely monetary) devaluation of labor power is a natural consequence of Fascist State ex nihilo money expenditures. This purely monetary devaluation of labor power goes hand in hand with a purely monetary devaluation of the fixed and circulating constant capital.

However, although labor power and the fixed and circulating constant capital are artificially devalued, this does not, by any means, imply a fall in the prices of these commodities — rather the situation is precisely the reverse. Under the conditions I am describing, the purely monetary devaluation is expressed inversely as rising ex nihilo prices for these commodities. They become dearer in ex nihilo money terms as their prices are held well over their actual values; in turn, society is compelled by generally rising prices denominated in the world reserve currency to consume fewer of these commodities.

However, it should not be understood by this that generally rising prices cause declining consumption of commodities; nor, does this imply that either or both result from the huge quantities of ex nihilo money created by the state. Rather, each of these is called forth by the growing conflict between the conditions of production and the conditions of exchange under circumstance of chronic or absolute over-accumulation of capital. Over-accumulation of capital means precisely over-accumulation of commodities — of fixed and circulating constant capital, and, of variable capital, i.e., labor power. Moreover, we have to assume that this over-accumulation of capital exists not simply in one or a few nations, but universally throughout the world market. Hence, export of capital no longer serves to resolve the contradictions inherent to capital.

Those who are following my reasoning so far immediately recognize the logical contradiction in the above paragraphs: I have made the absurd assumption that commodities sell at prices below their values and, simultaneously, above their values. On the surface, it would appear that these two paradoxical assumptions could not exist, or, if they did exist, would bring social production to a halt entirely. As a practical matter, however, these two assumptions, although occurring side by side during the circulation of commodities, nevertheless only occur serially in any given example and in two different directions: the capitalist purchases labor power where the average wage is priced below its value, and sells wage commodities where prices of these commodities are above their values. Which is to say, the world reserve currency, despite massive ex nihilo creation that should force its exchange rate against other currencies down precipitously, actually exchanges against these other currencies at a higher rate than would otherwise be expected — it enjoys what economists refer to as an “exorbitant privilege”.

As a result, there is a tendency for production to move toward the least developed regions of the world market, where labor power can be purchased for a fraction of its value, while the resultant output is sold in the most developed consumer markets. Capital denominated in the world reserve currency, since this currency can be exchanged for any local currency, can simultaneously purchase labor power in those places where wages are below their values, and sell the produced commodities in those places where prices are above their values. Productive employment of capital in the home market of the world reserve currency holder grows increasingly unprofitable and commodities produced there suffer from uncompetitive world market prices. Capital, therefore, takes flight to the less developed regions of the world market. This event is accompanied by loud public pronouncements by politicians and the business community on the liberating effects of free trade; and by angry denunciations on the part of those capitals who, because of their size or circumstances, cannot shift their capital to take advantage of this process and are driven to ruin or speculation.

This has implications for the development of the world market, which, rather than slowing because of the general over-accumulation of capital within the world market, now increases at an astonishing rate and geometrically: Capital denominated in the world reserve currency can not only take advantage of the price disequilibrium between labor power and wage goods, it can further exploit the “exorbitant privilege” of the world reserve currency. This must accelerate the export of capital to less developed regions of the world market to take advantage of extremely favorable terms on which labor power can be exploited in the local currency, and, simultaneously, lead to the expansion of the portion of the total social capital denominated in dollars at the expense of the portion denominated in other currencies.

The problem I spoke of in an earlier post in this series — that wages are too high, and yet too low — resolves itself naturally into accelerated export of productively employed capital to those places where labor power can be had for a fraction of its value, to produce goods destined for markets where commodities are priced many times their actual value. This arbitrage, which can only continue so long as new sources of ever cheaper labor power can be found, must be expressed in a growing volume of Fascist State ex nihilo money creation, which, moreover, must not simply increase, but increase geometrically.

Inflation, the negative rate of profit, and the Fascist State (Part five)

April 17, 2011 2 comments

According to the Wikipedia entry on Executive Order 6102, the fine for hoarding gold was ten thousand dollars. At the same time, the executive order demanded all private holdings be turned in and exchanged for government issued ex nihilo dollars at an exchange rate of $20.67 per troy ounce of gold. Using this as our base measure, the fine for hoarding gold amounted to 483.79 troy ounces of gold.

So, like the authors of the Wikipedia entry I tried to update the purchasing power of the 1933 ten thousand dollar fine into an amount of money equal to it in 2011 dollars. I went to the Bureau of Labor Statistics Consumer Price Index website and found that according to its statistical measure of inflation it now takes $171,897.69 to purchase the same quantity of goods that the ten thousand dollar fine would have purchased in 1933. According to the Bureau of Labor Statistics, the purchasing power of the ten thousand dollar fine has fallen to just 5.82 percent of its purchasing power in 1933. This is a fantastic depreciation in the purchasing power of dollars. However, it is also a gross lie — the depreciation of dollars has been far more severe than even the BLS admits, as we will now show.

The Problem of the Consumer Price Index

The Consumer Price index has been the subject of continuing controversy, including charges that it overestimates inflation and charges that it underestimates inflation. But, this controversy does not concern us here, since it is, in part at least, a political disagreement. What does concern us is the index itself, which popularly purports to measure the depreciating purchasing power of money in relation not to a fixed standard, but against a multitude of standards — that is, against a so-called basket of consumer goods.

Upon deeper investigation, however, I found, according to the entry in the Wikipedia on the United States Consumer Price Index, that the CPI was never meant to measure inflation or the depreciating purchasing power of money:

The U.S. Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.

Intrigued by this disclaimer, I went searching for the difference between a measure of inflation and a measure of the “cost of living”. Among the information I found was an admission by the Bureau of Labor Statistics that the Consumer Price Index not only does not measure inflation, but it is not even a true measure of the cost of living. It is limited to measuring market purchases by consumers of a basket of goods and services.

According to Wikipedia, the BLS states:

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework.

Since, the BLS, by its own admission, incompletely measures the amount you must spend to achieve a presumed certain level of “utility” — the so-called Standard of Living — how do they define this “utility”? Further reading explains:

Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula.

So, to sum up: the Bureau of Labor Statistics Consumer Price Index is a measure of a theoretical construct which cannot be defined, is difficult to determine, and, in any case, is not directly measurable: the so-called “Standard of Living“.

The hidden costs borne by society

If we go back to the first paragraph of the original definition of inflation proposed the the Wikipedia entry, we find this:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[my emphasis] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation is defined as the general rise in prices of goods and services, but also as the erosion of the purchasing power of money — i.e., the depreciation of money. Against what is this erosion of purchasing power to be measured? Here, the Wikipedia is silent, leaving us with the wrong idea that the “real value” of money is to be measured against the commodities we can purchase with it. As this “real value” erodes, we can purchase fewer goods and services. This implied method of measuring the depreciation of money, however, does not give us a general measure of the price level, as the BLS admits, but only a measure of the price level as expressed in a series of transactions in the market for so many individual commodities.

The war in Afghanistan, for instance, would not be captured by this implied method; nor, would the cost incurred by society as a result of  the damage British Petroleum caused to the Gulf of Mexico; nor, the cost borne by society for the Fukushima nuclear disaster, or that created by the bailout of the failed banksters on Wall Street. Unless these costs actually entered into the prices of commodities in market transactions, they will not show up in the Consumer Price Index. And, a considerable  period of time could pass between the events and their expression in the prices of commodities tracked by the Consumer Price Index. Moreover, the change in prices of the commodities tracked by the Consumer Prices Index are subject to innumerable factors arising from market forces within the World Market — making it impossible to trace any specific fluctuation back to its source. On the other hand, each of the events of the sort cited above materially affected either the necessary labor time of society or the quantity of ex nihilo money in circulation within the economy.

The question to which we seek an answer is not how much the purchasing power of ex nihilo money has depreciated with respect to some arbitrarily established concept of living ltandard, but how much it has diverged from the purchasing power of gold standard money? To answer this question, we must directly measure these changes by comparing the general prices level against the commodity that served as the standard for prices until money was debased and replaced with ex nihilo dollars.

Gold standard dollars more or less held prices to the necessary social labor time required for the production of commodities; the divergence between gold and dollars since the dollar was debased, provides us with an unambiguous picture of inflation since 1933.  The divergence between the former gold standard money and ex nihilo money must be expressed as the depreciation of ex nihilo money purchasing power for an ounce of gold over time , or, what is the same thing, as the inverse of the price of gold over a period of time — as is shown in the chart below for the years 1920 to 2010.

Inflation since 1933 has been four times higher than BLS figures show

So, how does all of this relate back to the fine imposed on anyone found guilty of hoarding gold under Executive Order 6120? Remember, in 1933 the ten thousand dollar fine could have been exchanged for 483.79 ounces of gold. According to the BLS Consumer Price Index this translates into $171,897.69 in current dollars. However, 483.79 troy ounces of gold actually commands the far greater sum of $714,441.22, or 4 times as many dollars as the BLS Consumer Price Index states.

To put this another way, the Consumer Price Index is a complete fabrication by government to deliberately understate the actual depreciation of dollar purchasing power. The cumulative results of decades of false inflation statistics can be seen by simply comparing CPI statistics to the actual depreciation of dollar purchasing power against its former standard, gold. The extent of this fabrication can be seen in the chart below:

Moreover, for 2010, the annual average price inflation rate was a quite staggering 26%, when measured against the value of gold, not the paltry 1.6% alleged by the BLS.

If you didn’t receive a 26 percent increase in your wages or salary in 2010, you experienced a 26% loss in purchasing power — your consumption power was systematically destroyed by Washington money printing.

Using gold as the standard against which the depreciation of ex nihilo money is measured demonstrates how the Fascist State deliberately manipulates statistics for its own purposes to hide from the public the extent to which it manipulates exchange, and, therefore, the extent to which this manipulation has resulted in greatly increased prices for commodities.

But, gold does not only allow us to actually visualize the extent of this manipulation, as we shall show in the next post, gold also can demonstrate how this manipulation results in the needless extension of social working time beyond its necessary limit. That the Fascist State relentlessly extends working time beyond this limit, or, more importantly, that operates to maintain an environment of scarcity within society, which is the absolute precondition for Capital’s continuation.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part four)

April 14, 2011 Leave a comment

Executive Order 6102

In the bare bones sketch of Marx’s theory I argued that the value of the object serving as money played no role in its function as money. This was incomplete, of course, but it served to advance my argument until I could directly address the implication of debasement of money by the industrial powers during the Great Depression. In reality, the price (actually value/price) mechanism can only perform its function to coordinate the separate acts of millions of individual labor times if it shares with commodities the attribute of being a product of labor itself, and, for this reason, requires a definite socially necessary labor time for its own production. Because gold has value, it can express the value of the commodities with which it is exchanged.

On the surface, a commodity is exchanged for money, and this transaction is the exchange of two absolutely unlike objects: the money serves no purpose but means of exchange, while the commodity with which it is exchanged is eventually consumed; the money never leaves circulation, while the commodity disappears; the money can always find a new owner, while the commodity only finds an new owner where it is needed. They are as different as night and day. Although, the flows of money through the community are only a necessary reflex of the flows of commodities through the community as it engages in a more or less developed act of social production. But, by always being exchangeable for commodities throughout the community, always being in constant circulation within the community, and by serving only as means of exchange, money brings millions of isolated individual acts of production into some sort of rough coordination.

As the physical expression of socially necessary labor time money is a natural and spontaneous means by which the value/price mechanism regulates the activities of the community in absence of the community’s own planned management. However, I must emphasize, money is only the expression of socially necessary labor time; it is not and should not be mistaken for socially necessary labor time itself. And, it can only express the socially necessary labor time of society, because the community requires some definite socially necessary labor time to create it. What object serves as money for the community is, therefore, of general interest to the whole of the community, and has a very long history — most of which, since we take this history as our starting point, is of no interest to us here. I only note that since this General Interest must take some form, the form it takes during the period under discussion, from the Great Depression until the present, are the laws of the various States regarding the legal definition of money.

Breakdown of the law of value emergence of the Fascist State

On April 5, 1933, the Roosevelt administration issued Executive Order 6102. The Wikipedia outlines the scope of this executive order:

Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The bank panics of Feb/March 1933 and foreign exchange movements were in danger of exhausting the Federal Reserve holdings of gold. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.

This simple executive order, which was succeeded by several additional orders during 1933, and by the Gold Reserve Act of 1934, removed gold as the standard for the dollar, made it illegal to own more than a small amount of the metal, and compelled individuals under penalty of law to turn their gold over to the Federal Reserve in return for the then existing exchange rate of $20.67. On the surface this order just gave the State monopoly over the ownership of gold and reduced money to just a State-issued token. While this step was, in and of itself, fairly staggering, particularly when we consider that it was duplicated in all the big industrial nations at the same time, once we consider the full ramifications of the orders and succeeding law in terms of the various national economies, it quickly becomes apparent that a state monopoly over the ownership of gold, and the replacement of gold standard money by State-issued currency was only the most obvious effect. John Maynard Keynes, who examined the issue entirely from the standpoint of a bourgeois economist, had some inkling of the far reaching implication of State issued ex nihilo money. Fifteen years earlier, he argued that the inflationary consequences of excessive money printing amount to the confiscation of private property:

… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

If excessive money printing raised the question of secret confiscation of property, the actual confiscation of gold, and the replacement of gold money  by state-issued currency amounted to the explicit expropriation of monetary wealth. Yet, even this implied expropriation of social wealth in its capitalistic form was not the most significant implication of the state action: From the standpoint of Marx’s theory, the debasement of money was the abolition of the historically developed natural and spontaneously created value/price mechanism as the regulator of the social act of production. In place of a natural relation between the values of commodities and the prices of commodities, the relation between the two was, after this, to be established as a matter of state policy. This separation is the absolute development of the historical antithesis between the commodity and money, since paper money has no use except as medium of circulation of commodities — as means of exchange. Moreover, by this executive order severing gold from money, we see not only that the value of the commodity was severed from its price, but, further, that production was severed from consumption; labor power was severed from wages; surplus value was severed from profits. Finally, with the law of value no longer determining the social necessity of a given expenditure of labor time, the labor time expended by society was no longer limited by social necessity.

In place of the historical, spontaneous and naturally developed mode by which the separate activities of millions of members of Civil Society in every country had been hitherto regulated, social labor and its duration was now regulated by the State, and under conditions determined solely by the State. The abolition of the gold standard did not simply sever the connection between gold and money, and abolish the value/price mechanism, it also placed the total social capital of Civil Society at the disposal of the State — or, what is the same thing, announced the emergence of the Fascist State. Property, the classical thinkers argued, is the power to dispose of the labor of others, hence this total social capital was converted into the property of the State.

The Fascist State as regulator of production and consumption

The entire social capital of every nation was expropriated, precisely as Marx predicted, but in a fashion and under circumstances quite different than those which might have been welcomed by him. As I argued in another post, Marx’s differences with Bakunin came down to difference over whether the Proletariat would be compelled to effect management of social production according to the principle of “to each according to his work”, that is by replacing the existing Civil Society and the State with new rules enforcing labor equally on all members of society. Marx was not making this argument in a vacuum; his theory predicted a breakdown of the law of value as the regulating principle of social labor before the necessary conditions were established for a fully communist society. Society would be required by this breakdown to step in and manage social labor directly and according to a plan. Marx’s argument with the Anarchists essentially asked the question, “By what rules would this management be effected?” As is obvious from an investigation of history, this question was settled decisively in favor of the existing Civil Society, which rose to manage its General Interest — i.e., its interests as a mode of Capital — through the machinery of the Fascist State.

Within ten years of this act, more than 80 million people were dead and the Eurasian continent lay in ruins, as each nation state, finding itself in total control of the productive capacity of their respective nations, immediately put this productive capacity to good use by trying to devour their neighbors — unleashing a catastrophe on mankind. By 1971, with the collapse of the Bretton Wood agreement, a single fascist state, the United States, had imposed on the survivors the very same control over the other national economies, that it imposed on its own citizens.

As I stated in the previous post:

However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end.

I have now considered inflation from the standpoint of Marx’s labor theory of value and have come to decidedly different conclusions than those drawn in the Wikipedia entry on the subject. These conclusions, I argue, suggest a catastrophic breakdown of the conditions of capitalist production and exchange during the Great Depression; and, based on this, the assumption by the State of direct management of social production, the conversion of the total social capital into the property of the State — not by means of outright seizure of this capital, but by taking control of the conditions of exchange — and the extension of this relationship to the entire World Market.

With the assumption of management of social production by the Fascist State, the law of value, which served to limit the average price of the commodity to the socially necessary labor time required for its production, no longer imposed such limits on prices. Hence, prices could be determined by factors other than the value of these commodities. On the other hand, with the law of value — that is socially necessary labor time — no longer imposing a limit on the total labor time of society, this labor time could be expanded in a form that is completely superfluous to social necessity. We can, therefore, define inflation as the chronic general rise in the price level resulting from the further extension of hours of labor beyond their socially necessary limit; or, prices held constant, by the reduction of the ratio of socially necessary labor time to the actual hours of labor expended. Finally, we can see that inflation itself is no more than the result of Fascist State policy, which, acting as the social capitalist, seeks the ever greater extension of the working day even as the productive capacity of society reduces the necessary labor time of social labor.

In my next post, I will examine each of these conclusions in turn.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part three)

April 11, 2011 2 comments

The Wikipedia definition of inflation includes this rather silly statement on the definition of the so-called “real value” of money:

…inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

In this statement the “real value” of money is reduced to the purchasing power of the currency, which is simply the inverse of the price of a commodity. If a commodity has a price of ten dollars, the “real value” of a dollar in relation to this commodity is one tenth of the commodity. By the same token, the value of the commodity can be said to be ten times the “real value” of one dollar. The value of the commodity is, therefore, only its price in some unit of the currency, and, in this way the economist can dispose of the nasty implications of Marx’s labor theory of value — that the classical notion of value amounts to a death sentence for Capital itself, and of the sum of relations of society founded on Capital.

It is typical of economics that its practitioners hold to the notion reality can be abolished merely by refusing to acknowledge its existence. Thus, tens of millions of unemployed women and men no longer exist simply because the Bureau of Labor Statistics’ data removes all evidence of their existence. Unemployment like the classical notion of value is no more than a conceptual construct which can be disposed of by replacing it with a new concept. However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end. The effort, however, is worth it.

Price and value

It may surprise you that, in Marx’s model, money can be thought of as something without any value at all. Value is a characteristic of a commodity, and, insofar as we consider money not as money, but as just another commodity (for instance, the gold in a necklace) it does indeed have value equal to the socially necessary labor time required for its production. But, when serving as money, gold’s value as a commodity never enters into the equation. As money, gold’s entire role in social production is to express the value of the commodity, not its own value; and this it does in its material body. Marx would never speak of the “real value” of money, because as money, its “real value” is not what matters — what matters is its physical material.

Simplified Marx’s model is this: When we speak of the value of a commodity, we are referring to the duration of labor time socially required to produce the commodity. This socially necessary labor time is expressed in a quantity of gold that requires the same duration to produce. The socially necessary labor time required to produce the commodity is the value of this commodity, while the quantity of gold equal to this socially necessary labor time is not the value of the commodity, but its price. Value and price are two different animals — in the market, where the commodity is exchanged for money, the the value of a commodity and its price in gold are just as likely represent two different quantities of socially necessary labor time as they are to agree. They will agree only on average. In its simplest form, Marx’s theory of value assumes not that the price and the value of a commodity are the same, but that they are NEVER the same — the price of the commodity and its value only coincide by innumerable transactions in which the two only coincide on average.

If the price and the value of a commodity never coincide, what is Marx’s point? His point isn’t to find the secret of prices of commodities, but to demonstrate how the millions of separate and isolated activities of the members of society are, through this mechanism of constant price fluctuations, converted into an embryonic form of social production. While the economist is trying to crack the great ‘mystery’ of price, Marx is showing how private productive activity naturally begins to inch its way along the long road to fully social cooperative productive activity.

The point of the exercise is to advance a theory showing how the labor time of the community, composed as it is of millions of separate labor times is regulated naturally through the pricing mechanism, since the community does not regulate this labor time consciously and according to a plan. In this sense, I think, Marx is not breaking any new ground in relation to the classical writers like Adam Smith. Marx’s unique contribution to this discussion is that in place of labor time generally, he posits socially necessary labor time — which is to say, he shows that productive activity is carried on under the conditions that are established generally in society and not directly arising from the decisions of the individual. The individual’s productive activity is, therefore, being constantly coerced by conditions that are entirely beyond her control, which impose on her the requirement to constantly reduce the amount of time she spends on the production of her commodity.

The conclusion Marx drew from his investigation, briefly stated, was this: If there is no connection between the socially necessary labor time of society and the prices of the commodities produced during this socially necessary labor time, the pricing mechanism could not effect a coordination of all of the millions of individual acts of production within society. We already know these millions of individual acts are not planned and consciously coordinated by the members of society; if we presume these millions of individual labor times are regulated naturally by prices, we have to accept the idea that price itself is doing what people are not, namely effecting regulation of millions of different labor times. So while, in the real world, a commodity requires so much definite time to produce, how much of this time is considered necessary, and how many of the items are to be produced, is determined by society in general, and this value is imposed on the individual in the very real form of the commodity’s price.

When too few of the commodity is produced, its price rises signaling a need to increase the amount of social labor expended on production of the commodity, when to many of the commodity is produced, its price falls signaling a need to reduce the labor time expended on production of the commodity. On the other hand, if the average amount of time need to produce to commodity falls, its price falls signaling a need to reduce the labor time expended on production of the commodity; and, if the average amount of time need to produce to commodity increases, its price increases signaling a need to increase the labor time expended on production of the commodity. This is not rocket science, folks. It is just common sense.

Capital and value

Capital introduces an additional complexity to what I have stated above: with capital the aim of production is not to produce the commodity, but to produce a profit on production of the commodity. The capitalist doesn’t care about the commodity in the least, he is totally focused on seeing that he ends with more gold in his pocket than he began with. To do this he begins with so much money-capital, which he lays out on labor power and the other necessities demanded by production of the commodity. Since he is bound by the same laws that govern production generally, he can only realize a profit if the labor power he purchases can produce more value than it costs for him to purchase it, that is if he can realize, in addition to the money-capital he advanced, this same quantity of money-capital plus an additional sum of money-capital.

However, there is a problem here: when we say the capitalist aims to produce more value than he laid out at the beginning, we are also saying the capitalist aims to produce more socially necessary labor time than is expended in the production process. Since, at every point in the development of Capital, the existing value of labor power in the form of wages is given, the new value created must result in still more labor power in the form of additional wages — the number of laborers under the direction of one capitalist constantly expands, fed by the millions of smaller, less productive, capitalists and property owners who a driven to ruin by the advance of Capital itself.

For our purpose in understanding inflation, what is important to note is that the very process of capitalist production itself presupposes that value, or, socially necessary labor time, exists in two contradictory forms: first, in the value of the wages paid out by the capitalist for labor power; and, second, in the form of additional value over these wages, which, having been newly created in the production process, can now reenter production as additional capital only if it is realized through sale. If we assume for purposes of this argument that the wages paid out are immediately realized by the existing mass of laborers in the form of food, clothing and shelter, we still have to consider how the additional sum of newly created value is realized.

Making a straight-line assumption for the sake of simplicity, this newly created value has to find a market beyond the existing social capital — i.e, it has to enlarge the market for the existing social capital. If this cannot be done, the newly created value cannot be realized, and further expansion of Capital cannot occur. The periodic crises when Capital momentarily out runs the conditions of its own process, is converted from its merely relative form into its absolute form as the capitalist can no longer realize profit on his production and ceases productive activity altogether — industry grounds to a halt, millions of laborers are idled, along ten of thousands of factories, prices of commodities collapse and lay unsold and the flows of money capital cease. While Capital presupposes the constant reduction of socially necessary labor time in the form of wages paid out, it simultaneously presupposes the expansion of socially necessary labor time in the form of additional wages for additional labor powers.

The contradiction inherent in value comes to the fore: to resume production socially necessary labor time must expand, but, since this socially necessary labor time is, in this example, limited to the wages paid out to the laborers, it can expand only on condition that wages increase. On the other hand, the increase in wages must reduce the profits of the capitalist, and the portion of existing socially necessary labor time that the capitalists claims as their rightful profits. Since, on no account are the capitalists willing to part with one additional cent in wages, they opt to maintain their profits by reducing wages still further; however, since this further reduction of wages only reduces still further socially necessary labor time, their actions only increase the problem. Wages are too high, yet, paradoxically, they are also too low.

Price and value reconsidered

Under the assumptions I am using of a very barebones description of the problem posed by the inherent contradiction in value, I need to sum up some of the characteristics of the contradiction. First, there is a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production. Second, there is a contradiction between the value of the commodity itself — i.e., the socially necessary labor time expended on the production of a commodity — and the expression of the value in the form of the price of the commodity.

To these two already identified contradictions we must add a third: there is a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money. While money denominates the price of a commodity, and thus express the value of the commodity, it does not necessarily follow that the money itself contains the same socially necessary labor time as is contained in the commodity. This much is already obvious, since prices fluctuate for innumerable reasons away from the value of the commodity, likewise this fluctuation is accompanied by corresponding fluctuations away from the socially necessary labor time contained in the money for equally innumerable reasons — for instance, a sudden discovery of a huge new source of gold which serves as the money, may force gold to exchange with commodities below its value for a time, which is to say, it takes a larger than “normal” quantity of gold to purchase a given commodity.

This is further complicated when we consider that gold was often not used directly in transactions, but substituted by a placeholder like paper money. In fact, Marx assumed that, for most transactions, gold was not even necessary even when it was formally designated as the money. The replacement of gold by paper tokens in circulation was entirely possible within certain limits. It was only a step from here for our economist to come up with the ‘brilliant’ idea that is didn’t matter what served as money. In this sophomoric reasoning, since money itself only played a token role when it served to facilitate transactions, anything could serve as money as long as it could fulfill this token role. The value of commodities could forthwith be expressed in units written down on paper or embedded in the dancing electrons on a computer terminal. As long as the State legally determined that these tokens were money, they could serve the role as effectively as any commodity money like gold.

This idea, although floating around in society for several decades, did not actually become the dominant view of money until conditions very much like those I described in the preceding section of the post burst into full bloom in the Great Depression. Those conditions brought all the contradictions inherent in value to the surface in a rather awesome fashion: to address the impasse created by the fact that wages were too high, and, at the same time too low; that socially necessary labor time in its wage form stood in complete contradiction with socially necessary labor time in its profit form; and, that, therefore, the value of commodities stood in direct conflict with the prices of commodities; within a short period of about five years every industrial nation devalued its currency and went off the gold standard. The contradictions inherent in value led society to sever the relation between value and price — not just in theory as previously, but in reality and throughout the World Market.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part two)

April 10, 2011 3 comments

I made the following points in the first part of this series:

  1. As regards the definition of inflation: The definition of inflation found in the Wikipedia entry is deficient because it assumes that the value of money is simply the reciprocal of the prices of commodities. This argument is a tautology which provides us with no real understanding of the problem of inflation. We are led to believe that inflation can be thought of as a rise in the price of commodities or, alternately, the depreciation of the “real value” of money. And, what is the “real value” of money? According to the economist, the “real value” of money is its purchasing power, i.e., the reciprocal of the price of the commodity. I will show why this definition of the depreciation of money is inadequate.
  2. Prices versus consumption: The Wikipedia definition is superficial, i.e., it is limited to generally rising prices. This only looks at the problem from the least important aspect of inflation, the increase in prices of commodities. But, if the amount of money in circulation is fixed, as it is more or less for each member of society, we can see also that inflation implies the reduced consumption of the mass of society — the impoverishment of society.
  3. Consumption versus production: Moreover, the Wikipedia definition of inflation only examines the effects of rising prices on consumption. Once we go beyond money as mere means of purchase and consider it as the money form of capital, i.e., once we leave the world of consumption and enter the world of production, we find that these rising prices act to reduce the profitability of productive economic activity. The depreciation of money acts to reduce the average rate of profit. It can be thought of as a negative rate of profit resulting from the depreciating purchasing power of money-capital over time.
  4. Money and demand: The Wikipedia’s explanation of the causes of inflation is nothing more than a tautology. First, the two causes identified as the cause of inflation: 1. an excess of the rate of growth of the money supply over the general rate of expansion of economic activity; and 2. the imbalance between the rate of expansion of demand for commodities over the rate of growth of the supply of commodities, resolves themselves into one and the same cause: the excess in the money-demand for commodities over the production of these commodities to satisfy this money-demand, or, alternately, the decline in the production of commodities relative to the money-demand for those commodities. Second, whenever we find that the rate of growth of the supply of commodities falling behind the rate of growth of the money-demand for these commodities, we cannot be speaking of imaginary demand — such as the human need created by a hungry belly — but “real” money-demand — i.e., a hungry belly with a wallet full of cash. The capitalist is not in the business of producing for people who imagine they are hungry, homeless, and naked, but only those who can prove they are hungry, homeless, and naked, by presenting him with sufficient cash to purchase food, shelter and clothing. On the other hand, money-demand is not limited to satisfying hungry bellies — it is still money-demand even if the demand to be satisfied is that of generals, national security agencies, or failed banksters. The authors of the entry discuss the imbalance of money-demand over the supply of commodities to satisfy this demand as if this is the entire story.
  5. Inflation as a policy: Only in the fourth paragraph does the Wikipedia entry hint at the most important characteristic of inflation: that it is not a naturally occurring economic malady — the result of actual processes arising from the production, exchange and consumption of commodities, but is a matter of Fascist State policy. Thus, only here do we find that it is the deliberate policy of the Fascist State to reduce the consumption power of society, its productive capacity, and to ensure a general and secular, i.e, chronic, inadequate supply of means of consumption in relation to the money-demand for those means of consumption — that the economic policy of the Fascist State is to maintain society in a condition of a wholly artificial scarcity.

The Fascist State as a mode of Capital’s own existence

Before we continue further we have to deal with the unstated assumption of the Wikipedia entry that Fascist State policy can be treated apart from and independent of the capitalist process of production and distribution. This notion, which is the standard thinking on all economic issues, and permeates the thinking not only of economists, but also of social revolutionaries and society generally, divides society into Civil Society, on the one hand, and the State, on the other. The fallacy of this sort of thinking is revealed whenever we investigate the causes of social maladies like inflation. We begin with the notion that inflation, poverty, hunger and scarcity arise solely from Civil Society and natural conditions, only to discover, under the capitalist mode of production, that, in addition to the invisible hand of the market, there is also the iron fist of the Fascist State — that the very real material conditions determining the capitalist mode of production have their ideal expression in State action.

Our picture of Capital is incomplete if we naively consider it a purely economic relation. For his part, Marx understood Capital as a social relation that permeated society — penetrating, reconstructing, reconstituting and revolutionizing the sum total of those relations, and, by these means, transforming society in its own image. It is clear from Moishe Postone’s work, “Time, Labor and Social Domination“, that this process, in Marx’s mind, was far more insidious — pernicious, subtle — than is generally understood even by Marxists — who never miss the opportunity to reduce his ideas to caricature — and most certainly by the outright opponents of his ideas, for whom most of his argument passes overhead cleanly and without effect.

In Marx’s theory, the State is not simply, nor even primarily, a sphere of politics; it is, itself, a mode of Capital’s own existence. In every stage of human development up to the present, the State has been inseparable from Civil Society, a mere part  of society’s greater division of labor in the social act of production. In capitalist society, however, the State appears indifferent to Civil Society — aloof from it — and, it is under these conditions that Civil Society begins to imagine its own independent existence apart from, and in conflict with, the State. Although Civil Society is no more than a collection of petty interests in continuous conflict with its own very real, flesh and blood, communal interest, because this communal interest is not the starting point of individual activity, this communal interest arises as an abstraction, in the conception of a General Interest — e.g., the so-called “National Interest” — standing over against the individual’s very real material flesh and blood interest. This abstraction finds its ideal expression in the form of a State that is aloof and indifferent to the many and varied individual interests of society, and, only represents them in the abstract.

In Marx’s theory, I believe (and I stand to be corrected if I am wrong), this conflict between Civil Society and the State arises from the mutual conflict of all of these petty interests with each other that arises from their increasingly universal and all-sided competition, and because their innumerable separate activities are not subjected to their common control and direction. To really represent the General Interest of society, the State must be increasingly indifferent to the many petty interests that constitute Civil Society; yet, at the same time, it must be continually reconstituted by Civil Society in proportion as ever newer petty interests emerge.

Hence, the bewilderment of the progressive activist, who finds, despite all of her fulminating and effort to overturn a political regime that favors the “Rich”, the greater her effort, the more surely politics is subjugated to the interests of the very biggest owners of Property. Hence, also, the Tea Party activist, who rebels against the increasing encroachment of the State on her “constitutional liberties”, that the more forcefully she attempts to throw off this oppressive interference in her private commercial activities, the more completely the State dominates them. Hence, finally, the bizarre counsel of the economist, who, trying to solve the riddle of stagnating economic growth in capitalist society, recommends precisely the policy that only deepens this stagnation and destroys the productive capacity of society: Inflation.

Fascist State policy and Civil Society

The problem posed for us by Marx’s theory of social revolution is not why the Fascist State embarks on a policy that maintains society in a wholly artificial condition of scarcity. We can consider and discard any number of competing theories regarding the motives of the Fascist State: that is seeks power for its own sake; or, that it represents the interests of the very wealthiest members of society against the rest of society; or, that it is a body of individuals committed to a collectivist vision of society; or, that it is an instrument of a small group of men and women engaged in a far reaching conspiracy against society bound up with their financial interests, and/or their industrial interests, and/or their political, religious, ethnic, national, regional etc. interests. And, we can also advance any number of anecdotes and statistics to sustain any one or all of these arguments.

Yet, all of these arguments come down to one of two explanations: The Fascist State maintains society in a condition of scarcity for its own purpose, or, for the purposes of individual interests arising from the ongoing conflicts within Civil Society that proceed from whatever source among the innumerable divisions within Civil Society. Thus, even if we accept all of these competing motives as partial explanations for the policies of the Fascist state, all that these competing explanations can tell us is that both for its own interest and the interests of the whole of Civil Society, the Fascist State is engaged in the systematic destruction of the productive capacity of society, and an ongoing degradation of its consumption power — that, for any the reasons advanced (yet, at the same time, for all of them together) the Fascist State is deliberately and systematically trying to maintain a general condition of scarcity for mankind. From this point of view, all of the reasons for the policies of the Fascist State are merely accidental and transitory, as first one and then another reason for these policies come to the fore, and assumes in our mind the position of THE general explanation for Fascist State policies, beside which all the other explanations are merely specific expressions.

Thus, in one instance, the Tea Party activist can assert that the economic policies of the Fascist State result from the collectivist impulse of the Obama administration, while the progressive activist counters that these same policies result from the subjugation of the Fascist State to the interests of the rich; still another faction of society asserts that these very same policies result from the Fascist State’s aggressive foreign policy, while a fourth blames these policies for an alleged loss of national sovereignty and the conspiracy of men and women committed to a New World Order. What none of these competing theories can explain is why any of these alleged causes must lead to the systematic destruction of the productive capacity of society, and the ongoing degradation of its consumption power. All of these explanations cannot tell why, as the productivity of labor increases, the actual productive capacity of society must fall, and society remain trapped in conditions of scarcity.

We are thus forced to assume what Marx’s theory assumes:

First, under the capitalist mode of production the productivity of labor advances under conditions that tend toward what Marx called the absolute development of the productive forces of society — of the capacity to produce an entire world of commodities in a dazzling array and seemingly endless variety. This implies not an excess of money-demand, but its opposite: circumstances under which the production of commodities constantly run into the limited conditions of consumption, which threaten social production with a continuous crisis and wholesale ruin — not just a depression, but an unprecedented Great Depression erupting not in just one country, but throughout the whole of the World Market and at once — which brings society itself to the brink of catastrophe and threatens the very existence of Civil Society itself. And, under which, as a result of this crisis and the Hobbesian environment of universal competition it provokes, the actual flesh and blood material relations of Civil Society escape its control completely and take the form of the Fascist State — absolutely indifferent to it, absolutely hostile to it, and standing over against it as a totalitarian power existing for, and answerable to, no other mandate than its own logic.

Second, insofar as the productive capacity of society advances toward its absolute development, and, therefore, insofar as the onrush of a catastrophic collapse of existing society itself looms on the horizon, and Civil Society experiences this onrush with the level of horror appropriate to it — since it implies, above all, the abolition of all of the existing conditions that are its own premise, and, thus, sounds the death knell for Civil Society itself , and for the State  — the  State detaches itself completely from Civil Society, and, in turn, seeks to destroy the very productive forces that threaten the whole of existing society.

To be continued

Inflation, the negative rate of profit, and the Fascist State

April 8, 2011 2 comments

With the clock counting down to an alleged shutdown of federal government operations, I thought I’d take this moment to discuss and inflation and Fascist State economic policy.

This is what Wikipedia has to say about inflation:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation’s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

In the first paragraph, inflation is defined as a general rise in the price level of an economy over a period of time. The authors of the entry also state that this general rise in the price level can be thought of as the depreciation in the purchasing power of money — a decline in the “real value” of money. By “real value” the authors of the entry do not mean the classical notion of value — a measure of the socially necessary labor time contained in a certain quantity of dollars — but the ratio by which these dollars can be exchange for a commodity in the market, the reciprocal of which is the price of the commodity. The term “real value” is here only another way of saying the price of the good. Thus, as the price of the good increases, the “real value” of the money declines. It is a tautological statement, and therefore, meaningless.

By the same token, we could say that Bob is taller than Jane, because Jane is shorter than Bob. Nothing of the meanings of “taller” or “shorter” is revealed in the statement. Do these terms describe their respective heights, or weights, or skin tones, or education levels, etc. For someone who enters our conversation from the outside — for instance, a Martian — the meaning of the terms “taller” and “shorter” would essentially be undefined until we explain the concept of height. Similarly, when the economist employs the terms “price” and “value” in a discussion with us (economic Martians) he does not in the least clarify for us what inflation is. We can only walk away with the idea that rising prices and an increase in the number of dollars needed to purchase a commodity are the same thing — a piece of information we already had at the outset of the discussion.

Inflation as a fall in the consumption power of society

There is, however, a more important problem with the definition given in the Wikipedia entry. The authors state that inflation is a general rise in the price level in the economy. They are satisfied with this statement and pursue it no further. We are led to consider inflation from the point of view of the prices of commodities, or, alternately, the purchasing power of the money in our pocket with which we buy these commodities. When the prices of these commodities increase, we must part with a greater sum of dollars from our pocket to exchange for them. But, if the cash in our pockets is finite, the rise in the prices of commodities translates into a fall in the quantity of commodities we can purchase. In this sense, at least, the increase in prices is the same as our impoverishment. A conclusion the authors of this entry are rather reluctant to express.

We can, therefore, make the following statement:

In economics, inflation is a fall in the general level of consumption in an economy over a period of time. When the general consumption level falls, each commodity costs a larger amount of dollars. Consequently, inflation also reflects an erosion in the material living standard of a country – a general decrease in the availability of commodities per unit of dollars. An increase in the price of a commodity is, at the same time, the decrease in the availability of that commodity per unit of money. If the total sum of money in the pockets of the members of society is unchanged, inflation would be reflected in fewer commodities available for purchase in return for this total sum. We can define inflation in terms of prices, or we can define inflation in terms of the actual quantity of commodities available to be consumed by society.

If, 100 loaves of bread are available to be purchased at $1.00 per loaf, an inflation rate of ten percent can be reflected in the quantity of loaves available for purchase falling from 100 to 90; or, it can be reflected in the prices of each loaf rising from $1.00 to $1.10.

So, the question immediately arises: “Why are the prices of commodities rising”, or, alternately, “Why is the quantity of commodities available to society falling.” In the third paragraph of the entry, the authors put forward two different theories:

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Here, the causes of inflation are divided into two: 1. High rates of inflation are said to be caused by excessive growth in the supply of money; and, 2. low rates of inflation are said to be caused either by increased demand for commodities relative to supply, or a decrease in the supply of commodities relative to demand. The division between these to causes is, of course, disingenuous. As Mish Shedlock has argued time and again, if we immediately doubled the amount of money in the bank accounts of every person in society, this mere doubling of their accounts would have no effect on prices unless their behavior changed: unless they took this additional money and actually pumped it into the economy by spending it. In this case, an increased supply of money is nothing more than a sudden increase in the demand for commodities due to a sudden increase in the amount of money everyone had to spend — an increase not in money, but in money-demand. As usual, the economist pretends to have an explanation for inflation that amounts to a tautology. Leaving aside the velocity of money, i.e., the frequency with which a dollar changes hands, there is no way to get an increase in demand unless there is also an increase in the amount of money available to express this demand. Prices do not increase because people suddenly desire more things, but because they have the means to buy those additional things.

But, at least the authors now admit inflation can also come about as a result of a contraction of the supply of commodities even if demand is unchanged. Rising prices can result either from a persistent increase in money-demand in excess of the supply of commodities, or, as we argued above, it can result from a fall in the availability of commodities even as money-demand for those commodities are unchanged — a fall in the real consumption power of society.

The real consumption power of society is only a function of the commodities available for it to consume and has nothing to do with the amount of money in the hands of individuals seeking to purchase those commodities. The amount of money individuals may have in their possession may double overnight, but unless this doubling is accompanied by a proportional doubling in the amounts of commodities available to be purchased, it has no effect on this real consumption power. Likewise, if the amount of commodities available for purchase by the members of society fall, and the amount of money in their possession is unchanged, the real consumption power of society will fall without any change in the amount of money in their wallets. Thus, the Federal Reserve Bank’s massive quantitative easing program and Washington’s equally massive federal fiscal deficits, despite creating trillions of dollars each year out of nothing, cannot increase the material consumption power of society, because this ex nihilo money creation does not in any way create more commodities..

While the demand for commodities in a capitalist economy can only be expressed in money-demand for those commodities, the supply of commodities to be purchased is determined only by production. Only production can increase the availability of commodities, and only this increase in commodities can increase the ability of society to consume. It is, therefore, impossible to understand inflation by referring only to the money-demand for the existing stock of commodities, we must also consider inflation and its effects on the actual production of these commodities.

Inflation or the Negative Rate of Profit

In relation to the price of a commodity inflation is expressed as a rise in the price of the commodity; in relation to the quantity of the commodity available to be purchased, inflation is expressed by fall in the quantity of commodities available to be purchased by a given sum of money-demand. But, how is this quantity of commodities determined? In a capitalist economy, production is determined by profit, and undertaken solely with the eye to realizing profit. However, profit is the rate of return on an investment of a given sum of capital. The capitalist lays out so many dollars of his capital in the form of labor power, and necessary materials of production, and he expects to realize this investment plus a certain rate of profit upon final sale of his commodities.

As we have shown in previous posts, if the capitalist advances $100 in labor power and the other necessities of production, and the average rate of profit is 10 percent. He expects to realize $110, or his original $100 plus a profit of $10. On the other hand, inflation during this same period reduces the purchasing power of his capital by ten percent, leaving the capitalist with little or no real return. He has advanced $100 with the expectation of realizing $110, but he has, in fact, only realized $100 of actual purchasing power. His capital, having nominally increased from $100 to $110, has actually remained unchanged in its purchasing power of $100 — despite his nominal success as a capitalist, he has realized no real profit on his investment. While the average rate of profit is nominally 10%, once we subtract the rate of inflation the real rate of profit is 0%.

While the consumer experiences inflation as a loss in purchasing power of her money, from the standpoint of the capitalist, inflation is a negative rate of profit. Since, he is an intelligent person who is not interested in beating his head against the wall of the Federal Reserve, and knows the Feds action will drive up the prices of commodities generally, our capitalist removes his capital from productive employment and uses it to speculate in the oil futures market. Thus, the productive capacity of society is reduced in proportion as inflation rages within the economy, and this loss of productive capacity reduces also the consumption power of society. Side by side with the increase in the prices of commodities, the availability of commodities shrinks; side by side with the falling productive capacity of society, the consumption power of society falls.

At this point you are scratching your head, because you notice in the fourth paragraph of the Wikipedia entry the following:

Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Could this be right? If, inflation, a general rise in the prices of commodities, expresses both the reduced capacity of society to produce and a reduction of its power to consume, why would economists advocate for “a low, steady rate of inflation”? Why would they advocate for policies that drives productive capital into the arms of speculators? Why would they advocate for policies that deliberately impoverish the mass of society?

These questions are, of course, deliberately misleading. For quite mischievous reasons, I am asking you to consider the issue from the standpoint of the economist, who, more than any other single profession in society, is constantly examining the problems of society through some completely bizarre lens that turns the whole of the world upside down. While we have seen thus far that the amount of money in the hands of society has absolutely no impact on its consumption power, and that this consumption power is solely a function of its productive capacity — its capacity to produce commodities for the satisfaction of human need, the economist, who sees the problem entirely from the perspective of money, tries to explain the consumption power of society with reference to a change in the given supply of money. While money has no role in the productive and consumption capacity of society, and only serves as a means of exchange — a necessary bridge between the act of production and the act of consumption — this bridge is turned by the economist into the entire explanation for both the progressive collapse of production and the progressive collapse of consumption.

The collapse of production and consumption — the growing impoverishment of society as a whole  — becomes, through the eyes of the economist, a problem of price inflation.

To be continued

Bakunin’s Anarchism, Marxists Dogmas and Marx

April 6, 2011 Leave a comment

K. Marx (L) and M. Bakunin

 

I set out to write a piece on Murray Rothbard and communism. Instead, I got bogged down by this detour into Marx’s theoretical differences with Anarchism. The day progressed, Marx and Bakunin would not stop their bickering and let me leave.

Alas, Murray will have to wait for another day.

***

There is an interesting response given by Karl Marx to a denunciation of his views by Mikhail Bakunin in notes on quotations Marx pulled from Bakunin’s book, Statism and Anarchy.

Bakunin writes:

They say that their only concern and aim is to educate and uplift the people (saloon-bar politicians!) both economically and politically, to such a level that all government will be quite useless and the state will lose all political character, i.e. character of domination, and will change by itself into a free organization of economic interests and communes. An obvious contradiction. If their state will really be popular, why not destroy it, and if its destruction is necessary for the real liberation of the people, why do they venture to call it popular?

Marx replies to this:

Aside from the harping of Liebknecht’s Volksstaat, which is nonsense, counter to the Communist Manifesto etc., it only means that, as the proletariat still acts, during the period of struggle for the overthrow of the old society, on the basis of that old society, and hence also still moves within political forms which more or less belong to it, it has not yet, during this period of struggle, attained its final constitution, and employs means for its liberation which after this liberation fall aside. Mr Bakunin concludes from this that it is better to do nothing at all… just wait for the day of general liquidation — the last judgement.

The answer Marx gives to Bakunin is extremely telling not simply in relation to Anarchist ideology, but — more important for our times — in relation to the present day Marxists.

In Bakunin’s understanding Marx was making the argument that some definite period of time after the overthrow of the political rule of the capitalist class, the working class would not immediately abolish its own coercive political rule, but would embark on some period of a transitional ‘worker’s state’ (a term Marx accepted in another context, but did not endorse). In Marx’s model, says Bakunin, during this period the worker’s state would “uplift the people … both economically and politically…” to some certain level of social development where the worker’s state, and its coercive functions, would become obsolete.

Bakunin proposes that a contradiction lay at the heart of Marx’s position: If the worker’s state is truly popular — that is, if it truly enforces certain rules that are commonly and overwhelmingly supported — why can’t this coercive power be done away with entirely? And, if its coercive power must be done away with for the society to enjoy real unfettered association, why is Marx calling it a popular power?

Marx corrects Bakunin to clarify that his position is expressed in the Communist Manifesto and not in the words Bakunin employs to describe them. He then continues to explain the basis of the ideas in the Manifesto: First, upon coming to power the Proletariat takes political control of society under definite economic conditions, and not on the basis of some idealist notions independent of those economic conditions. Since, in Marx’s theory, the State arises from the material conditions of society and does not exist independent of those conditions, it is not possible for coercion to just disappear until the conditions giving rise to it disappears as well. Try as society may like to abolish the functions of state power on the morning of the new order, still the actual economic conditions on which this new order rests have their reciprocal influence on society. Bakunin’s argument that in no case should the Proletariat establish its political rule amounted to a demand that it not take power until it could immediately abolish itself, its condition of existence up until that time, and all other classes in society, i.e, until Capital having completed its historic role of developing the productive forces of society and run its course, collapsed on its own.

Second, Marx’s meaning in this context is not always properly understood — and, this is where Marxists get themselves into hot water. State power is always coercive — it is the imposition on the individual of conditions of her own activity against which the individual naturally rebels. The coercive functions of the ‘worker’s state’ are no different in this regard to the coercive functions of any previously existing state. It may be uncomfortable for us to assert this fact, but it in no way can be ignored — for the individual the coercion of a ‘worker’s state’ is, in its effect, no different than the coercion of the capitalist state. With regards to the individual this rule is despotic, and the fact that, in this case, the despotic hand is encased in a democratic glove does not change its despotic nature in the least.

However, the discussion of this despotic rule is wrongly limited to the actual machinery of state, as if the coercion of capitalist society consisted entirely of an armed body of men and women enforcing the naked rule of the capitalist class. In fact, coercion here has to be seen in a broader context: it is also coercion that the worker, deprived of all means of production, must sell herself into slavery in exchange for wages. It is also coercion that no one may access the means of consumption in society except on the basis of exchange of equal values — of money exchange. It is also coercion that the worker cannot sell her labor for wages except on condition that she work a period of time in excess of the value of these wages for the exclusive benefit of the capitalist. Each of these examples is a form of coercion prevalent in capitalist society. And, each is understood by all members of society to be the conditions under which the whole of capitalist economic activity is carried on. So pervasive are they, that these forms of coercion appear to us not a forms of coercion at all but a basic and eternal condition of human existence. Moreover, in many cases these forms of coercion appear altogether accidental — for instance, it is possible to strike it rich in the lottery, write a best seller, or start a successful rock band and be able to avoid having to spend your days in a cubicle sending or answering email or working the checkout counter at WalMart.

The communist movement of society has the aim not simply of abolishing the machinery of state — the body of men and women who arrest you if you violate the law of equal exchange of value by pilfering in WalMart, the judge who presides over your trial, the district attorney who prosecutes you, the jailor to whose care you are remanded after conviction, and the politicians who passed the law into being — it also has the task of ending exchange of values and all other forms of economic coercion as the basis for the individual’s activity.

In the conditions under which Marx carried on his debate with the ideas of the Anarchist Bakunin, it is clear that society had in no way been prepared for the immediate abolition of the State in its entirety. Capital had not by any means so transformed the social economic landscape that Marx could imagine it prepared for not only the abolition of the political rule of the capitalist class, but all class rule and classes themselves. The economic development of society had definitely not reached the stage that the Proletariat could abolish itself as a class.

And, why is this? In my opinion, every scenario Marx could see of a possible assumption of power by the Proletariat, society was still in the grip of scarcity. Although, as he acknowledged, Capital had performed a prodigious feat of transforming the conditions under which labor was undertaken by society, society had not yet made the abolition of necessary labor possible. Taking power under those conditions would, of necessity, involved realizing a communism of relative poverty — the sharing of the conditions of scarcity under a more or less ‘equal’ apportioning.

And, what did Marx think was the rule under which this scarcity would be shared out? “From each according to his labor, to each according to his work.” Access to the common fund of consumption had to be on the basis of the labor of each member of society. Each would receive from this common fund no more than she contributed to this fund. Even if we assume the immediate abolition of the entire machinery of the old State and its replacement by the association of society — and Marx made precisely this assumption — nevertheless society would be imposing on the former capitalist and State officials the same coercive conditions of activity that nature imposed on it:

“Do you want to eat? Get a job! If you won’t work because you are too dainty and work is beneath you, then you will starve!”

Thus, society would take a step forward in its historical development in that, for the first time, labor would be required of all members of society. But, this step was not the final one to be taken: the final step consisted of the abolition of this very requirement imposed equally on all members of society to engage in labor. The replacement of the rule: “From each according to his labor, to each according to his work”, by a new rule, “”From each according to his labor, to each according to his need”, required not simply the assumption of power by the Proletariat, but a certain definite material condition — the emergence of a society of abundance.

He did not hesitate to make his opinion known to the Anarchists on this issue, and he did not hesitate to make it known to his so-called followers as well, when, as happened in the Gotha Program, they came up with all sorts of silly ideas. Marx’s response the Gotha was pretty blunt: Upon taking power the Proletariat would break the monopoly of the capitalist class over the means of production. Workers would not receive the entire proceeds of their labor, but only a portion; the rest of which would go to cover replacement of the common means of production, expansion of those means, and insurance against losses. From the remaining fund would be deducted general social costs of administration, means for common satisfaction of needs like medical care and education, and means for those who are not able to work. What portion of the common labor would be needed for these items could only be decided democratically by the whole commons — and, in all probability those who lost the vote would feel coerced by the majority, since these costs would still be deducted from them despite their disagreement. What was left after this had been accomplished would then be divided according to their contribution.

Marx continues:

What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges. Accordingly, the individual producer receives back from society — after the deductions have been made — exactly what he gives to it. What he has given to it is his individual quantum of labor. For example, the social working day consists of the sum of the individual hours of work; the individual labor time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labor (after deducting his labor for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labor cost. The same amount of labor which he has given to society in one form, he receives back in another.

Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values. Content and form are changed, because under the altered circumstances no one can give anything except his labor, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption. But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labor in one form is exchanged for an equal amount of labor in another form.

At this point, however, Marx is not finished: he goes on to explain why even this seeming logical and just division of the product of labor among the members of society actually conceals an unequal distribution, because although the return for work is the same, people are not. Although this inequality in fact is abhorrent — an indifference to the particular circumstance of each individual — there is, in his mind, no other basis that such division can be made. Thus, for Marx, the end aim of the transition is not an equal return on the labor contribution of each, but ending all connection between the labor each member of society contributes and the means they can access. The rule that everyone must work is itself abolished — or withers away.

And, this is where Marxists get into hot water — they impose on Marx’s comments the completely unhistorical dogma that the communist movement of society is necessarily split between the period beginning with the political overthrow of the capitalist State and the period during which the transitional form of Proletarian rule comes to an end. They are only parroting Marx in his argument with Bakunin, while understanding none of his argument.

At the beginning of this period of social transformation the political rule of the Proletariat is “stamped” with the conditions of the capitalist society that has just been overthrown. It follows from this that Marx is not making an unhistorical division between this point in time and the point where the Proletarian rule ends, but is precisely emphasizing that the actual conditions governing capitalist society, when this event takes place, must be studied and understood. It follows that his comment cannot be taken as a hard and fast rule, still less elevated into a dogma as the Marxists do, that there is some necessary period of transitional state between the overthrow of capitalist rule and a stateless, classless society. Capitalist society is by no means the same creature in 1874 that it is in 1917, 1929, or 2011. In each case the practical tasks imposed by the assumption of political power by the Proletariat must be different as the new society is being “stamped” with a decidedly different set of circumstances.

What are those conditions today? Are they the same as they were in 1874 or 1875? Are they even the same as they were in 1929 or 1970? Does Marx’s words have the same meaning in his day as they do now that Fascist State expansion — the continuous destruction of surplus value and its replacement by ex nihilo pecuniam — has become a condition for all economic activity?

Marxists have no answer to these questions because instead of making an analysis of present day conditions of capitalist society, they insist on taking Marx’s debate with Anarchists completely out of its historical context and worshiping dogmas.