Home > economics, political-economy > Inflation, the negative rate of profit, and the Fascist State

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

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

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  1. May 4, 2011 at 11:46 am

    “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… ”

    Are you not describing a particular brand of bourgois economist, the keynesian and monetarist? Paul Krugman woudl be an example. The neo-liberal neo-classical economists falsely consider the role of money to be only a means of exchange, whereas money for Marx has a crucial role in capitalist economics. As you write, the purpose of capitalist production is to increase the amount of money invested by the capitalist.

    The keynesian and also monetarist theories are in this respect advancements, because they admit that money is not “transparent” in capitalism.

    • May 4, 2011 at 5:14 pm

      No. I am describing all economists and the field of economics in its entirety. Arguments over monetary policy occur from every economics subcategory that I know of.

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