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

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