Home > political-economy > Worthless money as a rational absurdity

Worthless money as a rational absurdity


For a while now, I have been trying to come to grips with the neoclassical theory of money, which states anything can serve as money and that money doesn’t have to be a commodity. The theory is patently theoretically absurd, contradictory and internally inconsistent as John weeks explains in the paper I discuss in my post. Despite these defects, however, neoclassical money theory not only maintains its dominance in economics, its alternative, commodity money theory, is ridiculed and marginalized even among Marxist theorists.

While reading the John Weeks paper, it began to dawn on me why this is true. I had been spending my effort trying to argue for the superiority of commodity money theory, when I should have been trying to understand the circumstances under which neoclassical money theory made sense. Weeks, in his paper, explains two assumptions which are necessary for neoclassical money theory: 1. the economy has to produce only one composite commodity; and 2. the state must be able to control the money supply.

Weeks thinks both of these conditions make neoclassical money theory wrong, but now I believe he is wrong on this. In the capitalist mode of production, the only true commodity is labor power — the single composite commodity required by neoclassical theory. Moreover, contrary to Weeks’ assertion, the state can control the money supply, if we a speaking of classical commodity money. It need only declare commodity money is not money and replace this money in circulation with its own token, i.e., impose an inconvertible currency in place of gold. This was done in the 1930s in the US and Europe. The state can control the money supply, if by “control” that term includes also setting that supply to zero.

The result was a bit of an epiphany for me, since Weeks is describing how Washington directly manages the US economy as a single giant corporation, despite the economy appearing superficially as numerous separate capitals.

The article was rushed and is in need of serious editing, but I welcome criticism and challenges to this idea.


I want to recommend everyone read John Weeks’ paper, “The theoretical and empirical credibility of commodity money“, because he presents a key to the analysis of neoclassical economic theory that unlocks its inner logic. I missed the juicy goodness of his argument in my first read because I have an aversion to mixing math with social criticism. However, in his math Weeks uncover why money is not a commodity-money in neoclassical theory, and why it cannot be a commodity-money.

Weeks tries to make sense of a troubling rejection by neoclassical economic theory to admit to the obvious internal consistency of Marx’s commodity-money theory:

Th[e] theoretical superiority of commodity-based monetary theory has had little practical impact because of a perceived empirical absurdity of the commodity money hypothesis.

I came to my understanding of fascist state issued fiat money based on one closely held idea that neoclassical economics is not irrational, capitalism is. Yes, capitalism is as irrational as it has been declared by Marxists to be, however no one but an idiot would buy into the neoclassical argument unless it made sense in the context of fascist state economic policy. Since capitalism itself is irrational, a rational person looks like an idiot when he buys into its propositions; on the other hand, accepting the irrationality of capitalist relations of production as the basis for formulating fascist state economic policy is rational.

Take, for instance, ex nihilo currency, which is as worthless as neoclassical economics says it is. Why would any economic theory prefer this worthless fiat currency, detached from any commodity money, to be money in its theoretical system when the object of exploitation is the accumulation of wealth. The answer, given in Marx’s theory is that, in the capitalist mode of production, the circulation of commodities, not commodity-money is wealth. Money is only money in the full sense of that term when it is laying around uselessly in a hoard of bullion of some other commodity-money form.

The fact that the neoclassical theory of money makes no sense on its face, or as Weeks says, “the quantity-based explanation is theoretically unsound even by neoclassical logic”, should have been a trigger for me to ask, “On the basis of what logic DOES it makes sense?” Weeks himself provides the answer in his paper, but I missed it because I ignored his math in my first read. If I had employed the dogged engineering thinking of tweep @KirsteninMT, Weeks’ answer would have hit me in the face like a sledgehammer. Weeks states:

Without success in [explaining the determination of the price level} an economic theory cannot move beyond a barter economy.

However, in neoclassical theory,

The analysis of prices and money within the neoclassical framework presents two difficulties from the outset. The first and simpler is whether the term “price level” refers to a system with one or more than one commodities.

When I re-read this again today, it floored me. An economy with only one commodity? Why it floored me can be seen in another statement he makes:

The standard approach in the neoclassical quantity-based monetary framework is to assume that the hypothetical economy has only one product, and that the quantity of the means of payment is determined ex machina by an entity usually identified as the ‘monetary authority’.

Okay, the quote itself might seems obscure, but you are familiar with this argument in another context: What is the one commodity unique to the capitalist mode of production? Labor power, of course, which simultaneously appears in individual form as the labor power of each workers, and collectively as the total labor force of society. Neoclassical economic theory, therefore, assumes the existence of only one commodity, labor power, and the total act of production is the production of this one commodity.

Another way to say this is an argument I make: the fascist state is the manager of the total social capital – a manager that turns the collective activity of the total social capital into a single act of production subjected to a single plan. In a single act of production, exchange does not exist — even if appear to be an exchange, this is only an illusion. This is already obvious when you examine the inner working of a single company, where a money of account is used to direct the act of production – and it is already obvious if you look at the history of 20th Century communism. For instance, in the Soviet Union, even though all production took place under a single plan, enterprises “bought” and “sold” their output. On the surface, exchange appeared to take place, but since this production was planned beforehand, it was not exchange at all. And the money used in the pseudo-exchanges — the Soviet Ruble — was not real money.

A fiction of money for the fiction of exchange

That is what neoclassical money theory is telling us about the US economy — exchange only appears superficially within the economy; if the act of production is under a single plan, what serves as money has no significance at all — as long as it isn’t commodity money. The apparent absurdity of fascist state ex nihilo currency is only an absurdity when we assume the total social capital of a nation operates as a collection of individual capitals — once it is understood that they are managed together under single fascist state plan, the absurdity dissipates.

Weeks states,

While the assumption of a single, composite commodity may seem absurd (which it is for most purposes), it is essential in the neoclassical monetary theory.

In this statement Weeks has it exactly backwards: the assumption of single commodity is not required to accommodate neoclassical monetary theory, neoclassical money theory is required to manage the act of production under a single fascist state plan. To effect the management of production under a single plan requires a money that is as worthless as the units of account employed to manage a single company. This remains true even though the object of this management, as in capital generally, is the production of surplus value.

Weeks observes, the act of production,

…requires a physical measure of output which exists only in the case of an economy with one product.

If that one product is labor power, and only if it is labor power, the absurdity of a one product economy is solved. The productive consumption of this single product, labor power, is then split between the commodities constituting the wages of the laborers, and commodities constituting the means of production.

Which is exactly how the situation stood in the Soviet Union. In the Soviet system of production, money could be worthless because the division of the total social working time was decided beforehand according to a plan — and this exactly how it is being done in the US and all fascist economies today. Weeks observes that within the neoclassical framework, causality runs from money to prices and not, as in Marx’s theory from prices to money. Because only one type of commodity is produced, and the velocity of money is assumed to be constant –an assumption that only makes sense if a non-commodity money is legally declared money — changes in the supply of money change prices. Weeks thinks the vulnerability of the neoclassical money theory is that

Not even in theory can there exist a monetary authority that determines the quantity of money.

He is, of course, dead wrong on this: the state can, in fact, legally set the money supply at zero — which is to say, it can determine legally that commodity money is not money in the economy, which is what it did in the 1930s. It doesn’t have to do anything more than this, since no one is going to walk into a store and pay for groceries with seashells or monopoly money. All the fascist state has to do is remove commodity money from circulation and replace it with a worthless fiat legally defined as money. This, of course, happened not only in the United States but all other fascist states as well during the 1930s.

The argument that anything can serves as money is, of course, nonsense — just try to buy a car with monopoly money. It was never really offered by neoclassical theorists for any reason except to provide an argument for why gold did not have to be money. Once the argument is accepted in the formulation of fascist state policy, state issued worthless token can be used in exchange — the argument was political, and not founded on the logic of commodity exchange. Once the new monetary system is in place, prices respond to the supply of money in circulation, rather than determining this supply.

Now this is the cool part, if you want to increase the rate of extraction of surplus value — and who wouldn’t — all you have to do is increase the money supply. Walras and Keynes pulled a fast one on us, and the scheme has remained in operation for eight decades now. These fuckers managed to figure out how to implement a planned economy right in the middle of capitalism. And they did it without most of us ever figuring out how completely Washington runs the economy.

Meanwhile, we are still protesting against Warren Buffett and the Koch Brothers. Ha!

It’s not television, it’s fascist state economic policy

The system is not perfect — it is subject to all manner of crises and economic dislocation arising from the mode of production itself, but these crises are now managed by the state, and by competition between state capitals within the world market.

This revelation occurred to me after I finally broke down and watched “Too Big To Fail” last night, the HBO propaganda piece based on the book written by Andrew Ross Sorkin.

Every communist should watch that movie? Not because it is good, but because it calls into question the entire fascist state. That, of course, wasn’t Ross’s intention in writing the book: he was trying to produce a dramatic account of how Washington saved the world. But he actually and unintentionally raised questions going to the heart of the American dream machine, the national illusion.

The climax of the movie is a scene where Treasury Secretary and former Goldman Sachs capo Henry Paulson lays $125 billion on the table and buys stakes in the largest banks in the United States, literally making them an offer they couldn’t refuse.

It is a scene straight out of the Godfather, when the younger Corleone buys out his junior partner in the Vegas casino.

According to Ross’s portrayal, every bank boss in the room is reluctant to sell — an unlikely scenario, since every banker in that room knew they faced imminent collapse — not one could survive if the frozen credit system remained locked up. Okay, fine — the picture of a room full of bankers reluctantly agreeing to accept the terms and conditions of a fascist state buyout makes for dramatic television, and Ross milks it for everything it is worth. If Ross wants us to think it was all Paulson’s idea to buy stakes, and not a collective decision to save their sorry asses, fine. Ross almost makes it seem as though the bankers fall in with the fascist state’s effort to save them was an act of patriotism. Ha!

But this is all beside the point, my real point about this dramatic scene was where did the money come from? Did Washington have 125 billion dollars in revenue just lying around unused in some vault in Treasury? Did Henry walk into some back room and explain to the clerk or teller or some other functionary, “Hey, I need checks for 125 billion, made out to these bankers.” Did they have to physically count out 125 billion dollars to make sure they had enough?

(Imagine that scene: “Ah, Jeez, Mr. Paulson. We only have $124,687,300,852.56 on hand — can we get you the rest next week when quarterly taxes come in?)

Can a Marxist academic who advocates the theory that ex nihilo currency is money explain how Hank Paulson got his hands on 125 billion?

In fact, the entire process was performed on a computer terminal — money never needed to change hands; it was nothing more than a series of key strokes entered into the accounts of the banks, crediting them with the cash. All the bankers had to do was acknowledge the terms of the deal by signing a piece of paper. Is there a Marxist academic out there who can reconcile this transaction with their understanding of Marx’s labor theory of value? I would like to know, for instance, how this event can be explained by Kliman’s or Moseley’s MELT theory.

One hundred twenty five billion dollars was literally produced at a computer terminal, requiring or embodying no increase in total social labor time of society. What is the labor time expressed by this newly minted $125 billion in state issued fictions? In circulation, how is this newly created 125 billion to be distinguished from all other “real” state issued fictions already in circulation? During the same period as the new money was created out of nothing at a computer terminal, there was no significant change in the total labor time of society — the creation of the new $125 billion did not add any new labor time to society to account for its existence.

I ask these questions because that $125 billion could have supported 2.5 million working class families for a year on an income of $50,000 per family. So, if I understand this properly, with a few keystrokes, Hank created enough “value” to support all the families living in Rhode Island, Montana, Delaware, South Dakota, North Dakota, Vermont, Alaska, Wyoming, and the District of Columbia — combined — with an income of $50,000 for a year!

Of course, all this “value” Henry created was fictitious, and can only be accounted for by the depreciation of the existing mass of currency already in circulation. Of this, MELT says not a word. It never comments on the fact that Washington has the capacity to depreciate currency simply by entering keystrokes at a computer terminal. So one minute the a wage income has the purchasing power equal to so many units of gold, the next minute this purchasing power can be cut in half at a computer terminal. The real wages of the working class families have been expropriated without any change in the worthless dollars composing their nominal wages. And, all of this occurred at a computer terminal with a few keystrokes.

Another way to state this: Essentially, Henry Paulson garnished one percent of the income of all other income earners in the United States, and gave it to the banks.

Is this a problem? Not if you follow the Marxist MELT theory. MELT says there is nothing theoretically significant about Henry Paulson sitting in a room with the ten largest banks in American and transferring 1% of all income to them in return for their signature. But this is what happened in that meeting, in that room, on that day, according to Andrew Ross Sorkin. Henry Paulson could not create the value necessary to repair the balance sheet of the banks, he could only garnish the pool of existing value. When a previous Henry, Henry VIII, wanted to lavish value on his court he had to go out and actually expropriate this value from his other subjects; but Henry the Paulson, need only enter keystrokes at a computer terminal to accomplish the same thing without anyone realizing it happened.

Most of all he could do it without it entering the notice of the Marxist academy — the folks we rely on to tell us when shit is not right!

The manufacture of poverty as the point of Fascist State economic policy

According to MELT, events in that room had no affect on the total value represented by the pool of currency serving as money in circulation; and, insofar as we are speaking of the total value, this is not only true, it is emphatically true. As Andrew Kliman insisted to me, value is created at the point of production, not in exchange — this new currency was not “produced value”. Its creation, therefore, had no impact on the total sum of value in existence prior to its creation. All continued as before, except the distribution of this total value was altered by the creation of $125 billion in new currency out of nothing. After its creation, this amounted to a new distribution of the total sum of value in existence by an amount proportional to the newly created currency. A shift, mind you, to the tune of the combined annual wage of 2.5 million working class families living in nine US states, each earning $50,000 a year.

But that was only the $125 billion handed to the banks outright — Henry actually asked Congress to allow him to create $700 billion in new currency out of nothing an amount of instantaneous new currency creation equal to the wages of 14 million working class families. There are no states in the Union with a population greater than 13 million households total — including California. The total TARP package was larger than what it would take support the wage income of working families of 23 US states combined to the tune of $50,000 each.

This, of course, assumes that each working class family has an income of $50,000 per year, which is not true in most states.

I want to be clear on this: I am not a fucking progressive who bemoans the fact the rich are getting richer, at the expense of the majority. How long has that been going on — Mesopotamia, perhaps? The rich getting richer is actually a precondition for communism — and I am a communist. My sole purpose in looking at what happened in that meeting, in that room, on that day is the means by which this redistribution of wealth was accomplished — the instantaneous creation of valueless state issued fictions at a federal computer terminal.

Many folks in the Occupy are already aware of the redistribution of wealth taking place in the country and globally; communist don’t have to demonstrate this obvious and almost trivial fact to anyone with any common sense. What communists can do, however, is explain the means by which this redistribution is taking place — but first they themselves need to understand the fucking MELT is a stupid fucking theory that only hides the means by which this redistribution is taking place. And it hides the essential function the state as manager of the total social capital plays in this redistribution.

Marxists more than any other variant of communism don’t want to address the role of the fascist state as manager of the total social capital. To call the fascist state fascist is, for them, hyperbole — well, fuck you! The essential feature of fascism is the role of the state as manager of the total social capital of society. Libertarians and some anarchists call this corporatism, some progressives refer to it as crony capitalism, but Engels predicted what happened in that room in Treasury department this function 50 years before it became possible, based on his and Marx’s labor theory of value. Unlike a single anarchist or a single libertarian, he predicted the state would have to emerge with this new function. And this new function transforms the state itself, as well as the total capital of society.

The total social capital is managed according to single plan; and the state displaces the capitalist as the embodiment of capitalist relations of production. Yet we still have dumb fucking Marxist academics who want to pretend no change has taken place. In fact some of these idiots go further, asserting this new function was the attainment of some historic social compromise between wage labor and capital. The state’s expropriation of the individual capital appears to these Marxists as the state forcing compromise on the capitalist class.

My God! How fucking stupid can we be, folks! In TARP — ALONE — the equivalent of the wages of 14 million working class families was redistributed by state action. This doesn’t include Maiden Lane I and Maiden lane II, the GM bailout, the Obama stimulus package, Quantitative Easing versions 1 and 2 and lite, and the Quantitative Easing twist, nor the countless acts in the euro zone crisis, and it doesn’t include four years of Washington deficit spending provoked by the crisis — which spending was nothing more than the creation  of new currency along the same lines.

The point here is not the redistribution, which surprises no one, but the means, which could not happen without ex nihilo currency. And this ex nihilo currency passes complete control of the total social capital into the hands of the fascist state. What differs is that no new value is, in fact, created, but only the depreciation of the existing currency — of the wages of millions of working families across the nation — through state action to increase the extraction of surplus value.

This could not happen without fascist state acting as the national capitalist.

  1. Brian Gallagher
    June 5, 2012 at 5:52 pm

    Another nice post. Here’s what the Fed itself has to briefly say about it:

    Is the Federal Reserve printing money in order to buy Treasury securities?

    I believe that the answer given alludes to US global imperialism maintaining the $USD as the world’s reserve currency: Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty.

    Although Federal Reserve purchases of Treasury securities do not involve printing money, the increase in the Federal Reserve’s holdings of Treasury securities is matched by a corresponding increase in reserve balances held by the banking system.

    So they don’t create money ex nihilo is what I believe they’re saying.. they just grant permission to the bankers to do so? Do I have that right?

    • June 5, 2012 at 7:25 pm

      Yes! I believe this is exactly what they are saying. Thanks for the link!


  1. June 16, 2012 at 11:57 pm

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