Home > political-economy > Fiat currency: “No more money than a theatre ticket is”

Fiat currency: “No more money than a theatre ticket is”

I am adding additional comments to my reading of Weeks’ paper, “The theoretical and empirical credibility of commodity money” (PDF). In my first reading, I identified a problem with Weeks’ presentation of what he asserts is empirical evidence supporting a link between commodity-money and price. In my second reading I explained how Weeks’ real contribution to my understanding is his analysis of the neoclassical theory of money. In this reading, I am trying, based on Weeks’ argument to define exactly what the dollar and other fiat currencies are; and their relation both to commodity money and the circulation of commodities.

The problem posed by most Marxist attempts to analyze fiat currency is that state issued fiat is treated as if it is money when it is not; and prices denominated in a fiat currency are treated as if these prices express the value of commodities, which they do not. For years now Marxists have been asking if money can be a valueless piece of paper in Marx’s theory — the answer is no. This answer is unpalatable to many Marxists because they think it suggests Marx’s theory of money is invalid for purposes of analysis. My assumption in this post is that Marx’s theory is and remains valid AND this valueless currency is not money.

So if the dollar is not money, what is it? Why is it used for transactions? To answer these questions, we have to begin by understanding exactly how the currency works according to neoclassical theory.

The assumptions of the neoclassical theory of money

According to Weeks, the approach of the neoclassical money framework makes two important assumptions: first, it assumes an economy with a single composite product; second, it assumes the quantity of state issued fiat in circulation is determined by state monetary policy. Based on these assumptions, I argue neoclassical money theory assumes there is no commodity production taking place within “the economy” and, therefore, no need for a commodity to serve as money. The total social product of “the economy” can be conceived as a single product and the quantity of state issued fiat in circulation can be determined by the fascist state.

Whether neoclassical money theory is correct about this is not the point; these are the assumptions that forms the basis of the theory. While in Marx’s theory there is commodity production and, therefore, a commodity money regulating the labor of a community of commodity producers; in neoclassical theory there is only one social act of production and this act is not forcibly regulated by commodity money relations.

This understanding is important for reasons beyond simply understanding the neoclassical theory of money. It is also important to understand because the assumptions of neoclassical theory are not just a theoretical description of a capitalist economy, they are also the theoretical framework the fascist state employs to manage “the economy” through its fiscal and monetary policies. Based on the argument of neoclassical money theory, we can assume the fascist state is trying to manage “the economy” as if there is no commodity production taking place within it, and, therefore, there is no need for a commodity money to regulate the total social act of production.

Since, in reality, the capitalist mode of production is a system of commodity production, the fascist state is bound to experience catastrophes — it is trying to manage a complex system of commodity production as if commodity production doesn’t exist, i.e., as if the total social capital of a nation were a single capital. But, now we can put these catastrophes in their proper context: they are no different than the catastrophes experienced by normal capitals. Within a single capital all production proceeds according to a single plan in which this plan replaces what previously were a series of individual acts of commodity production and exchange. This does not imply catastrophes are abolished. In fact, it means these catastrophes increase in scale and severity side by side with the increasing scale of capitalist production. However, although crises increase in both scale and severity this does not change the fact the fascist state is trying to manage “the economy” as a single capital. If anything, these crises imply ever more frantic efforts by the fascist state to bring the whole of economic activity under its control

Even if we assume at the outset commodity production continues to exist for some time, the abolition of commodity-money within the territory of the fascist state is a step along the path toward abolition of this commodity production. In this sense, the abolition of commodity-money is an economic advance in that it figures as a step along the path of complete abolition of commodity production.

Fiat money as an instrument of control

Weeks provides this equation:

PY = vM*,

where P is price, Y is the single composite product of labor, v is a given constant velocity, and M* is the money supply set by the state. He 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 a footnote on page 6 of his paper, Weeks provides two reasons the neoclassical theory of money assumes all production results in a single composite product:

By making this assumption one can avoid two types of complications. The more immediately important is that associated with establishing the neutrality of money; i.e., that at full utilization of resources the relationship between changes in the quantity of the means of circulation and changes each commodity price is strictly proportional (Weeks 1989, Chapter 8). Of more profound methodological significance is that assuming one commodity eliminates means of production, so that the total price of the only commodity is P = [wages] + [profit].

These two reasons are, I think, revealing, of the aim of the theory. The first reason, Weeks says, ensures that changes in the quantity of fiat in circulation and changes in commodity prices remain proportional. This, I believe, implies neoclassical theory seeks to bring the general price level under the direct control of the state itself. The second of the two reasons for assuming a single commodity — to limit price to wages and profit — implies neoclassical theory is only concerned about newly expended living labor, which is the source of value and surplus value. Taken together, this suggests neoclassical theory is designed to control prices in order to establish control over the expenditure of living labor by society.

What is clear from the above is that the fascist state is trying to prevent the operation of the law of value from determining social labor time, and replace it by state economic policy. Thus it is not true or accurate in the least to argue  neoclassical theorists disagree with commodity-money theory. In fact, neoclassical theorists completely understand commodity money theory, they just don’t want socially necessary labor time to determine the quantity of means of exchange in circulation. Instead the fascist state wants the quantity of state issued token to determine labor time required by society.

This is not ignorance or stupidity on their part, it is their avowed intention. The reason why commodity-money theory is stubbornly rejected by mainstream economics is not because the mainstream thinks it is wrong or inferior but because commodity money theory is right. Commodity money cannot be controlled by the state, and this inability to control money prevents management of the economy by the fascist state. Essentially, neoclassical theory says this:

“Yes, money must be a commodity, but we are trying to establish state control over the economy. We are trying to replace money, which we can’t control, with an administrative unit we can control in order to impose a fascist state plan. So you Marxists can fuck off with your commodity money theory”

It depends on your definition of money

According to neoclassical theory, there are two conditions necessary to accomplish what fascist state economic policy wants to accomplish: First, fascist state policy must be indifferent to the particularities of use value – like capital, it must be indifferent to the particular use values produced. This is given in the assumption of a single composite commodity economy. Neoclassical theory is not saying there is only one commodity in the economy but that fascist economic policy is indifferent to any given form of useful labor. It is, in other words, only concerned with the production of value. When neoclassical theory looks at material activity in society it, like capital itself, does not see particular useful labors, but only abstract homogenous labor — value producing labor. This abstract homogenous value-producing labor is expressed in the form of a composite commodity with no particular useful properties. In the equation PY = vM*, this is the single composite commodity designated by Y. It is a single, undifferentiated commodity that is the composite of all actual commodities. i.e., the total labor power of society.

Second, the state must also maintain control over the supply of money in circulation. This means it must control both v and M in the equation. In commodity money theory both v and M fluctuate according to the vagaries of exchange within the capital production process. Commodity money presents a particularly sticky problem — if the supply is increased beyond that requirements of exchange, v (velocity) slows. If the money supply drops below the requirements of exchange, v will increase to offset it. (This, I think, is standard Marx labor theory. Of course, I might be overlooking some nuance that causes me to stumble later on.) In simple circulation, the quantity of money in circulation is determined by exchange, and hoards play a role in regulating this quantity. Under commodity money regime, therefore, any attempt by the fascist state to change the quantity of money in circulation would be offset by a corresponding and opposite change in the velocity of money to maintain a state of equilibrium between the quantity of money in circulation and the values of commodities being exchanged.

As Marx put it, in circulation, commodity money, when employed as means of exchange, vouches for its own value. In a commodity money regime, the fascist state can control either v or M, but it cannot control both simultaneously. To put an end to this, commodity money must be removed from circulation, which is to say the fascist state sets M — understood as commodity money in this case — to zero in the equation. With M set to zero, the velocity of money, v, is irrelevant for purposes of neoclassical theory and fascist state economic policy. In this case any value for vM* equals zero. The velocity of money can be 1 or 1000, without changing that side of the equation.

If the velocity of money times the quantity of money equals zero, then the price designated as P in PY must also be zero. Which is to say, from the standpoint of Marx’s labor theory of value, commodity money prices have been abolished within exchange. Commodity money can now be replaced by anything designated by the fascist state as “money” as long as it is not a commodity money.

Under these circumstances, the introduction of a new gold standard to replace the existing fascist state fiat monetary regime would dismantle the fascist state’s control over production. This is why, at all costs, folks like Ron Paul and the gold bugs must be ridiculed and marginalized. As I said in my last post, the argument in neoclassical theory that anything can be money is actually an argument for designating as money anything but commodity money. This theoretical absurdity has to be maintained, yet must be subverted in practice: money must be, not anything, but whatever the fascist state says it is.

There is, however, a second condition that is less evident: Although fascist state fiat currency is an absurdity, this absurdity is necessary not only in relation to commodity money, but also in relation to the abolition of money itself — money relations must be defended as necessary even though they are now a fiction, because these relations embody a relationship personified in the national capital. As in the Soviet system, planning must never go so far as to replace money relations entirely with planning.

The price level can be derived from the neoclassical equation PY = vM*, as P = vM*/Y. From the standpoint of the labor theory of value this resolves to: 0 = 0/Y. Which is to say, from the standpoint of the law of value, neoclassical prices are meaningless in relation to socially necessary labor time — they are not prices for labor value theory. Another way to state this: prices no longer reflect the socially necessary labor time required to produce commodities. This means, even in aggregate, both neoclassical theorists and MELT theorists are wrong to assert prices reflect or express value. Fascist state prices are meaningless from the standpoint of value and the labor theory of value.

The only proper response by a labor theory of value theorist to fascist state money is the one Marx gave to Owen’s labor-money scheme: it “is no more ‘money’ than a theatre ticket is”.

Inflation as class warfare by monetary means

According to Weeks,

When [the fiat money supply] is fixed at M* by the monetary authority and v is constant, causality runs from money to price and quantity.

Which is to say, the fascist state can now change prices and output by changing the quantity of fiat in circulation. I think this may be improperly stated, since the fascist state, as we saw, is not concerned about prices and output, but the production of value, that is, by the duration of living labor. And, as the national capitalist, it is only concerned with value insofar as this value is surplus over wages. The increase in the supply of fiat, therefore, serves to increase the production of value — not necessarily an increase in output and prices. This implies an increase in the quantity of fiat in circulation is meant to serve to increase the duration of labor time of the working class.

Put simply, neoclassical theory tells us the fascist state is deliberately using inflation as a bludgeon to compel ever greater quantities of labor time from the working class.

Since living labor is the only source of value in the capitalist mode of production, any increase in value produced must result from an increase in the duration of labor. And, since the fascist state, acting in its role as the national capitalist, seeks only the increase in surplus value, the increase in the quantity of fiat in circulation must result only in the increase in that portion of labor time beyond the material subsistence requirements of the mass of workers. Inflation must, therefore, increase only that portion of the social labor day during which surplus value is produced. I think this rate of expansion of the quantity of fiat in circulation is what is meant by a non-accelerating inflation rate of unemployment. It is a rate of inflation below which the working class actually begins to agitate for higher wages. (This is made easier if the working class organizations have been destroyed, or co-opted into the fascist state structure.)

The exclusion of output from consideration of the aim of fascist state policy is given in Marx’s theory by the exclusion of the particular properties of the commodity from calculation of its value; and therefore the exclusion of particular labor from the notion of abstract labor. On this basis, I think, it is possible to exclude an increase in output from any consideration of an increase in the duration of the labor time of the working class. The increase in the duration of labor for the working class does not in the least imply an increase in the material standard of living enjoyed by society.

Postone already reached this conclusion in his book, “Time, Labor and Social Domination”, where he writes:

Leaving aside the question of exploitation, this means a gap emerges between the significances of wages considered in value terms and considered in terms of material wealth. Once the socially general productive capacity of concrete labor becomes greater than that of the sum of individual labors, a growing discrepancy arises between labor time inputs and material output. The system of wages considered from the standpoint of material wealth, becomes a form of socially general distribution and only appears to be remuneration for labor time expenditure. It no longer has a basis in the production of material wealth; its systemic retention is a function of the value dimension alone.

Later in the same book, Postone argues the implications of this process: the emergence within the capitalist mode of production of a new category of labor time, superfluous labor time:

Until this historical stage of capitalism, according to Marx’s analysis, socially necessary labor time in its two determinations defined and filled the time of the laboring masses, allowing nonlabor time for the few. With advanced industrial capitalist production, the productive potential developed becomes so enormous that a new historical category of “extra” time for the many emerges, allowing for a drastic reduction in both aspects of socially necessary labor time, and a transformation of the structure of labor and the relation of work to other aspects of social life. But this extra time emerges only as potential: as structured by the dialectic of transformation and reconstitution, it exists in the form of “superfluous” labor time. The term reflects the contradiction: as determined by the old relations of production it remains labor time; as judged in terms of the potential of the new forces of production it is, in its old determination, superfluous.

Postone’s argument can be demonstrated empirically. Measuring GDP in a commodity money indicates GDP denominated in a worthless fascist state fiat currency like the dollar no longer reflects the socially necessary labor time required for the production of commodities. I have shown that this has been expressed in a growing discrepancy between prices and the values of commodities since 1934, when the US ended the gold standard under Executive Order 6102. This is not an hypothesis but a fact visible in the empirical data, as can be seen in the chart below:

Figure: The growing divergence of GDP measured in fiat US dollars and in ounces of gold — 1929-2009


John Weeks’ paper presents a critic with a number of difficulties in understanding the logic of neoclassical money theory:

First, his purpose is to show a relation between what he calls “the money economy” and the underlying production base; second, he wants to show the insufficiency of the neoclassical theory of money to establish this relation in any coherent way with its theory of money prices; third, he then wants to show how a commodity theory of money can explain the present price level in a coherent fashion; finally he wants to demonstrate this coherence by examination of the empirical data on prices since World War II.

The problem with Weeks’ project can be seen in the first step of his argument: Weeks never demonstrates that fiat currencies are monies and, therefore, that this “money economy” has a money relationship with the underlying production base. He is, therefore, setting out to argue a position he has yet to prove: that there is a relation between “the money economy” and the production base that can be demonstrated through the movement of prices. This relation can only be established once he has established that state issued currency is money and behaves like money.

From this initial error, Weeks proceeds to his next error: he treats neoclassical theory as a mere theory and not a matter of fascist state economic policy; which is to say, whatever the defects of the theory, including its patent incoherence in articulating what this state issued currency is, this state issued currency is, in fact, being used as if it is “money” in the economy.

His third error is to argue commodity money theory can explain prices denominated in the state issued currency, when commodity money theory can only explain true (commodity) money prices — and he has yet to prove prices denominated in state issued currency are, in fact, money prices.

These three successive errors combine to skew his empirical research off into a dead end, in which he has nothing to say about the actual relation between this so-called “money economy” and the production base. There are two ways to approach state issued fiat currency: either it is money, and conforms to the behavior of commodity money, or it is not money and conforms to the behavior of worthless tokens that embodies no socially necessary labor time. With a clearly established tendency toward depreciation over time, fiat currency does not exhibit the behavior of a commodity money, nor a token of commodity established by a definite and fixed relation with a commodity money.

The argument fiat currency is money is an argument that fiat currency is like gold, i.e., it can vouch for its own value, it functions as money in the full sense of that term, not when it is circulating, but when it is sitting in a vault — simply stated it is an argument that this fiat is a produced commodity. Failing this test, the conclusion must be that this worthless token, which no longer has any fixed relation to a money commodity, has no relation  to the circulation of values within the mode of production.

Weeks assumes what must be proven: that this currency counts as money just as if it were commodity money itself or pegged to commodity money. All of his successive errors result from this initial one: he has no idea what it is he is investigating. As a result it never occurs to him that this currency is not to be treated the same as commodity money within a commodity money theory. It never occurs to Weeks that neoclassical money theory accurately describes the behavior of this currency precisely because it is not money.

This does not imply commodity money theory is wrong, it simply means the crap issued by the fascist state isn’t commodity money. Nor is it a token of commodity money in any practical sense of the term — that is, it is not fixed in relation to a commodity money. Since a commodity money expresses in money form the real relations established within commodity production and exchange, a valueless currency having no definite relation to a money commodity has no definite relation to commodity production and exchange. It cannot express those relations, since it is merely the creature of the fascist state that issued it.

Investigating the laws of this state issued fiction requires us to leave the realm of commodity money theory itself, and analyze this valueless currency as what it is: an expression of the economic policy of the fascist state. However, the fascist state is simply a bourgeois state that has been compelled by the development of the capitalist mode of production itself to assume a new function: the management of the total social capital of a nation — to assume the role of the national capitalist. This fascist state, therefore, falls within the laws discovered by Marx concerning the operation of the capitalist mode of production generally, and should present no problem of analysis within his theory.

State issued worthless fiat currency is not money nor a token of money, but an instrument whereby the fascist state manages the total social capital within the limits of its control. This management is the imposition of a single despotic capitalist will on the total social capital within that limit, wherein this total social capital is treated as a single act of production by a single social labor power for the purpose of extracting surplus value. Properly understood, neoclassical money theory is not a competing theory of money, but a theory of management of the total social capital of a nation by the national capitalist. Once this is understood, the analysis of state issued token should pose no greater difficulty than the socialization of capitalist management at the turn of the 20th Century.

In this post, I assume the dollar and other fiat currencies behave the way they do, not because they conform to behavior one would expect of a commodity money, but because they do not meet this expectation. An example of this failure to conform to the standards of a commodity money is the tendency of fiat currencies to depreciate against commodity monies over time. Since they are not commodity money, their behavior cannot be explained by any commodity-money theory — they can only be excluded as money in commodity money theory. Moreover, the phrase employed in Weeks’ paper, “the general price level”, cannot be explained by reference to the socially necessary labor time required for the production of commodities since the fiat currency price of a commodity does not reflect its socially necessary labor time of production. I have shown the behavior of fiat currencies are not accidental, they are embedded in neoclassical theory itself. Simply stated, fiat currency is not money; rather, it is an instrument wielded by the fascist state to compel increasing quantities of uncompensated labor from the mass of the working class.

  1. Brian Gallagher
    June 10, 2012 at 6:30 pm

    Great post. I’ll have to read it over once again. However, since there has been (was?) a lot of energy on the part of the Ron Pauliacs in the last decade, I think it’s important to further elaborate on why it’s imperative to deride goldbugs. Impressed by his singular anti-war status years ago, I was briefly a Pauliac and even flirted with his other positions.
    With that in mind, it may seem strange to you to hear me say, “I am a communist,” since Ron Paul’s Bircherism is the farthest thing from communism. However, I realized recently that the capitalist is aiming at the same thing as the communist: the abolition of capitalist labor. Work ethic? They want to eliminate workers! If communism is an antiquated term, then just put me down as desiring emancipation.
    Aside: All these charts are exhausting. I’m more a Hegel and Engels guy. But kudos on the hard work!

    • June 11, 2012 at 8:11 am

      Thank you very much.

      Yes. This is exactly the argument of the autonomists/workerist/post-workerist theory, if I understand it correctly: that capitalism is trying to emancipate itself from the worker.

  2. Mike
    June 15, 2012 at 11:42 am

    Great post. When I initially saw your other posts on gold, I wondered whether you had seen Weeks’ paper.

    Curious if you have read http://critiqueofcrisistheory.wordpress.com? The author is another marxist who thinks the role of gold is very important.

    • June 16, 2012 at 9:20 am

      This is my first contact with John Weeks work, so fat as I can see in my list of readings. He has a fantastic grasp of the neoclassical argument. Yes, I have followed Critique of Crisis Theory. I have in the past. I have not visited the site recently however.

  1. June 16, 2012 at 11:57 pm

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