Introduction by Mike TreenMay 2, 2011 -- Links International Journal of Socialist Renewal -- Below is the latest entry from the Critique of Crisis Theory blog by Sam Williams [posted here with Williams' permission]. In it he analyses the current stage of the industrial cycle and asks, “Is the economic crisis over?”.
I hope that reading this post will encourage people to look more closely at the entire series on Critique of Crisis Theory, which has taken the form of a developing book on crisis theory.
The first chapter explains the biggest challenge the author faced — the fact that Marx did not leave a completed crisis theory. It was certainly the plan when Marx began Capital, but in the end only one volume was completed before his death and volumes two and three only took partial steps to a completed theory.
However, based on all of Marx’s writings, Williams believes the answer can be clarified. The solution he believes involves reaffirming Marx and Engels' views that periodic crises are the inevitable result of a clash between the powerful forces that drive capitalist expansion of production and the laws that govern the expansion of the market. In the words of Engels in Anti-Duhring:
The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real solution so long as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another "vicious circle".
Why this is the case is the subject of Critique of Crisis Theory.
To answer this question the Williams believes it is necessary to build on the most important economic discoveries of Marx in Capital, including Marx's perfected labour theory of value. In the process he critiques both the “underconsumptionist” and “tendency of the rate of profit to fall” schools for their one-sided approach to understanding crises. The first ignores the problems associated with the production of surplus value and the second the problems associated with its realisation.
At the same time both schools have tended to ignore the role of the money commodity gold as the universal equivalent. Sam Williams argues that the money commodity continues to be an integral part of the operation of the law of value in capitalist society with or without the gold standard for state-issued paper currencies, which in reality continue to represent gold in circulation. Taking into account this role is critical to understanding why capitalist crises of generalised overproduction periodically occur, according to Sam.
He takes up bourgeois critics of or alternatives to Marx including detailed critiques of Ricardo and the theory of “comparative advantage”, Say's Law, marginalism, the Austrian school and Keynes. He looks at the concrete history of capitalism and the question of “long waves” including whether there is a material basis to their existence.
After the main series was finished Williams took up questions and suggestions for discussion. I had my own “debate” over the question of productive and unproductive labour. And finally he discusses what the historical limits are to the continued existence of capitalism.
There is much to interest and challenge the reader.
Even if you don’t agree with everything that is written it does challenge and stimulate new ways at looking at the questions under debate — which are ultimately questions vital for the future of humanity.
[Mike Treen is national director of New Zealand's Unite Union.]
Is the economic crisis over?
By Sam Williams
May 1, 2011 -- Critique of Crisis Theory -- According to the media, the world capitalist economy has been in a recovery for almost two years. Yet there remains a widespread impression that the economic crisis that began in 2007 is far from over. True, the rate of profit has risen sharply since 2009, and the mass of profits is at record levels. Yet the crisis of mass unemployment persists.
At the current rates of job creation in the U.S. and other imperialist countries, it will be years before the number of jobs returns to the levels that prevailed in 2007 on the eve of the crisis. And even the pre-crisis 2007 levels were far from full employment. Therefore, is the economic crisis that began in 2007 really over?
The passage of a cyclical crisis described
Rosa Luxemburg in What Is Economics?—which was written shortly after the economic crisis of 1907-08 (1)— gave this vivid description of how a cyclical crisis of overproduction is reflected in the capitalist media:
“…once the crisis is in full swing, then the argument starts about who is to blame for it. The businessmen blame the abrupt credit refusals by the banks, the speculative mania of the stockbrokers; the stockbrokers blame the industrialists; the industrialists blame the shortage of money, etc.”
Though these words were written a century ago shortly after the 1907-08 crisis, they could just as well have been written to describe the crisis that began exactly a century later in 2007.
“And when business finally picks up again,” Luxemburg continued, “then the stock exchange and the newspapers note the first signs of improvement with relief, until, at last, hope, peace, and security stop over for a short stay once more.”
“Modern society,” Luxemburg further explained, “notes its [the cyclical crisis—SW] approach with horror; it bows its head trembling under the blows coming down as thick as hail; it waits for the end of the ordeal, then lifts its head once more—at first timidly and skeptically; only much later is society almost reassured again.”
Crisis of 1907-08 in historical perspective
As it turned out, after the crisis of 1907-08 capitalist society had little time to get “reassured again.” If the industrial cycle that began with the crisis of 1907 had followed the typical 10-year course, the next crisis of overproduction would have been due around 1917.
Instead, a new worldwide recession began in 1913, about four years early. In Europe, this new recession did not end with a new upswing that left society “almost reassured again.” Instead, it ended with the “Guns of August”—the outbreak of World War I.
Capitalism ‘celebrates’ the anniversary of 1907 crisis
The capitalist economy “celebrated” the 100-year anniversary of the crisis of 1907 in the most “appropriate” way possible—with yet another crisis. And like its predecessor a century earlier, the crisis that began in 2007 proved to be unusually severe. There is a feeling now that the crisis of 2007-09 (2) is perhaps, like the crisis of 1907-08, no ordinary crisis. Could this crisis, too, be the herald of a far more fundamental crisis of capitalist society?
In order to begin our exploration of the possibility that this may turn out to be the case, let’s examine the nature of the current recovery and how it compares to a “typical” cyclical recovery. I will begin with how it is being reported in the media.
Recovery in retail sales
“Analysts predicted,” Stephanie Clifford reported in the New York Times on April 7, “that sales at stores open at least a year, known as same-store sales, would post their first drop since August 2009. But the 25 retailers tracked by Thomson Reuters on Thursday posted an unexpected 1.7 percent increase for March, handily beating the average analyst estimate for a 0.7 percent decline. That was on top of a 9 percent increase in March 2010.” (3) Well, that is reassuring. The U.S. consumer is spending again!
True, the rate of increase of 1.7 percent per year in retail sales, was much less than the 9 percent rate of increase in the preceding year. However, March 2009 was very close to the lowest point of the crisis, so the jump in sales that occurred between March 2009 and March 2010 reflects the extreme crisis conditions that prevailed in the first part of 2009 rather than normal economic growth.
Rapid drop in official U.S. unemployment rate—a fraud
Another indicator that looks at first glance to be encouraging is the rapid drop in the official unemployment rate in the U.S. From more than 10 percent at the bottom of the crisis in 2009, it was expected to remain at over 9 percent through at least 2011. But instead, according to Bob Willis of Bloomberg News (April 1), “The unemployment rate in the U.S. unexpectedly fell to a two-year low of 8.8 percent in March as employers created more jobs than forecast, adding to evidence the labor-market recovery is gaining traction.”
However, there is a catch: “Unfortunately,” economist Brad De Long wrote on April 1, “none of the net reduction in the US unemployment rate over the past year came from increases in the employment-to-population ratio; all of it came from declining labor-force participation.”
In plain language, this means that if the rate of unemployment had been calculated honestly, there would have been no decline in unemployment at all over the last year. It would have remained more or less around the level it was at the lowest point of the crisis. The only real “improvement” is that the rate of unemployment would no longer be rising.
Why do both the media and government conceal the true extent of the unemployment crisis?
We were all taught in school that one of the purposes of the “free press,” as opposed to a government-controlled press, is to guard against the tendency of governments to issue misleading information that makes things look better than they really are. If the government does issue such brazenly misleading information—such as the U.S. Labor Department’s reporting a non-existent decline in the rate of unemployment during the current recovery—the “free press” is supposed to point this out.
The ‘fourth estate’
Indeed, the press is often called the “fourth estate”—a kind of fourth branch of government that keeps the other three honest. Why then isn’t the “fourth estate” doing its job when it comes to exposing the false unemployment statistics that are being issued by the U.S. Labor Department?
To answer this, we have to look no further than the class interests of those who own the media. As far as the capitalist class is concerned, high unemployment is in and of itself a positive thing. From the viewpoint of an employer as a purchaser of the commodity labor power, it is best if as many people as possible apply for every job offered.
If only one or two people apply, the boss doesn’t have much choice. But if 25 people apply, the boss gets to pick the type of person he wants for the job—in terms of age, experience, nationality, sex and sex appeal, education and personality. If “labor” is in plentiful supply, he can get exactly the type of worker he wants at a low price. The higher unemployment is—all other things remaining equal—the greater the competition among workers for the jobs being offered. The less competition for the existing pool of workers there is among the bosses, therefore, the lower wages are.
High unemployment means low wages, and low wages mean high profits
And the lower wages are, the greater is the ratio of unpaid to paid labor. More unemployment means a higher rate of exploitation of the working class, and the higher the rate of exploitation, the higher the rate and mass of profit.
What the capitalists don’t like is a situation where business is so depressed that they can’t make profits. Remember, if they can’t realize the surplus value that they squeeze out of the working class in money form, they do not realize a profit.
The unemployed, though they do not produce surplus value, do enable the capitalists to squeeze surplus value out of those who are employed. However, if the mass of unemployment is so high that the rate of surplus value has pretty much reached the maximum rate possible, given the prevailing level of labor productivity, any further increase in the number of unemployed only adds to the cost of maintaining them without any benefits to the capitalists in the form of additional surplus value.
This is why the capitalists encourage immigration—whether legal or illegal—in boom times when the demand for the commodity labor power rises, and then deport unemployed immigrants in bad times when it is not possible to realize the extra surplus value the immigrant workers could produce. The costs of keeping the now deported and unemployed workers alive until the next boom then is transferred to the immigrants’ home countries.
Therefore, within these broad limits the statisticians that work for capitalist governments are under great pressure to report unemployment rates that are as low as possible. The capitalist media not only doesn’t expose this, it positively demands it. If the true extent of unemployment were reported honestly, there would be much greater pressure for the government to “do something about unemployment” such has creating more public-sector jobs. This is exactly what the capitalist do not want. (4)
Recent rise in the number of employed workers in U.S.
“Payrolls rose,” wrote “Bob Willis in the above-quoted article, “by 216,000 workers last month after a 194,000 gain the prior month, the Labor Department said yesterday in Washington.” While the unemployment figures reported by the U.S.—and other capitalist governments—are nonsense, the employment figures are somewhat closer to the truth. Indeed, Wall Street speculators largely ignore the unemployment figures reported by the government on a monthly basis but do pay close attention to the employment figures.
And there has been a definite rise in the number of employed workers in the U.S. over the last few months. Not enough to reduce unemployment much if at all, once the natural increase of the working population is taken into account, but enough to indicate a certain pickup in the pace of business. This rising pace of business—increased turnover of (variable) capital—combined with the considerable rise in the rate of surplus value made possible by the mass unemployment created by the recent crisis is behind the recent stellar profit reports that are driving up share prices on Wall Street and on other world stock markets.
This represents an undeniable change in the situation that prevailed during the crisis proper—2007-2009—especially the phase of the crisis that immediately followed the great financial panic of 2008. At that time, the number of employed workers was falling sharply. Therefore, there has been a definite shift in the phase of the industrial cycle. Indeed, a situation like the present one, where unemployment remains very high but the number of workers being exploited is rising, is the most favorable possible situation from the viewpoint of the capitalists.
Is society then “almost reassured” again, in Rosa Luxemburg’s words? Despite the “positive” developments that I looked at above, there are many signs that we are not in a “typical” industrial cycle. Let’s look at some of the things that distinguish the current upswing from the early stages of a typical cyclical recovery.
‘Great Depression’ in residential construction
The “Great Depression” in housing construction continues with virtually no sign of improvement. AP economics writer Martin Crutsinger stated April 1: “Construction spending tumbled for a third straight month, dropping 1.4 percent in February, the Commerce Department reported Friday. The weakness pushed total activity down to a seasonally adjusted annual rate of $760.6 billion, the smallest total since October 1999. That was below the previous recession low set back in August.”
It is extremely unusual for residential construction in particular to still be showing little or no sign of recovery almost two years into the recovery stage of the industrial cycle. To understand the seriousness of the situation, it has to be understood that the current stage of the cycle is actually the most favorable stage for the residential construction industry. To understand why this is so, we need to examine how the residential construction industry interacts with a “typical” industrial cycle.
During the boom phase of the industrial cycle, competition rages for a relatively shrinking mass of available credit between industrial and commercial capitalists, the government, and the buyers of durable consumer goods including housing. In this situation, the first to be cut off are the buyers of houses and other durable consumer goods such as automobiles. This is why the cyclical downturn usually begins in the durable consumer goods industry.
Once the recession becomes general, however, the demand for credit by the industrial and commercial capitalists drops sharply. The industrial capitalists cannot use all the plant and equipment they already have and therefore cut back on their investments in new factories and machines. The commercial capitalists shift from accumulating inventories (commodity capital) to liquidating inventories.
The supply of available loan money increases as commodity turnover declines and money falls out of circulation. A lot of this money is thrown onto the money market. During the recession, the capitalists figure: If we cannot realize the average rate of profit, we can at least realize the average rate of interest.
The increase in the mass of available loan money combined with the reduction in the demand for loans by the capitalists causes a great mass of loan money to flow onto the market for home mortgages. Therefore, home construction tends to bottom out well before the industrial cycle reaches its lowest point.
During the first phase of the recovery, there is still a lot of excess capacity in industry left over from the preceding recession, and the demand for investment credit remains low. In addition, during the recession the industrial and commercial capitalists have built up huge reserves of cash. They are therefore less dependent on credit than they were and will be again during the boom phase proper.
As a result, there is still plenty of loan money around for mortgages and for credit to purchase other consumer durables. This combination of rising employment combined with plentiful quantities of mortgage money occurs only during the early part of the expansion phase of the industrial cycle. This is the phase of the industrial cycle we are in right now. So where is the upturn in residential construction?
After all, business in the U.S. alone is sitting on $2 trillion of idle cash. And if the residential construction industry is so depressed during this favorable phase of the industrial cycle, what will happen when the cycle again enters the phase where the supply of mortgage money becomes less plentiful and interest rates on mortgages begin to rise once again? This is already beginning to happen to a certain extent.
Roots of the debacle
The roots of the the continuing debacle in the residential construction industry can be traced back to the “Asian crisis,” as it was initially called by the media, that began in July 1997 with the devaluation of the Thai baht. The “Asian crisis” of 1997 was in reality the cyclical crisis of overproduction that preceded the crisis of overproduction that began in 2007, exactly 10 years later.
The crisis of 1997, though it first broke out in Thailand, quickly spread to Indonesia, then to South Korea, and then to Russia and Latin America. During this cyclical economic crisis, large amounts of loan money were withdrawn from the “developing” countries of Asia, Latin America and Russia and flowed back to the imperialist countries. Therefore, beginning in 1997, huge amounts of loan money suddenly flowed onto the home mortgage markets of the imperialist countries, and interest rates for home mortgages plummeted.
As a result of this flow of loan money capital into the imperialist countries, the spread of the crisis to the imperialist countries was first delayed and its intensity considerably mitigated when it finally arrived, beginning in the fall of 2000. Therefore, in the imperialist countries in the 1997 cycle the usual cyclical slump in homebuilding failed to occur. This was also true in other durable consumer goods industries such as automobiles that are generally highly cyclical.
It was the absence of the normal housing—and other durables—slump that greatly reduced the intensity of this recession in the imperialist countries. What were the consequences of this unusual extension of the boom in the residential construction industry?
As a boom enters the final phase of overproduction and over-trading—what Marx called fictitious prosperity—competition develops between the providers of credit over which provider can offer loans on the easiest possible terms. Lenders find themselves making loans to enterprises and individuals that cannot possibly be repaid. Ponzi schemes and other forms of swindling abound.
Eventually, this must come to an end if only because one piece of money cannot settle more than one debt at a time. After the credit bubble bursts, lending standards are once again tightened. Those lenders who made “too many” loans to people who could not possibly repay them go under leading to a new wave of centralization of banking and financial capital. The cycle then repeats itself.
As a result of the rather unusual way the 1997 industrial cycle and its accompanying credit cycle developed, the providers of mortgage credit had gone by the beginning of 2007 for more than 15 years without the whip of a crisis. As a result, there was an unprecedented relaxation of credit standards in the home mortgage market and to a lesser extent in the durable consumer goods markets in general. More and more people were receiving loans that enabled them to purchase houses against mortgages that they could not possibly pay back or even pay the interest on.
But it wasn’t only a financial bubble that affected the residential construction industry. The mortgage credit bubble meant that a huge number of houses were actually built that ultimately could not be paid for. As the great housing boom unfolded, jobs were very plentiful in residential building while during most of the “prosperity” of 2003-07 the number of factory jobs was actually declining in the U.S. But employment in the construction industry was at all-time highs. Blue collar workers who could not get factory jobs got jobs in construction instead.
The credit bubble, rooted in the way the crisis of 1997 had unfolded, had in effect temporarily removed the capitalist limits on the building of homes. As the abnormally extended boom in residential construction continued, Alan Greenspan—Greenspan is the now-discredited former head of the U.S. Federal Reserve System who presided over the residential construction boom—hailed the new age of “financial innovation” that made this “miracle” possible. Not only Greenspan but U.S. presidents—Democrat and Republican alike—boasted how under “my administration” a greater percentage of the population was owning homes and realizing the “American Dream” than ever before. (5)
What was really happening was that in the old but now decaying centers of industrial production—the overproduction, or over-building as it is called in the construction industry—was reaching levels never before seen in the history of capitalism. And despite the claims that this time things were different because of financial innovation made possible by deregulation and the “genius of the free enterprise system,” the day of reckoning arrived—as it always does—beginning in mid-2007.
The weakest link in the chain of payments
The weakest link in the credit chain during the crisis beginning in 1997 had been loans to “developing” countries beginning with the “Asian tigers.” But in the succeeding crisis, the weak link in the chain of payments proved to be the home mortgage market in the imperialist countries—above all in the United States. While the crisis of 1997 began in Thailand, the crisis of 2007 began in the USA itself, the very center of the empire. As the credit bubble burst beginning in mid-2007, the “over-building” began to rise to the surface.
While the crisis that began in 1997 had hit the oppressed countries hardest, its successor hit the imperialist countries themselves hardest. While many developing countries—for example, China, India and Brazil (6)—have recovered relatively rapidly from the crisis, industrial production and employment are still far from fully recovering in the imperialist countries. In this respect, the crises of 1997 and 2007 are to some extent mirror images of one another—though China and India avoided the brunt of the 1997 crisis as well.
Financial problems in Europe
Far from going away, the financial problems in Europe seem to be intensifying. Around the middle of last year, a sudden flareup in financial tensions centered on the debt of the Greek government brought the world economic recovery almost to a halt for about six months. Now the tensions have flared up anew centered on the government debt of Portugal, though the problems are by no means confined to Portugal.
“Portugal asked,” AP writers Barry Hatton and Alan Clendenning reported on April 6, “for a bailout Wednesday to relieve its crushing debt, joining Greece and Ireland by becoming the third European nation to ask for outside help amid a bruising European financial crisis.”
“The Republic of Ireland’s banks,” the BBC reported on March 31, “need an extra 24bn Euros (£21.2bn) to survive the financial crisis.”
Nor have the problems around the debt of the government of Greece been truly resolved. Barbara Zigah reported on March 9: “On Monday, Moody’s, the international ratings agency, aggressively downgraded Greece’s sovereign debt by several notches to B1, and kept the country’s debt ‘outlook’ firmly negative. The yield on Greek bonds at yesterday’s auction rose to the highest ever at 12.946%, testament to investor concern.”
Under the euro system, all member countries use a single currency—the euro. Before the euro, these countries had their own currencies—the German Deutschmark, the French franc, the Irish pound and so on. When the countries issued government bonds that were payable in their own currencies, they could always print more paper money and devalue their currencies if necessary to meet their legal obligations.
Under the euro system, however, there is one bank of issue in the euro zone, the European Central Bank—ECB. Like the dollar and all other currencies today, the euro is a token currency. It is convertible only in the sense that it can be freely bought and sold for other currencies and gold at open market rates. The ECB certainly will not redeem its euro-denominated token money for gold.
What is highly unusual about the euro as a form of token money is that it is not backed up by a strong central government like the U.S. dollar is. Generally, token money is issued by a “monetary authority”—either in the ministry of finance in times past or a central bank. (7) The token currency is then declared “legal tender” for all debts public and private.
But the European “union” has no strong executive authority that commands powerful military and police forces. There is only a rather powerless parliament and even more powerless “president” of the European Union. The state power—the command of the military, police and other “security” forces—is therefore not centered in Brussels, the headquarters of the European Union, but remains centered in Berlin, Paris, Rome, Athens and so on.
Even there, the state power remains subordinate as it has since the end of World War II to the overwhelming power of the armed forces and security forces (such as the Central Intelligence Agency, Federal Bureau of Investigation, National Security Agency and the many other “intelligence” agencies) of the United States.
We can contrast the evolution of the euro with that of the U.S. dollar. The U.S. did not have a modern currency system until the Civil War, which began just 150 years ago this month (April 2011). (8) It was the U.S. Civil War—called the “slave-holders’ rebellion” by Karl Marx—that once and for all established that within the North American union the center of state power was in Washington, D.C., and not the capitals of the various U.S. “states.”
The governments in Rome, Madrid, Lisbon, Athens, Dublin and so on are used to borrowing money as though they were the governments of sovereign states—sovereign in the sense of being able to issue their own legal tender currency. Under the current euro system, however, they have no more authority to issue legal tender currency than New York or California can. Therefore, much like a U.S. state or municipality, they will go bankrupt if they cannot meet payments coming due on the euro-denominated bonds they issue.
An upside for the European capitalists
This situation has a big upside from the viewpoint of the European capitalists—at least those European capitalists who are not too heavily invested in government bonds. The various national European governments cannot reduce their indebtedness by printing more money and thus devaluing their currencies. This can only be done at the level of the eurozone as a whole.
As the various European national governments face financial crises, they are therefore under much greater pressure to slash spending than they would have been if they had retained their old national currencies. They naturally cannot cut spending by much for “national security” military, police and “intelligence.” The U.S., which more than 65 years after the end of World War II still maintains powerful military forces in Europe, will not allow them to do so. And they have to meet their “commitments” to NATO and its many wars—such as the current wars against Afghanistan and its new war against Libya—to name just two.
As is the case with U.S. “states,” if a European government raises taxes on the capitalists, the capitalists can simply move their investments to other European countries where taxes are lower. The European capitalists then explain that the only way to avoid a massive financial crisis—with plunging bond prices, new waves of bank failures, soaring unemployment and possible national bankruptcy—is to cut social spending.
But cuts in social spending just happen to coincide with the class interests of the European capitalists. After World War II, due to the far better political organization of the European working class relative to the U.S. working class, the European capitalists were forced to grant far more concessions to the working class in terms of social insurance than was the case in the United States. (9) For example, medical care was more or less established as a right in most European countries. As the years have passed, this has put the European capitalists at a growing disadvantage compared to the capitalists in the United States when it came to holding down wages—or increasing the rate of surplus value.
This has been especially true since the post-Depression/post-World War II “long boom” ended back in the 1970s. Since the 1970s, the rapid rises in productivity brought about by the adoption of American technology by the European capitalists after World War II has leveled off.
The less social spending there is, the less unemployment insurance, the more that medical care has to be paid for through expensive private insurance plans and so on, the greater the pressure is on the unemployed workers to take the first job that is offered no matter how low the wage. As a result, a given level of unemployment is far more “effective” at holding down wages the less social insurance there is. The European capitalists are trying to use the financial crisis created in part by the euro system itself to reduce social spending to the skimpy levels that prevail in the United States.
In the U.S. itself, state governments not only have no right to issue their own legal tender currency, they are restricted by law on how much money they can borrow. These state governments have launched massive attacks on social services and public employees, including the right of public employees to organize and bargain collectively, which is leading to sharp confrontations with the public employee unions.
The state budget crises reflect in part the effects of the cyclical crisis of 2007-09 as well as the long-term economic decline of the U.S. economy. But they also reflect decades of pro-business tax cuts. U.S. states and even municipalities compete with one another on which one can offer the most favorable “business climate.” The “winners” are those that offer the lowest tax rates, the weakest unions and the least regulation. When workers complain about the anti-worker polices, they are told that these policies are the only way “we” can keep “good jobs” in “our” communities.
Milton Friedman always advocated tax cuts for precisely this reason. First, Friedman explained, you cut taxes and create government budget crises. Then you use the government budget crises created by tax cuts as an excuse to dismantle highly undesirable—from the perspective of the capitalists, that is—social programs by claiming “we can no longer afford to pay for them.”
The Standard and Poor’s credit regulatory agency has even threatened to lower the credit rating of the U.S. federal government itself, even though almost all its credit obligations are in terms of the U.S. dollar that the U.S. government creates itself—unlike the national governments of Europe under the euro system—through the U.S. Federal Reserve System. This is an attempt by the Wall Street interests represented by Standard and Poor’s to drive forward the extreme cuts in the already skimpy U.S. “safety net” that are now being pushed by the Republicans. President Obama’s Democrats are proposing slightly less extreme ones.
Keynesian economists—especially the more progressive Keynesians—are alarmed that the growing wave of cuts in government spending will reduce “effective monetary demand” and thus slow if not derail altogether the current recovery. Any sudden sharp drop in government spending certainly creates over the short run strong recessionary pressures.
The Keynesians’ bourgeois “neo-liberal” opponents play down this threat, claiming that rising private investment will make up for a fall in government spending. The “neo-liberals” argue that the more favorable business climate it would create—code for a sharp rise in the rate of profit made possible by the rising exploitation of the working class—will lead to a sharp rise in capitalist investment and thus more capitalist economic prosperity. This debate among the bourgeois economists goes all the way back to the days of Ricardo and Malthus. (10)
The “underconsumptionist” followers of Malthus through Keynes and Keynes’s successors have feared that a decline in government spending will lead instead to a “general glut of commodities” and economic stagnation. All the bourgeois participants in this debate, however, accept as a given the capitalist system of exploitation.
But as the dollar price of gold reaches the $1,500 level for the first time, there is another cloud on the economic horizon: the growing danger to the U.S. dollar and the international dollar standard created by the U.S. Federal Reserve System’s inflationary monetary policy.
China and the dollar standard
Under the dollar standard, China is under pressure to keep the yuan from rising rapidly against the dollar. A rise in the yuan against the U.S. dollar—everything else remaining equal—means a rise in the price of Chinese commodities on the world market in terms of dollars. This threatens the remarkable economic growth that China has experienced since the 1978 reforms. Since those reforms, Chinese industry has maintained its rapid growth rate by capturing an ever-larger share of the world market—which includes the rapidly expanding Chinese home market.
In order to prevent the appreciation of the Chinese yuan, the Chinese monetary authority—central bank—has striven to prevent any sharp change in the rate of exchange between the U.S. dollar and the Chinese yuan. It was one thing to do this during the “Great Moderation” of 1983-2007 when the U.S. dollar was relatively stable—and frequently even rising—against gold. But now that the U.S. dollar is again plunging against the money commodity, to continue to link the yuan to the U.S. dollar means the yuan is also being devalued against gold.
Unlike the U.S. economy, the Chinese economy recovered rapidly from the 2008 global panic. However, in order to keep matching Washington’s dollar devaluations with its own devaluations, China has been forced to follow an inappropriately stimulative monetary policy. Unlike the situation in the stagnant economies of the U.S., Europe and Japan, the internal demand for commodities within China is still growing strongly. Therefore, the devaluation of the yuan against gold is translating into higher retail prices much more rapidly in China than has been the case in the U.S., Japan or Europe. The rapid rise in prices, especially for food and fuel, in a country where many people still live in poverty—despite the remarkable economic growth of the last 30 years and indeed since the revolution of 1949—is threatening to destabilize Chinese society.
At the same time, the rise in Chinese prices is beginning to undermine China’s trade balance. MarketWatch’s V. Shani Kumar reported on March 10: “China unexpectedly posted a trade deficit in February, according to official data released Thursday, and economists said this could reduce pressure on the country to allow its currency to appreciate…. The slowdown swung the country’s trade balance to a deficit of $7.3 billion in February, more than offsetting January’s $6.5 billion trade surplus and giving China a net trade deficit in the first two months of the year.”
It is becoming harder and harder for China to maintain a rate of economic growth that is far above the overall rate of growth of the world market. Up to a point, China can grow more rapidly than the world economy as a whole by capturing an ever-larger share of the world market. This process is occurring partially through the very rapid expansion of the home market and partially through the penetration of Chinese commodities into markets abroad.
While a generation ago it was impossible to find commodities that were made in China in U.S. retail stores, today it sometimes seems that it is impossible to find commodities in U.S. retail outlets that do not bear the “Made in China” label—that is, assembled in China; many parts are made in other countries. But China obviously cannot continue to increase its share of the world market forever.
While this would be true under any international monetary system, including the international gold standard, the dollar system is particularly inappropriate for China, because it forces it to “import” the inflation that the U.S. Federal Reserve System is creating in its desperate attempts to breathe life into the moribund U.S. economy. Naturally enough, Chinese officials and economists are beginning to search for an alternative to the dollar system.
It is not surprising that the Chinese are becoming ever more unhappy with the dollar system. For example, Chinese economist Xu Hongcai writes: “Nations around the world have no way of restricting dollar issuance by the Federal Reserve. The current international monetary system lacks both stability and fairness.”
What Xu is complaining about is the situation where the U.S. Federal Reserve System acts as the world’s central bank but is controlled by the United States alone. This in effect turns all other national currencies including the Chinese yuan into satellites of the U.S. dollar.
And this brings us to the question of inflation and its implications for the development of the new industrial cycle that began with the outbreak of the last crisis in 2007.
A debate is raging between Keynesian “progressives”—so far backed by the most powerful “progressive” in the U.S. government (progressive in the sense that up to now he has resisted calls to tighten monetary policy), the Republican head of the U.S. Federal Reserve System Ben Bernanke—and “neo-liberal” economists on how real the threat of inflation is. The Keynesians insist that inflation is not a serious threat at the current time, while many neo-liberals claim that it is. Divisions are beginning to emerge within the Federal Reserve System itself around this question, though so far Bernanke’s “progressive” view that inflation is not yet a problem is prevailing. How long this will be the case remains to be seen.
Keynesian economists, forgetting the lessons of the 1970s, hold that inflation will not become a serous danger until an approximation to “full employment” returns. These economists, who despite their “progressive” views remain bourgeois economists, do not define “full employment” the way unemployed workers do. But they are well aware that the current situation is very far from even “an approximation to full employment.”
According to Keynesian theory, inflation develops only when money wages begin to rise. As long as unemployment remains high, the Keynesians correctly point out, competition among the workers for jobs keeps money wages low. The Keynesians, base themselves on the old economic fallacy that higher money wages lead to higher prices, which was disproved by David Ricardo 200 years ago. Using his law of labor value, Ricardo demonstrated that, all things remaining equal, higher wages lead to lower profits, not higher prices.
In his pamphlet Wages, Price and Profit (also known as Value, Price and Profit), Marx developed Ricardo’s arguments in light of his greatly improved understanding of the law of the (labor) value of commodities. The founder of scientific socialism explained why higher wages do not lead to higher prices but to lower profits for the capitalists. Therefore, Wages, Price and Profit is a kind of refutation in advance of one of the key arguments promoted by Keynesian economists against attempts of the workers to defend their living standards against inflation.
Wages, Price and Profit was originally a report delivered to the a meeting of the International Workingman’s Association—often called the First International—in London. Marx was actively combating a trend within the International that claimed, much like Keynesians do today, that workers’ struggles for higher money wages were pointless, because higher money wages would simply lead to offsetting rises in prices. (11)
Contrary to the predictions of Keynesian economists in recent months, prices, especially food and gasoline prices, have begun to rise sharply. Significantly, these prices began rising even before the current events in the Arab world began to affect the price of oil. Indeed, rising food prices were a crucial factor in causing the outbreak of the revolutions in Tunisia and then in Egypt in the first place.
A BLS News Release stated on April 14: “The Producer Price Index for finished goods rose 0.7 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed a 1.6-percent increase in February and a 0.8-percent gain in January…. On an unadjusted basis, prices for finished goods moved up 5.8 percent for the 12 months ended March 2011, the largest year-over-year gain since a 5.9-percent advance in March 2010.”
These rates of increase in the producer price index, which tracks wholesale prices, bring back memories of the 1970s. Price increases at the retail level are already accelerating as the price rises for raw materials work through the production chain that begins with the production of raw materials and ends at retail. We will soon be seeing price increases across a broad front—unless another panic like the one in 2008 causes raw material prices to plunge before they spread to retail.
Not surprisingly, the new wave of inflation is pushing millions into poverty. “The World Bank has warned,” the BBC reported on April 14, “that rising food prices, driven partly by rising fuel costs, are pushing millions of people into extreme poverty.”
“Rising food prices have pushed about 44 million people into poverty in developing countries since last June as food costs near peak 2008 levels,” writes Wendy Koch in USA Today, February 16, citing a World Bank report.
Stephanie Clifford and Catherine Rampell write in the March 28 New York Times: “As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages. With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tinier and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.”
The method of charging the same price for less food is one of the ways price inflation is hidden. The government can then report that food prices are stable while people are eating less. While the consequences aren’t dire for people who are not actually on the brink of starvation—though hunger is not unknown in the U.S.—rising food prices are by no means confined to Egypt, Tunisia and other oppressed countries.
Moreover, even official U.S. government reports show that raw material prices are already beginning to spread to the retail level. In both February and March, U.S. retail prices, if we are to believe government statisticians, rose 0.5 percent, which comes to an annual rate of increase of about 7.9 percent. This compares to an only 2.7 percent official rate of price increases in the year preceding March 2011.
In other words, since February the rate of increase in the cost of living in the U.S. has increased sharply. Despite this, much of the press reported that the March rise in U.S. retail prices “was well below expectations” and does not indicate any acceleration of the rate of inflation. This is reportedly the view of the Bernanke-led majority on the U.S. Federal Reserve Board.
How did the media come up with that one? The media and the Bernanke-led majority point to the so-called “core rate” of inflation.
The fraud of the core rate of inflation
The “core rate of inflation” excludes the commodities whose material use values make them the most important commodities to people—food and gasoline. In March, according to official Labor Department figures, the core rate increased only 0.1 percent, which the media reported was much lower than the “expected” 0.2 percent. This comes to an annual rate of about 1.8 percent, well within the quasi-official “inflation target” of the Federal Reserve Board of about 1 to 3 percent a year.
Hence, the media “explained” to the public that Bernanke and his colleagues within the Federal Reserve “believe” that there is nothing to worry about. Naturally, this is small consolation for those who cannot get by without food and fuel.
However, let’s examine the “core rate of inflation” argument more closely. “Stagnant wages,” the AP economics writer Christopher S. Rugaber, wrote on April 15, “are a big reason that most Federal Reserve policymakers say the spike in gas and food will have only a modest and temporary [emphasis added—SW] impact on inflation.”
Indeed, Rugaber explains, real wages calculated on an hourly basis, according to U.S. Labor Department figures, actually dropped 1 percent.
Following Keynes, the Federal Reserve Board is clinging to the view that inflation won’t accelerate as long as money wages are stagnant and real wages are falling. Indeed, also partially inspired by Keynes, falling real wages are key to the Federal Reserve’s plan to bring about a gradual return “to reasonably full employment” over the coming years.
Rugaber quotes Paul Ashworth, chief U.S. economist at Capital Economics: “Nothing here to change the Fed’s view that the surge in commodity prices can be ignored as long as it doesn’t lead to second-round effects in wages [emphasis added—SW] and core inflation,”
The first fallacy here is that the Fed view accepts—or at least pretends to accept—the long-refuted theory that rises in money wages cause inflation. In reality, the cause of the accelerating rate of inflation is the huge amount of dollar token money that the Federal Reserve System has been creating. During the panic of 2008, the abnormal demand for the dollar as a means of payment did allow the Federal Reserve System to increase the quantity of dollar-denominated token money without an immediate depreciation of the dollar against gold.
However, instead of removing the extra dollars once the panic subsided, the Fed in an attempt to jump-start an economic upswing has continued to create vast amounts of dollar token money far in excess of the rate of growth of the quantity of real money—monetary gold—that exists in the world.
For example, in the last year the rate of growth of the U.S. monetary base has been about 25 percent and is currently rising at an even greater rate as the Fed carries out its plan to purchase $600 billion worth of government bonds.
In effect, the U.S. Federal Reserve System is transforming $600 billion in U.S. government IOUs into paper money. To gain a sense of perspective on how inflationary this is, an historically normal rate of growth in the monetary base would be around 2 or 3 percent a year.
So the age-old economic law of inflation is beginning to assert itself. There are 25 percent more monetary tokens denominated in U.S. dollars in existence than was the case a year ago, but there isn’t 25 percent more monetary gold to back up the newly created tokens. The result is the inevitable fall of the dollar and the other paper currencies linked to it against gold.
It is hardly surprising that the dollar price of gold, which measures the actual amount of gold a U.S. dollar represents as a monetary token, has exceeded $1,500 an ounce for the first time. And in the long run, as long as the rate of growth of the quantity of paper dollars continues to exceed the rate of growth of real money material—gold—the dollar will continue to depreciate against gold.
Each dollar represents a smaller quantity of gold—and through gold a smaller quantity of abstract human labor, the social substance of value measured in terms of time. Therefore, the price of commodities expressed in depreciating U.S. dollars, or other currencies that are linked to the dollar, will continue to rise.
This is why, for example, the Chinese are having such a serious inflation problem, which is so gleefully reported in the U.S. media. This law manifested itself thousands of years ago when Roman emperors (13) debased the value of their currency by reducing the amount of precious metal contained in the coins. This allowed the Roman mints to increase the quantity of coins in circulation at a far higher rate than the quantity of precious metals in their empire was increasing.
It remains just as true today when the Federal Reserve System, whether through electronic means or the printing press, increases the quantity of its dollar token money faster than the quantity of monetary gold that exists today within the U.S. world empire. It is this and not a rise in money wages of workers that is the real cause of inflation.
Just like the 1970s
Indeed, as inflation began to accelerate in the early 1970s the Fed and Keynesian economists of those days tried to explain away the rising rates of price increases just like they are doing today. They came up with special explanations for the prices of individual commodities—the power of OPEC, the Iranian revolution, crop failures and fishery failures. Once these “special causes” subsided, the Keynesian economists promised, inflation would subside as long as the workers practiced “wage moderation.” Somehow these Keynesian “progressives” then as now failed to urge the bosses to practice “profit moderation.”
Continued deprecation of the dollar against gold led not only to much higher rates of inflation and falling real wages but an explosion of interest rates, as I explained in my main posts (for example, here). Milton Friedman and his neo-liberals—called “monetarists” in those days—began to look like economic geniuses by pointing out the obvious. (14)
A full or partial cycle?
Economic recoveries accompanied by soaring commodity prices in terms of debased currencies tend to be short-lived recoveries. Instead of a full cycle, we get partial cycles.
For example, the cycle of 1979-1990, which saw the stabilization of the U.S. dollar, lasted about 11 years, while the cycle of 1990-1997 lasted seven years. In contrast, during the 1970s we had only partial cycles. The 1969 cycle lasted only about five years, and gave way to a new and far worse recession by 1974—which was also dubbed the “Great Recession” because it was far worse than any other recession up to that time since World War II.
The next cycle, from 1974 to 1979, also lasted only five years and ended with the “Volcker shock” recession of 1979-82. Only after the Volcker shock finally more or less stabilized the U.S. dollar against gold did full industrial cycles of about seven to 11 years’ duration return.
The reason is that a depreciating currency increases the capitalists’ “liquidity preference” for gold. This causes first inflation—we’re beginning to see this now—then soaring interest rates as money tightens as prices start rising faster than the “monetary authorities” increase the quantity of paper money. This leads not only to inflation but actually drives the economy into recession.
If the current cycle turns out to be a 1970s-style partial cycle and lasts, say, five years, instead of the next recession beginning in 2017 it will begin some time next year—2012. If this is the case, unemployment will be much higher at the start of the new recession than it would be if the current cycle were to peak in, say, 2017.
Danger of a buying panic
A big danger today is that business people will suddenly lose what is left of their “faith” in the dollar. If this happens, a buying panic will break out. Businesses will start to snap up raw materials and build up huge inventories of commodities as the capitalists buy now before prices rise even more. If this happens, prices might well rise much faster than they did even during the 1970s, since business then was not sitting on the amount of idle cash that it is today.
That would create a short-lived inflationary boom, which would reduce unemployment for only a short time. But it would devastate the real wages of the workers and impoverish much of the middle class. Inevitably, it would quickly be followed by a new violent recession with soaring unemployment.
So is the crisis over?
I began this article with the question whether the economic crisis that began in 2007 is over. In the sense of the short-term cyclical crisis, it almost certainly is. Basic economic indicators have been rising for two years now. But there are many indications that in a broader sense it might just be beginning.
For example, the recession of 1969-70 had bottomed out by the end of 1970. In the the narrow sense, the economic crisis—the recession that began in 1969-had ended by the beginning of 1971. But in the broader sense, the whole crisis of “stagflation” was just beginning.
Or we might ask with the benefit of historical hindsight whether the economic crisis that began in 1907 had ended by 1911. Again, in the strict cyclical sense the answer would be a clear yes. In fact, the crisis that began in 1907 bottomed out by the second quarter of 1908. It was shorter than the most recent crisis, which didn’t bottom out until mid-2009. But though shorter in duration, the crisis of 1907 did resemble its successor a century later in one respect, it was unusually violent.
In Monopoly Capital, Baran and Sweezy provide unemployment estimates that show that the U.S. economy grew much more slowly after the crisis of 1907 than it had been doing before. There was only a relatively brief upswing, which ended four years “early”—assuming a normal 10-year cycle—in 1913. The new recession was followed not by prosperity but by World War I, which led in turn to the super-crisis of 1929-33 and the Depression of the 1930s and then another, far bloodier world war.
These events also led directly to the Russian revolution of 1917, Therefore, instead of remembering 1917 as the year of the panic of ’17, we remember 1917 as the year of the October Revolution. However, there was not only the socialist revolution of October 1917 but also the the horrors of fascism beginning with Mussolini’s seizure of power in Italy in 1922.
Today, in retrospect, it is clear that the crisis of 1907, though it was indeed a cyclical crisis, was more than that. It was also a sign of an approaching fundamental crisis of the world capitalist system that was not to be resolved until the end of World War II and the rise of the U.S. world empire. (See series of posts on the long cycle beginning with this one.)
Could we be seeing something similar today? This time it will not involve the rise of the U.S. world empire through two bloody world wars but its fall. And even more important, it will involve what will succeed the U.S. empire. Will it be the victory of the working class and socialism, or will it be a new world war and the “mutual ruin of the contending classes”? It is pointless to speculate since the answer will be determined by the class struggles that are beginning to unfold from Athens to Cairo to Madison and beyond.
1) An exact date for the writing of What is Economics? cannot be definitely established, since the work was not published in Luxemburg’s lifetime. However, we do know that the work is based on Luxemburg’s lecture notes for an introductory class on economics she was teaching for a Social Democratic Party school beginning in the fall of 1907 and lasting until the outbreak of World War I. The crisis of 1907 reached its peak in the final quarter of 1907, precisely when Luxemburg began teaching the class. Therefore, the passage of this violent crisis no doubt influenced her descriptions of crises in general in her What is Economics?
2) Bourgeois economists often claim that even if modern “stabilization policies” have not completely eliminated “recessions,” they have at least made them shorter than they were a century ago, when such policies were unknown. Notice, however, that the crisis that began in 2007 was actually longer than the crisis that began in 1907.
3) During the expansion phase of the industrial cycle, the media often claim that the economic data are “better than expected.” Since bourgeois economists believe that industrial cycles are psychological phenomena, they seem to think that if a feeling of optimism is created among the general public, the upswing will be assured.
Elements in the financial press may also be hoping that this will lure middle-class savers back into the stock market, raising the value of the shares that the owners of the press that publish these upbeat accounts of economic news and authors of the articles happen to hold in their own financial portfolios. The practical result is that middle-class savers after buying stocks because the “economy is doing better than expected” are forced to dump the stocks when the economy suddenly plunges into a new crisis and the stock market crashes. The big investors then get the shares at fire sale prices.
4) They don’t want this because if the government creates jobs in the public sector, it means that the government as a purchaser of labor power is competing with the other purchasers of labor power—the private capitalists. To the extent the government creates additional employment in the public sector, it makes it harder for the bosses to cut wages. Therefore, the capitalist media—which is, after all, made up of for-profit businesses—do all they can to minimize the problem of unemployment and head off demands that the government step in and directly create jobs.
5) The huge growth in loans to oppressed countries in the years preceding the crisis of 1997 was part of the long-term shift of industrial production from the old centers of industrial production—the imperialist countries—toward oppressed countries, including the so-called Asian tigers, where wages—and the rate of surplus value—were much higher. Therefore, the crisis of overproduction that began in 1997 was centered in the Asian tigers that had undergone rapid industrial development.
When the loan money suddenly returned to the imperialist countries in 1997, it took the form of mortgage money and other forms of consumer credit. In general, there was little revival in the moribund industries of the imperialist countries despite the sudden expansion of the availability of credit. However, the home-building industry and commercial construction industries were an exception.
The reason is that nobody has yet figured out how to build a house or a shopping center in Asia and have it pop up in the United States, for example. Therefore, the abnormally strong boom in the construction industry—especially in home construction—was not really a sign of economic resurgence, as the media and the bourgeois economists at the time claimed, but on the contrary was actually a symptom of the long-term decline of the increasingly parasitic economies of the United States, Western Europe and Japan.
6) Russia is often lumped in with these countries as the BRIC countries. However, after the massive destruction of socialist industry that had been built up by the labor of Soviet workers over the preceding 70 years of socialist construction, there has not been much capitalist “re-industrialization” in Russia. Instead, Russia’s recent “prosperity” is based on the soaring price of oil and other raw materials that Russia is rich in. The rise in raw materials prices is in turn largely based on the depreciation of the U.S. dollar and will end when the U.S. is finally forced—as it will be—to more or less stabilize the dollar once again.
The exchange of largely non-renewable raw materials for depreciating currency that is used to purchase consumer goods for the bourgeois “new Russians” is not the basis of a lasting prosperity. Therefore, it is incorrect to lump Russia in with China, India and Brazil—themselves very different countries—where industrial production has been growing rapidly as part of the general shift of global industrial production to the oppressed countries, where the rate of surplus value is far higher than it is in the oppressor imperialist countries.
7) U.S. paper dollars are actually printed by the U.S. Treasury and signed by both the Treasurer of the United States and the Secretary of the Treasury. They are, however, issued by the the 12 Federal Reserve Banks that make up the Federal Reserve System. In times past, the U.S. Treasury sometimes issued what are called United States Notes directly—the original greenbacks—but this is no longer the case.
8) Before the U.S. Civil War—or the slave-holders’ rebellion, as it should be called—there was no “paper” dollar. The federal government minted the money metals of the time—gold and silver—and the base metals, the latter into small-denomination token coins. Dollar banknotes were issued by private commercial banks backed by the credit of some of the state governments but not the federal government.
Only beginning with the national banking system—created during the Civil War—was a modern national currency system established where the paper notes—whether convertible into gold or not—are backed by the credit of the nation.
9) In Western Europe, there were powerful labor-based parties, whether of the labor, social democratic or Communist (former Third International) type. In the Soviet Union and Eastern Europe, the Communist parties controlled the state.
But in the U.S., the trade unions, whether those of the American Federation of Labor or the Congress of Industrial Organizations, were tied to the bourgeois Democratic Party—a party that had never been a workers’ party of any type but had begun as the party of the southern slave-holders.
10) Ricardo explained that a “sudden change in the channels of trade” brought on by a sudden decline in government spending after the end of the world war that followed the French Revolution could throw the capitalist economy into a crisis. Ricardo was undoubtedly right on this point.
After World War II, many of the more radical Keynesian economists claimed the U.S. economy would quickly return to Depression conditions after the massive deficit-financed wartime spending was discontinued. There actually was a sharp increase in unemployment between 1945 and 1946 as wartime production was discontinued. However, a sharp rise in spending by the industrial capitalists to renew and expand fixed capital—they now had plenty of money to finance it for reasons that I have described in my main posts and replies—which had been run down during first the Depression and then the war, as well as the need to rebuild stocks of many commodities whose production had been restricted or suspended during the war, prevented anything like a return to the extreme Depression conditions that prevailed during the 1930s.
While Keynesian and other “underconsumptionists” are wrong to think that a sharp cut in government spending would by itself bring about permanent economic stagnation—or that continued high levels of government spending can stave off permanent stagnation—sharp drops in government spending certainly are a force for stagnation in the short run for the reasons that Ricardo explained.
Therefore, if the cuts in government spending—both local and central—are sharp enough, there is no doubt that the “sudden change in the channels of trade” could certainly cause or contribute to a recession. Such a recession brought about by a “sudden change in the channels of trade” caused by politically induced cuts in government spending would not actually be a true cyclical crisis. For example, the U.S. “recession” of 1945-46 was definitely not a cyclical recession. It is quite possible, however, for a cyclical recession to be deepened by a sharp decline in government spending.
11) I am often asked what I would recommend as a good introduction to Marxist economics. One idea would be to start with Wage-Labor and Capital, as revised by Engels to bring in the concept that workers sell their labor power and not their labor, which was absent in the original edition written before Marx’s epoch-making economic discoveries that occurred around 1857. After that, Wages, Price and Profit is probably the best introduction to the basic ideas of volume I of Capital. This is no accident, since Marx delivered his report to the International just as he was finishing up volume I of Capital, so its ideas were fresh in his mind.
Such a study is particularly important now that the Federal Reserve System is once again debasing the dollar. We need to understand the real causes of inflation—the depreciation of the paper currencies against gold caused by allowing the “monetary base” to grow faster than the quantity of monetary gold—and know how to refute the false arguments advanced by Keynesian economists that higher money wages—or money wages growing faster than productivity—cause inflation.
12) And no matter what country you live in, whether you like it or not, under the dollar system Ben Bernanke is “your” chief central banker.
13) A famous example from ancient times involves the Roman emperor Diocletian. When Diocletian came to power, the empire was in a bad way, and the currency was debased in terms of its precious metal content. As a result, prices in terms of the debased currency were rising. Diocletian attempted to stop the inflation through a series of draconian laws that forbade any rises in prices or wages.
It didn’t work. This ancient inflation crisis was ended when Diocletian’s successor, Constantine, issued a new gold coin of a fixed weight—the solidus—in effect putting the empire on the gold standard, which halted the inflation. While economic conditions are vastly different today, the same basic economic laws govern the relationship of token money to gold bullion—and prices in terms of token money—as they did in the days of Diocletian and Constantine.
14) It should be pointed out that neither Friedman any more than Keynes had a real understanding of the relationship between token money, metallic money and inflation. That would require an understanding of the law of labor value. But perhaps like Constantine came to understand, Friedman did realize if you keep throwing ever more monetary tokens into circulation you are going to get inflation. For this “discovery,” he won the Nobel prize. Perhaps they should have awarded it instead to Constantine, though maybe long-dead Roman emperors who do not have degrees in economics are considered ineligible for the Nobel prize.