The inflation blame game and Marx’s crisis theory
Speech given at Ecosocialism 2023.
Inflation is back worldwide, and with it the blame game. So what is the truth behind the claims and counterclaims being made?
First, a little background.
An impending worldwide recession in late 2019, foreshadowed by a freeze in the US repo markets, led the US Federal Reserve to embark on a significant amount of money printing. Interest rates were pushed down to free up credit.
In early 2022, public health measures — economic closedowns — imposed in response to the COVID-19 pandemic further disrupted world production and trade. Both money printing by central banks across the globe and government budget deficits were massively expanded to cope. Interest rates were driven below zero in some cases. People were being paid to borrow money — imagine that.
The monopolies dominating global production and trade also seized on genuine or manipulated shortages to impose price gouging wherever they could. The profits of energy companies, for example, exploded as a consequence.
Most central banks, including the Reserve Bank of New Zealand, ignored the growing inflation and sought to blame the temporary supply chain disruption for the price increases.
Right-wing economic and political voices schooled in the “monetarist” schools of thought, which says inflation is always a monetary phenomenon (although none of them agree on what money is), stayed silent. They sensed that their system had dodged the bullet of a broader economic collapse. The extraordinary explosion in the global asset wealth of the ruling class that kicked in from late 2020 and through 2021 was also a factor in muting criticism, I’m sure.
But these same monetarists were supposedly in charge of economic and monetary policy in 2008 when the US Federal Reserve started the process of money printing. Dubbed “Quantitative Easing,” it was used for the first time as they sought to get out of the deepest crisis of world capitalism since the 1930s Great Depression. They had ignored their theories to save their system then. It seemed to work without triggering broader inflation so, they hoped, maybe it would also work this time.
But today, we have inflation averaging 6-10% over much of the globe. These are numbers not seen for decades. Turkey, Argentina, and Sri Lanka have inflation rates of 60-80%.
In these circumstances, the risk was that continuing expansionary monetary policies would unleash hyperinflation of the US dollar in particular, which would destroy its value and end its role as the dominant world currency. For the 1% owners of the world’s wealth, that must be prevented at all costs.
Hyperinflation was threatened once before in the late 1970s when US inflation hit 13%, and there was a flight from the dollar into gold which doubled in price over a few months in late 1979. This required what was dubbed the “Volker Shock”, in the name of the then US Federal Reserve Director Paul Volker. He stopped “easing” the monetary expansion and restored confidence in the dollar by pushing the Fed’s official interest rate up to 20%.
Government spending on welfare and education was also targeted for cuts. “Austerity budgets” became the norm. Aiming for a budget surplus became economic orthodoxy across the major capitalist nations, although this was only achieved temporarily in the US, given the demands of its permanent wars of empire across the globe.
After the inflationary 1970s in New Zealand, we had our version of the Volker Shock under the new Labour Government elected in 1984. The official interest rate reached an all-time high in 1985 of 18%. Variable mortgage rates hit 20%.
Financialisation and deindustrialisation
Of course, capitalists who were in the business of lending money rather than producing goods were massively advantaged by high interest rates. There is also no reason to open a business unless the profit rate is above the cost of money. Marx explained in his masterpiece Capital that a capitalist will never invest in new production unless the profit of enterprise is sufficiently above the rate of interest to be able to generate at least the average rate of profit, which they need to remain competitive. That is the economic origin of financialisation and de-industrialisation in the advanced capitalist countries as literally, General Electric became GE Capital.
The 1% don’t care how they make their money. But accumulated wealth needs to be stored in both financial and non-financial assets. Historically this was broadly a 50/50 share, but a gap has opened in favour of financial assets since 2008.
The 1% hate inflation with a passion as it reduces their financial asset values by that percentage or more. Working people also get angry at price increases and may join protests and strikes to protect their living standards. And, in normal circumstances, central banks will move to raise interest rates and slow the economy to stop it. This will, at least temporarily, hurt profits and share market prices, but that is the cost of restoring price stability.
But in 2008 and 2020, central banks tried to keep the economy from contracting further than it already had (in 2008) or was expected to do (in 2020) by printing money through another round of “Quantitative Easing”. In 2008 this had not led to much inflation as the recession had already hit hard in the US. The money was hoarded by the 1% or used to settle debts among themselves rather than boost spending more broadly.
But the latest round of quantitative easing involved both central bank money printing and government budget deficits to save the system. The money was also given to ordinary people to spend. Inflation was inevitable in these circumstances.
It is the owners of wealth that determine central bank and government policies on these matters, and the war on inflation will continue for as long as necessary to achieve their goals. It will be justified as essential for a nation’s economic survival.
The right-wing politicians and their economic “thinkers” dubbed monetarists have rediscovered their orthodoxy and say the fault lies with too much government spending and too much central bank money printing. Unfortunately, they are correct to an extent, but without fully understanding why. The question they need to be asked is why they stayed silent when it was happening.
Budget deficits as a cause of inflation
In the 1970s, the principal means of creating money and fuelling inflation was to run budget deficits. The US also needed to do this to finance the war in Vietnam. The economic orthodoxy at that time became known as Keynesianism, after the UK economist John Maynard Keynes. Keynes was an upper-class, classical, pro-capitalist, free-market economist. But he accepted that there must be something wrong with the classical view when the economic depression that couldn’t happen under those theories did happen in the 1930s.
He came to the view that the economy may need the assistance of lower interest rates from central banks or a budget deficit at times to stimulate demand and employment. Robert Muldoon, New Zealand Prime Minister and Minister of Finance from 1975 to 1984, and US President Richard Nixon (1969-1974) were public supporters of Keynesian policies despite their right-wing politics. Keynes also was not a friend of workers. He thought the cure for inflation was to cut wages through wage controls.
However, in the period after World War II, budget deficits became endemic. The result was dubbed “Stagflation,” a combination of inflation and economic stagnation. This is the worst of both worlds for working people because wages are cut by inflation while our ability to resist is undermined by high unemployment. That is why socialists don’t favour Keynesian policies over monetarist policies. It’s the capitalist system and its inevitable crises that is the problem, not the policies designed to manage the crises.
The Keynesians were removed from operational control and replaced by adherents of the Monetarist school. The principal theorists of monetarism were from the University of Chicago School of Economics, led by Milton Friedman. As well as allegedly wanting to control inflation, they were also radical free-market dogmatists who favoured austerity for workers, free trade in goods, free movement for capital, free interest rates, and the privatisation of everything, including education and health care. They also support eliminating the minimum wage and unions because these “interfere with the market”. The Act Party in New Zealand is an adherent of this school. They favoured tax cuts for the rich and regressive consumption taxes like GST on the rest of us.
With monetarists in charge, budget deficit financing was sharply curtailed — especially on spending that assisted working people — like welfare, health, and education. Infrastructure spending was starved. Literally millions of people have died as a consequence as even the richest nations on Earth have struggled with the impact of the COVID-19 pandemic because core state functions had been starved for decades.
Central banks like New Zealand's were made “independent" with the exclusive goal of targeting inflation to keep it low. The money supply was to be controlled through interest rate increases each time the economy started growing a little and unemployment began falling. Conveniently for right-wing political leaders, their theories are also deeply anti-working class.
The “Chicago Boys”, as Friedman and his colleagues came to be known, were invited to Chile to transform the economy in favour of the rich under the military dictatorship of General Augusto Pinochet, who seized power from a socialist-minded government in a coup in 1973.
The UK followed Chile’s policies under Prime Minister Margaret Thatcher in 1979, the US under President Ronald Reagan in 1981 and New Zealand in 1984 under a Labour Party government led by Finance Minister and future Act Party leader Roger Douglas.
These policies were dubbed “neoliberalism” to mark them out from the previous Keynesianism. It was theoretically possible for a government to stop the budget deficits and fight their inflationary impact by taxing the rich or eliminating war budgets. But no capitalist government from that time tried that, of course. Adherents of monetarism and its free-market dogmas were put in charge of every aspect of government policy. That is why the economists at the New Zealand government agency responsible for the labour market policies — the Ministry of Business Innovation and Employment — predict every year that the proposed rise in the minimum wage will lead to more unemployment when the opposite has consistently happened for the past two decades despite the minimum wage going from 40 to 60% of the average wage.
The monetary side of these policies was abandoned almost overnight when the 2008 crisis hit. Quantitative Easing became the norm across the advanced capitalist world, except in Australia and New Zealand.
This was considered necessary to stop a system-wide collapse of the banking and financial system in the US and Europe. All forms of debt exploded across the globe, but this was seen as the price of rescuing the private profit-seeking system. But then the recovery of world capitalism that followed was the slowest in capitalism's history. It was becoming clear that the world was gearing up for a renewed slowdown in late 2019, and then the pandemic hit.
The capitalist rulers knew they needed new doses of money printing and government spending to save their system. Capitalists only produce if they can sell goods for a profit. They only lend money if they feel they will get their money back with interest. The state in almost every country has stepped in to protect those profits whenever they get threatened.
A central bank can create money by simply printing it electronically. What that gets used for, however, can be different in different periods. During the most recent crisis, the US used the money to buy up bonds from distressed banks and industrial corporations to prevent them from going under.
The New Zealand Reserve Bank joined the Quantitative Easing club in 2020 and NZ$28 billion was given virtually free to the banks to lend directly to whoever they wanted. They gave most of it to property speculators who drove up house prices by 30% in one year. Another $100 billion was made available to the government to prop up businesses during the pandemic.
This also allows the government to run big budget deficits without horrendous interest rates being demanded (at least initially) by the private financial capitalists for the bonds they issue to finance the debt. This is “unorthodox” by any measure but was considered necessary as the crisis hit.
Now we are being told that the central banks will be returning to more orthodox policies over the medium term. This means a central bank must retire the bonds that it has created by buying them back, and needs to push up interest rates to do so.
But in the absence of taxes on wealth, budget deficits are also being targeted because they create spending artificially — a form of money creation but different from the central banks printing money directly. Reducing these deficits will be contractionary for the economy.
This will inevitably induce a recession in New Zealand over the next year or so. This is also true for Europe, the US and the whole globe. The cost of rescuing the capitalist profit-seeking system will now be unloaded on working people because the crisis that is coming has been made that much bigger and more dangerous by escalating debt.
World capitalism got out of the 2008 and 2020 crises with massive debt creation
The US public debt is the most important indicator of this process of debt creation because of the weight of the US economy. From about 60% of GDP before the 2007 crisis, it exceeded 130% after the 2020 recession.
In the EU, the average debt-to-GDP ratio was 88% at the end of 2021. Although the EU’s founding Maastricht Treaty provides for a maximum of 60%, many countries are well above the 100% of GDP level, as the table below shows.
In 2020, according to the International Monetary Fund, “we observed the largest one-year debt surge since World War II, with global debt rising to [US]$226 trillion as the world was hit by a global health crisis and a deep recession. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation.
Global debt [public and private] rose by 28 percentage points, to 256 percent of GDP, in 2020 [i.e., in the course of one year] … The global public debt ratio jumped to a record 99 percent of global GDP.
At the end of World War II, total debt after the massive borrowing to pay for the war was around 100% of GDP. It remained around that level until the end of the 1970s. Besides acting as a brake on government spending in terms of fiscal policy, this avalanche of debt, coupled with rising interest rates, will push several economies toward default. This applies to some heavily indebted rich countries like Greece and Italy, but will savage many poor countries.
The debt problem is not only affecting states but also corporations. There is no official standard for “zombie” firms unable to service debts, so estimates vary as to the number. Seeing Alpha reports: “In 2021 Goldman Sachs reported that some 13% of U.S.-listed companies 'could be considered' zombies, which it called 'firms that haven’t produced enough profit to service their debts.' The Federal Reserve study found that only roughly 10% of public firms were zombie companies in 2019. Finally, a Deutsche Bank study by Jim Reid in 2021 found that over 25% of U.S. companies were zombies in 2020.”
Bloomberg reports that zombie company debts total $900 billion. This is not only a US phenomenon. Zombies account for more than 20% of Europe’s companies, according to DW.
High-interest rates will make it much more difficult for these companies to refinance their debts, which can lead to defaults — which in turn means mass layoffs of workers.
The world is also being hit by a double whammy of war-induced shortages and price rises for basic food, fertiliser, and other commodities. This will accentuate the downturn.
The US currency is rising against most others because there is a flight of capital to the safety of the world’s biggest financial market. This means the poor countries’ debt, usually in US dollars, is getting increasingly unpayable.
As Oxfam notes in a new analysis, during the pandemic’s second year (from March 2021 to March 2022), the IMF approved 23 loans to 22 countries in the Global South — all of which either encouraged or required austerity measures.
Global poverty accelerating
The IMF has announced that the global economy is entering a major slowdown, downgrading the growth prospects of 143 countries. At the same time, inflation rates have reached historic levels. Around the world, hundreds of millions of people are falling into poverty, particularly in the Global South. Oxfam has sounded the alarm that we are “witnessing the most profound collapse of humanity into extreme poverty and suffering in memory”.
David Beasley, the director of the UN World Food Programme describes the situation in the following terms: “Even before the Ukraine crisis, we were facing an unprecedented global food crisis … Then, we thought it couldn’t get any worse, but this war has been devastating.”
…the number of people suffering from ‘chronic hunger’ had risen from 650 million to 810 million in the past five years… the number of people experiencing ‘shock hunger’ had increased from 80 million to 325 million over the same period. They are classified as living in crisis levels of food insecurity, a term he described as ‘marching towards starvation and you don’t know where your next meal is coming from’…
… after the economic crash of 2007-09, riots and other unrest erupted in 48 countries around the world as commodity prices and inflation rose… The economic factors we have today are much worse than those we saw 15 years ago.
If the crisis was not addressed, he said, it would result in “famine, destabilisation of nations and mass migration”. He concluded: “It is a very, very frightening time. We are facing hell on earth if we do not respond immediately.”
But the World Bank and IMF solutions for the crisis these nations face are more free market and privatisation policies. This is what is now being imposed on bankrupt Sri Lanka as the price of a bailout from bankruptcy. It is the price the Zelensky regime in Ukraine has agreed to pay for NATO support against Russia.
The climate crisis is also being compounded because the capitalist crises and imperialist wars are driving up the production of planet-destroying energy sources. Capitalists have no alternative but to be capitalists, and the planet is doomed if we continue business as usual.
The cause of the current crisis is the overproduction of commodities in the COVID-aftermath boom. The entire history of capitalism since the early 1800s has been marked by a cyclical movement of boom and bust every decade or so. Marx dubbed the ensuing crises as crises of overproduction. This was not overproduction in terms of human needs but overproduction in terms of being able to sell commodities at the average rate of profit at least
After the 2007-09 bank crisis and the Great Recession, capitalists were cautious about accumulating inventories and investing. This prevented a new worldwide overproduction crisis for some years at the price of lingering unemployment and eroding living standards. Stagnation appeared to be “the new normal for the world economy”.
However, by late 2019 signs of overproduction were again developing, causing a spike in interest rates, though the situation had not yet reached a crisis.
But then came COVID-19. In March 2020, the ruling class feared the virus would decimate the working-class population to such an extent their ability to squeeze surplus value out of the survivors would be impaired. They used state power to shut down much of the economy, throwing millions out of work overnight.
The COVID-19 shutdowns also caused a forced underproduction of commodities and a reduction of inventories.
When the shutdowns were eased, the boom began to rebuild inventories as demand for commodities soared. Demand exceeded supply at prevailing prices, resulting in high prices and higher profits. There was a rise in demand for labour power. But wages didn’t keep up with inflation, so real wages declined.
The Critique of Crisis Theory blog highlighted the accelerating signs of crisis in a post on May 22 headed “The Phony Crisis, the Real Crisis, and the Whip of Hunger”. It noted:
The massive overproduction resulting from the COVID aftermath boom has pushed the economy to the brink of what could become a deep recession. This is shown by the collapse of four regional banks, as well as by leading indicators such as the relationship between short- and long-term interest rates, called the yield curve — and measures of the money supply, dollar bills, coins, and bank deposits, that function as currency. The yield curve has not been so inverted — short-term interest higher than long-term — since the early 1980s. The global money supply, a predictor of approaching recession, has also been contracting at rates not seen since the super-crisis of the early 1930s.
If this was not enough, the dollar price of gold has been above $2,000 for several weeks as I write these lines on May 13, 2023. Its significance is that if the Federal Reserve System tries to stave off the crisis by moving to reverse the contraction of the global money supply, a run on the dollar could develop that has the potential to sink the dollar-denominated international monetary system, the financial foundation of the U.S. empire. Many countries have already built up gold reserves and taken other steps to reduce their dependence on the dollar.
Whenever a global crisis of the overproduction of commodities approaches, governments come under pressure to limit their borrowing and spending. When plenty of money and credit is available, central governments can borrow without reducing the quantity of loan money available to the rest of the economy. But when loan money starts to dry up, as it does just before a recession, government borrowing accelerates the credit crunch in the economy.
The recession in the US is happening now. Recessions set in when the credit system contracts due to a shortage of ready cash. This forces business to cease over-trading and overproduction,and shift to liquidating previous overproduction.
The US Fed faces a dilemma. It needs a recession to eliminate overproduction. But a recession before the 2024 election could result in the election of Donald Trump, who is feared by many in the ruling class for his erratic and dictatorial pretensions.
So the US Fed is hoping for a soft landing by pausing the series of interest rate rises in June 2023. However, the rate increases resumed on July 27 and at 5.5% is the highest level in 22 years with more rises indicated.
Monetarist economists accuse the Fed of being too weak. Keynesians generally accuse it of being too hard.
This debate around how effective monetary policies are in regulating the ups and downs of the business cycle is not one working people have a stake in. Neither side has our interests at heart.
Monetary policies are run by the central banks, with the US Federal Reserve operating like the world's central bank. Their principal tools are setting certain interest rates they can control or influence, and increasing or reducing the supply of token money. But token money is only one type of money in existence today.
Three types of money are in existence
To understand what is happening we need to understand the interaction of three types of money in existence today — token money, credit money and gold. Gold is a product of human labour that has emerged as the universal equivalent of all other commodities as a measure of value. All societies with a developed system of commodity production and exchange need a universal equivalent to function. Gold can also be hoarded for its intrinsic value, especially in times of monetary disorder.
Gold does not disappear in a crisis, but always retains its value. Capitalists and central banks hold a portion of their wealth or reserves in gold because of these special properties.
The second form of money is token money issued by the state, dubbed “fiat” money by economists. So long as the currency is not “over-issued” relative to the existing quantity of gold, the currency can retain its value so long as it is backed up by a state power which can impose taxes and use force on those it wants to do its bidding.
But if the currencies are “over-issued” they lose value in proportion to the over-issue. In normal circumstances, a doubling of token currency will result in a halving of its individual value. In other words, the currency price of gold will double. This is the origin of the general price inflation during the 1970s and early 1980s. Then US President Richard Nixon declared “We are all Keynesians now” and believed he could finance the Vietnam War without massive cutbacks in social spending in the US through budget deficit spending. The inevitable result was a steady devaluation of the US and other currencies, and endemic inflation worldwide.
The first casualty of this policy was for the US dollar to cut its link to gold at $35 an ounce in 1971. Keynes and Friedman claimed that policymakers would then be “free” of the gold “shackle” as it was dubbed by opponents of the gold standard. However, being free of the shackle only encouraged further devaluation. The price of gold hit $120 an ounce in 1976. Soon we had “stagflation” — inflation and economic stagnation at the same time. By the late 1970s, there was a flight from the US dollar into gold that saw the “price” of gold soar to nearly $600 an ounce.
To prevent a total collapse of the currency, the US Federal Reserve had to stop further accelerating the rate of growth of the dollar it created, which, in turn, boosted interest rates to record levels of 20% for the Federal Funds Rate and drove the country into a deep recession. Bad as inflation was — especially for the real wages of the working class being paid in debased currency — from the viewpoint of the capitalist economy the worst result was this rise in the rate of interest which wiped out profits. Inflation dropped from 14.8% in March 1980 to 3% by 1983. By the mid-1990s gold stabilised for a period at around $400 an ounce.
The amount of token money that can be issued is governed by the total amount of global gold bullion. This usually expands at a relatively steady pace of, say, 2% a year, so it is a relatively safe bet that token money can also be increased proportionately. But gold production also has its own cycle which runs counter to the normal industrial cycle and impacts interest rates and places objective limits on token money and credit creation.
If there were no objective limits to the creation of token and credit money, there would never be a crisis of generalised overproduction every ten years or so like we have seen throughout the 150-year history of developed capitalism.
These crises have been analysed and explained by Karl Marx as being generalised crises of overproduction relative to the ability of the market to absorb these commodities at prices that guarantee the producer at least the average rate of profit. Overproduction is reflected in growing inventories, factory shutdowns, and unemployed workers. If token money or credit could be expanded at will forever, then there could be no such crises. That is why pro-capitalist economic writers can't explain why they happen.
Monetarists don't understand the different forms of money. They treat gold, credit money, and token money as essentially the same. Keynesians also don't understand the different forms of money and why gold retains its essential role as a measure of value in economic life. Both Keynes and Friedman predicted that the price of gold would collapse once the state was stopped from being able to exchange their currencies at a fixed rate for gold. Of course, the opposite has happened, as Marx predicted it would.
Monetary authorities don’t understand the exact total of token money they can issue without devaluation. They operate to a great degree on trial and error. They don’t know what they are measuring the currency against, but the consequences of over-issuing become apparent very quickly in a rising price of gold, a broader leap in commodity prices in terms of the devalued currency and then a general rise in prices. This forces the central bank to increase interest rates, cut back on the currency being issued, or purchase previously issued currency to neutralise it. Failure to take action can lead in some extreme circumstances to hyperinflation and a currency collapse.
The third form of money is credit money. Under a developed system of finance and credit, this credit money is created and centralised by the banks through making loans. They can use deposits of token money created by the central bank as a base from which to expand, lending many times over the actual sums of customer deposits. So long as everyone doesn't want their money back at the same time the merry-go-round can continue. This is called fractional reserve banking.
But banks are profit-making competitive businesses. They have a built-in tendency to seek more and more creative ways to create and extend credit to maximise their returns. Derivatives that serve as a kind of insurance against loans going bad are the latest example. Eventually, as inventories of unsold commodities pile up and credit tightens, a breakdown happens, which will begin at the weakest links of the credit chain. A credit crisis and collapse of at least the most over-extended institutions then follow.
Credit money is not “real” money like gold and can disappear without a trace. The over-issuance of credit must be periodically neutralised for the system to restore balance. If there is no reduction in credit money then it is essentially being converted into token money. This will fuel an inflationary surge sooner rather than later with the inevitable consequences of a spike in interest rates leading to a deeper credit contraction, the very thing that conversion of credit money into token money is designed to avoid.
In the current crisis, the US Federal Reserve has been forced to prop up bank deposits as it seems to protect the currency system on one side while staving off the collapse of the dollar-centred international monetary system on the other. These are contradictory goals.
The point of capitalism's recurrent crises is to bring aggregate market prices back into line with aggregate values. Before a crisis hits, prices have inevitably been inflated by leverage. Before 1971, crises took the form of price deflation. Since the decoupling with gold, currency prices can increase, but capital still gets devalued in terms of “gold prices” as the currency itself depreciates. The 2007/08 debt deleveraging was short-lived, as the ruling class bailed itself out and passed austerity onto everyone else. The debt bubble and the discrepancy between aggregate market prices and aggregate values, however, remained and grew.
Pro-capitalist economists can't understand capitalism's recurrent crises when they have the wrong, subjective, marginalist theory of value. Price and value are always equal in marginalist theory. With the wrong theory of value (marginalism), you have the wrong theory of prices, the wrong theory of money, and you can't even build an objective theory of the business cycle. Hence Keynesians blame the “poor animal spirits” and monetarists blame central bank mismanagement.
Law of value operates through the ‘Invisible hand’
There are laws that capitalism must obey. The first great economic thinkers associated with the birth of this system were Adam Smith and David Ricardo. They explained how the system worked. Smith coined the term the "invisible hand”. As the pro-capitalist site Investopedia explains:
The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interests of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.
This invisible hand is based on the law of labour value that Smith and Ricardo both accepted and that Marx incorporated into his writings and took to their final, most scientifically developed form. Marx showed in Capital that prices (exchange values) are the form that labour values take. But as always there's a contradiction between appearance and essence. Aggregate market prices can diverge from aggregate labour values (or at least what they would be if they accurately represented labour values). During a boom, prices drift above values.
Marx corrected the classical labour theory of value to show that a commodity's price did not oscillate around a “natural price” based upon actual labour time but around a "price of production" that took account of the ratio of labour and capital relative to the average, and the turnover time. An individual commodity goes to the market to see what claim it can make on society's finite amount of labour time. In total, aggregate values equal aggregate production prices. However, the credit system divorces the act of purchasing from the act of paying.
Lenders can lend more than they have - they leverage. This pushes up aggregate market prices above their respective countries' labour values. Claims are made on future labour time that may never be realised. In a boom, everything appears to be going swell, and leverage continues to increase until the "Minsky Moment" — a sudden collapse in value with some lenders panicking that they may not get their money back.
We then get credit crunch, financial crisis and recession. The law of value acts. Marx's theory, contrary to myth, fully integrates the market, as the value of a commodity cannot be known until it comes to the market. That is, it isn't the actual amount of labour time inherent in the commodity that gives it value, but rather the amount of society's finite labour time it can claim in the marketplace.
When there was a gold standard, that meant deflation followed inflation. Now currencies (token money) get devalued (as measured by gold). Thus the stagflationary 70s still saw prices fall as measured by weights of gold. Before fiat money, the devaluation was obvious in price deflation. With fiat money, we get currency devaluation, as in the 1970s, 2008, and again today. In all three periods, currency prices in gold rocketed. In “gold price” terms there was deflation. And the reason gold still features in financial markets is that it takes a certain amount of labour time to produce an ounce of it. It is still a measure of value, as distorted as it may be due to speculation.
With Marx's theory of value (rather than the classical labour theory of value), you have an objective theory of the business cycle based upon the excessive creation of credit money leveraging aggregate prices above their value equivalent (the market extended by debt). This results eventually in a credit-crunch, financial crisis and recession.
Marx's theory of value explains the business cycle and the need for crises — no alternative exists 150 years later
Marx had an integrated value theory that explained how the so-called business cycle operated. The perfected labour value theory requires a money commodity to make it work. This is not a “nice to have” part of the theory. It is essential to making it work.
Marx's perfected theory also allows us to disprove and reject the three fundamental pillars of all bourgeois economic theory.
Modern neoclassical economics is based on the trinity of Say’s law, the quantity theory of money and the law of comparative advantage. This trinity is found in Ricardo as well. While Marx inherited and greatly deepened the Ricardian labour-based theory of value, neoclassical economics took over the Ricardian trinity rejected by Marx while discarding the Ricardian labour-based theory of value. Wikipedia summarises Says Law as follows:
In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is the source of demand.
Under Say's law, there can be no “overproduction” crisis because production creates its own demand. Marx dismissed this theory as that of a “trivial thinker”. Commodities don't create their own demand. Exchange, Marx explained, can be interrupted by any number of factors. Say's Law can be undermined by money hoarding, for example, when an interruption or delay in the circulation of commodities drags aggregate demand below aggregate supply; but if the money hoarded consists of a produced commodity, which for Marx is gold, then hoarding can be considered to be just one form of commodity demand. The history of capitalism is proof that Marx was correct.
The Quantity Theory of Money, supported by Ricardo, argues that prices and wages are directly commensurable to the ratio of the number of commodities in circulation on one side and the quantity of money on the other. If the quantity of money in circulation halved, prices and wages would halve. Alternatively, if the quantity of money doubled, prices would double. Monetarists use this kernel of truth to criticise central bank policies without understanding what money actually is.
This theory is needed for the operation of free trade. Ricardo argued that if a country ran a deficit, money would flow out, prices would decline, and therefore become more competitive internationally, and so would eliminate the trade deficit. To produce this result, Ricardo argued that in national markets, absolute advantage prevails, but in international markets, comparative advantage operates. But that notion is also disproved as it is obvious today that the world market determines prices.
Marx used the crises in the UK in the mid-19th century to prove that Ricardo's theory did not work in practice. When money (in this case gold) flowed out of the UK when it ran a trade deficit, prices did not decline. What happened was that interest rates rose and forced the economy into a recession to restore balance.
Bourgeois economists view interest as simply the reward that capital receives for holding money. Marx saw interest as being governed by the supply and demand for gold. That is why central banks, in the last analysis, can't control interest rates; the market does. It is inevitable that as the business cycle peaks, the demand for money capital peaks, and interest rates will rise and choke off the recovery. As the crisis deepens, money capital is accumulated and becomes more abundant, and interest rates decline, restoring the profit of enterprise and the desire to invest and produce more goods.
If the monetary authority allows the token money to depreciate as shown by a rising “price” of gold, the money capitalists will demand a higher rate of interest. And they have the power to collectively enforce their will. This collective money power is greater than the powers of the central banks.
This rise and fall in interest rates is part of the proof that gold remains the money commodity.
Marx did, of course, have a quantity theory of money when it came to token money. But if token money is halved, prices double, the opposite of what Ricardo predicted.
In the history of capitalism, who has been proven correct? Have trade balances been restored by free trade? Has the business cycle been eliminated? Has the gold price plummeted because of the reduction in demand? Post-Ricardo, bourgeois economists adopted “marginalism” as an economic theory. Marginalism argues that free-market capitalism would tend toward zero growth. Has that happened anywhere not subject to brutal US sanctions or war?
Marx predicted capitalism would be a system of expanded reproduction and continual overall growth, but with repeated crises. Has that happened? He predicted it would conquer and transform the globe in its image. Has that happened? He predicted there would be concentration and centralisation of capital. Has that happened?
We should be super proud of the old man. No one has surpassed his insight into how the system works, why it must be overthrown, and why the working class is and will remain the only class that can do that.
Trying to stop the law of value from operating is doomed
The operation of the law of value under capitalism, as explained by Marx, led to industrial cycles of boom and bust that ultimately produced a larger and more powerful system of production that conquered the globe. The system would rebound more strongly during periods of recovery if the laws of motion governing that system are allowed to do their magic. That continued to be true after World War II for three decades because of the depth of the Great Depression and the suppressed demand for consumer goods as a consequence of the war itself.
Since 1987 central banks have reflated the bubble with more token money. We now have the biggest distortion from values in capitalism's history. Bringing this back to balance will most likely require another Great Depression. The scale of the rescue operations has become staggering. This Financial Times report reprinted in the January 31, NZ Herald notes:
Since 1980, the US economy has spent only 10 per cent of the time in a recession, compared with nearly 20 per cent between the end of the second world war in 1945 and 1980, and more than 40 per cent between 1870 and 1945. One increasingly important reason is government rescues. Combined stimulus in the US, the EU, Japan and the UK, including government spending and central bank asset purchases, rose from 1 per cent of gross domestic product in the recessions of 1980 and 1990 to 3 per cent in 2001, 12 per cent in 2008 and a staggering 35 per cent in 2020.
Both the Keynesians and the monetarists have attempted to stop the law of value from operating with full force by using fiscal or monetary policies to stop a deep recession happening that would clean out the least productive capitalists (industrial or financial) and reward the most efficient and productive capitalists. The only results possible by these policies is an inflationary crisis or an explosion of debt that can never be repaid. Today, protecting that debt from the operation of the market to reveal its true value drags the entire system toward permanent stagnation and depression.
The current crisis has been accentuated by the financialisation of economic activity over the last three decades following the Volker shock. This has created a tiny financial oligarchy that controls most economic activity on the globe. Financialisation was also associated with an explosion of all forms of debt — personal, government, and corporate debt. But rather than this debt being used to accelerate growth under capitalism, the greed and predations of the dominant financial oligarchy appears to have become a brake on the system. Growth over each of the last three decade-long cycles has been progressively weaker despite (or maybe because of) the ever-growing debt.
But this financial oligarchy calls the shots on what type of government policies are considered acceptable. The debt market and interest rates are used to police those governments when necessary. This is especially true when it comes to monetary policy. After the inflationary 1970s, it was an article of faith that no government would be allowed to simply print money and spend it — especially on social programmes that benefited working people. Tax cuts for the rich were OK because that caused governments to be even less able to spend money on anything useful.
Central banks were removed from government control and made “independent” to prevent inflation beyond 2-3%. Many governments, including both Labour and National in New Zealand, turned the need to always run budget surpluses into religious dogma. All those dogmas have now been abandoned without explanation. Pushing back against complaints about their policies, the New Zealand Reserve Bank Governor Adrian Orr simply asserted that booming house prices were a “first-class problem” and that the alternative is “recession or depression” (13/11/20). That may be true, but we have a right to discuss alternatives to how the money being created should be used.
Essentially the world has gone through two crises over the last few decades where it became necessary to print money on a vast scale and simply hand it to the 1% who control the banks and other financial institutions to facilitate payments between themselves. No alternative policies have been allowed by the "independent" central banks and governments serving the 1%.
The following warning from Nouriele Roubini shouldn't be dismissed out of hand: “For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today's high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralised loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash” (2/7/21).
The Federal Reserve system faces a quandary: if it creates more dollars not backed by gold to keep the boom going, profits in dollar terms would remain high for a while but turn negative in gold terms. This would cause capitalists to transform as much of their capital as possible into gold. The resulting run to gold would accelerate dollar inflation and threaten to bring down the dollar-centred international monetary system.
On the other hand, if the Federal Reserve allows the bank money system to become paralysed by bank runs, the dollar would be saved but the economy would fall into a second Great Depression.
So the Federal Reserve is attempting a middle way: to keep the system of bank deposits as currency functioning, without bringing down the dollar’s role as the world currency — and other currencies linked to it.
The aim is to achieve a relatively soft landing, even if that means a recession with millions losing their jobs. But if the Federal Reserve is successful, it will keep a recession from turning into a depression while saving the international monetary system.
Whether the Federal Reserve can pull it off this time remains to be seen. But even if it does, the world will face a similar crisis again in a decade or so.
Huge growth in inequality
The direct consequence of handing the financial oligarchy trillions of dollars in the midst of one of the worst economic crises in human history is that the 1% has hugely expanded its wealth and power with inflated asset prices, and stock market values over the past years. Michael Roberts reports:
The top 1% of households globally own 43% of all personal wealth while the bottom 50% have only 1%. The 1% are all millionaires in net wealth (after debt) and there are 52m of them. Within this 1%, there are 175,000 ultra-wealthy people with over $50m in net wealth — that’s a minuscule number of people (less than 0.1%) owning 25% of the world's wealth!
Working people across the globe are caught in a dilemma. We don't want an economic collapse because we know we will be the worst affected. So, actions by governments to "rescue" the entire capitalist system of finance and production and trade are needed. But if we are going to do that, why don't we place the commanding heights of the economy, especially in the area of finance and money creation, into the hands of a publicly-owned and democratically controlled entity rather than simply hand the 1% our cash as if they have some God-given right to it? We have socialised all risks associated with private banking, so why not socialise banking itself? We must now build for a future that involves putting people and the planet before the pursuit of private profit.
The current combination of policies to combat the pandemic and associated economic crisis — which involves both a monetary and fiscal explosion — will sooner or later lead to an implosion of the entire credit and monetary system and along with it the system of capitalist production itself. The alternative is not to let capitalism operate without any limits in terms of subjecting all labour and the planet to its uncontrolled passion to exploit all and everything for the private benefit of a tiny class of owners. The planet cannot survive another few decades of the same old shit.
Working people need to put forward solutions in the here and now that protect our class and the planet we live on. Those immediate demands can form part of a program to transform the way we produce and live with each other. But we should do so with our eyes open to the fact that this system cannot accommodate what we need without generating new forms of crises.
The creation of money, in all its forms, should be a publicly controlled process without capitalist greed periodically putting entire financial systems at risk so we have to bail them out because they are “too big to fail”. This is effectively what happened in Ireland, the UK and the US after the 2008 crisis and we should make sure we do not repeat similar policies this time as we face the economic dangers ahead.
We must be prepared to go beyond a system based on private greed towards one based on human needs — a socialist world.