Initial Response to Questions from ‘Charley’

Reader Charley asks two extremely important questions:

Question one (see his Comment on this post) involves the importance of realizing surplus value in terms of money and the question of the exchange of capital among capitalists.

Question two (see his Comment on this post) involves Gibson’s paradox. Marginalist economic theory claims that there is a natural rate of interest. The American marginalist economist Irving Fisher proposed that market interest rates are a combination of the natural rate of interest plus the expected rate of inflation.

Gibson’s paradox—a term coined by Keynes—notes that under the gold standard the highest rate of interest tends to occur at the peak of the industrial cycle when prices are at their highest. At the peak of the industrial cycle under the gold standard, the expected rate of inflation becomes negative. According to Fisher’s theory, shouldn’t the market rate of interest—the natural rate of interest minus the rate of deflation that can be expected during a cyclical downturn—be at their lowest rather than at their highest?

Similarly, at at the bottom of the cycle when prices have stopped falling or have started to turn upward, interest rates are at their lowest point. According to Fisher’s theory, shouldn’t market rates of interest be at their highest anticipating the rise in prices that will accompany the upturn?

Or, what comes to exactly the same thing, under the gold standard high prices coincide with high interest rates and low prices coincide with low interest rates. In other words, interest rates coincided with the absolute level of prices as opposed to the rate of change in the level of prices that is predicted by Fisher’s theory.

I must thank Charley for referring me to the Summers article, which I will be studying in coming days as my schedule allows.

I will prepare a further response to both of the questions raised by Charley as soon as time allows. They involve questions vital to crisis theory and will allow a further examination of questions that I have raised in my posts.

Other readers are encouraged to send in their own comments on these questions as well.



2 Responses to “Initial Response to Questions from ‘Charley’”

  1. charley2u Says:

    I want to offer some additional idea to the first question, re: realization of surplus in money form.

    The question can be approached this way: According to Marx’s theory how would the economy appear to us at the moment of final capitalist breakdown?

    If you say there would be a lot of unsold stuff, you are only part right. But, in being part right, you also can be led to misconceive the problem of capitalist crises short of final breakdown. That’s because, as I understand it, a crisis only expresses the final breakdown of capitalism under conditions where the possibility of recovery exists. It is, in other words, a breakdown of the accumulation process under conditions where steps are possible to re-establish it again.

    For a fuller description of the economy at the moment of final breakdown, you need to understand what capital is doing up until that moment.

    It is reducing necessary labor time to the absolute minimum possible.

    So, side-by-side with a mass of commodities which could not be realized as money, you would see a mass of labor power which could not be employed – even though there were means available with which this living labor could be combined.

    Just as important, however, and perhaps counter-intuitive, there would be a mass of money which could not be converted to capital in the two proceeding forms.

    There would be the simultaneous occurrence of a mass of money, means, and labor power cut off from productive employment, i.e., the employment by capital as means for its self-expansion – rendered superfluous, not as useful things, but merely as means of valorization.

    So while it is true that in a crisis surplus in the form of commodities cannot become money, it is not because there is no money for which they can be exchanged, but rather there is no motive to convert them to money as they cannot be profitably employed in the process of creating further surplus value.

    I believe, this same process is at work in a crisis with one exception: steps can be taken to restore equilibrium such that the production of surplus value can resume.

    The example I use is the Great Depression: during this event capital did experience a partial breakdown. The cause of this breakdown, I propose, was the fact that capital in several nations had developed within the confines of those nations and required expansion beyond their national borders. (Think of a situation where several capitals within a nation must expand into the markets of their rivals or go belly up – the automobile industry comes to mind.)

    That crisis ended when, as a result of World War II, the productive capacity of human society was “devalued,” according to one estimate, by $4 trillion, including $1.4 trillion in direct costs and an additional $2.5 trillion in lost capacity and human life.

    This $4 trillion “devaluation of capital” and the resulting emergence of the United States capital to unrivaled supremacy made it possible for the establishment of a new equilibrium and subsequent expansion of capital.

    I do not know if this is correct, but it seems consistent with my understanding of Marx. What is important to understand here is that a mass of commodities, labor power and money (all and together) become superfluous to the process of accumulation in a crisis, and remain superfluous until such time as the production process is rationalized to reestablish equilibrium.

  2. charley2u Says:

    “So while it is true that in a crisis surplus in the form of commodities cannot become money, it is not because there is no money for which they can be exchanged, but rather there is no motive to convert them to money as they cannot be profitably employed in the process of creating further surplus value.”

    I meant say: “So while it is true that in the final breakdown of capitalism…”

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