2022: COVID aftermath boom, overproduction, crypto downfall

The final two months of 2022 were full of events promising to lead to even more important ones in 2023. Here’s a list of some of the most important.

1. Railroad workers

What may be the most significant event of November-December 2022 was the Biden administration’s decision, backed by Congressional Democrats and Republicans, to force a contract on railroad workers without meeting their basic demand for sick days! This might be tolerable if workers never got sick. However, rail bosses and their government servants denied sick days despite the continuing global COVID-19 pandemic that’s taken more than a million lives in the U.S. and continues claiming victims here and around the world daily. Forcing workers to work sick spreads disease. This refusal of the railroad bosses and government is dangerous and potentially deadly to people beyond the railroad industry.

The great labor upsurge of the 1930s, represented by the Congress of Industrial Organizations (CIO), established industrial unions in basic industry outside the Jim Crow South, but the upsurge bypassed the railroad industry. Since rail’s origin, the government hasn’t recognized their right to strike. Since then, rail workers have been hobbled by weak craft unions. The need to organize along industrial lines — where all workers in an industry belong to a single union regardless of craft — was realized long ago by conservative craft unionist Eugene Debs. In the 1890s, he came to this conclusion not by reading books but through his daily experience as a rail worker and union leader.

Like most workers today, Debs was no socialist when he started organizing. He organized an industrial union called the American Railroad Union (ARU). When a strike broke out, Debs and the ARU provided leadership. President Grover Cleveland, a Democrat like Debs, called out Federal troops to crush what the capitalist press called the Debs rebellion. Sentenced to jail, Debs used his time to read some socialist literature. This reading, combined with experience in the pitfalls of craft unionism, his attempts to organize an industrial union, and Cleveland’s decision to crush the strike by force, led Debs to break with the Democratic party. He went on to become a leader of the U.S. Socialist Party. If Washington, the rail bosses, and the Democratic and Republicans who serve them continue the course of refusing to recognize the right to sick days, not to speak of the basic democratic right to strike, the bosses will be faced not with one but many 21st century versions of Eugene Debs.

2. U.S./NATO proxy war

As 2022 ends, the bloody shooting war between Russia and Kiev’s Euromaidan regime acting as a proxy for U.S.-NATO rages on. Most of the fighting occurs not in Ukraine proper but in the industrial Donbass region. There, the ethnic-Russian population, arms in hand, supported by the Russian military, attempts to win independence from the anti-Russian, pro-imperialist government in Kiev and join the Russian Federation. Kiev, for its part, says it will liberate all of Donbass as well as retake Crimea. Crimea, a region long part of Russia, was given to Ukraine in 1954 by Soviet Communist Party leader Nikita Khrushchev. After the 2014 right-wing pro-imperialist Kiev coup, supported and organized by Washington, the people of Crimea voted in a referendum to join the Russian Federation. Kiev, backed by Washington-NATO, refused to recognize the results, insisting it was still part of Ukraine. There is talk that in 2023, Kiev, armed by the U.S. and its NATO allies, will attempt to retake Crimea.

3. January 6 coup attempt

The January 6 (2021) Committee of the outgoing House of Representatives issued its report on Trump’s attempted coup. The Committee recommended criminal charges be bought regarding his role in the events. However, neither the Committee nor Congress has the authority to bring such charges against an individual — it is the job of U.S. Attorney General Merrick Garland and a grand jury.

But trying Trump would be a nightmare for the capitalist legal system. For example, could an impartial jury be selected? In high-profile criminal trials, the defense often requests a change of venue to another region where it’s easier to find an impartial jury. But where could Trump’s case be moved — to an exoplanet?

And there’s the danger that Trump, with the right to confront his accusers in court, might reveal state secrets which would be highly embarrassing for his Democratic and Republican opponents in the ruling party of order. The party of order hopes the constant attacks against him by the media they control will reduce Republican-base supporters enough to render him unable to win the 2024 Republican nomination. Trump’s age would probably remove him from presidential politics as well. How the struggle between Trump and his supporters and the party of order will play out as the 2024 election approaches remains to be seen. Plenty can happen, especially if the expected recession turns out to be prolonged and severe..

4. Cryptocurrency: Bitcoins, Stablecoins and FTX

A story of special interest to our readers is the collapse of the cryptocurrency exchange FTX headed until recently by the 30-year-old boy-wonder Samuel Bankman-Fried. Cryptocurrency, developed only since 2008, is a product of bad economic theory combined with misused computer science. Bankman-Fried, the son of a Silicon Valley family of well-to-do law professors, studied mathematics, physics, and (bourgeois) economics in college. He imagined his knowledge of mathematics and computer science would enable him to outwit the market. He wasn’t the first to suffer under this illusion, and it’s a good bet he won’t be the last.

For a while, he seemed to succeed, amassing a paper fortune of $16 billion, not bad for a 30-year-old, even if coming from an already wealthy family. But on November 11, FTX declared bankruptcy, and he was forced to resign as president, his fortune gone.

Earlier in 2022, Bankman-Fried imagined he was the new J.P. Morgan. During the crisis of 1907, the Wall Street banker not only rescued the New York money market but got President Theodore Roosevelt to allow U.S. Steel Corporation (called the Steel Trust) to buy the stock of the Tennessee Coal, Iron, and Railroad Company. This increased the monopoly power of the Steel Trust, put together by Morgan a few years earlier. Morgan explained to Roosevelt that if the merger didn’t go through, the New York money market would collapse and bring the U.S. economy with it. The trust-busting president allowed the merger to go through. Earlier in 1895, the Treasury faced a run on its gold reserves. Morgan arranged the loan that halted the run. Bankman-Fried imagined he would play a similar role.

To understand the cryptocurrency market that bought Bankman-Fried down, we should refer to the bad economic theories underlying it, especially those of Austrian economist Frederick von Hayek. (1) Like the rival neoclassical school, Austrian economists believe that the value of commodities is determined not by the quantity of labor socially necessary to produce them but by the scarcity of objects of utility relative to subjectively determined human needs.

Along with the neoclassical school, the Austrians posit that objects of utility are valuable because they are scarce relative to subjective human needs. Gold and, to a lesser extent, silver make good money because they are scarce. Von Hayek held that paper money issued by governments and central banks should be abolished. Under the pressure of the masses, these economists believe the government and central banks issue too much paper money, making hyperinflation inevitable. They believe governments should get out of the money-printing business and central banks should be abolished — let the market decide what does and does not represent good money. Money can be gold, silver, or old-fashioned paper banknotes issued by profit-driven commercial banks, as was the case before the National Banking System, established during the slaveholders’ rebellion of the Civil War.

Now enter computer science. Von Hayek lived mainly before the age of computers and the internet. In the digital age, his followers believe there’s no need to mine gold. Instead, gold mining can be simulated on a decentralized global network of computers. The first and best-known of the cryptocurrencies is Bitcoin. Bitcoins are created by what amounts to a computer game and exist only in the computer memories of the networked computers. Put another way, the mining of Bitcoins has the same relationship to actual gold mining as video games like “Call of Duty” have to real warfare.

What guarantees the value of Bitcoin? The value is supposed to be guaranteed because the computer code mining Bitcoins allows only 21 million Bitcoins ever to be created. As with real-world gold mines becoming depleted, the Bitcoin-creating computer program is designed to make fewer new Bitcoins as the 21 million limit is approached. Today, to the dismay of environmentalists, massive amounts of computer power are used. They complain about the impact of using so much electricity, which is still primarily generated by burning fossil fuels, to run the mining computers.

Cryptocurrency supporters claim that this money creation is taken out of the hands of the government, as von Hayek advocated. Furthermore, it’s supposed to be guaranteed against computer crackers by what is called the blockchain. A blockchain is a computer database containing a pointer to the next computer data structure in the chain, a well-known programmer’s technique. Cryptography methods are then employed to secure the system against attempts to alter the data encoded in the chain.

As the Bitcoin craze swept the markets, Bitcoin had imitators. This would have warmed the heart of von Hayek—may the best money win! Starting in 2014, a new form of cryptocurrency emerged called stablecoin. Unlike Bitcoin, stablecoins are backed by assets such as government Treasury bills and are convertible into dollars on demand. Essentially, stablecoins are a form of credit money like old-time banknotes issued by the pre-Civil War banking system.

 In reality, cryptocurrencies are not money. Since they have no labor value, they’re subject to wild swings in their exchange rates with the dollar and other central bank currencies, as well as actual gold created by human labor. Because gold is a commodity before it is money, capitalism contains mechanisms to match the supply of money material necessary to support the circulation of commodities with the quantity of non-money commodities.

This mechanism works through successive booms and crises that we’ve been examining throughout this post. Cryptocurrencies contain no such mechanism. Central banks create extra money during crises when the demand for money as a means of payment increases. In contrast, the Bitcoin system contains no mechanism to increase quantity when there’s a sudden increase in demand — the total quantity can never exceed 21 million. Other cryptocurrencies have similar limits.

Stablecoins, in contrast, are a form of credit money. During booms, their quantity can increase beyond the value of the assets that back them. In a crisis, when investors lose faith in the coins and attempt to redeem them in dollars, the entities creating them face bankruptcy. Then the credit money represented by stablecoins is subject to the same massive destruction as commercial-bank-created banknotes in the pre-Civil War U.S.

The COVID-19 aftermath boom, overproduction, and the downfall of Samuel Bankman-Fried

A pattern I’ve noticed is whenever there’s even a hint of tightening in the money market, the value of crypto declines sharply. Conversely, whenever credit conditions ease, its value soars. Since crypto arose only after the 2008 crisis, it has yet to be tested in a real credit crisis. For the first time since 2008, the money market has been going through a prolonged tightening. This hasn’t been caused by the Federal Reserve System, as widely believed, but by the overproduction of commodities that occurred during the COVID-19 aftermath boom.

As of December 2022, the tightening of the money market hasn’t yet climaxed in a full-scale crisis. However, there are indications one is not far off, and crypto’s value has been wilting. It hasn’t served as money as its creators claimed but as a speculative vehicle. Buy it at one price, watch and grow rich as its price climbs. On paper, you get rich. Earning money this way is easier than actually working for it!

This is not the first time this has happened in the history of capitalism. It happened in the South Sea Bubble in the 18th century — even Sir Issac Newton got caught up in that one. Like Bankman-Fried, Newton was a math wiz — he invented calculus! But he couldn’t beat the market. Everybody imagines they’ll know when to get out — but most who get involved in these waves of speculation that periodically sweep capitalism are wiped out before they get out. There was speculation in the stock market in 1929, the dot.com boom of the 1990s, and then mortgage-backed securities in the years leading up to 2008. Bankman-Fried is just another example of somebody who stayed in too long and got wiped out.

When crypto, under the pressure of the tightening money market, began to weaken in April-May 2022, Bankman-Fried bailed out a few weaker crypto firms. He probably imagined — or at least desperately hoped — that the cryptocurrency would soon rally. But it kept falling. FTX had been increasingly acting like a bank — it accepted deposits from customers and promised to make them rich by investing in the soaring cryptocurrencies. But as crypto kept falling, FTX was in real trouble. In addition to the FTX exchange, Bankman-Fried owned a hedge fund called Alameda. Alameda was also invested in crypto, and the real bankers demanded the fund pay back the money they’d foolishly (even real bankers make mistakes) lent the speculative Alameda. So Bankman-Fried took the money on deposit at FTX to pay Alameda’s creditors. This was illegal, but Bankman-Fried must have reasoned the crypto market would soon rally as it had before, and no one would be the wiser.

But the market kept falling. Finally, depositors became suspicious and demanded their money back. FTX was short $8 billion, the swindle collapsed, and Bankman-Fried found himself under U.S. indictment. He was arrested and jailed in the Bahamas, where he had been hiding. Surely he’d be bailed out and be able to avoid extradition. But the swindled investors were furious. Again, no bail, and then Bankman-Fried thought he would show them the stuff he’s made of.

He stayed in a Bahama jail rather than face trial in the U.S. But the digs in Bahama jails were not up to what Bankman-Fried is used to. He agreed to return. The judge set the bail at $250 million. No problem, Mommy and Daddy, law professors at Stanford University in Silicon Valley, came up with the bail. Now the would-be new J.P. Morgan, at the age of 30, is back home living with Mommy and Daddy in California. In the meantime, all his associates are turning state’s evidence to try to avoid jail time themselves. Surely Mommy and Daddy will come up with something to keep their son out of jail.

Now let’s return to my examination of the work of Anwar Shaikh and the value-creating power of human labor.

What determines the regulating capital

Before I examine Anwar Shaikh’s concept of a regulating capital, we need to review Marx’s theory of ground rent. I’ll then contrast how the regulating capital in agriculture and extractive industries is determined, then the regulating capital in industries outside the extractive industries and agriculture.

Last month we saw that in agriculture and the extractive industries, the natural conditions of production play a more significant role in determining labor productivity than in manufacture, where technique plays the decisive role.

This doesn’t mean that technique has no place in determining labor productivity. As in manufacture, the role of technique is immense. But in agriculture and the extractive industries, the natural conditions of production often play a decisive role. (2)

But, technique can only go so far. For example, if there is no copper ore in a region, no level of technique will make it possible to mine it. The same is true in agriculture. As I mentioned last month, the coconut palm plant needs a year-round warm and humid climate to survive, grow to maturity, and bear coconuts. Therefore, it can be grown only in humid tropical climates. In contrast, steel mills can be built in many different climates.

Marx’s assumptions in analyzing ground rent

Marx assumed that both the extractive industries and agriculture have a below-average organic composition of capital. Assuming this is true, the price of production is below the value, or more strictly, the direct price. (3) Though the mechanization of agriculture has advanced greatly in recent decades, we’ll follow Marx about the relative organic compositions of capital invested in agriculture and industry.

In agriculture, the natural fertility of soil combined with climate plays a decisive role in determining the productivity of labor. The development of technique, such as the development of fertilizers and irrigation, can increase soil fertility. Likewise, farm machinery can increase the productivity of human labor employed. But when it comes to ground rent, we’re interested only in the soil conditions that cannot be modified by human labor.

Assume that land is used to grow wheat. We’ll assume there are four discrete grades of wheat-growing land. Grade A is the best, Grade B is the next best, Grade C is worse, and the worst land on which wheat can be grown is Grade D land. We also assume that all branches of production in society, not just other branches of agriculture, are conducted exclusively on a capitalist basis. We assume there are three social classes: the landowners who own the land, capitalists who own the means of production created by human labor, and proletarians who have nothing but their labor power which they must sell to the capitalists to live. (4)

Land that is Grade A is the best, but it’s scarce. Grade B land is not as good as Grade A but is less scarce. C land is worse but still scarce. Grade D land is the worst land. Unlike Grades A, B, and C land, Grade D land is not scarce. All Grades A, B, and C that can be devoted to growing wheat are fully utilized, but only some Grade D land is used. In response to a demand increase, additional wheat production will have to occur on Grade D land. In addition, we assume that technique is equally available to all farmers and does not change over time. (5) Capital invested in all four grades of land yield the wheat-growing capitalist farmers the average rate of profit on their capital once the cost of rent is deducted. Rent is defined as profit above and beyond the average rate of profit. We assume that a separate class of landowners appropriates the rent.

We also assume average business conditions — no booms or recessions. We assume average growing conditions — no droughts, unseasonable freezes, excessive rains, no wars, blockades, sanctions, or other trade barriers. We make these assumptions not because they’re realistic; they’re anything but that. We use the method of abstraction if we are not to lose the forest for the trees. Only thus can we lay bare the economic laws that govern ground rent. Once we do this, we can relax the level of abstraction and proceed to the analysis of real-world conditions. This is the method of abstraction employed by Marx throughout his economic writings.

I’ll start by making the abstraction of what Marx called absolute ground rent, so we can analyze what he called differential ground rent in its pure form. Then we’ll bring in what he called absolute rent. For any math geeks out there, Marx’s theory of differential rent assumes what mathematicians call discrete differences and not the continuity of the differential and integral calculus. In English, this means we assume there are only four grades of land, and those four grades do not blend into one another.

Armed with these assumptions, all the wheat produced on the four grades will have one of four values as well as one of four production prices. Remember, value is a quantity of embodied labor measured in some unit of time; prices of production, like other prices, are measured in terms of the use value of the money commodity measured by the unit appropriate to its use value — for example, ounces or grams of gold.

As we assume a lower-than-average organic composition of capital in wheat production, the individual production prices will be below the individual values and direct prices on all land grades. The difference between the single market price for which a given quantity of wheat sells and its individual production price on a given grade of land is the differential rent. The market price and individual production price for wheat grown on Grade A are identical, so the differential rent on A-grade land is zero. Since we are leaving out absolute rent, the market price of wheat will be governed by the individual production price of capitals invested on Grade A land.

If wheat grown on Grade A land, the best land, were sufficient to meet market demand, only Grade A land would be used. As long as the market price is above the individual production price, farmers will expand their cultivation on Grade A. If we assume demand is expanding, this will cause the market price to rise above the individual production price. If demand decreases, the market  price of wheat grown on Grade A land will fall back toward the individual production price. If demand continues to rise, the farmers will continue increasing production on Grade A land until all that land is fully used.

Assume demand continues to grow. The market price will rise above the individual production price for Grade A-grown wheat. Farmers will start cultivating Grade B land. If demand continues to rise, more and more Grade B land will be cultivated until it’s all used. A further rise in demand means market price rises above individual production price of wheat grown on Grade B land, and this will bring Grade C land into cultivation. Continued demand will eventually use up all the Grade C land, and rising market prices will then force the use of the least fertile Grade D land.

Unlike Grades A, B, and C land, we assume D is not scarce. Therefore, the farmers will continue increasing their use of Grade D land until the monetarily effective demand for wheat is fully met. At that point market prices equal the individual production price of wheat grown on Grade D land. (6) There is still more Grade D land that could be cultivated, but it isn’t because if it were, the market price of wheat would fall below the individual production price on Grade D land. Therefore, a portion of Grade D land will lie idle.

Under our assumptions, the wheat’s market price is ruled by the individual production price on Grade D land, the worst land available. This means capitals invested on Grade D land rule market prices and acts as regulating capitals. Since we assume that the land is not owned by the farmers but by a separate class of landowners, farmers on Grades A, B, and C land will be charged rent by the landowners. The economic role of the landowners is to reduce the profits of the farmers employing A, B, and C land to the average rate of profit. (7)

Absolute rent

The greater the fertility of a piece of land over the worst grade cultivated, the higher the differential rent on that land. Suppose the land is not owned by a class of landowners but by the capitalist state. Then, the state will be able to collect as taxes the super-profits earned on Grades A, B, and C land. If, in contrast, not the state but the farmers own the land, then the farmers themselves, in their role as capitalists, will appropriate the average profit yielded on their capital in their capacity as capitalists, but also the super-profit in their capacity as landowners.

Do those cultivating Grade D land get away without paying any rent? That depends on who owns the land. If owned by private landowners who purchased the land in the first place to earn a rental income, the landowners will also insist on collecting rent on Grade D land. Suppose the farmers refuse to pay rent because they make only the average profit rate before rent. In that case, the landowner will let some Grade D lands lie idle until the market price rises above the individual production price on Grade D land. Marx assumed the market price would rise to the individual value of wheat grown on Grade D land or, using Anwar Shaikh’s terminology, the individual direct price of the farmers utilizing the worst land.

It’s not the individual production price on the worst land that will rule the market price but the individual direct price. The individual direct price on Grade D land will be directly determined by the individual value of the wheat grown. Marx defined absolute rent as the difference between the individual value — direct price — of the Grade D-grown wheat and the individual production price of the wheat grown on it. (8)

Market value versus social value

The individual value of wheat grown on the worst land Marx called market value. It is not the same thing as social value. The social value is governed by the average productivity of the labor used in cultivation on all four grades of land. Marx assumes that agricultural market prices won’t be governed by social value. The reason is that the capitalist farmers with capital invested in all lands except the worst — Grade D — due to the shortage of land better than D will not be able to increase production to the point where the market price will fall to their direct prices. (9)

Landlords will charge absolute rent on the worst land. They’ll force farmers on the other grades of land to pay absolute rent as well as differential rent. Those on the worst land pay only absolute rent. As a result of the market price rising above the individual production price of the worst land, the workers will have to pay more for bread. This obliges the capitalist to pay higher wages than if only differential rent was charged. The result of private land ownership is a reduction of the average rate of profit..

Lenin, land, rent, and the Russian Revolution

Lenin is remembered as the originator of the concept of a tightly-knit revolutionary vanguard party that excluded the right and centrist wings of the old pre-1914 Social Democratic parties of the Second International. Lenin showed in his writings and practice that such a party is necessary if the working class is to seize and hold state power. He’s also remembered for his 1916 pamphlet on the monopoly or imperialist stage of capitalism, his insistence on the right of all nations to self-determination, the distinction between oppressed and oppressor nations, and his instance on the need to smash the machinery of the capitalist state as opposed to taking it over. (10)

If Lenin had died ten years earlier than he did, he’d be remembered primarily as the Marxist who wrote more on the question of landed property, agriculture, and the peasantry than any other. (11) These concepts and more represent what’s called Leninism. But we can only understand his thoughts on agriculture and the peasantry by understanding Marx’s economic theories in general and that of landed property and ground rent in particular.

Certain radical followers of Ricardo advocated the nationalization of land. Léon Walras, the founder of neoclassical general equilibrium theory, advocated state ownership of the land, the essence of neoclassical equilibrium theory socialism. Supporters of reformer Henry George wanted only the land’s rent to be taxed. George claimed that if only land income — ground rent — were taxed, all the social ills associated with capitalism would be solved. (12)

If the capitalist state assumes land ownership, there’s nothing to prevent it from allowing the capitalists to use Grade D land free of charge. The capitalist state can confine itself to collecting only the differential rent. The market price of agricultural produce will then be governed by the individual production price of the produce grown on the worst land, not the individual value. The state can do this and still perform its economic duty as landowner, assuring that capitalist farmers make only an average profit rate. (13) Assuming the land was previously owned by a separate class of landowners after the state assumes ownership, the average profit rate on capital rises after ownership is transferred to the state.

Based on Marx’s work on ground rent, Lenin pointed out that the nationalization of the land is not in and of itself a socialist measure, though socialism without the nationalization of the land is impossible. As we’ve seen, the nationalization of the land is necessary if the profit rate of capital is to be maximized. Lenin considered the nationalization of the land to be part of the bourgeois revolution, not the socialist one. To Lenin, nationalization is necessary for establishing the optimum conditions for capitalist development. In both the Marxist and the Leninist sense, figures like Henry George and Leon Walras were not socialists, though their opposition to private land ownership was progressive. For Lenin, in the course of bourgeois revolutions, he thought primarily about the approaching revolution, not only in Russia. Bourgeois advocates of nationalization of the land are temporary allies of the proletariat during the (bourgeois) democratic revolution.

Only by understanding the question of land and agriculture can you understand the development of Russia from the semi-feudal autocratic czarism prevailing up to 1917 to the Bolshevik Revolution and the successive stages it passed through to Stalin’s era of collectivization of agriculture and socialist industrialization. Political terror and repression accompanied the collectivization of agriculture and industrialization as well as bloody purges within the Communist Party; the phase of de-Stalinization followed, a reaction against the terror and purges of the Stalin years within the CPSU bureaucracy, climaxed in the political and social capitalist counterrevolution of 1985-1991. (14) The political and social counterrevolution negated the socialist achievements of the Russian revolution but not its bourgeois democratic achievements. Today’s Russia is capitalist but not feudal or czarist. In this sense only, Vladimir Putin, like Napoleon, is the son of a revolution.

The existence of a separate class of landowners is a relic of feudalism. Feudalism is a ruling class based on the ownership of land, not capital. The capitalist and landowning classes are completely intertwined in today’s mature (rotten) capitalism of the imperialist countries, especially those of colonial settler origin. The members of the ruling class own both capital and land. For purposes of theoretical analysis, we separate these different economic offices filled by the same wealthy individuals and families. For example, the original John D. Rockefeller, monopolistic owner of oil wells (industrial capitalist) and oil-bearing land (landowner), was both an industrial capitalist who pocketed profits on his industrial capital and a landowner who pocketed rent on the oil-bearing land he owned. The dual role as an appropriator of profit and rent was the source of Rockefeller’s wealth. But this fusion of capitalist and landowner is not only characteristic of capitalist countries of colonial settler origin. Today’s British royal family, a true feudal relic, owns vast amounts of land as well as stocks and bonds in capitalist corporations. British royals under King Charles III are both post-feudal landowners and modern money capitalists. The same is true of the Vatican, which controls the Roman Catholic church, another major feudal relic.

Anwar Shaikh and ‘regulating capital’

The theory of differential and absolute rent gives rise to the concept of regulating capital. In Marx’s theory of ground rent, regulating capital is the capital invested on the worst land. Let’s see what Shaikh has to say about the regulating conditions of production and regulating capital. He writes, “New investment must be able to replicate the conditions of these particular capitals. The profit rates of these regulating capitals [emphasis Shaikh] will be the focus of new investment.” [“Capitalism: Competition, Conflict, Crises,” Anwar Shaikh, p. 265].

He goes on to explain that the regulating condition can take various forms. The simplest is that the average conditions of production are the regulating ones. In terms of determining the social value of commodities, the average of the individual values determines the social value of commodities. But average conditions do not necessarily regulate prices. In the example of differential and absolute ground rent, the capital working in the worst production conditions regulates price. The natural conditions of production that play a major role in determining the differences between individual commodity values can’t be reproduced by human labor, given the prevailing level of technique.

Shaikh continues: “Another possibility is that the reproducible conditions are the highest cost ones in use. For instance, in agriculture or mining, the very best mines/lands might be fully exploited, as might be the second best ones, and so on.” [p. 266]

“The margin of cultivation will be the regulating condition of production in agriculture, the point of entry for new investment.” [p. 266]

This is so in Marx’s theory of differential and absolute ground rent examined above.

Shaikh says, “First, nothing in this argument implies that regulating conditions are ‘infinitesimal.’ Second, given that competition among producers will enforce a common price, lower cost producers will tend to have higher profit margins.” [p. 266]

By higher profit margins, he means higher profit rates relative to the average rate. “This means that better mines and land will earn excess profit for the producers simply because their conditions are not reproducible. This excess profit is economic rent.” [p. 266]

He should have said differential rent; because if they are not reproducible either directly or indirectly by human labor at a given development level, these production conditions are likely to be scarce. If they are reproducible, their scarcity can and will be overcome by the application of direct and embodied human labor.

Are there situations where capitalists working with the best equipment-producing commodities with the lowest individual value and lowest production prices rule market prices? Shaikh: “This situation occurs where higher cost ones represent older methods which remain in operation but are no longer competitive.” [p. 266-7]

This is true under market conditions where only capitalists working with the best equipment and the lowest cost prices can sell all they can produce in a given time at their individual production prices. This implies that other capitalists will be forced to sell their commodities below their individual production prices and pocket less than the average profit rate on their capital if they appropriate any.

Older production methods might remain for a while. The capitalists might write down on their accounting books the value of the old fixed capital to nothing. They’ll take a one-time hit in their profits. It’s common in industry to find machines in use whose book value has long since been fully depreciated. This is a bookkeeping categorization. The art of accounting can only approximate the actual profit rate. Often accounting tricks are used to hide profits from trade unions and tax collectors and losses from the stock exchanges and bankers. Industrial capitalists using older equipment often go bankrupt. Then, other capitalists can purchase the equipment at a fraction of the price minus depreciation that the bankrupt capitalists paid for them. They’ll then be able to run the business profitability using old equipment the original capitalists could not.

Or business can be depressed due to an unfavorable stage of the industrial cycle. During a depression, a capitalist’s individual production prices, working under the most favorable conditions, can rule market price. But depressions don’t last forever. Once average business conditions return, the market price will again be determined by the individual production prices of capital.

Unlike the static conditions we assumed when looking at the theory of ground rent, in the real world driven by real competition, values — whether individual social, national social, or global social — are constantly changing. With the advance of productive forces and the consequent rise in labor productivity that characterizes the history of the capitalist production mode and forms its historical justification, the course of commodity values is downward. The factories that represent the most favorable production conditions today represent only the average production conditions tomorrow and, the day after, the worst conditions of production. And then they’ll be junked for scrap.

In addition, we must remember the successive changes in the phases of the industrial cycle that run from crisis, depression/stagnation, average prosperity, boom, and climaxes again in a new crisis. Not only are values constantly changing in a downward direction, but market prices fluctuate around ever-changing production prices, themselves governed by ever-changing values. Prices are measured in the use value of the money commodity, whose value constantly changes.

Rises in market prices measured in real money — gold — causing prices to rise above value-governed production prices must be compensated by downward price movements in the opposite direction. Attempts by the capitalist state to contain the industrial cycle, particularly its downward phase, by devaluing or allowing the currency’s value in terms of gold to fall adds a new layer of chaos. Out of this chaos, the law of the value of commodities imposes order, though an unstable one. This is the essence of Shaikh’s real competition (15) that he counterposes to the static model of general equilibrium neoclassical theory. (16)

Real competition in manufacturing

While factories must be built on land, the land’s natural qualities are less important than in the agriculture and extractive industries. The differences in productivity between different industrial enterprises producing commodities of the same use value and quality are overwhelmingly dominated by differences in technique, not the natural conditions of production. Technique is anything but static. It’s constantly advancing with the advancement of science, technology, and engineering. Industrial capitalists producing under the most favorable conditions — lowest cost prices — realize super-profits. But super-profits are transient as competitors adopt the same techniques and improve on them.

Capitalists are constantly trying to establish monopolies that last as long as possible with the most advanced technology available to continue getting their super-profits, sometimes called technological rents. But, they differ from ground rent. Ground rent relies on shortages of the best land imposed by nature, and competition cannot eliminate differential rent. Competition can’t eliminate absolute rent as long as private ownership of land exists. Competition also constantly undermines technological super-profits as technology monopolies are transitory, so we should avoid the term technological rents.

The patent system and technological super-profit

The patent system is designed to prolong the period of super-profits. The state grants patent-holders a monopoly right to produce certain products or use certain industrial techniques. An inventor can sell the invention to a capitalist as a commodity, much like a landowner can sell the land. Companies exist whose only business is to buy and sell patents. In recent decades, the length of time that state-enforced patent monopolies apply has been progressively extended. During the rise of capitalism in the United States, U.S. capitalists simply ignored  British patents. After independence, enraged British patent holders could do nothing about it.

Today, however, capitalists of the U.S. and its imperialist satellites insist that all countries recognize patent monopolies enforced through the World Trade Organization (WTO), which establishes international trade rules. If a nation allows patent violation, it’s subject to strict penalties that make it challenging to engage in world trade. The WTO forces developing countries’ state power to enforce patent monopolists of the United States and its imperialist satellites. It is a crucial pillar of the U.S. world empire.

The justification for patents is that without them, there would be be no incentive for capitalists to spend money on development. Each capitalist would wait until their rivals developed new technologies and then use them. Since no one would spend any money on developing new technology, no new commodities would be developed, and labor productivity would stagnate. Competition is supposed to be the spur to progress. But if the state stays out, competition itself will block all progress! State-enforced monopoly is needed to allow competition to do its job!Let’s leave aside the question of monopoly, whether state-enforced or otherwise. Assume Shaikh’s real competition, which allows little room for monopoly except that of the capitalists and landowners in the ownership of means of production. When they carry out major new investments — for example, building a large factory — they use what engineers call best practice. Though the rate of surplus value plays a role, as a rule, best practice means as a rule producing commodities of a given use value and quality with the least amount of human labor. Each capitalist examines what new investment can be made, given the expected profit rates on each type of investment. Of course, nobody knows what future profit rates will be. Major investments require fixed capital advanced over many years, even decades. Over that time, both the demand for and the value of commodities can change dramatically and in unexpected ways, e.g., the development of personal computers in the late 20th century destroyed the demand for typewriters.

Capitalists choose investments they believe will yield the highest profit rate relative to other alternative investments. Best practice is determined by the level of technique and the rate of surplus value at the time the investment is made. Shaikh reasons that regulating capitals are those that use the best practice, which usually means producing commodities with the least labor or the lowest individual value. Capital producing at the lowest individual value then acts as the regulating capital.

This conflicts with the fact that social value is determined by the labor of average productivity, not by that of the greatest productivity. When the economy is in the depression-stagnation phase of the industrial cycle, individual production prices of capitalists with the most advanced technique and highest labor productivity rule market prices. But this is an exceptional situation. The average profit rate refers to profit rates in different industries as well as the average of good and bad years.

During the depression phase of the industrial cycle, commodity market prices are depressed below their production prices. Then market prices are governed not by the social prices of production but by the individual production prices in the most favorable conditions of production. In an extreme crisis/depression, market prices might fall below the individual production prices of the most favorable conditions of production. It also means that the opposite situation will prevail in gold mining and refining, the industries that produce money material.

Money material — gold or whatever commodity serves as money, as explained in previous posts — has no price in the proper sense of the word. It’s meaningless to measure the value of gold in terms of gold, but capital invested in the gold mining and refining industries does have a profit rate that is measured in terms of gold.

Like all other capitalists, those in the gold mining and refining industry advance a sum of money. If all goes well, they end up with a greater sum than they began with. When measuring profit in any capitalist industry, we begin with one sum of money (some quantity of gold) measured in some unit of weight and end up with a greater quantity of money measured in the same unit. The only difference is that capitalists in these industries don’t have to sell their commodity to make money — their product is already money. This means that labor used in producing gold, unlike that used in other branches of production, is directly social. The labor used to produce money material doesn’t have to show it forms a fraction of the social labor by being exchanged for money material.

Since gold is an extractive industry, we assume that gold produced from the worst gold-bearing land determines the market value, like wheat grown on the worst wheat-growing land determines the market value of wheat. During the depression-stagnation of the industrial cycle, capitals invested in the worst gold-bearing land realizes a profit above the average profit rate even after payment of absolute rent on the gold-bearing land. As a result, gold mining on the worst land expands, meaning an accelerated growth rate of the world’s money supply, which leads to an expansion of the market for other commodities. (17)

During the economic boom, the opposite situation exists. The profit rate equals the long-term average on capitals producing under the least favorable conditions of production. The profit rate is highest for those producing with the most advanced technology or best practice. Here the profit rate is highest not only relative to all other industries but relative to other phases of the industrial cycle.

Again, the opposite prevails in the mining and refining industries. Profits sink below the average or disappear altogether on capitals invested in the worst gold-bearing lands. As a result, gold production on these lands shrinks, leading to tight money that’s blamed on the central bankers, ending the boom. (18) Production prices and values of non-commodities and the profit rates on capitals invested in the production of non-money commodities above the long-term average conditions lead to the opposite situation where prices are below the production prices, and prices and profits are below the long-term average. The cyclical movement of the profit rate in the industry producing the money commodity moves in the opposite direction of the profit rate of other branches of industry. So, the industrial cycle of boom years is followed by crisis, depression-stagnation, recovery, and average prosperity, and then the boom keeps reproducing itself as long as capitalism exists. Shaikh’s failure to fully understand Marx’s theory of the form of value under capitalism — that money itself is a commodity produced for profit — stands in the way of fully understanding the nature of real-world capitalist competition and its ultimate results.

During the crisis and depression-stagnation phase, the oldest factories that produce with obsolete technology will be scrapped. Even if there are no new investments and the investment rate is depressed, the value of commodities falls because closing the oldest, most high-cost factories produce commodities of the highest individual value are closed. Closing down old high-cost factories lowers the average value of the social value of commodities. During the boom, investment is high in new factories with the most advanced production methods, and commodities’ social value drop for the opposite reasons. The increase in factories using less human labor reduces the average amount necessary to produce a commodity of a given quality and use value.

During the boom, when new factories are constructed and opened, prices don’t immediately drop due to the high demand created by the multiplier and accelerator effects. Because the increase in gold production slows down relative to commodity production — the definition of generalized relative overproduction of commodities — it’s only a matter of time before the slowing growth rate of global gold supply will end in a crisis.

Let’s view this process more concretely as it unfolded in the years following World War II. Coming out of the war, the United States had the most advanced industrial plant in the world. The Depression stimulated gold production, while the Depression and then the war economy depressed production of most non-military commodities. Once the war was over, prices, profits, and commodity production began to rise — first in the U.S. and then in Western Europe and Japan. However, production expanded faster in Western Europe — and even faster in Japan — than in the U.S. or Britain. In Western Europe — and more so in Japan — new factories used the most modern techniques available by the war’s end. But in the U.S. and more so in Britain, factories were older and used older technology. Britain, the first country of modern industry, had huge amounts of accumulated fixed capital representing obsolete techniques. They produced commodities with a lower labor productivity at higher individual values. As long as the boom, financed with the new gold produced during the Depression and expressed by an accumulation of reserves in the U.S. banking system, continued, even old factories were earning at least average profits while the new Western European and Japanese factories earned super-profits. (19)

By the end of the 1960s, global overproduction developed to the point that the super-profits of the new industries in Western Europe and Japan were threatened, but the U.S. and Britain had the oldest factories whose continued ability to make any profits was undermined. World gold production slowed, and the accumulation of excess reserves in the U.S. banking system was now fully absorbed by increased global production and higher prices. The U.S. and British reaction to this was to junk what was left of the international gold standard, called the Bretton Woods System. Gold was to be demonetized, and a new international monetary system of non-commodity money centered on the dollar was established. However, this violated capitalist production’s economic laws and was doomed to fail.

If the dollar could be established as non-commodity money, U.S. and British policymakers figured the permanent boom it would make possible would enable their aging industries of the U.S. and Britain to remain profitable. But the law of value, operating in what Shaikh calls real capitalist competition, would not permit this. The U.S. dollar plunged, and the British pound more so. Stagflation hit the U.S. hard and Britain even harder. West Germany’s industries had been rebuilt after World War II using the most advanced techniques and was less affected. With so many new industries, individual commodity values of West German industries were below world market social values. The mark was devalued less than the dollar and the pound, and both inflation and the long-term economic growth slowdown were less severe in Germany and Japan.

The dollar and pound crises and the inflation they bred forced the Federal Reserve System, under Paul Volcker, and the Bank of England to take measures to halt the depreciation of these currencies. Soon after, the collapse of much of the old industrial base in the U.S. and more so in Great Britain quickly followed. The U.S. rust belt was born, and Britain was largely de-industrialized. De-industrialization was less marked in Western Europe and largely absent in West Germany and Japan, an example of real capitalist competition.

Today, the rise of industry in mainland Asia, especially the Peoples’s Republic of China, but not only there, threatens a new wave of de-industrialization. The U.S. is doing all it can to pass on the weight of de-industrialization to other nations. This includes its enemies, such as China and Russia, as well as its so-called allies, especially Germany. Mercantilist policies again dominate, no matter how much comparative advantage economists deplore it, as all countries engaged in capitalist production are driven by the laws governing capitalist production to battle for the domination of the world market.

The battle for control of the world chip market

Now we have examined Anwar Shaikh’s writings on the laws governing world trade. Shaikh correctly explains it’s not the law of comparative advantage but that of absolute advantage governing world trade. The time has come to be more concrete.

Last August 2022, then Speaker of the House Nancy Pelosi staged a provocative visit to Taiwan. For a while, it seemed a full-scale shooting war between the U.S. and the People’s Republic of China might be immanent. While war didn’t occur, the danger remains. Behind the visit to Taiwan is the attempt of the U.S. world empire to maintain its domination of the market for computer chips, come what may. This is an important example of the war-breeding neo-mercantilist economic policies of the U.S. government that have been pursued both under the Trump and the Biden administrations. This will be the subject of next month’s post.

(1) Fredrick von Hayek (1899-1992) was, along with Ludwig von Mises (1881-1973), the main leader of “Austrian” economists of the 20th century. Von Hayek is most well-known to non-economists for his book “The Road to Serfdom,” first published in 1944. In this book, he argued that even mild social reforms, such as those advocated by Keynes, would inevitably lead to central planning, which would lead to a totalitarian state and a new serfdom. The “Road to Serfdom” has become a kind of bible for libertarians. (back)

(2) In political economy, the natural conditions of production are called land. (back)

(3) Value represents a quantity of labor measured in some unit of time. Price is measured in a quantity of the use value of the money commodity. The use value of money is measured in whatever unit of measure appropriate to the use value of the money commodity — for example, grams or ounces of gold. When a commodity sells at its value, the quantity of use value of money constituting that commodity’s price has the same value as the commodity whose value the money measures. (back)

(4) Here, we abstract the peasantry. The peasant question played a decisive role in all major revolutions of the 20th century. Until the end of the century, most of the human population were peasants. To abstract, the peasantry, in determining political strategy or analyzing the revolutions of that time, led to disastrous political conclusions. But in analyzing the laws of motion that govern capitalism, it’s necessary to abstract the peasantry and other small producers who own their means of production. This abstraction is necessary to analyze capitalism in its pure form, where all persons are either landowners, capitalists, or wage workers. This abstraction was done by Adam Smith and David Ricardo, who, before Marx, described capitalism’s main class as landowners collecting ground rent, capitalists collecting profit, and wage workers whose income takes the form of wages. (back)

(5) This assumption, as Marx knew, was false. It would be more false now if that were possible. We must abstract technological change to analyze ground rent. A concrete study of the development of modern agriculture drops the assumption of static, unchanging technique in agriculture and looks at the revolutionary changes in technique. (back)

(6) Capitalist economists assume that demand is governed by human needs. Under capitalism, it’s only monetarily effective demand that counts. Hundreds of millions of people worldwide would like to consume more bread, but their low monetary income doesn’t allow them all they need. As a capitalist farmer would explain, “I cannot give my wheat away to hungry people because I must make money. If I can’t make money, I’ll be forced to quit farming.” (back)

(7) A second case of differential rent I haven’t examined above involves differential rent arising from the successive investments of capital on a single grade of land that yields its owner a differential rent. Successive investments at a certain point yield a declining profit rate on the last (marginal) investment because the extra amount of capital that can be invested in a fixed quantity of land is limited. At some point, the profit rate on new capital invested declines. This continues until the return rate on the last capital invested equals the average rate of profit. This case of differential rent will be familiar to people who’ve studied marginalist economics, whether the Austrian or neoclassical schools. In both, differential rent arises from the scarcity of land of a given quality. If there were no such scarcity, differential rent wouldn’t exist. Marginalism incorrectly extends this analysis to all commodities based on the false assumption that the value of commodities arises from scarcity. The marginalist method is simply a mathematical tool to analyze scarcity. (back)

(8) Would absolute rent in agriculture or the extractive industries disappear if the organic composition of capital in those industries disappeared? If the organic composition of capital rose above the average organic composition of industry, then yes. In this case, the price of production of commodities produced on the worst land would be above the individual value — direct price — of these commodities. If the organic composition of capital in agriculture and/or the extractive industries were equal to the average organic composition of industry as a whole, the individual value of the direct price of these commodities would equal the value of commodities. In that case, the difference between the market price (a weight of gold) and the individual production price would be zero., and the absolute rent would be zero. In the case where the organic composition of capital in these industries was higher than the average, then the difference between the individual direct price and the individual price of production of the commodities produced on the worst land would be negative. There would be no absolute rent.

However, there would be nothing to prevent a class of private landowners from letting a portion of the worst land lie idle until the market prices rise above the individual price of production. Then rent on the worst land could be described as monopoly rent rather than absolute rent. The demand for the nationalization of the land would retain all its force. (back)

(9) Certain writers over the decades — for example, the Social Democratic revisionist Edward Bernstein and today Michael Heinrich — attempt to reconcile the view of value determined by the quantity of abstract labor necessary to produce a commodity of a given use value and a given quality with the view that the demand for a given commodity determines value. One way to do this is by pointing to the classical and Marxist theory of ground rent. In analyzing differential and absolute ground rent, didn’t Marx state that market value is determined by the individual value of the commodities produced on the worst land? They argue that the stronger the demand, the more land must be used to produce that commodity. As demand increases, poorer and poorer land is used, causing the market value to rise. Both demand and the quantity of labor socially necessary to produce a commodity,  play a role in determining the value of a commodity.

These writers criticize bourgeois marginalist economists for ignoring labor’s contribution to value and orthodox Marxists for ignoring the role of demand in creating value.

However, it is not the individual value of the commodity produced on the worst land that determines its social value. The average quantity of abstract human labor under the prevailing conditions of production determines the value of commodities. As long as a commodity takes human labor to produce and meets some human need the commodity has value. If one or both of these conditions don’t exist, the object is not a commodity.  If the demand for a commodity increases to the point that worse land has to be bought into production, then the value of the commodity would rise in value only to the extent that the quantity of labor determined by the average conditions of production would rise. Otherwise, changes in demand can only affect market prices, not their value. Value determined by labor exists prior to market price. (back)

(10) Shaikh rejects Lenin’s view on a monopoly stage of capitalism as articulated in his 1916 pamphlet on “Imperialism.” In his economic views on imperialism, Shaikh is not a Leninist. (back)

(11) Lenin’s views on the peasantry go beyond the view that the workers must unite with the peasantry. He pointed out that the peasantry under capitalist conditions is not a class but a series of classes. The rich peasants, called kulaks or “fists” in Russian, were incipient capitalist farmers. They become part of the capitalist class as they exploit more and more wage labor. The poor peasantry still retains ownership of some means of production. Still, it cannot maintain its wretched standard of living by selling or consuming the products produced on its tiny farms. These poorest peasants were forced to sell their labor power either to rich peasants or other capitalists. The poor peasants are  semi-proletarians. The middle peasants are in between, neither exploiting wage labor nor being forced to sell their labor power to the capitalists.

In the coming Russian bourgeois revolution, Lenin believed the large urban capitalists, the liberal bourgeoisie, would attempt to ally with the landowners to liberalize czarism but not overthrow it. The peasantry as a whole had an interest in overthrowing landed property but not capital. They would be a revolutionary ally in the struggle of the Russian working class to thoroughly democratize Russian society along bourgeois-democratic lines. This alone could win full democratic rights for the workers’ movement. The large capitalists could, at best, be neutralized, though the large capitalists would be the big winners in a bourgeois revolution. Politically the alliance of the working class and peasantry would be expressed in what Lenin called the revolutionary democratic (but not socialist) dictatorship of the proletariat and peasantry. Lenin predicted before 1917 that in the event of the victory of the (bourgeois) democratic revolution, the rich peasants would unite with the large capitalists and landowners in a counterrevolution to restore czarism. This was the alliance of class forces Lenin foresaw in the coming bourgeois democratic Russian revolution.

In the socialist revolution, the working class would find allies not in the peasantry as a whole but only among the poorest peasants. Middle peasants could, at best, be neutralized, while rich peasants would be the most stubborn allies of the large capitalists. Politically this would be expressed in the dictatorship of the proletariat allied with the poorest peasantry that would try to neutralize the middle peasants. The dictatorship of the proletariat would struggle to keep the poor peasants as allies while the rich peasants would attempt to win over the middle peasants to the cause of the bourgeois counterrevolution.

How this all worked out in practice during the Russian Revolution, the Chinese Revolution, and other 20th-century revolutions that shaped the early 21st-century world can hardly be dealt with in a footnote. Understanding the results, achievements, and limitations of the last century is a central question that, as Marxists, we face in the approaching 21st-century revolutions. (back)

(12) In the People’s Republic of China, while industry is today conducted along capitalist lines, land remains state-owned. The evolution of agriculture and landed property in Russia, Ukraine, and other former Soviet nations since the 1985-91 political and social counterrevolution are of great interest though little is said about this in the West. (back)

(13) In the U.S., the federal government owns vast amounts of mineral- and oil-bearing land in the West. The government performs its role as landlord poorly, allowing the capitalists that lease this land to pocket the lion’s share of the ground rents rather than collecting the rents in the form of taxes. (back)

(14) Economically, one of the most important developments of the de-Stalinization period associated with Nikita Khrushchev was the decision to sell off state-owned farm machineryto the collective farms. As a result of this reform, many of the poorer collective farms went bankrupt while the strong ones emerged as the owners of farm machinery. Stalin’s final pamphlet, “Economic Problems of Socialism,” opposed this reform and he organized the 19th Party Congress, the last to be held under his leadership, to fight against this reform. He died shortly after this Congress, and the reform was implemented after the 20th Congress, the one where Khrushchev denounced Stalin’s personal dictatorship over the party and the accompanying bloody purges, terror, and repressions that were directed against many party leaders and members. (back)

(15) Shaikh’s analysis of real competition is limited by his belief that modern money is non-commodity money. This view is incompatible with Marx’s theory of value and the real scientific part of Shaikh’s work. As we will see, his mistakes on the theory of money have important implications for his views on monopoly. (back)

(16) The static nature of Marx’s models of reproduction were used by the opportunist wing of the Second International to prove that capitalism could last forever, making socialism a mere moral idea rather than a necessity. (back)

(17) Under today’s dollar-based international monetary system, accelerated gold production means the U.S. dollar price of gold will fall. It becomes possible for the U.S. Federal Reserve System to increase the rate at which it issues new dollars causing interest rates to fall without the dollar depreciating. Or as it appears to the members of the Federal Reserve System open market committee without causing inflation to accelerate. It appears to the lay public, the economists, and the Federal Reserve that its stimulative monetary policy fuels economic recovery. In reality, the economic recovery is fueled by the rising production of money material. The rising rate of increase of money material is caused by the rising relative and absolute rate of profit in the gold mining and refining industries. Rising profits in the gold-producing industries are the result of the fact that commodity prices in gold terms have fallen below their prices of production. Shaikh’s false belief that modern money is non-commodity money prevents him from understanding this process. (back)

(18) When the economy is overheated, overproduction backed by over-trading occurs, and the belief prevails among the lay public, the economists, and the Federal Reserve System itself, that the Fed’s tight money policy is slowing down the overheated economy. Progressives and others complain that the Fed’s tight money policies are leading to recession, and when the recession arrives, the Fed is blamed for it. In reality, it’s the rate of growth in the production of non-money commodities increasing faster than the rate of increase of the world’s supply of real money — gold — that makes recession assuming capitalist production is retained inevitable. This is the situation we are in at present (December 2022). When the production of gold fails to keep up with the production of non-money commodities, this shows that market prices have risen above their prices of production. Again Shaikh’s misunderstanding of the nature of modern money prevents him from analyzing this correctly. (back)

(19) It’s often claimed that the rapid expansion of the market after World War II was caused by applications of expansionary policies advocated by John Maynard Keynes. Or alternately by the high level of military spending, particularly by the U.S. government, often called military Keynesianism. The post-war boom was also attributed to the development of nuclear energy (which, contrary to predictions, has yet to replace fossil fuels), the development of electronic computers (a process that was still in its earliest stages at that time), and the continued mechanization of industry which received a new name: automation.

The real reason for the wave of accelerated economic growth was the sharp rise in gold production caused by the fall of market prices to levels below their prices of production during the Depression. Then, the growth in the world gold supply accelerated while the production of non-money commodities was stagnant. During World War II, while production of war commodities soared, the production of civilian commodities declined further. When the war economy was largely shut down immediately after the war, the accumulation of gold during the Depression fueled increased demand for civilian commodities. It took several decades for expanding commodity production and gradually rising prices in gold terms to fully absorb the extra currency that central banks created as a result of the accumulation of gold during and after the Depression.

Eventually, accelerated by the Vietnam war, the extra demand raised market prices above the price of production, bringing the wave of accelerated economic growth to a halt. During the period of the boom, new inventions developed during the Depression and World War but not put into production could now be utilized in civilian production. The new inventions didn’t cause the boom but the boom made it possible for these new inventions to be used on a large scale. (back)