Rate of Interest | A Critique of Crisis Theory

Archive for the ‘Rate of Interest’ Category

Gold Bullion, Jewelry, and the Monetary and Non-Monetary Uses of Gold

January 31, 2010

A reader asked to what extent gold jewelry can be considered money. A second reader wants to know the implications of the crisis theory developed in my posts for the so-called transformation problem—the transformation of values into prices of production as a result of the equalization of the rate of profit.

Both are excellent questions, and they point to the method behind these posts.

When I first conceived the “Project” back in the 1970s, I imagined that I would write up a section on the nature of the law of value, surplus value, money and prices, and competition, and then finish it with a section on crises. Hadn’t that been Marx’s plan?

Well it proved too much for even Marx!

In fact, the basic work on value, surplus value and its division into profit (interest plus profit of enterprise) and rent, money and prices had, after all, been done by Marx. Marx based himself on his predecessors, the bourgeois classical political economists, especially David Ricardo. Therefore, the basic work of criticizing bourgeois political economy was already accomplished.

In order to cut the “Project” down to size, I assumed that readers would already have mastered Marx’s critique of political economy. Not only do we have the work of Marx, but we have many popularizations of that work, though in the nature of things some of these popularizations are better than others.

Gibson’s Paradox, the Gold Standard and the Nature and Origin of Surplus Value

January 17, 2010

Charley in a comment on this post pointed out an article, “Gibson’s Paradox and the Gold Standard,” by U.S. marginalist economists Robert B. Barsky and Lawrence H. Summers, that appeared in the June 1988 edition of the Journal of Political Economy.

To tell the truth I played with the idea of working Gibson’s paradox into the main series of posts but ultimately couldn’t quite find an appropriate way to do it. I therefore am delighted that Charley raised the subject.

Gibson’s paradox—a term coined by Keynes in his 1930 book “A Treatise on Monetary Reform”—is named for British economist Alfred Herbert Gibson, who noted in a 1923 article for Banker’s Magazine that the rate of interest and the general level of prices appeared to be correlated.

The “paradox” involves a major contradiction between marginalist economic theory on one hand and the actual history of prices and interest rates under the gold standard on the other.

The question of “interest” involves the holiest of holies of economics, the nature and origin of surplus value. The marginalists confuse the rate of interest, which is only a fraction of the total profit, with the rate of profit. They falsely claim that if the economy is in equilibrium, there will be only interest and no profit. They therefore make their task of explaining away surplus value much easier by first reducing the total surplus value, or profit—which is divided into interest and profit of enterprise—plus rent, into interest alone.

Why Prices Rise Above Labor Values During a Boom

January 3, 2010

Nikolas wants a clearer explanation of exactly what causes commodity prices to rise above their labor values during the upswing in the industrial cycle. In order to fully grasp the nature of the capitalist industrial cycle, it is important to understand why this is so.

In my answer to Nikolas, I want to emphasize that I am discussing changes in prices in terms of money material, or gold. I am not interested here in price changes that represent changes in the value of paper money in terms of real money—gold. I am also assuming for purposes of simplification a single ideal industrial cycle and ignore the question of long waves or long cycles in prices, since these do not affect the basic argument I am making.

Responses to Readers — Austrian Economics Versus Marxism

December 20, 2009

Some readers have expressed interest in the Austrian School of economics. What is the Austrian School, and what is its role?

The Austrian School is a branch of marginalist economics. It differs from the other schools of marginalism by avoiding mathematics. Instead, it specializes in advocating marginalist ideas in ordinary language. In contrast, most of the other schools of modern marginalism specialize in building mathematical models that are only accessible to those who have mastered the necessary higher mathematics.

The reason why the Austrian School avoids math is that unlike most professional economists they aim their arguments at the “non-mathematical” lay public. The Austrian School—as its name implies—began in German-speaking Austria. As a result, it soon found itself in intense ideological combat with the Marxist-led Austrian workers’ movement. While most marginalists simply ignored Marx, the Austrian School attempted to refute him.

The Austrians specialize in demoralizing intellectuals attracted to the workers’ movement, attempting to steer them toward reactionary bourgeois economics and politics instead.

Since they concentrate on refuting Marx, they are frequently somewhat more familiar with Marxist ideas than are most professional bourgeois economists. As intellectuals they love to play with ideas, and have in fact absorbed certain ideas from Marx, which they use for their own purposes. Undoubtedly, Austrian economic theory was influenced by the Austro-Marxist School and the Austro-Marxists were, in turn, influenced by the ideas of the Austrian School. I will examine some of these mutual influences below.

Factors that Limit the Life Span of the Capitalist System

December 6, 2009

In this final post in the series that began in January 2009, I will summarize the various factors that make impossible the permanent existence of the capitalist system of production.

First, let’s examine the effects of the tendency of the rate of profit to fall. Many Marxists see this tendency as the crucial factor that dooms the capitalist system to perish in the long run.

Capitalism is above all a system of production for profit and only profit. But Marx showed that with the growth of the productivity labor—expressed under capitalism by a rise of the organic composition of capital—the rate of profit tends to fall. A major contradiction of capitalism is that though it is a system of production for profit its very development tends to lower the rate of profit. Doesn’t this make the downfall of capitalism inevitable sooner or later.

The ‘Long Cycle’—Summary and Conclusions

November 1, 2009

In this series of posts, I have examined the question of whether the capitalist economy experiences cycles that are considerably longer than the industrial cycles of approximately 10 years. It’s been proposed by various economists over the last hundred years that in addition to 10-year industrial cycles and shorter “inventory cycles,” there also exists a “long cycle” of approximately 50 years’ duration.

Over the last several months, I have examined the concrete history of the cycles and crises that have occurred in the global capitalist economy from the crisis of 1847 to the crisis of 2007-09. Over these 161 years, we have seen decades when economic growth surged ahead, and other periods dominated by prolonged depression or stagnation.

Changing patterns of cycles and crises

While industrial cycles of approximately 10 years have been a remarkably persistent feature of capitalism, there have been periods when these cycles have been suppressed by world wars and other periods when we have had only partial cycles.

For example, the two world wars of the 20th century suppressed to a considerable degree the entire process of expanded capitalist reproduction. Since industrial cycles arise within the broader process of the expanded reproduction of capital, wartime suppression of expanded capitalist reproduction suppressed the industrial cycle.

After the super-crisis of 1929-33—itself part of the aftermath of the World War I war economy—there was no complete industrial cycle. The brutal deflationary policy of the Roosevelt administration in 1936-37 prevented the cyclical recovery of 1933-37 developing into a real boom. The war economy of World War II replaced the recovery that followed the 1937-38 recession before it could develop into a boom. Therefore, in the years from the super-crisis of 1929-33 until after World War II we saw only partial industrial cycles.

No full industrial cycle between 1968 and 1982

There was also no complete industrial cycle between 1968 and the beginning of the “Volcker shock” in 1982. During the recessions of 1970 and 1974-75, governments and central banks attempted to force recoveries through deficit spending and monetary expansion. Under the conditions prevailing at that time, these repeated attempts to force a recovery simply led to panicky flights from the dollar and paper currencies in general, causing the recoveries to abort. Full industrial cycles of more or less 10-year duration only reappeared after the Volcker shock of 1979-82.

The Dollar Empire and the ‘Great Moderation’

October 25, 2009

During the “Great Moderation,” the United States became increasingly dependent on imports to maintain its standard of living. When we talk about the standard of living of a nation, we should always be careful to distinguish between the standards of living of the different classes and strata of the population.

The decaying U.S. industrial base and the consequent absolute decline in the level of factory employment during the Great Moderation devastated the standard of living of factory workers. Those industrial workers who did maintain their jobs often had to accept wage cuts and worsening working conditions. This was particularly true for the young generation of factory workers. The unions often accepted two-tier contracts that protected the wages and benefits of older workers at the expense of those of new young workers.

The younger workers who found factory jobs during the Great Moderation were lucky. Many young workers, especially workers of color in the inner cities often couldn’t find any jobs—let alone factory jobs. If they could, it was usually in low-wage, non-unionized “service” establishments such as MacDonald’s or Walmart. It is significant that the biggest U.S. corporation in terms of revenues is not an industrial giant such as U.S. Steel, as it was early in the 20th century, or General Motors, at mid-century, but rather a trading company, Walmart.

The growing mass of more or less permanently unemployed, or at most marginally employed, youth has encouraged the growth of inner-city street gangs engaged in the drug trade. This has swollen the U.S. prison population. At any given time, there are now considerably more than 2 million people, disproportionality young people of color, in U.S. prisons and jails. Many more people pass through jails or prisons in the course of a year, or are in other respects “in the system,” fighting criminal charges, on parole or on probation.

It remains important, however, for the U.S. ruling class to maintain a large percentage of the population in a relatively comfortable “middle-class” lifestyle. This is a key difference between the United States as the world’s leading imperialist country and an oppressed “third world” country.

From the Dollar-Gold Exchange System to the Dollar System

October 18, 2009

The Bretton Woods dollar-gold exchange standard began to unravel with the collapse of the gold pool in March 1968 and collapsed completely in August 1971, when Nixon formally ended the convertibility into gold of the U.S. dollar by foreign governments and central banks. The U.S. dollar, even dollars in the central banks or treasuries of foreign governments, was now a purely token currency and no longer a form of credit money. From now on, the dollar would follow the laws of token money, not credit money.

The question posed by Nixon’s August 1971 move was whether the U.S. dollar could maintain its position as the main world currency now that it was a token currency and not credit money. As long as the dollar had retained its convertibility into gold at a fixed rate by foreign central banks and treasuries—which also meant that the open market dollar price of gold could not move very far from the official $35 an ounce—commodity prices quoted in dollars and international debts denominated in dollars were in effect quoted and denominated in terms of definite quantities of gold.

But with the transformation of the dollar into token money, this was no longer true. The dollar no longer represented a fixed quantity of gold but a variable quantity. Its gold value could change drastically over a short period of time.

Reagan Reaction and the ‘Great Moderation’

October 11, 2009

After World War II, the Keynesians reformers took unjustified credit for the postwar economic upswing. Similarly, in the 1980s the extreme right-wing governments that came to power in Britain in 1979 and the United States in 1980 also took unjustified credit for the end of the protracted economic crisis of 1968-1982.

These right-wing governments attempted to take back as many concessions as possible that had been granted to the working class after World War II. At first, the policies of the new reactionary governments was called “monetarist,” but later they were called “neoliberal” for reasons that will become apparent below.

As I mentioned last week, the “monetarist,” or “neoliberal,” era in the United States actually began with the appointment of Paul Volcker as chairman of the U.S. Federal Reserve Board by the Democratic administration of Jimmy Carter in August 1979. The post-World War II reformist era had been made possible by the generally expansionary economic conditions that prevailed between 1948 and 1968. The collapse of the London Gold Pool in March 1968 marked the end of the early post-World War II era of capitalist prosperity.

Attempts to relaunch the post-World War II capitalist prosperity through Keynesian methods repeatedly failed during the 1970s. This was the economic basis for the new era of reaction that was symbolized by the election of Ronald Reagan in the November 1980 U.S. presidential election, as well as the rise to power of Margaret Thatcher in Britain with her “there is no alternative” slogan.

What Thatcher really meant was that there was no “Keynesian” alternative to her reactionary “monetarism” as long as the British pound was plunging in value both against gold and even against the dollar on world currency markets.

From the 1974-75 Recession to the ‘Volcker Shock’

October 4, 2009

As I explained last week, the devaluation of the U.S. dollar in terms of gold had temporarily halted by the end of 1974. After peaking at $195.25 an ounce on December 30, 1974, the dollar price of gold had fallen to $104.00 on August 31, 1976.

As a result, during 1975 the rate of U.S. inflation as measured by the government producer price index was “only” about 4.4 percent. Still, the official producer price index rose more in the recession-depression year of 1975 than it had in the inflationary boom year of 1965. This despite a slump that was considerably worse than that of 1957-58.

The U.S. workers—and workers in other capitalist countries—were hit in two ways. One, workers’ living standards were lowered by the rising cost of living in terms of the devalued currency their wages were paid in. In a more traditional type recession-depression, the cost of living would have been expected to fall.

Second, just like was the case in a traditional crisis-depression, wages were under downward pressure from the high rate of unemployment. In the case of U.S. workers, this was on top of the disastrous—for U.S. workers—wage and price controls that had been imposed by the Nixon administration.

A Critique of Crisis Theory