Commodity Money Versus Non-Commodity Money

On March 11, President Joseph Biden signed into law a $1.9 trillion package called the Coronavirus Relief bill. It provides for $300-a-week extra in unemployment insurance payments — only half the original $600 provided by the CARES Act passed last year — and only until Sept. 6. It also provides $25 billion for rental relief and utility assistance and $350 billion relief for hard-pressed state and local and Native American tribal governments.

The bill includes a one-time $1,400 payment for low- and middle-income Americans. Also, $20 billion will be spent on COVID-19 vaccinations. Democrats are especially proud of a provision that extends for a year a child tax credit that was part of the CARES Act. They claim this will reduce child poverty in the richest nation in the world by one-half. This tells you a lot about the nature of the U.S. tax system, which pushes many children of working-class families below the official federal poverty line while allowing billionaires like former President Trump as well as giant corporations like Apple to get away with paying virtually no taxes.

Progressives were hoping that the stimulus bill would have a provision raising the federal minimum wage to $15 an hour from the current $7.25. This was important because the bizarre and undemocratic rules that govern the U.S. Senate mean only a few bills can be passed through a process known as “budgetary reconciliation” with a simple majority vote. All other bills need the support of 60 senators. This means that given the composition of the current Senate, 50 Democrats and 50 Republicans with Democratic Vice President Kamala Harris casting the tie-breaking vote, the GOP has veto power over most other proposed legislation coming up this session.

For the minimum wage hike to have had any chance of passing in the current session, it would have been necessary to include it in the stimulus bill. President Biden gave lip service to the proposed minimum wage hike but failed to push it. This gave the green light to conservative Democrats to ally with the GOP to exclude the $15-an-hour minimum wage from the bill — effectively killing it. This is the exact outcome the capitalists wanted. Once again, the Democrats and Republicans working together delivered the goods for capital.

The stimulus bill

The idea behind this bill is a classic “Keynesian” policy of pumping trillions of extra dollars into the U.S. economy in hopes it will “prime the pump” (1) of recovery. The hope is that the stimulus will lead to an upward movement of the industrial cycle that will be considerably stronger than the sluggish upswing that unfolded after the Great Recession of 2007-09.

Washington policymakers have for some time talked about allowing the U.S. economy to “run hot.” The Federal Reserve System has indicated that it only aims at an average inflation rate of 2% over many years. Since the official rate has been below 2% in recent years, the Fed is indicating that it will allow the inflation rate to rise above 2% for a fairly long period before it will take action to “tighten money” setting the stage for the next recession.

Too much stimulus?

I mentioned in earlier posts that economist Nouriel Roubini fears that the fiscal and monetary stimulus that the U.S. government and Federal Reserve System launched beginning in March 2020 to contain the pandemic-enhanced “Greater Recession” will end with stagflation followed by a “Greater Depression” as early as the middle of the current decade.

Larry Summers, an economist much closer to the “establishment” than Roubini, has expressed similar fears. “I think,” Summers told Wall Street Week, “this is the least responsible macroeconomic policy we’ve had in the last 40 years.”

Summers has said that he sees three possible outcomes. “Summers,” the Hill reports, “warned that there was a one-third chance that inflation would accelerate over the next several years, with the U.S. possibly facing stagflation or economic stagnation.” This is similar to Roubini’s fears that the stimulus will lead to stagflation or a combination of accelerating inflation, rising interest rates, and little or no economic growth. Stagflation, such as emerged in the 1970s, is an extremely unstable condition that can only end in a deep recession.

Another possible outcome would be that the Federal Reserve System to stave off stagflation will in Summers word’s “hit the brakes.” This would put the U.S. Treasury borrowing in sharp competition with corporations and consumers for access to a limited supply of loan money. In this case, interest rates would soar — though not as much as interest rates will ultimately rise if Federal Reserve does not “tighten” before stagflation takes hold — causing economic growth to slow sharply and quite likely leading to an early recession. In either case, the “stimulus” will fail in its aim of increasing the rate of economic growth over the coming decade.

Summers gives only a one-third chance that the “stimulus” will succeed and lead to a more or less prolonged capitalist prosperity. A prolonged period of accelerated economic growth (2) is what both the Biden administration and progressives are counting on. If such a period does take hold, the Democrats will be well-positioned to defeat the Republicans in coming elections and the danger recedes of Donald Trump or somebody like him winning the 2024 and later presidential elections.

If this scenario unfolds, progressives hope their influence within the Democratic Party will increase. At some point, the door will finally be opened for long-overdue reforms such as Medicare for All and a Green New Deal that will finally shift the economy away from fossil fuels toward a new long-term sustainable energy system. Progressives hope that a capitalist system will emerge from these reforms that will be kinder to both the working class and the environment. However, if Summers and Roubini are right and the stimulus fails, what “Plan B” do progressives have? It seems that for the most part there is no Plan B.

At the other end of the U.S. political spectrum, Donald Trump and the Republicans are counting on a failed stimulus to pave the way for their political comeback. After passing a huge pro-cyclical tax cut for the rich that went into effect in 2018), Trump and the GOP feel they are poised to blame the “failed socialist policies” of Biden and the Democrats for anything that goes wrong. If the stimulus does fail, progressives’ hopes for a new and kinder capitalism will turn into a nightmare as the capitalist political pendulum again lurches sharply rightward.

In a sign of trouble ahead, long-term interest rates have recently risen sharply. The dollar price of gold has declined as long-term interest rates have rebounded. But it has not declined that much when the sharp rise of interest rates is taken into account. Gold closed at $2,046.10 on August 8, 2020, when long-term interest rates were near their low point but had fallen back to $1,731.60 by March 27, 2021, in the face of a doubling of long-term rates. On Aug. 1, 2020, 10-year bonds yielded 0.5360%. But on March 27, the same bond yielded 1.66%, a rise of 207%. While at 1.66% the return on the 10-year bond is still historically low, if long-term interest rates keep rising at the rate they have been since last August, the economic recovery will be short-lived and the stimulus will fail.

With the number of vaccinated people increasing, even if at a too slow pace, and huge quantities of money idled by more than a year of lockdowns and pandemic-depressed retail sales, it seems virtually certain that we will see a continued sharp economic rebound from last year’s extremely depressed economic conditions. The real question is what happens after that.

While the views of bourgeois economists such as Roubini and Summers are worth noting, we have a far better tool to probe into what the future holds. That is Marxism if we dare use it. This brings us back to the question raised by Fred Moseley whether money must always be a commodity.

If money has to be a commodity, meaning gold bullion is still the universal equivalent that in terms of its own use value measures the value of all other commodities, the economic prospects for the 2020s may well be different than will be the case if the U.S. dollar as a “non-commodity money” independent of gold serves as the universal equivalent. If gold remains the money commodity and non-commodity money is an illusion, the success of the current stimulus policy will depend on there being a sufficient quantity of gold bullion in the world to finance it. If there isn’t enough gold, the stimulus will fail just as Roubini and Summers fear it will.

But if the dollar today is indeed non-commodity money, and given the high level of excess capacity in industry even before the pandemic-enhanced recession hit, and the huge pool of unemployed workers in the U.S. and even more so in the world, there is no reason to think that the stimulus will not succeed in kicking off a new capitalist economic boom — with the potential of improving the conditions of many workers and working people around the world within the limits of continued capitalist wage slavery. This is exactly what progressives are counting on.

Back in the 1970s, I knew a man, knowledgeable in Marxist economics, named Robert Langston. Langston, who died much too young, was a friend of the well-known Marxist economist Ernest Mandel (1923-1995). At that time, both Langston and Mandel were interested in the transformation problem. If my impression was correct, both were trying to prove that the sum of direct prices and the sum of prices of production must always be equal. They were also attempting to demonstrate that the total amount of profit in terms of direct prices must equal the total amount of profit in prices of production. And finally, both Langston and Mandel believed that the rate of profit in value terms, direct prices, and prices of production must also be exactly equal, just as Fred Moseley believes today. Langston and Mandel believed that Marx’s “labor theory of value” required these equalities.

At the time, I had purchased a copy of the famous economist and Ricardo scholar Piero Sraffa’s “Commodities Produced by Means of Commodities,” originally published in 1960. This slim volume has played a central role in the debate over the Marxist transformation problem as well as the “Cambridge Capital Controversy” of the 1960s. (3) While Sraffa’s book was mostly over my head in those days, Langston wanted to discuss it with me. I guess he was eager to get ideas wherever he could.

At our meeting, Langston expressed the view that in solving the transformation problem there was no need to transform the inputs into prices of production. This is the same argument that Fred Moseley makes in his book “Money and Totality.” Back then, I found this view rather surprising since it seemed obvious to me that, assuming the rate of profit was equal in all branches of production regardless of their varying organic compositions of capital, the capitalists would buy their inputs at their prices of production, not at their direct prices.

I had been told by friends that the total sum of prices of production must always equal the total sum of direct prices. But I had come to the realization that at least in terms of the industrial cycle this idea was wrong. I realized that in the course of the industrial cycle in turbulent movement, as Anwar Shaikh puts it, prices first rise above their prices of production and then must compensate by falling below their prices of production. I had concluded that is not only true of individual branches of production but capitalist production as a whole. (4)

I saw the downward movement of “golden prices” during the 1970s as a repeat of this pattern. During the post-World War II prosperity, prices in both U.S. dollars and gold had risen above but now were beginning to fall below their prices of production in terms of gold. Stagflation, in my opinion, was a classic prices-in-terms-of-gold deflation hidden by a highly inflationary devaluation of the dollar and other paper currencies against gold. This is illustrated by a graph in Anwar Shaikh’s “Capitalism.”

I ran my budding ideas on economics by Langston to the extent that they were developed in those days, which is a lot less than they are today. But I don’t believe he was interested. His overwhelming interest was the transformation problem. Now I have come to believe that Langston was grabbing hold of one side of the problem and I was grabbing hold of the other.

Langston like Moseley today was interested in the deviations of prices from values (direct prices) that arise from the differing organic compositions of capital in different industries — the transformation problem — while I was interested in the divergences of market prices from values (direct prices) and prices of production in the course of the industrial cycle and longer “Kondratiev cycles.”

I was developing an interest in the transformation problem at that time insomuch as it was the main weapon being used by bourgeois economists and some “neo-Ricardians” (5) such as Ian Steedman to overthrow Marx’s theory of value. But my main interest was the limits and contradictions of Keynesian-based stimulus policies. Was it true that modern macro-economics based on Keynes’ work had armed the capitalist state with a “tool chest” that had now rendered the industrial cycle harmless? This question is raised once again today with Biden’s stimulus package. I was beginning to realize that the limits of Keynesian stimulative measures were revealed in Marx’s theory of value, which logically includes the necessary conclusion that money must always be a commodity.

Single System and Dual System approaches to the transformation problem

Moseley is superior to most present-day Marxist economists because he senses there is a big problem with the reigning theory of “non-commodity money” but has unfortunately not been able to find the way to the correct solution. And as we have seen, the question of whether money must be a commodity is linked to the transformation problem, which has bewitched Marxist and before it classical political economy for the last 250 years. It is a characteristic of the so-called Single System approach to the transformation problem that it attempts to derive a solution without realizing that in fact, capitalism is a dual system of commodities and money.

In the capitalist “dual system,” the accumulation of money capital must proceed alongside but separately from the accumulation of real capital. This quality of capitalism as a dual system of commodities and money is rooted in the contradictions of the commodity relationship of production itself.

The commodity is both a use value and a value. And value must always take the form of exchange value. This is true even in simple barter before the emergence of money. Marx demonstrated in the opening chapters of ‘Capital’ that even in its simple form the value of one commodity must be measured in terms of the use value of another commodity. Marx then demonstrates that the money relationship of production is simply a generalization of this simple form of value. By doing this, Marx had already proved that under any system of commodity production and exchange, including the most highly developed capitalism, non-commodity money is impossible.

In the first three chapters of “Capital,” Marx already demonstrated that the development of commodity production out of barter leads to the emergence of a commodity whose use value functions as the universal equivalent form of value that we call money. Therefore, value — abstract human labor embodied in commodities — is by necessity measured by the use value of a commodity, for example, gold bullion, that is produced by a special type of concrete human labor. This illustrates the dual nature of a commodity as both a product of abstract human labor that produces value and of concrete human labor that produces use value. The dual nature of capitalism is therefore already present in embryo in simple commodity production.

Marx realized that capital is made up of both commodities and money. Therefore, before Marx could explain what the capital relationship of production is, he first had to explain what the commodity relationship of production is and then, based on that, what the money relationship of production is. From that he derived the formula for simple circulation C—M—C. We already have commodities and money here but not yet capital. But we already have a “dual system” — commodities and money.

Only then, starting in Chapter 4, Volume I of “Capital,” was Marx able to begin his investigation of capital proper. Marx began this with the basic formula M—C—M’. Instead of two C’s and one M that he uses to describe simple commodity circulation, Marx has two M’s and one C in the middle. Crucially, the M on the right-hand side is larger than the M on the left-hand side. Marx almost in passing had now demonstrated a crucial fact that is completely overlooked or denied outright today. Profit defined as the difference between M’ and M must therefore always be calculated in terms of the use value of the money commodity.

It is, however, only when capitalism has reached a certain degree of development — which in concrete history occurred with the crisis of 1825 — does the quality of capitalism as a dual and contradictory system of money on one side and commodities on the other reach its highest expression in a crisis of the generalized relative overproduction of commodities. This type of economic crisis is unique to capitalism and does not occur until capitalism has reached a certain level of development.

The accumulation of wealth throughout the lifetime of the capitalist mode of production must retain this dual character. It is both the accumulation of money material — gold bullion — on one side and the accumulation of all other forms of social wealth on the other. This duality does not only apply to a phase of capitalist production such as the era of the international gold standard, or capitalism before 1940 as Anwar Shaikh believes, or before 1971 as many other Marxists believe. This process of a parallel accumulation of money material on one side and all other forms of social wealth on the other only ends with the transformation of capitalist production into socialist production.

Non-Commodity money and Say’s law

The claim that money is now non-commodity money comes down to the claim that today all commodities are money so that no particular commodity is money. If non-commodity money were possible, this would mean that capitalism has now become a “single system.” Therefore, if capitalism is indeed a single system then all commodities are money. Among the consequences would be that Say’s law has now become valid.

Jean-Baptiste Say (1767-1832) essentially assumed that all commodities are money. He did this by claiming that commodities are purchased using other commodities. Say held that if you doubled the number of commodities you would automatically double the means of purchasing commodities. This does not preclude the possibility that some types of commodities are overproduced relative to other types of commodities. Therefore, according to Say, an overproduction of some types of commodities backed by an underproduction of other types of commodities is perfectly possible. But Say, James Mill, and their supporters, which included David Ricardo, insisted that a general glut of commodities is impossible.

The conclusion that the supporters of Say’s law must draw is that if an economic crisis breaks out it must be caused by some factor other than a general overproduction of commodities. Many other things can indeed cause an economic crisis, both under capitalism and other economic systems — for example, bad weather leading to famine, war and its aftermath, or a pandemic as we have all now seen. These factors can cause economic crises under any system of production. In addition, in capitalism, a rate of surplus value that leads to a rate of profit so low that it destroys the incentive of the capitalists to produce additional surplus value can also cause an economic crisis.

The strong form of Say’s law

Jean-Baptiste Say, James Mill, David Ricardo, and today “neoclassical” economists, as well as the economists of the Austrian school (6), believe that a general relative overproduction is impossible under any circumstances. These economists see prices as extremely sensitive to any change in the quantity of money relative to commodities. According to the supporters of the strong form of Say’s law, a capitalist economy is always operating at its physical limits. Therefore, any increase in the quantity of money relative to commodities will only lead to higher nominal prices and wages but will have no other effects. Similarly, a drop in the quantity of money relative to commodities in a given country will quickly lead to a drop in the nominal level of prices and wages. This doctrine, which goes hand and hand with the strong form of Say’s law, is called the neutrality of money.

The weak form of Say’s law

However, there is also what I call a weak form of Say’s law. The weak form concedes that a general glut is possible if the government or central bank follows a false monetary policy. For example, if the government unwisely ties the creation of money to gold, and if gold is for any reason under-produced relative to other commodities, a general overproduction of commodities relative to money will occur. Such overproduction of commodities will then cause an economic crisis marked by falling output, contracting employment, and mass unemployment. Or a crisis of general overproduction might occur because the “monetary authority” creates an insufficient quantity of money for some other reason. For example, the monetary authority may simply miscalculate and accidentally fail to create a sufficient supply of money to maintain “full employment.” (7)

Or the monetary authority under the pressure of the capitalists might deliberately keep the supply of money below the level necessary to maintain “full employment” to lower wages and raise the rate of profit.

But what I call the weak form of Says law holds that as long as the government desires to avoid crises of general overproduction and maintain “full employment,” and as long as its hands are not tied by mistaken legislation such as a law mandating a “gold standard,” it always has the power to maintain “full employment” and avoid general relative overproduction of commodities.

The weak form of Say’s law is a logical consequence of the claim that modern money has either always been or is now non-commodity money. This view today is most consistently expressed in Modern Monetary Theory. MMT is based on the theory of money known as chartalism, which holds that money does not emerge spontaneously from barter but rather is established by the state. MMT teaches that barring bad legislation such as a gold standard, or bad policy, the only limitation to demand for commodities is the number of commodities themselves. This idea, based on what I call the weak form of Say’s law, is today very alluring to progressives.

Guns and butter

Modern Monetary Theory encourages progressives to ignore the very real financial problems caused by the Pentagon’s gigantic trillion-dollar budget. For example, MMT supporters claim the U.S. government can fund desperately needed social programs without having to cut the war budget or repeal the latest Republican tax cuts based on there being so many unemployed workers and so much excess capacity in industry.

MMT and non-commodity money-based economic theories, therefore, encourage the illusion that it is possible to reach out to “far-seeing members of the ruling class” and solve today’s most pressing problems such as the need to address global warming and in the U.S. establish health care as a universal right, without having to take on the endless propaganda that justifies the Pentagon war budget. This war propaganda includes, but is not limited to, the demonization of foreign “dictators” that at present include Syria’s Bashar al-Assad, Russia’s Vladimir Putin, Venezuela’s Nicolas Maduro, North Korea’s Kim Jong-un, China’s Xi Jinping, and “the Iranian mullahs.”

Stimulus programs versus the socialist transformation of production

The view has become widespread today among Marxists that thanks to the rise of non-commodity money the problem of overproduction has been licked. Indeed, you rarely if ever see “overproduction” mentioned in a work written by a modern Marxist economist. Today’s Marxist economists write about the “over-accumulation of capital” (8) but not the overproduction of commodities. Yet it cannot be denied that from the 1840s until Engels’ death in 1895 Marx and Engels considered crises of the relative general overproduction of commodities to be a central contradiction of capitalism.

Frederick Engels wrote in 1877 (“Socialism, Utopian and Scientific”): “The enormous expansive force of modern industry, compared with which that of gases is mere child’s play, appears to us now as a necessity for expansion, both qualitative and quantitative, that laughs at all resistance.” However, Engels goes on to explain that the expansive forces of modern industry do meet resistance in the form of markets capable of absorbing the commodities at profitable prices:

“Such resistance is offered by consumption, by sales, by the markets for the products of modern industry. But the capacity for extension, extensive and intensive, of the markets is primarily governed by quite different laws that work much less energetically. The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real solution so long as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another ‘vicious circle.’”

Today, however, most modern Marxist economists believe that this vicious circle has indeed been broken thanks to non-commodity money.

Marxist economists of the Monthly Review school attribute modern economic crises and economic stagnation to monopoly. However, these Marxist economists believe that “the surplus” thanks to non-commodity money can always be absorbed if only the central government is willing to spend enough money absorbing it. Other Marxists — for example, Anwar Shaikh and Michael Roberts — attribute crises directly to the “falling rate of profit.” This comes down to saying that if (real) wages are cut sufficiently, the rate of profit will always be high enough to avoid economic crises. (9)

The tendency of the rate of profit to fall and overproduction

I believe that the tendency of the rate of profit to fall — Marx called it the most important law of political economy — is crucial to understanding the rise and decline of the global capitalist system. I also believe that it should be combined with a theory of a periodic general overproduction of commodities. The fall in the rate of profit brought on by a rising organic composition of capital obliges capital to increase the scale of production to compensate for the fall in the rate of profit through a greater mass of profit. The increasing scale of production then leads to periodic crises of overproduction. Also, the lower the rate of profit is the less the rate of interest can rise before it rises above the rate of profit, destroying the incentive to produce surplus value.

A crucial consequence of a declining rate of profit is that small capitals become less and less viable. You can live quite comfortably on a yield of 1% on a capital of $1 billion but you can’t live on a yield of 100% on a capital of $10,000. Therefore, a low rate of profit means that small businesses that can “afford” to experiment with new technologies because they have little to lose, can only survive if they yield a rate of profit far above the average rate of profit.

This is not a situation that can last for long because it will attract more capital into these new branches of production, which will again lower the rate of profit to the average rate and then below the average rate. Therefore, the more the organic composition of capital rises and the rate of profit falls the greater will be the gap between what we get under capitalism and what science and technology are making possible.

Capital reacts to a fall in the rate of profit by moving from regions and countries where wages are high to areas where wages are low thus fueling a “global race to the bottom.” The dramatic shift of industrial production over the last 40 years from the USA, Western Europe, and Japan to China, India, Vietnam, and other low-wage countries illustrates the effects of both the tendency of the rate of profit to fall and capital’s response to it. While periodic crises of the general overproduction of commodities unfold over relatively short periods, the tendency of the rate of profit to fall operates over much longer periods.

Finally and most importantly, the tendency of the rate of profit to fall is the consequence of the development of the capitalist mode of production itself and points to the fact that capitalism is only a phase in the history of production. It will inevitably give way to a higher mode of production that will end the exploitation of the class that works by another class that does not work.

Money as the standard of price

Units of currency like dollars, pounds and so on represent state-defined quantities of money and therefore function as standards of price. A standard of price such as a U.S. dollar functions best when it represents the same quantity of money — gold bullion — over time. If the government or central bank desires to keep its unit of currency representing the same quantity of money, it must establish a fund of gold to back its currency and pay on demand the quantity of gold the currency unit represents. If I can sell a troy ounce of gold to the U.S. Treasury for $35, I won’t sell it to anyone else for less than that price. And if I can obtain a troy ounce of gold at the U.S. Treasury for $35 an ounce, I will not pay a private gold dealer any more than $35 an ounce.

However, if the U.S. Treasury is no longer willing to sell gold at a fixed price, the dollar price of gold will vary on the open market. To the extent, that the U.S. dollar price of gold is allowed to vary, the dollar’s role as a standard of price is impaired. The less the dollar “price” of gold varies over time, the better it can perform its role as the standard of price.

But money as we know is not only a standard of price but a measure of value. This means that money is also the sole measure of surplus value — profit. The U.S. dollar — or any other currency — is an excellent measure of profit as long as it continues to represent the same quantity of money — weight of gold bullion over time. But to the extent that the dollar does not represent the same quantity of money — gold — over time, the dollar’s role as the medium in which profit is measured is impaired.

Money as the measure of surplus value

Since profit is the only motive for capitalist production, the question of how profit is measured becomes extremely important. During periods of inflation, rising prices lead to higher profits. To produce surplus value, the industrial capitalists must purchase the commodities, including labor power, that form the elements of productive capital. The prices of these commodities are added up by the industrial capitalists and constitute their cost prices. But if the market prices of the commodities that the industrial capitalists produce rise between the time they are produced and the time they are sold, the industrial capitalists will realize windfall profits.

Are profits that are swollen by inflation “real” profits, or are they bogus? If the currency is stable against gold, the profits are genuine in terms of gold bullion. (10) However, unless the rise in prices reflects a change in labor values, it will mean that sooner or later market commodity prices will rise above values (direct prices) and prices of production.

This will mean that the rate of profit in the gold mining and refining industry will drop both absolutely and relative to other branches of industry. Then in a turbulent movement, capital will flow out of gold mining and refining into more profitable branches of industry. Therefore, the production of gold relative to the production of other commodities will slow down.

The total quantity of gold in the world keeps increasing but at a slowing pace while the rate of growth in the number of commodities is accelerating. This is the essence of the relative general overproduction of commodities. A rise in the velocity of circulation of money, and most importantly the modern credit system, allows the general overproduction of non-money commodities relative to the money commodity to go on for a certain period.

However, the inflation of credit caused by overproduction leads to the all-too-familiar symptoms of a tightening money market: rising interest rates and an inverted yield curve. The inflation of credit always ends with a contraction of credit. The world market then contracts, and overproduction finally becomes apparent to the capitalists in the form of commodities piling up unsold in warehouses.

At this point, prices begin to fall. Now in a turbulent movement, as Anwar Shaikh calls it, so characteristic of real capitalist competition, the profits previously inflated by prices rising above their values — or direct prices — and more strictly the prices of production that are ruled by labor values, now fall below them. Inflated profits are now offset by losses.

Just as inflation previously inflated profits, deflation now reduces profits and may even temporarily wipe them out altogether, even though surplus value is still being produced. Profit is first swollen and then collapses in a process that appears to be independent of the production of surplus value.

But just as individual prices of production are ruled by values, so are the quantity and rate of profit ruled by the quantity of surplus value relative to the value of the total capital. The mass and rate of profit first rises above and then crashes below the value rate of profit and mass of surplus value, which is itself constantly changing. We should always be careful not to confuse a permanent fall in the rate of profit caused by an increase in the organic composition of capital with a temporary collapse in the rate and the mass of profit caused by a crisis of overproduction.

When market prices previously inflated above values and prices of production have now fallen below them, the stage is set for a movement in the opposite direction. The fall of prices below their prices of production means that the rate of profit rises in the gold production and refining industries both absolutely and relatively. Capital in a turbulent movement now returns to these industries to take advantage of their high — relative to the average — rate of profit.

The rate of growth of the world’s total accumulated gold hoard measured in terms of some unit of weight now accelerates just as the purchasing power of a given quantity of gold increases, while the number of commodities measured in terms of their golden price tags contracts. The rise in the absolute and relative quantity of money material causes the rate of interest to fall, and the money market becomes easy. As inventories are restocked, business begins to pick up. In a turbulent movement, a new cycle of industrial expansion begins and rises once again to an all-time peak before it once again collides with the barrier of sales and markets.

John Maynard Keynes and the attempt to establish non-commodity money

After the Great Depression, capitalist governments and central banks were determined to avoid another such disaster. They believed the key to doing this was to ensure that the general price level would never be allowed to drop again. Whenever prices threatened to break downward, the job of the government was to pump extra demand into the economy through central government budget deficits and monetary inflation. This inevitably came into conflict with the Bretton Woods gold-dollar exchange standard.

However, conditions that had been created by the Depression and the Second World War produced unusually favorable conditions for evading for a considerable time the consequences of this contradiction. For 15 years preceding the end of the war, capitalist expanded reproduction had been virtually suspended. This was so first because of the Depression itself. Then, just as expanded reproduction was about to get going again, World War II intervened. While the war economy stimulated production, it repressed reproduction. As a result, the production of commodities in 1946 and 1947 was considerably lower than it would have been if the war had been avoided.

Rising prices in terms of gold, along with falling absolute and relative profits in gold mining and refining, reduced gold production considerably during the war but did not destroy any of the existing gold, though it did reduce the purchasing power of a given unit of gold. The global gold hoard continued to grow during the war though at a reduced rate.

Market prices that had been below prices of production thanks to the Depression rose above prices of production by the end of the war, as shown by the slowdown in gold production. However, the accumulation of so much gold relative to other commodities meant that market prices could remain above their prices of production — which are determined by the relative labor values of gold and other commodities — for 25 years after the war.

Because market prices were above their production prices during the first 25 years after the war, the production of new gold failed to keep up with the growth of the quantity of (non-money) commodities as measured in terms of their golden price tags. As a result, the rate of interest gradually rose from very low levels to historically high levels by the late 1960s. The rising rate of interest was necessary to equalize the demand with the supply of gold that was growing scarcer relative to the growing mass of commodities in circulation and the rising quantity of productive capital that was necessary to produce them. The straw that finally broke the camel’s back was the Vietnam War.

The Johnson administration in 1964 passed a major regressive tax cut through Congress as part of a massive economic stimulus plan and then proceeded to escalate the war in Vietnam. As a result, a huge amount of purchasing power was pumped into the U.S. and global capitalist economies. Prices that had been relatively stable since the Korean War rose further above the prices of production, finally bringing to an end the post-World War II rise in gold production.

Interest rates now rose at a faster pace, which was necessary to reduce the growth in demand for new gold to the now falling level of production of new gold. The point was finally reached where it was no longer possible to avoid a major decline in the dollar prices of commodities while retaining the Bretton Woods gold-dollar exchange international monetary system.

The 1960s were the heyday of Keynesian economics. Professional macroeconomists and policymakers were now convinced that the key to avoiding a major new depression was to prevent the general price level from dropping. Therefore, it was the Bretton Woods system that had to go. In August 1971, U.S. President Richard Nixon announced the “temporary” closing of the U.S. Treasury’s “gold window.” It was clear to observers even at the time that the U.S. government had no intention of ever opening the gold window again. What the Nixon administration was attempting to do was to establish the U.S. dollar as non-commodity money in place of gold.

Most Marxist economists who believe that today’s money is non-commodity money believe that this transition occurred when Nixon closed the “gold window” in August 1971. In this view, Marx’s analysis of money holds good up until August 1971 but after that non-commodity money reigned.

Anwar Shaikh agrees that modern money is non-commodity money but believes that the transition occurred earlier, in 1940. Shaikh is impressed by the fact that British and U.S. prices between 1780 and 1940, though they had many ups and downs, changed little during those 160 years. But from 1940, British and U.S. prices rose without ever falling.

What Shaikh overlooked was the massive devaluation of the British pound against gold that began in 1931 when the Bank of England stopped redeeming its banknotes in gold bullion. Roosevelt devalued the U.S. dollar against gold by 40% in 1933-34. {[link to blog?]} During those two years, the dollar price of gold rose from $20.67 a troy ounce to $35 after which the value of the U.S. dollar was stabilized by the U.S. Treasury at $35 per troy ounce. Therefore, it isn’t surprising that since the pound and U.S. dollar represented considerably less gold after 1931 and 1933-34, prices expressed in pounds and U.S. dollars would rise considerably once the Depression ended.

Profits in the 1970s

The U.S. government and Federal Reserve System believed that with non-commodity money established, they now had the tools to prevent prices and therefore profits from collapsing as they had always done in the past during economic downturns. They planned to continue to pump enough additional demand into the system through budget deficits and for the Federal Reserve System to continue to monetize enough of the Federal debt so that government borrowing would not “crowd out” the private sector.

For this to work, the economists and policymakers believed they would have to demonetize gold and establish the U.S. dollar as the measure of the value of commodities and the medium in which profit is measured in its place. Nixon-era policymakers believed, or at least hoped, just like MMT economists claim today, that gold was money only because the state treated it as such.

Nixon-era policymakers believed that the U.S. dollar would replace gold as the universal equivalent of the value of commodities and the media in which profits are measured because governments would now treat the U.S. dollar rather than gold as the ultimate form of world money. From now on, Nixon-era policymakers believed, the U.S. dollar, instead of being backed by a single commodity, gold, would be backed by U.S. and indeed world commodity production.

Keynes had hated gold with a passion because he realized that if gold is money, with legal-tender money only representing it in circulation, the capitalist state and the central bank would not be able to create demand at will. All the mathematical models created by the original Keynesian economists in the late 1930s that purport to demonstrate how the government can achieve and maintain “full employment” assumed that money is created by the state and not by the gold miners and refiners.

In Keynesian economics, the rate of interest equalizes the demand and supply of money. (11) If the demand for money exceeds the supply, the rate of interest rises. Rising interest rates reduce the demand for money thereby equalizing at a higher level of interest rates the supply and demand for money. When the demand for money is less than the supply, the rate of interest will fall, equalizing the demand and supply of money at a lower level of interest rates. Keynesian economists believed that if the gold standard was abolished, rate(s) of interest could then be controlled by the “monetary authority” — the central bank

Since Keynesian economists think that the central bank can determine the rate(s) of interest, they believe that it can always keep the rate of interest below the rate of profit ensuring a positive profit of enterprise. If there is something less than “full employment,” the central bank, the Keynesian economists believe, can always increase the quantity of money, which will reduce the rate of interest. Assuming the rate of profit is unchanged, the lower the rate of interest, the more investments will yield a positive profit of enterprise. In this way, the central bank can increase investment and through the operations of multiplier and accelerator effects increase demand until there is “full employment.”

If simply lowering the rate of interest proves insufficient to restore “full employment,” Keynesian economists believe that the central government should borrow and then spend the money — deficit financing. However, Keynes knew that if the state increased the amount of money it borrows, all other things remaining equal, the rate of interest will rise, just as has indeed happened over the last seven months. In this case, with the government borrowing more money, the idle money balances in the hands of the capitalists would drop and higher interest rates would then be necessary to once again equalize the supply and demand for money. The Keynesians feared that a rise in interest rates would reduce the profit of enterprise and reduce private investment. This would reduce or neutralize altogether the increase in demand caused by government spending.

However, if the central bank increases the supply of money sufficiently, interest rates can be prevented from rising as government borrowing increases. This way, the Keynesian economists argued, the danger of canceling out the increased demand created by government deficit spending leading to higher interest rates can always be prevented until the economy reaches “full employment.” We see that Keynesians’ claim that the government and central bank if they work together can achieve “full employment” depends on the establishment of non-commodity money.

Keynes and his followers, unlike “orthodox neoclassical” economists, admitted that overproduction was possible, but they believed that if overproduction did occur it was the result of incorrect government and central bank policies. Keynes no longer believed as he had once believed as a young “neoclassical” economist in the strong form of Say’s law. But he continued to cling to what I call the weak form of Say’s law. Marx and Engels, on the contrary, rejected both the strong and weak forms of Say’s law. They believed that periodic — not permanent — overproduction was inevitable, as long as capitalism once it reached a certain level of development continued to exist. The only cure for the periodic crises of overproduction was, according to Marx and Engels, not the utopia of non-commodity money under capitalism but the socialist transformation of production.

To be continued.


1 Keynesian stimulus packages rely on what Keynesian economists call the multiplier and accelerator effects. For example, say I use my $1,400 stimulus check, paid to me by the federal government with money it borrowed, to buy a new computer. The industrial capitalist who manufactures the computer will have to hire a formerly unemployed worker to assemble the computer. Orders will have to be put in by the industrial capitalist who assembles the computer for components. Those industrial capitalists will themselves have to hire additional workers.

The newly hired workers will spend their wages on additional consumer goods causing the industrial capitalists who manufacture these goods to hire still more workers. Eventually, not $1,400 but possibly $7,000 of additional commodities will be purchased than would have been spent if I had not received and spent my $1,400 stimulus check. In this case, the multiplier is said to be five.

As millions of people spend their $1,400 stimulus checks that the federal government finance with borrowed money, the industrial capitalists will be obliged to reactivate a lot of their previously idle machinery and reopen some closed plants. The amount of excess industrial capacity will shrink. Fearing they will lose business to competitors if demand continues to increase, the industrial capitalists enlarge the productive capacity of their current plants and build new plants.

The machine-building industry receives a wave of new orders and has to hire additional workers, the construction industry has to build the new plants leading to more workers getting jobs in construction. This potent uplift is called the accelerator effect.

Therefore, when the federal government borrows and spends “only” let’s say $6 trillion that is raised not by extra taxes but through borrowed money, the market for commodities expands not only by $6 trillion but by a much larger amount. Hence, as was said in the 1930s, the “pump is primed.” However, Keynesian pump-priming operations only work if there is enough potential loan money capital on the market so that increased borrowing by the federal government is not offset by reduced borrowing by other potential borrowers and spenders. (back)

2 The Monthly Review editors have a contradictory position. On one hand, they put their hopes in a “cross-class alliance” organized around a program of aggressive Keynesian stimulus policies aimed at accelerating capitalist economic growth to achieve “full employment.” On the other hand, the Monthly Review writers believe that production, not just capitalist production but human production in general, now exceeds the capacity of the environment to sustain it. They, therefore, believe that production must be cut not increased if we are to avoid an environmental catastrophe. (back)

3 The “Cambridge Capital Controversy” involves a debate that was triggered by Piero Sraffa’s book “Commodities Produced by Means of Commodities.” The two chief debaters were Piero Sraffa on one side and the neoclassical marginalist economist Paul Samuelson on the other. It was nicknamed the “Cambridge Controversy” because Piero Sraffa was based in Cambridge University in England while Paul Samuelson taught economics at MIT, located in Cambridge, Massachusetts.

The chief point of contention was the neoclassical assumption that assuming “perfect competition” each factor of production (land, labor and capital) is rewarded according to the amount of value it contributes to the final product. Therefore, the neoclassicals claim, as long as perfect competition prevails none of the three classes of capitalist society — the landlords representing “land,” the workers representing “labor,” and the capitalists representing “capital” — can exploit another social class.

According to neoclassical theory, if wages rise, even if only slightly, all other things remaining unchanged, the wage will now exceed the value that the workers produce. The capitalists will then replace some of the workers with machines. Therefore, neoclassical economists oppose raising the federal minimum wage from $7.25 an hour to $15 on grounds that if workers are now being paid less than $15 an hour it is because they are producing less than $15 in value per hour of labor they perform. The bosses will lay off these workers if they are forced by law to pay them $15 because they will lose money if they keep them on.

It would be best, neoclassical economists hold, to abolish the minimum wage altogether. According to them, as long as there are minimum-wage laws low-skilled workers whose labor produces little value are kept unemployed and can never improve their skills, leading to a vicious circle of chronic unemployment and poverty. If the minimum-wage law were abolished, low-skilled workers would be able to get jobs at low wages. By working, the low-skilled workers will be able to improve their skills eventually allowing them to earn higher wages and escape from poverty.

Sraffa showed mathematically that under certain circumstances capitalists will hire labor at a low wage rate, shift to machinery at a higher wage rate but then re-switch back to labor at a still higher wage. This counter-intuitive result is called double re-switching. Double re-switching relies on the effect discovered by Ricardo that showed that prices of production of commodities (to use Marx’s terminology) with a lower organic composition of capital will indeed rise as wages rise but the prices of production of commodities produced by capitals of a higher than average organic composition of capital will fall. Double re-switching can occur as one capitalist’s output is another capitalist’s input.

Though double re-switching is unlikely to occur in the real world, it is theoretically possible. The bare theoretical possibility that double re-switching can occur is enough to disprove the claim that assuming perfect competition workers will always be paid the full value their labor produces. How can workers be producing an insufficient quantity of value to justify their employment at one wage but produce a sufficient quantity of value at a higher wage? Samuelson, though a skilled mathematician, was unable to disprove Sraffa’s double re-switching argument.

A second problem involves the measurement of the value of capital and the rate of profit. The rate of profit is calculated by dividing the total profit by the total capital. However, according to neoclassical — and Austrian — theory, the value of capital is defined as a current value discounted at the rate of interest (profit) from a future higher value. In other words, I will pay more for an apple I can receive and eat right now than I will pay for an apple that I will receive 10 years from now.

The rate of profit (interest) depends on the value of the capital while the value of capital depends on the rate of profit. This is a classic circular argument where something is defined in terms of itself. Again, Samuelson was not able to find a way out of this circle. In contrast, in Marxist economics, we measure the value of capital in terms of the quantity of labor socially necessary to reproduce it under the present conditions of production. So the problem in neoclassical and Austrian economics of the measurement of the value of capital that involves a logical contradiction is non-existent in Marx.

The supporters of Sraffa, sometimes called “neo-Ricardians,” politically occupy a middle ground between Marxists to their left and neoclassicals to their right. The neo-Ricardians hoped that their victory in the Cambridge Capital Controversy would mark the end of the teaching of neoclassical economics in universities and its replacement by an economic doctrine far more favorable to the interests of the working class.

But this has not happened. Instead, generations of economics students continued to be taught neoclassical economics and most professional economists today have probably never heard of the Cambridge Controversy. The aftermath of the Cambridge Controversy is an example of the class interests of the ruling capitalist class trumping the class interests of the working class as well as logic and mathematics.

Worst yet, about the time that the Cambridge Controversy was disproving neoclassical economics mathematically and logically, in the Soviet Union neoclassical economists who described themselves as the “mathematical school of economics” were taking over the teaching of economics.

Neoclassical economics is a form of neo-Platonism. In an ideal economy, what is called general equilibrium arises from “perfect competition,” which does not and never can exist in reality but only in the human mind. In terms of Plato’s philosophy, an economy in general equilibrium is a form that can only be copied imperfectly in the world of corrupt matter.

With a given degree of scarcity, in an ideal economy based on perfect competition in general equilibrium, each individual, motivated by self-interest alone, maximizes his or her satisfaction. The neoclassical economists build elaborate mathematical models around this idea that probe the properties of an economy that exists only in their minds. They then leap to assuming that this platonic economy can be approximated in material reality if the government follows policies that so happen to coincide with the interests of the capitalist class. For example, the government should eliminate minimum wage laws and bust unions in order to lift the working class out of poverty.

In the Soviet Union, the Soviet neoclassical economists dubbing themselves the mathematical school contrasted the real-world Soviet planned economy not to what a real world capitalist economy would be able to accomplish in its place but rather to a purely imaginary economy based on perfect competition.

Finding the Soviet economy wanting when contrasted to a perfect economy based on perfect competition, these economists recommended the abolition of central planning and the introduction of a free market to achieve “perfect competition.” The soon-to-be ex-Soviet mathematical economists, though they didn’t stress this until the beginning of the 1990s, implied that private property in the means of production would have to be reestablished to achieve “perfect competition.” Then, hard-pressed Soviet consumers, these neoclassical economists claimed, would, at last, achieve “maximum satisfaction.”

The ideas of the Soviet neoclassical economists became the basis of Gorbachev’s perestroika. They were carried to their logical conclusions under Boris Yeltsin. Thirty years later, the realities of capitalist Russia represent in practice the most radical refutation possible of neoclassical — and Austrian — economics. (back)

4 In studying Kondratiev cycles, Anwar Shaikh also noticed these phenomena, as documented in his book “Capitalism.” The Russian-Soviet economist Nikolai Kondratiev (1892-1938) noticed that capitalist history is marked by periods of rising and falling prices longer than the 10-year industrial cycle. He noted that eras of rising prices are marked by periods of accelerated economic growth and brief recessions while periods of falling prices are marked by slower growth and prolonged economic depressions. To simplify somewhat, Kondratiev saw a long cycle of approximately 50 years, with 25 years of rising prices followed by 25 years of falling prices. Krondratiev calculated prices in terms of the major capitalist currencies such as British pounds and U.S. dollars. Calculated in terms of currency, these cycles of rising and falling prices disappear after World War II. Instead, since World War II prices have only risen.

However, when Shaikh recalculated prices in terms of gold he found that prices rose between the beginning of World War II and 1970. Thereafter, “golden prices” as Shaikh calls them, fell sharply in the 1970s and then rebounded beginning in the early 1980s and continued to rise through 2000, though remaining well below their 1970 peak and even higher peak in 1920, and then again declined. Shaikh also noticed that the 1970s and early 1980s saw the deep recession of 1973-75 and the early 1980s “Volcker shock” recession. Again during the fall in golden prices that began in 2001, we saw the Great Recession of 2007-09.

In contrast, the period of rising golden prices between the end of World War II and 1970 and again the period of rising golden prices between the end of the Volcker shock recession and 2000 saw only relatively mild recessions, though economic growth remained well below that of the 1945-70 period.

Shaikh has expressed the view that a new upswing of the Kondratiev cycle was due to begin about 2018. Of course, we have been passing through the pandemic-enhanced recession that began in 2020. Perhaps in the absence of the pandemic, we would have had a much milder recession than we experienced in 2007-09, which would be in line with Shaikh’s view.

Shaikh, however, believes since 1940 money has been non-commodity money, even though Marx’s theory of value indicates that such money is not possible under the capitalist mode of production. Shaikh reconciles this contradiction in his thinking by assuming that gold does retain one monetary function, which he calls a means of safety.

Shaikh believes that after several decades of prosperity the rate of profit falls so much due to a rising organic composition of capital and a falling rate of surplus value that further expansion of the mass of profit becomes impossible. At this point, the Kondratiev cycle begins its downward turn. The capitalists respond by stepping up their demand for gold bullion to protect the value of their capital. The price of gold then rises in paper money terms causing golden prices to turn downward. After some years, falling profits lead to a severe economic crisis and unemployment rises substantially.

In the last Kondratiev cycle downturn, which Shaikh believes began around 2001, another factor was in play. Starting in the early 1980s, according to Shaikh, central banks began to lower interest rates and they have continued to lower rates since. I don’t believe that central banks have this power, but Shaikh does. This means according to him that though the rate of profit didn’t rise after the early 1980s, due to the rising organic composition of capital, the profit of enterprise — the difference between the rate of profit and the rate of interest — did rise considerably after the early 1980s. This led to what Shaikh calls a “Great Boom” — or what former Fed chief Ben Bernanke called more cautiously the “Great Moderation.”

However, as Shaikh sees it, as interest rates have fallen toward their zero-bound minimum, the ability of the Federal Reserve System and other central banks to lower interest rates further are exhausted. As a result, a new fall in the profit of enterprise can no longer be prevented by lowering interest rates leading to the downturn of the Kondratiev cycle in 2001 and then the crash of 2008 marking a new “great depression” in the Kondratiev cycle.

According to Shaikh, in all Kondratiev downturns, high unemployment raises the rate of surplus value, and the rate of profit partially recovers. The capitalists respond to the stabilization and at least partial recovery in the rate of profit with increased investment, which causes the rate of economic growth to accelerate while reducing the demand for gold as a means of safety. This causes the “money price of gold” in a system of non-commodity money to drop once again causing the golden prices of commodities to rise. So despite what Shaikh believes is the reign of non-commodity money, he concludes that the Kondratiev cycle continues. If Shaikh is right, once the effects of the current pandemic are behind us, we should see a new “great boom” in the Kondratiev cycle. (back)

5 Unlike Steedman and other modern “neo-Ricardians,” Ricardo continued to defend his law of labor value though he admitted there were contradictions he couldn’t solve but hoped a future economist would. These contradictions were finally solved by Karl Marx. (back)

6 Marginalist economics that developed during the last third of the 19th century split into two main camps, the neoclassical and Austrian schools. Both schools accept the subjective scarcity theory of value and reject the objective labor law of value. The consumer and not the worker is at the center of marginalist economics. Both schools make use of the “marginal method” to analyze scarcity.

The neoclassical school makes extensive use of mathematics, particularly plane geometry and differential calculus. Using these and other mathematical tools, the neoclassical economists have built increasingly obtuse mathematical models of an ideal economy in a timeless platonic state of “general equilibrium.” It takes years of study to master the mathematics that is necessary to grasp “general equilibrium” just like it takes years of study in divinity school to master “Christology.”

Austrian economics, though it shares the same marginalist foundations as the neoclassical school, uses oral arguments rather than mathematics. Austrian economists were faced with mass Marxist-inspired Social Democratic parties and they had to make their arguments understandable to people who had not spent years of university study mastering higher mathematics. Today, right-wing amateur economists who describe themselves as “classical liberals” or “libertarians” support the Austrian school because they do not have the mathematical knowledge to master neoclassical economics. (back)

7 Economists who believe in what I call the weak form of Say’s law, which includes most of today’s academic Marxists, avoid calling cyclical economic downturns crises of overproduction because they see the real cause of the crises rooted in some other factor such as a bad fiscal or monetary policy or a wage level that is so high that it leads to a rate of profit that is so low that the capitalists cut back on production. Supporters of under-consumption, in contrast, see economic crises arising from the fact that wages are too low, which then destroys the market.

But supporters of what I call the weak form of Say’s law hold that if wages are at the right Goldilocks level, neither so high that it kills the rate of profit but not so low that the mass market for commodities is destroyed, crises of overproduction can be avoided. Marx and Engels, in contrast, believed that crises of overproduction would erupt at periodic intervals no matter what fiscal and monetary policies the government and central banks adopt or whether wages are too high or too low.

The Monthly Review school believes that the level of wages itself neither increases nor reduces the chances of an economic crisis, because under the influence of Michael Kalecki (1899-1970) in direct contradiction to Marx they believe that capitalists will simply pass on wage increases in the form of higher prices. Under monopoly capitalism, according to the Monthly Review school, monopolies restrict production to safeguard their monopoly super-profits. This tends to lead to stagnation as money piles up in the banks rather than circulates through the economy. However, the government can always take this surplus money, either through taxation or borrowing it, and spend it, which will counteract the tendency toward stagnation. If recession and stagnation occur anyway, the Monthly Review school reasons, it is because of bad fiscal policy rather than overproduction. As a result, Monthly Review generally avoids calling recessions crises of overproduction. (back)

8 A general relative overproduction of commodities is the same thing as a relative general overproduction of capital. First, commodities produced capitalistically are capital because they contain surplus value. Therefore, by definition, an overproduction of commodities is the same thing as overproduction of commodity capital. Second, the industrial capitalists would not be able to overproduce commodities unless productive capital was also overproduced.

However, a relative overproduction of capital, the same thing as a relative overproduction of commodities, is different from what Marx in Volume III of “Capital” called an absolute overproduction of capital. This is a situation where productive capital has expanded to such an extent that the supply of additional labor power has been exhausted. In this situation, no additional investment of capital can increase the quantity of surplus value. Indeed, the fierce competition among the capitalists for the existing supply of workers will mean that both the rate and mass of surplus value will rapidly decline.

A decline in the absolute quantity of surplus value will certainly cause an economic crisis. However, such a crisis is not the same thing as an economic crisis caused by the production of commodities beyond the point the market can absorb them at profitable prices. Under modern capitalism, with its hundreds of millions of unemployed and underemployed workers worldwide even in the best of times, a relative overproduction of commodities will cause an economic crisis with rising unemployment long before there is a true absolute overproduction of capital.

An economic crisis brought about by the absolute overproduction of capital is compatible with both the strong and weak forms of Say’s law. This is why our modern Marxists speak about the “over-accumulation of capital” causing economic crisis and stagnation but in contrast to Marx and Engels never mention the general overproduction of commodities as a cause of economic crises. (back)

9 To make things clear, these Marxists don’t advocate cutting wages; they would prefer socialism. But they do believe that wages that are too high relative to the needs of capitalist production are behind the long waves of economic semi-stagnation that have marked certain periods in the history of capitalist production. (back)

10 Anwar Shaikh in his “Capitalism” and elsewhere makes the mistake of calculating profits not in money material but in “real terms.” He does this by applying a “deflator” to the general price index. To Shaikh, much as is the case with Ricardo, if prices fall the industrial capitalists have not lost anything because they can carry out the next cycle of production at lower prices. This view overlooks the fact that capitalists who have held their money back during a period of falling prices can buy the means of production of capitalists who have lost money during the period of falling prices and are forced into bankruptcy. Such canny capitalists then emerge as the victors in the war of what Shaikh himself calls “real competition.” The capitalists are quite right from their point of view to talk about making and losing money. When we calculate profits in real terms, we make the mistake of treating capitalist production as though it was socialist production. (back)

11 In contrast, the neoclassical and Austrian schools believe that the rate of interest equalizes the demand and supply of savings. The two main marginalist schools take for granted that money and commodities are at bottom the same thing. Both neoclassical theory in its pure form and the Austrian school support the strong form of Say’s law.

Keynes and other late 1930s Keynesian economists, however, held only to the weak form of Say’s law and believed that if money was issued in insufficient quantities by the monetary authority, money scarcity would lead to a general crisis of overproduction of commodities. A general glut of commodities is therefore possible according to Keynesian economists. In the past, overproduction occurred because currencies were tied to gold, which was indeed frequently scarce relative to other commodities. The cure for crises, the pioneer Keynesian economists believed, was to replace gold-backed money with non-commodity fiat money.

Once non-commodity money was established, the state could create enough money to lower interest rates to the level necessary to achieve and maintain “full employment.” Hence, they replaced the claim that the rate of interest equalizes savings with investments with the view that the rate of interest equalizes the supply and demand of money.

The reality is that the rate of interest equalizes the supply and demand for gold money and not the supply and demand for the legal-tender token money created by the state or the credit money created by the banking system. This is enough to rob the capitalist state of its alleged ability to determine the rate of interest and thus its ability to achieve and maintain “full employment.” The only way to achieve and maintain full employment is through the socialist transformation of production. (back)


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