Money as the Universal Equivalent

Do crises originate in the real or the monetary economy?

Some Marxists have been arguing on the Internet that the current crisis shows the cause of capitalism’s periodic economic crises lies in the “real economy” as opposed to the “money economy.” They seem very pleased by the renewed interest in the theories of John Maynard Keynes. Keynes, it is said, realized that capitalist economic crises originate in the “real economy.” These Marxists are hoping that the star of “monetarist” theory, Milton Friedman, who is widely and justly hated by exploited people throughout the world, is setting at last.

The late Milton Friedman was the main ideologue of “neoliberalism” within the economic profession. He held, in opposition to the followers of Keynes, that capitalism is an inherently stable system. The only serious cause of cyclical instability in a capitalist economy, according to Friedman, is located on the monetary side of the economy. (1) Therefore, Friedman opposed the kind of “stimulus packages” that are now being implemented by various governments around the world.

According to Friedman, the only thing which has to be done to make sure a recession does not get out of hand is for the “monetary authority”—such as the U.S Federal Reserve System, Bank of England or the European Central Bank—to keep the “money supply” growing at a slow and above all steady rate. As long as such policies are followed by the “monetary authority,” Friedman and his followers claimed, the industrial cycle of boom and bust would all but disappear. Until the current crash, this had been the reigning economic dogma in both Washington and London for almost 30 years.

The resurgence of Keynes

What a difference six months can make! Over the last six months, the views of John Maynard Keynes have staged a dramatic comeback. Keynes is generally considered to have been 20th-century Britain’s leading bourgeois economist. (2) Under the blows of the 1930s “Great Depression,” he had revised his youthful views and came to the conclusion that capitalism was indeed a highly unstable system. To this extent, Keynes late in his life came to agree with Marx. Left to its own devices, Keynes conceded, capitalism was prone to violent swings from boom to deep depression. He also believed that depressions were tending to become worse and feared that mass unemployment would become permanent.

What exactly was the source, according to Keynes, of the instability that characterized the capitalist economy? As these posts develop, I will be examining the economic theories of Keynes. So what I say below is only the beginning of my exploration and critique of Keynesian economic theory. First, I should point out that like most modern bourgeois economists, Keynes as much as possible sought to avoid the discussion of classes. (3)

Instead, he generally divided society between “households” and “entrepreneurs.” (4) Households are families who do not include an active industrial, commercial, or banking capitalist. Households might be poor—proletarian—or they might be very rich—capitalist. A fine way of avoiding the discussion of class! Households save some of their “income,” and the rest is spent on consumer goods. Entrepreneurs, on the other hand, carry out “investment.” (5)

Keynes divided the total spending that occurs in a capitalist economy—in effect the market—into three parts. One part was spent by “households” on consumer goods, a second part was spent on “investment” by the entrepreneurs, and a third part was spent by the government. It was the part of the total spending represented by the “investment” of the entrepreneurs that is, according to Keynes, so dangerously unstable. Sometimes the “entrepreneurs” are carried away by their “animal spirits,” investment soars and the economy booms. But if profits prove less than expected, the “entrepreneurs” become dejected, investment plunges, and the economy spirals into deep recession, just like it is doing right now. Therefore, unlike Friedman, Keynes is generally seen as locating the cause of capitalist crises in the real economy, not the money economy.

Keynes, therefore, came to advocate large-scale deficit spending by the government during periods of economic recession or stagnation. If the spending by the “entrepreneurs” proved inadequate, then the government should make up the difference through increased spending. This spending should be financed by borrowing, Keynes stressed. If the increased government spending was financed by current taxes (6) on the “entrepreneurs” or “households,” the latter would be forced to reduce their spending accordingly. In this case, the increased spending by the government would then be matched by reduced spending by the entrepreneurs and households. There would therefore be no net stimulus.

According to Keynes, while such deficit spending could be for useful public works, the most important thing in a “stimulus package” is the spending itself, not whether it is useful. Indeed, Keynes noted that during World War I, when deficit spending was being carried out on an immense scale, there was no problem of unemployment! The implication was clear. Spending on war just as much as spending for useful public works could be equally viable ways of combating economic depression.

Keynes was not the first bourgeois economist to advocate large-scale government spending to combat economic stagnation and unemployment. As I mentioned in an earlier post, Malthus advocated just this kind of government spending during the economic stagnation and widespread unemployment that followed the end of the “Napoleonic,” or “anti-Jacobin,” wars. Malthus argued that widespread unproductive expenditures by landlords, clergy as well as the government would be necessary to combat capitalism’s tendency toward “general gluts”—or general overproduction of commodities. Ricardo, Say and other economic liberals opposed such “stimulus packages,” which they saw as simply squandering the capital of the nation and thus slowing down rather than “stimulating” the accumulation of capital and economic growth. Appealing to Say’s Law, the economic liberals argued—and still do—that a general overproduction of commodities is impossible.

A key difference between Keynes and Marx

Keynes had come to agree with Marx that capitalism was an unstable economic system. But in contrast to Marx, Keynes thought that prompt action by the capitalist government would be able to compensate for the natural instability of capitalist investment, and thus eliminate cyclical economic crises within the framework of capitalist production. Therefore, according to Keynes, there was nothing fundamentally wrong with capitalism that a correct policy on the part of the government and the “monetary authority” could not fix.

Deficit spending and crowding out

The bourgeois economists who oppose Keynesian-style “stimulus packages” often claim that the more the government borrows the more that investment by the industrial capitalists will be “crowded out.” Some Marxists, for example the late Ernest Mandel, have pointed out that during periods of economic recession, such as the present, there is much idle plant and equipment, not to speak of massive numbers of unemployed workers. These Marxists have praised Keynes for realizing, in contrast to the died-in-the-wool capitalist opponents of “stimulative packages,” that the idle workers and machines are available to meet the extra demand created by deficit government spending.

Keynes himself, however, realized that there was another problem. It isn’t only a matter of the “real economy” but the “money economy.” (7) If an insufficient amount of money is available for lending, government deficits will raise long-term interest rates. The government would be able to borrow but the private capitalists would be cut off. In Marxist terminology, there would be a danger that the average long-term rate of interest would rise above the average rate of profit, reducing the profit of enterprise to less than nothing. If this happened, capitalist investment would collapse and thus offset the effects of the “stimulative package.”

Another potential problem is that if the government deficit rises too quickly and interest rates on long-term government bonds either fails to fall or falls much more slowly than it would without the increased deficit spending, mortgage rates and rates on loans for consumer durables in general might stay high postponing the recovery in the durable consumer goods industries. A type of situation can arise where the government, the industrial capitalists, and would-be home owners and purchasers of other durable consumer goods are competing for a limited amount of credit.

However, Keynes thought the danger of such monetary “crowding out” could always be overcome by the “monetary authority,” such as the Bank of England or the U.S. Federal Reserve System. Keynes claimed that during periods of high unemployment among workers and machines, there would be no danger of inflation, since production could always be quickly increased to meet any increase in “monetarily effective demand.” (8) That’s the whole point of Keynesian-type stimulus packages, after all.

Therefore, according to Keynes, inflation is not a danger during recessionary periods. While Friedman, who believed in the basic stability of the capitalist system, advocated a slow and above all steady growth in the money supply, Keynes advocated a rapid growth in the money supply whenever recession threatened. Indeed, Keynes thought that such policies if carried correctly would avoid the recession in the first place. If a recession hit anyway, Keynes held that a policy of deficit spending by the government should be combined with a rapid increases of the money supply by the “monetary authority” so that deficit spending would not “crowd out” private investment or consumer loans. The rapid growth of the money supply should be continued until “full employment” returns. (9) Beyond that point, “stimulative packages” would only create inflation, since increased demand for commodities could only be equalized with the limited supply of commodities through higher prices.

Under such inflationary conditions, Keynes advocated the opposite of a stimulus package. During inflation, he urged the government to increase taxes and cut government spending. In addition, interest rates should be raised through reduced monetary creation by the “monetary authority.” Therefore, Keynes held that if inflation develops due to a “stimulus package,” deflationary policies can always be applied that will end the inflation. The only difficulty would be perfecting the exact mix and timing of “stabilization policies” as first inflation and then recession threatened.

What Keynes and Friedman had in common

The differences between Milton Friedman and John Maynard Keynes, though real, shouldn’t obscure what both these bourgeois economists had in common. Both men hated socialism and supported the continued rule of the capitalist class. And they both believed that given correct policies by the governments and “monetary authorities”—even if they differed on exactly what these policies should be—a crisis-free capitalism could be achieved.

Many on the left, overlooking what Friedman and Keynes had in common, have hailed the current resurgence of Keynesian thinking in policy-making circles. These leftists are hoping that as governments ditch the Friedman-inspired policies of the last 30 years and return to those advocated by Keynes, a new reformist era much like that that followed World War II will emerge. They praise Keynes for seeing the cause of economic crises in the “real economy” as opposed to the Friedmanites, who see capitalist crises as originating in the “monetary economy.”

We can’t explain capitalist crises by abstracting capitalism

Besides the fact that we might forget that Keynes was no friend of either socialism or the working class, there is a hidden danger in seeing the cause of capitalist crises in the real economy as opposed to the money economy. The danger is that we end up abstracting the capitalist nature of capitalist production itself in order to explain capitalist crises.

In no other type of society, whether ancient tribal communism, ancient slave society, ancient Egypt, ancient China, ancient India, European feudalism, or the planned economies of the Soviet Union and its allies, did crises of generalized overproduction ever occur. There have been economic crises in other types of society, but these crises have always been crises of a shortage of use values relative to human need and not crises of generalized overproduction of commodities relative to the ability to pay.

Marx often complained that bourgeois economists tended to analyze capitalist production as though it was in fact socialist production. Pick up any introductory textbook in economics. The author or authors will explain that “capital” consists of factory buildings, machines and raw materials that are produced by “saving.” Marx, in contrast, saw capital as a specific social relation of production.

In contrast to the bourgeois economists, Marx held that factory buildings, machinery and raw materials were not necessarily capital at all. Capital, Marx emphasized, was a social relationship of production among people, mediated by things, not the things themselves. The origins and causes of capitalist crises must therefore be located within specific capitalist relations of production. In volume II of “Capital,” Marx analyzed capitalism as a unity of opposites between production and circulation. This is the reason Marx could not leave out money.

I believe that when analyzing the capitalist economy and its crises, the division into a “real economy” and a “money economy” is basically alien both to Marx’s method and, much more importantly, reality. Instead, I believe that we have to look at the capitalist economy as a unity of opposites in which the “real economy” of use values is entangled with the “monetary economy.” (10)

But to understand why this is so, we have to jump back to the very beginning of “Capital,” the first three chapters of volume I. Though these chapters can be rough going, tedious, and frankly rather boring at times, the effort put into mastering them is well worth it. Once you have begun to master them, you begin to see the subject of capitalist economic crises in a whole new light. At least I know that I did.

So lets jump in!

In chapter 1, Marx gives the following simple equation of exchange:

20 yards of linen = 1 coat

I have produced 20 yards of linen. Under the prevailing conditions of exchange, I can barter the 20 yards of linen for exactly one coat of a given type. The equal sign assumes that in some sense 20 yards of linen are the same as 1 coat. But exactly what is being equated here?

First, we see that both linen and coats are useful things, objects of utility, or as the classical economists called them use values. Each use value is being measured in a unit that is appropriate for it. In the case of linen, the unit is length. Marx uses the old-fashioned English units of length yards—still used in the United States. If we wish we could use the metric system measuring length in terms of meters instead.

On the right hand of the equation, we have 1 coat. The unit of measure of coats is each individual coat itself. We can divide the linen, within certain limits, without destroying its use value. But we cannot divide the coat in half without completely destroying its use value. So the individual coat is our unit of measure. We could have 1 coat like we have above, 2 coats, 100 coats, and so on. The units that measure the two use values are quite different.

Second, the two use values are qualitatively quite different. No matter how much linen I have, I don’t physically have a coat. The reverse is true. Coats cannot physically be reduced to linen. Yet the two are being equated. They must in some sense be qualitatively the same. The quality that they share, according to Marx, is that they are both products of human labor.

But the labor, the actual skills, necessary for the production of linen on one hand and coats on the other are quite different. An hour of the labor of one person differs quite a bit from an hour of labor of another person. Indeed, no two hours of labor performed by a the same person are identical. A garment worker might work much more efficiently when she is fresh then she will later in the day when she is tired out. If she is forced to work 10 hours per day, for example, not only will she work slower but she will be far more likely to make mistakes. Indeed, every person who has ever worked at all can testify to the truth of these observations.

Here we have to make an abstraction. We’ve got to leave out every feature of a particular act of human labor—the exact skills of the workers, whether the labor was performed at the beginning or the end of the workday, whether the workers had had a stimulating cup of coffee just before the labor was performed, whether the workers were in good or bad health, happy or sad. What we get is labor in the abstract, or labor as the logical class human labor. All particular characteristics of human labor are stripped away leaving only what is common to all human labor.

It is abstract human labor, that creates value, as opposed to concrete labor, which produces use values. What is being equated is not concrete labor but abstract human labor. The measuring unit of both concrete and abstract labor is some unit of time, whether seconds, minutes, hours, days, months or years.

No two units of concrete human labor measured in terms of time are alike. They are qualitatively different and therefore cannot be quantitatively compared. In contrast, abstract human labor is homogeneous. It can in principle be divided into an infinite number of smaller units without losing its qualitative properties. However, abstract human labor is not a physical substance, we cannot actually see it in the linen or the coat. It is, rather, a social substance. It is this common social substance that is being equated in the equation 20 yards of linen = 1 coat.

Therefore, while concrete labor creates use value—real wealth—it is abstract human labor that creates value. The very substance of value is nothing but abstract human labor.

Now, how do we measure the value of a commodity in everyday life? Is it in units of abstract human labor measured by the clock? Exactly how much abstract human labor was contained in the cup of coffee you bought this morning? Have you any idea? But you do know that you paid a dollar, a euro or sixty pence for it. The value of commodities is never measured directly in terms of hours of labor.

But why not? Indeed, many reformers over the decades have suggested just that. Why can’t we just issue currency that represents a unit of labor. For example, a one-minute note, a one-hour note, an eight-hour note, and so on. For example, why not pay a worker in an eight-hour note after the worker has performed a standard eight-hour workday?

Actually, we would have to pay the worker in a four-hour note, assuming the rate of surplus value is 100 percent. If that were done, the exploitation would not be hidden but would be obvious. There is also the problem, of course, that we would be measuring the workers’ concrete labor here, not abstract labor. But doesn’t on average eight hours of concrete labor amount to eight hours of abstract labor?

What makes such “labor money” schemes completely impossible is the very nature of a commodity economy. Commodity producers are independent producers performing their labor for their own private accounts. They have no idea what their fellow commodity owners are producing, let alone what the broader needs are of society. Over the last three weeks, in my examination of capitalist reproduction, I have shown that production must be carried out in certain very precise proportions. If it is not, production completely breaks down, and with it human society itself. How are the correct proportions among the various branches of production achieved and maintained among the various branches of production under a commodity system where there is no central organ that consciously organizes the labor of society among the various branches of production?

The first commodity exchanges were more or less accidental exchanges of products between different communities. But over time one community—in effect an independent commodity producer—would not accept a ratio of commodity exchange—for example, 20 yards of linen for 1 coat—unless they knew that it took more or less the same amount of labor on average to produce 20 yards of linen as it takes to produce one coat.

Suppose I represent the community—the independent individual commodity producer, which can just as well be a collective as an individual worker—that produces linen. I will measure the value of my commodity linen by the use value of the coat. Marx called the linen—the commodities whose value is to be measured—the relative form of value, and the coat that measures the value of the linen the equivalent form of value.

Value, then, must take the form of exchange value. The exchange value of 20 yards of linen, according to Marx’s example, is 1 coat. Notice that the exchange value of the linen is measured in terms of the use value of the coat.

Below, for reasons of simplification and space, I will assume that the amount of (abstract) labor that it takes to produce commodities remains unchanged.

Now suppose for some reason the coat producers fail to produce a sufficient quantity of coats. After all, there is no central authority of any kind telling them what to produce. How would I, a linen producer, know that not enough coats are being produced? I will know because I will now need more linen in order to obtain a coat.

Perhaps my 20 yards of linen will only exchange for one-half coat. But half a coat is useless both in terms of use value and therefore in value terms too. Therefore, if I as a linen producer want a coat, I will have to work for twice the amount of time. I now need to produce 40 yards of linen in order to “buy” a single coat.

I will be tempted to shift to the coat trade. As a coat producer, I will have to work only half the time to obtain the linen I need. Perhaps I am too old to learn a new trade, but my children will shun the linen trade for the coat trade. Coats are now “hot,” not linen. Eventually too many coats will be produced causing the “price” of linen in terms of coats to soar. (11) Now it will be linen’s turn to be hot, while the coat trade suffers from overproduction and hard times.

So through recurrent “mistakes” by the commodity producers, first producing too much of commodity x relative to commodity y and then producing to much of commodity y relative to commodity x, a balance is maintained over the long run. It is precisely through competition—or the mutual pressure of one commodity producer on another—that the correct proportions of production are achieved and maintained over time. This is what Adam Smith called the “invisible hand,” and Marx called the “law of value,”

The differentiation of the real economy and money economy in embryo

The 20 yards of linen has both a use value and an exchange value—in Marx’s example, the exchange value of the linen is 1 coat. Here in the simplest form of barter, we see in embryo the polarization of the economy into the a “real economy” and a “money” economy. Just like every “cell” in the human body has the complete genetic blueprint of a human being, the division between the “real” and the “monetary” economy is built into the simple commodity, the cell of capitalist production.

But in the simplest commodity exchanges, we see this differentiation into the real and monetary economy only in an embryonic form. To the linen producers, the coat is the equivalent of his or her commodity. The reverse is also true. From the viewpoint of the coat maker—or coat-making community—it is the coat that is the relative form of the commodity and the linen which is the equivalent form of the commodity. But isn’t money nothing but the universal equivalent for commodities as a whole?

As commodity exchange evolves from occasional accidental exchanges towards towards a broader system of commodity production and exchange, one commodity or at most a few emerge as the universal measure(s) of value. It becomes the special function of the money commodity to measure in terms of its own use value the exchange values of all other commodities. This indeed is the basic function of money.

But why must this be so? In the simple equation of exchange 20 yards of linen = one coat, the coat functions as the measure of value for the linen producer in terms of its own use value and the linen functions as the measure of value for the coat producer in terms of its use value. Why can’t all commodities be both the relative form of the commodity—the commodity whose exchange value is to be measured—and the equivalent form of value—at the same time? (12)

All commodities cannot be money

Suppose all commodities could function as equivalents—in effect, all commodities would be money. I assume “price” is simply the exchange value of a commodity measured in terms of the use value of an equivalent commodity. I go into a coffee shop and ask the owner for my morning coffee. Naturally, I need to know what is the “price” of coffee today? The owner then says that in terms of linen it such and such a length, while in terms of coats it is a fraction of a coat of a given quality and another fraction of a coat of another quality, and so forth, while in terms of shoes, it such and such fraction of a shoe, while in terms of laptop computers it is …

Well you should get the idea. If n represents the total types of commodities produced, then each commodity would have exactly n – 1 “prices.” If linen and coats were the only types of commodities, this would work, but in a system of complex commodity exchange, not to speak of capitalism, where virtually everything is a commodity, this simply won’t do.

But the problem can be easily solved if we use only one commodity as an equivalent rather than all commodities. For example, if the general equivalent for commodities was linen, the store owner might say that the price of a cup of coffee was a quarter of an inch of linen, to use the old English unit.

This is, of course, much closer to reality, and is at least conceivable. Indeed, the name of the British currency, the pound sterling, derives from the fact that once upon a time the pound sterling represented an actual pound of the specific commodity sterling silver. And the use value of sterling silver is measured in terms of weight, for example pounds in old-fashioned English weights.

Next: From money as the universal equivalent to money as currency.


1 In 1963, Milton Friedman, then a professor of economics at the University of Chicago, and economist Anna J. Schwartz published their “Monetary History of the United States 1867-1960.” They noted the tendency of what the bourgeois economists call the “money supply”, defined as the total amount of “paper” money and coins in circulation plus bank deposits, tends to contract during periods of economic recession. They especially noted the one-third drop of the “money supply” between the summer of 1929 and March 1933.

Friedman and Schwartz then jumped to the the conclusion that the capitalist economy would be stable if the growth rate of the “money supply” was stabilized. This, the two economists held, could easily be done by a “monetary authority.” Friedman and Schwartz blamed the Depression of the 1930s on the U.S. “monetary authority,” the Federal Reserve Board. They complained that “the Fed” allowed the U.S. money supply to contract by one-third. If the U.S. Federal Reserve Board had instead expanded the “money supply,” which Friedman and Schwartz claimed it could easily have done, instead of allowing it to contract by one-third, the Depression would have been avoided. The implication is obvious. There would have been no “New Deal,” no CIO, and in the United States the good old days of McKinley, Harding, Coolidge and Hoover would have continued forever.

Their theories were originally dubbed “monetarist.” Later, for reasons I will examine in later posts, the term “monetarist” was eclipsed by the term “neoliberal.” Monetarism increasingly replaced the previously dominant “neo-Keynesian” views in university economic departments from the 1970s on. The beauty of the theories of Friedman and Schwartz from the viewpoint of the ideologues of capitalist reaction was that the theories enabled them to revive their traditional claim that the “neoclassical marginalist economists” had scientifically “proven” that capitalism is a very stable economic system. This claim had gone into decline in university and government circles after the 1929-33 economic crisis and the work of John Maynard Keynes.

2 John Maynard Keynes was a student of the British “marginalist” pioneer Alfred Marshall. At first, he was, like Marshall, a conventional “liberal” economist who believed, much like Friedman and Schwartz, in the stability of the capitalist system.

However, during the 1920s, even before the crisis of 1929-33 hit, Britain was already suffering massive unemployment. Keynes got together with the leader of the British Liberal Party, Lloyd George, and advocated a program of public works to be financed by deficit spending to combat the unemployment. Keynes obviously hoped the declining British Liberal party would be able to undercut the new trade union-based British Labor Party, which was doing little in practice to fight the unemployment crisis. Keynes’s suggestions were similar to those that had once been advocated by Malthus when Britain had also suffered massive unemployment in the wake of a world war.

The problem for Keynes was that the basic economic theory that he had learned from Marshall and like-minded economists in his youth had “proven” that the kind of unemployment crisis Britain was then passing through could not occur. In 1936, Keynes published the “The General Theory of Employment, Interest and Money.” In this book, he modified the conventional “marginalist” theories so that they would conform to the reality of widespread prolonged mass unemployment and stagnation. This book became the “bible” of “Keynesian economics.”

3 It was bourgeois classical political economy that first described the classes that characterize modern bourgeois society. Adam Smith described the three main classes of capitalist society. First there are the landlords whose main source of income is ground rent, then the owners of capital whose source of income is profit, both interest and the profit of enterprise, and finally there are wage workers whose income is wages. Smith names the main classes of society leaving out intermediate “petty-bourgeois.” Though it was obviously numerically quite large in late 18th-century Britain, the petty bourgeoisie combines within itself the elements of the three major classes. In respect to Smith’s analysis of the basic class structure of capitalist society, Marx was very much his pupil.

The later bourgeois economists, especially those of the “marginalist school,” do everything they can to avoid the question of class. Keynes, whenever possible, referred to “households” in order to avoid dealing with classes, which were so central to the analysis of the classical bourgeois economists and Marx. This is one of the ways that vulgar political economy, including that of Keynes, differs from classical bourgeois political economy, on one side, and the Marxist critique of classical political economy, on the other.

4 As part of his general tendency to bury class, Keynes preferred the French term “entrepreneur” to the plain English term “industrial capitalist.”

5 Keynes liked to use the term “income,” not distinguishing between profit and wages if he possibly could. Indeed, throughout the “General Theory,” Keynes avoided the term profit entirely, confining himself to either interest, when it was necessary for his argument, or the marginal efficiency of capital, by which he meant in Marxist terms the interest plus profit of enterprise that is appropriated by the industrial and commercial capitalists. In this way, Keynes avoided the word profit, though profit is the driving force of the entire capitalist system that he was analyzing!

6 I say current taxes, because the increased public debt bought about by deficit spending has to be serviced by future taxes. Deficit spending always means increased taxes down the road. The theory is that when these taxes hit, the recession will be over. The capitalist class is always trying to shift the burden of taxation on to the shoulders of the working class. One of the jobs of the workers movement is to fight this. And with stimulus packages across the globe generating—outside of world wars—unprecedented government deficits, we can expect a massive attempt by the capitalist class to shift the burden of servicing what will be a tremendously increased public debt on to the working class.

7 Keynes, unlike many of his later supporters, did not ignore the problem of money. Indeed, in the “General Theory,” he wrote much about money. As I develop my critique of Keynes, I will explore Keynes’s monetary theories and how they compared to those of other bourgeois economists and Marx.

8 During the 1970s, contrary to the predictions of Keynes, a high level of unemployment of both workers and machines co-existed with a high and frequently rising rate of inflation. This increasingly discredited Keynesian theory in practice, and therefore, at least in part explains its decline. This opened the door to the “neoliberal” theories of Milton Friedman, which I will also be critiquing in these posts. At this moment, the rapid development of the current crisis, which has caught them with few exceptions completely by surprise, is throwing the bourgeois economists into confusion. The Friedmanites, now entrenched in university economics departments, are desperately hoping the crisis will quickly pass. If that’s the case, they hope they will then be able to sweep it under the rug. If it is prolonged, they will become increasingly discredited, much like the traditional liberal “marginalists” were in the 1930s.

But their Keynesians opponents have to sweep under the same rug the prolonged “stagflation crisis” of the 1970s. If we as Marxists, critics of all bourgeois economics, are to take advantage of the current confusion and demoralization among our bourgeois opponents, we should be careful not to let incorrect ideas coming from the Keynesian school creep into our analysis. As I will show in the coming posts, only by basing ourselves solidly on Marx—not as some kind of infallible religious prophet but as a fellow economic scientist—can we explain not only the crisis of the 1930s and today’s crisis, but also the stagflation crisis of the 1970s.

9 As representatives of the capitalist class, the Keynesian economists don’t necessarily define “full employment” the same way the working class does.

10 Marx was a student of Hegel before he became a pupil of Adam Smith, David Ricardo and the other classical bourgeois economists. All movement—change—arises because almost all relationships and objects are actually unities of opposites. For example, the basic unit of chemistry, the atom, is a unity of opposite electrical charges. The negative charge—the electrons—and the nucleus carried by the protons that have a positive electric charge. Other types of elementary particles have different non-electrical types of positive and negative charges that correspond to the other physical forces. In quantum mechanics, a particle with one spin can become entangled with a particle of the opposite spin when the “wave function collapses.”

Or if particle physics is not your thing, take the example of the weather. The weather, especially the weather of “temperate zones,” is driven by the uneven heating of the earth. The extra-tropical cyclones—or depressions, as the English call them—that cause most of the storms of the temperate zone are unities of cold and warm air masses that are constantly interacting within one another.

This is what the word “dialectics” is all about. Dialectics is nothing but the study of contradiction, opposing poles, the interaction of contradictory poles, and how this gives rise to movement and change, sometimes gradual and sometimes sudden and violent. The simple division of the economy into the “real economy” and “money economy” without seeing them as a dialectical unity of opposites is a good example, in my opinion, of the non-dialectical thinking that is so entrenched in the English-speaking world.

11 I put price here in quotes to emphasize that we have only the “embryo” of price here. With the further development of the commodity relationship of production, price in the true sense will  emerge, as we will see next week.

12 This is a very important point. Later, I will show that the illusion that economic crises can be eliminated with the help of a correct policy on the part of the “monetary authority,” which is important not only to Friedmanite economics but to Keynesian economics as well, rests ultimately on the illusion that all commodities can be “money.”

12 thoughts on “Money as the Universal Equivalent

  1. Please date every article. Perhaps the original and updated dates would be useful. For example, somewhere in this article it says “Over the last six months”. Six months since when?
    Why not date them in general? Marx’s writings are so old and yet so relevant. Dating doesn’t make it relevant to irrelevant.

    I came across this paragraph:
    “Keynes himself, however, realized that there was another problem. It isn’t only a matter of the “real economy” but the “money economy.” (7) If an insufficient amount of money is available for lending, government deficits will raise long-term interest rates. The government would be able to borrow but the private capitalists would be cut off.”

    It seems that the author agrees with what Keynes “realized”. But what Keynes “realized” didn’t happen. Did it? In 2009 and 2010 we witnessed the following:
    There was plenty of money available for lending. In the US, the Federal Reserve paid banks to borrow money. Yes it paid banks to borrow because the interest rate was zero while inflation rate was 5%. This makes real interest rate -5%. So what happened? Banks borrowed money and bought government debt. Interest rates stayed at historic lows. It’s been declining not rising for reasons that I would not get into here. Private capitalists are not cut off. There is excess capacity. Why borrow in order to expand when there is excess capacity? Why should consumer borrow? This indeed is the reason why the so called money supply has been shrinking. It’s not a supply issue. It’s the demand.

  2. “All movement—change—arises because almost all relationships and objects are actually unities of opposites.”

    Can you point me to the physicist or meteorologist who employs ‘unity of opposites’ as you do? Other dialectical Marxists don’t qualify.

    See – – for critique of dialecticalism.

  3. Both Keynes and Marx initially left out “financiers”. The deliberate confusion of financiers and industrialists is common in economics; Veblen makes a point of distinguishing the two, and for good reason. They interact, and are sometimes the same people, but they perform totally different roles in the economy. The financier’s role is the most dangerous.

    I tend to think that Hegelian “dialectics” is so much bafflegab most of the time — not an informative way of looking at things.

  4. “During the 1970s, contrary to the predictions of Keynes, a high level of unemployment of both workers and machines co-existed with a high and frequently rising rate of inflation. ”

    This problem was trivially and straightforwardly solved by the *environmental economists*. Both Marxists and capitalists, oddly, spend much of their time ignoring *real resource shortages*.

    The 1970s stagflation was driven by the oil price shocks, period, full stop. Nothing more is needed in terms of explanation. The economy was no longer constrained by labor — the economy was constrained by the oil supply, which had to be sourced from abroad using “hard” (exogenous) money. Labor was idle because the co-production factor in all the industrial processes, oil, was missing; something which even Marxist policies could not have changed. Only environmental policies could have changed that.

    Price inflation was up because the primary factor in the cost of products, oil, cost more.

    The only remaining question is why wage inflation happened as well; there is empirical evidence of widespread indexation of wages to prices, which is enough to account for that on its own, and there are other possible causation effects as well.

    This shows the massive dangers of having your entire economy dependent on a limited, non-renewable resource. I submit that the same phenomenon of stagflation would be impossible in a solar economy, barring deliberate governmental debasing of the currency.

    1. Can’t the cause for stagflation come the rising wages and falling profits of the post WWII period, which then meant that when the oil shock came businesses that used oil as an input became unprofitable, tried to raise prices above values to compensate, and that meant that the businesses that used inputs from the first tier of businesses using oil directly as inputs faced rising input costs themselves which wiped out their profits, so they had to raise prices and so on and so forth, and since workers were so organised during this time, in reaction to commodity inflation they forced employers to raise their wages in line with inflation to compensate, which meant that the gap between the value of what was produced and wages didn’t grow and profitability wasn’t restored, which meant that businesses needed to try and raise prices again to restore profitability etc leading to generalised inflation? So that would be a combination of Marxism and environmentalism, really; the low rate of profit made businesses vulnerable to rising input costs, which came from the form of the ‘oil shock.’

  5. “Suppose all commodities could function as equivalents—in effect, all commodities would be money. I assume “price” is simply the exchange value of a commodity measured in terms of the use value of an equivalent commodity. I go into a coffee shop and ask the owner for my morning coffee. Naturally, I need to know what is the “price” of coffee today? The owner then says that in terms of linen it such and such a length, while in terms of coats it is a fraction of a coat of a given quality and another fraction of a coat of another quality, and so forth, while in terms of shoes, it such and such fraction of a shoe, while in terms of laptop computers it is …”

    Historically this was actually done in ancient Egypt, which was also centrally planned (so the exchange ratios were set by the Pharoah). They didn’t actually have money.

    Thought that might interest you…

  6. Gold is an exceedingly rare item, it’s extraction is hard and so keeping up with it as a money standard is hard. But, what about a basket of very rare noble metals? Most of them were not even known to exist by the time Marx wrote the capital or were just scientific curiosities.

    I am not talking about silver, since its availability and extraction makes the labor for extraction less intensive. Keeping it requires a large volume and weight so only countries with a very undeveloped capitalism could used as a standard.

    I’m talking about a basket of metals as equally rare and hard to extract as gold, such as Platinum, Rhodium, Gold, Iridium, Osmium,Palladium, Rhenium.

    Some others others, like Tellurium are rare, but are not extensively used as a commodity, so the mines run slow. But, in case they were intensely, run they could be very expensive since some of them are even rares than gold.

    So, maybe a standard based on heavy bars with a standard mixture of all these metals, would hugely increase the availability of money, while still keeping very high the quantity of labor time to extract them.

  7. The rise of cyber ‘money’ like the Bitcoin is an interesting phenomenon. My view is that rarity doesn’t necessarily confer value. There does need to be a use value associated with a commodity. Even the fiat currencies have a use value. They are accepted by governments as payments for tax statements.

    So, the Bitcoin, and other forms of cyber ‘currency’, is, or should be, worthless. So is its perceived value the result of erroneous judgement by buyers and sellers, or is some re-appraisal of theoretical understanding called for?


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