‘The Failure of Capitalist Production’ by Andrew Kliman — Part 2
Measuring the mass and rate of profit
As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.
But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.
Should we use historical or current prices in calculating the rate and mass of profit?
Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.
Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.
However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on an expanded scale. In that case, hasn’t our capitalist made a profit after all?
Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.
As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.
Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.
However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.
Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit. (1)
Profits are measured in terms of money
However, despite the claims of the physicalists of all schools, as far as actual capitalists are concerned profits are measured not in terms of physical means of production but in terms of money.
We often hear that the shares of a given corporation soared—or declined—on the stock exchange because the company “beat its numbers”—or fell short of the “Street’s” expectations. For example, a given company might “beat its numbers” by 25 cents a share or fall short of expectations by 25 cents. We don’t read that the company beat its numbers or fell short of them by 0.001 lathes per share, or 0.004 industrial robots per share or 0.005 employed workers—labor power—per-share.
Ask any businessman and he will tell you his aim is to make money—not increase the quantity of factory buildings, lathes, industrial robots or number of workers at work in his factories or other productive enterprises.
But wait a minute! In order to make money, isn’t it necessary for industrial capitalists to increase their factory buildings, lathes, industrial robots and number of workers employed and thus increase the overall wealth of society? Any physicalist economist will explain that the real purpose of a “free market economy,” as they prefer to call capitalism, is to increase the wealth of human society to the maximum extent possible.
Profit measured in terms of dollars and cents—money—is simply the way real wealth is measured, according to the physicalists. The real purpose of a “free market economy” is to increase as much as possible the wealth of society measured in terms of utilities (use values) that are desired by the members of society.
This is, however, not the way the capitalists engaged in the day-to-day struggle of capitalist competition see it. From the viewpoint of the capitalists themselves, the making of money is indeed the end, and any increase in material wealth that results from this is merely an unintended side effect.
If a capitalist can make the same amount or even a greater amount of money by lending money at interest (M—M’), for example, this is just as legitimate as far as the “bottom line” is concerned as making the same amount of money by building a new factory that produces medicines to fight childhood diseases.
The aims and historical significance of capitalist production
According to the Marxist theory of historical materialism, the justification of the capitalist mode of production, with its cruel exploitation, is precisely the vast increase of the material wealth of society in terms of the use values of commodities. It also brings about a vast increase in the productive powers of labor as well as the creation of a class of wage workers that has both the material interest and potential to transform exploitive capitalism into a classless society.
Remember, historical materialism teaches us that any conception of socialism without the huge accumulation of material wealth that has occurred during the era of capitalist production is a pipe dream. So what is a mere side effect for the capitalists themselves is actually the most important historical result of capitalist production.
How the capitalists measure their wealth
Publicly traded corporations are obliged to issue two types of financial reports: income statements and balance sheets. The income statement more or less honestly—and sometimes not so honestly—measures the mass and rate of profit. The balance sheet attempts—again more or less honestly or not so honestly—to measure the wealth of the corporation as a whole.
The balance sheet will actually list the material elements of the wealth of the corporation in use value terms, though often the details are quite skimpy. Each listed material element of wealth is, however, assigned a monetary value. We may see a factory employing thousands of workers busy night and day producing automobiles, clothes, iPads, medicines and so forth, but the men—and nowadays a few women—who run the corporations see a definite sum of money, measured in terms of dollars, euros, yen or yuan as the case may be.
Whether it is a worker at work—variable capital—or a machine, or a stock of yet to be sold finished goods—commodity capital—each material element of wealth is valued by capitalists and their accountants in terms of a definite quantity of money.
While a typical industrial capitalist—or corporate officer—will have trouble defining exactly what money is if you try to pin him or her down, he or she does know that money is infinitely divisible and that a given unit of money—for example, a U.S. dollar, is equivalent to another U.S. dollar. Therefore, unlike the use values that make up material wealth that differ qualitatively from one another, money is made up of some sort of uniform substance. Different quantities of money are qualitatively identical and differ only in quantitative terms.
Our industrial capitalist—especially nowadays—is also aware that the same thing is true across currency units. At any given point in time, assuming that a euro is worth say $1.30, a euro represents the same exact quantity of wealth measured in terms of money as one U.S. dollar and 30 cents. Behind dollars, euros, yuan, and yen there is hiding the common substance called money. Every active capitalist knows—or if he or she doesn’t they won’t remain a capitalist for very long—that this money substance must be increased as much as possible at the pain of ruin.
At the end of the day, the corporations—and non-corporate capitalists as well—will commit any crime—even risk life on earth itself (2)—to increase this all-important substance called money, which represents social wealth in general but not wealth in the form of specific means of production or means of personal consumption.
Only a portion of the total capital is money capital
It is sometimes claimed that the capitalists’ aim is to increase the quantity of money capital—that is, capital existing in the form of money. This, however, is not true. While a certain portion of the wealth of capitalist society must exist in the form of money—for example, dollar, euro, yuan, yen and so forth bills you carry in your wallet—the vast bulk of the wealth in capitalist society most certainly does not exist in the form of money.
The aim of capitalist production is not to maximize the quantity of money itself—this is where a capitalist differs from a miser—but to increase the quantity of wealth measured in terms of money. Most of the “money” here is actually imaginary money or what Marx called money of account.
Kliman is a Marxist who unlike the “neo-Ricardians” upholds the law of labor value. He like all Marxists who accept in some form the Marxist theory of value knows that behind this mysterious substance called money there lies a social substance called value. Money, virtually all Marxists who concern themselves with questions of economic theory would agree, represents value.
But what is the actual relationship between wealth measured in terms of money—dollars and cents—and value measured in terms of abstract human labor? Here things can get tricky.
Monetary expression of labor time, or MELT
Kliman measures capitalist wealth through what he among other Marxists call the monetary expression of labor time, or MELT. This seems reasonable. But exactly what is the relationship between value—embodied labor time—and its monetary expression?
If prices directly equaled value, things would be quite simple. If a factory is worth $10 million, this would be just another way of saying that this type of factory on average takes x number of hours of abstract human labor to construct. Using dollars rather than hours would be simply a convenience.
Indeed, this this is exactly what Marx himself did when he explained surplus value on the basis of the exchange of commodities with other commodities of equal value in Volume I of “Capital.” Indeed, Marx insisted that surplus value cannot be explained without this assumption. So, for certain problems, including the most important question in all economics, the origins and nature of surplus value, the concept of MELT is quite useful.
But Kliman knows that real-world market prices are constantly deviating from values. The real problem is exactly how we relate the world of prices to the world of human beings engaged in production and exchange. In other words, what is the relationship—if any—between wealth measured in money and wealth measured in labor value?
Since the end of the Ricardian era, the (bourgeois) economists, whether they are Austrians, neo-classicals or neo-Ricardians, deny that wealth measured in terms of (labor) value and wealth measured in terms of money have any meaningful relationship to one another. Therefore, these “physicalist” economists claim that the concept of MELT is meaningless. They instead make a kind of shortcut, directly connecting wealth in terms of utilities, or use values, with wealth measured in terms of money.
MELT, in contrast to the physicalist theories of the neo-Ricardians—and other bourgeois economists—attempts to connect monetary value and value based on abstract human labor directly. The idea behind MELT without a money commodity is that a dollar, a euro and so on represents a definite quantum of value—abstract human labor—that is not embodied in any particular commodity but rather reflects the value embodied in commodities as a whole. While the supporters of MELT agree that individual prices can and indeed do deviate from values, the sum of prices will equal the sum of values.
As we saw when we examined Kliman’s earlier book “Reclaiming Marx’s Capital,” to the supporters of MELT the sum of the prices of production equals the sum of direct prices, and the rate of profit calculated in terms of values will exactly equal the rate of profit in terms of both direct prices and values. Marx himself made these assumptions, though he noted as we will see below that these equalities were only approximate, not exact.
These equalities, if they are treated as exact as opposed to approximate, will inevitably lead to contradictions that open the door to the neo-Ricardians. The neo-Ricardians have no difficulty showing that except under unrealistically restrictive assumptions, the rate of profit in terms of value and in terms of money will never be exactly equal.
The neo-Ricardians then jump to the conclusion that the rate of profit in terms of value is meaningless. The neo-Ricardians profoundly “explain” that the decisions made by real-world capitalists have nothing to do with the value rate of profit. After all, real world capitalists neither care about the value rate of profit nor know what the value rate of profit is. This is certainly true as far as it goes.
Faced with what appears to them to be contradictions in Marx’s theory of value, the neo-Ricardians give up and retreat from value theory altogether to the “commonsense view” that profit simply consists of the growing mass of material use values produced by capitalist industry minus the means of consumption the workers get to consume in exchange for their labor. The neo-classicals and Austrians reply to the neo-Ricardians: We told you so all along.
If you accept these arguments of the neo-Ricardians, you naturally will tend to agree that it is more meaningful to measure profits in terms of current prices—taking into consideration the effects of either inflation or deflation, as the case may be—as opposed to historical prices. After all, just as the workers are ultimately more concerned with real wages—what their wages actually buy—aren’t the capitalists also more concerned with their real profits—what their profits buy in terms of material use values as opposed to their purely nominal money profits? (3)
From the classical economists to Marx
While today’s bourgeois economists are all “physicalists,” this was not the case with the classical economists. Though the French school of the Physiocrats were physicalists in the sense that they confused surplus value with the biological fact that if you plant a certain quantity of corn seeds, at the end of the growing season you will possess more corn seeds than you began with. This is why the Physiocrats saw only agricultural labor as productive of surplus value. Though naive, this view was still a great advance over the view that surplus value arises in the sphere of circulation and not the sphere of production.
It was the English school of classical political economy—England and Scotland being the countries where capitalist production was most advanced—that developed the distinction between what they called value in use—use values—and value in exchange that is produced only by human labor.
The distinction of English classical economy between use value and exchange value was the starting point for Marx. Nobody was ever born an accomplished Marxist economist, not even Marx. In the beginning, Marx was the student of the classical economists. He did not become a fully fledged “Marxist” economist all at once. Inevitably, therefore, Marx’s early writings are mixture of “Marxism” and classical political economy. (4)
However, by the time he wrote “Capital,” Marx described not two but three types of “value.” In addition to use value and exchange value, the distinction he inherited directly from classical political economy, Marx distinguished between value and the form of value—exchange value. Why did Marx introduce this distinction that was unknown to the classical economists? Was he simply showing off his philosophical education? Remember, Marx was a philosophy major in college and held a doctorate in philosophy.
Since Marx did not fully develop the distinction between value and exchange value until relatively late in his career and didn’t make this distinction in his earlier writings, many modern Marxists, who often lack a proper philosophical education, remain confused on this question. The very concept of “forms,” after all, takes us back to the world of ancient Greek philosophy. What do the old Greeks who lived thousands of years ago in a slave—not capitalist—society have to do with the economics of modern capitalist society (5)
I believe that without understanding the distinction between value and the form of value, we not only fail to fully grasp Marx’s theory of value—at best, we have an understanding of value that is somewhere between that of Ricardo and the mature Marx—we cannot fully understand either capitalist crises or the evolution and fate of modern capitalist society.
What is this “form of value” and how does it differ from “value.” According to Marx, the form of value is exchange value. Exchange value arises because value, after the earliest phases of barter, cannot express itself directly as hours of labor but must express itself through the ratio in which a commodity of one use value exchanges with a commodity of another use value.
Let’s take an example that Marx himself used in “Capital.” Suppose a coat of a given quality is exchanged for a given number of yards of linen. How would a merchant measure the amount of coats he has in inventory? He would measure the coats in discreet units—by how many physical individual coats he has in inventory. Why does he measure coats this way? Because it is in the nature of coats as a material use value that two coats can never be combined into one coat. Also if you cut a coat in half, the coat will lose its entire use value as a coat.
Linen, by contrast, has a completely different unit of measure, some unit of length. Marx uses the old English measure of length called a yard, which consists of three old English feet. These old English units of measure are still used in the United States, but most of the rest of the world uses meters. A yard is roughly the old English equivalent of a modern metric meter. If Marx was writing “Capital” today, he would probably have used meters rather than yards. But old English yards and metric meters have one thing in common, they are both measures of length. Therefore, the use value of linen is measured in some unit of length.
Notice that the use value of our two different commodities, coats and linen, are measured in totally different units. In contrast, their (labor) values are measured in a common unit of measure, the quantity of abstract human labor measured in units of time. The unit of time may be hours, minutes or seconds just like we can measure the lengths of linen in terms of either meters or yards.
Suppose I am the maker of the coat and barter it for linen. I am interested in what the value in exchange of my coat will be in terms of linen—measured in yards or meters. This brings us to the distinction between value and exchange value. In the above example that I borrowed from “Capital,” the value of the coat is measured in abstract human labor—that is, in some measure of time. In contrast, the exchange value of the coat is measured in terms of units of linen measured in some unit of length.
Therefore, value and exchange value are two distinct relationships. However, the fact that the coat and a given quantity of linen are being exchanged implies that they have something in common. But what is it? Marx finds that what they have in common is that they are both products of abstract human labor. Not the specific human labor that produces a coat nor the specific human labor that produces linen, but what the human labor that produces coats, linen, gold, iron and so on have in common.
When the value of the coat corresponds directly to the value of linen it exchanges for, the coat represents the same quantity of abstract human labor that the linen does. This relationship, however, includes the possibility, and, in the real world as Marx makes clear, the overwhelming probability, that the coat and linen will exchange at some ratio other than the one that exactly expresses the coat’s labor value.
Indeed, Marx explains again and again that exchange value virtually never expresses value exactly. The distinction between exchange value exactly expressing value—the rare exception—and exchange value not exactly expressing value—almost always the case—causes any concept of MELT without a commodity like linen that measures the value of a coat in terms of its own use value to break down.
Marx explains that the exchange value relationship where the exchange value of a coat is measured in terms of a given quantity of the use value of linen contains in embryo the money relationship. In order to arrive at the money relationship of production, we simply have to generalize the relationship between the coat and the linen. Instead of measuring the exchange value of only a coat in terms of linen, we can measure the exchange value of all commodities—except linen—in terms of linen. In that case, linen would serve as money. Alternatively, we can replace linen with a more suitable commodity—a precious metal such as gold.
To return for a moment to the coat-linen example, Marx calls the coat—the commodity whose value is being measured—the relative form of value and the linen—the commodity that serves as the unit of measure of exchange value—the equivalent form of value. Of course, in a simple barter exchange we could just as well use coats to measure the exchange value of linen. In that case, we would call the coat the equivalent form of value and the linen the relative form of value.
But this ceases to be true once a commodity establishes itself as the universal equivalent. Why do we need a universal equivalent? When only a few products of human labor are exchanged, we really don’t need a universal equivalent. However, this changes once hundreds and then thousands of products—still far less than the millions of types of commodities that are exchanged today—are exchanged. Indeed, if we did not have a universal equivalent, every commodity would have many thousands of prices, or as many prices as there are commodities with distinct use values and qualities—minus one, the commodity whose value we are trying to determine.
This problem is easily solved if we simply set one commodity aside and use its use value to measure the exchange values of all other commodities. In “Capital,” Marx gives an example where linen serves as the universal equivalent and calls it the general form of value because linen is not really a very good money. He then gives another example where gold replaces linen as the universal measure of value. We have arrived at the stage of money where gold serves as the universal equivalent, or money commodity.
Price is shown to be the measure of the value of a commodity—value must always be measured in terms of its value form, exchange value—as a given weight of the precious metal gold. The value of a commodity can never be measured directly in terms of quantities of abstract labor but only through the form of exchange value. Once gold has established itself as the universal equivalent, the values of all commodities, all the wealth of capitalist society, are measured in terms of weights of gold—that is, in terms of prices.
Whatever commodity serves as money, whether gold, silver or some other commodity, is not determined by any individual, government or “monetary authority” but rather by a process akin to natural selection. Some commodities, due to their material use values—such as gold, for example—make better potential monies than other commodities with different use values, such as linen.
Gold is superior to linen as a money commodity because it contains a much greater quantity of value in a smaller physical mass, it does not deteriorate with time as linen does, and it is divisible down to its atomic level. Gold therefore approximates the (in principle) infinite divisibility of embodied abstract human labor much better than the physical divisibility of linen. Also, unlike linen, different quantities of gold can be easily recombined by melting down different physical pieces of gold and recombining them.
For example, gold coins can be melted down and forged into a bar of bullion, which is the purest form of money. A bar of bullion can also be melted down and minted into many gold coins. Currency units can then be defined as specific weights of gold, and gold then becomes the standard of price. Prices then become physical quantities of gold measured in terms of a given unit of weight. In this way, all the wealth of the capitalist world can be measured in terms of weights of gold.
Why can’t we use embodied labor to directly measure wealth?
But why do we need to measure value—embodied abstract human labor—indirectly though the value form of exchange value rather than directly? Why can’t we measure value directly in terms of labor time? Wouldn’t this be far superior to the system of using exchange value, which introduces the possibility, neigh the inevitability, of value being measured imperfectly?
In the 19th century, a whole series of reformers, including the Ricardian socialists and the French anarchist-socialist Pierre-Joseph Proudhon proposed just such a reform. These proposed reforms involved the setting up of a labor bank that would assess the value of every commodity presented to it in terms of the quantity of labor it took on average to produce. In exchange for the commodity, it was proposed by the reformers, the bank would issue a unit of currency that would represent the value of the commodity in question in terms of the labor that was necessary to produce it.
This “labor money” would then be exchangeable by its owner for any other commodity that represented the same quantity of labor as determined by the labor bank, whose employees would presumably be experts in determining the quantity of labor it takes on average to produce a given commodity of a given use value and a given quality.
The champions of labor money believed that such a system would be vastly preferable to the system of measuring the values of commodities indirectly through exchange values—or under modern conditions—the price system, because it would eliminate unequal exchanges between commodity users.
Pre-Marxist socialists such as the Ricardian socialists believed that by eliminating the unequal exchange of commodities, surplus value would be eliminated thus rendering the existence of a class of wealthy non-workers who live off the unpaid labor of the working class impossible.
These early socialist champions of labor money lived before Marx demonstrated that surplus value arises not through the unequal exchange of commodities but on the basis of the equal exchanges of commodities of a given value. This becomes apparent as soon as we distinguish between the labor performed by the workers and the ability of the worker to work (labor power), which is the actual commodity that the worker sells to the capitalist. Therefore, even if a system of labor money could actually work, it would not eliminate surplus value. Its only merit would be that it would make surplus value transparent rather than hidden behind equal and apparently voluntary exchanges by two equal contracting parties such as is the case under the money price system.
But could such a system of labor money work, at least in principle? Marx explained that it could not under a capitalist or indeed any other form of commodity production. Why is this? Because if every commodity producer was guaranteed the sale of his or her commodity at its value regardless of whether or not its use value actually met any real need, there would be no mechanism whatsoever to see to it that the use values would be produced in anything like the proper proportions. Social production would disintegrate entirely unless the labor bank was a “despotic ruler of production,” as Marx put it in “The Grundrisse,” and determined the proportions in which the use values were actually produced. (6)
In those circumstances, we would no longer have commodity production—a market economy—and without commodity production we would no longer have capitalist production because capitalist production is simply generalized commodity production where labor power itself has become a commodity.
Commodity producers know that they are producing too much of a commodity of a given use value and quality precisely when its price falls below its value, and they know that they are producing too little when the price of the commodity in question rises above its value.
Since the competitive relationship among commodity producers forces them to adjust the amounts they produce to maximize their appropriation of value as measured in money, the endless fluctuations of prices around the axis of values makes possible the production of material use values in approximately the right proportions. It is the price mechanism that makes the existence of commodity producing societies including capitalist society possible in the first place.
Therefore, what at first appears as a grave defect in the money-price system—the fact that it measures the values of commodities imperfectly—turns out to be absolutely necessity for the existence of the whole system of commodity production and therefore no defect at all.
Real money versus money of account
Since money must exist in the form of an actual commodity, it is possible to actually possess exchange value in a material form. Marx described metallic money such as gold bullion as the independent form of exchange value. Though I can’t carry around units of unchanging “real purchasing power” in my pocket, I can literally carry exchange value around in my pocket in the form of gold coins, or in the form of tokens, such as paper dollars, that represent the money commodity and are exchangeable for the money commodity.
IOUs payable in real money—credit money—or monetary tokens that are convertible on the “free market” into gold bullion can serve as money substitutes but only to the extent that they are convertible into real, that is commodity, money. Therefore, in addition to possessing real capital—capital that consists of material use values other than money—a capitalist has to possess a certain amount of wealth, even if only a small portion, in the form of money—either in the form of actual money—gold bullion—or in the form of money substitutes that represent real money such as token money, or credit money—for example, a checking account at a commercial bank.
The quantity of money substitutes that can be created by the “monetary authority” and the banking system, measured in terms of weights of real money without depreciating against real money, will ultimately be limited by the amount of real money in existence.
Money of account
In addition to real money—and its representatives such as token and credit money—there is also the purely imaginary money that capitalists use to value the commodity elements of their real capital. This type of imaginary money used for valuation Marx called money of account.
With this in mind, let’s take another look at the question as to whether profit should be calculated on the basis of historical costs, as Kliman insists it should, or current costs. The formula for capitalist production is M—C..P..C’—M’. Our industrial capitalist must start with a definite sum of money M—called “seed money” in business terminology. He can invest the money in a business in the hope of making a profit in terms of money or he can for the time being hold onto wealth in the form of money. If the capitalist chooses the latter course, he will forgo the opportunity of making a profit. In this case, he won’t strictly be acting as a capitalist just yet but rather as a miser.
Since our man wants to be a capitalist and not a miser, he will if at all possible use his money to create a business that realizes a profit in terms of money. But under certain conditions, such as a crisis, he will be well advised to postpone the founding of a business until favorable conditions for profit-making return. In the wake of a crisis—like the present—there are widespread complaints that the capitalists—corporations and banks—are sitting on huge sums of accumulated money. Why are they seemingly so irrational?
In reality, they are waiting for the prospects for profit-making to become more favorable. When these prospects become favorable enough, they will indeed invest the money and keep on investing and then borrowing money in ever greater quantities until the market is again flooded with unsold commodities and profits again collapse.
In order to grasp this, let’s tell a story of two would-be capitalists. Each of our capitalists starts with an equal amount of money. Exactly how they got the money—whether through inheritance, winning the lottery, theft, or some other way—is of no concern here. One of our would-be capitalists correctly senses that a crisis is approaching and expects a sharp fall in prices that will preclude any possibility of realizing a profit in terms of money in the immediate future. He decides to hold onto his money until the approaching crisis runs it course.
Capitalist number two wrongly expects that prosperity will continue and goes ahead and invests his money by setting up factories and purchasing raw materials and labor power. The crisis arrives and prices fall exactly as capitalist number one expected. In money terms, our first capitalist has neither made a profit nor a loss. (We assume he has some other source of income to keep himself alive as he waits for the crisis to bottom out.) He has exactly the same amount as wealth, all in the form of money, that he had before.
Our second capitalist has made a loss in terms of money but due to the rise in the purchasing power of money, he is in a position to actually expand the scale of his operations. In terms of historical prices—the way Kliman calculates profit—our second capitalist has made a loss but in terms of current costs he has made a profit.
Now let’s assume that the crisis has run its course. Prices have bottomed out and are set to rise. In terms of money, which capitalist possesses greater wealth? Our second capitalist has lost wealth in terms of money though he has increased his wealth in real terms—that is, in terms of accumulated material use values. Our first capitalist has neither gained nor lost wealth in terms of money, since all his wealth is in the form of money, but he too has gained in terms of real wealth because the purchasing power of his money is greater than it was before the crisis caused prices to fall.
The first capitalist who has kept his wealth in money has two advantages over the second capitalist. First, he has a greater mass of wealth in terms of money. Second, since all his wealth is in the abstract form of money, he can convert his money wealth into any specific form of wealth he wants to. Since it is his intention to act as an industrial capitalist, he enters the market as a buyer and buys up means of production, raw and auxiliary materials, and labor power. He now has a greater mass of real capital than our first capitalist. He also has the advantage of having not only more machines but the latest models that are more efficient than the older models possessed by our second capitalist.
Since our first capitalist’s cost prices are lower and he can undersell our second capitalist as well as produce on a greater scale, he drives our second capitalist out of business depriving him of all his capital. Very likely he will be in a position to buy our second capitalist’s means of production at bargain basement prices and add it to his own means of of production. The fact that our second, now ex-capitalist made a profit in terms of current costs is small consolation to him.
Therefore, Kliman is absolutely correct on the need to calculate profits from historical costs, not current costs. Profits have to be calculated in terms of the amount of money capital that the capitalist actually advanced when he bought his means of production, raw materials and labor and not the costs that the means of production and labor power would have cost him at the present time. If these have fallen, so much the worse for him.
MELT and the relationship between prices and values
The most naive theory of the relationship between values reckoned in hours of abstract human labor and prices reckoned in weights of gold bullion is that prices always equal values. More precisely, since hours of abstract human labor are not really the same thing as weights of gold bullion, the gold serving as the money commodity always exchanges for a quantity of commodities that embodies exactly the same quantity of labor that the gold did. However, as we have seen, this is ruled out even in theory, since if it were true, there would be no mechanism in a commodity-producing economy to allocate the labor available to society to carry out production in the proper proportions.
Still, as we have already noted, making the assumption that prices are indeed directly proportional to labor values is absolutely necessary for solving some problems including the most important problem in all economics, the origin and nature of profit—surplus value.
A somewhat less naive theory would be that while individual prices of commodities deviate from their values, the sum total of all prices always equals the sum total of the direct prices of all commodities. Under this assumption, the total sum of the prices of production will always equal the total sum of direct prices. We can then show that the total quantity of surplus value equals the total quantity of profit—surplus value—measured in terms of exchange value or physical weights of gold, assuming gold serves as money, both in terms of the mass of profit and the rate of profit.
Used correctly, this a powerful abstraction. It is absolutely necessary for solving certain problems such as the transformation of prices that are directly proportional to values into prices of production that ensure that equal quantities of capital yield equal profits in equal periods of time. It allows us to understand the division of the total social surplus value between the capitalists working with capitals of different organic compositions, as well as the nature of ground rent. Finally, it is necessary to explain the law of the tendency of the rate of profit to fall—the most important law of political economy according to Marx.
However, we have to keep in mind the limitations as well as the power of this abstraction. When we talk about the total sum of the prices of commodities, we are not actually talking about all commodities, because we are always leaving one commodity out—the commodity whose use value serves to express exchange value. We cannot forget that the total sum of commodities N does not equal N–1, the total sum of commodities minus the commodity that functions as money and serves as the “yardstick” that measures in its own use value the values of all other commodities. This inevitably transforms the exact equalities of prices and values—or direct prices—into approximate equalities. (See this previous post for a more in-depth discussion of the transformation problem.)
By failing to grasp this, many of our post-Marx Marxists have left the door open for the “neo-Ricardians”—who seek to replace Marxist economics with vulgar economics, or to the extent that the “neo-Ricardians” are socialists, replace scientific socialism with vulgar socialism.
MELT, paper money and metallic money
For the purpose of explaining surplus value, the concept of the monetary expression of labor time—MELT—is adequate, even if we do not need to understand that non-commodity money is impossible. We do not need Marx’s full theory of value to understand the most important problem in all economics, though we will need it later to defend Marx’s discovery on the origin and nature of surplus value against the “neo-Ricardian” attack.
But when it comes to examining the world of ever-fluctuating market prices, MELT without a money commodity will not do. We have to understand that market prices are virtually never equal to direct prices, whether of individual commodities or of commodities as a whole. Here we need to understand what laws really govern the movement of market prices.
As prices of commodities as a whole rise above their direct prices, as they do during an economic boom, the capitalists indeed make a higher rate of profit in money terms than they do in value terms. This is exactly what present-day neo-Keynesian economics—and its echo in the Keynesian-Marxist school that Kliman rightly polemicizes against—bases itself on. The Keynesian-influenced policy makers figure that as long as they ensure that there is a gradual rise in the general price level—called inflation targeting—they will ensure that business will always be profitable. However, we know that extra profits made by capitalists due to a rising general price level that does not reflect changes in values or a rise in the rate of surplus value are temporary.
Such price movements have no lasting effect on the rate of profit. Inevitably, such a rise in prices will set in motion forces that will lower them once again—at least when prices are calculated in terms of the use value of the money commodity—weights of gold.
Inevitably, the extra profits made by capitalists due to such a rise in prices above values will be offset by losses that will occur when prices inevitably fall once again to a level that is below the direct prices of commodities. When this happens, forces will be set in motion that will again raise prices. In the long run, therefore, the rate of profit calculated in terms of the use value of the money commodity—weights of gold—will fluctuate around a level that approximately corresponds to the value rate of profit, just like the prices of individual commodities fluctuate around an axis that approximately equals the direct prices of the commodities in question.
In only one sense are “physicalists” right when they claim that profit must be measured in terms of physical quantities. Profit must indeed be measured in a physical quantity but only the physical quantity of the use value of the commodity that serves as the universal equivalent, or money, commodity. If linen serves as the universal equivalent—like it does in Marx’s coat-linen example—profits would have to be reckoned in yards or meters of linen. If gold serves as the universal equivalent, profits have to be calculated in terms of weights of gold—metric tons.
The measure of profit since the end of the gold standard
Under a gold standard, the rate of profit in terms gold bullion and the rate of profit in terms of currency are identical. This is because currency units—dollars, pounds and so on—are defined in terms of specific weights of gold bullion. The last time a gold standard prevailed—during the Bretton Woods system—the U.S. dollar was defined as 1/35th of a troy ounce of fine gold.
However, under a system of token money, currency units like dollars have no fixed definition in terms of gold. This gives rise to the illusion that currency somehow serves as tokens of value directly and therefore acts as non-commodity money as opposed to mere money substitutes. This is the mistake the supporters of MELT make. They imagine that the value of the coat can be measured by tokens that directly represent value as opposed to being measured by the use value of linen. But Marx proved this to be impossible.
Because labor under any system of commodity production, including capitalist production, is private, it can only express its social nature by exchanging for another commodity with a different use value. Except for the earliest stages of barter, the abstract labor embodied in a particular commodity having a particular use value with a particular quality must prove its convertibility into a given quantity of the money commodity measured in the unit appropriate for the use value of the money commodity. This is necessary to demonstrate that the abstract human labor embodied in it is actually a fraction of the total social labor. In contrast to all other commodities, the labor embodied in the money commodity, Marx explained, is directly social.
The effects of the depreciation of token money
During the 1970s, the currency price of gold—the exchange rate of dollar monetary tokens with the money commodity gold bullion—rose so rapidly that hoarding gold was more profitable than most lines of business. While prices were rising in terms of U.S. dollars and other currencies linked to the U.S. dollar under the dollar system, prices calculated in terms of gold bullion fell rapidly, in fact so rapidly that profits in terms of gold bullion were wiped out. This did not mean that surplus value wasn’t being produced—it was—but the surplus value wasn’t being realized in terms of the use value of the money commodity—gold bullion.
However, though paper money was losing purchasing power against commodities, real rates of profits—after inflation was taken into account—profits measured in terms of commodities in general were still high enough to make possible continued expanded reproduction in physical terms. Therefore, virtually all bourgeois economists and most Marxists assumed that production was still profitable since in physical terms the capitalists were proceeding with expanded reproduction—even if at a somewhat reduced pace.
Most economists would agree that nominal profits were somewhat overstated in the 1970s due to inflation. In a period of high inflation like the 1970s, if we calculate prices in terms of current costs as opposed to historic costs, the rate of profit will be considerably lower. What is often not realized is that we have to distinguish between a rise in prices in terms of gold and a rise in prices produced by the depreciation of the paper currency against gold. For example, the high inflation during World War I in the U.S. is an example of inflation of the former type, while the high rate of inflation during the 1970s is an example of the latter type.
In the U.S. economy during World War I, it was not simply prices in terms of gold that rose independently of value, it was profits in terms of gold as well. But precisely because the movements of prices and profits did not reflect real changes in underlying labor values, they proved unsustainable. The profit bonanza of World War I was ultimately paid for by the huge losses that the capitalists incurred in the early 1930s. This played no small role in the origins of the the Great Depression. This was the market’s way of balancing things out so that in the long run, the rate of profit in value terms and the rate of profit in gold and currency terms were pretty much in line with the value rate of profit.
But what about the 1970s when the movements of not only prices but also profit measured in terms of depreciating U.S. dollars diverged sharply from prices and profits measured in terms of gold bullion. Under the influence of Keynes, during the 1970s Washington policy assumed that by tolerating a rather high rate of inflation in dollar terms they were successfully staving of a situation where falling prices would cause profits to disappear entirely for a number of years like happened in the early 1930s.
The pragmatic policymakers reasoned that practical businessmen were governed by profit in terms of official legal tender currency, not profits in terms of gold bullion. Washington—echoed by Keynesians and the supporters of Milton Friedman as well—claimed that gold was being “demonetized” and that in the future a “pure” fiat currency would act as the measure of value directly without any help from gold or any other commodity.
It is true that except in the final stages of extreme hyper-inflations, practical businessmen will measure their profits in terms of official legal tender currency, though there was a general feeling during the 1970s that the official rates of profit in terms of paper dollars were being considerably overstated. If inflation was taken into account, the mass and rate of profit would be lower, both bourgeois and Marxist economists alike reasoned. (7)
However, the same practical businessmen are always looking to move their capital into the areas where they earn the highest rate of profit in terms official legal tender currency. During the 1970s the most “profitable” area to invest capital was to purchase and hoard gold bullion. Of course, if we measure profits in terms of gold the mere hoarding of gold by definition bears no profit. Leaving aside the costs of storage you simply break even. If, however, we combine Marx’s analysis of value and exchange value as the form of value while never forgetting that capitalism cannot exist for very long without a positive rate of profit, we draw the conclusion that a situation like the 1970s where profits remain positive in terms of paper money but are strongly negative in terms of gold bullion is unsustainable.
Why the ‘Volcker shock’ was necessary to save capitalism
Most radical Keynesians and Keynesian-Marxists argue that the Volcker shock was either a horrible mistake or, as the Keynesian-Marxist Doug Henwood argues, a move to lower real wages by the Federal Reserve System. (8) It would have been possible, they argue, to avoid the horrible “Volcker shock” recession and the reactionary policies of the Reagan presidency that followed if only the U.S. policymakers of the time had been willing to tolerate a little more inflation or a somewhat higher real wage.
However, in reality the only real alternative to the Volcker shock would have been a socialist revolution. Any attempt to maintain the situation where the rate of profit was positive in terms of paper money but negative in terms of gold bullion would have been incompatible with the continuation of the capitalist system. A continuation of Keynesian-type stimulus polices under the conditions of the late 1970s and early 1980s was simply not an option. Under pain of complete economic collapse, a positive rate of profit in terms of gold bullion had to be restored.
Of course, it is unlikely that practical policymakers such as Paul Volcker understood this in the above terms. So how did the necessity of stabilizing the dollar in order to restore a positive rate of gold profit impress itself on their practical minds?
In 1979, the Federal Reserve System, like it generally does in “normal times,” had been targeting interest rates. As inflation accelerated, interest rates—in terms of paper dollars—rose. Since the Federal Reserve System was attempting to hold interest rates down in an attempt to maintain prosperity, it responded to the rising interest rates by issuing more token dollars—which led to still greater depreciation of the U.S. dollar, higher inflation and higher nominal interest rates.
Finally, between August 1979 and January 1980, the dollar price of gold rose from around $300 in August to $875 at one point in January. Within a period of only five months, the U.S. dollar had lost considerably more than half its gold value. If the Federal Reserve System had attempted to continue to hold interest rates down, it would have had to more than double the quantity of U.S. token dollars at a time when there was a run out of, not into, the U.S. dollar—like there was in the last quarter of 2008. The stampede out of the dollar and its satellite paper currencies into gold would have rapidly intensified. (See this and this earlier post on the stagflation period.)
If the Fed had continued to fight the rise in nominal interest rates by creating ever more dollar token money at an accelerating pace, the result would have been true hyper-inflation, where the capitalists would have stopped calculating prices and profits in terms of paper dollars altogether and instead would have increasingly calculated them directly in terms of weights of gold. If inflation had continued to increase, they would have refused to sell commodities for paper dollars and demanded gold instead. Under these conditions, the government would have been unable to enforce the legal tender laws. The system of paper currency and the credit system built on top of it would have been wiped out entirely.
At this point, it became clear to practical policymakers such as Volcker that the Keynesian “cure” was worse than the disease.
How we interpret the “Volcker shock” has important political implications. Keynesian demand management policies at a certain point inevitably run into a blind alley—or the “metal barrier,” as Marx called it in Volume 3 of “Capital”—in the form of a runaway demand for gold. Though Keynesian-Marxists are right when they say that there is a realization problem, they are utterly wrong when they believe that this problem can be solved by government deficit spending and currency inflation.
Kliman and other Marxists who think like him, while they tend to ignore the realization problem, are ultimately correct when they explain that the rate of profit cannot be altered by manipulating monetarily effective demand or simply by creating, as Marx wrote in “Theories of Surplus Value,” “profits upon alienation” (buying cheap and selling dear).
Therefore, contrary to the hopes of our Keynesian reformers, the interests of the capitalist and working classes cannot be reconciled through Keynesian-style “demand management.” Any such attempt will inevitably run into the currency rate of profit being negated by the underlying value rate of profit.
After the Volcker shock
The Volcker shock did not actually restore the gold standard. Instead, under Volcker the Fed simply refused to further accelerate the rate of growth of U.S. dollar token money. Over the next 20 years, though the value of the U.S. dollar continued to fluctuate against gold, the overall dollar price of gold declined from a peak of $875 to well under $300 by 2001.
Unlike the 1970s, the rate of profit was positive during the 1980s and 1990s not only in terms of of dollars but—what really counts—in terms of real money, gold bullion. This was because the dollar was gaining gold value—thus simply hoarding U.S. Federal Reserve notes actually “earned” the owner a positive rate of interest in terms of gold—and therefore prices in gold terms were rising more rapidly than in dollar terms. The rate of profit in gold was not only positive during the 1980s and 1990s, it was actually higher than the rate of profit in terms of U.S. dollars. On its own terms, the Volcker shock was not a tragic mistake but a tremendous success!
This brings out another economic law. While the rate of profit in terms of token money units and the rate of profit in terms of gold can deviate dramatically in the short run, as they did in the 1970s, in the long run the basic laws that govern the capitalist economy will cause them to converge toward the value rate of profit.
What left-Keynesian economists, supported by the Keynesian-Marxists, really hope to achieve is to replace profits based on surplus value—that is, exploitation—with profits based on buying low and selling dear and on this basis reconcile the interests of the working class and the capitalist class. This is a pure utopia!
Therefore, I believe Kliman’s basically correct argument against Keynesianism and Keynesian-Marxism would be greatly strengthened if he acknowledged the impossibility of non-commodity money. There are some indications in “The Failure of Capitalist Production” that he may be moving in this direction.
For example, he correctly links the sharp rise in the dollar price of oil in 1973 to the dramatic depreciation of the U.S. dollar against gold when he comments: “Although the Arab-Israeli war of 1973 was the immediate event that caused OPEC … to cut production, the consequent rise in the price of oil served to accomplish OPEC’s longer-term objective: reversal of the decline in revenues in terms of gold.” (p. 59) Quite correct.
Kliman also writes: “As the volume of outstanding government debt mounts, confidence in its ability to guarantee debt and repay its own debt—with real money, not printing-press money and a depreciated currency—will move in the opposite direction.” (p. 207) What can real money be except gold bullion, the money commodity?
Next month: The tendency of the rate of profit to fall in crises and the evolution of the rate of profit from the stagflation of the 1970s to the Great Recession.
1 A massive deflation in nominal prices across the board has not occurred in the lifetime of most people alive today for reasons that should be well known by regular readers of this blog. However, such massive deflations have occurred historically—for example, in 1920-21 and 1929-33.
2 An example of this is the huge campaign against the reality of global warming being waged by fossil-fuel capitalists. In waging this campaign, they are acting like “good” capitalists. They are subordinating the long-term continued existence of life—on this planet at least—to the higher—for the capitalists—end of increasing their wealth measured in terms of money.
3 The modern bourgeois economists, unlike their classical ancestors, deny that there is any real difference between capitalists and workers. While it is true that both workers and capitalists are interested in the quantity of material use values they get to consume, the capitalists are also concerned with the accumulation of capital. This makes all the difference.
4 Back in the late 1960s when I was young, there was a great deal of discussion of who was more relevant, the “young Marx” of the “Economic and Philosophical Manuscripts” written around 1844 when Marx was just getting started in his study of political economy, or the “old Marx” of “Capital.” There was a whole school who defended the “young Marx,” who wrote about “alienation,” against the “old Marx” of “Capital,” who wrote about surplus value. Looking back, I find this a little silly. It would be like defending the “young Einstein,” who was just mastering the physics that had been handed down to him by Newton, Faraday, Maxwell and other physical scientists against the “old Einstein” of the special and general theories of relativity.
5 It is almost like asking, what do the old Greek philosophers have to do with the “high tech” revolution of the last few decades? Actually, quite a lot since today’s “object-oriented programming” is largely rooted in the categories developed by ancient Greek philosophy.
The Greek schools of idealist philosophy—above all Plato—saw “forms” as the most important element in reality. In contrast, materialism recognizes that “forms” are products of the human mind that help us in distinguishing the different elements of reality from one another. Unlike the idealists, materialists in the final analysis realize that reality is always concrete.
For example, in a computer program what actually counts when the computer executes the machine language instructions is not the form of the object in a high level programming language—this merely helps human programmers understand the program—but the manipulation of the actual data by the computer’s instruction set.
Therefore, every object-oriented program can be rewritten without the objects—or the forms—though this might well make it harder for a human programmer to understand the code.
The essence of value—people engaged in labor and exchange—is the reality and not the “form of value”—coats valued in terms of linen or in terms of money.
7 For example, there was a tendency for business to shift to LIFO (last in, first out) accounting, which assumes that the last items in inventory to be produced or acquired are sold first, as opposed to FIFO (first in, first out) accounting, which assumes the converse. During periods of rising prices, LIFO-type accounting will show a lower profit than FIFO accounting, since it will eliminate the profits that are earned simply through the rise in the prices of commodities between the time a business acquires its inventories and it sells its inventory—called “inventory profits” by accountants.
8 Capitalists and the organs of the capitalist state, including the central banks, are always trying to increase the rate of profit, and there is no surer way of doing this than by increasing the rate of surplus value. However, the Volcker Fed at the end of the 1970s was faced with a far more urgent problem—the threat of an imminent economic collapse of the capitalist system. They took the only road open to them—since socialist revolution was hardly an option—to prevent it.