Why Prices Rise Above Labor Values During a Boom

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

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

There is considerable empirical evidence that commodity prices are indeed subject to quasi-cyclical “waves” or “cycles” of durations considerably longer than the 10-year industrial cycle. For a detailed discussion of the long cycle-long wave question and its effects on prices, see the first of my series of posts on the long cycle question.

Just as the generalized overproduction of the boom makes inevitable a fall of prices below the values of commodities, the period of the generalized underproduction of commodities that follows the crisis makes inevitable a rise of prices above the values of commodities.

Remember, the crisis proper is nothing but the more or less violent transition from the generalized commodity overproduction of the boom to the period of the generalized relative underproduction of commodities of the depression.

How does the underproduction of the depression lead to a general rise in the price levels of commodities? And why does the rise in commodity prices continue until prices have risen above the values of commodities?

Once the boom gives way to the crisis, industrial production declines. As sales slow, creditors demand repayment from debtors. This obliges indebted industrial and commercial capitalists to shift from a policy of building up inventories in an attempt to keep up with demand to a policy of liquidating inventories to raise cash. Inventory liquidation—contraction of commodity capital—has the immediate effect of lowering prices, but later on the reduction of the quantity of commodities for sale on the market will lead to a rise in prices.

During the crisis and depression, it isn’t only the inventories of unsold commodities that are liquidated. The means of producing commodities are also reduced. Factories are closed down, and a certain number of these factories and much of the machinery within them are physically destroyed. Factories are torn down and sold off for scrap, or are left to rust away, like the ruins of the ancient civilizations of Greece or Rome. This is exactly what happened in the former steel producing areas of Pennsylvania, Indiana, New York and Illinois, for example. Today we see the same thing in the traditional automobile producing center of Detroit.

This process of the destruction of the “surplus” means of production reduces the ability of society to produce commodities when the depression ends and a new period of prosperity sets in. (1) In addition to the means of production that are destroyed during the crisis-depression, we have to take into account the means of production that are not created but would have been if no crisis had intervened.

Therefore, while the crisis is marked by falling prices, by ending the overproduction and ushering in a period of underproduction, the crisis actually limits how much the prices of commodities will fall below the values of commodities. It does this both by reducing the quantity of commodities on the market and by reducing the capacity of society to produce additional commodities in the future.

But this very process contains the seeds of its reversal.

Even if the quantity of credit money shrinks—due to reduced bank loans and bank failures—the supply of real money—gold—does not shrink. Instead, the crisis causes the production of money material—gold—to rise. Indeed, both the decline in the rate and mass of the profit in all or most industries except the industry that produces money material that occurs during the crisis and the general fall of commodity prices actually stimulate the production of money material. The accelerated rate of growth of money material lays the foundation for the creation of a larger quantity of credit money in the future.

How does the crisis stimulate the production of money material? It does so in two ways. First, the fall in the prices of commodities required to produce the money commodity lowers the cost price of producing money commodity and therefore increases the rate of profit in the industry that produces the money commodity. This raises both the rate and mass of profit absolutely in the industry that produces money material. The more the price of the commodities that enter directly and indirectly into the production of money material fall, the higher the rate and mass of profit in the industry that produces money material will be. (2)

The second way that a crisis stimulates the production of money material is through a rise in the rate of profit in the money material producing industry relative to other branches of production. (3) As soon as the crisis hits, the industrial and commercial capitalists experience a slowdown in the rate of turnover of their capital, including their variable capital. But this is not the case in the industry that produces money material. The demand for money material does not decline in a crisis, instead it rises. (4)

A rising profit rate both relatively and absolutely in the industry that produces money material leads to an increase in the production of money material. The supply of money material—gold—therefore grows at an accelerated rate. The more that prices in terms of money material decline relative to the value of commodities, the more rapidly the total amount of money material on the world market will grow.

The extra money material created as a result of the crisis-depression represents an increase in the potential demand for commodities. The potential demand for commodities grows at an accelerated rate at the very time that the supply of commodities and the ability to produce them—other than the commodity that serves as money—is shrinking. But for a more or less prolonged period, this potential demand is frozen in the form of hoards of gold, token money and credit money that accumulate in the hands of the capitalist class without being spent.

In the wake of a crisis, the banks and the industrial and commercial capitalists concentrate on paying off their debts—de-leveraging—and building up their cash balances. Complaints are widespread during this stage of the industrial cycle that the banks are not lending the money they are accumulating and business in general—industrial and commercial capitalists—are refusing to spend the great amounts of money they are accumulating. Isn’t this exactly what we see at present?

In the wake of the crisis, the velocity of the circulation of money remains depressed and even slows further, but the supply of money—especially the monetary base, which even under paper money systems remains closely tied to the actual amount of gold in a country and on the world market—is growing at an accelerated pace. (5) Once the velocity of circulation of money returns to its normal level, the market—the monetarily effective demand for commodities—will grow at an explosive pace. This is nothing but the sudden expansion of the market that occurs at the beginning of every successive industrial boom.

How exactly does the growing mass of idle money lead to a sudden expansion of the market?

On the eve of “sudden expansion of the market,” the growing mass of hoarded money is burning a hole in the collective pockets of the capitalist class. Remember, only variable capital—labor power purchased by the industrial capitalists—actually produces surplus value. Hoarded money most certainly is not variable capital—it produces not an atom of surplus value. Everything else remaining equal, the more the total capital consists of money capital—or more strictly, potential money capital—the lower the rate of profit will be.

No matter how much industrial production has fallen during the preceding crisis, demand can never drop to anywhere near zero. Everybody has to eat. The owners of the growing supply of money will certainly continue to spend it on commodities that are needed for personal consumption. In addition, a certain amount of this money must be distributed to the unemployed workers whether in the form of charity, welfare or unemployment insurance. If this were not done—leaving aside the social explosion that mass starvation amidst plenty would cause—the resulting dying off of the working class would mean an acute shortage of labor as soon as the demand for labor power again increases.

Therefore, during the crisis and into the depression the supply of commodities falls faster than demand. At some point the supply of commodities will have to be increased if the demand for commodities is to be met at existing prices. This is the point where prices stop falling.

The industrial and commercial capitalists therefore shift from the liquidation of inventories—contraction of commodity capital—to renewed accumulation of commodity capital. As this occurs, what the bourgeois economists call the “multiplier effect” begins to kick in. For example, commercial capitalists after a prolonged slump in sales finally have to renew their inventories, even in the absence of a rise in sales.

But this will mean new orders for the factories that produces the commodities that make up our commercial capitalists’ inventories. The factories that are receiving these new orders from the commercial capitalists will have to sooner or later begin to hire or rehire additional workers. These newly hired—or rehired workers—will in turn use their wages to purchase more items of personal consumption. The commercial capitalists will have to increase their orders to the industrial capitalists that make the commodities that serve as items of personal consumption for these workers.

As factories increase production, they must purchase more raw and auxiliary materials. For example, higher levels of production imply more consumption of electricity—an auxiliary material. As commodity production rises, more raw materials are of course necessary.

Though it takes longer, as commodity production continues to grow the point is reached where additional fixed capital—machines and factory buildings—must be created. Rising demand for means of production for the industries that produce items of personal consumption leads to increased demand for means of production for the industries that produce means of production for consumer industries. The bourgeois economists call this the “accelerator effect.”

The combination of the multiplier and accelerator effects at the beginning of a period of prosperity occurs at a time when there is a huge amount of idle money—potential demand—to draw on. Working together, the multiplier and accelerator effects transform this potential demand into actual demand. The market suddenly expands.

However, this sudden expansion of the markets occurs not only after a prolonged period of reduced commodity production and inventory liquidation but, just as important, after years of factory shutdowns during which few new factories and machines have been built.

Therefore, demand now overwhelms the ability of industry to increase production at existing prices. Shortages begin to appear, and the more capitalist industries attempt to overcome these shortages by increasing production and investment, the more demand is stirred up, and the more acute the shortages of commodities at existing prices become.

The growing shortage of commodities relative to demand reduces and even virtually eliminates the competition among sellers of commodities while increasing the competition among the buyers of scarce commodities. The only way the demand can be equalized with supply under these conditions is through a rise in commodity prices.

Rising prices lead sooner or later to higher money wages as well—wages being nothing but the price of the commodity labor power—since money wages must rise if the real wages of the working class are to be maintained. To the extent labor shortages develop at current wages levels, and especially if the workers are organized into strong trade unions, the workers will be able to win rises in money wages and may even be able to increase real wages as well

At this stage of the industrial cycle, it looks as though the expansion will last forever. Rising sales mean increased orders, which in turn lead to more commodity production. In order to meet the rising demand for commodities, more workers must be hired, further increasing the demand for more consumer goods, which in turn leads to a growing shortage of the means of production used to produce these consumer goods.

In order to better understand why prices rise in periods of prosperity, we should remember that it takes time to build new factories. During the period that a factory is under construction, the capitalists that supply the materials needed to build the factory and the machinery that the factory will contain must be paid. The wages of the construction workers employed in building the factory must also be paid.

Consequently, the demand for both products of Department I, the department of industry that produces the means of production, and Department II, the department of industry that produces the means of consumption, is increased long before the factory and the machinery that it contains actually produces anything. The result is that the more the industrial capitalists increase their investment in new means of production, the more the demand for commodities exceeds the supply of commodities at existing prices. The general price level is therefore driven upward.

Therefore as the boom continues, demand for commodities will inevitably at some point rise above their labor values. There is no mechanism that causes prices to stop rising as soon as they reach their labor values. And of course the capitalists themselves are completely unaware when this point has been reached.

What happens when prices rise above the values of commodities?

Once the general price level rises above the values of commodities, the rate of profit of the industry that produces money material will fall below the average rate of profit. This follows a prolonged period when the rate of profit in this industry was above the average rate of profit.

At this point, the production of money material begins to decline—or at least its rate of increase begins to decline—and it is only a matter of time before the remaining hoards of idle money are drawn into circulation. The growing shortage of cash causes interest rates to rise and forces the industrial and commercial capitalists to shift increasingly from cash to credit transactions.

As the credit system inflates, the way is opened up for the development of the “over-trading” and swindling that the credit system makes possible and indeed inevitable. The inflation of credit enables the boom and the rise in prices and interest rates to continue—for awhile. During this period the gap between the prices of commodities expressed in money material and the underlying values keeps growing.

But at a certain point, because it is impossible for a single piece of money to pay off two debts at the same, the chain of payments begins to tear in in a thousand places. A new crisis now breaks out and prices start to fall. But this does not happen until the prices of commodities have been above the values of commodities for some time.


1 These productive forces are surplus in the sense they can no longer function as capital—that is, yield a profit to some capitalist. They are not surplus relative to the needs of the population as a whole for additional use values. Therefore, these productive forces must be temporarily or permanently withdrawn from production, assuming that capitalist production continues.

2 For example, the decline in the price of food makes it possible for the industrial capitalists that produce money material to cut the money wages they pay to their workers. Suppose the mint price of gold is $20.67 an ounce, like it was in the United States before the New Deal. Since gold was freely minted, this meant that a gold miner could bring an ounce of gold to the mint, and the mint would turn it into a gold coin with a face value of $20.67.

In a crisis, the prices of commodities including agricultural commodities would decline. The combination of rising unemployment and the falling cost of living caused in part by declining food prices made it possible for the industrial capitalists, including the industrial capitalists that mined and refined gold, to cut wages. While most of the industrial capitalists had to cut the prices of their commodities during the crisis, this was not true of the gold capitalists. They could continue to send all the gold they could produce to the mint at the mint price of $20.67. Therefore, a crisis actually increased the rate of profit and the total mass of profits of the gold mining and refining industries leading to increased gold production.

Today under a paper money system, every major crisis, such as the crises of the 1970s and the one that began in 2007, leads to major increases in the demand for gold on the part of capitalists. The capitalists fear that under the paper money system the “monetary authorities” will attempt to combat the crisis by rapidly expanding the supply of the token money they create. The capitalists therefore protect themselves from the resulting depreciation of token money by increasing their holdings of metallic money—gold. The resulting depreciation of the paper money against gold leads to a rise in the purchasing power of gold. Or what comes to exactly the same thing causes a major fall in the prices of commodities in terms of gold.

The 1970s crises caused the rate of profit in the gold mining and refining industries to soar leading to a major rise in investment in gold production. This resulted in a substantial rise in gold production between 1980 and 2001. While a rise in the rate of profit in the gold mining and refining industries should cause a major rise in gold production in the wake of the crisis we have been passing through over the last few years, the growing depletion of gold mines—causing an actual rise in the relative and perhaps even absolute value of a given quantity of gold—is making this ever more difficult to achieve, and the cost to the environment is ever greater.

3 Even minor crises that cause little or no fall in the prices of commodities in terms of gold can still cause an increase in the production of gold.

4 Under the gold standard, gold miners could mint—or sell to the central banks—all the gold they could produce. Since the end of the international gold standard, every major crisis has led to fears of major currency devaluation, which duly send the demand for gold soaring. Consequently, whatever the prevailing monetary system, the industrial capitalists who produce the money commodity have no trouble selling their commodity during a crisis.

5 Since the extremely rapid increase in the monetary base engineered by the U.S. Federal Reserve System and other central banks since the panic hit with full force in the fall of 2008 is so much greater than any possible increase in the supply of gold, there is a strong tendency for the dollar price of gold to rise sharply. This renewed depreciation of the dollar and the other paper currencies tied to it threaten to unleash a new wave of inflation—not the normal rise in commodity prices in terms of gold that accompanies a “healthy cyclical upturn” but inflation caused by the depreciation of paper money against gold.

The Federal Reserve System and the other central banks are therefore under growing pressure to take measures to combat this growing threat of inflation that threatens the entire dollar-based international monetary system. This, in turn, could lead to the renewal of the crisis—the so-called doubled-dip recession that the media talks about—long before the next cyclical crisis is due, which would be around the year 2017 assuming a 10-year industrial cycle.


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