The Ideas of John Maynard Keynes (pt 3)

Ricardo and Marx versus Keynes

Ricardo, unlike Adam Smith, attempted to use the law of labor value consistently. He sensed that the law of labor value applied not only to simple commodity production but also to capitalism proper. Ricardo was not completely successful in this, but he was certainly on the right track. He realized that price is a relationship between two commodities, the commodities whose price is being measured and the money commodity—gold—in which the price of the commodity is reckoned.

According to the Ricardian law of labor value, market prices tend to fluctuate around an axis determined by the relative values of gold and the commodity whose value gold is measuring. Ricardo realized that a rise or fall in wages would affect the rate of profit but not the overall prices of commodities.

Marx developed Ricardo’s law of labor value further, resolving the contradictions that Ricardo himself was unable to overcome. However, even the Ricardian version of the law of labor value is quite sufficient to refute the claim of Keynes that wages determine prices.

As for Marx, he demonstrated in the first three chapters of volume I of “Capital” that price must always be measured in terms of the use value of the commodity that serves as the universal equivalent. Assuming gold is the money commodity, exchange value, or what comes to exactly the same thing, price, is always a certain quantity gold measured in terms of weight.

Value, unlike exchange value, is not mediated by a physical substance such as gold but is a purely social substance—abstract human labor. While gold as a material use value is measured in terms of weight, abstract human labor, though it is a social substance, not a physical substance, also has its unit of measure—time.

Unlike Ricardo, Marx in his mature writings from 1857 onward made the distinction between labor and labor power. Since labor in the abstract is the very substance of value, labor as such cannot have value. Labor, therefore, cannot itself be a commodity.

What is a commodity is the workers’ ability to work—that is, labor power. The workers must sell their labor power to the industrial capitalist. (1) When the industrial capitalist buys the workers’ labor power from the workers themselves, the capitalist comes into possession of the workers’ ability to work. The industrial capitalist—the boss—then orders the workers to perform work that is used to produce a product that will take the form of a commodity. The workers’ labor embodied in the commodity is the value of that commodity.

The labor embodied in the commodity produced by the workers is, in turn, divided into two parts. One part, the necessary labor, replaces the value of the workers’ wages. The other part, the surplus labor, which under capitalist production takes the form of surplus value, is the labor that workers perform without payment for the capitalists, landowners and other eaters of surplus value. The industrial capitalists do not get to keep all the surplus value produced by the workers. They are obliged to share it with money capitalists, landowners and the state.

The value of labor power

Though labor is not a commodity, labor power is. Like all commodities, it has both a value and exchange value. The price, or the exchange value, of the commodity labor power is known as a wage. (2) A wage is a sum of money—that is, the wage represents a certain weight of gold that industrial capitalist must use to purchase a certain quantity of labor power.

As a use value, labor power is measured in terms of time. The fact that the unit of measure of both labor and labor power is time leads to the common failure to distinguish between the two. It is this common confusion that creates the illusion that all the work performed by the worker is paid for.

With the marginalist economists, including Keynes, this confusion is formalized mathematically by declaring it to be a postulate, a statement that does not have to be proved.

Determination of the value of  labor power

In order to work, workers must first live and then produce the next generation of workers. To do this under the capitalist system, workers must consume the commodities they purchase with the money they receives in exchange for their labor power. As workers consume these commodities, they transfer the value—the amount of abstract human labor needed to produce these commodities under the average prevailing conditions of production—to their own labor power, as well as the developing labor power of their children.

Therefore, the value of the workers’ labor power consists of the commodities that the workers must consume to reproduce their own labor power on a daily basis as well as produce the next generation of workers. The value of labor power can change for two reasons. The first reason is a change in the productivity of labor in the industry that produces “wage goods” that the workers must consume to reproduce their labor power and raise the next generation of workers. (3) The second factor is a change in the quantity and quality of use values that the workers get to consume.

What determines the quantity and quality of these commodities in terms of use values that workers consume to reproduce their labor power? Marx explained that the wage consists of two elements. One is the biological minimum. The biological minimum, in turn, consists of two sub-elements. The first sub-element is the portion of the wage that is needed to reproduce the workers’ labor power on a daily basis. The second sub-element is the portion of the wage that is necessary to reproduce the next generation of workers.

If the wage were to fall below the level necessary to reproduce the workers’ labor power on a daily basis, capitalist production would collapse within days or weeks as the working class starved to death. If the the level of wages were to fall below the level necessary for the workers to produce and raise a new generation of workers, capitalist production would collapse within a decade or so, as there would be no replacements for the workers that would be dying off. (4) The biologically determined minimum sets the limit below which wages can never fall, at least not for very long.

The other element of the wage is the social element. Over generations of class struggle, the workers have managed to add to the biological element an additional element beyond it. This additional element allows the workers, as Marx put it, to participate to some extent in the progress of civilization.

For example, workers do not actually need radios, TVs, cell phones, personal computers and so on to live and reproduce their labor power. The apologists for capitalism like to point out that in the past even the richest people had to go without these and many other commodities that at least in the imperialist countries we take for granted today. They then draw the conclusion that today the workers live better than the wealthy did just a few generations ago. (5) Within a remarkably short period of time, many of these new types of commodities have become necessities.

Wages and trade unions

The struggle of the trade unions revolves around this extra wage that is added on to the bare biological minimum wage. The capitalists are always pushing wages downward towards the biological minimum. Indeed, in the oppressed capitalist countries wages are often very close to the biological minimum. The trade unions, on the other hand, try to defend, and under favorable conditions increase, the extra portion of the wage that is added on to the biologically determined minimum wage.

Wages and prices

Now, what do changes in the level of wages have to do with the prices of commodities? In last week’s post, I explained that Keynes claimed that a rise in money wages will lead to a rise in prices. But in fact, changes in the level of money wages—or real wages, for that matter—have only very modest effects on prices. Assuming all else is equal, Keynesian economists notwithstanding, a rise in money wages will have no effect on the overall cost of living.

What is affected is the rate of surplus value, or what comes to exactly the same thing, the ratio of unpaid to paid labor. As Ricardo explained, a rise in wages won’t raise prices, but it will lower the rate of profit. The capitalists and their spokespeople among the professional economists and the mass media oppose wage increases not because they are inflationary but because they lower the rate of the capitalists’ profits.

The total mass of commodities that serve as articles of personal consumption can be divided into two parts, necessaries and luxuries. Necessaries are consumed by both the working class and the capitalist class. For example, whether you’re Bill Gates or work in a Los Angeles garment factory, you still have to eat, wear clothes and so on. Luxuries are consumed only by members of the capitalist class. For example, Gulf Stream personal jet airplanes are purchased and used as items of personal consumption only by the capitalists, indeed only by members of the wealthiest section of the capitalist class.

What commodities consist of necessaries or luxuries, however, is not set in stone and can change over time. Here the the struggle of the trade unions under favorable conditions can have a considerable impact. Automobiles, for example, were definitely luxuries in the first years of the 20th century. If we go back a few years, before the turn of the 20th century, the automobile did not exist at all. The closest thing was a horse-drawn carriage. Starting with the introduction of mass production of automobiles during the 1920s, the value and consequently the price of automobiles fell considerably. Indeed, they fell so much in value and price that the better-paid workers in the United States could actually afford to purchase them.

Today, in some countries automobiles are not luxuries but are necessities. Especially in the United States, with its poor public transportation system, many workers would not be able to commute to their workplaces and therefore would be unable to sell their labor power without owning an automobile. (6) In most of the world, however, automobiles are still beyond the means of the workers. In these countries, the automobile remains very much a luxury. What commodities represent luxuries and what commodities represent necessaries varies over both time and place.

Suppose in a given country at a given time, the trade unions are strong enough to achieve a general rise in money wages. According to Keynes, this would lead to a rise in marginal prime costs, which will in turn lead to a general rise in prices. But what in fact would happen?

A rise in money wages will increase the purchasing power of the working class. But the rise in the purchasing power of the workers will be offset by a fall in the purchasing power of the capitalists. This is why the capitalists are so bitterly opposed to any proposals to increase money wages. The rising purchasing power of the workers will increase demand for consumer necessities like food, clothing, radios and TVs. It is possible that certain articles that were in the past considered luxuries might even enter into the consumption of the working class allowing the working class to take part in “the progress of civilization.”

Even if that happens, it is safe to say that there will be no increase in the demand for personal Gulf Stream jet planes. Instead, higher wages will mean that the demand for Gulf Streams will fall, since the capitalist class will have less purchasing power than before. But won’t the rise in the purchasing power of the working class drive up the prices of the necessities that enter into the consumption of the working class? That might happen. Perhaps the prices of food, essential medicines and other necessities would indeed rise.

But as economists have understood since the days of Adam Smith, the rate of profit in different industries tends to equalize. Capital in its constant search for the highest profit possible flows from sectors where the rate of profit is below average to sectors where the rate of profit is above average.

Immediately after the rise in wages, the rate of profit in the industries that produce necessities will be above the now lower average rate of profit, while those industries that produce luxuries such as Gulf Streams will find that their rate of profit is now below the new lower average rate of profit. The rate of profit will probably fall in all branches of industry, but it will fall much more in industries that produce commodities such as Gulf Streams than it will fall in the food and basic clothing industries, for example.

Capital will therefore start to flow out of industries that produce commodities that are consumed by the capitalists into industries that produce commodities for the workers. As this process unfolds, prices of necessities will fall while the prices of commodities such as Gulf Streams will rise. Soon the rate of profit will be more less equal once again. However, the new average rate of profit will be lower than it was before the rise in wages. (7)

Second, more of the total labor time of society will be devoted than before to producing commodities for the workers and less to producing commodities such as Gulf Streams for the capitalists. There will be a greater chance that a given worker will be producing commodities for her fellow workers and less chance that a given worker will be producing commodities for her capitalist exploiters.

This doesn’t mean that prices will necessarily be exactly the same as before. This is because commodities tend to sell at prices that don’t exactly express their value but rather at prices that equalize the rate of profit among the various branches of industry. In more labor-intensive branches of production, or, to use Marxist terminology, in those branches of industry that have a lower than average organic composition of capital, prices will rise as wages rise and fall as wages fall, because these branches of industry spend more on their “labor costs” than the average for industry as a whole.

Conversely, industries with a higher than average organic composition of capital, what the economists call “capital-intensive industries,” are less affected by a rise in wages. Immediately after a rise in wages, the rate of profit in industries with an above-average organic composition of capital, though they will suffer some decline in their profit rates, will now exceed the now lower average rate of profit in industry as a whole. Capital will flow into these industries from the “labor-intensive” industries. Therefore, the prices of commodities produced by these industries, in direct contradiction to the claims of Keynes, will actually fall as wages rise. This effect is actually one of Ricardo’s great economic discoveries.

Here I should make a few qualifications. First, I am assuming that the rise and fall in money wages is “across the board.” If the workers win a rise in wages in just one industry, which fails to inspire a rise in wages in other industries, then this might indeed cause a price rise for the commodity that is produced by that particular industry. This is because profits will fall in the face of rising “labor costs” in a particular industry, causing that industry’s rate of profit to fall below the average for industry as a whole.

All other things remaining equal, a rise in wages will cause an outflow of capital from that industry. Even in this case, however, the rise in prices in one industry would lead to a slight fall in the prices of commodities produced in all other industries as capital flows out of the industry that has experienced a rise in wages into all the other industries that have not. So in this case, too, there would be no general rise in prices.

The same is true on an international scale. It is well known that wages in Asia, excluding Japan, are a tiny fraction of wages in the United States, Western Europe and Japan. That is why in recent years we have seen a flow of capital out of industries located in the United States and Western Europe toward Asia. In the years preceding the current crisis, industry developed at a feverish rate in many Asian countries, while there was little expansion of industrial production in the United States and Western Europe. Indeed, in these countries that trend for a generation now has been toward “de-industrialization.” (8)

These extreme differences in wages, which were unknown in the days of Marx, allow the industrial capitalists operating in Asia to charge considerably lower prices and still realize the overall global average rate of profit.

However, these lower prices are offset by a rise in the prices of commodities—as a rule, commodities that are still produced in the imperialist countries themselves are produced by industries that have a very high organic composition of capital—that are still produced in the United States, Western Europe and Japan. So again, when looking at the world market as a whole, the general price level remains unaffected.

The only way that the general price level could be affected by changes in wages would be if such a change affects the “price” of the commodity that serves as money. As I have explained in earlier posts, the “price” of the money commodity is simply all price lists read backwards.

For example, if the wages were to rise in all countries and the average organic composition of capital in the gold mining and refining industry was lower than the global industrial average, the “price” of the money commodity—price lists read backwards—would rise. Or what comes to exactly the same thing, a rise in wages in the gold industry would actually lower the general global price level assuming that the gold values of the currencies remain unchanged.

How apartheid helped the ‘free world’ win the cold war

While I am on this subject, I might examine the effect on global commodity prices of the artificially low wages in the gold mining industry after World War II. Under the prevailing Bretton Woods international monetary system—which collapsed between 1968 and 1971—currencies unlike today were still more or less stable against gold. South Africa, which in those days was ruled by the ultra-racist regime of apartheid, was the world’s largest gold producer.

Under apartheid, normal trade union activity was impossible for the African workers who actually mined and refined the gold. (9) Assuming that gold was selling at its “price” of production, this would mean that the rate of profit in the gold industry would be well above the average rate prevailing on the world market.

As the post-Depression, post-World War II boom gradually raised prices on the world market, the rate of profit began to decline in the South African gold industry. But since the rate of profit was abnormally high in that industry due to the extremely low level of wages under apartheid, it took a long time for the rate of profit to fall to the point where the production of gold began to decline.

Indeed, gold production didn’t begin to level off until the mid-1960s and didn’t start to drop until 1971. (10) Therefore, the extremely low level of wages of African gold miners made possible by apartheid, along with the devaluation of the dollar against gold by U.S. President Franklin Roosevelt in 1933-34, explains why dollar prices in the United States and the world were so much higher in the post-World II years than they were in the years before World War II—though in dollar terms they were still much lower than prices today.

Higher money wages, therefore, had absolutely nothing to do with the “high cost of living,” though the higher cost of living did lead to higher money wages as a reaction to the rise in the cost of living. Indeed, if money wages had not risen after World War II, real wages would have fallen to starvation levels, or even below the biologically determined minimum wage.

The high level of gold production that prevailed after World War II, and the consequent expansion of the world market that the newly produced gold made possible, meant that the early postwar industrial cycles were dominated by the boom phase. And as I showed in earlier posts, one of the effects of booms is to raise the general level of commodity prices. Therefore, higher money wages were an effect not a cause of a rise in the cost of living.

In contrast, the extremely low wages of the South African gold miners did contribute to the high and rising price levels that prevailed under the post-World War II Bretton Woods international monetary system.

What really does cause inflation?

Ricardo and Marx proved scientifically that rising wages, whether by rising wages we refer to money or real wages, does not cause inflation. The effect of higher wages, all other things remaining equal, is to lower the rate of profit. If rising money wages don’t cause inflation, what does cause inflation? Severals factors can cause a general rise in commodity prices.

Price increases caused by booms

First, as as I explained in my series of posts on an “ideal” industrial cycle, during the boom phase of the industrial cycle the demand for commodities at the existing prices levels tends to exceed the supply. Therefore, prices must rise so that supply and demand can again be equalized.

However, these higher price levels are temporary. As soon as the industrial cycle turns down, supply will exceed demand at the existing price levels. Prices again drop to their values and below their values. Indeed, one of the main functions of crises is to keep market prices in line with values in the long run. Therefore, changes in the phases of the industrial cycle cannot explain the almost continuous rise in prices that we have seen since 1933. At most, booms partially explain the rise in prices between 1945 and 1968, when industrial cycles were dominated by their boom phases.

Price increases caused by a fall in the value of the money

Commodity prices as a whole will rise if the value of the money commodity falls relative to the value of other commodities. For example, when gold and silver were discovered in the Americas during the 16th century, the opening up of these rich new mines lowered the value of gold and silver relative to most other commodities. This caused prices measured in terms of these precious metals to rise.

This phenomenon was observed again after the discovery of gold in California and Australia between 1848 and 1851. The previous falling trend in prices was reversed, and prices continued to rise until 1873. The introduction of the cyanide process in gold refining—which enables gold to be extracted from very poor ores—during the 1890s, combined with discovery of rich new gold fields in Alaska and the Yukon, greatly lowered the value of gold. This set off a significant rise in world commodity prices that began in 1896 and continued until 1913.

Price increases caused by wars

War, particularly world wars that curtail the production of civilian commodities, both articles of personal consumption and capital goods, lead to sharp rises in prices. This was observed, for example, during the world war that followed the French Revolution of 1789-93, World War I and World War II. However, once the war ends and normal “peacetime” patterns of production resume, prices inflated by war, all other things remaining equal, will drop sharply. This was observed in Ricardo’s time after the end of the world war that followed the French Revolution and again after World War I.

Price increases caused by currency devaluations

Nominal prices, as opposed to prices in terms of fixed weights of gold (or, in the past, silver), will rise if the amount of precious metal represented by the unit of currency is reduced. (11) In times past, governments would often reduce the gold or silver content of its coinage. Or they might simply define the currency unit—the pound sterling, for example—as a lesser amount of precious metal. This was a common practice in the days of mercantilism.

Today, a rise in the “price of gold” in terms of a given currency accomplishes the same thing, as I explained in the posts dealing with money. For example, the devaluation of the U.S. dollar by 40 percent between 1933 and 1934 set off a long period of rising prices in the USA.

A far more violent inflation occurred in 1970s, when the U.S. Federal Reserve System, following the advice of Keynesian economists, refused to curtail the growth rate of its token money in the face of declining gold production. In the end, the Federal Reserve System’s vain attempt to maintain capitalist prosperity of the early post-World War II years—the Fed was attempting to overcome the global “shortage” of gold by substituting its token money for gold—caused the U.S. dollar to lose about 90 percent of its gold value over a period of a decade.

Inflation storm warning

“Suddenly it seems as if everyone is talking about inflation,” the Nobel Prize-winning Keynesian economist Paul Krugman wrote in a May 28, 2009, New York Times op-ed piece. “Stern opinion pieces warn that hyperinflation is just around the corner,” he noted.

Krugman, as is typical of Keynesian economists, sees little danger of inflation. “It’s important to realize,” he writes, “that there’s no hint of inflationary pressures in the economy right now.”

And why does our Nobel Prize-winning disciple of Keynes draw this reassuring conclusion? First, according to Krugman, “consumer prices are lower now than they were a year ago,” and second, “wage increases have stalled in the face of high unemployment. “Deflation, not inflation, is the clear and present danger,” he concludes.

Let’s examine Krugman’s argument. Argument number one is that according to official government figures the cost of living has dropped slightly over the last year in both the United States and Western Europe.

However, when you consider that the last year has seen the most violent global crisis of overproduction both in terms of industrial production and world trade since the 1930s, the question should immediately be rephrased. Why has the cost of living—largely reflecting a fall in gasoline costs—fallen only slightly in terms of official government data in the face of the vicious global downturn?

In the days before the Depression, a far milder recession would have led to a much greater fall in the cost of living. The lower cost of living would have compensated to some extent for the reduced hours of employment and cuts in money wages that occur during the crisis phase of the industrial cycle. In last week’s post, I showed how the tendency of falling prices to counteract cuts in money wages during a crisis so upset Keynes.

But even if the cost of living had fallen sharply during the current crisis—which is far from the case—this tells us nothing about what will happen to the cost of living over the the next few years.

Second, and this is Krugman’s main argument, “wage increases have stalled in the face of high unemployment.” Krugman is, of course, right about wage increases having stalled. If anything, he understates the case. Wage increases are not only stalled, a wave of wage cuts is growing in the face of the mass unemployment caused by the crisis.

Unlike in pre-World War II crises, however, these wage cuts are being at best only slightly compensated for by a fall in the cost of living. As a disciple of Keynes—as opposed to Ricardo or Marx—Krugman believes that changes in wages cause changes in prices. If Keynes was right, there would be little danger of inflation at the current time. Indeed, inflation would be no threat at all until “full employment” returns, which is probably many years away if it is ever again experienced under the capitalist system. But if Ricardo and Marx are right, changes in wages tell us absolutely nothing about the likely future trend of prices.

Yet Krugman notwithstanding, there are signs that prices will soon be increasing and quite sharply at that, if they are not doing so already. For example, the price of oil has risen from $33.87 a barrel on December 19, 2008, to $68.58 on June 1, 2009. Over a period of less than six months, the price of the most important industrial commodity has more than doubled! And this in the face of continuing deep depression in global industrial production and trade.

True, oil prices are still below the levels of well over $100 a barrel that prevailed last summer just before last autumn’s panic. But if the upward momentum in oil prices continues, they will be at the start of the next Northern Hemisphere winter back to the levels of last summer.

Remember, back last summer there were worries about the effect that winter’s cold would have, because people would not be able to afford the fuel to heat their homes if the oil prices that prevailed during the summer had persisted into the winter season. The panic and subsequent collapse of oil prices eased this situation, though at the cost of a monstrous rise in unemployment.

But what will be the situation this coming winter? Will double-digit unemployment produced by the crisis and its subsequent depression be combined with unaffordable fuel prices next winter? What is going to happen to food prices? Unless something checks the current rise in oil prices, many people as they shiver in their unheated homes will be looking back at the winter of 2008-09 as the good old days.

However, there is no real mystery about these price movements. Since last August—just before the panic—according to the figures published biweekly on the St. Louis Federal Reserve Bank’s Web site, the U.S. monetary base—dollar token money—has more than doubled. And as I explained in the section on token money, a doubling in the quantity of token money—all else being equal—will mean a doubling in the general price level.

All things are of course never equal in the real world. Still, Marx’s theory of token money, historical experience, and the current movement of primary commodity prices such as the price of oil all point toward a major rise in prices. (12) Only the followers of Keynes such as Krugman, who cling to the theory already discredited in Ricardo’s time that it is changes in money wages that drive changes in prices, can fail to be alarmed about an approaching radical increase in the cost of living.

How to react and how not to react to currency devaluation—two examples from history

Almost as soon as he assumed office in 1933 at the bottom of the Great Depression, Franklin Roosevelt began to tamper with the U.S. currency system. He ordered the Reconstruction Finance Corporation to start buying gold on the open market at higher and higher dollar prices. During 1933 and 1934, the Roosevelt administration pushed up the dollar price of gold from the $20.67 that had prevailed since 1879 to $35. This amounted to a 40 percent devaluation of the dollar against gold.

This was a move by the New Deal to raise dollar prices, supposedly to help indebted farmers who were an important part of the base of the Democratic Party. Prices began to soar, and industrial production also began to rise rapidly as industrial and commercial capitalists began to buy commodities in the expectation that their prices would soon rise. (13) This “expectation” on the part of the capitalists—quite rational in the face of Roosevelt’s deliberate reduction in the gold value of the currency—quickly became reality and prices started to rise sharply.

U.S. workers, whose wages had already been battered by the first three and a half years of the Depression, responded with a wave of strikes demanding union recognition and wage increases to compensate for the inflation caused by Roosevelt’s deliberate devaluation of the dollar. Within a few years, basic industry was for the first time in U.S. history organized by industrial unions, and the CIO was born. (14)

The rise in wages neutralized the effects of the fall in the dollar’s value on the standard of living of U.S. workers. Perhaps Roosevelt halted his devaluation of the dollar in 1934 because of the resistance in the form of strikes and union-organizing drives it was provoking. Therefore, indirectly, the push for higher money wages by the workers may well have actually halted further inflation at that time.

This is in sharp contrast with what happened in the 1970s. During 1968-71, the U.S. government broke its promise to keep the dollar at 1/35th of an ounce of gold, and the price of gold began to soar. It rose from $35 an ounce in 1970 to $875 at the peak at one point during the winter of 1980. In terms of U.S. dollars, the price of gold never fell below $250 again.

As I mentioned last week, the AFL-CIO unions, listening to Keynesian economic advisors like Krugman, practiced wage restraint. (15) As a result, unlike after 1933, the real wages of the workers were devastated. And in direct contradiction with Keynes’s marginalist analysis of employment, the unemployment rate soared as well. Since the unions largely failed in their most elementary role to defend their members’ standard of living, they became increasingly discredited. Far from launching new unionization campaigns—with few exceptions—as they did in the 1930s, the unions retreated across the board.

Everything indicates that in the near future the cost of living in terms of dollars and other paper currencies will begin to climb sharply. It is also quite likely that the industrial and commercial capitalists will respond as they did in 1933 and go on a buying spree in order to “beat” further price increases, thereby provoking even greater prices increases. But this would also cause a rise in industrial production and economic activity in general that would for a certain period of time more or less halt the massive wave of layoffs and might actually increase the demand for the commodity labor power. This would provide an opening for the unions to go on the offensive.

If the workers and unions around the world were then to react in the way U.S. workers reacted in 1933-34, we could begin to see a revival of the trade unions and with it the entire workers’ movement. Such a revival would mean that the workers would be in a far better position to face whatever the coming years may bring.

However, Keynesian economists like Krugman will insist that unions practice wage restraint. (16) They will claim that inflation is not a danger but only as long as the workers practice wage restraint. When inflation comes anyway, the Keynesians will then claim that any rise in money wages that merely reflects the skyrocketing cost of living is the cause of inflation. They will strongly oppose any attempts by the workers to raise money wages to protect their standard of living.

The Keynesians will explain that such wage restraint will stop inflation and enable the U.S. Federal Reserve System—and other central banks—to continue an “expansionary policy” by which they mean the creation of even more token money that will make it possible to finance the huge government deficits that, according to the Keynesians, are the only hope for a meaningful economic recovery for many years to come. (17)

If they do listen to the advice of Keynesian economists, the unions will be further weakened if they do not collapse completely, and the the road will be paved for a new sharp shift to right in world politics, just like happened in 1970s and 1980s. Contrary to what Keynesian economists claim, a recovery built on an explosion in the quantity of token money—as opposed to an increase in the quantity of metallic money—will be very short lived leading only briefly to a reduction in unemployment. Once inflation “unexpectedly” explodes, the ideas of Milton Friedman and the whole neoliberal program will be trotted out again, but this time in a more extreme form.

It is happening already! In California, the most populous, dynamic and richest state in the United States, the Republican governor has just proposed that welfare be abolished completely along with deep cuts in education among other things. The Democrats will probably propose “only” steep cuts as opposed to abolishing welfare completely. All this at a time of double-digit unemployment, according to official government reports in the state. Gutting welfare will make unemployed workers facing the inevitable end of their unemployment insurance payments—assuming that have any to begin with—desperate to accept a job at almost any wage to avoid starvation. If this is combined with a new wave of inflation, which all indicators are pointing to, the effect on real wages will be disastrous.

This is why I don’t share the enthusiasm that some left-wingers have expressed for the revival of Keynesian ideas. These ideas in reality were always very harmful to the trade unions and the workers’ movement. This was especially true during the decade of the 1970s. To be fair to Keynes, he never pretended to be a friend of the workers’ movement. But under today’s economic conditions, Keynesian ideas are a disaster waiting to happen if the workers and their unions listen to them.

Next week, I will examine Keynes’s theories of money, profit and interest.


1 Not all labor power sold by workers is used to produce surplus value. For example, the labor power of domestic servants or of workers who help commercial capitalists perform transactions dealing purely with titles of ownership does not produce value or surplus value. In these cases, labor power is still a commodity with a definite value and exchange value, but its use value to the buyer is something other than the production of surplus value. The definition of an industrial capitalist is a capitalist who purchases labor power for the specific purpose of obtaining a surplus value above and beyond the value of the purchased labor power.

2 In the 19th century, some of the better-paid English workers were paid directly in gold sovereigns. But generally, workers are paid in instruments that represent gold, such as token coins made of base metals, legal tender paper money, and credit money in the form of paychecks payable in legal tender token money. This token money represents gold in circulation according to the laws of token money that I examined in earlier posts.

3 Real wages cannot in the strict sense be quantitatively compared between different countries and different epochs. For example, the commodities that were available for personal consumption in the time of Marx are qualitatively very different than the commodities available today. Workers in Marx’s time—indeed capitalists in Marx’s time—could not find on the market many items we take for granted today, such as radios, electric lights, TVs, telephones, and many types of medicines, just to name a few examples.

4 Workers, either men or women, who do not have children, can live on much less than workers who are raising a family. However, if the wage fell so low that only workers who do not have children could live on that wage, it would be impossible to find replacements for the older generation of workers as they retire or die. The size of the working class would shrink leading to labor shortages. The growing labor shortages would shift the relationship of forces between the buyers and sellers of the commodity labor power in favor of the latter. This would cause the price of labor power, the wage, to rise to levels that would once again allow the workers to raise children and thus produce a new generation of workers.

5 These types of arguments take advantage of the impossibility of making quantitative comparisons between qualitatively different use values. Still, despite all the new types of use values that have been invented since the days of Marx, the workers often still have to worry about whether they will have enough to eat next week, or how they will manage to pay the rent and avoid homelessness for another month. The wealthy of previous epochs did not have to worry about these things.

6 In the United States, the auto companies used their influence to deliberately destroy public transportation as much as possible. They did this in order to force the workers to buy their products whether they wanted to or not. This is an example of capitalism’s famous “freedom of choice” in practice.

7 It is sometimes argued by people in the trade union and left-wing movement in general that the capitalists who produce commodities entirely for the consumption of the working class will actually benefit from wage increases because of the increased demand for their products. The conclusion is then drawn that these capitalists are allies of the working class, unlike the capitalists that produce luxury and capital goods that are consumed only by the capitalist class.

These types of arguments overlook the equalization of the rate of profit. It is possible that a wage increase might at first even increase the rate of profit of certain capitalists that produce commodities consumed exclusively by the working class. In this case, the rise in the prices and turnover would more than compensate for the rise in their own wages costs.

But these effects would be temporary. Other capitalists would move in to take advantage of these high profits, and soon the capitalists producing items of consumption aimed at the working class alone would face greatly increased competition, which would lower their profits to the new lower average rate of profit. While this process would be good for the working-class consumers, it would be very bad for the capitalists producing the items for exclusive working-class consumption. Those trade unionists and leftists who look for allies among the capitalist class who benefit from increased consumption of the working class are therefore chasing a phantom.

8 In the United States, the all-time peak employment of workers engaged in manufacturing, according to official government statistics, was in 1979, exactly 30 years ago. The trend is similar in Britain and the rest of Western Europe and has been developing in Japan as well.

9 This is a good place to remind ourselves that, contrary to what the introductory textbooks on economics “teach,” money is not created out of thin air by central bankers in their well-appointed air-conditioned offices, but is produced by the labor of the industrial workers employed in the gold mining and refining industry.

10 In the light of the challenge to capitalism represented by the Soviet Union and its allies after World War II, capitalism’s survival largely depended on a prolonged postwar boom. Maintaining a high and rising level of gold production over a prolonged period was essential to the interests of the “the West” in its struggle against the Soviet Union and its allies. And indeed, as soon as global gold production began to decline in the 1970s, the capitalist world economy began to descend once again into economic crisis.

This trend continued until gold production began to increase again in the early 1980s for reasons I will examine in later posts. Without this renewed rise in gold production, which bought time for world capitalism—time that it unfortunately used very effectively—the “Great Moderation” that lasted from 1983 to 2007 would not have been possible. However, after 2001, global gold production entered into renewed decline as production in the old depleted South African gold mines has plummeted while new gold discoveries have been quite modest. Within only seven years of the all-time peak in world gold production, the panic of 2008 hit.

The need of capitalism to win the “cold war” against the Soviet bloc—and ultimately against the world working class and its allies—is one of the reasons why the Democratic and Republican administrations, liberal as well as conservative, so stubbornly supported the South African apartheid regime. Washington, for example, included the African National Congress, led by now-revered Nelson Mandela, on its official list of “terrorist organizations.”

11 Most of the price increases that have occurred since the Great Depression have their roots in currency devaluations. If prices are measured in terms of gold rather than in terms of paper currencies of declining gold value, the long-term trend of prices—factoring out the effects of wars and economic booms—has been strongly downward since 1920. This downward trend in prices measured in terms of gold reflects the relative rising value of gold as the world’s gold mines have been increasingly depleted.

12 The Federal Reserve Board will presumably try to remove some of the “liquidity”—token money—it has created over the last nine months as economic recovery takes hold—always assuming of course there is not a renewed flare-up of the panic. Central banks can do this in the wake of panics. This is because the abnormal demand for money as a means of payment comes to an end.

In an earlier post, I explained that back in the middle of the 19th century it was enough to give the Bank of England the authority to issue additional banknotes beyond its gold reserves to end a panic without actually increasing the supply of banknotes. But never in the history of capitalism has the world’s leading central bank created so much token money in such a short period of time in response to a panic.

It’s enough to glance at the graph showing changes in the U.S. “monetary base” provided by Federal Reserve Bank of St. Louis. Since 1987, we have seen the stock market crash of 1987, the virtual collapse of the savings and loan system in the United States combined with recession in 1990, the Asian crisis that began in 1997 and spread to the U.S. financial markets when the giant Long Term Capital Management hedge fund all but collapsed in 1998, and finally the recession and stagnation of 2000-03, which saw the dot-com crash and the collapse of Enron among other things.

The Fed responded to these crises by creating additional bank reserves—token money—and then withdrawing the token money when the crises subsided. But if you look at the graph, these movements in the “monetary base” are mere wiggles. The rise in the monetary base since last August is of another order of magnitude entirely.

If the Fed were to suddenly withdraw these token money reserves from the banking system, interest rates would almost certainly rise sharply—as they are already showing signs of doing—aborting the much hoped-for cyclical recovery before it can even get off the ground. A full-scale repeat of the Great Depression would then be upon us. If as seems much more likely, the Fed keeps the bulk of the reserves it created over the last nine months in the banking system, at most halting their further growth, its hard to see how a new wave of inflation much worse than the 1970s will be avoided.

In this case, the Fed will almost certainly be forced to allow interest rates to rise very sharply over a short period of time in order to prevent the collapse of the dollar standard. If this happens, it will mean another monster recession within only a few years at most.

13 U.S. industrial production fluctuated wildly, first increasing sharply when Roosevelt moved to devalue the dollar, then slumping sharply when the devaluation didn’t go as far as market speculators were expecting. While the cyclical crisis proper of 1929-33 had bottomed out, and the general trend of industrial production and economic activity was upward, industrial production didn’t begin a smooth sustained increase until Roosevelt stabilized the dollar price of gold at $35 an ounce in 1934.

14 The Congress of Industrial Organizations was originally formed as a committee within the American Federation of Labor, a trade union federation based on craft unions. The AFL and its craft unions were notorious for their racism and reactionary politics. The CIO soon split completely from the AFL and organized unions according to whole industries not crafts.

However, it only made a very limited break with the AFL’s reactionary politics. Unlike the unions in Britain, for example, the CIO failed to form a labor party. Instead, it formed a close alliance with the Democratic Party and supported U.S. imperialism in general just like the AFL did. It limited itself to aiming to improve the conditions of the workers within the framework of an American imperialism that was now reaching for nothing less than worldwide empire.

During the post-World War II witch hunt, the U.S. Communist Party, which had played a leading role in organizing many of the CIO industrial unions, was driven out of the CIO unions. Other leftists, including bitter “anti-Stalinist” opponents of the U.S. Communist Party, were kicked out as well. In 1955, with the radicals of all political shades now purged, the CIO returned to a merged AFL-CIO with the super-reactionary AFL bureaucrats holding the upper hand. Since then, the U.S. unions, both craft and industrial, have progressively declined, as they have failed to organize, with a few exceptions, new workers, and much of U.S. basic industry that was organized by the CIO collapsed. Today, the U.S. trade union movement is a shadow of what it was in the days of the CIO.

15 Since the “reds” of all shades had been driven out, the AFL-CIO’s economists were generally pro-New Deal bourgeois economists of the Keynesian school.

16 Their rivals, the Friedmanites, will blame the inflation on the Federal Reserve System and the other central banks for causing the “money supply” to explode. If the 1970s are any guide, the current revival in Keynesian economics will be short lived. If we don’t develop the Marxist critique of all bourgeois economics, and simply echo Keynesian arguments on the plea that Keynes was a critic of capitalism, too, resurgent Friedmanite reaction—or something even worse—will again go largely unchallenged.

17 Krugman points out in his May 28, 2009, New York Times op-ed that the ratio of the U.S. Federal government debt to the GNP, though now growing sharply, is still below the level that prevailed immediately after World War II. Since absolutely disastrous inflation didn’t occur at that time—though this was generally an inflationary era—there is little danger of inflation now. Krugman would be right if the high public debt were the only factor working towards inflation. The brewing inflationary threat does not stem from the explosion of the public debt but the explosion in the quantity of token money, called the monetary base by the economists.

What the Federal Reserve System and the other central banks are attempting to do is to provide enough “liquidity” that will enable the governments to finance their huge deficits without a major rise in long-term interest rates. If long-term interest rates do rise sharply, the stimulative effects of deficits that the Keynesians and the governments are counting on to prevent the present depression from turning into a full-scale repeat of 1930s Depression will be largely neutralized.

However, the creation of token money on a scale that far exceeds any possible growth in the quantity of gold—real money—on the world market, threatens a huge fall in the gold value of the dollar and other paper currencies that are more or less linked to the dollar under the prevailing “dollar standard.”

If the dollar plunges against gold in reaction to the doubling of the dollar “monetary base,” a huge wave of inflation would be quickly followed by very rapid and sharp increases in interest rates. This would quickly lead to a new violent recession and its accompanying new sharp surge in unemployment. If all this gets completely out of hand—there is no precedent for the current situation in the entire history of capitalism—it could end in an economic debacle that would in the end be far worse than even the 1930s Depression. This is why the stakes are so high. If the workers’ movement listens to Keynesian economic advisors and continues its retreat, and the threatening economic super-crisis fully develops, it could lead to a new wave of fascism and or a new world war that could well be the grave of modern civilization. In that case, the modern struggle between the capitalist class and the working class would end in the “mutual ruin” of both contending classes, to use the grim words of the “Communist Manifesto.”

One thought on “The Ideas of John Maynard Keynes (pt 3)

  1. I know this post must be from the year 2012 or so and I do apologize to not have read all that you ever wrote on this blog. I just read this very page. And from this perspective I want to give a few remarks.

    First, I never know in this chapter whether you speak about nominal wages or real wages. I sometimes read Krugman’s column in the NYT and from what I know, he argues in favor of rising wages. And the driver of this is not the question of inflation but the fact that there is an increase in the GDP but no increase in real wages. Hence the capitalists increase their share of the public income.

    Second, with the numbers I can quickly gather (oil price chart, gold price chart, wage chart, inflation rates) your assumption that inflation would sharply rise wasn’t right. The inflation both in the US and in the EU remains low. In fact the European Central Bank has begun using their monetary tools to prevent a deflation because all signs point towards that. This was exactly what Keynesians had forseen based on constantly low wages, right? And the example of Greece shows it also: constantly cutting the wages in Greece has lead to a constant decline of the inflation. As for 2013 Greece even had 1% deflation. Exactly what Keynesians would predict.

    Third, I have no idea why you think the capitalist’s share of the public income would generally decline if the workers get higher wages. The capitalists set the prices based on the demand. So if the demand grows due to higher wages, why wouldn’t the capitalist raise prices again to secure his share?

    Greetings from a German lay Keynesian 😉

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