The Phases of the Industrial Cycle (pt 3)

The real industrial boom begins

The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during the boom that capitalist expanded reproduction develops with full vigor. Therefore, it is the boom that develops the contradictions inherent in capitalist production to the point where they can only be resolved—only temporarily as long as capitalist production is retained—by a crisis.

I explained in the last post that during the phase of average prosperity, excess capacity is whittled away at both ends, so to speak, by the closing down of factories that will never again be profitable, and the reopening of factories and machinery that after write-downs can once again yield to the industrial capitalists the average rate of profit.

As the margin of excess capacity shrinks, the percentage of industry that is lying idle is reduced to such an extent that the industrial capitalists are forced to undertake massive investments in new factories packed with state-of-the-art machinery. The industrial capitalists do not want to see their margin of excess capacity shrink to zero. They want to maintain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand.

If an industrial capitalist cannot fully meet the demand due to an inability to increase production sufficiently, customers will turn to the industrial capitalist’s competitors. In this way, a previously thriving industrial business can enter onto the road of decline that ends in bankruptcy. If the customers of our industrial capitalist turn to competitors, the customers might never return. They may find they actually prefer the competition’s products instead.

While industrial capitalists don’t like leaving their capital idle—just like money capitalists don’t like leaving money around that isn’t “earning” interest—they also do not like losing customers to rival industrial capitalists. Indeed, each industrial capitalist is doing everything he or she can—unless there is some kind of cartel agreement among the industrial capitalists—to win customers from other industrial capitalists. (1) This is one of the main purposes of advertising. (2)

If excess capacity falls below a certain critical level, the industrial capitalists are thereby forced under pain of losing customers to construct new factories and introduce new, far more powerful machines to increase their ability to produce. The boom has begun. With the onset of the boom, recovery finally spreads to the sub-department of Department I that produces the means of production used by Department I itself.

Not only do sectors of Department I such as the factory construction industry that have been languishing since the end of the last boom finally come to life. Business also improves even further in Department II. The workers and capitalists of the sub-department of Department I that produce means of production for Department I now have greatly expanded purchasing power to purchase the items of personal consumption that are produced in Department II. This is what Keynesian economists call the “multiplier” and “accelerator” effects. The growing boom feeds on itself.

Therefore, the more the individual industrial capitalists attempt to expand their margin of excess capacity, the more the margin of excess capacity shrinks overall. (3)

Like crises, booms vary greatly in intensity as well as in duration. The intensity of a given boom is measured by the extent to which excess capacity disappears. The more intense the boom, the more that factories and other enterprises are operating all out.

Indeed, driven by their need not to lose customers, many industrial capitalists are forced to operate their factories at levels of capacity that exceed the “optimum” levels. (4) The ability of the factory and its workers and machines to produce is strained to the point that productivity of labor might actually drop slightly in some branches of industry. This does not mean that labor productivity is declining in an “organic way.” It simply means that the demand for commodities is so strong that the industry is working at a level that is beyond its “optimum” efficiency in terms of labor productivity.

On the other hand, it is precisely during the boom that the construction of new factories that use the most advanced machinery causes the “organic” level of productivity to grow faster than during any other phase of the industrial cycle. However, the fact that at least some industrial capitalists are having trouble increasing the level of production to fully meet the demand that the boom is generating does mean that the demand for the commodity labor power rises substantially, despite the rapid replacement of living labor—variable capital—by dead labor—constant capital. (5)

Unemployment now drops below its average level. The relationship of forces on the labor market finally begin to shift in favor of the sellers of labor power—the workers—and against the buyers of labor power—the industrial (and other) capitalists.

Inflation raises its ugly head

As excess capacity melts away, it becomes increasingly common for the demand for commodities at existing prices to exceed the supply. As Marx explained in his early work “Wage Labor and Capital,” under these conditions price competition between the sellers of commodities vanishes. The relationship of forces now favors the sellers of commodities over the buyers. A “sellers’ market” prevails. Under these conditions, supply can only be equalized with demand through a rise in prices. As long as the boom continues, prices keep rising.

During booms, the capitalist media and many economists blame rising wages for the rise in prices. They claim that rising money wages are increasing the “cost of production,” forcing the industrial capitalists to raise prices. Only restraint on the part of the unions, they claim, can end the “cost-push” inflation. (6)

However, the workers are generally reacting to the rise in the prices of commodities that enter into the consumption of the working class. What is true is that the strong demand for the commodity labor power makes it easier for the workers to take these defensive actions against the rising cost of living. The demand for labor power, especially skilled labor power, begins to exceed the supply at existing prices. Wages are, after all, nothing but the price of the commodity labor power. To fully take advantage of these relatively favorable conditions, however, the workers must be organized.

Under boom conditions, industrial capitalists are especially afraid of strikes. Remember, the boom begins because each industrial capitalist is fearful of losing customers to other industrial capitalists. This forces each industrial capitalist to undertake major investments so that they will be able to meet the rapidly rising level of the demand for their commodities. It is precisely under these conditions that a strike is a grave danger to an industrial capitalist. A strike will likely mean that a particular industrial capitalist will lose customers to the “competition.” (7)

Therefore, the industrial capitalist is far more likely to compromise with, or even simply grant, trade union demands for higher wages. If the unions are able to win the right to withhold their labor power in an organized way at all times, boom conditions provide the best time to threaten strikes to defend and even increase the workers’ standard of living. During the boom, the strike might not even be necessary, since the boss is under tremendous pressure to meet the rising demands of customers in order to keep them away from competitors.

Wage increases that exceed productivity growth are not inflationary

The economists, especially of the Keynesian school, like to claim that increases in wages that exceed the growth in productivity are inflationary. The capitalist media often explain this alleged economic law as though it was a proven scientific fact. In fact, it was refuted two hundred years ago by the great English classical economist David Ricardo.

It is true that if real wages rise faster than the rise in the productivity of labor in those branches of industry that produce commodities that enter into the consumption of the workers, the rate of surplus value will indeed drop. However, a falling rate of surplus value, all things remaining equal, will mean a decline in the rate of profit.

This, however, will not mean higher prices. When bourgeois economists claim that real wages should never rise faster than the growth in the productivity of labor, they really mean that the rate of exploitation of the working class—the ratio of unpaid to paid labor—should never fall. What a fine doctrine from the viewpoint the exploiters! (8)

The classic Marxist argument against the “wage push” theory of inflation is given by Marx in “Value, Price and Profit,” which was originally a report by Marx delivered at a meeting of the International Workingmen’s Association (First International) in London.

If they are well organized into trade unions, the skilled workers especially can sometimes win substantial wage increases not only in money terms but in real terms. If the boom turns out to be long and protracted, wage increases eventually spread to the unskilled workers as well. Industrial unions, as opposed to craft unions, which organize the unskilled and semi-skilled workers as well as the skilled workers, enable the unskilled workers to take advantage of these all-too-rare circumstances.

However, unless demand exceeds supply at the existing market prices, the industrial capitalists, under the pressure of competition, cannot simply increase prices because their wage costs, or unit labor costs, are rising. If the industrial capitalists could increase prices at will, what would prevent prices from rising to infinity? From the viewpoint of any seller of a commodity, the higher the price the better. But it is competition, and behind competition, the law of value that works through competition, that determines prices, not the will of the industrial capitalists.

If the workers do not take full advantage of the boom, they will be in a far worse position when the boom is succeeded by the crisis, and conditions on the labor market shift once again in favor of the bosses.

A powerful factor that does lead to higher prices during the industrial boom is the increased construction of new factories and other large construction projects. It takes a considerable amount of time to build a large factory. Not only do the factory buildings have to be built, new large-scale machines have to be constructed, installed, tested and debugged before the factory can be put into production.

The capitalists engaged in these activities receive profits, and the workers receive wages. In addition, the capitalists collect a cash flow that realizes in money form the value of the constant capital used up in production. This cash flow is reflected on the income statement under “allowances for depreciation.” (9)

This cash flow—profits and wages plus depreciation allowances—increases the buying power of both the capitalists and workers of Department I. But until the new factories are in production, there will be no increased supply of commodities to meet the increased demand. Until the new factory construction actually leads to the the increased production of commodities, the supply and demand of commodities can only be equalized at higher prices.

Price, value and the boom

In order to achieve revolutionary rises in the productivity of labor, new more-efficient methods of production that enable commodities to be produced with considerably less labor have to put into operation on a large scale. If they aren’t, labor productivity will not rise, and the value of commodities will not fall. Older factories can be made more productive by “retooling”—that is, replacing old, less-powerful machinery with new, more-powerful machinery.

But there are frequently limits to the extent older factories can be upgraded to take advantage of new technology. Factory buildings are often designed around the type of machinery they contain. For example, 19th-century multistory factory buildings were often built around gigantic steam engines. A factory would contain one very large steam engine. The motive power produced by the steam engine would be transmitted to the various factory machines through a system of levers and pulleys. These machines were often located on different floors.

The replacement of steam by electricity as the main motive power in industry dictated a major change in the structure of factory buildings. Each machine could now contain its own electric motor (or motors). Electricity and electric motors made possible the modern assembly line. Modern assembly line production generally requires a very large single-story factory building.

Therefore, it wasn’t really possible to convert the old-fashioned multistory factory buildings built for the age of steam to modern assembly line mass-production factories where electricity provides the motive power. During the transition to modern electrically powered assembly lines, many old multistory factory buildings had to be torn down and replaced by single-story buildings. Since the new single-story buildings required a lot more real estate, they were usually constructed in a different location, often in the countryside.

In the steel industry—the heart of “heavy industry”—successive generations of steel mills were built around successive generations of steel-making technology. The Bessemer process, the open-hearth process, the electric furnace process and finally the modern basic oxygen process succeeded one another. Today, a similar evolution is occurring in the young microchip manufacturing industry. Each great new advance in the manufacturing of microchips requires the construction of ever larger and more automated “fabs”.

To make these successive revolutions in production effective, it is not enough for science and technology to make it possible. That is only the first step. Large-scale industrial investments then have to be made to create factories and machines that take full advantage of the new techniques of production. Under the capitalist mode of production, these large-scale investments are generally undertaken during the boom phase of the industrial cycle.

In times of boom, the number of industrial workers increases absolutely and unemployment declines, but the faster growth in the productivity of labor made possible by the utilization of new technology causes industrial production to increase much faster than the increase in the number of employed industrial workers. Absolute employment is growing and unemployment is declining, but relative to the level of production, the number of industrial (and other) workers is declining. This is a reminder that the decline in the level of unemployment during the boom is temporary.

This increasing use of powerful state-of-the-art machinery is a weapon in the hands of the industrial capitalists in their daily struggle against the working class. This fierce competition between workers and machines means an accelerated growth in the organic composition of capital.

Under inflationary boom conditions, this does not mean an immediate fall in the rate of profit as reported on the capitalists’ books. The value of commodities, the amount of labor socially necessary to produce them, is indeed falling at an accelerated pace. But market prices, far from falling, are rising. The market now rewards those industrial capitalists who adopt more constant capital-intensive methods of production with super-profits, while those that retain the older more labor intensive methods can still continue to realize the average rate of profit. This is possible because values on one hand and prices and profits on the other are moving in opposite directions.

As long as prices and values are moving in opposite directions, the increasing utilization of constant capital in production means a lower cost price, while the sale prices keeps on rising despite the falling value of the commodities that are being produced. (10) This is why as long as the boom lasts the older factories using more variable capital continue to make more or less the average rate of profit, while the new factories that employ relatively—and sometimes even absolutely—fewer workers, make super-profits.

The (bourgeois) economists point to this as proof that Marx was wrong when he said only living labor creates profit (surplus value). They claim the super-profits made by new constant capital-intensive factories shows that not only living labor (variable capital) but also constant capital is directly producing profit. The key to keep the boom going, these vulgar economists claim, is to keep the level of productivity growing.

But doesn’t this divergence between price and value that develops during the boom show that the Marxist law of value is being violated? Aren’t the bourgeois economists right after all? The law of value would be violated if the divergent movement between prices and values could continue indefinitely. However, the more that commodity prices rise above their values, the stronger are the forces being bought into motion that will drive down prices, not only to their values but below their values once again.

Contradiction between money as measure of value and as means of circulation

In earlier posts, I explained that the basic function of money is that it is the special commodity that in terms of its own use value measures the exchange values of all other commodities. If commodities sell at their values, this means that the value of the quantity of money that constitutes the price of the commodity represents the same amount of abstract human labor as the commodity whose exchange value it is measuring.

This creates the possibility that this equality may in fact become an inequality. If the the market price of a commodity is below the value of the commodity, the quantity of money material—gold functions as money material—that constitutes the price of the commodity on average takes less labor to produce than the commodity whose value the money material is measuring in terms of its own use value. (11)

Conversely, if the price of a commodity is above its value—which increasingly is the case in the boom—the quantity of labor that on average is necessary to produce the given amount of gold is greater than the quantity of labor that on average is necessary to produce the commodity. Relative to its value, gold—or whatever commodity serves as the money commodity—becomes depreciated against commodities.

Since money in the final analysis is a commodity that like all other commodities must be produced, the growing disproportion that develops in the sphere of circulation between prices and values must increasingly spread to the sphere of production.

As the boom begins, prices that early in the industrial cycle were below values rise to their values. But they don’t stop there. Instead, they keep right on rising. As a result, the longer the boom goes on, the more market prices rise above their values. This means the rate of profit in the special branch of industry that produces money material—gold—will fall below the average rate of profit. Not only does the rate of profit in gold mining and refining decline absolutely, it declines relatively.

Other branches of industry are now making super-profits, while in the gold mining and refining industry the rate of profit is falling below the long-term average. Indeed, as the boom proceeds and prices continue to rise, the profits in gold mining and refining tend to disappear altogether. All but the richest gold mines are progressively closed down. (12)

During the industrial boom, capitalists whose commodity is the money commodity gold, like all other industrial capitalists, have to pay higher money wages as well as higher prices for all the inputs that represent constant capital. But by definition, unlike other industrial capitalists, the gold-producing industrial capitalists are not in a position to raise prices as their costs defined in terms of the commodity they produce—gold—rise.

Since gold is money, it is the standard of price. As such it cannot itself have a price, as I have previously pointed out. The closest we can get to the true “price of gold” is to read all price lists backwards. (13)

Therefore, the more the prices of commodities rise, the lower the rate of profit will be in the gold producing and refining industry. In fact, a prolonged-enough price rise—assuming the value of money (gold) remains unchanged—will mean the progressive closure of the less productive gold mines. If the rise in prices measured in terms of gold could continue indefinitely, it would only be a matter of time before gold production would cease completely.

However, long before this happens in the real world, a generalized crisis of the overproduction of commodities relative to gold arrives. The crisis then lowers prices measured in terms of gold, causing them to fall below the values of commodities, thus stimulating gold production once again.

Like in every other industry, the fall in the rate of profit, both relative to other industries as well as absolutely, means that capital will increasingly be withdrawn from gold production and invested instead in other now more-profitable branches of industry.

There is nothing special about the industrial capitalists who are engaged in gold production in this respect. They are in business for one reason, to make as much profit as possible. The result is that the more the prices of commodities rise above their values, the more the rate of profit from producing gold—or whatever commodity constitutes in its material use value money material—will fall. (14)

The inevitable result is that the growth in the quantity of metallic money—which in the long run drives the expansion of the market—slows down, tending to grind towards a halt as prices keep rising. Or what comes to exactly the same thing, the more the production of commodities expands, the slower in the long run will be the expansion of the market for them. The tendency towards the generalized overproduction of commodities is thus built right into the commodity foundations of capitalist production.

As I explained in the section on money, the rate of growth in the quantity of money as currency—whether currency consists of gold coins, convertible-into-gold-coin banknotes that prevailed under the international gold standard, the token paper money that exists today, or credit money issued by the private for-profit commercial banks that in fact now forms the bulk of the circulating media—is ultimately limited by the rate of growth of the quantity of metallic money.

Therefore, as commodity prices rise above their values, the growth in the quantity of money—whether metallic, token, or credit money—must sooner or later slow down. Or, if we adopt the viewpoint of a modern central banker, the central banks must slow the growth rate of their token money as the rate of growth of the world’s gold supply slows, in order to preserve the value of their token money against gold. (15) As gold production declines, the central banks must slow the growth of the paper money they issue in order to avoid its depreciation and prevent it from eventually falling into disrepute.

Now, what happens when an ordinary commodity—let’s say shoes—is overproduced causing its price to fall below its value and the profits in the shoe-producing industry to fall below the average rate of profit? Industrial capitalists begin to shift out of the shoe-producing industry into other more profitable lines of production. The quantity of shoes will drop on the market. Eventually shoes be will in short supply at prices that correspond to their values, or more precisely at prices that correspond to their prices of production. Once again, prices and profits recover in the shoe-making industry. As profits rise, industrial capital once again flows into the shoe-making industry. Shoe production rises once again. Adam Smith gave the classic description of this process in his “Wealth of Nations,” published in 1776. In this way, in the long run, the rate of profit is more or less equalized among the various branches of industry.

Equalization of the rate of profit in the industry that produces money material

Does the same process occur in the industry that produces money material? During the boom, profits, both relative to other branches of production and absolutely, fall in this industry. Capital will flow out of gold mining and refining industries in search of more profitable fields of investment. Gold production declines and the rate of growth of the quantity of metallic money will slow down causing in turn the growth of all forms of money to slow down sooner or later as well.

Up to this point, there is no difference as far the equalization of the rate of profit between the industry that produces money material and other sectors of industrial production such as the shoe manufacturing business.

But won’t the slowing growth rate in the money supply cause a growing shortage of money that will then lead to a recovery in profits in the gold mining industry? Won’t this in turn cause capital to flow back into gold mining and refining, which will cause a renewed rise in gold production and thus the quantity of money?

This would indeed be true if the classic quantity theory of money applied to metallic money. This is exactly what Ricardo assumed. In the coming weeks, we will see that this assumption led Ricardo and the economists who followed him into grave errors not only of theory but of practical policy as well.

The big mistake of the quantity theory of money when it is applied to metallic money is that it ignores the role of the rate of interest. As I explained in the section on money, a decline in the quantity of metallic money relative to other commodities will not in itself lead to a decline in prices. (16) Instead, the rate of interest will rise. If the rate of interest is low relative to the total profit—which it will be in the wake of the crisis for reasons I examined in the previous post—the rate of interest might be able to rise for quite some time before the entire profit consists of interest, or what comes to exactly the same thing before the profit of enterprise falls to zero destroying the incentive to produce surplus value.

As we have already seen, during the recession and depression phases of the industrial cycle great hoards of idle money accumulate, mostly in the form of excess bank reserves. These idle hoards can linger well into the phase of average prosperity or even, if they reach exceptional levels, into the boom phase.

Remember, the velocity of circulation of the currency also declines during the recession and remains relatively low during the the post-recession depression-stagnation phase as well. The result is that even if the quantity of money is declining—relative to commodities, not absolutely—this decline can up to a certain point be counteracted by the rise in the velocity of circulation.

Ultimately, this increase is limited by the fact that a given piece of money cannot purchase two or more commodities at exactly the same time. However, the greater the amount of idle cash that accumulates during the recession-depression—and the deeper and longer the recession-depression phase is, the greater this will be, all other things remaining equal—the lower the velocity of circulation will fall. Therefore, the longer the velocity of circulation can increase during the succeeding boom before the limits on its growth will be approached.

In addition, even if the the growth rate of metallic money and of banknote or token money based on the metallic money slows down, more credit money is created that can replace either gold coins or token money as the medium of purchases and payments. The quantity of credit money is ultimately limited, however, by the fact that a given piece of metallic or token money cannot pay two owners of credit money seeking to redeem it in “hard cash” at the same time.

But, again, the more idle money is accumulated in the banks during the recession-depression phases of the industrial cycle, the longer the amount of credit money can be increased before these limits are approached. (17) Therefore, the increase in the velocity of circulation of currency and the growth of credit money allows the boom to continue even as gold production declines. And as long as the boom continues, so does the rise in prices.

Finally, the limits to expansion of credit money are reached. The rate of growth of the quantity of credit money slows and credit increasingly replaces all forms of money as the means by which commodities are purchased. The more this occurs, the more the boom can be prolonged, though at the price of rising interest rates. The increasing scarcity of money means that the balance of competition between the money capitalists and the commercial capitalists begins once again to favor the money capitalists. More and more of the profit—surplus value less rent—that is produced by the working class is appropriated in the form of interest by the money capitalists.

Let’s now quickly review what happens during the boom as far as values, prices and the quantity of money is concerned. The more the boom is prolonged, the greater the contradiction between the rising prices of commodities and their falling values becomes. During the boom, there is a growing need for means of circulation as both the quantity of commodities in circulation and their prices increase. But there is less and less incentive for the industrial capitalists to actually produce the gold that is in the long run necessary for the means of circulation to grow. Therefore, as capitalism booms, it needs ever more means of circulation but Adam Smith’s “invisible hand” tells it to produce progressively less means of circulation.

The “invisible hand”—or to give it its real name, the law of value of commodities that makes it possible for unplanned capitalist production to produce commodities of different use values in the proportions that enable capitalist society to reproduce itself—at a certain point in the expansion stage of the industrial cycle turns on capitalist society and begins to choke it.

This tightening choke hold can only be relieved by a generalized crisis of overproduction that reduces the quantity of commodities in circulation and lowers their prices, on one side, and stimulates the production of money material, on the other. It is only through such crises that the rate of profit can be equalized between the branch of production that produces the money commodity and all other branches of commodity production, once capitalist production and its contractions have developed to a certain point.

Next: From Boom to Crisis


1 In a cartel agreement, industrial capitalists agree to divide up the market and limit competition among themselves. To the extent that the cartel agreement sticks, it enables the allied industrial capitalists to limit production without losing customers to their competitors. However, like diplomatic agreements among rival imperialist powers, cartel agreements are always in danger of breaking down as the individual industrial capitalists attempt to find ways of “cheating” in ways that benefit their individual profit interests. A cartel, therefore, can only limit the competition among individual industrial capitalists, not completely eliminate it. Only a trust where the individual industrial capitalists are replaced by a single industrial capitalist can completely eliminate competition. In this case, the individual enterprises retain at most an administrative autonomy, and capitalist competition between them ceases.

2 Competition among the industrial capitalists for customers is not limited to industrial capitalists producing in the same branch of industry. For example, my financial situation might allow me to purchase a new computer or a new television set but not both. The job of advertising is to convince me that I absolutely must get a new computer, or if the same ad agency is working for a television manufacturer, why I cannot do without the latest-model TV. Since the ability of capitalist industry to increase industrial production in the long run is much greater than the ability of the market to expand, not only do individual industrial capitalists compete with one another, the different branches of capitalist industry are forced to compete with one another for the customer’s “dollar.”

3 Remember, an individual industrial capitalist can be a corporation, not an actual person. Indeed, a corporation is considered to be a “legal person.”

4 During an intense boom, the government might report that a given industry is operating at more than 100 percent capacity. This means that the factories or mines are operating beyond the level of production that ensures the maximum labor productivity per worker. In extreme cases, it might cause severe damage to the equipment, not to mention the dangers to the lives and health of the workers.

5 This is the mirror image of the sharp rise in labor productivity that occurs early in the recovery when factories that were working at levels of utilization well below the optimum begin to operate once again at optimum, or at least nearer to optimum, levels. By organic productivity, I mean the productivity of labor that exists when the factory is operated at its optimum level. It is this level of productivity that determines the quantity of socially necessary labor that is required to produce a commodity under given conditions of the technology.

6 During the 1970s, the bourgeois economists of the Keynesian school blamed the high rate of inflation that was actually caused by depreciation of the paper dollar against real money—gold—on rising wages. Here, however, I am assuming a situation where the value of the currency remains stable against gold.

7 During periods of weak demand relative to the ability of the industrial capitalists to produce, the opposite situation prevails. Under these conditions, it is the industrial capitalists who will do all they can—which is quite a lot—to force workers to strike. The strike then serves a dual function for the industrial capitalists. Not only do they hope to weaken or even “bust the union” and increase the exploitation of the workers all around. They can use a strike they themselves forced to liquidate “excess inventories.” If the industrial capitalists cannot force the workers to strike, they will then sometimes simply “lock out” the workers to achieve the same objective.

8 To be just to them, the neoliberal followers of Milton Friedman also deny that higher wages cause inflation. Instead, they blame higher prices on the excessive growth of the money supply. During the inflation of the 1970s, the inflationary rise in the supply of token money created by the central banks was indeed the cause of the inflation. The rise in wages in terms of depreciating token money merely reflected the attempt of the working class—only partially successful—to defend their standard of living. The main economic error of the Friedmanites as far as their analysis of inflation is concerned is that they apply the laws that apply to token money to metallic money, on one hand, and to credit money, on the other. As I demonstrated in the posts devoted to the theory of money, the different forms of money are governed by quite different economic laws.

9 Remember, the price of a commodity includes not only a part that replaces the variable capital or wage, and the part that represents the profit, but also a part that replaces the value of the constant capital that was used up in the process of producing it. Suppose a construction—or engineering—firm is building a factory using heavy building equipment that will itself produce the new factory. The construction company might wear out its heavy construction equipment during the construction of the factory. But if the boom is intense enough, it might find that it cannot replace its heavy construction machinery unless it is willing to pay a price for it higher than the prevailing market prices, since the factories that produce such equipment are already working all out. They are meeting the demand generated not only by simple reproduction but by expanded reproduction as well.

10 Or at least a rise in the cost price that is less than the rise in the selling price.

11 Remember, a price is always in the final analysis a quantity of the money commodity measured in terms that are appropriate to the use value of the money commodity—for example, a certain weight measured in terms of troy ounces of gold. The bourgeois economists, who have long since rejected any form of the law of labor value, not only do not understand what determines prices, they don’t even know what prices are.

12 During the “Great Moderation,” the financial press often noted with great satisfaction that while stocks in general were doing very well indeed, stocks in companies that produced gold were falling on the stock exchanges. “Gold loses its luster,” the headline on these articles often proclaimed. They took great comfort from this fact. Perhaps they thought that gold was becoming demonetized after all, and in the future the U.S. dollar would finally be established as the universal measure of value in place of gold. But in fact the fall in gold mining and refining stocks simply indicated that a violent crisis—or perhaps series of crises—was brewing that would arrive in its own good time. And last fall, the crisis—or at least the first of the series—arrived in full glory.

13 For a fuller explanation of this point, see the section on money.

14 This is an important point. We are not discussing the nature of gold as a material use value or a natural element, but rather the nature of money as a relationship of production. Any other commodity that functions as money in gold’s place will be subjected to exactly the same laws.

15 And that is exactly what they did in the years leading up to the current crisis. Starting in 2001, world gold production began to decline. Just look at data in graphical form that is provided by the Federal Reserve Bank of St. Louis on the growth of the “monetary base”—the token money created by the Federal Reserve System—and you will see that its rate of growth steadily declined right up to outbreak of the current crisis as world gold production declined. Presumably, the members of the Federal Reserve Board were not looking at gold production, or even the rising dollar price of gold. But they could not ignore the rising prices in terms of the depreciating U.S. dollar of other primary commodities such as sweet crude oil that ultimately enter into the prices of virtually all other commodities. In order to prevent a new 1970s-style inflation, they therefore gradually reduced the growth of the token money they were creating. This ended in the panic of 2008.

16 The quantity of gold on the world market never actually declines. It grows as the gold mining and refining industry produce more and more of the stuff. Since monetary gold isn’t actually consumed, it just keeps piling up in hoards. But the quantity of gold can decline relative to the total quantity of commodities in circulation. This happens if the quantity of gold grows more slowly than the quantity of commodities in circulation on the world market.

17 The Great Depression followed by the interruption of expanded capitalist reproduction brought about by the World War II war economy created an especially huge hoard of money lying idle in the banks and even in the hands of individual hoarders. It is no coincidence that the prosperity that followed World War II was both pronounced and prolonged. Though this development was an unwelcome surprise to most Marxists who were alive in those days, the process was quite in accord with the economic laws described by Marx.


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