Three Books on Marxist Political Economy (Pt 6)

Shaikh’s theory of money

Shaikh deals with money in two chapters—one near the beginning of “Capitalism” and one near the end. The first is Chapter 5, “Exchange, Money, and Price.” The other is Chapter 15, “Modern Money and Inflation.” In this post, I will concentrate on Shaikh’s presentation in Chapter 5. In Chapter 15, Shaikh deals with what he terms “modern money.” I will deal with his presentation in this chapter when I deal with Shaikh’s theory of inflation crises that is developed in the last part of “Capitalism.”

In Chapter 5, Shaikh lists three functions of money—considerably fewer than Marx does. The three functions, according to Shaikh, are (1) money as a medium of pricing, (2) money as a medium of circulation, and (3) money as a medium of safety. Shaikh deals with money’s function as a means of payment under its role as a means of circulation. The problem with doing this is that money’s role as a means of payment is by no means identical to its role as a means of circulation and should have been dealt with separately.

Anybody who has studied seriously the first three chapters of “Capital” Volume I will be struck by how radically improvised Shaikh’s presentation here is compared to that of Marx. It is in the first three chapters of “Capital” that Marx develops his theory of value, exchange value as the necessary form of value, and money as the highest form of exchange value. He does this before he deals with capital. Indeed, Marx had to, since the commodity and its independent value form, money, is absolutely vital to Marx’s whole analysis of capital.

Marx versus classical economics

Marx’s exposition of the nature of value, exchange value and money are not found in the classical economists, neither Adam Smith nor Ricardo nor any other classical economist as defined by Marx (1), still less the “neo-Ricardian” school, which Shaikh lumps into a continuing classical school together with Marx.

The fact that Shaikh fails to fully repeat or equal Marx’s exposition of value and its forms is in and of itself not a criticism of Shaikh. Beside the fact that it is a hard task to equal Marx’s exposition on value and its forms, Marx has already done this for us. Merely repeating Marx’s exposition does not advance us a single step. At most, it merely prevents us from slipping backwards.

Where would biology and physics be today if biologists and physicists merely repeated Darwin and Einstein? Still, taking all this into account, one is struck by how improvised Shaikh’s presentation of value, exchange value and money is compared with other sections of Shaikh’s work. (2)

The most important conclusion Marx draws from his exposition of value and its forms is that value cannot, due to the very nature of commodity production, be measured directly in terms of hours of abstract human labor, which forms the (social) substance of value. Instead, value must take the form of exchange value, where the value of one commodity—called by Marx the relative form—must be measured in terms of the use value of another—called by Marx the equivalent form of value. The social substance of value in one commodity must be put in the form of the physical substance of another.

The developed form of value that prevails under capitalism—the highest form of commodity production—is the money form, where one commodity in terms of its use value measures the value of all other commodities. (3)

Let’s examine how Shaikh’s exposition of money in Chapter 5 of “Capitalism” relates to Marx’s presentation in the first three chapters of “Capital” and elsewhere. Shaikh’s number one function for money is that money serves as a “medium of pricing.” This lumps together Marx’s money as a measure of value—the most important function—with money’s secondary role as a standard of price. “We must specify the medium and a unit,” Shaikh writes. The “medium” corresponds to Marx’s money as a measure of value and the unit corresponds to Marx’s money as a standard of price. We will see that Shaikh has failed to grasp Marx’s conclusion. Shaikh simply does not understand that the medium that measures the value of a commodity must be and not simply can be the use value of another commodity.

Shaikh is of course aware, like virtually all economists and historians of money, that historically money was a commodity. And he gives examples and even provides pictures of some of the various commodities besides silver and gold that have served as money. Pictures of various money commodities are indeed the only pictures in a book that consists otherwise only of text and mathematical expressions.

Money’s role as a standard of price

“Over time,” Shaikh explains, “a coin containing 1 oz. of silver may come to be designated by the money name ‘penny.'” This is an example of money’s role as a standard of price. An ounce of silver bullion is designated a “penny. … ” Instead of pricing commodities in term of ounces of silver, we can quote the price in terms of pennies. In earlier times, the penny was more like today’s U.S. 10- or 20-dollar bills in terms of value and purchasing power than the virtually valueless pennies issued by the U.S. mint today.

Money’s role as a standard of price works best when the standard remains fixed. In the above example, this is the case when the “price” of an ounce of silver bullion in terms of pennies is not allowed to deviate significantly from one penny per ounce. To the extent the market price of silver bullion rises above one penny per ounce, the silver penny has become depreciated. If the market price of silver bullion were to rise to two pennies per ounce, the penny would have lost half its silver value.

Assuming silver pennies are minted into one-ounce coins by the government mint—which may or may not be the case—we say that the mint price of an ounce of silver is one penny. The depreciation of a penny could only occur if the bulk of silver pennies in circulation came to physically contain less than an ounce of silver bullion and the silver penny was issued in excessive quantities relative to the silver bullion monetary reserve fund.

Money’s role as a means of payment not the same as money’s role as a means of circulation

As the economy booms, commodities are increasingly purchased with credit, while payments of debts created by these purchases is increasingly done by borrowing even more money. But with the “unexpected”—as indeed it is to capitalists and their hired economists, who are drunk on prosperity—arrival of a crisis, cash payment is now demanded. Only hard cash—money—is now wealth! The sudden assertion of money’s role as a means of payment means a breakdown of the circulation of commodities. Money’s role as a means of payment is therefore quite different than money’s role as a means of circulation.

As we saw in 2008 when money’s role as a means of payment suddenly asserted itself, tens of millions of workers lost their jobs and homes as society was shaken to its foundation. In the 1930s, the assertion of money’s role as a means of payment led to among other things the rise of Adolf Hitler. The aftermath of the 2008 crisis has among other things led to Donald Trump coming to power in the U.S. This shows why Shaikh should have listed money’s role as a means of payment as a major function of money here instead of lumping it in with its role as a means of circulation.

The sudden demand for monetary tokens as a means of payment allows central banks during periods of crisis to issue additional tokens even in the absence of any increase in the metallic monetary reserve fund without an immediate depreciation of the tokens and associated inflationary rise in commodity prices in terms of these tokens.

The reason why the U.S. Federal Reserve System’s “quantitative easing” program has not yet led to a wave of runaway inflation is that the U.S. dollar functions as the main international means of payment—the dollar system. Therefore, instead of a surge in the dollar price of commodities, we saw a sharp decline in the velocity of circulation of the U.S. dollar.

However, if the Federal Reserve System does not make good its promise to “shrink its balance sheet”—that is, destroy some of the huge amount of extra dollar tokens that it created during “quantitative easing,” commodity prices in terms of the U.S. dollar will rise sharply in the coming years.

Shaikh’s third function, ‘money as a medium of safety,’ and his ‘golden prices’

Shaikh’s “money as a medium of safety” coincides more or less with Marx’s category of money as a means of hoarding and accumulation. However, Shaikh’s reduction of this function of money and accumulation to a mere medium of safety shows how Shaikh radically improvises Marx’s theory of value and money.

Marx explained that the miser of old hoarding gold coins anticipates the modern capitalist. Unlike members of old pre-capitalist ruling classes who accumulated use values only for immediate or future consumption, the miser like the King Midas of legend cannot “consume” gold coins. Instead, the miser aims to accumulate wealth as such in its most abstract form without consuming it. Here we have accumulation for the sake of accumulation and the production of gold or silver for the sake of production. The miser is therefore the ancestor of the modern capitalist.

From miser to modern capitalist

Today’s capitalists accumulate capital in various forms: labor power (growth of the number of employed productive-of-surplus-value workers on a global scale); raw materials; auxiliary materials such as the electrical power consumed in a given period of time; factory buildings, factory machinery and inventories of finished commodities; and gold bullion—money material. Yes, a certain amount of the total social capital must still be accumulated in the form of gold bullion.

Once capitalist production becomes established, the quantities of all these forms of wealth measured in terms of their use values show a rising curve interrupted only by crises and major wars. Indeed, herein lies the historical justification of the capitalist mode of production.

Leaving aside crises and wars, the ever-growing mass of wealth, accompanied by an ever-rising productivity of labor, prepares the way for a higher form of society without classes, which Marx and Engels called communism. Therefore, with the industrial capitalists, in contrast to the miser, we have production for the sake of production not only of money material but of all elements of wealth that can be increased by the application, directly or indirectly, of human labor.

However, unlike the wealth of the miser, the wealth accumulated by the capitalists consists of an ever-increasing diversity of use values. Wealth grows not only quantitatively but qualitatively. Every type of use value has its appropriate unit of measure. The only way that the total wealth consisting of ever-greater numbers of use values can be measured quantitatively is by reducing it to a common substance. This brings us to another function of money that Shaikh should have dealt with separately—money’s role as a money of account.

If we reduce in our minds all the types of commodities that constitute the total wealth of capitalists to a single use value—money material—we thereby gain the ability to measure the total wealth of capitalist society in quantitative terms. Instead of attempting to measure the quantity of the use values of commodities, we simply add up the numbers on their price tags—or the prices at which they are actually sold.

As Andrew Kilman correctly points out, notwithstanding the fact that he makes the same basic mistake on money that Shaikh does, “neo-Ricardian” economists attempt to calculate wealth in what Kilman calls “physical” terms. Last month, we saw that Shaikh made this typical neo-Ricardian mistake when in his analysis of exchange rates he attempted to compare global “real wages” that consist to some extent of different types and not only different quantities of use values.

For example, workers in Bangladesh don’t need to purchase heavy coats and hats for winter, while workers in Siberia most certainly do. How then can we quantitatively compare the wages of Bangladesh workers with Siberian workers? We can do this only in terms of a universal world money—gold bullion—but not in terms of their real wages.

In the final part of this extended review of Shaikh’s “Capitalism,” we will see that Shaikh makes the typical neo-Ricardian mistake of calculating in terms of use values—or in “physical terms,” as Kilman puts it—when he should have been calculating in monetary terms.

Why not calculate wealth directly in terms of value

We can, of course, calculate wealth—or rather value—directly in terms of abstract human labor using some unit of time such as hours. This way of measuring value is useful theoretically for many purposes. This is especially true for grasping the nature of surplus value, where it indeed is absolutely necessary. But capitalist society cannot do this, because social production is carried out privately by industrial capitalists for their own account. Therefore, industrial capitalists have no way of knowing whether the labor that has actually been expended meets a social need or is simply wasted except by selling their commodities at prices that at least equal their prices of production. Therefore, capitalist society is forced to calculate wealth in terms of the use values of the special commodity that functions as the universal equivalent—money.

Capitalist society must still accumulate ever greater amounts of money material

As we saw above, the miser accumulates wealth only in the form of money material—silver or gold. However, no matter how advanced capitalism becomes, and with it the ever-increasing types of use values that capitalism produces, capitalism must still accumulate a certain, even if relatively small, portion of its wealth in good old-fashioned gold bullion. The ever-increasing amount of accumulated gold bullion makes possible the growing markets that capitalism needs if it is to continue.

But under normal conditions, gold bullion—typically stored in the form of gold bars—appears as the most absurd form of wealth. (4) Who cares if the newly produced gold bars are accumulated by some “gold bug” investors or in the vaults of the Russian central bank? However, during crises an “irrational demand” develops for wealth in this particular form. Now it seems that wealth is only gold bullion, and in the scramble for gold a lot of wealth in far more useful forms is destroyed. Indeed, this wealth must be destroyed if capitalism is to emerge from the crisis.

A brief review of Marx’s theory of money

Because the theory of money presented by Shaikh in “Capitalism” is so inadequate, we have to briefly review Marx’s basic theory of money. As commodity production develops, a special commodity that serves as the universal equivalent emerges in whose use value the values of all other commodities are measured. The value of all commodities is measured in terms of some unit of the use value of the universal commodity—the money commodity. Marx emphasizes that before a material use value like gold bullion can function as the universal measure of value of commodities in terms of its own use value, it must first of all be a commodity in its own right. Under capitalism—fully developed commodity production—the money commodity must be produced by industrial capitalists whose only aim, as with all other capitalists, is to maximize their profit.

It is quite impossible to carry around a quantum of pure value—abstract human labor—in your pocket, or for that matter store it at Fort Knox or in the vault underneath the Federal Reserve Bank of New York. But it is possible to carry in your pocket gold coins that represent independent exchange value. To be sure, all commodities also represent embodied abstract human labor. But only the money commodity represents embodied human labor that is directly social. In my country, there is an old labor song, “Solidarity Forever,” sung to the tune of “John Brown’s Body,” (5) which goes in some versions, “In our hands is placed a power greater than their hoarded gold.”

There is a profound economic truth in the lyrics of this grand old labor song. Under capitalism, only the labor that goes into the production of gold is directly social. But when the associated producers of the world have become the conscious masters of production, the labor embodied in all products will be directly social labor. Only then will the power of money and capital be banished forever!

The money commodity—from here on, I assume the money commodity is gold bullion—can be replaced in circulation by representatives or tokens. Token money dates back at least 2,500 years to Lydia, which is now part of Turkey, and possibility earlier in China. It arose through the coinage of precious metals. The minter basically certified that a certain amount of precious metal measured in terms of some unit of weight that was presented to the mint indeed had the weight and fineness of metal that it claimed to have.

Even full-weight gold coins, however, become representatives of gold bullion in circulation. For example, if a gold coin turns over 10 times a year, it will represent during a year 10 times as much gold as it physically contains. If it turns over 300 times in a year, it will represent 300 times as much bullion as it physically contains in the course of the year.

As long as the monetary tokens remain sufficiently scarce—relative to the metallic reserve fund—no matter how light or “clipped” they become in circulation, they can continue to circulate without losing their bullion value. Only if they are over-issued relative to the metallic reserve fund will they become depreciated. The degree of depreciation of a gold coin in circulation is measured by how much the market price of gold bullion in terms of the coin rises above the mint price.

It doesn’t matter what material the monetary token are made off

Monetary tokens do not have to retain any precious metal at all. Indeed, the monetary system works best when the currency contains no monetary metal, because the maximum amount of metal is then freed up to go into the reserve fund. In addition, the problems associated with coins becoming “light” in circulation or “clipped” are avoided. In the days when gold coins circulated, the government had to be careful to withdraw “light coins” from circulation.

From token money to modern fiat money

After the invention of paper—first in China—token money began to made not only of base metals but of paper. The difference between monetary tokens made of paper and tokens made of base metals is that it became possible to increase the quantity of the monetary tokens far more rapidly than before. This made possible for the first time runaway inflation, with prices in terms of the monetary tokens increasing at rates of five or more digits per year, which were impossible before.

Monetary policy had to be developed to avoid these disasters. Therefore, with the coming of paper money, governments made taxes payable in terms of paper money. Later, states went further and made state-issued paper money “legal tender” for all debts public and private. Paper money subject to such “forced circulation” is sometimes called “fiat money.” Therefore, token money made of non-money material such as paper—as opposed to coins made of actual money material—can act as a representative of actual money material in circulation only where the authority of the state that issues them reigns supreme.

Today, under the U.S. world empire, the authority of the U.S. state extends around the globe, which allows the U.S. dollar to act as a worldwide paper—token—currency even where the dollar is not officially legal tender. We will know that the U.S. world empire, whose end has been prematurely announced many times for those who wish it be gone, has truly ended when the U.S. paper dollar has ceased to be the world currency.

A third form of money, which is often wrongly confused with token money, emerges only with emergence of the modern credit system. This is called credit money. Credit money is a promissory note payable in some other form of money, either gold or state-issued legal-tender—fiat—paper money by one person to a second person. The second person can transfer the note to a third person and the third person can transfer it to fourth person, and so on. In the language of commercial law, this is called “negotiability.”

Credit money is therefore not a token, as Shaikh mistakenly calls it, but rather a legal contract in which one person promises to pay another person and that can be transferred to a third person. As a general rule, credit money is created by banks that make loans in the form of imaginary deposits. Today, the form of credit money that makes up the great bulk of the currency in advanced capitalist countries is the checkable bank deposits that can be transferred to another person either by old-fashioned checks or by electronic means.

The laws that govern credit money are quite different from the laws that govern token money. For example, if token paper fiat money is over-issued, the result is the depreciation of all the pieces of paper money—the price of gold bullion in terms of the paper money rises—and sooner or later the prices of all or at least most commodities in terms of the paper money rise as well. However, if too much credit money is issued relative to the money that the credit money is payable in on the demand of the bearer, the result is a run on the banks, a freezing up of credit, and a fall of prices in terms of the currency that backs up the credit money.

Faced with a threatened collapse of the commercial banking system due to an over-issue of credit money by the commercial banking system, today’s governments will convert a looming deflationary crisis into an inflationary crisis by greatly expanding the legal-tender—fiat—money that backs up the credit money created by the commercial banking system. This maneuver ends in the depreciation of the fiat money, which leads to inflation.

From simple circulation to capital

The formula for the simple circulation of commodities is C—M—C. The two C’s represent different use values of identical exchange value. Here the aim is not to accumulate wealth but to exchange one form of wealth in terms of use value for wealth of a different use value—for example, a pair of shoes for five shirts.

Quite different is the general formula of capital M—C—M’. Here, we have two M’s and one C. In the formula for simple circulation, use values predominate and exchange value appears merely has a means to an end. In the general formula for capital, in contrast, the aim is to increase wealth as such, as opposed to acquiring some use value for either productive or unproductive consumption. In common language, it is to “make money,” though only the industrial capitalists who make the money commodity are literally making money (material).

We cannot grasp the nature of capital without understanding the nature of both the commodity relationship of production and the money relationship of capital, neither of which are by themselves capital. If we don’t understand the nature of commodities and money, we will sooner or later make grave errors when we get to analyzing capital and capitalist production.

The formula M—C—M’ is the general formula for capital as well as the particular formula for merchant capital, but it is not the specific formula for capitalist production. This formula is M—C…P…C’—M’. Profit, or rather profit plus ground rent, is surplus value realized in money form. It is the difference between M’ at the end and M at the beginning. Profit, like prices, must be measured in terms of the use value of the money commodity. The same is true of the fractions that the total realized surplus value is divided into—profit and rent. It is also true of the sub-fractions that profit is divided into—profit of enterprise and interest.

Money wages (not real wages) are also measured in terms of money. Secondary incomes such has the salaries of non-productive of surplus value workers, tax revenues, and so on that exist under the capitalist mode of production must also be measured in terms of the use value of the money commodity. Money is also used to measure the price of politicians for services rendered.

Recently, former President Barack Obama received considerable criticism from Bernie Sanders and many others for accepting a fee of $400,000 to address a Wall Street bank on the subject of health care. So the speeches of former U.S. presidents are measured in terms of the money commodity. With the dollar price of gold around $1,200 per troy ounce, we can divide $400,000 by $1,200 to obtain 333.33 troy ounces of gold. So it seems that the former president, or rather the price of his speech, tips the scale at 333.33 troy ounces of gold bullion as far as the Wall Street bankers are concerned.

So again, the price of politicians—and their speeches—is measured in terms of the use value of the money commodity. Those progressives engaged in the unenviable task of trying to return the U.S. Democratic Party to its purely imagined past as a party of the working class are only too well aware of this function of money!

Some insights of Shaikh

Despite his grave errors, Shaikh being Shaikh provides interesting insights that put him head and shoulders above almost all other contemporary Marxists even in this the weakest part of his work. Shaikh noticed in analyzing “long waves” of periods of accelerated growth followed by periods of slower growth that before 1940 slow-growth periods were accompanied by falling commodity prices while periods of accelerated growth were accompanied by rising commodity prices. But after 1940, prices rose virtually without interruption. After 1940, with a few trifling exceptions, he observed only changes in the rate of price increases not necessarily associated with periods of slower and faster rates of growth.

Here Shaikh comes to the brink of the correct solution to the problem of “modern money.” He notes that if you calculate prices in gold as opposed to paper currencies that patterns of rising prices accompanying periods of accelerated growth and falling prices accompanying periods of slower growth reappear. Throughout this blog, I have borrowed from Shaikh the term “direct prices,” meaning prices where the values of the commodity being measured and the quantity of gold doing the measuring are identical.

Shaikh’s terminology is preferable to that of Marx because Marx assumed that his readers had the same understanding of value and forms of value that he had acquired but only after many years of intense mental labor. However, as the case of Shaikh himself shows, that assumption has proven up to today to be generally unjustified, though this will hopefully change as the 21st century progresses.

Direct prices remind us—if not necessarily Shaikh—that prices refer to different quantities of the money commodity—weights of gold bullion—while value refers to a certain quantity of abstract human labor measured in terms of time.

Shaikh has invented another term that I may use in the future—”golden price.” The concept of “golden price” enables us to further clarify the difference between money’s role as a measure of value—its basic function—from its secondary role as a standard of price.

From golden price to price

Gold bullion as a material use value is measured in terms of some unit of weight such as grams, troy ounces, metric tons, and so forth. Golden prices, to use Shaikh’s terminology, therefore are expressed in terms of a standard system of weights and measures. For example, we may use traditional “English” units or metric units. Historically, prices are first expressed in terms of units of the money commodity using the appropriate unit of measurement for the use value of the commodity that serves as universal equivalent. The name of some monetary units still preserve their origins in standard units of weights and measures.

The most well-known example is the British pound sterling. At one time, a British pound was defined as an actual pound of silver bullion. But as was the case with the British currency, names became divorced from their origins as specific weights of precious metal. By the 19th century, the British pound came to represent not a pound of sterling silver but the gold bullion contained in a British sovereign, a gold coin still minted by the British government containing 0.2354 ounces (7.322 grams) of gold. This quantity of gold still legally defines the “gold pound.”

The difference between the market price of gold expressed in paper pounds and the mint price of gold measured in terms of sovereigns—gold pounds—measures the dramatic depreciation of the British pound sterling since August 1914. Before 1914, as a creditor of the Bank of England if you had a five-pound note—the smallest denomination issued by the Bank of England—you could go down to the nearest Bank of England branch and cash in your banknote for five full-weight gold sovereigns. These sovereigns could easily be melted down into bullion and often were in international trade to be re-coined into, for example, gold dollar coins—which also had a fixed weight of gold bullion. The gold dollars could also be melted down and re-coined back into sovereigns or into some other gold coin of a specific weight.

Shaikh’s “golden prices” are expressed in standard units of weights and measures. We can use “golden prices” if we want to, but standard units of weights are poorly designed to function as prices. Imagine quoting the price of your morning cup of coffee in grams, not to speak of ounces, of gold. For this reason, a special measure (weights of gold or whatever precious metal served as the money commodity) grew up that was better suited for providing a convenient system of pricing. Since it was not very convenient to express commodity prices in terms of grams, troy ounces, metric tons, English pounds, and so forth of gold, pounds, dollars, marks, francs and so on came to be used in their place.

These currency units are designed to be easily divided into fractions that represent tiny amounts of gold bullion that would be extremely clumsy to express in standard units of weight. Examples in the U.S. are the familiar penny (1/100 of a dollar), nickel (1/20th of a dollar), quarter (a quarter of a dollar), and half dollar. For example, a typical commodity price expressed in dollars might be $39.99 for a pair of shoes.

Shaikh’s concept of “golden prices” therefore enables us to specifically define mint prices as well as “official” prices of gold. The mint—or under gold bullion standards the government-defined price of bullion–is therefore nothing else but the rate of conversion between the standard system of weights and measure and the special unit of weights and measures that is used for purposes of pricing.

The system of weights and measures that is used for pricing is also used for profits, rents, interest rates, profits of enterprise, and the total wage bill. We can measure total corporate profits in a given year in terms of metric tons of gold if we want to, but it is more convenient to measure them in pounds, dollars, marks, francs, and so on. We also use this special measure of weights to measure honor, the price of politicians, and so on.

The same is true of the most important variable in the capitalist economy, the rate of profit. The rate of profit is a ratio that divides total profit by the total advanced capital. This division cannot be carried out unless both profit and capital are defined in terms of the same physical substance. In making this calculation, we cannot use the use values that constitute surplus value and divide it by the use values that constitute capital. The use values are qualitatively different and therefore quantitatively incomparable.

We can, however, use a common social substance that is qualitatively identical—value, abstract human labor measured in terms of time. This is not only useful but indeed necessary, for example in analyzing the long-term tendency of the (falling) rate of profit, where, as I have explained elsewhere, we assume that all value is realized. We can divide one quantity of abstract human labor—surplus labor (value) that is performed without payment by the working class—with another quantity of abstract human labor, capital. But the capitalists cannot do this if only because they are engaged in private production for their own account and therefore have no way to determine whether the labor that has been expended is socially necessary or not.

So instead they must use exchange value, or in its developed form it must take the form of monetary value that every person is familiar with. And money ultimately must be a commodity whose use value is measured in terms of its appropriate unit of measure. In the case of the precious metals such as gold, this is some unit of weight.

When we calculate the rate of profit, we do not divide the actual use values of the commodities that make up surplus value by the use values of the commodities that make up capital. Rather, we divide the gold represented by the prices of the commodities that represent surplus value were actually sold at by the monetary value of commodities that make up capital. Therefore, the rate of profit is measured by dividing one quantity of gold bullion measured in terms of some unit of weight—profit—divided by another mass of gold bullion measured by the same unit of measure.

In calculating the rate of profit, we divide one imaginary quantity of gold bullion representing realized surplus value by another imaginary quantity of gold bullion representing capital. If we don’t grasp this, though we might understand that the rate of profit is the crucial variable that regulates the capitalist system, what the rate of profit actually is slips through our fingers.

This is self evident as long as the gold standard lasts. But what about after the gold standard? Here Shaikh becomes confused and makes his big mistake.

Shaikh’s big mistake on the theory of money

Shaikh writes: “Second, Marx’s published writings are explicitly restricted to the analysis of monetary systems in which a money commodity (say gold) is the effective medium of pricing.” But, he asks, “What happens when a money commodity no longer serves as direct or indirect medium of pricing?” This is where Shaikh makes a radically wrong turn that will have grave consequences for much of the rest of his analysis in “Capitalism.” The correct answer to Shaikh’s question is that what he is asking is impossible and his question is therefore meaningless. It would be like asking how we can explain the orbits of the planets of the solar system once gravity ceases to operate.

Shaikh fails to understand this, and it is at this point that his analysis starts to go rapidly downhill. “And,” Shaikh claims, “[Marx’s] elliptical references to those forms of state-issued paper money which do not obey the laws of commodity money remain mysterious to this day.” Shakih does not provide a single quote to support his contention that Marx ever made references to a form of money that does not depend on “commodity money.” The only mystery here is exactly what passages Shaikh is referring to.

In a footnote, Shaikh comes close to admitting that these “mysterious passages” are non-existent: “Most authors conclude that even Marx’s theory of fiat money is functionally tied to a money commodity. … ” But let’s take up Shaikh’s analysis before he makes his great blunder.

Shaikh observes that the vast increase in the rate of growth and quantity of money material following the gold discoveries in California in 1848 and Australia in 1851 did not raise prices nearly as much as the quantity theory of money would have predicted. This theory is based on the assumption that the natural state of the capitalist economy is “full employment,” at least of the physical means of production if not of labor power. This was Ricardo’s position. Later on, the neoclassical marginalists added the full employment of the workers (“labor”) as well. The quantity theory of money, therefore, rests on the claim that the limits of capitalist production are the physical limits of production in general. In this way, capitalist production is made to appear as the absolute final form of production never to be superseded.

The supporters of the quantity theory of money from Ricardo to Milton Friedman have assumed that industrial output can only be increased gradually through the creation of new means of production—and growth of the working class population—since the existing means of production—including labor (power), the neoclassicals add—are already fully employed.

A sudden increase in the quantity of money or in the rate of the growth of the quantity of money, such as occurred 1848-1851, will cause monetarily effective demand at current prices to increase faster than the production of commodities can increase. The quantity theory of money theorists reason that any increase in growth of demand at current prices beyond the very limited ability of production to increase in the short run means that the industrial capitalists will not be able to meet demand at existing prices. The gap between the supply of commodities including labor (power) and the demand for commodities at current prices will be corrected by a rise in prices and wages. This is all perfectly consistent with Say’s so-called law.

The gold discoveries of 1848-1851, therefore, put the quantity theory of money to a test. What happened? Referring to the great historian of prices, Thomas Tooke, Shaikh writes: Tooke finds “that in the wake of discovery of gold in California in the late 1840’s, the global price level rose much less than the global quantity of money, contrary to the what the Quantity Theory of Money predicted. One reason for this is that output of commodities increased substantially.”

These facts not only blow up the quantity theory of money but show that a lack of demand was holding down the growth of industrial output before the gold discoveries of 1848-1851. The industrial capitalists in the pre-1848 period were physically capable of developing industrial production at a much faster rate than they were doing but could not as capitalists do so because when they did markets became flooded. Not all the commodities could be sold at the existing prices so that profit measured in terms of money—weights of gold bullion—disappeared. And production that is not profitable will not be carried out, at least for very long, under the capitalist mode of production. The result for the workers is increased unemployment and poverty.

However, when the gold discoveries of 1848 and 1851 accelerated the growth of the market, the limits for that demand—a specific limitation put on production by capitalist relations of production—was partially removed. The result as observed by Thomas Tooke was that the rate of growth in production was considerably accelerated. Whole new industries arose not only in Britain but in other developing capitalist countries of the epoch, including France, the German lands, and the United States.

The consequent increased demand for labor power reduced poverty among the workers by allowing wages, not only money wages measured in terms of gold bullion but real wages measured in terms of the use values of the commodities that workers consumed, to rise. These developments dashed hopes of an early socialist revolution Marx and Engels had entertained in their youth.

Instead, the years immediately following the publication of the “Communist Manifesto” turned out not to be the opening of the socialist revolution but a period of greatly accelerated capitalist development. Therefore, far from being “neutral” as far as the production of real wealth—measured in terms of use values—is concerned, affecting only the nominal level of prices and wages as supporters of the quantity of theory of money claim, an increase (or a slowdown) in the rate of growth of the quantity of money can dramatically affect the rate of economic growth and can indeed completely change political prospects.

Shaikh’s fall to earth

What would be the consequences if “pure fiat money” were actually possible? Wouldn’t it allow the state to eliminate capitalist crises of overproduction? Shaikh answers this question in the affirmative. He writes, “The beauty of fiat money and the modern credit system is that they fuel a growth in aggregate demand for commodities far in excess of any possible growth in the potential supply.”

Here Shaikh, who often soars above the crowd of Marxist—and other—economists, falls to earth. We are back to the world of Say’s Law, where under capitalism supply creates its own demand and the limits of production are the physical ability to produce. As Marx somewhere remarked of Ricardo in a similar context, this is quite unworthy of Shaikh!

Next: Shaikh’s theory of profit, money, demand and crises.


1 Marx coined the term “classical economists,” who he contrasted with the vulgar economists. According to Marx, the classical school began with the early French economist Boisguillebert (1646-1714) and English economist William Petty (1623-1687). Classical economics ends with the French Jean Charles Léonard de Sismondi (1773-1842) and the English economist David Ricardo (1772-1823).

According to Marx, the classical economists differed from the vulgar economists in that they went below the surface and saw the capitalist economy as a system where producers are engaged in a complex division of labor and exchange of the products of their labors. In contrast, the vulgar economists confined themselves to describing appearances of the capitalist economy. For example, they described the setting of prices and the equalization of the rates of profit through competition.

As used by Marx, what unites all the economists is that they see capitalism as the final or absolute form of human society. In the early 19th century, an opposition developed to the economists called the “socialists.” The socialists, in contrast to the economists, envisioned a society beyond capitalism and attempted to design various forms of society that they believed should replace capitalism. A subset of the socialists were the communists—for example, the Englishman Robert Owen, who proposed the abolition of private property in the means of production.

According to Marx, by the 1830s onward, the further development of the classical school became impossible. This was due to the growing struggle between the capitalist ruling class on one side and the working class on the other. Beyond this date, the main task of the economists was to concentrate on covering up the real origin of surplus value in the unpaid labor of the working class. This was the death of political economy as a science. At best, bourgeois economists—Thomas Tooke would be an example—could carry out valuable empirical or statistical studies.

Marx viewed himself, therefore, not as an economist but a socialist, more specifically a communist. He differed from the earlier socialists, who he called utopian socialists insomuch as they attempted to design an ideal society to replace capitalism. Instead, basing himself on the work of the classical economists and going beyond them, Marx showed that the very development of capitalism itself was making a transition to a higher form of society not only possible but absolutely necessary—a viewpoint Marx called “scientific socialism.”

Keynes borrowed the term “classical economists” from Marx and like Marx he was a keen student of the history of economic thought. But Keynes changed the meaning of “classical economists.” He included not only the classical economists defined by Marx but also the founders of the marginalist school including his own teacher Alfred Marshal. In Marx’s sense of the term, marginalism with its ever more elaborate mathematical scaffolding is simply the ultimate form of vulgar economics. So Keynes’s definition of “classical economists” is radically different than Marx’s in terms of social content.

Shaikh uses “classical economists” in a third way. His definition includes the economists Marx called classical economists, Marx himself—who would have strongly objected to be considered an “economist” at all—post-Marxist Marxists, and the modern neo-Ricardian school, whose outstanding figure is the Italian-British economist Piero Sraffa (1898-1983). Unlike Marx, who saw classical economics ending in the 1830s due to the growing struggle between the capitalist class and the working class, Shaikh sees classical economics as a school in economics that continues until today. While both Marx, and in a quite different way Keynes, viewed themselves as going beyond what they considered to be “classical economics,” Shaikh views himself as working within a continuing classical school of economics. (back)

2 Lenin famously remarked somewhere after studying Hegel’s “Logic” that nobody had understood Marx! For example, if the three most “Hegelian” chapters of “Capital” were indeed widely mastered, the so-called transformation problem used by generations of Marx critics to “refute Marx’s labor theory of value” would have been declared fully solved decades ago.  (back)

3 Besides the obvious role a correct theory of money plays in crisis theory, the theory of money plays an important role in explaining why comparative advantage as opposed to absolute advantage cannot prevail in international trade under the capitalist mode of production. Marx’s theory of value and money explain that we live in a “mercantilist” world, in which among other things wars are inevitable among capitalist nations.

Shaikh has done excellent work on comparative advantage, and I am very much in debt to him for my own arguments. But his arguments would be much clearer if he had fully understood Marx’s theory of value and exchange value. Unfortunately, he doesn’t. So the first three chapters of “Capital” involves a lot more than simple “Hegelizing” on Marx’s part but are necessary to understand very real “practical” economic problems such as the laws that govern world trade under capitalism and ultimately political conflicts and wars that inevitably flow out of them. (back)

4 I remember back in 1968 when I was a very young person who knew almost nothing about economics observing the alarm that the huge demand for gold that was quickly exhausting the supply of gold bars stored in Fort Knox was causing in the media. How could the depletion of bars of metal sitting in a vault that played no role in the actual production of wealth be a problem at all?. If it was oil or food that was being exhausted, the cause of the alarm would have been self-evident, but gold bars that were merely gathering dust somewhere? It was a good question and finally many decades later helped lead to this blog. (back)

5 John Brown was a radical white abolitionist who attempted to organize a slave rebellion and was hanged by the pro-slavery government of what was then the state of Virginia. The song “John Brown’s Body” was sung by Union soldiers as they marched into battle against the pro-slavery rebels. A watered down version of the stirring anti-slavery hymn was adopted by the Union government in the form of the “Battle Hymn of the Republic.”

Today, in this form it is used by the U.S. military as a nationalist song to whip up chauvinism and blind obedience to being sent off to fight in wars against oppressed peoples abroad. However, the International Workers of the World adopted the same hymn but with words describing the struggle of wage workers against wage slavery under the title “Solidarity Forever.” Later generations of Unionists expanded the song, though eventually the AFL-CIO removed the most radical verses in their version that clearly foresee the overthrow of capitalism by the wage workers. (back)

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