Three Books on Marxist Political Economy (Pt 8)

Engels wrote in “Socialism Utopian and Scientific”: “We have seen that the ever-increasing perfectibility of modern machinery is, by the anarchy of social production, turned into a compulsory law that forces the individual industrial capitalist always to improve his machinery, always to increase its productive force. The bare possibility of extending the field of production is transformed for him into a similarly compulsory law. The enormous expansive force of modern industry, compared with which that of gases is mere child’s play, appears to us now as a necessity for expansion, both qualitative and quantitative, that laughs at all resistance. Such resistance is offered by consumption, by sales, by the markets for the products of modern industry. But the capacity for extension, extensive and intensive, of the markets is primarily governed by quite different laws that work much less energetically. The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real solution so long as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another ‘vicious circle.’”

This famous quote was written when Marx was still alive. It passed his muster. Indeed, throughout their long partnership, the founders of scientific socialism described cyclical capitalist crises as crises of the general relative overproduction of commodities. However, most modern Marxist economists reject this idea. Among them is Anwar Shaikh.

Shaikh, in contrast to Marx and Engels, believes that the limit “modern industry” runs into is not the market but the supply of labor power. Marx and Engels believed that securing an adequate quantity of “free labor power” was crucial to the establishment of the capitalist mode of production. This was the big problem early capitalists faced, which was solved by separating the producers, often through force and violence, from their means of production. But once capitalism was firmly established, it has been the limit imposed by the limited ability of the market to grow relative to production that capitalism regularly runs up against.

Shaikh’s theory of the ‘natural rate of unemployment’

When the rate of unemployment falls below what Shaikh calls the “natural rate of unemployment,” the rate of surplus value—in real terms, surplus product—declines. (1) As capitalist industry shifts to producing more means of consumption for the workers previously employed, according to Shaikh, the production of means of production and means of subsistence previously used to expand the scale of production falls. This causes economic growth to slow.

In addition, the capitalists react to rising real wages by accelerating the replacement of living labor by machinery. The result is that not only does the fund, defined in physical terms, used to expand the scale of production shrink, but there is a shift within this fund from the production of means of subsistence used to hire additional workers to machinery. The number of new jobs created cannot keep up with growth in the (working class) population.

The rising rate of unemployment—relative to the natural rate—causes the rate of unemployment to rise towards and then above the natural rate. The fund used to expand production, defined in physical terms, will again rise as industry is freed up from producing means of subsistence for workers already employed and back toward producing means of subsistence to hire additional workers, or expand the hours of workers already employed, as well as produce additional machinery that will be used to expand the scale of production. The rate of economic growth rises.

With labor power once again relatively cheap compared to new machinery, the capitalists will slow the rate at which they replace living labor with machinery. Unemployment starts to fall due to the combined effects of accelerated economic growth and a slower rate of growth of labor productivity. Eventually, unemployment again falls below the natural rate of unemployment and the cycle repeats.

Over time, in a turbulent movement, unemployment fluctuates around the axis of the natural rate of unemployment, just like market prices fluctuate around the prices of production. At quasi-regular intervals, capitalism fluctuates between “long waves of prosperity” characterized by unemployment below the natural rate of unemployment, and “great depressions” with unemployment holding above the natural rate. Shaikh considers the “Long Depression” of 1873-1896, the 1929-1940 “Great Depression,” the stagflation of the 1970s and early 1980s, and the period beginning with the onset of the Great Recession in 2007, which he expects to end around 2018, to be examples of “great depressions” in the history of capitalist production.

Though I do not accept Shakih’s view that there is a natural rate of unemployment akin to the natural prices of classical political economy and the prices of production of Marx, there are important insights within this analysis. When the productivity of labor grows more rapidly than is usually the case under capitalism, the rate unemployment will tend to rise. The result will be that the rate of surplus value rises putting downward pressure on wages defined in terms of value, as well as money wages and real wages. Labor power becomes in terms of values and prices both absolutely and relatively cheaper compared to machinery.

The cheapening of labor power will increase the demand for labor power, causing unemployment to fall. Therefore, under the capitalist mode of production the rate of growth of the productivity of labor, which tends to express itself as an increase in the organic composition of capital, is not merely a function of the growing power of technology provided by the progress of science and engineering. The rate of growth in the productivity of labor and the organic composition of capital is actually regulated by the rate of surplus value. All other things remaining equal, a high rate of surplus value means a slowdown in the rate of the growth of productivity while a low rate of surplus value will increase the rate of growth of labor productivity.

Capitalist economists claim they are mystified by the slowdown in the rate of growth of the productivity of labor during the 1970s “stagflation” and again since the Great Recession. But there should be no mystery here even for economists trained in the various marginalist schools of economics. The 1970s saw a drop in real wages and in terms of value. The economic crises and inflation of this period increased the rate of surplus value, thereby slowing the increase in the growth of labor productivity.

Modern capitalist economists often point out that the key to the economic and ultimately the social progress of society is the increase in the productivity of labor. In this respect, they are in agreement with Marx. Indeed, a key tenet of historical materialism is that the succession of differing modes of production is ultimately determined by their ability to increase the productivity of labor. Therefore, rising labor productivity is the key to human progress.

However, if the economists were really interested in increasing the rate of growth of labor productivity and with it human progress in general, they would advocate passing laws that strengthen the workers in their everyday struggles with the capitalists over the rate of surplus value.

They should favor all laws that favor unionization and oppose all laws designed to strengthen the hands of the employers. In the United States, the economics profession should launch a struggle for the repeal of the Taft-Hartley law. This would wipe “right to work for less” laws, which have been spreading from state to state, off the books. The economics profession should be virtually united not only in the purely negative struggle against the Republican-Trump attempt to “repeal Obamacare” but in a positive struggle for the introduction of a single-payer health insurance system on a federal level. Adopting this system would finally bring the U.S. up to world standards by recognizing health care as a right and not a commodity that can only be purchased by those who have sufficient money.

In the United States, a federal-level single-payer system would deprive the bosses of one their most important weapons in their daily struggle to increase the rate of surplus value by ending their ability to terminate the access to health care of workers and their families. Such a measure by making labor power relatively more expensive to the capitalists relative to machinery would give the capitalists a real incentive to economize on the use of labor power. For the same reason, the economics profession should also be in the vanguard of the $15-an-hour minimum wage at both state and federal levels.

These measures would give a massive boost to the rate of growth of labor productivity of U.S. capitalist industry. But with relatively few exceptions, the economics profession is dominated by the paid and bought representatives of capital and therefore do not support any of the above measures. These economists are not really interested in increasing the rate of growth of the productivity of human labor and of human progress in general. Instead, they only support policies that increase the rate of profit that accrues to the owners of capital, even though such policies depress the rate of growth of labor productivity.

However, as important as Shaikh’s observations about the relationship between the rate of exploitation of living labor and the rate of growth of productivity is, they do not in and of themselves constitute an adequate theory of cyclical capitalist crises. Instead, they help to explain the role that the periodic capitalist crises play in maintaining the system of capitalist wage slavery over the long run.

In “Capitalism,” influenced by the Russian economist Nikolai Kondratiev (1892-1938) and Belgium Marxist economist Ernest Mandel (1923-1995), Shaikh concentrates on “long cycles”—called by Mandel “long waves”—that span a number of industrial cycles.

Shaikh has little to say about the shorter term crises—or recessions—that occur during both “long waves of prosperity” and “great depressions.” Perhaps he believes the shorter-term recessions and booms are a consequence of the “turbulent movement” through which the rate of unemployment fluctuates around the “natural rate of unemployment.” However, the logic of Shaikh’s analysis implies that cyclical recessions and booms are caused by the same factors that cause “great depressions” and “long waves of prosperity.” A “great depression” in Shaikh’s sense of the term is simply a series of recessions that are either more severe or longer than recessions during “long waves of prosperity.”

Are recessions caused by a lack of markets or a lack of labor power?

The question whether cyclical recessions are caused by a lack of markets or a lack of labor power has again come to the fore in practical politics due to the advanced age of the current industrial cycle. This cycle, which began in 2007 when the Great Recession began, is now almost 10 years old. During this industrial cycle, Donald Trump—and similar right-wing demagogues in other imperialist countries (2)—have been able to gain a certain following among the white working class by promising through economic nationalism to bring back good-paying industrial jobs. If an ordinary recession occurs over the next three or four years, even if it is much milder than the Great Recession, Trump’s promise will be all the more exposed as the empty rhetoric that it is. Such a recession will help clarify things even in the eyes of the most backward sectors of the U.S. white working class who voted for him. This makes it all the more important for Marxists to have a correct crisis theory.

The bosses’ press has recently claimed for the first time since the Great Recession that the U.S. economy is at “full employment” and is facing a “labor shortage.” If this indeed is true, industrial capitalists are having growing difficulty converting M—money capital—into labor power, or real variable capital. If we believe the capitalist media, capitalist expanded reproduction is threatening to break down at M—LP.

If such a shortage of labor power is actually developing in the U.S. and throughout the capitalist world, the competition for scarce labor power at current wages should be forcing the bosses to raise wages as competition among them for labor power increases while competition for the increasingly plentiful supply of jobs among the sellers of labor should be decreasing.

These claims raise two question: First, is the U.S. and world capitalism really facing a “labor shortage,” (3) and second, could the workers help stave off the threatening recession by practicing wage restraint? We saw last month that Shaikh’s theory of alternating long waves of prosperity and great depressions holds that if workers are willing to, or are forced to, accept lower real wages, the natural rate, and in the long run the actual rate, of unemployment will fall.

Is the U.S. experiencing a labor shortage today?

If the U.S. economy has reached “full employment,” we would see a growing competition among bosses for labor power. This would put the sellers of labor power—the workers—in the driver’s seat. The symptom would be a rapid rise in money wages throughout the country. On July 5, the Washington Post published an article by Ana Swanson describing the discussions within the leadership of the U.S. Federal Reserve System. While the Fed is officially predicting that the growth rate of the U.S. economy is about to accelerate, Swanson reported that some Fed leaders have “pointed to other measures of the economy that appeared less encouraging—including stubbornly low wage growth” [emphasis added—SW]. The labor market doesn’t lie. There is no sign of the alleged “full employment” or labor shortage in the U.S. economy.

Continued “low wage growth” has not prevented the corporate media from publishing an increasing number of articles to buttress their claim the U.S. is facing the prospect of a serious labor shortage. Various corporate organs have run interviews with various bosses claiming that their operations are being hindered by a lack of “labor.” But when you read carefully, the complaints usually involve shortages of skilled labor and then only in certain industries and areas of the economy, such as computer engineers in Silicon Valley.

Such periodic shortages of skilled labor, which appear in the late stages of the industrial cycle, are absolutely necessary for capitalism. If there weren’t periodic shortages of skilled (complex) labor, the wages of skilled workers would fall to the level of unskilled (simple) labor power. The supply of skilled labor power would progressively dry up. To take an extreme example, how many young people would spend at great monetary expense years studying computer science and engineering if the high-tech firms paid their engineers wages that were no higher than those offered by the local MacDonalds.

The same argument holds for wages of more traditional “blue collar” skilled workers like carpenters, machinists, plumbers, and welders. The demand for skilled labor creates the supply of skilled labor out of the raw material of unskilled, simple labor. A shortage of skilled labor, therefore, is not the same thing as a general shortage of labor.

Faced with a shortage of skilled labor power—but not a general shortage of unskilled—simple—labor power, capitalists react in two ways: They can replace the skilled jobs—where technically possible—with machines and unskilled labor, or they can train some of the unskilled workers to do skilled work.

Traditionally, many workers in the auto industry began their careers as unskilled workers on the line where youthful strength and endurance is what is needed. After a number of years “on the line,” many auto workers would get the opportunity to learn a skilled trade where training and experience are needed as opposed to brute strength and endurance. They would then spend the later part of their careers
as unionized auto workers performing these highly skilled but physically far less demanding and better-paying jobs. Here we see that unskilled labor is indeed the raw material out of which skilled labor is created.

There is also a shortage of another type of labor, which has been affecting some U.S. industrial capitalists, especially capitalist farmers and to some extent building contractors. U.S. capitalist farmers depend heavily on seasonal labor at harvest time. This is extremely hard labor, which often has to be performed in searing heat, and few native-born U.S. workers can keep up the pace the bosses have come to expect. Instead, capitalist farmers depend on workers from “south of border,” who are more accustomed to this very hard labor from an early age and have on average a far lower standard of living than U.S.-born workers.

However, beginning with Obama’s deportation campaign but now intensified by the racist Trump administration, many capitalist farmers have complained about labor shortages. The way to overcome this particular “labor shortage” is a thorough repudiation of Obama’s deportation campaign and Trump’s racism beginning with the scrapping of Trump’s plans to build a border wall on the U.S.-Mexico border. No recession is needed for this purpose.

Other industrial capitalists have claimed that they have many “positions” available that they cannot fill because young Americans lack “good work habits” and are “incapable of following instructions.” No doubt, years of mass unemployment where young people have either faced total idleness or been forced into illegal work like selling drugs or at best sporadic employment at low wages have undermined “good works habits” among the young—and not so young.

If this is really as big a problem—for the capitalists—as the bosses claim, they should in their own profit interest be demanding the immediate firing of Trump’s anti-public education, pro-private school Secretary of Education Betsy DeVos and the general repudiation and immediate halting of the Trump administration’s campaign against public education. Public schools were established in the first place to prepare children for their future roles as surplus-value producers.

Why is the Federal Reserve System raising interest rates?

But if the U.S. economy, not to speak of the world economy, is nowhere near “full employment,” how is the Fed justifying its move to raise interest rates, which
historical experience shows virtually always ends with a recession? Despite all the evidence to the contrary—including the failure of wage increases to accelerate—the Fed leaders have joined the chorus of the media and many professional economists claiming that the U.S. economy is “at or near full employment.” Unless we take action now, the Fed leaders claim, “we”—the capitalists—will experience serious labor shortages that will lead to inflationary increases in money wages. Taking a cue from Keynes, the Fed chiefs claim that higher money wages will set off a general inflation of prices.

If this happens, the Fed leaders claim, they will then have no choice but to rapidly raise interest rates to head off disaster. The Fed is justifying its interest-rate-hiking policy by appealing to the so-called Phillips curve, named after New Zealand economist William Phillips (1914-1975).

The Phillips curve is based on Keynes’s claim that it is the level of money wages that determine the general price level. Phillips started with the correct observation that when unemployment falls below a certain level, money wages rise. He then shifted to the false claim that money wages determine the prices of commodities. Fed chief Janet Yellen and other supporters of the Phillips curve draw the conclusion that once unemployment falls too low—called “over-employment” by the economists—the resulting “wage-price spiral” gets out of control forcing the central bank to raise interest rates rapidly, which triggers a recession.

In order to prevent such a “wage-price spiral,” Yellen and other Fed officials are now claiming they have no choice but to raise interest rates. But, they explain, since an inflationary wage-price spiral has not yet developed, they can raise interest rates “gradually” and therefore avoid a recession for many years to come.

But what would happen if Yellen explained the real reason the Fed has to tighten money now? Once again, they would have to explain that capitalist industry on a world scale—not necessarily in the U.S.—is overproducing, not relative to human needs but relative to the ability of the world market to expand. Yellen and Company could explain that this ridiculous problem could be solved by recognizing the social nature of production and abolish the private ownership of industry, which is the real cause of our periodic recessions and resulting mass unemployment. But our government and the Federal Reserve System, which is part of the government, is a class government that represents not the great majority of the people but the private owners of the means of production, who live off the unpaid labor of the non-owners of the means of production, who must sell their labor power to the employers.

So the best we—the Fed—can do is to recognize the need to raise interest rates now before industrial overproduction gets completely out of control. If we wait too long, we will simply be adding to the misery caused by adding a collapsing currency to the inevitable crisis of overproduction as happened in the 1970s. Then we would have both inflation and mass unemployment. If we take that course under current economic and political conditions, the whole dollar system will likely collapse bringing to an end the U.S. world empire, which has prevented a new war among the imperialist countries for the last 70 years.

No, they—the Fed—cannot give the real reasons why they are raising interest rates. Far better to prattle about the Phillips curve and labor shortages. In this way, they hope to dupe the people into continuing to tolerate capitalist rule and to a certain extent even fool themselves into thinking what they learned in their university studies is true after all. Capitalism, they learned, is really the best of all possible economic systems, both just and efficient. (4)

Shaikh rejects the Phillips curve

Shaikh rejects the Phillips curve and for very good reasons. Basing himself on the law of labor value, he realizes that money wages do not determine prices. In this, he follows the argument first developed by David Ricardo and later taken up by Karl Marx that thoroughly debunked this false notion.

Shaikh, however, unfortunately does accept the claim that periodic shortages of labor power develop that cause real wages to rise to the point at which expanded reproduction—economic growth—is disrupted. Again, Shaikh recognizes, in contrast with Phillips and Keynes, that rising money wages do not lead to inflation. Only if the government misdiagnoses a “great depression” actually caused by high real—not money—wages as one caused by a lack of demand and then uses “pure fiat money” to boost demand beyond the ability of the economy to physically increase production will inflation result.

However, Shaikh agrees with Phillips that a lack of labor power and not the conflict between private ownership and socialized production makes periodic crises inevitable under advanced capitalism. The correct theory of crises shows that it is the capitalist class as a class that is responsible for crises and not some subset of the capitalist class such as the Federal Reserve System, the politicians, the Wall Street bankers, George Soros, Goldman-Sachs, Jewish bankers, the Republican Party, the Clinton administration that deregulated the banks, the Bush administration, the Arab “oil sheiks,” etc, etc. All these people and entities do share responsibility for crises insomuch as they are part of the capitalist class and supporters of capitalism. And the actions of individual politicians and central bankers can worsen a capitalist crisis. Also, individual capitalists do sometimes benefit from crises, though others are ruined.

But a correct theory of crisis underlines the fact that the periodic return of capitalist crises and the social, political crises and wars that these crises lead to are caused by the capitalist class as a whole and not a few bad players. Grasping this—and it not that easy—is the difference between the various shades of populism—as well as pseudo-populism including its worst variant, fascism—and Marxist class consciousness.

In contrast, Shaikh’s theory of crisis implies that “moderation” by the trade unions can lower the natural rate of unemployment and either postpone or reduce the intensity of crises. It gives a certain amount of support to the claims of capitalist economists that it is trade unions that cause crises and not the capitalist class. Shaikh’s incorrect crisis theory, then, is a blunt tool, to say the least, in the struggle to end capitalist class rule.

So, in this simplified model, the market prices of all commodities that have prices of production are equal to their prices of production. In addition, capital invested in the industry that produces the money commodity will also realize equal profits in equal periods of time. However, the exchange value of the money commodity is the extended form of value—or, in plain language, the list of prices read backwards.

I do, however, believe with Shaikh that “great depressions,” including the Long Depression of 1873-1896 and those of the 1830s and 1840s as well as the “stagflationary” 1970s and the Great Recession of 2007-2009 and its aftermath, have common causes, though each episode has unique features as well.

The unique feature of the Great Depression was its severity as measured by levels of unemployment in various capitalist nations, especially in the United States and Germany, the decline in world trade and industrial production, as well as the extraordinary political consequences that it produced.

Shaikh’s theory cannot explain why this particular “great depression” was so much worse than the other “great depressions” that have marked the history of capitalism since the middle of the 19th century. For this reason, I use capital letters for the 1930s Great Depression and lower-case letters for the other episodes called by Shaikh “great depressions.”

Prices of production

My work and Shaikh’s have in common a great emphasis on prices of production, which are largely ignored by most other present-day Marxists. In one sense, the theory of crises developed in this blog could be called a “price of production” theory of capitalist development and crises. Like Shaikh, I put the constant search for individual profit, where the average rate of profit forms the lower boundary, at the center of the analysis. Can the extraordinary severity of the Great Depression be explained through the “price of production approach”? I believe it can. But first we need a precise definition of a situation where the market prices of commodities equal their prices of production.

First, I will assume as Marx often did a pure capitalist society where every person is either a capitalist or a worker. I will also assume that capitalist production has completely conquered all branches of production. Under these assumptions, all commodities have prices of production prices with two exceptions. The first is the money commodity, which due to its role as the commodity that in terms of its own use value measures the values and serves as the standard of price of all commodities. Therefore, the money commodity does not have a price of production. The other is the commodity labor power. It does not have a price of production because it is not produced by industrial capitalists. However, the commodities workers consume to reproduce their labor power do have prices of production.

In the history of capitalism, there has never been a single day where such a situation existed. However, in an extremely turbulent motion, market prices dominated by economic forces but also influenced by wars and revolutions are either rising toward or falling back from their prices of production. As a general rule, the more prices rise above or fall below their prices of production the more violent the movement in the opposite direction will be. This is true not only of individual commodity prices but of the sum total of commodity prices as well. In addition, the values of commodities, including the commodity that serves as money, and the relationship between the money commodity and other commodities are changing constantly. In the real world, market prices are fluctuating around prices of production that are themselves constantly in flux.

It is through these turbulent movements that the law of value rules real-world capitalism. We are very far indeed from a Walrasian world of “perfect competition,” or as Shaikh points out in “Capitalism,” the theories of “imperfect competition” that are constructed on top of “Walrasian” perfect competition.

Was the Great Depression caused by real wages that wiped out profits?

I decided this month to examine the causes of the Great Depression of the 1930s and postpone to next month the “great depression,” in Shaikh’s sense of the word, of the 1970s and early 1980s that combined inflation with high unemployment. Here, I want to explain how Shaikh’s theory of “great depressions” fails to explain the Great Depression of the 1930s. By examining this failure, we will better understand why he also fails to explain the “stagflation” of the 1970s and early 1980s.

Rate of profit below zero

While the rate and mass of profit show declines even during mild recessions, Shaikh notes that in the U.S. during the super-crisis of 1929-1933 the rate of profit dropped below zero. For a number of years, U.S. businesses ran at a net loss. Was the profit collapse caused by real wages being so high that net profits in real terms (6)—to use Shaikh’s incorrect language—actually fell below zero? In 1929 just before the crisis, the mass of profits was at all-time highs and the net rate of profit was certainly positive. Indeed, during the 1920s boom, unions were extremely weak—arguably uniquely so for a period of capitalist prosperity.

During that era, most U.S. workers lacked union protection. The more than adequate—from the standpoint of the capitalists—rate of profit and net profit was reflected in the booming stock market of those days. These profits were not being threatened by a resurgent union movement or soaring real wages created by a “labor shortage.” Indeed, the U.S. government had recently passed stiff anti-immigration laws, which would have been relaxed or repealed if the U.S. had been facing a serious labor shortage. This situation did not prevent the fall of the rate of profit and net rate of profit to below zero. But the profit collapse occurred only after unemployment rose to record levels. Unions, already weak in 1929, were weakened further as unemployment soared to all-time records.

What really caused the collapse in the rate of profit and the net rate of profit between the spring-summer of 1929, which saw the peak of the industrial cycle, and the winter of 1932-1933, the bottom of the industrial cycle, was a sudden collapse in the realization of the value of commodities in terms of money. In those days, the U.S. dollar was defined in terms of gold, and dollar bills were redeemable for full-weight dollar gold coins at one of the 12 Federal Reserve Banks or the U.S. Treasury. The only difference between dollar prices and golden prices was that the dollar was defined as 1/20.67 troy ounce of gold, while golden prices were measured in terms of standard units of troy ounces, grams, metric tons, and so on. Therefore, changes in dollar prices and golden prices were identical in both directions and in percentage terms. This remained true until March 1933, when Roosevelt suspended the convertibility of dollars into gold and began to devalue the dollar.

During the super-crisis, which quietly began in June 1929 when industrial production peaked and ended dramatically in March 1933 as Roosevelt took measures to halt a run on the banks, markets were so glutted that commodities could not be sold at prices anywhere near their prices of production, or in many case even at their break-even prices. Unlike in 1920-1921 when industry ran out of commodities before the market prices had fallen all the way back to their prices of production, the period of plunging prices lasted for three and a half years. This was followed by Roosevelt’s 40 percent devaluation of the U.S. dollar against gold, which lowered golden prices even more.

Unlike in 1920-1921, there was more than enough overproduction during the 1920s to allow the market prices of most commodities to fall below their prices of production. This is shown by the fact that world gold production soon reached record levels and then kept rising to far above post-World War I levels.

The profound Depression conditions that lingered through the 1930s also meant that huge amounts of money fell out of circulation, forming massive hoards of idle money capital, including in the U.S. banking system. This meant that the market for commodities at prevailing market prices had for a considerable period of time the ability to expand at a rate far greater than the growth in the quantity of gold in existence. While the gold shortage of the 1920s forecast the coming of the Depression, the “gold glut” of the 1930s forecast the coming of the post-World War II boom.

This and not Keynesian demand management policies is what led to the sudden major expansion of the market that was to dominate world capitalism for the first several decades after World War II. The effect was similar to the discovery of cheap new gold mines, though the preceding Great Depression was necessary in the absence of such a cheapening of gold in order to achieve this “happy result.”

One page 727 of “Capitalism,” Shaikh has an interesting graph of the movement of the golden prices of commodities prices between the years 1780 and 2010. It shows that the so far absolutely unique events that include the Great Depression did not begin with the Great Depression at all but with World War I. Using the mathematical method of Deviations from Cubic Time Trends, we see peaks and troughs in “golden prices.” The peak that preceded the peak of 1920 occurred in 1873—the year that the “long depression” of the late 19th century began. This peak measured just over 20 on the graph’s scale.

However, golden prices peak at over 100 in 1920, the highest in the entire period between 1780 and 2010. This implies that something very unusual happened around the year 1920 in the relationship between prices of production and market prices and that it can be analyzed mathematically. The unprecedented commodity glut of the early 1930s was actually caused by a combination of the normal cyclical forces that I have analyzed throughout this blog—which would have produced a normal crisis but not a super-crisis—combined with an abnormally low level of gold production that began in the 1910s and continued until the outbreak of the super-crisis. (7)

The fact that the market prices of most commodities were above their prices of production is shown by the fact that throughout the 1920s gold production remained well below the levels that prevailed on the eve of World War I. This means the rate of growth of the world gold hoard, which in the long run governs the ability of the market to expand at prevailing market prices, was far below the level that prevailed before World War I. This situation was corrected by the super-crisis itself.

A note on some economic and political history

Even on the eve of World War I, gold production had leveled out. This means the slowdown in the rate of growth of the world’s gold hoard had occurred even before “the guns of August” had slowed the rate even more sharply. One reason was that the gold mines discovered in Alaska and Canada were being depleted, which again raised the value of gold relative to most other commodities. This caused the prices of production that measure the value of commodities to fall. The second reason was that the market prices of commodities had risen. Indeed, between 1896 and 1913 when all major currencies were on the gold standard, market prices in terms of these currencies rose at a rate of about 3 percent a year. Since under the gold standard the movements of nominal currency prices and golden prices were identical, golden prices rose by the same amount. This was perhaps the fastest “peacetime” golden inflation in history.

Indeed, the great economic problem of the era attracting the attention of Marxists was not unemployment and depression, which was to dominate the attentions of the next generation. Rather, it was the high and rising cost of living. A lively debate raged among the economists of the Second International concerning to what extent the “high cost of living” was caused by the growing power of monopoly and to what extent it was caused by the devaluation of gold against commodities.

During the 1890s, the devaluation of gold raised the golden prices of production. The result was that market prices of commodities were in the 1890s well below their prices of production. The resulting sharp deviation of golden market prices, which were far too low relative to golden prices of production, was corrected by one of the most powerful economic booms—or technically, series of booms—in the history of capitalism. One of the consequences of the great boom with its “golden inflation” was that the uneven development between Britain, which had up to then been the most powerful industrial country in the world, against rapidly rising Germany and the USA was greatly intensified.

This set the stage for World War I. By the eve of the “Great War,” the combination of the depletion of the new gold mines combined with the “great golden inflation” itself meant that market prices were again rising above their now once again falling prices of production.

In 1913-1914, a worldwide recession broke out that engulfed the economies of all the major capitalist countries. It seemed that a “great depression,” to use Shaikh’s terminology, was beginning that would drive market prices back below their prices of production. But before a “great depression” could develop, the war economy came and with it a far greater rate of golden inflation than that of 1896-1913.

It is important to realize that this radical inflation, which approximately doubled the prices of commodities during the four years of World War I, was a “golden inflation” and not an inflation caused by the depreciation of paper money against gold. Many paper currencies during the Great War were indeed devalued against gold as well, and these countries suffered additional inflation in terms of their paper currencies that were proportional to the degree that their currencies were devalued.

However, even the most fanatical “gold bugs” are forced to admit that during the “Great War” gold was a poor hedge against inflation. Even gold cannot buy commodities that are not produced. Because the wartime “golden inflation” was built on top of the great golden inflation of 1896-1913, the greatest gap was created between market prices and the prices of production that has so far been seen in the entire history of capitalism.

Why didn’t the Great Depression begin immediately after the war? There was still one missing ingredient. The war economy associated with the war, unlike peacetime expanded capitalist production, bred shortages, not gluts. Capitalist crises that breed depressions require commodity gluts, not shortages. The deflationary policies of the U.S. Federal Reserve Board and the Bank of England in 1920-1921 dramatically lowered prices in terms of the non-depreciated U.S. dollar and even to a lesser extent the only moderately depreciated British pound.

By contrast, in the weaker capitalist countries, governments and central banks dared not follow deflationary policies. Instead, they sharply devalued their currencies. Instead of a sharp drop in prices in terms of their currencies, these countries experienced a sharp rise in prices in terms of their local currencies. However, in all capitalist countries, whether their currencies were devalued or not, the golden prices of commodities experienced in 1920-21 sharp declines. This greatly eased but did not eliminate the huge gap between market prices and prices of production of commodities.

Why did the deflation of 1920-1921 fail to lower market prices back to or below their prices of production? The reason was that industry ran out of inventory—commodity capital—before market prices could fall all the way back to, let alone below, their prices of production. This set the stage for the disaster that was to follow at the end of the first post-World War I industrial cycle.

Though gold production recovered in the face of the massive golden deflation of 1920-1921, it remained well below the peaks of 1914. As a result, the rate of increase in the world’s gold supply, which governs the ability of the market to grow in the long run, was well below the pre-World War I levels. To produce the Great Depression, all that was now necessary was a normal peacetime industrial cycle that would provide the necessary overproduction. Up until 1929, the resulting global “money squeeze” was made good by an inflation of credit money and credit. Inevitably, the expansion of credit money and credit on a completely inadequate “gold monetary base” ended in a crash of unprecedented proportions.

Once the crisis hit, sales (which collapsed the rate of turnover of variable capital) and market prices dropped so rapidly that profit and net profits became negative. During this period, industrial capitalists were able to realize only a part of the constant capital they were using up in the process of production, while the value of the commodities whose use values represented the real wages of the workers was only partially realized as a result the sharp fall in the purchasing power of workers. When capitalists subtracted the value of the capital and surplus value that was frozen in unsold commodities, the profits of the capitalists—which, remember, always have to be reckoned in money and not in “real” terms or directly in values—taken as a whole turned negative.

As a result, the total income of the capitalist class fell below zero for a few years—though the wealthy capitalists didn’t suffer very much because they were able to “live off their capital” very well for a number of years. Many smaller capitalists, however, went under losing their entire capital.

Real wages and profits during the Great Depression

The income of workers who own no capital, however, can only fall to zero. Indeed, if the incomes of these workers fall to zero they die, since unlike the capitalists they have no reserve to live off of. In practice, capitalist society has always had to find some way to keep unemployed workers alive during crises and depressions if only through soup kitchens and church charities. And of course, not all workers even during the Great Depression were laid off. Indeed, those workers who were able to work the same number of hours—like certain government employees—even saw their real salaries rise even as their money salaries fell but less than the cost of living.

However, most workers saw reduced hours of work. Overtime disappeared, and many workers were put on short time or faced longer periods of unemployment during “slack seasons.” Hourly real wages—though not money wages—actually increased but most workers—facing either partial or total unemployment—were working fewer hours. So their overall wage incomes in money, and to a lesser extent in real terms as well, declined considerably.

However, if you only looked at the higher real wages calculated on a per-hour basis and the negative profits, you would draw the conclusion that real wages had suddenly risen causing profits—including net profits—to be wiped out. This indeed is how (bourgeois) economists of the time saw things. The learned economists insisted that the only way to escape the crisis of mass unemployment was to lower wages to whatever extent was necessary to restore profits! So-called orthodox economists and Austrian school economists such as Ludwig Von Mises, Frederick Von Hayek and Lionel Robbins demanded that wages be cut to whatever extent necessary to restore “full employment.”

John Maynard Keynes differed from the orthodox and “Austrian” economists by distinguishing between money wages and real wages. Keynes agreed with Von Mises, Von Hayek, and Robbins that the mass unemployment of the early 1930s was caused by wages that were “too high.” But Keynes claimed it was real wages, not money wages, that were too high. Basing himself on the false claim that money wages determine commodity prices, Keynes argued that cutting money wages would cause prices to decline, leaving real wages unchanged.

Keynes drew the conclusion that the only way to restore “full employment” was through inflationary policies that included abandoning the gold standard and devaluing the currency. These policies would leave money wages more or less unchanged but would slash real wages. The fall in real hourly wages would then, according to Keynes, restore full employment.

Contracted capitalist reproduction during the Great Depression

At least in the United States, production of capital goods fell so sharply that not enough of these means of production were produced to maintain even simple capitalist reproduction let alone expanded capitalist reproduction. Not only did the level of production fall by more than half but the ability of U.S. industry to produce was eroding as well, since used-up means of production were not being replaced.

The part of the surplus product calculated in physical terms used to replace the existing means of production fell sharply, while production of means of production to expand production was zero. Therefore, if you only looked at the economy physically, as Shaikh, shifting from economist to engineer, tends to do when he runs into difficulties, you would observe that the real wages of the workers remained positive while real profits, or more accurately the surplus product, was below zero. You then could draw the false conclusion that the U.S. economy had collapsed because real wages had suddenly risen so much that the rate of surplus product—and all the more, the net rate of surplus product—had suddenly fallen below zero. But here you would be confusing cause with effect.

A difference between Marx and Shaikh is that Marx liked to calculate in value terms, while Shaikh often calculates in physical terms. The rate of surplus value remained positive and increased during the super-crisis, but capitalists were not able to realize anything close to the full value of their commodities in money terms. Therefore, in money terms, the rate of profit—and net profit—was indeed negative. As a result, the process of expanded reproduction in physical—or engineering—terms collapsed. Under the capitalist mode of production, if there is no profit—which must be measured in monetary, not in physical/engineering terms—production in physical/engineering terms comes to a halt.

Another problem arises if we try to apply Shaikh’s analysis of the “great depressions” to the Great Depression of the 1930s. How do we explain the recovery? With regard to the “great depression” of the 1970s and early 1980s, you can point to Reagan and Thatcher’s anti-labor offensives that lowered the “natural rate” of unemployment. The problem is that this analysis doesn’t work for the Depression and post-Depression eras.

In the United States, the Depression saw the rise of the Congress of Industrial Organizations, and the A F of L unions were also greatly strengthened. For the first time in U.S. history, the bulk of workers in basic industry now had union protection. The Roosevelt administration and the bosses were forced to make concessions to unions, which included Social Security—however inadequate—and unemployment insurance. (8)

After World War II, concessions unprecedented in the history of capitalism were also granted to the workers of Western Europe (9). Unions were greatly strengthened, Social Security systems expanded, and single-payer health care systems implemented. This enabled real wages to rise sharply. According to Shaikh’s theory, these concessions wrested from capital by the workers should have raised the natural rate of unemployment considerably. The mass unemployment of the Depression should have continued and in time grown even worse. But the opposite happened! It turned out that “ordinary workers,” unschooled in economic theory, were correct against the learned economists who warned that pressing for higher wages—and higher social wages—would only bring back Depression or even worse levels of unemployment.

‘Modern monetary theory’

Periodically, readers write in asking why I reject all variants of the theory of “pure fiat money” and insist that “modern money” represents gold in circulation. What is my evidence for this view, which is rejected by almost all professional economists including Marxists like Anwar Shaikh? Long before I launched this blog—and before blogs even existed—I got the same arguments when I raised this question verbally.

This is, of course, a good question. I deal with this question throughout this blog, but fortunately Shaikh’s work has enabled me to explore the question to a whole new level. For readers who want to dig deeper, there is really no alternative but to go back to the first three chapters of Marx’s “Capital” Volume I, where Marx deals with the whole question of value and the forms of value like nobody else ever before or since has done. It is not easy reading, but once you really grasp it, which in my case took many decades of study and thought—you will realize why “pure fiat money” is simply impossible under capitalist production.

The reason I think that Shaikh rejects the idea that crises are crises of the generalized overproduction of commodities is his belief that “modern money” is not based on a particular money commodity but on commodities in general. I think he has simply followed the consensus here and not given it much thought. In “Capitalism,” Shaikh comes right up to the brink of the correct solutions of so many problems including crises. He explains how the surge in gold production that followed the 1848 and 1851 gold discoveries in California and Australia led to a huge acceleration in the growth of industrialization. Why can’t the reverse happen? But at the very last moment, he gets cold feet, surrenders to the consensus and accepts the possibility of “pure fiat money.” At that point, his analysis begins to go down hill rapidly.

MELT and Say’s law

Once you accept “pure fiat money,” you inevitably arrive at Say’s law. Shaikh’s acceptance of “pure fiat money” is tacked on to the main body of his work and stands in opposition to his real work. However, the concept of “pure fiat money” is better developed by the so-called MELT theory of value, money and price.

MELT stands for the “monetary equivalent of labor time.” The MELT theorists have accepted labor value but do not understand the necessary relationship between value and the form of value. In other words, currency does not represent the money commodity in circulation but the value of all commodities. MELT means that the total of commodity prices by definition always equals the sum total of value. There is no special money commodity, because all commodities are equally money.

While Shaikh doesn’t use the term MELT, his acceptance of “pure fiat money” is similar. What the MELT theory of money, value and price really comes down to is that all commodities are money—or in some versions become money once the gold standard is abandoned—so in effect no commodities are money. Once you accept MELT—and this is what Shaikh does, whether he realizes it or not when he accepts pure fiat money—you inevitably arrive at Say’s law. Why is this so?

The French economist Jean Baptiste Say (1767-1832), who was what Marx called a vulgar economist and is usually credited with “discovering” Say’s law, though some economic historians give that dubious honor to the English economist James Mill (1773-1836). James Mill, who was the father of the far better known John Stuart Mill (1806-1873), also supported this “law.”

In the early 19th century, the leading economists of the period carried out a great debate on whether a general glut—a general overproduction of commodities—was possible. In one camp were the French economists Sismondi—considered by Marx to be, along with Ricardo, the last of the classical economists—and Malthus, better known for his population theory (10) and held in low regard, to say the least, by Marx, who held that a “general glut” was possible.

In the other camp was James Mill, Say and Ricardo. The argument of those who claimed that a general glut of commodities was impossible—Mill, Say and Ricardo—went like this. In the final analysis, commodities are purchased by means of other commodities. In effect, this means that all commodities are equally money, so there is no special money commodity. Therefore, if we were suddenly to double commodity production, there would be no general glut of commodities because by doubling commodities we would also be doubling the means to purchase the commodities.

Say’s law leads to the view that the total quantity of money will always be just enough to purchase the total quantity of commodities in circulation—the quantity theory of money. Shaikh rejects the quantity theory of money in “Capitalism,” but his acceptance of “pure fiat money” implies it. This is an unresolved contradiction in Shaikh’s work. According to Say’s law it is possible and to some extent inevitable for some commodities to be overproduced relative to other commodities. But a general glut—overproduction of commodities—is impossible. You can have an overproduction of shirt buttons relative to shirts or shirts to shirt buttons, but you can’t overproduce shirts relative to buttons and buttons relative to shirts at the same time. Therefore, the conclusion was drawn by Mill, Say and Ricardo that a general gut of commodities is not possible.

Marx answered Says law by explaining that you can have a general overproduction of commodities relative to the money commodity. Strictly speaking, there is no general overproduction of all commodities if you include the money commodity, but rather general overproduction of all commodities relative to one special money commodity. This explains why “general gluts” are possible. If you were to suddenly double the production of non-money commodities but left the production of the money commodity unchanged, you would soon have one hell of a glut of non-money commodities relative to the money commodity.

As soon as a separate money commodity emerges—which occurs long before the emergence of capitalism—a general overproduction becomes theoretically possible. Fully understanding Marx-Ricardo’s theory of value is not enough here—you need to understand that value must take the form of exchange value where the value of one commodity is measured in the use value of another commodity. You further need to understand that the developed form of exchange value is monetary value, in which the values of all commodities with the exception of the money commodity are measured in terms of the use value of the money commodity.

A necessary consequence of this is that all incomes—wages, rent and profit (both interest and the profit of enterprise)—must also be measured in terms of the use value of the money commodity. All this forms the foundation of any correct crisis theory. As we saw, Shaikh stumbled badly on this very point when he writes about real net profit as the driving force of capitalism. At this point, Shaikh’s up to then masterly analysis begins to MELT away.

Crises that occur at periodic intervals only become inevitable once capitalism has developed the productive forces to such a degree that production can be rapidly increased at a pace totally impossible in former epochs, including under early capitalism. Money is both the measure of value, the standard of price and a means of circulation. During a capitalist boom, demand for commodities at a certain point exceeds the demand for commodities at current prices. Rising prices—as well as the rising scale of production—means that a greater quantity of money is necessary to circulate commodities. However, the counterpart of the rising prices of commodities—and rising rate and mass of profit realized by the capitalists who are producing them—is that the production of the commodity that serves as money becomes both absolutely and relatively less profitable. The polarity between commodities and money is then expressed in the sphere of profits both absolutely and relatively.

Inevitably, once this happens capital in search of the highest available rate of profit will move out of the increasingly unprofitable money commodity industry and flow into other branches of production. Production of gold declines just as the production of other commodities is increasing. The result is an overproduction of all—or at least most—commodities relative to the money commodity. Sooner or later, this situation is resolved by a crisis of overproduction that causes a temporary reduction of commodity production—except for the money commodity, which increases—and a fall in the golden prices of commodities to below their golden prices of production. Most recently, this was illustrated by the Great Recession of 2007-2009, which led to a big decline of non-money commodity production but greatly stimulated the production of gold, which allowed gold production to return once again to record levels.

Therefore, if we abstract the turbulent fluctuations of real (as Shaikh calls it) competition, gold and non-money commodities are produced in the proportions that allow capitalists to carry out expanded reproduction, just as they do in Volume II of “Capital.” However, if we take account of the turbulent fluctuations that are a necessary consequence of real competition, the necessary proportionality between the production of the money commodity and all other commodities is satisfied in the long run only by being constantly violated in the short run. Hence, the fluctuations of the industrial cycle between boom and crisis.

To be continued …


1 Though Shaikh tends to mix them up, the categories of surplus value, profit and surplus product are actually different categories that have different units of measure. Surplus value is the unpaid labor that the working class has to perform for the capitalist class. Surplus value consists of a homogeneous social substance—abstract human labor—which is measured in terms of some unit of time. Profit is the form that surplus value must assume under the capitalist mode of production. It is broadly defined as the realized surplus value—the sum total of profit and rent—and more narrowly defined as the total sum of realized surplus value minus rent.

Profit must be measured in terms of a homogeneous physical substance. This substance is the use value of the money commodity measured by a unit of measure appropriate to that particular use value. Since gold bullion is the money commodity, profit is measured by some unit of weight.

Finally, we come to the surplus social product. The surplus product is not homogeneous but is made up of heterogeneous physical substances (goods and services), each with its appropriate unit of measure. It consists of use values that are used as means of subsistence and luxury consumption by the capitalist class and other non-workers, a reserve or insurance fund, and the means of production and subsistence used to expand the scale of production in physical terms.

In order for capitalist expanded reproduction to continue, surplus value must be produced and realized as profit measured in terms of the use value of the money commodity. In addition to profit, surplus product must also consist of use values produced in correct proportions used to expand production in physical terms. (back)

2 In an encouraging development, it seems that thanks to the embarrassing performance of Trump in office, combined with the strong opposition Trump has faced in the streets of the U.S., the far right in Europe is now losing momentum. This is shown by the unexpectedly strong performance of the Labor Party under the left-wing leadership of Jeremy Corbyn in the recent British election, combined with the wiping out of the racist anti-immigrant right-wing United Kingdom Independence Party and the weaker than expected performance of the National Front in the recent French election. (back)

3 When the imperialist countries face a “tightening” of the labor market, they respond by relaxing, whether officially or unofficially, the controls on immigration. On the other hand, they crack down on immigration during periods of high unemployment. They cracked down especially hard on immigrants during the period of high unemployment that followed the Great Recession, earning Barack Obama the title “deporter in chief.” (back)

4 Ideology is not only used by the ruling class and its functionaries like Yellen to fool the oppressed class but also to a certain extent to fool themselves. Perhaps the most complicated form of ideology is economics. The whole mystification of economic crises and their real causes is a textbook example of ideology in action. (back)

5 In order for all commodities to sell at their production prices, inputs must also sell at their production prices. Left out the analysis here is the question of ground rent in the gold industry as well as the different degrees of risk in different branches of industry. If the risk is higher than average in a particular branch, the capitalists will demand an extra profit. If it is lower, they will settle for a somewhat lower rate of profit.

However, none of these complications affects the essence of the matter. The essence is that under given conditions of production, golden prices of commodities are not arbitrary but fluctuate around a definite axis. Forces, mostly economic but also wars and revolutions, can for awhile drive prices far above or below their golden prices of production. However, when this happens powerful economic forces are unleashed that pull them back toward this axis. Shaikh understands this, which is indeed the central theme of “Capitalism.” But his brilliant analysis falls apart at the end when he accepts “pure fiat money.” Then his concept of price dissolves into relative exchange rates of commodities, and his whole analysis goes to pieces. (back)

6 Here Shaikh’s incorrect theory of money bites him hard. There is no such thing as real profit or real net profit. Profit must always be defined in terms of money(back)

7 The analysis of production prices and market prices also explains the unusual severity of the 2007-2009 Great Recession, though the causes were quite different than those that led to the Great Depression of the 1930s. The special cause was the depletion of the gold mines of South Africa, which for a century had been the world’s chief source of newly mined and refined gold. For a hundred years, mining technology had enabled gold from the South African mines to be recovered from deeper and deeper levels, but at end of the 20th century, this technology finally began to meet its match. As a result, the output of the South African mines declined steeply, and from 2001 on, world gold output began to decline.

As a result of the depletion of South African gold mines, the value of gold rose sharply relative to the value of most other commodities. The result was that the values of commodities were now expressed in lower golden prices of production of almost every commodity. The ability of the world market to expand at the prevailing market prices reflected the higher golden prices of production that preceded the depletion of the South African mines. A major downward shift in golden market prices towards the now lower golden market prices of production became inevitable. Under today’s paper money dollar system, this took the form of the Great Recession, accompanied by a major devaluation of the U.S. dollar and its satellite currencies, while U.S. dollar prices remained largely unchanged. In this way, the golden prices of commodities fell to reflect their now lower golden prices of production.

The fall in the golden prices of commodities made the development of gold mines profitable that would not have been sufficiently profitable for the capitalists at the market golden prices that prevailed before the Great Recession. As a result, gold production has again risen to record levels, which has restored the ability of the market to expand at a pace sufficient to end the Great Recession and allow the current weak upswing to unfold without, as of this writing, a new global recession. While purely economic—cyclical—forces make a new global recession inevitable in the next few years, a new cheapening of gold relative to commodities would again sooner or later accelerate the pace of capitalist development for a certain period of time as a result of an increased ability of the market to grow. Even in this case, for the reasons we have examined throughout this blog, the market would still expand more slowly than the ability of the industrial capitalist to increase production, so periodic recessions with their resulting mass unemployment would continue. In addition the uneven development among the countries would in the long run intensify which would lead sooner or later to new political conflicts and wars. This is exactly what happened between 1896 and 1913!

The depletion of new mines that were started following the Great Recession or a major war—assuming it doesn’t end in socialist revolution or the destruction of modern civilization—leading to a “golden inflation” that could again raise the market golden prices of commodities far above their golden prices of production, would set the stage for a much deeper economic crisis. (back)

8 Unfortunately, this did not include single-payer health care. Originally, Roosevelt’s proposed social security included what we now call single payer, but the American Medical Association objected and it was dropped—shades of Obama taking “the public option” off the table in 2009-2010! (back)

9 During the Cold War, the “threat of communism” forced the capitalists and their governments to make unprecedented concessions to the working class in order to block the growth of communist influence in the working class. The U.S. was obliged to give up on formal segregation in the U.S. South—called “Jim Crow”—partly because “the Communists” were using Jim Crow “in their propaganda to discredit Western-style democracy.” (back)

10 Malthus’s principle of populations holds that any increase in the means of subsistence will quickly call for a corresponding increase in the population. Therefore, no matter how much the productive forces grow in the future, the great majority will still live in extreme poverty because the human population will only be checked by starvation.

Today, this principle of population is—or rather should be—totally discredited as the rate of population growth has slowed dramatically and is at present mostly negative in the rich countries. Only in poor countries is the human population still growing, the exact opposite of what the Malthusian population principle would have predicted. (back)