Inflation and Imperialism

In an article in last week's Weekly Worker, Mike McNair writes, of the war in Ukraine, and subsequent sanctions and boycotts,

“This war, moreover, and the sanctions imposed on Russia in order to pursue it, is one of the fundamental causes of the general inflation and the resulting cost-of-living crisis - just as occurred as a result of 1914-18.”

This is not only wrong in theory, but is demonstrably wrong empirically, as a look at the recent data on both consumer and primary product prices show, as well as the movement of asset prices, and liquidity, i.e. value of currency/standard of prices.

As I have described, before, for Marx, inflation is a monetary phenomenon, because prices are an expression of the exchange value of commodities, measured by money, i.e. the standard of prices. The idea that inflation is a consequence of increased costs of production (cost-push), or excess demand (demand-pull) is a bourgeois theory, mostly attributable, in the post-war period to Keynesians. In that post-war period, it was adopted by Stalinists, and their entourage within the ranks of the Left reformists, but also by sections of Troskyists/New Left, as they abandoned Marxist economic theory, and collapsed into Keynesianism.

As Marx demonstrates, in A Contribution To The Critique of Political Economy, most extensively, but also in Capital, Chapter 3, and Theories of Surplus Value, Chapter 20, because prices are exchange values expressed in terms of money/standard of prices, like any other exchange-value, they are subject to variation as a result of a change on either side of this exchange relation. If the value of a metre of linen is 10 hours of universal labour, and that of a gram of gold is the same, then the exchange value of a metre of linen is 1 gram of gold. If the the value of gold falls to 5 hours of universal labour, then the exchange value of 1 metre of linen is 2 grams of gold, or expressed another way, the gold “price” of a metre of linen is 2 grams.

If we replace gold with corn, and grams with kilograms, then we can similarly, say the “corn” price of a metre of linen is 2 kilograms. Yet, the value of linen has not changed. Its exchange value, and hence its price, has changed, not because of any change in its own value, i.e. the labour-time required for its production (cost of production), but simply because of a change in the value of the commodity which is used as an indirect measure of that value, just as, if I measure the length of a field in feet, rather than yards, I will get a larger measurement (3 times larger), even though the actual length of the field has not changed.

The other implication of this, as Marx sets out, is that, if all values rise proportionately, there is no change in exchange-values/prices. If the value of a metre of linen rises from 10 hours of universal labour to 20 hours, whilst the value of a gram of gold, also rises to 20 hours, then the exchange value/gold price of a metre of linen, remains 1 gram. If gold is the money commodity, and 1 gram of gold acts as the standard of prices, given the name £1, then although, the value of linen has doubled, i.e. its cost of production has doubled, its price would remain constant, as would the prices of all other commodities, whose values had doubled. Similarly, if the values of all commodities remains constant, but the value of gold falls, say to 1 gram = 5 hours of labour, then although the exchange-values of all commodities, to each other, would remain constant, their prices would all double, because, where they previously equalled 1 gram of gold (£1), they now equal 2 grams of gold (£2).

This easily observable. Take the prices of a globally traded commodity such as oil. A barrel of Brent Crude is currently $83.59. However, at the current exchange rate, it is £65.05. Why is there this difference? Obviously, because a Dollar, as standard of prices, currently, has a lower value than a Pound, as standard of prices, i.e. the Dollar represents a smaller quantity of universal social labour than does the Pound. At current exchange rates £1 = $1.27, i.e. £1, as standard of prices, represents 127% the amount of universal social labour that $1 represents. Had you compared the prices of oil in Dollars and Pounds, say, in 1972, the difference would have been even greater, because, at that time, the relative value of the $ to £'s, was much less. In 1972, for example, there were $2.61 to the Pound, so, at that time the $ price of a barrel of oil would have been much higher than the £ price of a barrel of oil, even though the value of a barrel of oil, itself, would be the same, whether bought in £'s or $'s. It is only its exchange-value/price that varies, as a result of the different value of $'s as against £'s, i.e. the different amount of universal social labour that each currency/standard of prices represents.

But, that change, in the value of the $ as against the £, between 1972, and 2023, also illustrates the further point, set out by Marx in A Contribution To The Critique of Political Economy. That is that the standard of prices, itself changes, over time. Originally, that was because the value of the money commodity, such as gold or silver changed, as described above, so that a gram of gold, might represent only 5 hours of labour, rather than 10, for example. Then, it also reflected the fact that states began to, also, reduce the amount of gold/silver represented by the standard of prices. So, for example, if £1 originally represented 1 gram of gold, the state could reduce the amount to, say, ½ gram of gold. In other words, even if the value of gold, as money commodity, remained constant, the value of £1 would fall in half, because, as standard of prices, it now represented only ½ gram, i.e. 5 hours of universal labour, rather than 10 hours.

With fiat currencies that are not exchangeable for any given quantity of gold or silver, then, as Marx sets out, their value is determined, solely, by the quantity of them thrown into circulation. If the total value of commodities to be circulated is equal to 1 million hours of universal labour, and every £1, performs 10 transactions a year, then, 100,000 £1 notes/coins, is required in circulation, with each £1 representing 1 hour of universal labour. If, however, 200,000 £1 notes/coins are put into circulation, with no change in the velocity of circulation, each £1, can, now, only be equal to ½ an hour of universal labour. The total value of commodities remains 1 million hours, but the total of prices rises from £1 million to £2 million – inflation.

So, Mike McNair's statement is wrong, in theory, because it is not a change in values/costs of production, particularly of just a few commodities such as oil and gas that is “one of the fundamental causes of the general inflation” seen in the last few years, or ever, but, the huge devaluation of currencies, over recent years, resulting from massive injections of liquidity by central banks. That sections of the Left do not want to accept that reality, is not surprising, because the most obvious expression of that destruction of value of currencies/standard of prices, in recent years, arose during lockdowns, as the value of commodities produced, and to be circulated, was curtailed massively, and yet, states printed large additional quantities of money tokens/currency, which was thrown into circulation, and handed to consumers to spend on the reduced total value of commodities!

Marx explains that, if the total value of commodities to be circulated falls, then the total value of currency/money tokens, in circulation, must fall proportionately, otherwise, the value of the currency/standard of prices must fall, and prices/inflation rise. If we take the example above, if the total value of commodities to be circulated is 1 million hours, and each £1 circulates 10 times, then £100,000 is required in circulation. If, however, as a result of lockdowns, only 80% of commodities are produced, the total value of commodities to be circulated falls to 800,000 hours = £800,000, and only £80,000 should be in circulation. If liquidity is not reduced, each £1 would fall in value, accordingly, to £0.80, and the total of prices would rise from £800,000 to £1 million, with the average unit price of each commodity rising from £1 to £1.25, i.e. a 25% inflation.

But, in fact, although there was a 20% reduction in the amount of new value created, during lockdowns, the amount of currency in circulation was not reduced, by 20%, so as to keep unit prices constant, it was significantly increased, as central banks printed money tokens, which were handed to governments to disburse as furlough payments, and so on! Of course, lots of sections of the Left do not want to accept that this is massively inflationary, because they were at the forefront of not only demanding ever stricter lockdowns, but also of even more liquidity injections, and “free money”! The same utopian mentality lies behind the petty-bourgeois demands for a Universal Basic Income, and Modern Monetary Theory, Proudhonism, not Marxism.

Now, it could be argued, but, there was no inflation of consumer prices during that period of lockdowns, when this additional liquidity was injected. Except that is not true, as I described at the time. Its true that if you take the measures of CPI there was no large scale rise in prices during that time, but those measures are measures only of selected baskets of goods and services. But, during lockdowns, a whole swathe of those goods and services could not be bought, because consumers were not allowed out to buy them!

Given that it was these that mostly comprised the baskets of goods and services contained in the measures of CPI, of course, they showed no significant increases! But, a look at the prices of all those goods and services that consumers shifted their spending to, instead, showed that, for these commodities, there was a significant increase in prices, and that increase in prices, together with the increased volumes of sales of those commodities is what also boosted the profits of the companies involved in their production/sale, during that time.

That was even more noticeable, during those periods, when lockdowns were partially or periodically lifted. For example, as I noted at the time, prices for haircuts at barbers, were reported as having risen by up to 100%. But, also, as with the previous forty years, one set of prices, once again, did rise significantly, and that was the prices of assets. It might be imagined that, in conditions where lockdowns had caused production to be curtailed by 20%, and so surplus value reduced by an even greater percentage, companies would see share prices tumble, with a knock on effect on asset prices such as for bonds, and property. Is that what happened? No. Between March 2020 and January 2022, for example, the S&P 500 rose by 120%! In Britain, despite the fact that lockdowns meant that people could not get out to be buying houses in great numbers, house prices rose, during the same period, by around 26%, again reflecting their status as speculative assets.

And, besides these rises in prices, a similar rise in primary product prices occurred, long before either the invasion of Ukraine, or the subsequent implementation of boycotts and sanctions. Brent Crude went from $25 in April 2020 to $85 in October 2021, for example, with a steady rise throughout 2021. A look at EU natural gas prices shows it rose from €5 per megawatt/hr., in June 2020, to €35 in July 2021, long before any invasion of Ukraine, or imperialist boycotts, but consistent with the start of lifting of lockdowns, and surge of the sea of liquidity into circulation. Similarly, UK CPI had risen from below 1% in 2020, to 7%, in March 2022, prior to the invasion, and subsequent imperialist boycotts. The actual inflation, was clearly well embedded, as a consequence of that earlier liquidity injection, and devaluation of currencies, long before, any invasion, and increase in primary product prices caused by the imperialist boycotts and sanctions.

That is not to deny that the subsequent sanctions and boycotts caused a rise in global energy and food prices. I have detailed how they have done so. For example, if we take those EU gas prices they rose from €35 in July 2021, to €339 in August 2022. They simply added fuel to the existing fire of inflation that was caused by the injections of liquidity during lockdowns, as well as the huge amounts of liquidity injected over the previous forty years, whose purpose was to inflate asset prices, and so protect the paper wealth of the ruling class that owns its wealth in the form of fictitious-capital.