Corbyn 80%, The Rest Nowhere

In the last Labour Leaders debate, screened by Sky News, last night, Jeremy Corbyn removed every last vestige of the argument put by the Tory media, and the Blairites that a Corbyn led Labour Party could not win the next election. In the poll of Sky's viewers, who one can assume are not an over representation of left-wing views, Corbyn was seen as having won the debate by a whacking 80%. That support came from Labour, Tory, Liberal, UKIP voters alike, all in huge numbers compared to the other contenders. The only other candidate to increase their standing as a result of the debate was Liz Kendall, with those thinking that either Yvette Cooper or Andy Burnham had won, being essentially deminimus.

The reason Kendall's support was higher at 9%, than the other two who scored around 5-6%, could be that she attracted more of the Tory vote than the other two, but also, Kendall at least stuck to her Blairite message, despite the fact that no one other than Tories and died in the wool Blairites believes it anymore. She possibly picked up some support for consistency, whereas Cooper and Burnham are seen as technocratic and dissembling.

Burnham's excuse for having argued against abstaining on the government's Welfare Bill, and then abstaining, was pure sophistry. He was sticking by his principles he argued, not the principle, of course, of acting in accordance with what you claim to believe, and of opposing Tory attacks on the working-class, but the principle that he claimed the Labour Movement had always been based upon – that of solidarity. The Shadow cabinet had agreed a position and he was voting in accordance with that decision, even though he disagreed with it!

His argument in relation to the EU refugee crisis was also hardly inspiring. He advised Cameron to be more amenable to taking in refugees now, because he said, it would win him brownie points with other EU countries to try to get through his other reactionary policies for limiting the free movement of labour in future!

Yvette Cooper saved her main fire, for attacking Corbyn over his economic policy, and in particular the idea of a “People's QE”, to provide some finance for a national Investment Bank that could provide funding for a series of infrastructure projects and so on required to improve the efficiency of British capital. For a trained economist, it has to be said that Cooper's argument was either economically illiterate, or else dissembling.

At least Cooper did not try to put the ridiculous argument used recently by Jack Straw, who tried to argue that QE to fund government spending was inflationary, whilst QE to fund the bailing out of the banks was not, and in the process illustrated that he clearly did not understand how QE works, via the Bank of England creating electronic deposits, which are used to buy government bonds from banks and financial institutions.

Instead, Cooper argued that Corbyn's proposal was inflationary, whereas the previous QE was not, because at the time of the previous QE, the economy was contracting, but now it is growing. This is an essentially Keynesian argument that QE previously was not inflationary, because without growth in the economy, the additional money created, does not get into circulation, because there is no demand to pull on it. As Keynes put it, its like pushing on a piece of string. Now, however, with the economy growing, there is a demand pull, so that the additional currency goes into circulation, and thereby enables prices to rise.

What is inflation? Over a year, there is a certain value of commodities that are put into circulation. Some commodities are put into circulation for final consumption, such as food, clothing and so on, whilst other commodities are put into circulation, to be used in the production process itself, such as raw materials, machines and so on. In a money economy, the circulation of these commodities is brought about by the use of money. If A has a commodity with a value of £1, they sell it to B, and get in exchange £1 in money. A then uses this £1 to buy a commodity from B, with a value of £1, so that in reality, what was exchanged was two commodities with a value of £1, and money only intervened as a means of effecting the exchange. In reality, A would buy commodities from C-Z, with the £1, who in turn would make further exchanges, amongst themselves, but the net result is the same.

If we assume that the velocity of circulation of the currency is 1, that is each unit of currency, on average, performs just one transaction during the year, i.e. a £ coin only buys £1 of commodities in the year, then the amount of money put into circulation, should be just equal to the total value of commodities that are to be circulated during the year. When the currency was comprised of gold coins, the Bank of England used to put currency into circulation on this basis.

Money is merely an equivalent form of value, and a money commodity, such as gold, is merely a physical manifestation of this value, or in other words, a physical manifestation of a given amount of social labour-time.  As Marx says, in Theories of Surplus Value, every commodity is money, in that every commodity is such a physical manifestation of this quantum of labour-time.  Every commodity could act as money because it could be used to purchase other commodities of an equal value.  Gold and silver come to be seen as money itself, rather than being merely money commodities, only because over time, they prove themselves to be the best suited to fulfilling that role.  There is nothing specific about gold and silver that makes them money itself.

Prices, are then merely the name given to the exchange value of commodities when measured against this money commodity. If an ounce of gold has a value of 10 hours of labour-time, and a coat has a value equal to 10 hours of labour-time, then the price of a coat is 1 ounce of gold, and if this 1 ounce of gold is given the name £1, then a coat has a price of £1.

If, the value of gold falls, because say, gold is found in California, that requires less labour-time to produce, then it may be the case that an ounce of gold has a value of only 5 hours. In that case, 2 ounces of gold would be required to buy a coat, so that although the value of the coat itself has not changed, its price will rise to £2. A fall in the value of the money commodity, will, therefore, cause an inflation of the prices of commodities.

But, where precious metals are replaced as currency, by money tokens, or credit money, this same rule still applies that only the amount of money should be put into circulation that is equal to the value of commodities to be circulated. (In fact, because the money performs several transactions, only enough money needs to be put into circulation that is needed to perform this function, divided by the average number of transactions.) But, there is no restriction on the quantity of these tokens that can be thrown into circulation.

Suppose, 10 ounces of gold needs to be thrown into circulation, and these represent £10. Instead, paper notes could be thrown into circulation, to represent this money. In that case, everything is fine. But, if notes with a face value of £20 is thrown into circulation, then the value of these tokens is thereby cut in half. The prices of the commodities measured by these money tokens, will rise from £10 to £20, even though there has been no change in the value of those commodities, or of gold.

If, the quantity of commodities to be circulated in the economy remains constant, therefore, printing additional money tokens (and the same applies with creating additional credit money, or bank money, by QE) acts to depreciate all of the money tokens in circulation, and thereby causes inflation. But, of course, things are not that simple, which is why the argument put forward by Cooper as a trained economist is either illiterate or dishonest.

First, of all, one issue here is about whether the money is actually in circulation. Additional money tokens that do not go into circulation, but just sit in banks vaults, or people's pockets cannot act to inflate prices, precisely because it is not in circulation. It is the same as if each piece of money performs, on average fewer transactions, so that the velocity of circulation is reduced. But, the whole point of QE, if it has any, is that the money tokens do go into circulation. So, the argument is rather moot, because the increased money tokens can only cause inflation if they go into circulation, but the whole point about any QE is that the tokens do go into circulation. So, on this basis any effective QE, must cause inflation, all other things being equal.

But, herein lies the other aspect, in which things are not so simple, because, of course, everything else is not equal. The argument put for QE, for example, in the US and in Japan, and previously in the UK, is that it was intended to reduce interest rates, and provide banks with liquidity, so that, on the one hand, lower interest rates would encourage people to borrow, and so stimulate economic activity, and on the other would provide banks with the liquidity they needed to be able to lend, to meet the additional demand for borrowing. In other words, the purpose of the QE that was given was that it was intended to stimulate additional economic activity.

Suppose the level of activity is such that the value of commodities to be circulated is £1 trillion, so that £1 trillion of money needs to be put into circulation. If there is QE, which is effective in stimulating additional economic activity, so that the value of commodities to be circulated rises to £1.2 trillion, then so long as only £0.2 trillion of additional money tokens are put into circulation, this is not inflationary, because only as much value of money tokens is in circulation as are required to circulate the value commodities.

Now, on this basis, its odd that Cooper, as a Keynesian economist, put the argument she did. Keynes' argument was that in conditions where there are unemployed resources, it is possible to stimulate economic activity, and for this to be self-financing, because of the multiplier effect. In other words, if £100 of additional spending is put into the economy, those in receipt of this money will spend it, and that means that those with whom they spend this money, also thereby get additional income, which they in turn spend, and so on.

Keynes proposed that the government would achieve this by deficit spending, i.e. spending more than it took in in taxes, but, because the consequence would be that economic activity increased, and incomes were thereby raised, taxes would naturally rise, so that the gap between the increased spending and taxation would be more than closed.

Now, if we look at the QE that was undertaken to bail out the banks, and the QE that Corbyn is proposing, Cooper's argument appears even more odd. The QE that was used to bail out the banks, actually did nothing to stimulate economic activity. That was true in the UK, US and in Japan, and it looks to be true in relation to the EU now too. Interest rates were already very low, and in any case, as I've set out elsewhere, QE does not reduce the average rate of interest. It can only reduce the yield on selective financial instruments, i.e. those actually bought by the central bank, with the newly printed money, whose prices are thereby raised.

Individuals who in all of the above economies are already massively in debt, and who face an uncertain future – especially if you work in the public sector, facing austerity, or in an industry that may be affected by such austerity, or you are on a zero hours contract, or you are self-employed and no idea whether work will be forthcoming – are not likely to go out and borrow even more, just because interest rates become a few basis points lower. By the same token, firms facing such an uncertain future, with demand growth sluggish at best, are not going to go out and borrow money to take on lots more workers, build a new factory, by additional machines and material etc.

What is more, large companies already had lots of cash, and didn't need to borrow, whilst small companies could not get loans, because banks didn't want to lend to them, under such conditions, because they might not get the money back. It was much easier, for the bank to use the additional liquidity that the central bank provided to them, instead to buy all those financial assets that the central bank was themselves underpinning. So, it was better for banks and financial institutions, to buy more of the government bonds, whose prices were being pushed up, by central bank purchases, or to buy the shares of companies, as stock markets were sent into ever higher bubbles, as a result of the same process.

So, this process of QE to bail out the banks did nothing to stimulate economic activity. To that extent, the money did not get into circulation, and so was not inflationary. But, in another sense, it did get into circulation, and was hyper inflationary. The money got into circulation to buy these bonds, and to buy shares, and as a consequence it sent the prices of these assets soaring. That is bad for a number of reasons. Firstly, it does nothing to stimulate economic activity, or to create additional value, and so the additional money tokens that have been created, have no value equivalent in circulation. At some point, when that money stops circulating around financial markets, and enters the real economy, it will be hyper inflationary, precisely because it has not contributed to any additional increase in the production of value, i.e. it has led to the production of no additional commodities, as an equivalent value to the money tokens.

The second reason that it is very bad, is that this QE killed workers pensions. By massively inflating the prices of shares and bonds, it made them much more expensive for workers to buy with their monthly pension contributions. So, they bought fewer of them into their pension funds, so those funds generated less income with which to pay pensions. Moreover, because the same process sent yields on bonds and shares down to near zero, this cratered the income generated by pension funds even further, which is apparent in the worthlessness of annuities on private pensions. This is why many companies have massive black holes in their pension funds.

The reality here is that the need to provide for old age via a pension is a part of the value of labour-power, and QE massively increased that cost, as a result of the above, and massively increased the value of labour-power. It should have been compensated by a consequent rise in wages, so that workers could increase their monthly pension contributions, so as to be able to buy the required number of bonds and shares, into their funds, so as to be able to provide the required pension income. That has not happened, and if it had, then not only would the real rate of inflation have been massively higher, but the rise in wages would have cratered profits. But, the problem has not gone away, it has simply been deferred to a future crisis.

The same applies with property prices. Loose money policy in the 1980's through to the present caused excessive borrowing to finance the purchase of houses at increasingly ludicrous prices. Again, if the price of houses was included in the inflation figures, the real inflation figure would have been much higher than it is indicated. Once again, had wages risen accordingly to cover this hyper inflation of property prices, then profits would have been cratered, and again this is a crisis that is yet to be resolved.

In the latter stages, house prices became so ludicrously high that workers could not be enticed into buying them even with near zero interest rates, and no questions asked financing. Instead, capital that might have gone into productive activity, went into property speculation, as amateurs frustrated at getting no returns on their savings and pensions, gambled with their money as buy to let landlords, acting to keep the bubble inflated for a while longer. In both the US and UK, in the last year or so, it has been almost entirely buy to let landlords that have bought up properties, and they have been encouraged to do so by governments that have given them favourable tax treatment even over individuals taking out mortgages to buy property to live in.

In other words, the QE that was undertaken caused a hyper inflation of the prices of fictitious capital. In so doing, it caused a massive rise in the value of labour-power, which has not yet been reflected in the required rise in wages. Either the prices of this fictitious capital will collapse, or wages will have to rise massively, or both. Wages are not going to rise massively, but will undoubtedly have to rise, which means that the prices of fictitious capital will collapse with the consequent economic implications. But, what makes this worse, is precisely that it had none of the beneficial effects that a Keynesian stimulus would have had of actually stimulating economic activity, and thereby increasing the amount of value created in the economy, as the corollary of the additional money tokens, which would then have prevented it from being inflationary.

So, compared to this QE, that Cooper and other Labour Ministers have had no problem with, the form of QE proposed by Corbyn, seems eminently sensible, because it is designed not to keep financial bubbles inflated, and thereby further inflate the fictitious wealth of the top 0.001%, but rather to encourage additional economic activity, to create additional value, and so if anything is far less inflationary, than the type of QE that Cooper has supported in the past.

Of course, there is nothing socialist about such a social-democratic strategy, but it is far more rational, as a social democratic strategy, which meets the needs of big industrial capital, than is the current policies of monetary stimulus combined with fiscal austerity that Cooper and the Blairites are signed up to along with the Tories.

One danger for Corbyn, however, might be that with his popularity amongst the general public now so high, and a general election victory looking all the more likely, he might find himself the unwilling beneficiary of the support of Rupert Murdoch. Murdoch always likes to back a sure winner, as was seen by his support for the SNP in May. It would be an irony that Blair and his supporters won the backing of Murdoch, by their pathetic fawning at his feet, and accommodation to his reactionary politics, whilst Corbyn obtained it by the opposite, by sticking to his principles, providing a clear alternative, and winning the support of the electors. What a refreshing change.