The Austrian School Dismissed - Part 5

“Secondly, its emphasis on "costs determining prices" has encouraged the view that businessmen push up prices or that unions push up prices, rather than governmental inflation of the money supply.” (Rothbard, ibid)

This proves the writer is totally ignorant of Marx’s writings, because he argues the direct opposite of what is attributed to him here. Marx, long before the Austrians and Monetarists, identified that it was devaluation of the currency which caused inflation. And this truth derives directly from the Labour Theory of Value. The value of gold as money like any other commodity, Marx argued, is determined by the labour required for its production. If a new rich source opens up, for example, as happened in California, then the labour required to produce gold diminishes, and its value falls, relative to the value of all other commodities. As these other commodities are all priced in gold, as money, the reverse of this fall in the value of money is an increase in the general level of prices for all other commodities i.e. inflation. He went on to illustrate how, with paper currency, an increase in its supply likewise has the same effect.

(The origin of these theories of subjective, or relative value, in the 19th century was Samuel Bailey.  He criticised Ricardo, and his followers for attempting to turn the concept of value into an absolute rather than relative quantity.  Marx, in Theories of Surplus Value, Part 3, says the only positive aspect of Bailey's work was to show that what Ricardo and his followers {the same is true of Smith} were guilty of was searching for some constant external measure of value, i.e. some commodity, be it gold, labour, or corn, which was unchanging in value.  Such a search, Marx says, is unnecessary, because, so long as this external measure of value changes in the same proportion to all other commodities, whose value it expresses, there is no need for it to be constant itself in value.  Moreover, such a search would never result in finding such a commodity, because all commodities, change in value, and have to change in value, because of the nature of value itself.  Every commodity, must change in value, because the labour-time required for its production necessarily changes as social productivity changes.

But, what Bailey unconsciously also reveals, and the same applies to all those theories of subjective value, derivative from it, is that for relative value to exist, i.e. exchange value, it is first necessary for value to exist.  Gold, for example, as an external measure of value, can only act as a relative measure of the value of other commodities, because gold itself has value.  In other words, I can only say that 1 gram of gold is equal in value to 1 metre of linen, if I first know what the value of gold and linen is.  Its only possible to equate the weight of 3 oranges with 2 grapefruit, because both oranges and grapefruit possess the quality weight/mass.  They possess that quality quite independently of any relation made by comparison between them, and its only because they possess that quality independently one from the other, that a relationship on that basis can be established.  As Marx establishes, the value must exist first, before exchange value can exist.  Exchange value, is merely a derivative form of value.  The immediate value cannot be measured by another commodity, but only by the quantity of the value creating substance that each comprises - labour.  Labour is the immediate measure of value, and it can only be so, because labour itself is not a commodity, and has no value.

"To estimate the value of A, a book for instance, in B, coals, and C, wine, A, B and C must be as value something different from their existence as books, coals or wine.  To estimate the value of A in B, A must have a value independent of the estimation of that value in B, and both must be equal to a third thing expressed in both of them...

{Theories of Surplus Value, Chapter 20}

Marx also sets out why this immediate value is not equal to the actually embodied labour, but the socially necessary labour required for its reproduction.

"On the other hand, as value it appears as something merely contingent, something merely determined by its relation to socially necessary, equal, simple labour-time.  It is to such an extent relative that when the labour-time required for its reproduction changes, its value changes, although the labour-time really contained in the commodity has remained unaltered." {ibid}

"Relative value means first of all magnitude of value in contradistinction to the quality of having value at all.  For this reason, the latter is not something absolute.  It means, secondly, the value of one commodity expressed in the use-value of another commodity.  This is only a relative expression of its value, namely, in relation to the commodity in which it is expressed.  The value of a pound of coffee is only relatively expressed in tea; to express it absolutely—even in a relative way, that is to say, not in regard to labour-time, but to other commodities—it ought to be expressed in an infinite series of equations with all other commodities.  This would be an absolute expression of its relative value; its absolute expression would be its expression in terms of labour-time and this absolute expression would express it as something relative, but in the absolute relation, by which it is value." {ibid})

In Volume III of Capital, he also writes about the role of credit in crises, in terms which, if the reader were not aware of the author they could be forgiven for thinking they were reading Bill Bonner. (Bill Bonner is the editor of The Daily Reckoning newsletter, on whose discussion Board, this discussion was taking place.)

“Ignorant and mistaken bank legislation such as that of 1844-45 can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.” (Marx)

“At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. “ (Marx)

He also points to the resultant deflation after the crash caused by the inflation.

“On the eve of a crisis, and during it, commodity capital in its capacity as potential money capital is contracted. It represents less money capital for its owner and his creditors (as well as security for bills of exchange and loans) than it did at the time when it was bought and when the discounts and mortgages based on it were transacted. If this is the meaning of the contention that the money capital of a country is reduced in times of stringency, this is identical with saying that the prices of commodities have fallen. Such a collapse in prices merely balances out their earlier inflation.

“The incomes of the unproductive classes and of those who live on fixed incomes remain in the main stationary during the inflation of prices which goes hand in hand with overproduction and over-speculation.” (Marx)

Sound familiar?

But Marx also argues the absolute opposite to the idea that wages (or businessmen for that matter) push up prices. In the pamphlet “Value, Price and Profit” he argues decisively that a rise in wages does not cause a rise in prices. Rather, it results in a fall in profits an increase in demand for wage goods (resulting from the workers higher wages), an increase in the profits of capitalists producing wage goods (because of the higher prices resulting from the higher demand), a fall in the prices of goods bought by capitalists (typically luxury goods) (caused by a reduction in income to the capitalists, to spend on these goods), a reduction in profits for capitalists producing luxury goods (caused by the lower demand for their products from capitalists) and a consequent reallocation of resources away from luxury goods to wage goods with no overall increase in the general level of prices. This also demonstrates that Marx’s economic theory (and the same is true of Smith and Ricardo) did not ignore the laws of supply and demand. They were quite happy to recognise the operation of these laws to determine short run market prices, and reallocation of capital to bring about an equalisation of the rate of profit. What they rightly saw no need for was the vacuous dead end concept of value determined by utility.

“Third, its emphasis on "objective, inherent value" in goods led to "scientistic" attempts to measure values, to stabilize them by government manipulation, etc.” (Rothbard)

Objective theorists do try to undertake measurement. That is the scientific approach. In rejecting it, the Austrians admit they have given up on the dead end their theory led them down unable to resolve its conundrum. With nowhere else to go, they fall back, not on science, but an appeal to a mystical or religious faith, a demand that we take the theory on trust, even though it cannot be scientifically proven or tested.

“(I might add that the resultant holistic approach by Smith and Ricardo was subtly socialistic in still a fourth way: it established the fashion of separating Distribution from Production, and of talking only about groups of factors instead of individual factors – labor instead of laborers.)” (ibid)

But this is standing truth on its head quite shamelessly. The Labour Theory of Value, as developed particularly by Smith, Ricardo and Marx, but also in essence by the Physiocrats, is a combined theory of production and distribution. It begins where any rational economic theory must, in the sphere of production, because production physically and logically precedes consumption, exchange, and distribution. It locates the source of value and surplus value, and shows how once realised the money equivalent of the value created is distributed amongst “the three great classes of society”, and the reasons why each gets the share they do. In other words, it is both a micro and macro-economic theory. It is neoclassical theory which is purely a micro-economic theory, and starts from the position of production having taken place, of profit already existing and concerns itself solely with the distribution of income to the factors of production. It does so precisely because of its inability to provide an answer to the question “where does profit come from?”

Indeed in the work of Walras, that neoclassicists claim to follow, profit disappears altogether since under conditions of total competition the value of the marginal product is dissolved into depreciated capital, wages, interest and ground rent. Read Walras “Abrege des Elements d’economie politique” p 187-9.

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