Marx and Engels told us that
commodity production and exchange has existed for around 10,000 years. On the basis of this commodity production and exchange,
value then takes the visible form of
exchange-value, and the
objective basis of this exchange-value is the value of each commodity, i.e. the
social labour-time required for its reproduction. As soon as
money arises as the universal
equivalent form of value, this exchange-value takes the form of a
money price. Under capitalism, the value of commodities continues to be the underlying determinant of prices, but now these prices are not exchange-values, but
prices of production. Prior to commodity production and exchange, the value of
products was also determined by the labour-time required for their production, but this value was
individual value, and the labour was the actual
labour embodied in their production. These products were also exchanged, as different tribes met, and exchanged gifts as part of wedding rituals and so on. Indeed, these exchanges form the basis of the development of trade, and, from there, the development of commodity production and exchange itself. But, prior to the development of commodity production and exchange, there was no
objective basis for the ratios in which these products were exchanged. The basis of exchange was purely
subjective, based upon
supply and demand. As commodity production is brought to a standstill, by government diktat, in response to the
moral panic over COVID19, we are again placed in a similar condition. It is a condition in which the favourite argument of the proponents of
subjective value comes into its own.
That argument is known as the water-diamond paradox.
I discussed it, and what is wrong with it several years ago. The neoclassical economists argued that the basis of exchange ratios was the
subjective value that buyers and sellers place on commodities, and this subjective value is equal to the
utility that each believe they obtain from them. This concept was put forward by
Samuel Bailey in the early 19th century, and is refuted by Marx in
Theories of Surplus Value, Chapter 21. It was pointed out that, if the basis of the value of commodities was their utility then the value/price of water should be much higher than the value/price of diamonds, because water has far more utility than diamonds. The subjectivists eventually responded to this objection, by saying that what was determinant was not the total utility, but only the
marginal utility. The way they made this argument was with the example of someone dying of thirst in a desert, who is in possession of a diamond, but no water, and a water seller, who has water to sell, and so is able to exchange it for the diamond. On this basis, the marginal utility of the water, for the man dying of thirst, is greater than the marginal utility of the diamond, and vice versa, so they exchange.
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As Marx says, in Capital I, Robinson Crusoe tells
us all we need to know about value. Like the
primitive commune, he has limited labour-time,
he must use to produce all of his requirements.
The value of each of these items is determined by
the time required to produce it. He must balance
this value against the use value/utility he obtains
from it. |
I have set out what is wrong with this example, in the post linked to above. Essentially, it has nothing to do with the determination of exchange values of commodities in systems of commodity production and exchange, let alone under capitalism, as a specific historical form of such a system. Prior to commodity production and exchange, primitive nomadic tribes, and communistic societies produced
use values to meet their own direct needs. Each of these
products had an
individual value determined by the amount of
labour-time the tribe or commune had to spend to produce it, as Marx sets out in
Capital I, and in
A Contribution To The Critique of Political Economy. So, even here, the exchange relation/value between different products is not subjective or arbitrary, as Marx again describes in
Capital I, and in his
Letter to Kugelmann explaining this
Law of Value. Each tribe or commune had only a limited amount of labour-time at its disposal, and so the value of each use value, determines how many of them can be produced by this total labour-time. If it uses all this labour-time to produce one type of use value, it cannot then produce any other type of use value.
The tribe or commune must then make decisions about how to allocate this total labour-time so as to maximise its welfare, i.e. to maximise the amount of use value/utility it can obtain, given the value of each type of use value. Its true that the use value it places on each type of product is more or less entirely
subjective in nature – not entirely, because given the need to live, you are
objectively constrained, first, to produce those things that make that possible, even if you would like to have been able to be producing something else – but that only tells you how you might allocate the available labour time; it does not change the actual value of the product, or its relation to other products. The fact remains that if you use an amount of available labour-time to produce potatoes, the cost of that, is not just this labour-time, but the other products that could have been produced instead – what orthodox economists call the
opportunity cost. The measurement of the
value of the potatoes is
immediate, direct and
independent, and is measured in
labour-time; the measurement of its
exchange-value, is
contingent, indirect and dependent, because it depends not just on the value of the potatoes, but on the value of anything for which it is to be exchanged, and is measured in terms of the
quantity of these
other use values for which it exchanges.
When tribes and communes first begin to exchange, therefore, they exchange
products not commodities. These exchanges occur at ceremonies such as weddings between members of the different tribes and communes. One tribe has a surplus of some product, which proliferates in its area, and the same applies to the other. The first exchanges, therefore, have no
objective basis. They are simply founded upon supply and demand, in the same way as the example of the exchange of water for a diamond. However, as I set out in relation to that example. It has nothing to do with systems of commodity production and exchange. If the
market price of water, as measured in diamonds is high (its diamond price), relative to the cost of production of water, then more people will engage in the production of water for sale, in exchange for diamonds. The supply of water will rise, and the diamond price of water will then fall, until such time as the ratio matches the relative values of each. Under capitalism this appears as when the
market price of each commodity is equal to its
price of production, i.e its cost of production plus
average profit.
However, under current conditions, the subjective theory of value, represented by the water-diamond paradox comes into its own, precisely because commodity production is being brought to a halt by government diktat. The determination of prices by exchange-value, or by price of production can only operate where the supply of commodities can be increased by additional production, in response to the price of some commodities being higher than their exchange-value, or price of production. Someone who has a monopoly of supply over some commodity that everyone must have to live, such as water, can effectively charge whatever price they like for it, because the supply cannot be increased by other suppliers, and so competition cannot act to drive down its price. That is one reason that Marx saw that capitalism fulfilled a highly progressive role in breaking apart all of the old feudal monopolies.
If the policy of governments, around the world, for example, leads to bakery workers staying home, so that no bread is baked, shops that have existing stocks of previously baked bread will be able to charge more or less what they like for this bread, because consumers will still want to have bread. The shops will have the added incentive to sell the bread at extortionate prices, because it has a limited shelf life. They will not want to miss a golden opportunity to maximise the price/
profit they obtain from selling the bread, because once it has gone they too will have no more to sell, and someone else will have an even stronger monopoly of its supply. So, its no wonder that
supermarkets have an incentive to blame their empty shelves on panic buying, because pointing to the fact of empty shelves only encourages more people to seek to obtain the commodities they need, and to pay higher prices for them. They are like the water seller who tells the thirsty traveller that they should hand over their diamond because there are no more water sellers for miles around in the desert.
And, what applies to bakery workers applies to all other food production workers and those producing vital commodities. If production stops, prices for these commodities rise without limit, because demand cannot be met by supply, and so competition cannot act to regulate prices. The price of non-essential items may fall, as people use their money to buy the essential items whose prices are soaring, but that does not change the fact that these essential products will rise in price inexorably.
Moreover, as the diamond-water paradox indicates, what is essential depends on the particular conditions. It may be that people do not view a car as essential, for example, but if your own car breaks down, and cannot be repaired, because all car mechanics have stopped work, then buying a replacement car might be your only option so as to make essential journeys, and to be able to avoid contact with others using public transport. In that case, the car may become essential for you, and you may then be prepared to pay a high price for it, so as to meet that essential need. As you will only be able to buy from the existing stock of cars, as car production ceases, the car dealers who have the monopoly supply of this stock of cars, will, like the supermarket selling bread, or the water seller exchanging water for diamonds, be able to charge whatever price they like, and that price will get higher and higher, the more the stock of existing cars for sale is depleted, and that will get more severe the longer the production of cars is stopped. With no vaccine for COVID19 likely for another 18 months to 2 years, if governments continue their idiotic policy of deliberately cratering economies, the stock of cars will run out long before then. After all essential workers like health workers, require cars to get to work and so on, essential services require cars and commercial vehicles in order to function.
Its always in such conditions when the supply of commodities is constrained that market prices can rise unrelated to underlying values, and in which black markets, and criminality rise on the back of it sharply. Just think about the price of alcohol under
Prohibition in the US, or the price of illegal drugs today, or the exchange rates that people in Iron Curtain countries were prepared to offer on the street for Western hard currencies, and so on. The longer the constriction on supply continues, the higher the prices go, and the more the black marketeers step in to profit from those rising prices, and the more criminal gangs enforce that constriction on supply so as to maximise those profits. Its no wonder that alongside the idiotic policy of closing down economies, and thereby supply, governments around the globe are
introducing lockdowns, curfews, and martial law!
Those that suffer, at least initially, in these conditions are the poor and vulnerable, because they are least well placed to get access to these dwindling supplies of goods, and when they do get access, they are least well placed to be able to pay for them. Again, as wartime rationing showed, introducing rationing of goods is no answer, because it simply encourages the development of black markets. Those that can pay, pay, and buy from black marketeers and spivs, and the latter always have their own access to products via illicit channels, often depleting the stocks available for legal distribution in the process. The attempt to hold down prices by such rationing acts to further suppress legal production and supply of products, whilst encouraging the illegal production and supply of products, as was seen with Prohibition, with wartime rationing, and now with illegal drugs.
The others that suffer in such conditions are those involved in primary production, and many of these producers are also in poorer economies themselves, with their workers being correspondingly poor and badly paid. If car and vehicle production comes to a halt, therefore, the demand for steel drops. No one wants even the existing stocks of steel, and because steel rusts if left unused, steel suppliers seek to get rid of it quickly, at almost any price, before it becomes worthless. And, with steel production closed down, there is no demand for iron ore, limestone, carbon and so on, so that the primary producers of these products also see the price of their existing stocks fall sharply. The same has been seen with oil prices, now headed towards $10 a barrel, which spells doom for US shale producers, North Sea producers, and other high cost fields. With governments around the world committing to bailing out all of these businesses, the amounts of money required become astronomical. In 2008/9, the UK spent £2 trillion bailing out the banks and financial institutions, the US spent $9 trillion. To similarly bail out the whole of the businesses in the economy, in the same way, will cost ten times these amounts, sending borrowing, and thereby
interest rates to unheard of heights.
“Its obviously impossible to know when the next crisis will occur. But, we do know there will be another crisis, because capitalism is a system whose dynamism stems precisely from its inherent contradictions. It moves forward, each time it resolves those contradictions, and, because it is an unplanned system, the only way those contradictions can be resolved is through crises...
Similarly, it is impossible to predict what kind of crisis it might be...
But, we do know now from Marx and Engels' Theory of Crisis, that the potential for crisis arises from the contradictions between use-value and exchange value, that arise from the separation of production and consumption, between the role of money as means of circulation and means of payment, and from disproportions in supply. We also know, from their theories of crises that these potential causes of crisis can manifest themselves in a break-down in the circuit of capital in any of its three phases, a failure to convert money-capital into productive-capital, for productive-capital to be metamorphosed into commodity-capital, or for commodity-capital to become money-capital, and we know the reasons why these break downs might arise. We also know that in addition to economic crises of the kind described above, there are other forms of crises such as financial crises, and political crises. These are crises in their own right not determined by economic crises...
It will only be possible to analyse it when it has happened. But, there are plenty of candidates to choose from. Not only might a crisis erupt, as a result of some black swan event, that no one has foreseen, but it could arise from a large number of grey swans that are in full view.”
(Chapter 6)
Well, the current crisis is certainly one of those Black Swan events, not because of COVID19 itself, but because of the moral panic, and action of governments that has arisen on the back of it. But, it is also, now combining with the other “Grey Swans”, a term I developed at the time that I talked about in the book.
What has been said above, in relation to the prices of commodities applies also to the
general commodity, money, and to money-capital. The supply of money-capital is dependent on two sources. Firstly, realised profits, but profits are disappearing, because production itself is being deliberately stopped by governments. Secondly, savings, but savings are being drained down at a phenomenal rate, because both firms, and households deprived of income, are using savings to fund their continued consumption. Banks, including the government
National Savings and Investment body, are e-mailing customers telling them not to go into bank branches, or to ring the bank, but to conduct all transactions online. That is a clear indication that they now fear a
bank run, as savers start to draw out their savings to fund their continued consumption. Large companies are doing the same, drawing down on their credit lines with banks to fund their continued operation, and so as to pay outstanding bills.
Ford in the US has drawn down $15.4 billion on two credit lines, for example and this is happening across the globe. In India, the government has had to nationalise Y
es Bank, for example, and ask regional governments not to withdraw funds from it.
The global financial system was never cured from the financial crisis of 2008, and all of the additional liquidity, acting to further inflate asset price, has, in fact, only made its situation even more precarious. As asset prices collapse, as interest rates rise in response to the rising demand for money-capital, and sharp reduction in supply of money-capital, the underlying bankrupt nature of the banking system will again be exposed. As I wrote several years ago, following the collapse of banks in Cyprus,
the precarity of other banks across Europe, such as Deutsche bank was even greater, and only disguised by the size of the bank and its balance sheet.
The supply of money-capital is being curtailed, just as the supply of other commodities is being curtailed as governments shut down production. But, the demand for money-capital, not to be used as
capital, but as Marx describes in his analysis of crises, just to be used as currency, to pay bills, is rising astronomically, and so those who hold stocks of money can charge whatever they like for it. That is why, despite the government pumping in further billions of Pounds of liquidity, UK banks are charging businesses 12% if they want a loan, as well as imposing further restrictions and conditions. If I am the local loan shark, with a suitcase of money in my loft, and I see people around me desperate for cash to buy bread, whose price rises by the day, as its existing supplies dwindle, then I will feel free to charge 100% a day interest, and more, on any money I loan to such people, with the threat of a broken leg, for anyone that fails to make good on their debt. Welcome to the world that closing down the economy is creating in the next few months.
