Can money printing be used to stimulate the economy? In some conditions, yes, just as, in some conditions, Keynesian fiscal stimulus can be effective. However, its necessary to understand when, how, and why that can work, rather than, as the Keynesians and proponents of MMT do, putting forward those solutions as cure-alls.
In 2008, I wrote,
“As Mandel recounts in “The Second Slump”, there were a number of recessions during the post-war boom of 1949 – 74. Each was cut short compared to previous periods as a result of Keynesian intervention. How explain this? Keynesian intervention requires state spending. The state can only spend if it taxes. Borrowing does not change this, it merely defers that taxation to some future date when the borrowing has to be repaid. But, Marx tells us that taxes are a deduction from Surplus Value. If the state intervenes by spending it does so by – at least in the short term – making the bosses pay to resolve their crisis... If it is a matter of a recession within the context of a period of prolonged growth then once the crisis is over reforms can be clawed back, profits restored, state intervention rolled back. This after all is the basis of Keynesianism. It assumes that over the longer term the intervention is cost free because the increased economic activity utilising unused resources provides the basis of the higher tax revenues that pay back the previous deductions from surplus value.”
In short, in a period of long wave upswing, there can be periods where there are unused or underused resources. This can be because of the normal business cycle that operates within the long wave cycle; or it can be because of other short-term exogenous factors; it may be due to short-term frictions, for example in moving labour and capital to new areas of production, or geographic locations; it may be that new types of production require large amounts of capital that only the state is likely to provide in the first instance, or else requires large amounts of infrastructure spending, which again is a matter for the state.
In all these cases, the unused or underused resources are not the result of a crisis of overproduction. Partial crises of overproduction may arise in certain spheres, which could result in a generalised crisis of overproduction, in the way that Marx describes, i.e. by creating overproduction as a consequence of under-consumption. For example, Marx describes a situation where capital is not generally overproduced in the economy. High rates of profit may exist, and also high levels of demand for commodities, so that these profits can be realised. If, however, one large, or several sizeable industries experience a crisis of overproduction – they may expand too quickly, so that they are unable to obtain the specific labour they require, or only at much higher wages, or else their demand for raw materials means that they are not available or only at much higher prices, so that their surplus value, and their realised profits are squeezed or become negative, or they may simply expand their output so rapidly that the market does not expand quickly enough to absorb this output at prices that realise profits (for example the massive expansion of optical fibre and switching gear at the end of the 1990's, the example given by Marx in Theories of Surplus Value, is the expansion of yarn production resulting from the introduction of spinning machines) – then these industries, sharply reduce their output, to clear the overproduction. They lay off their workers who now stop or reduce their own consumption. The firm itself stops its demand for inputs from other producers, who in turn find that even at constant levels of output they are overproducing due to this under-consumption. They, in turn lay off workers, who reduce their consumption, and reduce their inputs from other suppliers and so on.
The consequence of this is that all of these other industries that were not overproducing, now see the demand for their own output curtailed significantly, so that this under-consumption, is expressed in their own overproduction of commodities. Another version of this is given by Marx in Capital II, Chapter 20, in examining the replacement of fixed capital. If fixed capital lasts longer than its normal average lifespan, then the firms employing this fixed capital do not replace it, and their under-consumption of fixed capital, means that the producers of fixed capital, who expected the demand for their output to be higher, will have overproduced. Marx notes that, in these conditions of under-consumption of fixed capital,
“There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”
The intervention of the state, in these conditions can prevent what was only a partial overproduction from becoming a generalised overproduction, as a result of under-consumption. Similarly, large scale state spending may be required to create the conditions required for new capital accumulation. In the 18th century, there was huge borrowing by the state to finance infrastructure development which was required for the development of what was becoming a unified national economy, founded upon commodity production and exchange, and development of markets. All of the additional borrowing, and credit creation, threw large amounts of liquidity into circulation, but it was geared to productive investment. This productive investment led to a sharp increase in output, and so the increase in value circulating in the economy was matched by the increase in liquidity, so that there was no rise in inflation. This depends upon the ability to mobilise unused or underused resources, and also requires that, in mobilising these resources, the capital involved is able to produce profits. During a period of long wave upswing, particularly at its start, these are precisely the conditions that exist.
If we look at Trotsky's analysis of the inflation in Russia produced by the Stalinists, then, as he says, it is not proportionate to the increase in money supply, precisely for this reason, because Russia had unused and underused resources, and in a planned economy, the state can direct the additional liquidity put into circulation to the employment of those resources. Output increases, so that the amount of value in circulation, and mass of use values produced increases, so that the unit price of output does not rise proportionate to the increase in liquidity, i.e. the equivalent form of that value.
“During the first period of the five-year plan, on the contrary, all the sluices of inflation were opened. From 0.7 billion rubles at the beginning of 1925, the total issue of currency had arisen by the beginning of 1928 to the comparatively modest sum of 1.7 billions, which is approximately comparable to the paper money circulation of tzarist Russia on the eve of the war – but this, of course, without its former metallic basis. The subsequent curve of inflation from year to year is depicted in the following feverish series: 2.0 – 2.8 – 4.3 – 5.5 – 8.4! The final figure 8.4 billion rubles was reached at the beginning of 1933. After that came the years of reconsideration and retreat: 6.9 – 7.7 – 7.9 billion (1935). The ruble of 1924, equal in the official exchange to 13 francs, had been reduced in November 1935 to 3 francs – that is, to less than a fourth of its value, or almost as much as the French franc was reduced as a result of the war. Both parties, the old and the new, are very conditional in character; the purchasing power of the ruble in world prices now hardly equal 1.5 francs. Nevertheless the scale of devaluation shows with what dizzy speed the Soviet valuta was sliding downhill until 1934...
As for the advantages to socialism achieved with its help, they are more than dubious. Industry, to be sure, continued its rapid growth, but the economic efficiency of the grandiose construction was estimated statistically and not economically... The absence of correct accounting, disguised on paper by means of combinations with the “conventional ruble”, led in reality to a decline of personal interest, to a low productivity, and to a still lower quality of goods.”
In other words, production was, indeed expanded so that the volume of output increased absorbing some of the increased liquidity, but liquidity increased faster than output resulting in inflation, and even the increase in output was dubious in nature, for the reasons Trotsky elaborates. Much of it was low quality or even useless, a feature that plagued the soviet economy until it collapsed. The equivalent form of the value in circulation – money – could only increase in line with the amount of value in circulation. Simply putting more money tokens in circulation than is required only results in the value of each token falling, and so prices rising – inflation.
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