Of course, however, it again requires consideration of the specific conditions. Currency put into circulation does not immediately wash through into all prices, and similarly, any effect on economic activity, if any, does not immediately extend beyond any specific, immediate uses for which the liquidity is used.
In 1980 I undertook a study of the relation of increased money supply to GDP. Figures for M1 and M3, and GDP were obtained from “Economic Trends” and the “National Income and Expenditure Blue Book”, on a quarterly basis from 1972 to the third quarter of 1978. All data were seasonally adjusted, which meant that dummy variables were not required. Figures for GDP were set to 1975 prices, which meant that the change in GDP was made up solely from volume, rather than any price effects. Five variables V1-V5 were established for year, quarter, M1,M3 and GDP, with four more variables established to examine the effects of previous changes in money supply, by a transformation of V3 and V4, so that V6 and V7 were lagged four quarters, and V8 and V9 lagged 8 quarters.
I then ran regression analyses of the data using different combinations of variables. As Friedman had found some relationship between money supply lagged 8 quarters, and GDP, a regression of V8 on V5 was run first. This produced the worst result. The best results were obtained with a combination of present money supply and money supply lagged eight quarters. The best fit was given with M1 and M1 lagged eight quarters. Durbin-Watson Test Statistics were obtained for these regressions, and showed no auto-correlation, confirming these as the best fit. The analysis showed a close relationship between GDP growth and money supply on this basis.
But, this analysis covered a short period of time, in specific conditions. Moreover, as I have set out elsewhere, GDP is only a measure of the new value produced during the year. It is not a measure either of total demand (a basic error that Roberts makes in his article), nor of the total value of output. So, increases in the value of constant capital, c, that is not manifest in GDP data, might call forth increased money supply. Only as the increased value of c is reflected in greater employment of labour would this become apparent in GDP data.
GDP, or the new value created, consists only of v + s (variable-capital + surplus value), which resolves into revenues, used for personal consumption or saving (accumulation). But, total output consists of c + v + s, i.e. it also consists of the value of materials and wear and tear of fixed capital, produced in previous years, and consumed during the current year. So, demand for this output cannot consist, as Roberts mistakenly says, just of GDP, or revenues, because if it did there would be a perpetual under-consumption equal to the value of c. This is the mistake that Sismondi made, and that was continued by Malthus. As Marx points out, as against Sismondi/Malthus, and Lenin makes the same point against the Narodniks who took up Sismondi's position, demand consists not just of revenues, but also of demand by capital, i.e. productive consumption. This demand is funded from the value of output that does not resolve into revenues, but is itself the equivalent of the value of the consumed constant capital. I will come to Roberts' fundamental error later.
Trotsky noted that, in Russia, in the 1920's, the Stalinists also used increases in money supply to finance economic growth and investment, but he, also, likewise, notes that the economic growth itself was not proportionate to the increase in money supply, and consequent inflation.
“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. Taking command of the rouble – giving it, that is, various arbitrary purchasing powers in different strata of the population and sectors of the economy – the bureaucracy deprived itself of the necessary instrument for objectively measuring its own successes and failures. The absence of correct accounting, disguised on paper by means of combinations with the “conventional rouble”, led in reality to a decline of personal interest, to a low productivity, and to a still lower quality of goods.”
(The Revolution Betrayed, Chapter 4)
Trotsky, who had no doubt that inflation was a monetary phenomenon, and resulted from this printing of excess paper tokens, concludes the chapter,
“The platform of the Opposition (1927) demanded “a guarantee of the unconditional stability of the money unit.” This demand became a leitmotif during the subsequent years. “Stop the process of inflation with an iron hand,” wrote the émigré organ of the Opposition in 1932, “and restore a stable unit of currency,” even at the price of “a bold cutting down of capital investments.” The defenders of the “tortoise tempo” and the superindustrializers had, it seemed, temporarily changed places. In answer to the boast that they would send the market “to the devil”, the Opposition recommended that the State Planning Commission hang up the motto: “Inflation is the syphilis of a planned economy.””
This, of course, was the use of money printing in the context of a planned economy, where the state could utilise the additional liquidity directly to finance its desired projects, and yet, as Trotsky describes, the effect, inevitably, is that wherever this liquidity washed into the economy, it also then washes out into other spheres, in the way Marx describes in A Contribution To The Critique of Political Economy, the state having simply issued this liquidity has no control over where it ends up. Similarly, in the 1970's, the state might print money to finance its own attempts at demand management, via government spending, but, once injected, that money, inevitably, flows out into other spheres, resulting in inflation, unless the conditions exist in which an economic expansion is facilitated that is sufficient to absorb that additional liquidity. For example, as Mandel describes in relation to the recession of 1957. In other words, in conditions of long wave uptrend, short-term recessions might be cut short, by such intervention, enabling the underlying economic expansion to proceed, which then expands the value of commodities being circulated to a level whereby, the liquidity is absorbed without inflation. Something similar could be seen with the increase in liquidity provided in 1847, that ended the credit crunch that had impacted the economy, and enabled the underlying powerful economic expansion to resume.
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