Roberts then contradicts everything he had previously said about “it is changes in prices and output that drives money supply”, and states,
“But capital does like some inflation, as price rises enable companies to expand production and increase profits at the expense of wages. Thus central banks and monetary authorities try to combat the long-term tendency for price inflation to ebb by injecting money and credit (more M). Money supply acts as a countertendency to slowing value creation.”
Firstly, the hypothesis is false, for the reasons Marx sets out. The new value creation at best only relatively declines over very long time periods, as Marx describes in his explanation of the tendency for the rate of profit to fall. But, as Marx describes, that very same process sees the absolute amount of new value, and of surplus value itself expand massively, as a result of a greater volume of capital and labour being employed. As Marx, describes in Theories of Surplus Value, in fact, this same process driven by rising social productivity, also reduces the value of fixed capital potentially by more than the quantity of it employed (one machine replaces several older machines), at the very least, as he sets out in Capital III, Chapter 6, the proportion of fixed capital value in output continually declines, as both its value declines, and its productivity increases.
As Marx sets out in explaining the Law of The Tendency for the Rate of Profit to Fall, it is actually driven by the rise in the Technical Composition of Capital, whereby rising productivity causes a greater volume of raw material to be processed, so that it forms a growing proportion of the value of final output. Its this element that Roberts actually obliterates from his theory, equating constant capital rather with fixed capital (capital goods), the demand for which he then explains, like Keynes, by conflating it with Net Investment. In fact, given the technological developments in agricultural and primary production, there is no reason why the value of materials, as with the value of fixed capital, should not decline by a greater proportion than the increase in the physical quantity of them consumed, so that rather than forming a growing proportion of total output value, the form a smaller proportion, which would reverse the mechanism of the falling rate of profit! More significantly, in economies where 80% of new value and surplus value production comes from service industry, rather than manufacturing, the growth of the physical mass of raw material processed, does not occur, and so the mechanism is made redundant.
But, even assuming none of that then, why would central banks bother, when, according to Roberts earlier argument, it is changes in prices and output that drives money supply, not vice versa, and so any increase in money supply, he argued, would simply result in a lower velocity of circulation!
He says,
“Indeed, for the last 20 years, central banks have failed to achieve their target rate of inflation of around 2% a year with zig-zags on interest rates and monetary controls.”
But, that assumes that their primary aim was that 2% inflation target, which it wasn't. Indeed, prior to 2008 inflation went above it, leading to official interest rates being raised, which acted as a spark to the financial meltdown of 2008. After 2010, UK inflation went as high as 5% for some time, even despite the austerity. Their primary target was to reflate asset prices, the main form of wealth of the top 0.01%, and they have done that extremely successfully, in part due to keeping inflation low, by diverting money into asset speculation, and by measures of fiscal austerity to slow economic growth, which they would not have implemented if their real goal was economic expansion, and higher commodity price inflation!
He continues,
“A Marxist model of inflation, which I have outlined previously, suggests that it is the movement of profits and investment demand, along with money supply growth, that will drive price inflation this year and next.”
This is, in fact, the Ricardian, rather than Marxist model. It was Ricardo who argued that investment only occurs where prices/profits were rising. Marx points out that investment/capital accumulation takes place each year – other than where there is a crisis – because capitalists assume the market itself will grow each year, and, by adding additional labour-power, materials and machines they make that a self-fulfilling prophecy. Ricardo argued that for farmers to cultivate additional land required higher agricultural prices so that it enabled the payment of rent from higher agricultural profits.
"Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.”
(Capital III, Chapter 39)
As Marx describes, in conditions when the economy is growing rapidly, firms have to respond to that by accumulating capital, even if their rate of profit is falling, because any failure to do so, will result in them losing market share, and so being squeezed out of business. In the conditions, we have now, it seems unsustainable for Roberts to claim that it is profits that will be driving economic expansion in the year ahead, as a result of investment promoted by those profits.
Profits have been decimated as a result of government imposed lock-downs. Indeed, not decimated, which implies reduced by a tenth, but, in many cases, destroyed entirely, turning into losses, as firms have had to meet costs, without any sales. On the basis of Roberts' argument that it is growing profits that explain increased capital investment that fuels economic expansion, then the crushed profits that businesses have suffered ought to result in a huge reduction in capital investment, leading to a powerful recession of the type that Roberts has been predicting annually for the last ten years. Indeed, a year ago, when Roberts was demanding that economies be shut down to avoid tens of thousands of deaths from COVID, that is precisely the argument he was making (See his WW posts: Prepare For The Scarring, 7/5/20, and Underlying Weakness Exposed, 16/7/20, which both echo the position he had argued on his own blog that there would be a "Post Pandemic Slump"), whilst I pointed out that, it would depend upon whether capital itself was destroyed, in the interim, and whether the conditions existed at the end of it, for demand to increase rapidly. But, the opposite of what Roberts' theory suggests is happening, and, as I predicted, demand is surging, forcing firms to respond to it, by engaging in capital accumulation so as not to lose market share. Despite crushed profits, firms are responding to sharply rising demand by having to ramp up their own production. The money demand is not coming from the source that Roberts theory describes, but from the liquidity that the state has injected into the system and paid directly to consumers.
Indeed, as demand increases sharply, firms are not just seeing that their last year's profits turned into losses, but that their rate of profit on current production is being severely curtailed too, because ongoing restrictions have raised costs, and reduced rates of turnover, whilst sharply rising demand for inputs, in conditions of excess liquidity, has pushed up those input prices, including the price of labour, as various types of skilled labour is not available in sufficient quantity. Yet, again, this lower rate of profit has not resulted in the lower level of capital accumulation that Roberts' Ricardian model predicts, as firms have been forced, by competition, to accumulate to meet this rising monetary demand.
He says,
“this model forecasts US consumer inflation will go over 3% this year and next.”
Well congratulations on that brave call, given that US inflation is already above that level, and rising. As I wrote on 12th May,
“US CPI has risen by the most since 2008. It has way exceeded the estimates, coming in at 4.2%, year on year, more than double the Federal Reserve's target of 2%. But, the month on month figure, of 0.9%, for core inflation, poses a bigger problem for the Fed. It was three times the estimate of just 0.3%. The headline figure of 0.8%, month on month, was four times the estimate of 0.2%.”
(Note: I wrote this prior to the release of the June data. The June data release, however, simply emphasises further the point, as CPI rose to 5% - See: US Consumer price Inflation Surges To 5%)
He then talks about if inflation rises, the Federal Reserve would tighten monetary policy, but again, why would they, if, as he claims, inflation is not a monetary phenomenon but driven by costs? If the Fed does tighten policy this will increase yields, which, he says, would be a big problem for large parts of corporate America, who would face higher interest costs on their debt. In fact, this is nonsense. Most corporate bonds pay a fixed coupon for their duration. If inflation rises these fixed amounts of interest fall in real terms. Real yields, i.e. yields after inflation on much corporate debt is near zero. Its why corporations have issued bonds, in order to use the proceeds to buy back shares.
If yields/interest rates rise, as a result of inflation going even higher, then real absolute levels of interest rates would still be constrained. In terms of the cost of capital, as a determinant on whether a large corporation is going to borrow to finance expansion, it is likely to be negligible in conditions of a rapidly expanding economy in an inflationary environment. What, however, even such small absolute rises in interest rates bring about is a major fall in the capitalised value of financial and property assets. Corporations would find that the real debt burden they faced, after inflation would fall, whilst the price of bonds, and other forms of fictitious capital would be cratered. Indeed, its precisely fear of that which has led central banks and states to try to avoid rapid economic expansion in the past, and a consequent rise in interest rates.
Roberts also points to this house of cards in the realm of fictitious capital, but seeks to connect it to the real economy on the basis of his comments about corporate debt. Rather the connection is the other way around. The productive sector is indeed still decisive, as he says, but from the perspective that it is economic expansion, in that sector, that leads to rising interest rates that causes financial and property bubbles to burst. The question then is, as in 1847, 1857 and 2008 to what extent a financial crisis is allowed to impact the real economy, as a result of credit restrictions and breakdowns of the money transmission system, none of which need occur, if the appropriate measures are taken.
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