Tuesday, 30 November 2021

The Handicraft Census In Perm - Article I, Section I - Part 1 of 6

The Handicraft Census In Perm

In this work, written when Lenin was in exile in Siberia, during 1898, he, again, provides an analysis of the latest economic data, and examines the conclusions drawn from it by the Narodniks. Many of the economic trends highlighted by the data have already been illustrated in previous works, and also comprise part of the more comprehensive analysis in Lenin's later work, The Development of Capitalism In Russia. I will avoid replication of tables unless required for clarity, because the original tables are available in the work online, or in print in Lenin's Collected Works, Volume 2, from which the page references again are taken.

Article One  

As part of the 1896 Exhibition in Nizhni-Novgorod, the Perm Gubernia Zemstvo provided funds for a scientific survey of the state of handicraft industry in the region. The result was to be a handbook of eight volumes, amounting to over 3,000 pages, in total. In fact, only one volume was published in time, A Survey of Perm Territory. A Sketch of the State of Handicraft Industry in Perm Gubernia. It is this data that Lenin analyses, along with other data. He notes,

“For the novelty, wealth and fullness of the material on which it is based, the Sketch is a work of outstanding interest. The material was obtained through a special handicraft census financed by the Zemstvo and taken in 1894-95. This was a house-to-house census, each householder being questioned individually.” (p 357)

The questions asked were also wide-ranging, covering not only the activities of the master craftsmen, but also their family members, and wage labourers. It covered things like agricultural activity, as well as details on raw material purchases, production techniques, seasonal work patterns, sale of products, debts, and the time businesses had existed.

“As far as we are aware, this is perhaps the first time such abundant information has been published in our literature. But to whom much is given, much is required. The very wealth of the material entitles us to demand its thorough analysis by the investigators, but the Sketch is a long way from meeting this demand. Both in the tabulated data and in the method of grouping and analysing them there are many gaps, which the present author has had in part to fill by selecting material from various parts of the book and computing the appropriate data.” (p 357-8)

Lenin emphasises that his analysis is based on the data and the economic reality as it is. The point is made, because the Narodniks continually analysed data within the confines of their view of how economic reality “should be” rather than how it is. In other words, they filtered it through the prism of the moral socialist view of how Russia's development should take place, had it not been led down a wrong path of capitalist development. By contrast, Lenin looks at the data in the context of the economic realities, and also explains, from a materialist perspective, why those realities were inevitably what they were, and not something else.

“As to extending the conclusions drawn from the data on Perm Gubernia to “our handicraft industries” in general, the reader will see from what follows that such an extension is quite legitimate, for the forms of “handicraft industry” in Perm Gubernia are exceedingly varied and embrace every possible form ever mentioned in the literature on the subject.” (p 358)

Lenin emphasises that, in this work, it divides into two elements, firstly the analysis of the data, and secondly, his discussion of the Narodnik conclusions drawn from it.

Inflation Continues To Surge. Interest Rates Are Next - Part 9 of 10

In a recent post in the WW, Michael Roberts, promoting his perennial catastrophist narrative that the next recession is at hand, writes,

“Indeed, because of low profitability on productive capital in most major economies, in the first two decades of the 21st century profits from productive capital have increasingly been diverted into investment in real estate and financial assets, where ‘capital gains’ (profits from rises in stock and property prices) have delivered much higher profits.”

But, it was not low profitability on productive-capital that led to this speculation in assets. It was the fact that the capital gains – I will leave aside his description of capital gains as “profits”, whereas, for a Marxist, profits are derived only from surplus value – were in excess of even high rates of profit, and were guaranteed by central banks, in a way that profits never can be. Moreover, as Marx describes, the antagonistic relation between the owners of productive-capital (the associated producers) and the owners of fictitious capital (share and bondholders), is brought out in precisely this. If companies had invested more in productive-capital, as a result of the high rates, and levels, of profit, created by the technological revolution of the 1980's, the consequence would have been, higher levels of demand for money-capital, relative to supply, and so higher rates of interest, which would have acted to restrain the rise in asset prices, and to crash them where they had been inflated. It was precisely for that reason that the owners of that fictitious capital, i.e. the dominant shareholders, used their controlling position, to divert profits into share buybacks, and so on to further inflate asset prices, and away from productive investment!

Roberts confuses the interests of fictitious capital, and its owners, with the interests of productive-capital. The latter, does, indeed, seek to maximise accumulation, and the profit of enterprise, whilst the former's main concern is to maximise the interest they can extract from the owners of industrial capital, and, more recently to maximise its potential for capital gains, and minimise its risk of capital losses.

Roberts also says,

“A long boom is only possible if there has been a significant destruction of capital values - either physically or through devaluation, or both.”

In fact, Marx makes clear, in Theories of Surplus Value, that a physical destruction of capital is not helpful in raising the rate of profit, and creating conditions for economic expansion. It is only the devaluation of values that performs that function. The preservation of the use values, themselves, is a requirement for raising the rate of profit, or else, a portion of social labour-time, and, thereby, a tie up of capital is required to replace them, as part of the process of social reproduction.

“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.”

(Theories of Surplus Value, Part 2 p 496)

The notion that the rate of profit is enhanced, or accumulation facilitated, by the physical destruction of use values is a Keynesian notion, not one advocated by Marx. It was Keynes, not Marx, who advocated digging holes so that others could be paid to fill them in!

Its true, that the 2020's are not going to be a repeat of the 1920's, but for reasons the very opposite of those Roberts proposes in his article. Roberts correctly describes the period preceding the 1920's, as one in which a technological revolution gets underway. He says,

“By cleansing the accumulation process of obsolete technology and failing and unprofitable capital, innovation from new firms could prosper. Schumpeter saw this process as breaking up stagnating monopolies and replacing them with smaller, innovating firms. In contrast, Marx saw creative destruction as creating a higher rate of profitability after the small and weak were eaten up by the large and strong.”

Again, this is not accurate. Marx does see, small and weak firms being eaten up by larger firms, but he also sees, new small firms, particularly in new spheres of production, entering the fray, during such a process, as part of the lifeblood of capitalism being refreshed. These new firms, in new spheres, are generally characterised by a lower organic composition of capital, and so with a higher annual rate of profit. (Capital III, Chapter 14) The lower organic composition may result from employing a lot of labour relative to capital, or else may be the result of employing a relatively small number of highly skilled workers, whose labour is complex.

But, the reason Roberts analogy is wrong, is that the period of long wave boom does not result directly from the technological revolution, and clearing out of deadwood. What accompanies the latter is a period of stagnation and slower growth, precisely, because the introduction of the new technologies – intensive accumulation – is one in which labour is replaced by it. It is a period in which the gross product rises at a slower pace than the net product, as Marx describes in Theories of Surplus Value, and which is the physical manifestation of the fact that the rate of surplus value rises.

The period of long boom, by contrast, follows such a period. It comes when, intensive accumulation, and rapidly rising productivity ceases, and, so, when, in order to grab market share, driven by competition, firms have to accumulate capital extensively, rather than intensively, including the employment of additional labour. It is that, which, then, creates the conditions for the demand for wage goods to rise more rapidly, and so sets in the process by which gross output grows faster than net output. The 1920's (actually from around 1914), at least in Europe, were characterised, precisely as a period of crisis, leading into the stagnation that carried on into the 1930's. The 1920's and 30's, was a period of higher rates of profit, as wages fell, and constant capital was devalued. That created the conditions, in which, during the 1940's, 50's and 60's, economic expansion could proceed, leading again into the period of crisis of the 1970's, and early 1980's.

It is the 1980's that are the equivalent of the 1920's, and the current period is the equivalent of the 1950's and 1960's, when those conditions did result in a period of expansion and boom. The start of that was seen between 1999 and 2008. It has been deliberately hibernated since then, via measures of austerity to reduce economic growth, and measures of QE to divert money and money-capital away from the real economy, and into speculation in assets.

Monday, 29 November 2021

Adam Smith's Absurd Dogma - Part 21 of 52

In primitive society, Marx says, there are no produced means of production, and so,

“...no constant capital, the value of which could pass into the product, and which, in reproduction on the same scale, would have to be replaced in kind out of the product and to a degree measured by its value.” (p 847)

But, Nature provides the means of subsistence and means of production gratis. A stone becomes a primitive means of hunting, digging, cutting, as with sticks etc. Its in these conditions that the members of these primitive societies can use surplus labour-time to produce means of production to increase productivity. But, this expenditure of resources, out of revenue, is, then, not a replacement of consumed means of production, just as with the accumulation of capital out of surplus value.

“This reconversion of profit into capital shows rather upon closer analysis that, conversely, the additional labour — which is always represented in the form of revenue — does not serve for the maintenance, or reproduction respectively, of the old capital value, but for the creation of new excess capital so far as it is not consumed as revenue.” (p 848)

In other words, this is equal to Keynes net investment, and, in no sense, accounts for the replacement of consumed constant capital.

“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.” (p 849)

So, again, what we have is social reproduction as a physical reproduction of material balances, the fact of which is plain if no change in social productivity or capital accumulation occurs. But, a change in social productivity does not change this relation, it simply means a change in the proportion of social labour-time allocated to reproduce these different material balances. A rise in social productivity, as described in Capital III, Chapter 6, and in Theories of Surplus Value, brings about a release of capital, meaning more social labour-time is available for consumption or accumulation, and vice versa. It means that the rate of profit rises, because any given mass of surplus value, now accumulates greater quantities of means of production and labour-power. This is no different than Robinson Crusoe using his excess labour-time to produce a bow to increase his hunting capacity. The only difference is that, under capitalism, it is the capitalist that owns the surplus labour capacity, and, thereby, the products of it in the form of additional capacity.

“However, what is actually transformed into capital is not profit as such. Transformation of surplus-value into capital signifies merely that the surplus-value and surplus-product are not consumed individually as revenue by the capitalist. But, what is actually so transformed is value, materialised labour, or the product in which this value is directly manifested, or for which it is exchanged after having been previously transformed into money.” (p 850)

Inflation Continues To Surge. Interest Rates Are Next - Part 8 of 10

A sure sign that market rates of interest are rising is when borrowers begin to try to lock in loans for longer periods, at fixed rates. Anyone with a bank account or savings account will have had emails from their bank or building society, in recent weeks, telling them that they can get a higher savings rate than the current near zero rate, by applying for a fixed rate bond, or other such vehicle, tying up their money for the next three years. Why? Because, the banks know that, in the very near future, they are going to be having to pay much higher rates on savings accounts, and those rates are likely to rise way above the fixed rates they are now trying to tie savers into for three years and more. Already, banks and building societies have begun to raise mortgage rates for borrowers, even ahead of actual rises in policy rates by central banks.

The standard line being pushed, in relation to these higher mortgage rates, is that they do not pose any immediate threat to house prices, because, existing borrowers are, themselves, mostly covered by fixed rate mortgages, extending out for another 3-5 years. That argument is nonsense.

It is nonsense for several reasons. Firstly, the effect of higher interest rates on asset prices, such as that of land and property is not primarily effected through that means. It is effected via the role of capitalisation. That is, with higher interest rates, the capitalised value of the revenues from any asset falls. If a hectare of land produces £1,000 of rent per year, then, if the rate of interest is 1%, the hectare of land produces as much revenue as £100,000 producing £1,000 of interest. But, if the rate of interest rises to 2%, the £1,000 of rent is equal only to £50,000, producing £1,000 of interest. One of the reasons that money started to flow into speculation in buy-to-let properties, was precisely that the interest that could be earned on savings fell to very low levels, meaning that rents from properties offered a better alternative. When, this speculative demand drove up house prices to astronomical levels, the speculators, then, had another incentive. Even the rent, as revenue, ceased being the main concern, as it became the potential for large annual capital gains from rises in property prices that took over.

The more property prices have risen, the more prospective landlords have to pay for additional properties, and the more capital they have tied up in their existing properties. Even as rents have risen, therefore, rental yields have fallen. As interest rates rise, so those rental yields become even less attractive, and as landlords, then, begin to sell to release their capital, so the prospect of capital gains from property speculation disappears, turning into the prospect of capital losses, and, so provoking even greater selling, and further falls in property prices. The landowners who were also keen to try to hold on to their land, begin to want to release it, before its price falls, and, in so doing hasten those falls.

But, even, in terms of the mortgage rates, the argument about fixed rates is false. Nowadays, the limit of how much people can offer for houses is not the house price itself, but how much they can afford to pay each month in mortgage payments. Current mortgage rates vary from around 1% to 1.25%. For ease, let's take 1%, and a repayment mortgage over 20 years. Suppose someone wants to buy a £200,000 house. That means over 20 years, repayment of the capital is £10,000 p.a., and interest is £2,000 = £12,000 p.a., or £1,000 per month. Assume, this is the most they can afford to pay each month. Now, however, interest rates rise to, say, 3% - that is not at all unreasonable as the long-term average for mortgage rates is 7%, for comparison – so that, the amount of interest p.a. rises to £6,000, or £500 per month. Given that the buyer can only afford £1,000 per month in total, this clearly means that the amount they can afford to borrow, and so pay for a house, is severely curtailed.

At this interest rate, they could borrow £150,000, meaning £7,500 p.a. in capital repayments, with £4,500 p.a. in interest payments. Immediately, therefore, the houses that buyers could previously afford to offer £200,000 for, can now only attract offers of £150,000, a fall of 25% in prices. It is not the immediate effect on existing borrowers being unable to afford to pay their mortgages, in respect of those with fixed rates - though some of them will always be coming to the end of their fixed rate periods, and need to renew at a higher rate, which many will be unable to afford – and so becoming forced sellers that causes prices to fall, but the fact that any buyers – first-time buyers or not – will, now be able to afford, and so offer, much less, that causes prices to drop, and, as seen in this example, to drop substantially. If mortgage rate rise to the long-term average of 7%, then that represents, on the above basis, a 50% fall in the price that buyers could offer, and were we to rise to the 10-15% levels seen in the early 1990's, an even bigger decimation of house prices would be inevitable. With interest rates now set to be rising steadily in the period ahead, landlords, in particular, seeing the likelihood of considerable capital losses, will begin to want to get out ahead of the rush. The fall in property prices, will be just the start of the crash in asset prices overall.

Sunday, 28 November 2021

A Characterisation of Economic Romanticism, Chapter 2 - Part 16 of 16

Greg, of course, as with the conservative, social democratic romanticists, in relation to Brexit, wanted to present things as beneficial to all. Marx illustrated that, in terms of economic gain, this was not the case for workers. He argued that the fall in food prices would simply enable employers to reduce wages, and so boost profits. In fact, as Marx says, this is not entirely true, because wages are sticky downwards, and so the fall in food prices, does not result in a corresponding fall in wages. Living standards for workers rise, because they do not fall by the full amount. In the 20th century, capital responds to this condition, under Fordism, by utilising central banks to print excess money tokens, to create inflation, so that money wages always appear to rise.

The argument of the liberal free trader was that, yes, competition between workers would reduce wages to the level of the reduced wage goods, but those lower prices would stimulate additional consumption, and this increased consumption, and the increased demand would call forth additional production, requiring more labour, which would result in higher wages. Lenin quotes Marx's comment, which also reflects what he says in Wage Labour and Capital,

“The whole line of argument amounts to this: Free Trade increases productive forces. If industry keeps growing, if wealth, if the productive power, if, in a word, productive capital increases the demand for labour, the price of labour, and consequently the rate of wages, rise also. The most favourable condition for the worker is the growth of capital. This must be admitted. If capital remains stationary, industry will not merely remain stationary but will decline and in this case the worker will be the first victim. He goes to the wall before the capitalist. And in the case where capital keeps growing, in the circumstances which we have said are the best for the worker, what will be his lot? He will go to the wall just the same. . . .” (p 263)

This latter conclusion is also the same as arrived at in Value, Price and Profit, where Marx says that, for this reason, the workers should not devote themselves to trying to defend their wages, but should take advantage of the development of the productive forces that capitalism brings, as well as the economic forms it creates, in the shape of socialised capital, so as to transform society itself.

“Thus, the speaker was able to find a criterion for the solution of the problem which at first sight seemed to lead to the hopeless dilemma that brought Sismondi to a halt: both Free Trade and its restraint equally lead to the ruin of the workers. The criterion is the development of the productive forces. It was immediately evident that the problem was treated from the historical angle: instead of comparing capitalism with some abstract society as it should be (i.e., fundamentally with a utopia), the author compared it with the preceding stages of social economy, compared the different stages of capitalism as they successively replaced one another, and established the fact that the productive forces of society develop thanks to the development of capitalism. By applying scientific criticism to the arguments of the Free Traders he was able to avoid the mistake usually made by the romanticists who, denying that the arguments have any importance, “throw out the baby with the bath water”; he was able to pick out their sound kernel, i.e., the undoubted fact of enormous technical progress.” (p 263-4)

And, the same with the EU and the Brexit debate. When Marxists argue against Brexit, and in favour of Remain, it is not as some would present it, the Marxists siding with the interests of big capital, but of siding with the reality of the progressive nature of the development of the productive forces, i.e. they side with history. The reality is that the EU, for all its limitations, represents the greatest achievement in human history, of peacefully and voluntarily uniting 500 million people in the largest economic and political union, and single market on the planet. It is not necessary to be satisfied with that as against an, as yet, non-existent socialism, or some other “abstract society as it should be”, to recognise its progressive nature, not only in regards the nation state, but also as part of the fundamental material conditions for creating socialism on an international scale.

Yet, the Lexiters and their fellow travellers do present things in this way, condemning the Marxists for supporting Remain as being the equivalent of being the lackeys of big capital and ideologists of neo-liberalism, and imperialism. It is the same position as that of the Sismondists and of the Narodniks, who assailed the Russian Marxists in exactly the same terms.

“Our Narodniks, with their characteristic wit, would, of course, have concluded that this author, who had so openly taken the side of big capital against the small producer, was an “apologist of money power,” the more so that he was addressing continental Europe and applying the conclusions he drew from English life to his own country, where at that time large scale machine industry was only taking its first timid steps. And yet, precisely this example (like a host of similar examples from West-European history) could help them study the thing they are not at all able to understand (perhaps they do not wish to do so?), namely, that to admit that big capital is progressive as compared with small production, is very, very far from being “apologetics.”” (p 264)

Unlike the romanticists, Marx outlined, scientifically, the contradictions that arise from capitalism, and the more acute those contradictions become, the more developed it becomes.

“But he never descended to uttering a single sentimental phrase bewailing this development. He never uttered a word anywhere about a possibility of “diversion from the path.”” (p 264)

The position is made clear, by Marx, in his speech, in setting out why he came down on the side of free trade. It was because it more effectively broke up the old feudal society, and its remnants. The same applies today in relation to the progressive nature of large-scale, multinational, socialised capital, as against the remnants of small scale, private capital, and the multinational states and political forms arising from the former as against the attempts to constrain society within the fetters of the nation state, which is the programme of the latter.

As Lenin says, Engels had made clear this progressive role, even before the repeal of the Corn Laws, and the effect it would have on workers' consciousness. Lenin concludes with Marx's closing words from the speech on free trade, where this progressive nature of breaking up the old forms, and facilitating the development of capitalism is summed up.

“It is in this sense alone, gentlemen, that I vote in favour of Free Trade.” (p 265)

Inflation Continues To Surge. Interest Rates Are Next - Part 7 of 10

The narrative from bourgeois economists and financial pundits is one in which the most important price in the economy, the price of capital/rate of interest, is one wholly determined by the state, via its central bank. That such ardent proponents of the power and necessity of the market to determine prices should themselves become the advocates of a centrally planned economy, in this one regard, is again evidence of the degree of contradictions they now find themselves ensnared within. In fact, this power they give to the central bank is wholly misplaced. Not even in truly centrally planned economies, does the state and central bank have the power to determine the rate of interest, which continues to be determined, as Marx describes, by the balance of demand and supply for money-capital. As Trotsky pointed out, when the Stalinists in the USSR thought that they could “send the market to the devil”, by financing the demand for additional money-capital, for investment, by printing additional money tokens, the result was an increasingly runaway inflation.

“During the first period of the five-year plan, on the contrary, all the sluices of inflation were opened. From 0.7 billion roubles at the beginning of 1925, the total issue of currency had risen by the beginning of 1928 to the comparatively modest sum of 1.7 billions, which is approximately comparable to the paper money circulation of Tsarist 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 roubles 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 rouble 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 rouble 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...

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.””

(The Revolution Betrayed, Chapter 4)

A similar trajectory is, today being seen in Turkey, where Erdogan has insisted that the central bank continue to reduce its policy rates, and increase liquidity, despite soaring inflation, with the inevitable result that inflation continues to soar higher, imposing even higher costs on firms and households, requiring even higher levels of borrowing that pushes market rates of interest higher still, and has caused the Turkish Lira to drop through the floor relative to the Dollar and other currencies, which leads to even higher levels of imported inflation.

The US Federal Reserve has announced it is starting to taper its QE programme, and the Bank of England was expected to raise its policy rates last month. It didn't, as, especially given the added problems the UK economy faces, as a result of the self-imposed damage of Brexit, it clearly fears that, as soon as these official interest rates begin to rise, even by very small absolute amounts, it will spell the start of a crash in UK asset prices, because those small absolute rises in rates, amount to huge proportional rises. A rise from the current 0.1% to just the expected 0.25%, for example, represents a 150% increase.

But, these changes in official policy rates, are merely a reflection and grudging admittance of the fact that real market rates of interest are rising, for the reasons described above. Its why states and governments have been keen to try to use renewed lockouts and lockdowns to restrain economic activity, and even to begin to talk about a reintroduction of austerity measures, even, though, for many governments, including the Tories, in Britain, with their levelling up agenda, any such austerity measures would be political suicide.

Saturday, 27 November 2021

Inflation Continues To Surge. Interest Rates Are Next - Part 6 of 10

It is because the dominant section of the ruling class, the top 0.01%, nowadays, own their wealth in the form of such fictitious capital, and not as productive wealth, that they have been so concerned to avoid crashes in asset prices, and it is also why central banks, as part of the capitalist state, have been so concerned to ensure that any such falls in those asset prices are prevented, or reversed as quickly as possible, when they happen. They have been prepared to do that even at the cost of destroying real productive capacity, by using monetary policy to encourage money and money-capital to flow into such speculation, rather than into the real economy, either as personal consumption or productive consumption. Its why they introduced measures of harsh austerity alongside the policy of QE.

The potential for further austerity measures had reached its limits, economically and politically, and having imposed lockouts and lockdowns, governments were even forced to have to do the opposite, borrowing huge amounts to cover spending on income replacement schemes, and so on. Lockouts and lockdowns, acted, initially, to restrain demand, and economic activity, as a proxy for renewed austerity, and that, again, combined with even greater amounts of QE, acted to, again, divert money into speculation, driving asset prices, again, to new highs, where, previously, they had begun to look fragile. But, sooner or later, the justification for those lockdowns and lockouts was going to be seen to be fallacious, and that was hastened by the rapid introduction of vaccines, which created large-scale herd immunity and brought the level of serious illness, hospitalisations and deaths down to a small fraction of what it had been.

As soon as governments were, then, forced to begin removing those restrictions, the consequence was inevitable, as consumers who had had most of their incomes protected by government income replacement schemes, started to spend, whilst the supply of commodities available for them to buy had been artificially reduced, as a consequence of those very same government imposed lockouts and lock downs. Huge amounts of inflationary liquidity, fed into a sharp rise in monetary demand, whilst artificially constrained supply was unable to satisfy it, leading to inflationary rises in prices and costs. This illustrates the extent of the contradiction that the ruling class and its state now faces.

With lockdowns, that contradiction is again manifest. Billions spent on vaccines that were supposed to – and do – provide protection, but, which then removes the need for lockdowns, with a consequent upsurge in economic activity, and upward pressure on interest rates, which will cause asset prices to crash. So, states have to continually talk about infection rates, which are meaningless, in order to divert attention from the fact that vaccines and herd immunity has resulted in serious illness, hospitalisation and death, from COVID, more or less disappearing. It necessitates a continual supply of new variants of the virus being identified as justification for further lockdowns despite the success of vaccines, whether or not those new variants represent any additional threat or not. In fact, in all cases, so far, the vaccines have been found to provide more or less the same very high level of protection against serious illness, as they do in respect of the initial variants.

The sharp rise in monetary and physical demand, spurred firms to compete to grab their share of this demand, and additional profits, causing economic activity to spike higher. During the lockouts and lock downs some firms had no earnings, and even had to run down balance sheets, others saw earnings decline significantly. Faced with a need to increase supply, sharply, they had no reserves with which to do so, and, facing rising costs of inputs, including labour costs, they faced a challenge in financing even a resumption of their previous production from internal resources, let alone any expansion.

Fortunately, as Marx describes, when economic activity increases sharply, a lot of the costs of firms are met via commercial credit. Firms buy inputs from their suppliers, on the basis that they do not need to pay for them, for say, 30 days, 60 days, or even 90 days. So economic expansion can occur without any increase in borrowing, or need for increased money supply. With workers paid a month in arrears, this is even true, in respect of labour, especially in respect of many service industries, where the rate of turnover of the capital, is very rapid. It is, also why measures of investment in productive-capital, which only take into account investment in fixed capital, rather than this expansion of circulating capital, are seriously deficient, especially in economies that, today, are 80% based on labour-intensive service industry.

But, it is not true for all such costs. Especially, where firms, faced with labour shortages, and rising wages, seek a solution in labour-saving equipment, they need to borrow to finance the investment. A firm that seeks to occupy new premises, or even just seeks to expand by the process of extensive accumulation, i.e. simply buying more of the existing technology to be operated by additional workers, needs to borrow to do so, and this increased borrowing, an increased demand for money-capital, acts to cause interest rates to rise. That is particularly the case where the supply of new money-capital, from realised profits, begins to be constrained, as a result of wages starting to squeeze profits. Profits grow absolutely, but fall relative to the demand for additional money-capital.

Moreover, its not just business that demands money-capital. The state also demands it. To the extent that the state finances its operations via taxes, those taxes are a drain on surplus value, and so on profits. In a period, where competition drives firms to invest to capture their share of a rapidly rising market, any reduction in profits, due to higher taxes, can only result in firms borrowing more, or throwing less of its realised profits into capital markets. Indeed, to the extent that the government spends more, using those taxes, it acts to stimulate the economy and demand even further, causing firms to need to spend more to grab market share. If the government taxes less, so that firms have more profits available to invest or save, the government itself has to go directly to the capital markets to borrow more to finance its activity. Either way, the demand for money-capital rises, relative to supply, causing interest rates to rise.

That process was already beginning to be seen towards the latter part of last year, even finding its way into a reflection in the highly manipulated government bond markets, as bond yields began to rise by large percentages. On cue, last year, governments re-imposed lockouts and lockdowns, to slow economic activity, and, so, the rise in interest rates. And, now, as those restrictions again were lifted, economic activity rose sharply again, inflation and employment rose sharply, and the impact on interest rates, again, began to take effect. Across the globe, countries have even had to begin to raise their policy interest rates.

Northern Soul Classics - This Won't Change - Lester Tipton


Friday, 26 November 2021

Friday Night Disco - All These Changes - Milt Matthews


A Characterisation of Economic Romanticism, Chapter 2 - Part 15 of 16

When Marx examines the question of free trade, in general, it is from the perspective of capitalism as a system, and viewed from this perspective, Marx says, free trade is the logical conclusion, the requirement for its most rapid and rational development. Marx notes,

““The repeal of the Corn Laws in England is the greatest triumph of Free Trade in the nineteenth century.” “. . . By the repeal of the Corn Laws, free competition, the present social economy is carried to its extreme point.”” (p 259)

In this, Marx agreed with Sismondi. The difference was that Sismondi saw this development of capitalism as a bad thing, and so something he wanted to hamper, whereas Marx saw it as the most progressive development in human history, and so something whose development was to be encouraged. Speaking of Marx and Engels, Lenin says,

“Hence, the issue presents itself to these authors as a question of whether the further development of capitalism is desirable or should be retarded, whether “different paths” should be sought, and so forth. And we know that their affirmative answer to this question was indeed the solution of the general fundamental problem of the “destiny of capitalism” and not of the specific problem of the Corn Laws in England, for the point of view established here was also applied much later in relation to other countries. The authors held such views in the 1840s in relation to Germany, and in relation to America, and declared that free competition was progressive for that country; with respect to Germany one of them wrote, as late as the sixties, that she suffered not only from capitalism, but also from the insufficient development of capitalism.” (p 260)

And, the same is true in relation to the Brexit debate. The capitalist EU is not the goal that Marxists seek, any more than capitalism is the goal we seek, but like Marx, we understand that the path to the goal of Socialism runs through capitalism, and its development, through the stage of monopoly and multinational capitalism, the creation of a world market, imperialism and the bursting through the fetters imposed by the nation state.

Speaking of Marx, Lenin notes,

“For him it is not the abstract question of which system England should adopt, what path she should choose (as the question is put by Sismondi, who forgets that England has a past and a present, which already determine that path). No, he forthwith presents the question on the basis of the present-day social and economic system; he asks himself: what must be the next step in the development of this system following the repeal of the Corn Laws?” (p 260)

The effects on industry were apparent. It would cheapen raw materials, thereby creating a large release of constant capital, and also raising the rate of profit. It would cheapen food, and so enable a reduction in wages, so increasing surplus value, the rate of surplus value, and rate of profit. The manufacturers, to argue that the measure would benefit the nation, had to also show that it would benefit agriculture. They launched a competition for those who could demonstrate such advantages. It was won by Hope, Morse and Greg, and Marx chooses this latter as best reflecting scientifically the interests of the capitalist farmers, though Greg himself was a large manufacturer. He argued that it would,

“thrust the small farmers out of agriculture and they would turn to industry, but it would benefit the big farmers who would be able to rent land on longer leases, invest more capital in the land, employ more machines and get along with less labour, which was bound to become cheaper with the fall in the price of corn. The landlords, however, would have to be content with a lower rent because land of poorer quality would drop out of cultivation, as it would be unable to withstand the competition of cheap imported grain.” (p 260-1)

This analysis was proved right. As Marx set out in Value, Price and Profit, in fact, as some of the small farms closed down, even this reduction in demand for agricultural labour was not enough to prevent it being in short supply, as the larger farms expanded, because the agricultural labourers became industrial workers, construction workers and so on. It led to rising agricultural wages, but the farmers could not raise prices, and could only respond by further mechanisation to replace labour, which then reduced costs of production, and increased profits. In fact, as Marx and Engels describe, in Capital III, these developments meant that even the foreseen reduction in rents did not occur. Lenin quotes, Marx from Capital I.

“The repeal of the Corn Laws gave a marvellous impulse to English agriculture. . . . A positive decrease of the agricultural population went hand in hand with increase of the area under cultivation, with more intensive cultivation, unheard-of accumulation of the capital incorporated with the soil, and devoted to its working, an augmentation in the products of the soil without parallel in the history of English agriculture, plethoric rent-rolls of landlords, and growing wealth of the capitalist farmers. . . . Greater outlay of capital per acre, and, as a consequence, more rapid concentration of farms, were essential conditions of the new method.” (p 261)

In other words, the repeal not only gave an impetus for the development of industrial capital, but also of agricultural capital. And, Lenin, basing himself on Marx and Engels' analysis of differential rent, says that the reasons the rent did not fall, even as prices fell, is also explained. He quotes from Capital III.

““When the English corn duties were abolished in 1846 the English manufacturers believed that they had thereby turned the landowning aristocracy into paupers. Instead, they became richer than ever. How did this occur? Very simply. In the first place, the farmers were now compelled by contract to invest £12 per acre annually instead of £8. And, secondly, the landlords, being strongly represented in the Lower House too, granted themselves a large government subsidy for drainage projects and other permanent improvements of their land. Since no total displacement of the poorest soil took place, but rather, at worst, it became employed for other purposes—and mostly only temporarily—rents rose in proportion to the increased investment of capital, and the landed aristocracy consequently was better off than ever before” (Das Kapital, III, 2, 259).” (Note *, p 261)

Inflation Continues To Surge. Interest Rates Are Next - Part 5 of 10

So, when its claimed that excess money printing, in the 1990's and after, did not cause inflation, this is not the case. Compared to the falls in unit prices that should have occurred, as a result of massive increases in productivity, and the fall in unit values of commodities, excess money tokens, thrown into circulation, prevented the corresponding fall in unit prices. More significantly, the excess liquidity led to a huge inflation of a particular type of prices, i.e. the prices of assets, be it, shares, bonds, or property and their derivatives, or other assets, each of which became a target for speculation.

The difference between these assets and other commodities, is that the supply of assets does not increase in response to a rise in prices that brings about higher profits. If the demand for cars rises so that the market price rises, then profits for car producers rise. Competition means that they each then seek to obtain their share of this increased demand, and the profits from it, by increasing their supply.

Generally, because larger-scale production brings economies of scale, the result of this increased production is a lower unit value for cars, so that, as demand and supply adjust to this higher level, the market value/price of production for cars is lower than it was before. Orthodox economics comes to the opposite conclusion to this, because it assumes diminishing returns, so that increased production/supply entails proportionately higher costs. That may be true, in some conditions, as far as short run costs are concerned – and is a factor, now, as firms face supply shortages and bottlenecks – but it is not true in the medium and long-term. In the long-term, because rising productivity leads to lower unit values, it should always result in lower prices, were money supply adjusted accordingly. The fact that money prices, instead, rise over time is evidence that central banks always deliberately create inflation, by increasing liquidity more than is required.

But, this increased supply/production, in response to higher prices/profits, does not apply, when it comes to assets. If the demand for land rises, say, because house prices rise sharply, due to speculative demand, and builders want more land to build on, its not possible to create additional land. This is what is meant by a monopoly of land ownership. Someone can't just go out and produce more of it, in the same way they can with cars, or mobile phones etc. Moreover, when demand for land rises sharply, causing land prices to rise, there is a clear incentive for its existing owners to hold on to it, in the expectation that its price tomorrow will be higher than it is today. It creates the potential for a speculative capital gain, which, in turn, creates the conditions for more such speculation.

With shares, its true that, when share prices rise, this creates an incentive for companies to create additional shares, as a means of borrowing money, because it means they can borrow more cheaply. They can raise any given amount of money by issuing fewer shares at these higher prices than they would have had to do at a lower share price. 

If companies were actually controlled by their collective owners, the workers and managers within them, then they would have done that on a massive scale over the last 40 years. But companies are not controlled by their collective owners. Instead they are controlled by a specific type of creditor of the company, i.e. the shareholders. Those shareholders, like landowners, have had a clear interest in restricting the supply of new shares, over the last 40 years, because, as speculative demand for shares has risen, along with speculative demand for bonds, land, property and all other assets, in the hope of large speculative gains, fuelled by central bank money lending and QE, the prices of shares, and all these other assets have soared, massively inflating the paper wealth of all the owners of this fictitious capital. So, instead, of companies creating additional shares, they have used profits to buy them back, so reducing the supply, and causing the prices to go even higher.

With commodity prices, its often said that the cure for higher prices is higher prices, i.e. as set out above, the higher price results in increased supply, which then reduces the price. But, with assets the consequence of higher prices, is even higher prices, as they set off a speculative frenzy, prompting existing owners of such assets to want to hold on to them, and those without them to want to buy them. So are bubbles created, until such time as those bubbles burst, and then the opposite becomes true, lower prices lead to even lower prices, as the owners of the assets seek to avoid making even bigger capital losses, by selling as fast as they can.

Thursday, 25 November 2021

Adam Smith's Absurd Dogma - Part 20 of 52

Marx explains that what leads to Smith's absurd dogma is a number of factors.

“1) The fundamental relationship of constant and variable capital, hence also the nature of surplus-value, and thereby the entire basis of the capitalist mode of production, are not understood. The value of each partial product of capital, each individual commodity, contains a portion of value = constant capital, a portion of value = variable capital (transformed into wages for labourers), and a portion of value = surplus-value (later split into profit and rent).” (p 843)

Forcade resolved this problem in a similar way to that used by Michael Roberts referred to previously. He equates the element of c to capital accumulation out of s, or the growth of output. (See: Note 53, p 843)

Secondly, the process by which the value of constant capital is preserved by concrete, use-value creating labour, as against the creation of new value by abstract labour was not understood.


“... the difficulty is not understood how it is that the product in which wages and surplus-value, in short, the entire value produced by all the labour newly added during the year, is realised, replaces the constant part of its value and yet at the same time resolves itself into value limited solely by the revenues; and furthermore how it is that the constant capital consumed in production can be replaced in substance and value by new capital, although the total sum of newly added labour is realised only in wages and surplus-value, and is fully represented in the sum of the values of both. It is precisely here that the main difficulty lies, in the analysis of reproduction and the relations of its various component parts, both as concerns their material character and their value relationships.” (p 844)

Fourthly, there is the issue of the categories of revenue and capital being interchanged, and this becomes ever more complex as the process of social reproduction is characterised by an increasing social division of labour.

“One may, therefore, squeeze out of the dilemma by remonstrating that what is revenue for one is capital for another and that these designations thus have nothing to do with the actual peculiarities of the value components of commodities. Furthermore: commodities which are ultimately destined to form the substantive elements of revenue expenditure, that is, articles of consumption, pass through various stages during the year, e.g., woollen yarn, cloth. In one stage they form a portion of constant capital, in the other they are consumed individually, and thus pass wholly into the revenue. One may therefore imagine along with Adam Smith that constant capital is but an apparent element of commodity-value, which disappears in the total pattern. Thus, a further exchange takes place of variable capital for revenue. The labourer buys with his wages that portion of commodities which form his revenue. In this way he simultaneously replaces for the capitalist the money-form of variable capital. Finally: one portion of products which form constant capital is replaced in kind or through exchange by the producers of constant capital themselves; a process with which the consumers have nothing to do. When this is overlooked the impression is created that the revenue of consumers replaces the entire product, i.e., including the constant portion of value.” (p 845)

Fifthly, the whole process of social reproduction is obscured by the fact that, under capitalism, commodities exchange at market prices determined by price of production, not exchange-value. The source of value and surplus value is obscured, and it appears that value itself is created by all factors of production.

Inflation Continues To Surge. Interest Rates Are Next - Part 4 of 10

In the 1980's, and 1990's, a huge rise in productivity resulted from the technological developments of the period, which themselves had been prompted by the labour shortages, and higher wages that squeezed profits in the 1960's and 70's, resulting in the crises of overproduction of capital, in the 1970's, and early 1980's.

This technological revolution, whose symbol was the microchip, brought about a period of intensive accumulation, in which new types of fixed capital, replaced labour. That meant that a relative surplus population was created, unemployment rose, and wages fell, enabling profits again to rise, thereby, ending the crisis of overproduction of capital.

The revolution in technology, brought about a massive moral depreciation of existing fixed capital, and all of the new fixed capital was not only much more productive, but also massively cheaper than the fixed capital it replaced, not only relatively, but in many cases, absolutely. For example, a PC costing around £500, in the mid 1980's, had as much power as a mainframe computer of the 1970's costing £2 million! Every small business was now able to computerise its accounts, payroll and stock control systems, in a way that previously only the largest companies could do. Even small engineering companies could introduce computer controlled lathes and milling machines, as well as introducing computer aided design. Word processors replaced typewriters, and photocopiers replaced printing machines. This large-scale depreciation of fixed capital, meant that there was a huge release of capital, and a massive rise in the annual rate of profit.

The surge in productivity, meant that much greater volumes of commodities could now be produced, and, the unit value of these commodities was now a fraction of what it had previously been. Using Marx's formula above, then, it can be seen that, if the average unit value of each commodity falls, then the amount of money in circulation must also fall, unless either a) the number of transactions, i.e. the volume of commodities to be circulated, at least, increases proportionately, or else the value of money falls more than the average value of commodities, or else the velocity of circulation falls.

It is certainly the case that the quantity of commodities produced, and so number of transactions undertaken increased hugely. As an indication of that, of all the goods and services produced in Man's entire existence, 25% of them were produced in the first decade of this century.

So, on the one hand, this huge increase in the volume of output would require more money in circulation, whilst the huge falls in the unit value of those commodities counteracts it. If we look at the unit prices of all these commodities, however, the number which actually fell is quite limited. In nearly all cases, it is the prices of newly introduced commodities that fell, as they became more mature.

In most part, the falls in unit prices came in the form of improvements in quality, a fact that led to the use of so called hedonic pricing for the calculation of GDP, productivity and inflation. Taking, say a pocket calculator, when they began to be introduced in the 1970's, they were relatively expensive, and basic. First, as they began to be produced and sold on a huge scale, the prices of them fell, but, then, rather than the prices continuing to fall by so much, they began to become much more powerful, offering more and more functions. A similar course can be seen with PC's, and later with other devices such as mobile phones, and, then, many of these devices simply became lumped together in one device, without any corresponding price increase.  Today, we see the opposite phenomenon in the form of "shrinkflation" as the prices of various commodities rise by small amounts, whilst the actual commodity itself is reduced in quantity/quality.

For other things, such as cars, food and so on, it was not an actual fall in unit prices that occurred, but a fall relative to wages and other revenues, itself indicating the role of inflation. For, example, I was watching an episode of Dalgleish the other day, set in 1974, when a boy buys cod and chips for 50p. Today, it would cost you more than a fiver. Yet, compared to wages, and other revenues, food prices have fallen. Car prices have also risen, but not by as much as wages and other revenues, especially when comparing the cars of today with the crude, inefficient, rust buckets of the 1970's.

To put this another way, although money prices have risen, living standards have also risen, because money revenues increased faster than money prices. That is true, even in respect of wages, despite the fact that wages fell relative to profits and other revenues. That is because, whilst the gross product rose more than total values (lower unit values), the net product rose at a faster rate than the gross product, i.e. the surplus product, and surplus value rose at a faster pace, and was one of the foundations of a higher rate of profit, the other being the fall in the value of constant capital.

The value of gold, as with other commodities, will have fallen as a result of rising productivity, but there is no reason to think it would have fallen by more than that of other commodities. More significantly, the relation of the currency to gold has been broken. The currency, now, is merely a representation of a given quantity of social labour-time, and the quantity of currency in circulation required is, then, merely a function of it.

In other words, rather than each banknote claiming to represent a given quantity of gold – which itself was only a physical proxy for a given amount of social labour time, a primitive means of indirectly measuring value – each note may just as well say that it represents a certain quantity of social labour-time, a claim on society's products equal to that amount. So, the total amount of those notes, in circulation, can never have, as a total nominal value, an amount greater than their equivalent, the value of commodities to be circulated in the economy.

If more is put into circulation, then the consequence, as set out in Marx's formula, can only be inflation, a rise in unit prices, independently from values. Finally, the velocity of circulation is a function of the number of transactions, and of technical factors in relation to payments. A greater volume of transactions, and increased economic activity, will cause the velocity of circulation to rise, and similarly, as the mechanisms for payments and transmission of money – for example, use of electronic payments – become more efficient, so the velocity of circulation is increased.

Wednesday, 24 November 2021

A Characterisation of Economic Romanticism, Chapter 2 - Part 14 of 16

Lenin notes Sismondi's comments, which would not be out of place today amongst the opponents of globalisation, and just in time production.

“What will become of England’s honour if the Emperor of Russia is in a position, whenever be wishes, to obtain some concession or other from her, to starve her by closing the Baltic ports?” (p 255)

Of course, for a relatively small country, especially an island, such as Britain, such strategic issues cannot be ignored, but, today, it illustrates precisely why the answer lies not in the idiocy of autarky, and self-sufficiency, but in the joining together with others in the EU, or similar multinational blocs, in ensuring that both the advantages of free trade, and strategic security can be obtained.

“The concrete problem evoked by the conflict of definite interests in a definite system of economy is thus submerged in a flood of innocent wishes! But the interested parties themselves raised the issue so sharply that to confine oneself to such a “solution” (as romanticism does on all other problems) became utterly impossible.” (p 256)

So too was the abstentionist position of the CPGB in the Brexit debate. For Sismondi, the question resolved itself into a policy issue that involved damaging either the agricultural workers or the industrial workers, though he concludes that damaging the former means also damaging the latter, for the reasons described. So, he puts forward a compromise solution, whereby the Corn Laws would be modified but not repealed. It demonstrates the bankruptcy of romanticism when faced with a sharp practical issue.

“Romanticism countered every contradiction with an appropriate sentimental phrase, answered every question with an appropriate innocent wish, and called the sticking of these labels upon all the facts of current life a “solution” to the problems. It is not surprising that these solutions were so charmingly simple and easy: they ignored only one little circumstance—the real interests, the conflict of which constituted the contradiction.” (p 257)

The same can be seen with the approach of romanticists today, for example, the position of liberal interventionists, who tell us that, when imperialism intervenes militarily across the globe, it does not have to inevitably result in it acting in its own interests, or committing atrocities to that end, and so on.

Lenin then turns to the method of Marx in dealing with the question of free trade. From the start, he approaches it not abstractly, not as a policy question, but as a question that is determined by the interests of different social classes.

“On January 9, 1848, Karl Marx delivered a “speech on Free Trade” at a public meeting in Brussels. Unlike the romanticists, who declared that “political economy is not a science of calculation, but a science of morality,” he took as the point of departure of his exposition precisely the plain and sober calculation of interests.” (p 258)

Marx shows how it is a conflict of interest between landowners and manufacturers. Both attempt to present their interest as the national interest, but landowners sought to preserve high prices as the basis of high rents and land prices, which was the basis of their power, whereas manufacturers sought lower raw material and food prices, to boost their profits and rate of profit.

“Unlike the romanticists, who had presented the problem in the shape of the considerations which a legislator must have in mind when carrying out the reform, the speaker reduced the problem to the conflict between the real interests of the different classes of English society. He showed that the entire problem sprang from the necessity of cheapening raw materials for the manufacturers. He described the distrust of the English workers who regarded “these self-sacrificing gentlemen, Bowring, Bright and their colleagues, as their worst enemies. . . .”” (p 258)

The same was true with the Brexit debate. The working-class had no reason to align themselves with the view put forward by the liberals/conservative social democrats, who sought to remain in the EU, on its existing capitalist basis, but they had even less reason to align themselves with the reactionary views put by the Brexiters and Lexiters, which sought to return to an even less mature form of capitalism, based on the interests of the petty-bourgeoisie. A key requirement of moving forward is not to move backwards.

Marx noted that the workers understood the basis of the debate, despite all the money the manufacturers put into their propaganda.

“The English workers have very well understood the significance of the struggle between the landlords and the industrial capitalists. They know very well that the price of bread was to be reduced in order to reduce wages, and that industrial profit would rise by as much as rent fell.” (p 258-9)

Nevertheless, the workers understood that to move forward, its necessary not to move backwards, and so, whilst they were not duped by the manufacturers' claims, they still allied with them against the landlords, and those that Marx and Engels describe, in The Communist Manifesto as Feudal Socialists.

“The aristocracy, in order to rally the people to them, waved the proletarian alms-bag in front for a banner. But the people, so often as it joined them, saw on their hindquarters the old feudal coats of arms, and deserted with loud and irreverent laughter.

One section of the French Legitimists and “Young England” exhibited this spectacle.

In pointing out that their mode of exploitation was different to that of the bourgeoisie, the feudalists forget that they exploited under circumstances and conditions that were quite different and that are now antiquated. In showing that, under their rule, the modern proletariat never existed, they forget that the modern bourgeoisie is the necessary offspring of their own form of society.

For the rest, so little do they conceal the reactionary character of their criticism that their chief accusation against the bourgeois amounts to this, that under the bourgeois régime a class is being developed which is destined to cut up root and branch the old order of society.

What they upbraid the bourgeoisie with is not so much that it creates a proletariat as that it creates a revolutionary proletariat.”

(Marx – The Communist Manifesto)

Inflation Continues To Surge. Interest Rates Are Next - Part 3 of 10

Marx explains the basis of this inflation. Money is the universal equivalent form of value. Initially, this equivalent form comes as a series of regularly traded commodities, which act to measure, indirectly, the value of all other commodities.  In other words, value becomes measured not in hours, but in a quantity of some other use value, its exchange-value.  This exchange-value, measured by the money-commodity, is its money price.

 Eventually, just one commodity, for example, cattle, gold or silver, is singled out to perform this function of being the universal equivalent form of value. Being the equivalent form means what its name suggests, when it comes to acting as money. If the total value of commodities to be circulated, in an economy, is equal to 1,000 hours of labour, then the equivalent form of these commodities must be a quantity of the money commodity equal to 1,000 hours of labour. It cannot be more, nor less than that, or else it is not equivalent. If gold is the money commodity, and 1 ounce of gold is equal to 10 hours of labour, then 100 ounces of gold would be required as money. However, because each ounce of gold can, during a year, act in several exchanges, less gold is actually required. If each ounce of gold acts in 10 exchanges, during a year, only 10 ounces are required to perform this function.

So, as Marx sets out in A Contribution To The Critique of Political Economy, if we have 100 commodities, each with an average value of 10 hours of labour = 1,000 hours, then the amount of money required as currency is determined by the value of an ounce of gold, multiplied by the velocity of circulation, 10 x 10 = 100, hence 10 ounces, if circulation is only 5, then 20 ounces, if an ounce of gold is equal to 5 hours of labour, and velocity is 10, then 20 ounces, and so on.

However, money and currency are not the same thing, because, as Marx sets out in the above work, gold and silver, take the form of coins, when they act as currency, and later, they take the form of bank notes. They act as money tokens, representing the specific quantity of gold or silver, whether those tokens are made of gold or silver, copper, nickel, or paper. A gold or silver coin, in circulation, gets worn down, so that the amount of gold or silver contained in it is reduced to a level whereby the value of that gold or silver is much less than the face value of the coin. However, provided only the required amount of coins are put into circulation, as determined by the above formula, in other words, if the total amount of gold they purport to represent is only what is required, they will continue to function, as though they were still full weight. Its this fact that enables the precious metal in the coin to be replaced, first by more base metals, and then by worthless paper notes.

However, this introduces a further factor. If too many gold coins are put into circulation, then the value of each coin falls, relative to the value of the gold each full weight coin contains. It becomes worthwhile for the owners of any such full weight coins to take them out of circulation, and turn the gold back from being money into again being a commodity, because they can now sell 1 ounce of gold for more than a coin representing 1 ounce of gold. The currency circulation would, then, automatically adjust.

Of course, if all gold coins in circulation actually contained much less than 1 ounce of gold, and that is what happens, when the state deliberately corrupts the coinage – usually to cover its debts – then its not possible to simply melt down the gold in the coin, and get more from it than the face value of the coin. In that case, the reality imposes itself over the appearance. Each coin comes to represent this new weight content/value of gold it contains, even if its historic name still links it to its past weight.

Because, each coin now represents a smaller amount of value, a smaller quantity of social labour, the number of coins in circulation, must rise accordingly. If each gold coin contains only half an ounce of gold, then, although it might retain the name Pound, it would, now, represent just 5 hours of social labour-time, so that, to be the equivalent form of 1,000 hours of social labour-time, in the form of commodities, 20 such coins would be required, if the velocity of circulation remained 10. Consequently, commodities whose exchange-value was formerly measured as £10, is now £20, the money price has doubled, even though the value of these commodities is unchanged. It is only their price that changes as a result of the depreciation of the currency.

Similarly, if gold is removed from the coin entirely, and is replaced by copper, nickel, or paper, the actual value of the coin or bank note is itself near zero. Its no longer possible to take them out of circulation, and melt them down to obtain the value of the content, if too many of them are put into circulation. And, so these money tokens continue to circulate, but, whatever the face value they have, whatever the amount of social labour-time that purports to represent, it can only, in reality, act as the equivalent form of the actual amount of value of commodities to be circulated. So, using Marx's formula above, which can be represented as MV = PT, i.e. the value of money in circulation, multiplied by the velocity of circulation is equal to the average price of commodities, multiplied by the number of transactions/quantity of commodities to be circulated, then, if too much M is put into circulation, and assuming no change in V, or in T, the effect can only be to raise P, i.e. the average unit price of commodities – inflation.