Inflation
Summary
Inflation is an increase in the general price level resulting from a reduction in the value of the money commodity, standard of prices, or of money tokens. It is a monetary phenomenon.
Price is exchange-value measured in terms of the money commodity, or money tokens.
Exchange-value is the value of one commodity measured, indirectly, by a quantity of some other use-value/commodity.
Exchange-value first takes the form of The Relative Form of Value, whereby the value of each commodity is measured separately against every other commodity. As trade develops, and a number of commodities, whose value is well known, are traded more frequently, such as cattle, the value of other commodities is measured, indirectly, in terms of these commodities, which act as The Equivalent Form of Value.
Eventually, one of these commodities is singled out to perform this function as equivalent form of value. It becomes the universal equivalent form of value, the money commodity, and, now, the value of all commodities are expressed, indirectly, in it, as a money price.
As a consequence, whilst the value of every commodity, individually, may move up or down, as a consequence of changes in the labour required for its production, such changes only affect the price of that one commodity. However, because the value of all commodities are expressed as a quantity of the money commodity, any change in its value, brings about a change in the price of all those commodities, even though the value of these commodities may be unchanged, and their proportional relation to each other be unchanged.
A given quantity of the money commodity is used as the standard of prices. For, example, the Pound Sterling originally referred to a pound of sterling silver. If this quantity of silver represents 100 hours of universal labour, then any commodity with a value also of 100 hours of universal labour, has a price of £1. The prices of all commodities, can then be “ideally” expressed as multiples, or alternatively fractions, of a £.
The names Pound, Dollar, Franc and so on, are merely historical labels representing these original quantities of the money commodity that act as the standard of prices. The prices of all other commodities can then change because either, the value of the money commodity changes, or else, the physical quantity of the money commodity, contained in the standard of prices changes.
A gold coin containing a quarter ounce of gold, and called a sovereign, might exchange for 10 metres of linen. The price of 10 metres of linen is 1 sovereign. If the value of gold falls in half, then the value of sovereigns is halved, and the price of 10 metres of linen rises to 2 sovereigns. But, the value of gold might remain constant, whilst the quantity of gold contained in a sovereign is halved. The sovereign retains its name, but represents only half its previous value, so that, again, the price of 10 metres of linen rises to 2 sovereigns. But, in both cases, its not the value of linen that has changed, but that of the sovereign, and this change will double the prices of all commodities, even though their exchange-value to each other might remain constant. That is inflation.
The money commodity is replaced in currencies by money tokens. The value of these tokens is then no longer determined by their own material content, but by the quantity of the money commodity they represent, where they are exchangeable for it. If an excess of these tokens is put into circulation, the value of each token is, thereby, reduced. The tokens themselves bear the name of the standard of prices, such as £, $ etc., or its subdivisions, and multiples, and so, if each token is devalued, this is manifest as an inflation of prices.
If the token remains convertible to the money commodity, then this would result in a devalued token exchanging for an unchanged quantity of the money commodity. It is not the value of commodities – including the money commodity – that have risen, but that the value of the tokens has fallen. It would mean that the tokens would be exchanged for the money commodity, say gold, as though no such reduction in the value of the token had occurred, so that tokens would be rapidly exchanged for actual gold.
That is why, convertibility of money tokens for gold is ended – an example being the US ending Dollar convertibility in 1971, when France demanded payment in gold at the official gold price of $30 an ounce – and currencies become fiat currencies backed only by the state.
In a fiat currency system, the tokens act as the universal equivalent form of value of total social labour-time, i.e. the equivalent of the total value of social production. Each token represents an aliquot part of that total social-labour-time. If total social labour-time represented in the value of commodities remains constant, but the total quantity of tokens increases, then each note represents a smaller aliquot part of total social-labour-time, its value is reduced, and the manifestation of that is higher prices.
Each token performs a number of transactions during the year, so that a higher velocity of circulation, means that each token performs more transactions. The higher the velocity of circulation, the smaller the number of tokens in circulation required as indicated in the formula MV = PT, where M is the nominal value of money tokens, V is the velocity of circulation, T is the quantity of transactions undertaken, and P is the average price of commodities in each transaction.
So, an increased quantity of money tokens may not result in higher prices, if the velocity of circulation is reduced. However, as Marx describes, the velocity of circulation is mostly determined by technical factors, and by the pace of economic activity. In periods of faster economic activity, there are more transactions, and so currency circulates more rapidly, and vice versa, but it is also determined by the level of development of payments systems. Electronic banking systems, means that payments are made more quickly speeding up the rate of turnover of capital, which in itself, means that money is thrown back into circulation, more quickly to replace the consumed means of production and labour-power.
The evidence that increased liquidity is not automatically counteracted by a slowing of the velocity of circulation is illustrated by all periods of inflation, such as the hyper-inflation of Weimar Germany, in the 1920's, or the stagflation of the 1970's.
Bourgeois economics believes that prices are subjectively determined by the interaction of supply and demand, and so whether in the Keynesian or Monetarist theories it is the effects of these relations that result in inflation. For Keynesians, it is rising demand – usually for labour – that leads to rising costs, or else it is rising demand – again usually from rising wages – that leads to changes in supply and demand, leading to higher prices. For monetarists, it is excess liquidity that leads to excess monetary demand that leads to higher prices, including for inputs, such as labour.
In the current inflation, Keynesians see it as resulting from cost-push due to supply bottlenecks, whereas Monetarists see it as arising from excess monetary demand resulting from excess liquidity.
Thank you dear Boffy, got excited for this post!
ReplyDeleteHere you define Inflation as an increase in the “general” price level. But you know when it comes to measuring inflation, we are left with a handful of indices, including CPI, PPI and the like. All they have in common is that they are limited to a specific range, and not all, of commodities. CPI, for example, is defined as the change in the prices of a “basket of goods and services” that are typically purchased. So, in this case, rising demand for the items contained in the basket, subsidy cuts by the government, rising wages of the workers involved in producing those goods/services, rising costs of raw materials and so on, can result in inflation and therefore can not be neglected. So, while we know that inflation, as an increase in the general price level, is essentially a monetary phenomenon (a fact you proved again recently by your Robinson Crusoe example), but it seems that inflation, as measured by the above-mentioned indices, is explainable by different causes.
Here is the confusion I have and hope it gets solved in the upcoming parts.
yours
Thanks Elijah. I hope he subsequent posts, broken down into a series of headings will answer your point.
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