And, in Value, Price and Profit, Marx gives, evidence of this from the real economy. He takes the example of the rise in British agricultural wages between 1849 and 1859, a period of long wave upturn, in which the demand for labour rose strongly, and, in particular, a lot of rural workers went to work in the booming industrial towns, and on rapidly expanding railway and infrastructure construction.
“What was its consequence? The farmers could not, as our friend Weston would have advised them, raise the value of wheat, nor even its market prices. They had, on the contrary, to submit to their fall.”
(Value, Price and Profit, Chapter 14)
One reason for that was that the industrial capitalists had managed to repeal the Corn Laws, so that cheaper imported food, pushed British agricultural prices down.
The consequence was that British capitalist farmers faced squeezed profits on their output. The same happens when capital in general faces a squeeze on its profits from rising wages. In such conditions, those same rising wages, as Marx had set out in Chapter 2, cause the demand for wage goods to rise, and may, as a result of rising prices in that sector, cause profits to rise too. With or without those rising profits, competition amongst the producers of wage goods, leads them to expand their production in order to grab their share of the rising market. Its only when those rising wages reach such a level that they squeeze profits out of existence, causing a crisis of overproduction of capital, as Marx sets out in Capital III, Chapter 15, that it leads to a sharp cessation of production.
But, Marx, in Chapter 15, and in Value, Price and Profit, Chapter 14, describes how capital responds to such conditions, engaging in a search for new technological solutions to replace labour, and so reduce wages, and restore profits.
“But during these eleven years they introduced machinery of all sorts, adopted more scientific methods, converted part of arable land into pasture, increased the size of farms, and with this the scale of production, and by these and other processes diminishing the demand for labour by increasing its productive power, made the agricultural population again relatively redundant. This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in old, settled countries. Ricardo has justly remarked that machinery is in constant competition with labour, and can often be only introduced when the price of labour has reached a certain height, but the appliance of machinery is but one of the many methods for increasing the productive powers of labour. The very same development which makes common labour relatively redundant simplifies, on the other hand, skilled labour, and thus depreciates it.”
(Value, Price and Profit, Chapter 14)
And, also disproving the idea that higher wages lead to higher prices, Marx sets out the other role of this investment in labour-saving technology that higher wages provokes. Britain, Marx sets out, had wages some 50% higher than those in Europe, at the time, and yet, Britain undercut all of its European competitors on prices, as well as, at the same time, making higher rates and volumes of profit. The explanation was precisely the greater productivity of the British labour resulting from the higher level of fixed capital standing behind them.
If a British worker works for 10 hours producing linen, and a European worker does the same, they both produce the same amount of new value. But, during this period the British worker produces 100 metres of cloth, whereas the European worker produces only 10 metres, because the British worker operates a power loom that is ten times as efficient as the loom used by the European worker. In that case, the amount of new value per metre is 1 hour for the European worker, but only 0.10 hours for the British worker, so the British linen undercuts the European linen, enabling them to make both bigger profits, and to grab market share.
11 comments:
Thank you again Boffy for this helpful post. To better realize some parts of it, I had to read your exhaustive criticism of Roberts' understanding of inflation.
You have clearly and convincingly explained what is wrong with demand-pull/cost-push theories of inflation and that these theories can only explain changes in the market price of "individual commodities," while inflation is defined as an increase in the "general price level," as opposed to individual prices.
But here is a twist for me. when it comes to measuring inflation, the most well-known indicator is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of individual commodities. So let's suppose that in an economy with n circulating commodities, this basket includes only 5 items. if the AD for this basket grows faster than its AS, this will lead to its higher equilibrium price, but at the same time the AD for the other commodities (n-5) falls below its AS, causing their market prices to fall. This leaves no overall change in the general level of prices (meaning no inflation), but CPI may show a considerable "inflation," for the simple reason that it only reflects the price changes of some individual commodities. In this case, when we are to find out the reasons behind this "CPI inflation," we may end up with many factors (from rising demand to increasing costs, subsidy cuts, etc.)
The only way I can solve this problem is by making distinction between these two, meaning that CPI is not an indicator of inflation as such, but of inflation of a specific group of commodities.
and one more question. as you have explained in detail, inflation is nothing but a monetary phenomenon. but how is that some developing countries are usually faced with chronic, high inflations, while in many developed capitalist countries inflation is more or less restrained and controlled? can this be explained solely by the difference in their central banks' monetary policies? and by the fact that in under-developed capitalist economies less new value is created, but more money tokens are published and put into circulation by their governments to simply meet their own needs?
Thanks Elijah,
The simple answer is that CPI is a measure of the price changes of a basket of commodities, not the general price level, but for me to use that answer would be a cop out. Its more complicated, and probably more complicated in total than can be dealt with in blog posts let alone comments. I probably need to write a book on it.
The more detailed than simple answer is that a) central banks create excess liquidity, and so increases in market prices of some commodities, are not matched by corresponding falls in the market prices of other commodities, so general price levels rise, because b) prices revolve not around exchange values, but prices of production (c + v), or k, + p, and as Marx describes in Capital III, output prices are simultaneously input prices, so if, say, iron ore prices rise that affects steel input costs, and steel prices, and so on, whilst an increase in food costs increases wages. With exchange values, a rise in wages simply reduces s, leaving prices unchanged, but with prices of production that's no longer true for individual prices. It now depends on the organic composition of capital for different commodities, causing prices to rise where its below average, and to fall where its above average, because p falls, but for the former k rises more than the drop in p, whereas for the latter the reverse is true.
There is also the question of so called "hedonic pricing". If the price of a mobile phone rises by 20%, but the mobile phone in question is one that has replaced a previous model, and is twice as powerful/useful, is this really a 20% rise in price, or is it really a fall in price, the same as if the price of a sack of coal rises by 20%, but the sack now contains twice as much coal? The converse of this is so called "shrinkflation".
On your EM question, again complicated not simple. First, where does currency go? Into commodity circulation, or asset purchases? In EM mostly the former, in DM, directed into assets. Secondly, the role of the Dollar is not restricted to US as world currency. It flows into purchases of commodities from EM's - think of petrodollars, for example. It sums up both. Dollars flow into oil producers, raising commodity prices in those countries. Excess Dollars flow out into the purchase of US assets, inflating their prices.
Second, the question of currencies, as discussed before. Turkish Lira falls, and so it imports inflation. Third as discussed before, the function of comparative productivity.
So grateful for your response. The more you explain, the more light is shed on my understanding of this complicated issue.
As for the second question, I got my answer from your explanation. as for the former, I almost got your point, but still need to think and read more about it. so would you mind recommending me further relevant blogposts to help me with that?
I'm not sure what bit you are not sure about, so I'm assuming its about prices of production, and affects on prices of different commodities. The basic idea is summed up in this comment by Marx.
“All changes in the price of production of commodities are reduced, in the last analysis, to changes in value. But not all changes in the value of commodities need express themselves in changes in the price of production. The price of production is not determined by the value of any one commodity alone, but by the aggregate value of all commodities. A change in commodity A may therefore be balanced by an opposite change in commodity B, so that the general relation remains the same.”
(https://boffyblog.blogspot.com/2015/08/capital-iii-chapter-12-part-1.html)
Read also the posts following that covering that Chapter. But also, to understand how changes in the average rate of profit affect the prices of commodities of different organic compositions read - https://boffyblog.blogspot.com/2015/08/capital-iii-chapter-11-part-1.html, et sub.
Where the average profit falls because the value composition of capital rises, rather than wages rising, its those capitals with a higher organic composition (whose costs for materials etc rise by more than the fall in profit) whose price of production rises. Of course, this does not affect total prices, if values don't change overall. I've actually dealt with this in one of the posts coming in this current series on inflation. To give a sneak preview, because social productivity rises in a secular fashion, the total of values should fall rather than rise, and so prices should fall, not rise overall. the fact they don't indicates that central banks inflate prices annually, which is what they are intended to do.
Hi Boffy. While re-reading your post and our previous comments, two questions came to my mind.
First, as you have explained here and elsewhere, when excess money tokens are put into circulation (MV), the total prices (PT) will have to rise in order to match it up. Theoretically, on paper, this equation sounds simple and understandable. but how and through what process does this happen in the real world? let’s suppose that the price of production of a commodity is 10$ (and each $ represents 1 hour of social labor-time). The capitalist doesn’t have the slightest idea that central bank has doubled the amount of liquidity, each $ has been devalued in half and the price should be now 20$. He still produces and sells at 10$. How is this excess liquidity finally and actually translated into rising price of this commodity?
And second. Before we had a brief discussion about “imported inflation” in Petro-dollar/ import-led economies. According to your explanation, if 1 US dollar is worth more than a national currency, it is because of the higher productivity in the US as compared to that of a less-developed economy, meaning that 1 hour of US labor produces more value than 1 hour of labor taken in another country. If so, how can it be explained that Kuwaiti Dinar is worth three times as much as dollar? Does this mean that Kuwaiti economy is more productive than the US?
All the best
On your first point, in the series on the Critique, I have set out how Marx explains this process, both in regard to actual money and precious metal tokens, and in relation to paper tokens. I suppose, another practical way of looking at this would be to look at how prices changed when countries gave up their national currencies and adopted the Euro. Some prices were higher in Euros, where the national currency was of higher value, and vice versa. That's a one of conversion of nominal prices. But, when a currency is debased/devalued by its metal content being eroded, or the volume of tokens being inflated, its a process.
For gold coins that are debased its complicated by Gresham's Law. Underweight coins cannot be converted to bullion at their nominal value. In Marx's example, 1600 coins have to be given up to obtain 1200 ounces of gold. So full weight coins are driven out of circulation, because owners of such coins turn 1200 of them into bullion, which can be exchanged for 1600 coins. So, a process in which only lower weight coins are in circulation. The market price of gold rises above its mint price, for this reason, but that is only one price along with all others. Eventually, the state recognises the reality by changing the mint-price of coins.
With money tokens, the same applies, but unlike gold coins there is no full-weight note to convert. They are all the same. The state, for example, may want to buy various commodities, and rather than raising taxes, simply has the central bank print additional notes, which are handed to the government to spend. The state then spends those notes, creating additional demand that has no equivalent value - I have set out previously how, in some conditions, this CAN result in currently unused resources being mobilised, so that the equivalent value is then actually created, and there is no inflation - and so, in the spheres where this additional demand is manifest, suppliers raise market prices, and this gradually feeds into their suppliers, the wages of their workers, the suppliers of wage goods to those workers, and so on. That is why, it takes around two years for the effects of such changes in liquidity to feed into total prices. Marx's historical account of the debate between Lowndes and Locke, and Attwood and Peel explains this.
On your second point, I think you have got a bit hung up on the currency names, such as Dollar. Again the conversion of national currencies to Euros, for example, would be a good example. In other words, the question is how much social labour-time does the Kuwaiti Dinar represent as compared to the US Dollar. Or take the experience of Germany or Italy. I have some 10 million Italian Lira notes that my dad brought back from WWII, for example. Then, whilst keeping the name Lira, Italy issued new notes, dropping several zero's from their denomination, so that each note represented a million times more social labour-time. This appreciation of the Lira was not a consequence of rising productivity etc., but simply a redenomination. The same is true in Marx's description of Holland changing from gold as the base of its currency to silver.
If the Kuwait Dinar represents 12 hours of universal labour, and the US Dollar only 4 hours, then 1 Dinar will equal 3 Dollars. As with Italy post WWII, or as with Germany post Weimar, Kuwait could halve the quantity of notes in circulation, and make each note equal to 24 hours of universal labour, with a consequent effect on Kuwaiti prices, and now a Dinar would equal 6 Dollars. But it wouldn't change the amount of Kuwait universal labour that exchanged for US universal labour, only its nominal representation in the respective currencies.
What changes that is changes in relative productivity that changes the amount of universal labour represented by an hour of Kuwaiti labour compared to an hour of US labour. If Kuwaiti productivity halves compared to US productivity, then although a Dinar might be equivalent to 12 hours of Kuwaiti universal labour, it will only be equal, now, to 6 hours of US universal labour, and consequently, if the quantity of notes in circulation remains constant, the Dinar would fall in value relative to the Dollar to 1.5, from 3.
Hope that explains it.
Thank you. As for the first point, your explanation helped me understand the process through which excess liquidity ends at inflation.
On the second point, as far as I understood, you mean that from the appreciation of a currency against the other, it can’t be necessarily concluded that one economy is relatively more productive than the other, this may be simply because of redenomination. It is changes in relative productivity that changes the amount of universal labor represented by two national currencies, and therefore determines their exchange rates.
Of course, it can’t be neglected that these foreign exchange rates are also determined by the market supply and demand. this may explain why some currencies (including the dinar of Kuwait, as an oil producing country) are more valuable than the US dollar.
By raising this question, I intended to focus more on inflation in those countries heavily dependent on imports, which are mostly denominated in US dollar, as the graph below shows:
https://www.imf.org/-/media/Images/IMF/Blog/Articles/Blog-Charts/2022/Dollar-Blog-chart-164.ashx
First of all, how can this kind of “imported inflation” be explained as a monetary phenomenon? Is it correct to explain this by the fact that when dollar-denominated revenues/costs of an exporting/importing country are converted into their national currency, it is as if more currencies have been put into circulation and so this leads to more inflation? Secondly, how is it possible to restrain the weakening of a currency against, say, US dollar and its subsequent inflationary effects? By raising productivity, imposing government restrictions on its foreign currency market or a combination of both? And last but not least, what practical program can be taken by labor unions in the interests of workers who are the main victims of such an inflation?
" It is changes in relative productivity that changes the amount of universal labor represented by two national currencies, and therefore determines their exchange rates."
The amount of national universal labour-time represented by a currency is a function of the standard of prices. Suppose you have an economy where an ounce of gold is the standard of prices, and is called £1. The ounce of gold is the proxy form of, say, 100 hours of universal labour, so the £1 is equal to 100 hours of universal labour. But, the country may decide to make its £1 standard of prices equal to 2 ounces of gold, and so 200 hours of universal labour, in which case, its domestic prices would halve, or vice versa. Similarly, if such a currency exchanged for $5, it would now exchange for $10.
But, an hour of universal labour in country A might be equal to 5 hours of universal labour in country B. Previously, £1 would then have bought a commodity with a value of 100 hours in country A, but would also exchange for $5 equal to 500 hours of social labour in country B. But, this 500 hours of social labour in B, represented by, say, a hat, is only equal to 100 hours in A, also equal to a hat. After rebasing, £1 buys $10, and so would buy 2 hats, both in A and B.
Assuming no rebasing of currencies, if productivity in B rises five fold, its hour of social labour is now equal to that in A, so that £1 would equal $1 ($2 assuming the above rebasing). So, still £1 buys 2 hats in both A and B.
You are right about demand and supply for currencies, however, it actually works in he opposite direction that in your example. Oil is globally priced in Dollars, so that countries buying oil, must first buy Dollars, inflating demand for Dollars, and so raising its exchange rate. In some of my recent posts, I've set out how during the period of fixed exchange rates, inflation of US currency supply, enabled it to buy imported commodities cheaper than it otherwise would have done, had the Dollar been floated. It, thereby exported excess Dollars to exporting countries, inflating their prices.
Similarly, with floating currencies, excess liquidity causing the exchange rate to fall, not only causes domestic prices to fall, but means more currency must be given up to purchase foreign currency to import goods, whose prices in the currency of the exporting country remain constant, but whose prices in the importing country rise.
As far as dealing with imported inflation, the measures flow from the above. Firstly, liquidity can be reduced. That doesn't mean an absolute reduction, only that liquidity rises more slowly than output, so that each money token becomes worth a greater proportion of total social labour-time. In extreme cases such as Weimar, Italy, Zimbabwe etc. it may also mean an absolute reduction alongside the rebasing of the currency. States don't like doing this where labour is strong, because it means limiting domestic prices too, which with rising wages means squeezed profits. It normally implies a curtailment of economic activity to undermine labour.
Secondly, raise official interest rates. If Britain raises its official interest rates, US Dollars, and other currencies flow into Britain to obtain higher rates on savings deposits, and yields on government and commercial bonds. So, now, Britain can pay for its imports, not by using £'s to buy $'s etc., but simply by using the inflow of Dollars in search of higher interest rates. However, such flows are called "hot money". If the US or some other country raises interest rates the currency can disappear as quickly as it came in. Also, higher official interest rates may mean that firms borrow less to expand, and consumer borrow less to buy, so that an economic contraction arises, which is not in workers' interests.
Thirdly, economies can impose import controls, as the US did under Trump. Some on the Left have misguidedly proposed such courses of action, and its part of the agenda of Sanders and co in the US. Engels in his articles on Free Trade explains why its against workers' interest. Firstly, it blames foreign workers, and so is innately racist, and divides workers internationally. Secondly, by cutting off the supply of the cheaper imported commodities, it forces domestic buyers to buy more expensive home produced commodities. So, it raises workers cost of living, as well as reducing the domestic rate of profit, and so capital accumulation, which weakens workers position. Marx and Engels set out the argument in relation to the Corn Laws.
Finally, the economy concerned can raise productivity. The imposition of import controls is sometimes justified on this basis, as giving time for the necessary investment and adjustment to achieve it. It almost inevitably means actually just screwing workers more via speed up rather than real improvements in productivity. Workers have no control over it. However, its worth noting that, in the 1920's, US workers and their unions welcome the Taylorists who pointed out that a lot of the lack of US productivity was down to poor US management, lack of standardisation and so on. It can be used as an argument for workers' control of production, but ultimately its only workers' control of the economy as a whole that can effect such a change in workers' interests.
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