Inflation - Keynesians and Cost-push - Part 6 of 7

But firms do not like reducing their profits to absorb such costs, and, in the longer-term, the capitalist state, and central banks exist to enable them to try to avoid doing so. As with firms attempts to raise prices in response to rising wages, so too central banks tend to accommodate these requirements by increasing liquidity so as to enable compensating price rises to recoup the additional costs. But, in value terms, nothing has actually changed, and by facilitating the higher prices by increased liquidity, all that ensues is an upward twist in the inflationary spiral. In fact, even if firms find that they can pass on the higher price of the raw material, in the value of their products, so avoiding any reduction in their profits, they still suffer a fall in their rate of profit. For example, in the example above, we had in the first instance a rate of profit of 500/1000 + 500 = 33.3%, and after the rise in the price of cotton 500/2000 + 500 = 20%, even though the amount of profit remained constant at £500. That is because the laid out capital rose by £1,000 due to the rise in the price of cotton.

Firms do not like such falls in their rate of profit either. In the longer run, as Marx describes, competition leads to capital moving from spheres in which the rate of profit is lower than the average to those where it is above the average. However, as he describes, any such variations take a long time to become visible, amongst all of the gyrations of market prices and profits, and, in any case, it is not easy to physically move large amounts of productive-capital from one sphere to another. For one thing machines and material used to produce yarn cannot be used to produce motor cars, for example. So, such movement occurs, not as such a physical relocation of capital, but as a consequence of productive-capital expanding faster in one sphere than it does in another.

So, again, central banks tend to increase liquidity so as to generate moderate levels of inflation each year, even as the values of commodities continue to fall year after year, as a result of continually rising social productivity. If currency was expanded only in line with the increase in the total value of commodities to be circulated, then we would have had continually falling general levels of prices. Central banks have prevented that for several reasons.

Firstly, Marx pointed out in Capital that workers resist nominal falls in money wages, a fact that Keynes also noted when he described wages as “sticky in a downwards direction”. Capital can force such decreases in nominal wages only in conditions of stagnation, when there are high levels of unemployment, but, even then, as noted earlier, these falls in nominal wages have gone along with falls in nominal prices, so that for many workers in stable employment, the fall in nominal wages is compensated by increases in living standards – often accompanied by the availability of whole new ranges of consumption goods.

But, capital needs to be increasing surplus value, and the rate of surplus value all the time, and its main way of achieving that is via the production of relative surplus value, which means reducing the value of labour-power, i.e. the proportion of the day required as necessary labour, and reflected in wages. So, the way it does that is via a steady inflation of prices. That is facilitated in periods when productivity is rising steadily, and reflected in rising living standards, as, for example, in the 1950's. Suppose we have:

c £1000 + v £500 + s £500 = £2000.

This £2,000 equals 2000 commodity units of £1 each. The rate of surplus value is 100%, and rate of profit 33.3%.

Now, assuming productivity doubles, so that 4000 commodity units are produced, their value now drops to £0.50 each. But, the value of labour-power is determined by the quantity of use values/commodity units that workers must consume to reproduce their labour-power, not any fixed amount of value. Total new value created by labour remains the same, but workers require only 25% of total production to reproduce their labour-power, equal to 500 units. Those 500 units, now have a value of only £250, meaning that nominal wages should fall to just £250. In terms of surplus production, it too was previously equal to 500 units (£500), but is now 1500 units, with a value of £750, meaning that the rate of surplus value has risen to 300%.

The value of c has also fallen to £500, meaning that there is a release of capital, but, ignoring that, these falls in values should result in nominal wages being halved. However, workers would resist any such actual reductions, and large-scale industrial capital prefers to avoid any unnecessary industrial action and stoppages in production, given the huge amounts it has tied up in fixed capital that would be standing idle, and depreciating. The answer is a corresponding devaluation of the currency. If the £ falls to half its previous value, we would have

c £2,000 + v £500 + s £1500 = £4000

So, it now appears to workers that their wages have remained the same, and yet, they are now three times more exploited by capital than they were. The rate of profit, as a result, rises to 60%. In fact, capital can afford to allow workers living standards to rise – and may do so to facilitate a market for the large increase in the quantity of output to be sold and realise profits – so that, instead of consuming 500 units of output, they consume 800. In that case:

c £2,000 + v 800 + s £1200 = £4000.

So, now, the rate of surplus value has risen to 150%, and the rate of profit has risen to 42.86%. This was the basis of Fordism, and of the Mutuality Agreements between unions and employers that became common in the post war period, whereby, workers agreed to various means by which productivity was increased each year, increasing their levels of exploitation, in return for annual nominal wage rises, and a steady increase in living standards.

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