A Contribution To The Critique of Political Economy, Chapter 2.3 Money - Part 1 of 2

Chapter 2.3 Money

Money emerges naturally from the exchange of commodities, C – M – C. Commodities, under barter, are directly exchanged for each other. However, as seen, in order to compare the value of the first C with the second C, given that they are both the result of different quantities of heterogeneous, concrete labour, they come to be compared to a quantity of some other commodity, whose value is well known, and which is regularly traded, for example cattle. It is, then, not necessary for this third commodity to be actually present, in such transactions. This third commodity simply becomes the proxy for universal labour, i.e. it reduces the actual labour, contained in the other two commodities, to this universal labour, abstracting from their physical characteristics as concrete labour, and subsuming the individual labour/value of any any specific producer/commodity into a market value, based upon average, socially necessary labour. This is the role of money that Gray, Thompson, Bray, Proudhon, and, today, the proponents of MMT do not understand.

By equating the first and second commodities, not on the basis of the actual amount of concrete labour used for their specific production (embodied labour), but only on the basis of the amount of this universal labour they represent, their exchange ratio can be determined. This is the function of money as measure of value/unit of account, as opposed to currency. Currency, in the form of coins or other money tokens, however, arises, naturally, from the mediating role of money, as measure of value, because, as proxy for universal labour, it also becomes the proxy for all other use values. By possessing this one use value, it is possible to possess any and all other use values, simply by exchanging it for them.

If I possess wine, I may or may not be able to exchange it for linen, and so obtain the use value of linen, because that depends on an owner of linen wishing to exchange it for my wine, but, if I own money, it is always possible to exchange it for linen, or any other commodity. So, it inevitably becomes the case that, as well as money acting as measure of value, in C – M – C, the owners of commodities seek to sell them for money, or to obtain money tokens, in order to the use that money/tokens to buy other commodities. But, once money exists as currency, rather than just as measure of value, the circuit C – M – C implies, also, both C – M, and M – C, but, then, M – C, implies also C – M, so that, as well as the circuit C – M – C, we also have a circuit M – C – M.

“In the form C—M—C it is the commodity that is the beginning and the end of the transaction; in the form M—C—M it is money. Money mediates the exchange of commodities in the first circuit, the commodities mediates the evolution of money into money in the second circuit. Money, which serves solely as a medium in the first circuit, appears as the goal of circulation in the second, whereas the commodity, which was the goal in the first circuit, appears simply as a means in the second. Because money itself is already the result of the circuit C—M—C, the result of circulation appears to be also its point of departure in the form M—C—M. The exchange of material is the content of C—M—C, whereas the real content of the second circuit, M—C—M, is the commodity in the form in which it emerged from the first circuit.” (p 122-3)

In other words, money emerges, naturally, from the exchange of commodities, and this is quite different from the idealist conception of money, put forward by Ricardo and others, and adopted by modern orthodox economics, in which it arises ready formed, in its phenomenal form as currency, devised in Men's heads simply to facilitate exchange. The point of producing products, in order to enjoy their use value, in consumption, is clear, as is the point of exchanging these products as use values, for another, i.e. to exchange one use value for some other, which provides you with greater utility, and so raises your level of social welfare. This, indeed, is the foundation of the transformation of products into commodities, and the development of commodity production and exchange, the separation of value from use-value, and conversion of individual value into exchange-value. But, what then is the point of exchanging money for money? Initially, the point of obtaining money is obvious.

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Martin Thomas On Inflation - Part 14 of 25

No amount of distributional struggle can change the laws of capital and economics. Only a successful class struggle that brings about a change in the mode of production itself can change those conditions.

During periods of stagnation, like the 1920's/30's, or the 1980's/90's, the relative surplus population makes it impossible for workers to simply increase wage share, no matter how militant their struggle. Similarly, in periods of economic expansion, capital is forced, by competition, to accumulate more rapidly, as each individual capital seeks not to lose market share, and as intensive accumulation gives way to extensive accumulation, productivity growth slows, and the relative surplus population is used up, leading to labour shortages and wage rises, which accelerates the process.

From the early 2000's, that has again been apparent, and the ruling class, now owning its wealth in the form of fictitious capital, rather than real, industrial capital, has been forced to adopt ever more aggressive means of actually destroying the real economy to prevent it. It introduced fiscal austerity after 2010, and after 2020, introduced physical lockdowns of the economy, and yet, it has failed to prevent those underlying processes of the long wave expansion manifesting themselves.

It is precisely the fact that capital becomes overproduced, as described by Marx above, that leads it to address that condition. Firstly, the crisis results in firms closing down, and unemployment rising. Inflation remains high, in the 1970's and early 80's, not because of entrenched “expectations”, but because, central banks did continue to produce excess liquidity, often linked to fiscal stimulus as part of Keynesian demand-management policies. Secondly, its precisely at such times that capital engages in a new innovation cycle, as firms seek to develop and introduce new labour-saving technologies to address the problems they have in obtaining workers, and it is these new technologies that create a relative surplus population, and so undermine the capacity of workers to even maintain rather than increase their wage share.

That innovation cycle, began in the 1970's, and peaked in 1985, and created all of the base technologies that led to the revolution in productivity, and undermining of the power of labour in the last 30 years. It was that change in material conditions, putting workers on the back foot, that enabled capital to beat them down, reduce wage share and increase profit share, which then meant that central banks no longer had to provide accommodation to enable firms to raise prices to cover higher higher wages.

The position of Bob Rowthorn, cited by Martin, is correct in that context.

“The British Marxist writer Bob Rowthorn emphasised another angle on this: in conditions of fiat money, heightened class conflict would increase inflation, as the state adapted to more intense battles by both bosses and workers to improve incomes in nominal (cash) terms, as their only way to seek improvements in real terms. Right-wingers were not entirely wrong to say that a "wage-price spiral" was driving inflation; only, for workers, a spiral of both wages and prices was better than a spiral of prices alone.”

But, after 1985, as workers were defeated, they could no longer obtain the higher wages, as prices, for a time continued to rise faster, itself bringing a rapid rise in profit share.

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Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 22 of 22

In the age of free market competition, where a plethora of small private capitals competed for market share, on the basis of lowering prices, by lowering the individual value of their output, lower prices, in general, posed no great problem, although, as seen, states were led to devalue the standard of prices, both as a consequence of the normal wear and tear of coins, and as a result of debasement by the state as a means of paying their debts. In the 19th century, discovery of new goldfields, as Marx describes, reduced the value of gold, and so led to rising money prices.

Marx sets out the way the Bank of England increased the currency in circulation according to these laws outlined. But, what is also apparent is that, in terms of paper, fiat currencies, no relation to gold or silver need be maintained. As Marx has described, there have been periods when the value of gold has fallen, or where the quantity of gold represented by the standard of prices has fallen, but where the general price level does not rise proportionately, and that is because the quantity of money tokens thrown into circulation is not increased in the same proportion. It is not any relation to gold or silver of the token that is ultimately determinant, but the relation of the token to social labour-time. Gold and silver as money commodities, were simply historical phenomena that acted as physical manifestation of that universal labour, in the process of social development, and mediated the relation between social labour-time and currency.

A look at the huge fluctuations in the gold price from week to week, or month to month, shows that it no longer performs the function, or is needed for that function. The general level of prices can be influenced by central banks completely independent of any change in the value of gold, or the amount of gold represented by the standard of prices. As this was understood, it played an important role, as capitalism itself moved from the era of the monopoly of small private capital to the era of large-scale socialised capital, and oligopoly.

These huge socialised capitals require increasing levels of macro-economic planning and regulation, across increasingly large single markets. For the billions of Dollars of investment they undertake, they require as much stability as they can get, in order to ensure that such investment is going to be profitable over long time horizons. In these conditions, falling prices are to be avoided, and a moderate 2% p.a. inflation of prices is desirable.

For one thing, workers resist falling money wages, even when their living standards are rising, but Fordism was based on these money wages rising by less than the annual increase in productivity. If prices were constant, rising productivity means a lower value of wage goods, requiring lower money wages, even if these lower money wages bought a greater volume of wage goods (rising living standard). A small inflation of prices means that money wages rise, but by less than the increase in productivity, so that wages fall relative to output, raising the rate of surplus value and profits.

In addition, if one large firm increases its prices, its competitors will tend not to follow, unless they have to, because they hope to gain market share. However, if one cuts prices, the others will do the same, again in order not to lose market share. Such price wars are destructive of profits for oligopolies. The last thing they want is generally falling prices.

So, for example, in 1913, the US Federal Reserve was created, and one of its functions is to preserve price stability, now understood as aiming at this annual 2% inflation. A central bank is no longer constrained by quaint and now historically redundant questions such as the value of gold, in determining monetary policy. Whatever happens to the price of gold, silver or any other previous money commodity is irrelevant in influencing the general level of prices, which is achieved by increases or decreases in the volume of currency and credit in circulation. That is not to say that central banks have monolithic control over such phenomenon, as the current high levels of inflation indicate.

“The gold coin obviously represents the value of commodities only after the value has been assessed in terms of gold or expressed as a price, whereas the token of value seems to represent the value of commodities directly. It is thus evident that a person who restricts his studies of monetary circulation to an analysis of the circulation of paper money with a legal rate of exchange must misunderstand the inherent laws of monetary circulation. These laws indeed appear not only to be turned upside down in the circulation of tokens of value but even annulled; for the movements of paper money, when it is issued in the appropriate amount, are not characteristic of it as token of value, whereas its specific movements are due to infringements of its correct proportion to gold, and do not directly arise from the metamorphosis of commodities.” (p 122)

Where gold no longer acts as money commodity, and measure of value, its role in the process determining the quantity of paper notes in issue also disappears. The paper note does, indeed, then represent the prices of commodities directly, because the note itself, now, directly represents, not a quantity of gold, but a quantity of social labour-time.

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Martin Thomas On Inflation - Part 13 of 25

One reason that Keynesian and Neo-Keynesian economists linked rising wages to rising inflation, is precisely because, in practice, as labour shortages led to such rising wages, central banks did increase liquidity – in addition such conditions are produced by rising economic activity that also leads to increased commercial credit, increasing liquidity – so that firms could pass on higher wage costs in higher prices. But, it is not the higher wages that cause the higher inflation, but this central bank accommodation.

Martin describes the position of Alain Lipietz.

“Lipietz built on this thought to argue that bosses would seek to maintain profits by increasing mark-up. Governments and banking systems guided by capitalist interests would adapt credit and state-led determinants of demand to suit.

Since the labour-time value of labour power (the "living wage") could not be fundamentally driven down just by financial manipulation, but only by class struggle, wages would catch up; profits and investment would remain low; inflation would continue while unemployment remained high”.

What this fails to take into account, however, is that what is involved, here, is not “class struggle”, but merely distributional struggle, and so long as capitalism exists, capital always holds all the cards. As Engels put it,

“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”

(Engels – The Condition of The Working Class in England p 243)

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Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 21 of 22

Marx then deals with those occasions where the currency is debased and yet where the corresponding rise in prices does not occur. The reason for this is quite simple, as described earlier. If the currency is devalued by 50%, but the amount of currency put into circulation does not double, then prices, themselves, will not double, because the value of the currency/money tokens is a function of their quantity in circulation. In other words, if the standard of prices is based on silver rather than gold, a £ is devalued to 1/15 its previous amount, and 15 times as many £'s would be required in circulation, causing prices to rise 15 fold. If, however, only 5 times as many tokens are put in circulation, prices would rise only 5 fold rather than 15 fold.

“This is the solution of the difficulty which was not resolved by the controversy between Locke and Lowndes. The rate at which a token of value – whether it consists of paper or bogus gold and silver is quite irrelevant – can take the place of definite quantities of gold and silver calculated according to the mint-price depends on the number of tokens in circulation and by no means on the material of which they are made.” (p 120)

What is illustrated, here, is that the two functions of money, as measure of value, and as currency, are not only different, but also contradict each other.

“As regards its function as a standard of value, when money serves solely as money of account and gold merely as nominal gold, it is the physical material used which is the crucial factor. Exchange-values expressed in terms of silver, or as silver prices, look of course quite different from exchange-values expressed in terms of gold, or as gold prices. On the other hand, when it functions as a medium of circulation, when money is not just imaginary but must be present as a real thing side by side with other commodities, its material is irrelevant and its quantity becomes the crucial factor.” (p 121)

If silver is the money commodity, then ideal prices are markedly different to where gold is the money commodity, because silver itself is of much lower value than gold. If the value of social production is 1 million labour hours, and an ounce of gold has a value of 100 hours, then 10,000 ounces of gold is its equivalent form. But, if silver has a value of 10 hours labour, 100,000 ounces are its equivalent form. If an ounce is the unit for the standard of prices, then prices will be ten times higher in the latter regime than the former.

That is the case in terms of the measure of value, and standard of prices, but, as seen, when it comes to currency, the coins and other tokens used, although they represent money/social labour-time, may themselves have no value at all, in terms of their material content. An ⅛ ounce gold coin, as currency, may represent ¼ ounce of gold, for example, just as may ¼ ounce of silver, or copper, or a scrap of paper. What gives these tokens value is only their ability to represent money, i.e. to represent universal labour, social labour-time, and their ability to do this depends on them being accepted, and only being thrown into circulation within the limits described.

“Although whether it is a pound of gold, of silver or of copper is decisive for the standard measure, mere number makes the coin an adequate embodiment of any of these standard measures, quite irrespective of its own material.” (p 121)

The consequences of this are different in conditions where gold coins act as tokens than where paper tokens are used. As previously described, if ¼ ounces of gold is the standard of price, and has the name £1, then the quantity of gold coins in circulation must be equal to the number of ¼ ounces of gold that is the equivalent form of the value of commodities to be circulated, divided by the velocity of circulation. If gold coins are worn in circulation, so that, on average, 1600 ounces are required to obtain 1 lb. of gold bullion, rather than 1200 ounces, it means the money price of gold rises above its mint price. On the basis of Gresham's Law, owners of full weight coins, melt down 1200 of them to obtain 1 lb. of gold bullion, and then exchange this gold bullion for 1600 sovereigns.

But, such a process is impossible with paper notes. A £1 note has no material value, and its value is determined solely on the basis of the quantity of them thrown into circulation, relative to the money/social labour-time they represent. The greater this quantity, the smaller the aliquot portion of total value each note actually represents, but, because it continues to have the name £1, the manifestation of this can only be a rise in the prices of commodities, i.e. more of these notes are required to buy commodities – inflation.

“The rise or fall of commodity-prices corresponding to an increase or decrease in the volume of paper notes – the latter where paper notes are the sole medium of circulation – is accordingly merely a forcible assertion by the process of circulation of a law which was mechanically infringed by extraneous action; i.e., the law that the quantity of gold in circulation is determined by the prices of commodities and the volume of tokens of value in circulation is determined by the amount of gold currency which they replace in circulation. The circulation process will, on the other hand, absorb or as it were digest any number of paper notes, since, irrespective of the gold title borne by the token of value when entering circulation, it is compressed to a token of the quantity of gold which could circulate instead.” (p 121)

In other words, if total circulation amounts to 1 million hours of labour/value, which equals 1,000 £1 gold coins, but instead, 2,000 £1 paper notes are put in circulation, this cannot change the 1 million hours of value they represent. The total value represented by the notes is then “compressed” into this 1 million hours of value, rather than the nominal appearance. Each note now represents only half a coin, half the amount of social labour-time.

“In the circulation of tokens of value all the laws governing the circulation of real money seem to be reversed and turned upside down. Gold circulates because it has value, whereas paper has value because it circulates. If the exchange-value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity-prices, whereas commodity-prices seem to rise or fall with the changing amount of paper in circulation. The circulation of commodities can absorb only a certain quantity of gold currency, the alternating contraction and expansion of the volume of money in circulation manifesting itself accordingly as an inevitable law, whereas any amount of paper money seems to be absorbed by circulation.” (p 122)

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Martin Thomas On Inflation - Part 12 of 25

Martin writes,

“The ability of bosses to keep ahead was shown by what happened after the great French general strike of 1968, which won a 35% rise in the minimum wage. By investing and expanding use of capacity, bosses were able to keep their profit rates up, while inflation ran no higher than 5% or 6% a year until the oil crisis of 1973-4.”

Of course, a 35% rise in the Minimum Wage is not the same as a 35% rise in all wages; a large one-off rise, largely catching up on previous price rises, is not the same as annual rises of that amount, thereafter, when prices were rising by an average 5-6%, but its also not true to say that bosses were able to keep their profit rates up.

As I have set out elsewhere, the 1960's, and, even more so, the 1970's, was the period when increasing labour shortages led to rising wage-share, and a consequent fall in the rate of profit. That is what Glyn and Sutcliffe demonstrated in Workers and The Profits Squeeze, in relation to Britain, and the same phenomena was demonstrated by Thirlwall for the US (See Thirlwall, “Changes in Industrial Composition in The UK and the US and Labour's Share of National Income 1948-69”, Bulletin of the Oxford University Institute of Economics and Statistics (Nov 1972) and Nordhaus (See W.D. Nordhaus, “The Falling Share of Profits”, Brookings Papers on Economic Activity (1974)), as well as Heidensohn, and Zygmant in relation to Germany (See: Heidensohn and Zygmant, “On Some Common Fallacies in Interpreting Aggregate Pay Share Figures” Zeitschrift fur die Gesamte Staatswissenchaft (Apr 1974))

What, inflation was able to do, during this period, was to cushion the effect of rising wage share, and the squeeze on profits, as central banks increased liquidity so as to enable firms to raise prices to cover some of their increased wage costs, but not all of it. Moreover, as wage share rose, and profit share fell, but continued strong economic activity, driven by the long wave cycle, and manifest in rising aggregate demand, itself driven by rising demand for wage goods, this inevitably led to rising market rates of interest, and a consequent fall in inflation adjusted asset prices. Despite the economic boom of the 1960's and 70's, inflation adjusted asset prices fell between 1965-1985, as a consequence of this rise in interest rates.

And, in fact, in the 1960's, and early 1970's, the investment undertaken by firms, contributed to this squeeze on profits. The peak of the Innovation Cycle had come in 1935, producing all the base technologies that were used in production during the post-war boom. By the 1960's, the effect of these new technologies, in production, to be able to raise productivity, as they replaced older technologies, was fading. A new machine that replaces 2 older machines, and the 2 workers that operated them, brings a sharp rise in productivity, but when its a matter of merely a worn out new machine being replaced by another machine of the same kind, no improvement in productivity arises. And, when capital expands by simply adding more machines of the same kind, each requiring additional workers, this simply reduces, rather than increasing, the size of the relative surplus population, creating the conditions for labour shortages, rising wages, stagnant productivity growth, and the squeeze on profits witnessed during that period.

Martin also refers to the fact that, in the post-war period, economists based their analysis on the so called Phillips Curve, by which there is a trade-off between inflation and unemployment. In fact, Phillips never made the link as being between unemployment and inflation, but between unemployment and wages. That link, in fact was nothing new, because Marx describes it in Theories of Surplus Value, where he also sets out a sequence in which as unemployment falls, and employment expands, first workers are employed to work longer hours, for additional pay at the normal rate, then at overtime rates, so that absolute surplus value stops rising, until, as labour shortages arise, workers demand higher hourly rates, and so relative surplus value is also reduced, squeezing profits, and leading to an overproduction of capital. He summarises it in Capital III, Chapter 15.

“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

Associated with it is also the Beveridge Curve, measuring unemployment against job vacancies. It is Keynesian and Neo-Keynesian economists that took the Phillips Curve relating unemployment to wages, and turned it into one relating unemployment to inflation. But, as Marx sets out, in Value, Price and Profit and elsewhere, whilst there is clearly a link between the level of unemployment and wages, there is no such relation between unemployment and inflation, because it is not wages that cause inflation, but excess liquidity. It is quite possible to have both high levels of unemployment and high levels of inflation, simultaneously – stagflation – as was demonstrated with the Weimar hyperinflation, and with the stagflation of the 1970's and early 1980's. It is also possible to have high levels of wages and employment, with low levels of inflation, provided that there is no excess liquidity, but such a restriction would more quickly show up as a squeeze on profits, as firms were not able to raise prices to cover the higher wages.

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Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 20 of 22

In condition of an overproduction of commodities, it is not more money that is required, i.e. more liquidity. As set out, that could only reduce the value of each token, causing prices to rise, so that a condition of stagflation arises. Either the value of existing commodities must fall, so that they can be sold profitably, at a lower price, so that demand for them rises, removing the overproduction, or else incomes must rise, relative to those values, so that demand rises. But, how is that to happen? If wages rise, enabling workers to buy more, then profits will fall. Workers may buy more, but capitalists would buy less, and, in conditions of squeezed profits, its even more likely that prices may not be sufficient to avoid losses.

Alternatively, a whole range of new use values are introduced, so that consumers, instead of demanding money, demand these new commodities. That, in fact, is the way all such prolonged periods of overproduction and stagflation are resolved. In the 1930's, for example, new technologies made available motor cars, as well as domestic appliances, and demand for these commodities is enabled, first among the middle-class, and subsequently amongst workers, as the value of these commodities falls to levels at which these sectors of the population can afford them.

In the 1980's and 90's, the microchip revolution began to make available video recorders, personal computers, and so on, all of which created the industries upon which the new upswing, after 1999, was based. This is the process Marx describes, in The Grundrisse, as The Civilising Mission of Capital.

Similarly, a crisis of overproduction of capital cannot be resolved by additional liquidity. A crisis of overproduction of capital is also a crisis of overproduction of commodities, because the elements of capital are comprised of commodities. Such a crisis arises because capital has expanded relative to the social working-day. Absolute surplus value cannot be expanded, and relative surplus value is reduced as wages rise. The solution to this is a technological revolution. It creates new labour-saving technologies, which creates a relative surplus population, restoring the relation between capital and the social working-day.

Wages are pushed down, and profits rise. Fixed capital is devalued, as a result of the technological revolution, and by moral depreciation. That raises the average annual rate of profit, and creates a release of capital. Circulating constant capital is devalued as a consequence of the technological revolution, also raising the annual average rate of profit, and creating a release of capital. The value of labour-power is reduced, via the technological revolution, and rise in relative surplus value, so that again the average annual rate of profit rises, and variable-capital is released. These technological changes also raise the rate of turnover of capital, raising the annual average rate of profit. So that the crisis of overproduction is ended.

Attempts to deal with the crisis via additional liquidity, as proposed by under-consumptionists, Keynesians and proponents of MMT, are doomed to failure, and only result in stagflation as seen in Weimar and in the 1970's.

“Let us assume that £14 million is the amount of gold required for the circulation of commodities and that the State throws 210 million notes each called £1 into circulation: these 210 million would then stand for a total of gold worth £14 million. The effect would be the same as if the notes issued by the State were to represent a metal whose value was one-fifteenth that of gold or that each note was intended to represent one-fifteenth of the previous weight of gold. This would have changed nothing but the nomenclature of the standard of prices, which is of course purely conventional, quite irrespective of whether it was brought about directly by a change in the monetary standard or indirectly by an increase in the number of paper notes issued in accordance with a new lower standard. As the name pound sterling would now indicate one-fifteenth of the previous quantity of gold, all commodity-prices would be fifteen times higher and 210 million pound notes would now be indeed just as necessary as 14 million had previously been. The decrease in the quantity of gold which each individual token of value represented would be proportional to the increased aggregate value of these tokens. The rise of prices would be merely a reaction of the process of circulation, which forcibly placed the tokens of value on a par with the quantity of gold which they are supposed to replace in the sphere of circulation.” (p 120)

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Martin Thomas On Inflation - Part 11 of 25

With paper notes, it is no longer a question of, periodically, minting coins with less gold content, but simply of an increased quantity of notes, each, thereby representing a reduced quantity of gold/universal labour. The only thing that, really, stood behind such tokens, was always, then, the authority of the state, and the state always had the power to determine, by diktat, the value of the standard of prices, by either varying the metal content of precious metal coins, or by changing the quantity of paper notes put in circulation, and the amount of gold each was redeemable for.

This was not something arising only in the post-war period! Indeed, the establishment of central banks, like the Federal Reserve, in 1913, went along with the dominance of industrial-capital, in the form of large-scale socialised capitals, and development of Fordism and the social-democratic state. That depended upon a modus vivendi between capital and labour, in which living standards would rise year on year, made possible by annual rises in productivity, which ensured that the rate of surplus value rose, at the same time. Because workers object to falling nominal wages, even when real wages rise, the means to achieve this was, via moderate rises in inflation each year, so that both nominal and real wages were seen to rise, but prices rose as values declined. So, for example,

c $100 (100 commodity units) + v $50 (50 commodity units) + s $50 (50 commodity units) = $200 (200 commodity units @ $1 per unit).

With 10% inflation, and a rise in productivity of 20%

c $110 (120 units) + v $55 (60 units) + s $55 (60 units) = $220 (240 units) @ $0.92 per unit.

As workers only need 50 units, not 60, to reproduce their labour-power, a rise in real wages to 55 units can be achieved, whilst the rate of surplus value and profits rise. So,

c $110 (120 units) + v $50.42 (55 units) + s $59.58 (65 units)

Moreover, for oligopolies, price wars are destructive of prices, as any firm that raises prices will not lead to others following suit, as they seek to gain market share, any that cut prices, will see others follow suit, for the same reason, and the consequence is reduced profit. Consequently, central banks seek to have the general level of prices rise each year, to avoid such conditions, even though annual rises in productivity bring falling unit values for commodities that would, with a stable currency, lead to, year on year, falls in the general level of prices. There are other reasons why states like to see a small rise in prices each year, too, for example, that falling prices encourage consumers to delay spending in the expectation of future lower prices, and such behaviour leads to an overproduction of commodities, and so difficulty for capital to realise profits.

An illustration that inflation was not something that arose just after 1970, can be seen by looking at a chart of UK inflation from 1860-2015. 

The same can be seen for the US.

This had nothing to do with “The speed and intricacy of the circuits of capital ... far outstripping the capacity of gold (heavy, difficult to move physically, restricted in quantity) to facilitate it”. It was a function of excessive liquidity, an example of which, on a grand scale, had been shown in Weimar. US inflation was more subdued than that in Britain in the 1940's, 50's and 60's, despite its additional liquidity injections, because a) its productivity revolution enabled a massive rise in output, absorbing the liquidity, and b) large amounts of $'s went overseas, creating inflation there, whilst the US benefited from importing these commodities at lower prices, due to the fixed rate of the Dollar against other currencies.

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Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 19 of 22

As Marx points out, a money/financial crisis, of the kind of 1847, 1857 or 2008, is completely different to a crisis of overproduction of commodities or capital.

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.”

(Capital I, Chapter 3, note 1 p 137)

A crisis of overproduction of commodities arises because the production of commodities is ramped up, in the expectation of sales and increased masses of profits, faster than the market for these commodities rises. Consequently, the output cannot be sold at the idealised prices. The market price falls below that required to reproduce the consumed capital, and this can apply to some (partial crisis) or all/most commodities (generalised crisis). As Marx puts it in Theories of Surplus Value, Chapter 20,

“The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

And, this can apply not just to knives, but all/most commodities simultaneously.

“At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”

(Theories of Surplus Value, Chapter 17)

A crisis of overproduction of capital arises when, as Marx sets out in Theories of Surplus Value, Chapter 21, and in Capital III, Chapter 15, the economy has expanded to such a degree that the relative surplus population has been used up, the social working-day cannot be expanded further, and so absolute surplus value cannot be increased. Further capital accumulation pushes up wages, reducing relative surplus value, and so squeezing profits. So, even if the mass of profits rises marginally, it is on the basis of a much larger volume of output, so that the rate of profit/profit margin is continually squeezed. Only small changes in conditions are then required to turn these tight profit margins into losses, which on the huge volumes of output amount to large total losses, and an inability to reproduce the consumed capital. That first impacts those smaller capitals operating with the tightest margins.

As I have described elsewhere, this crisis of overproduction, arising from squeezed profits is the diametrical opposite to Marx's Law of the Tendency for the Rate of Profit to Fall, which arises on the back of falling wages and increased profits (from a rising rate of surplus value). It is a measure of the average rate of profit between one long wave cycle and another.

Crises of overproduction are not the consequence of insufficient money/liquidity, as the under-consumptionists believe, but of production expanding faster than the market, either for a few or for all/most commodities. Frequently, they arise because a previous period of economic expansion has, in fact, put more money in consumer's – primarily worker's – pockets enabling them to increase their consumption, including, for many commodities, to a level where they have no reason to expand that consumption further. Marx's example of the demand for knives applies equally where workers' wages have risen, rather than the price of knives falling. It is simply income elasticity rather than price elasticity of demand.

In these conditions of near full employment, where all worker households have satisfied their needs for these basic commodities, they could only demand more if, either, their wages rose by much more, or if prices fell by much more. However, in those cases, they are more likely to use the increased disposable income to demand entirely new types of commodity, which is why, as Marx sets out in Capital II, its during such periods that workers begin to consume some former luxury products, and the range of their consumption expands. Yet, they can, equally, simply hold on to money instead.

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Japanese Inflation Hits 4%

For years, Japan has had near zero or even below zero increases in its consumer prices. Like every other country in the world, ever since lockdowns were lifted, during 2021, that has changed, and prices have risen significantly. Now, even Japan has consumer prices rising by 4%, year on year, according to the latest figures. 

Japan is a good example of the phenomenon I described several years ago, whereby, QE, promoted as a means of raising inflation, actually results in a disinflation of consumer prices, as liquidity is drained from the real economy, and diverted into the purchase of assets. In the case of Japan, the purchase of those assets was not even, just in Japan, but, via the so called carry trade, a purchase of assets in other countries, particularly the US.

Japanese headline inflation rose from 3.8% in November to 4% in December. It is the highest level since January 1991. The headline figure, as in other economies, discussed recently, hides the fact of much higher rates of increase in particular sectors that affect workers. Food prices, for example, rose 7%, as against 6.9% in November. Fuel prices rose by 15.2% as against 14.1%, and within that electricity prices rose by 21.3% as against 20.1%, as Japan, too, has been affected by the global rise in energy prices caused by NATO's boycott of cheap Russian oil and gas.

Core consumer prices also rose by 4%, the most since 1981, copying the picture seen in other developed economies, where inflation has risen to levels not seen in 40 years. The only bright spot was that, month on month, prices rose by only 0.3%, as against 0.4% in the last 3 months, but, despite that, the projections are for the headline rate to continue rising in coming months.

The reasons for this inflation, in Japan, are the same as for the inflation across the globe. That is the injection of excess liquidity into circulation, devaluing its Yen money tokens, each, then representing a smaller quantum of universal social labour-time, and so reducing its value as standard of prices. That process has been going on for more than 30 years, and the reason it is appearing, now, has also been previously explained.

For thirty years, and specifically after 2008, that excess liquidity was actively targeted at, and directed into the purchase of financial and property assets, causing an astronomical inflation of their prices, and, as those prices inflated, creating huge capital gains for the owners of those assets – the form in which the global ruling class now owns its wealth, and from which it derives its power – gains that were made a one-way, bet, as central banks ensured that the gains remained private, but any subsequent losses were always socialised, as the state was called in to bail out the speculators and the banks and finance houses which act as their conduit.

With such a one-way bet, it ensured that liquidity was sucked out of the real economy, and into this fictitious economy, thereby, causing a disinflation of commodity prices, and, in combination with fiscal austerity, slowed the real economy, so that potential money-capital was diverted away from real productive investment, and into this speculation, not only by the purchase of financial and property assets, but by the use of profits to buy back shares to inflate their prices and so on.

As Marx put it,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

(Capital III, Chapter 33)

When all of these methods still failed to stop the global economy from growing, as developing economies took the opportunity to close the gap on their reluctant elder brethren, and smaller capitals grew at the expense of larger capitals, as competition is bound to bring about, when those larger capitals look to the interests of shareholders rather than real capital investment, more direct means of slowing economic growth, and so the demand for labour and capital, were resorted to, in the form of lockdowns under the spurious cover of the pandemic. But, that simply exposed the heightened nature of the contradiction that had developed.

As the state insisted that workers not work – though in reality it needed the vast majority of workers to continue working or society would have collapsed, and so it was led into all sorts of absurdities in ignoring its own propaganda over infections and spread, to ensure that those workers did travel to work, and sit alongside other workers all day, engaged in that production – and so, would be deprived of income, it was forced to become the provider of variable-capital of last resort, and to pay the wages of those workers itself in the form of furlough schemes, or else risk immediate rebellion and social unrest.

But, that involved a further inevitable contradiction that also exposed the basic lie at the heart of bourgeois ideology. It is labour that creates new value, and it is from that new value that all revenues derive. Out of that new value, the worker is handed back a part as wages, the equivalent being the wage goods that the working-class as a whole produces, and which it buys with these wages. But, the other part is appropriated as profits by capital, and out of it, is also paid interest to the money lender, rent to the landowner, and taxes to the state. If the worker is prevented from undertaking labour, then no new value is created, and so there is nothing that can be handed back to them as wages, as well as there also being no profits, and consequently no interest, rent or taxes. That is appropriate, because, also, if the worker is not allowed to work, nor are there any consumer goods and services for any of the above revenues to be spent on, nor are their any capital goods produced, to be bought by profits to accumulate additional capital.  Indeed, nor would there be any production to reproduce even the consumed elements of constant capital, so that, not only would GDP fall, but society would be forced to consume its own seed-corn, and consequently to suffer a fundamental reduction in its output, and productive capacity for future years, as its capital is consumed. 

Lockdowns exposed this fundamental lie at the heart of bourgeois society, which is why it had to be hidden by other lies; by pretending that all labour had been locked down, when, in fact, 80% of all labour continued to take place as before, which is why GDP only fell by 20%, and not 100%, and also with the other lie, which is that the worthless paper tokens put in circulation, by central banks, are actually money. In order to pay replacement incomes to workers, the self-employed, and small business owners, at a time when the new value required for those revenues had not been created, it was necessary to create the fiction that these revenues could be produced simply by printing more of these worthless tokens, and handing them out for their recipients to spend.

Over the previous thirty years, this same process, most visible as QE, had been used to inflate asset prices to astronomical levels. Now it was being used, much as the proponents of MMT and UBI had previously advocated, not to buy assets, but to buy consumer goods, to provide households with a basic income, even though they had performed no labour to create the value equivalent of the payment, and also had produced no consumer goods and services to be bought with those revenues!

In the first period of lockdowns, this posed no problem, because, although, initially, financial markets sold off at the prospect of not being able to sell goods and services, and so make no profits, they quickly recovered and soared to new heights, as the speculators realised what had been demonstrated over the previous thirty years, which is that share prices and financial asset prices in general, do not depend on profits being produced, but purely on a Ponzi Scheme, in which speculation, in search of capital gains, drives those prices ever higher, and if those prices drop, the central bank will always step in to buy up the worthless paper, and start everything off all over again. The soaring asset prices are simply the other side of the fact that the money tokens used to buy them, and which act as the measure of their value, have become increasingly worthless, as more and more of them are printed. Its like pretending you have grown taller, by using ever smaller measuring sticks to assess your height.

With large areas of consumer spending made impossible by lockdowns, as the largest areas of consumption, in services, were physically closed down, all of this blizzard of confetti currency, formed itself into drifts in households' bank accounts, after some of their more costly debt had been paid down, and, as a consequence, it also was shovelled up by the banks and financial houses, and poured into speculation, once more, in those financial and property assets. This huge mass of savings, also drove down interest rates to even lower levels, as lockdowns meant that no firms were engaging in actual productive investment, seeing yet another opportunity to use profits to buy back shares and push up share prices. After the initial sell-off in early 2020, bond and share prices soared by around 50%, as the Dow Jones rose from 22,000 to 37,000.

But, once lockdowns inevitably had to be lifted, the nature of that contradiction became manifest, as did the absurdities of MMT, and UBI that I, and others, have pointed out in the past. Not only had all of that confetti money been hugely depreciated in value, as it entered circulation, first in the purchase of financial and property assets, but, also, now, as it surged out into the real economy, as shops opened, bars and restaurants scrambled to recruit staff, and industry after industry found it could not get either the workers or the other inputs required to meet sharply rising demand, as consumers flooded out to make up for lost time, and now armed with wodges of the confetti money the state had issued to them over the last two years.

The surge of demand inevitably subsides after a time, and the problem of obtaining inputs, and increasing supply also resolves itself, eventually, so that these short-term spikes in market prices are reversed, but what is not reversed is the fact that the measure of values, the standard of prices itself – be it Dollars, Pounds, Euros or Yen – has been devalued, as a result of this excess liquidity, and so, the general level of prices is permanently raised. Its like changing from using a yard as your basic unit of measurement to using a foot, the unit measurement of everything becomes three times greater. The only difference is that a devalued Pound continues to be called a Pound, and so on, as though it were the same value as before.  Japan has experienced that inflation of prices just as has every other country. Its 4% inflation might seem mild compared to the 10-14% in Britain, the 10% in the EU, or even the 7% in the US, but given its history, over the last 30 years, and given the specifics of its economy, it is substantial.

In the 1980's, Japan like other developed economies, and particularly the US and UK, experienced a massive inflation of asset prices, be it share, bond or property prices. The Nikkei Index began 1980 at 6,569. At its highest point in 1989, it hit 38,957, a rise of around 500%. Then, in 1990, the bubble burst. It fell precipitously, and unlike the global crash of 1987, when, central bank intervention by the Federal Reserve and others reversed the crash, it continued to fall. It closed 1990 at 23,848, and fell again the next year. By the end of 1992 it was down to 16,925, a fall of 54% from its highs. But, that was not the biggest of the falls in asset prices, as the bubble burst. Japanese property prices fell by up to 90%, and some commercial property by 99%!

As in 1987, with the global crash in asset prices, however, Japan continued to respond to these falling asset prices, by a process of QE, of the central bank printing money tokens, used to buy up the increasingly worthless assets, to prevent their prices falling further. As with QE, the central bank's zero interest policy was promoted as being a means of preventing recession, but, unlike the policies of states, since 2010, the Japanese government also engaged in a series of fiscal expansions, similar to those undertaken, more recently, by the Chinese state, also designed to stimulate the economy, during the 1990's, when the global economy was still experiencing the last stages of the long wave downtrend.

Japan's economy, highly productive, and geared to growth via exports, was susceptible to domestic stagnation, because it could increase output without the need for large increases in employment. In addition, its economy was based on a culture of lifetime employment, and so of labour being hoarded. It also had an ageing population, with a culture of saving, similar to that, now, in China. As the Bank of Japan printed money tokens, used to buy up government debt, and raise bond prices, lowering yields, and introduced its zero-interest policy, that also reduced the yields on other assets, as they became cheap relative to government bonds. Even as the Japanese government engaged in large infrastructure projects, and other fiscal stimulus, issuing additional debt to pay for it, which should have raised yields, and lowered asset prices, the process of QE, and zero-interest rates sucked even more liquidity out of the real economy, and into the purchase of assets.

Japan's elderly savers bought up the debt, meaning that, unlike most other countries, which were reliant upon the kindness of strangers, i.e. foreign purchasers of debt, Japan could keep increasing its debt to GDP, because the debt was debt effectively owed to itself. The fiscal stimulus failed to stimulate the Japanese economy, as Japanese citizens, instead of spending their incomes, continued to devote a large proportion of their revenues to saving, and the purchase of bonds, and other financial assets. But, it had another effect.

With Japanese yields so low, and a seemingly unlimited capacity for Japanese savers to buy up bonds, it became lucrative for foreign borrowers, be they corporations, rich individuals, or financial institutions, to issue Yen denominated bonds, or to borrow in Japan by other means, and then to use the proceeds to buy foreign assets, where the yields were much higher, in particular to buy up US assets, as it had become the world's largest debtor nation, following the Voodoo Economic policy of Reagan, but also those of the UK, which had undertaken a similar policy under Thatcher, and manifest in the Financial Big Bang of 1986.

This is what happened with the Japanese carry trade. Suppose US institution A issues Y100 million in bonds equivalent to, say, $1 million. With Japanese yields being near zero, it is able to borrow this money, at an interest rate of, say, 0.1%. It, then, converts the Yen into Dollars, and uses these Dollars to buy 10 Year US Treasuries, with a Yield, of say 5% p.a. So, now, its cost of borrowing is $1,000, but the interest received is equal to $50,000. What is more, as the Bank of Japan continued to issue more Yen, as part of this policy, so the value of the Yen fell relative to the Dollar. If, instead of there being Y100 to the Dollar, there is Y120, when the Japanese bond is redeemed, the US borrower only has to convert $833,333 into Yen, to do so, thereby, also making a gain on the currency exchange.

Japanese savers, including Japanese corporations, had an incentive to buy up this debt, because, even with near zero interest rates, with a depressed Japanese economy, and near zero or even falling Japanese consumer prices, these yields were still positive in real terms, and also offered the potential of capital gains, as asset prices appreciated. The savings, however, did not fund real capital accumulation in Japan, which would have lifted it out of stagnation, and allowed liquidity to enter its real economy, preventing the continued disinflation and deflation, but, instead flowed into the purchase of financial and property assets, often, not even in Japan itself, and consequently added to the inflation of those asset prices in the US, UK and elsewhere.

The fall in the value of the Yen, resulting from these policies, made Japanese exports cheaper, but that simply emphasised the increasing dependence of the Japanese economy on exports, rather than on the expansion of its domestic economy, and so also enhanced its requirement to also continually increase productivity, expanding output, whilst employing less labour to do so. But, the 1990's were still a period of long wave downtrend, a condition that only begins to change in the late 90's, and particularly after the new uptrend begins in 1999. Moreover, in the 90's, it also faced other obstacles to that growth, with the global recession of the early 90's, and the Asian Currency Crisis of 1997, which impacted, its most immediate markets, in the region.

It also faced another challenge, which was that, by the early 2000's, it faced a new kid on the block, in the guise of a newly emerging, and rapidly expanding China, which not only sucked in investment, but also acted to undercut the role that Japan had had, in being the most efficient and productive producer of large amounts of consumer goods, particularly of consumer electronics. To compete with China, Japan had to become even more productive, and drive its prices ever lower, adding to the stagnation of its domestic market, and deflation of its consumer prices. The zero-interest rate policy, and liquidity injections failed to stimulate the Japanese economy during the 1990's, which became known as the Lost Decade.

Because of its dependence on exports, and so the global economy, and particularly the US, Japanese growth has moved accordingly. With the new long wave upswing after 1999, its economy grew, at around 3%, but, as the US suffered first from the effects of the Tech Wreck of 2000, and, the, the effects of 9/11, followed by the Iraq War, the Japanese economy fell back. After 2004, it resumed a rate of growth around 3%, but was again affected by changes in the Dollar-Yen exchange rate. Like other developed economies, it dropped sharply following the effects of the 2008 financial crisis. But, it rebounded strongly from that reaching a growth rate of around 5%, and, up to 2020, its economy went through alternating periods of growth of around 3%, and stagnation, reflecting changes in the value of the Yen, and of periods of fiscal stimulus by the state. In 2020, its GDP fell by 10%, but bounced back with the lifting of lockdowns, growing by 7.7% in the second quarter of 2021.

Along with that growth, Japanese inflation also began to rise, in 2021, from September onwards, as economies globally started to reopen, and as all of the liquidity injections, handed to households, now flooded into the real economy, rather than into the purchase of financial and property assets.

A look at the chart shows this to be distinctly different to the situation in Japan over recent decades. Another manifestation was the further devaluation of the Yen, particularly relative to the Dollar. In 2011, there were Y76 to the Dollar, but by October of last year, the Yen had almost halved in value to Y148 to the Dollar.

One reason for that is that, whilst the US Federal Reserve was led to end its QE, and tentatively begin QT, as well as raising its nominal policy rates, the Bank of Japan, continued its policy of Yield Curve Control, which required it to continue to print ever more money tokens, to buy up government bonds (JGB's) at the long end, to prevent their yields rising sharply against the yields of 2 Year Bonds, which are largely determined by its official policy rates. But, in conditions of globally rising inflation, as all of the liquidity floods into the real economy, and at a time when other factors have caused market prices to rise, such as frictions caused by lockdowns, trade wars, and the boycott of Russian energy and food exports, the sharply falling Yen, meant much higher import prices, as witnessed by the figures for Japanese energy, cited at the start.

Just as a condition of prolonged disinflation or deflation, creates a vicious circle, particularly in conditions where saving, and speculation in financial and property assets exists, so the opposite applies. As in the early 1990's, rising global interest rates are causing asset prices to fall. Bond prices have suffered their biggest fall ever in 2022, and that has affected Japanese bonds too, causing the Bank of Japan to have to pump even more liquidity into the purchase of assets. Money that was transferred to US assets, as part of the carry trade, now also moves back, because, with such sharp falls in bond and share prices, even the prospect of higher yields, on those US assets, does not match the actual capital losses resulting from those falls, and so that liquidity finds its way back into the Japanese economy. Japanese households, seeing rising consumer prices, now have an incentive to use that liquidity to buy now, at current prices, rather than saving and consuming later, when prices will be higher.

In fact, for the reasons I have previously set out, rising interest rates, and falling asset prices, now create conditions in which saving rates fall, and consumption spending rises, and is a far more effective means of stimulating the real economy than QE, whose real purpose was to inflate asset prices, and protect the paper wealth of the ruling class speculators. The Bank of Japan has been unable to hold the line on its policy of Yield Curve Control, already having had to double the target yield on the 10 Year JGB to 0.50%, a limit to which the market speculators have already pushed it to, and beyond, daring the Bank to continue to spend even more to defend its policy. It will not be able to do so, and so will mark the end of an era, not only for Japan, but also for the global economy.

Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 18 of 22

As Marx points out, Ricardo had only ever seen this kind of financial crisis, the first crisis of overproduction only appearing in 1825. Its why he he was led into accepting Mill's Law of Markets/Say's Law that it is impossible for there to be a general overproduction of commodities. In a crisis of overproduction of commodities, its second form does appear as a payments crisis, as sellers cannot sell, and, thereby, obtain currency, and without such currency cannot pay suppliers bills or wages, which, in turn, leads to a sharp fall in aggregate demand, not to mention the bankruptcy of all those businesses, which, not having been paid, cannot replace their consumed capital.

So, as Marx says, this overproduction of commodities has the appearance of a lack of money, rather than an overproduction of commodities. It appears as under-consumption, rather than overproduction, and the under-consumption is the result of a lack of money. This is basically the thesis of Sismondi, plagiarised by Malthus, and of Attwood as adopted later by Keynes, and today MMT. But, as Marx points out, such overproduction usually occurs when consumption is at its height, when prices have previously risen substantially, and when money abounds. It is the rise in money prices, along with rising demand, that leads to rising levels of production, as firms compete for their share of this increasing market, and the money profits that go with it.

However, the increased money profits are a function of idealised prices. In other words, they are the money profits they expect if they sell all their output at these ideal prices. And, dependent upon the phase of the long wave cycle, such anticipation may be entirely warranted. After 1843, the global economy entered a new long wave uptrend. More workers were employed, more wage goods were bought, aggregate demand rose, encouraging higher capital accumulation. At the same time, as China was opened up, it provided large new markets for manufactured goods. This was interrupted by the financial crisis of 1847, but, as Marx describes, this was not primarily a crisis of overproduction. On the contrary, it was sparked by a crisis of under production resulting from crop failures, and compounded by the idiocy of the 1844 Bank Act, which prevented the currency being expanded, leading to a credit crunch, until the act was suspended. It was further compounded by the bursting of the bubble in railway and other shares, as interest rates rose.

However, its nature as a financial crisis, rather than an economic crisis, is illustrated by the fact that, once the act was suspended, the crisis ended, even without additional liquidity, and the boom resumed until around 1865. An almost identical crisis arose in 1857, following the end of the Crimean War, and was again ended with a similar suspension of the Bank Act. The global financial crisis of 2008 was again of this nature, rather than being an economic crisis, resulting from an overproduction of commodities or capital. I set this out in my book – Marx and Engels Theories of Crisis.

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