Michael Roberts in an article in The Weekly Worker, correctly says that the current policy of central banks, of raising interest rates, will not reduce inflation. I set out why some time ago. But, Roberts' argument as to why that is the case is totally fallacious. He gives us simply the bourgeois economics explanation of the determination of prices by the interaction of supply and demand. His explanation is basically the Keynesian theory, except where the Keynesians are usually to be seen arguing the case that it is wages causing costs to rise, Roberts argues that it is supply bottlenecks that have been responsible.
He says,
“The reason for the accelerating inflation of the last two years is to be found in the restriction of supply, both in production and transportation - partly from supply-chain blockages after the Covid slump, partly from the Russia-Ukraine war and partly from very low productivity growth in the major goods sectors of the world economy.”
In other words, according to Roberts, as with the bourgeois/neoclassical economic theory, prices are determined by the interaction of supply and demand. It is the theory expounded by Lord Lauderdale, and dismissed by Ricardo, as set out by Marx, in The Poverty of Philosophy. The only difference is that Roberts applies this to the general price level, rather than to the prices of individual commodities. In other words, where the bourgeois theory explains prices of individual commodities on the basis of the demand for, and supply of those commodities, Roberts seeks to explain the general level of prices on the basis of the interaction of aggregate demand and aggregate supply for all commodities.
In fact, he is not consistent even in that, because what he gives is not an explanation of changes in the general price level (inflation), but only an explanation of changes in the prices of certain commodities, primarily energy and food. Its quite true, as Marx explains in A Contribution To The Critique of Political Economy, that the prices of some commodities can rise, because their costs of production/value rises, i.e. more universal labour is required for their production, as a result of a fall in productivity. But, that is not the same as inflation, nor a rise in the prices of all, or the majority, of commodities. For one thing, social productivity generally rises each year, so reducing the aggregate value of all commodities.
For it to explain a rise in the general price level, i.e. a rise in the prices of all, or at least the large majority of commodities, it would have to be the case that social productivity as a whole, fell, i.e. the universal labour required for the production of all commodities rose. Even then, that would not explain a rise in prices, as against a rise in values. If we take Marx's explanation of what price is, as against value, it is the value of a commodity expressed indirectly in terms of a quantity of the money commodity, say gold.
If we call all commodities A, and the universal labour required to produce 1 million units of A is 1 million hours, and the value of an ounce of gold, as the standard of prices, is equal to 10 hours of universal labour, then the money equivalent/price of the 1 million units is 100,000 ounces of gold, which, if we call the ounce of gold/standard of prices £1, is then equal to £100,000. If, as a result of a fall in social productivity, the value of A rises to 1.2 million hours, this same fall in social productivity, would increase the value of an ounce of gold/£1 to 12 hours, and, consequently, the money equivalent of the 1 million units of A remains 100,000 ounces of gold/£100,000, with the average unit price of a commodity remaining as £0.10.
But, in fact, even in his quote above, Roberts talks not of a general fall in social productivity, but of a rise, albeit “low productivity growth”. But, any productivity growth, low or not, should result in values, in aggregate, falling not rising. The only basis upon which prices could rise, then, is if there is a difference in the change in the value of commodities in aggregate, as against the value of the standard of prices, which indirectly measures those values, in the same way that a metre or a yardstick measures lengths.
Marx set out two ways that could happen. Firstly, the value of gold itself might fall, and so the value of the standard of prices would fall, causing all prices to rise, or alternatively, the quantity of gold represented by the standard of prices could be reduced, thereby, reducing the value of the standard of prices. But, today, with fiat currencies, the standard of prices is not determined by any quantitative relation to gold or any other precious metal. The standard of prices, in each country, be it Dollars, Pounds, Euros, Yen is simply a direct representative of a certain quantity of universal labour/social labour-time, and what that quantity is is determined by the quantity of these money tokens thrown into circulation. As Marx put it,
“Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity.”
Roberts says that he and others have argued “with evidence” that “this monetary tightening policy will have little effect on getting inflation down, because its causes do not lie in excessive money supply”. But that is not what Marx's analysis and theory suggests, and nor is it what the evidence itself suggests. Raising central bank interest rates does not constitute monetary tightening, particularly where real interest rates (nominal rates minus inflation) remain significantly negative, in conditions where liquidity continues to be expanded, either as a result of continued QE or other central bank liquidity, or as a result of expanding credit.
In may 2021, Roberts model of inflation, he told us, predicted US inflation rising above 3% that year and next. Well, of course, strictly speaking, it did go above 3%, but the implication of his statement was that it was not going much above 3%, especially in conditions in which he was also predicting that the ending of lockdowns was going, yet again, to result in a slump. In fact, even by the time Roberts words appeared in print, US inflation had risen to 5%, and, as I predicted, at the time, was set to rise much further.
My prediction that US inflation was set to hit, not Roberts' 3% figure, but 9.6%, was more or less spot on, as it came in at 9.1%, a year later, in June 2022. (See: Vindicated 1- Inflation, for that and the other correct predictions of where inflation was headed over the last 3 years). And, of course, Roberts' perennial predictions of slump again proved wrong, as, in fact, when the lockdowns he had also called for ended, there was a surge in demand, and economies rebounded quickly, which was part of the reason for the emergence of the bottlenecks Roberts then blames for the inflation!
In fact, most of those bottlenecks have now been removed, as global supply chains were rebuilt, in which case, if Roberts' theory were correct, we should, as central banks similar prediction that the inflation was simply a "transitory" phenomenon caused by them, implied, have seen not simply a reduction in that inflation, but deflation, as the increased supply caused prices to fall! Of course, no such deflation has happened, and, indeed, inflation remains at high levels, because its cause is not an imbalance of aggregate demand and supply.
Marx's theory and analysis that inflation is a monetary phenomena, caused by an excessive amount of liquidity thrown into circulation, devaluing the standard of prices has again been entirely vindicated. In the period from the 1980's that excessive liquidity caused a huge inflation of asset prices, and, now, as it has been fed into the real economy, following the ending of lockdowns, it has created the current commodity price inflation.
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