As Marx describes in Value, Price and Profit, this causes market prices for wage goods to rise. Profits in that sphere rise, and capital migrates to it, thereby, raising supply, and lowering prices. Demand for inputs for the wage goods sector also rises. The rise in nominal wages squeezes profits, but capital is forced, by competition, to accumulate, to meet the increased demand for wage goods, further increasing the demand for labour. The reduced profits means a larger proportion goes to accumulation, and a smaller proportion to luxury consumption. As demand in this latter sector falls, luxury goods prices and profits fall, leading capital to leave this sector and migrate to wage goods production.
As Marx describes in Value, Price and Profit, this is why the rise in wages does not lead to inflation or a general rise in prices. It leads only to a reallocation of demand and supply into wage goods production and away from luxury goods production.
However, as I have described, elsewhere, central banks, as part of the state, are there to protect the interests of the ruling class. One way they do that is by devaluing the currency/standard of prices. By that means, as Marx described earlier, nominal wages might remain constant, but real wages fall, if the value of the currency is reduced, i.e. inflation. This can never be a long-term solution, because, although inflation allows firms to protect profits in the short-term, by raising prices, those higher prices lead to higher money wages, simply creating a price-wage spiral.
As profits are squeezed by rising wages, an increased proportion of profits – the main source of additional money-capital – is required for capital accumulation, rather than being thrown into money markets. In other words, the demand for money-capital rises, relative to supply, and so interest rates rise. Higher interest rates also reduce the proportion of profit available as profit of enterprise. They increase the debt servicing cost of the capitalists state, requiring higher taxes as a deduction from profits. Higher interest rates, however, also lead to a fall in asset prices, acting to release liquidity from that unproductive sphere, as I have set out, elsewhere.
Rises in interest rates cannot be prevented by increasing currency supply, i.e. by increasing liquidity, QE etc. Such increase – inflation – only leads to higher money prices, including for fixed and circulating capital, so that the demand for money-capital simply rises in line with these higher input prices. Increased liquidity leading to inflation might disguise the squeeze on profits for a time, but does not prevent it; it simply leads to a more destructive and destabilising price-wage spiral, as happened in the 1920's, in Weimar, and other hyperinflations.
Ultimately, so long as capitalism exists, the squeeze on profits can only be reversed by a new technological revolution that introduces labour-saving equipment that creates a relative surplus population (unemployment) reducing wages, and raising profits, reducing the value of the components of capital, and thereby, raising the rate of profit. In that respect, the current ideas of Larry Summers, and other representatives of the ruling class speculators are also false. They seek to raise unemployment, so as to reduce wages, and boost profits, so reducing the need for inflation to achieve that end. But, a rise in unemployment, caused by an artificially induced economic slowdown, rather than a labour-saving, technological revolution, would also reduce the mass of profits. Money profits could be maintained by further inflation, but the underlying reality of extensive capital accumulation, and relative labour shortages, causing rising wages, would remain.
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