Prediction 3 – Inflation Returns - Part 1

Prediction 3 – Inflation Returns

As Marx sets out, in "A Contribution To The Critique Of Political Economy", “Capital”, “Theories of Surplus Value”, and “Anti-Duhring”, inflation is a monetary phenomena. It is a consequence of a reduction in the value of the standard of prices, relative to the unit value of commodities. Its result is a rise in unit prices relative to their unit value. The fall in the value of the standard of prices, Marx notes can result from a fall in the value of the money commodity, for example gold, upon which the standard is based, or from a fall in the amount of the money commodity that the standard represents. In both cases, this requires more money tokens to be put into circulation to represent the same amount of value. In monetary systems where the currency is redeemable for a stated amount of gold – or silver – this means that the monetary authority/state cannot simply increase the currency supply/liquidity, faster than the growth in the total value of commodities to be circulated, without it causing a rise in unit prices, including the price of the money commodity/gold, which, then, results in the currency being redeemed for gold, and a reduction in liquidity.

In fiat money systems, this reduction in liquidity, as money tokens are redeemed for gold, cannot happen. The tokens remain in circulation, and each falls in value, causing unit prices of commodities to rise, which is what is, then, seen as inflation, but is, in fact, the consequence of, the manifestation of the inflation of the currency supply. This confusion of rising levels of unit prices with inflation provides a basis for all sorts of false theories about the cause of those rising prices, as Marx set out in the above works, as well as in his polemics with the likes of the Proudhonists, for example, in The Poverty of Philosophy, and in Value, Price and Profit, and Wage-Labour and Capital. These false theories, which basically come down to the claim that the value of commodities is resolvable, in the end, to wages, also provided the basis of the theories of the social-democrats/Keynesians and post-Keynesians.

Their argument amounts to the claim that the value of commodities is resolvable entirely into revenues (wages, profit, rent, interest, taxes), which is the cost of production theory advanced by Adam Smith, and adopted by Say and others, which provides the basis of Say's Law. As I noted in past articles, although Keynes rejected the claim by neoclassical economists that a general overproduction of commodities was not possible, if the market operated freely, because Say's Law says that supply creates its own demand, he did not reject this overall assumption. Keynes was simply forced to recognise the obvious reality, set out by Marx nearly a century earlier, that, in a money economy, money can be saved rather than spent on consumption (personal or productive consumption). Keynes simply adjusted Say's Law to account for saving, whilst maintaining its overall equation of aggregate supply and aggregate demand.

Like Sismondi, whose work was plagiarised by Malthus, and like Attwood and the Birmingham Little Shilling Men, Keynes, therefore, saw such crises of overproduction of commodities as simply a consequence of under-consumption, which could be remedied by increasing consumption. Malthus, as paid advocate of the old landlord class, argued the solution was to increase the rents paid to the landlords, and other unproductive classes, so that they could spend more to provide the additional consumption. Keynes offered up the capitalist state instead as the means of increasing that consumption. The neoclassical and Austrian School economists argued that such crises were a consequence of the market not being allowed to operate freely – although, the founders of the Austrian School, such as Bohm-Bawerk, had themselves warned against an unfettered free-market leading to chaos – whereas Keynes argued the need to intervene in the operation of the market, during such crises. Keynes view held sway for more than 30 years after the end of WWII, and the entire global economic structure was based upon it, with a series of global para state bodies established such as the IMF,GATT/WTO, World Bank and so on to regulate its operation.

Indeed, even before WWII, Keynes ideas had wide currency. They were adopted by the various national socialist regimes, such as Nazi Germany, and some Nordic states. They formed the basis of the economic nationalist programme of other national socialist parties, including the Mosley Memorandum, put forward by Oswald Mosley and eulogised by the likes of Nye Bevan and others. It shows the superficiality and light-mindedness of equating increased spending and investment by the capitalist state with any kind of left-wing or socialist programme. Another example of that was the huge bail-out and nationalisation of the banks by the capitalist state after 2008.