Gold4Cash

Yesterday, Gold hit a new high of more than $1190 an ounce. It is only $10 away from all-time high prices in sterling and euro terms too. In the last year it has risen by 50% in dollar terms. Some people are referring to a “Gold Bubble” similar to the bubbles we have seen in the dotcom bubble, or in house prices. But, the rise in the price of Gold is not a bubble. Far from it, the rise in Gold prices has much, much further to go. One definition of a Bubble is where everyone jumps on a bandwagon to buy some particular asset, without really understanding why they are buying it. Some of the “smart money” investors, for example, said that when they were getting technology share tips from taxi drivers, in 2000, they knew it was time to sell! But, so far it is not Taxi drivers or other members of the General Public who are buying Gold. The buyers of Gold are the “smart money” investors, and increasingly Central Banks like China, India, and Russia. In fact, a look at the TV shows that the adverts, of the last few years, encouraging people to take on increasing amounts of debt, at high rates of interest, over prolonged periods, in order to buy things they don’t really need, have been replaced with adverts exhorting people to exchange their Gold Jewellery for cash. So long as Joe Public is exchanging Gold for a rapidly depreciating paper currency, Gold still has a long way to run. When all those people, who have sold their Gold jewellery off cheap, for that depreciating currency, begin instead to buy Gold its price will go parabolic.

The Value And Price of Gold

In the 1970’s the price of Gold rose 30 fold to reach its peak of $800 an ounce in 1980. If, it did the same thing this time it would rise from its 1999 low of $250 an ounce to $7,500 an ounce, or about a six-fold increase from where it is now. Its necessary to understand the difference between the value of gold, or more accurately what Marxists call its Price of Production (Cost of production plus average profit) and its price. The prices of commodities vary around this price of production, which can be viewed in orthodox economics terms as the equilibrium price. However, in the short run shifts in supply and demand will move prices up or down from this equilibrium. A change in tastes, which increases demand, which cannot immediately be met by increased supply will cause prices to move up and vice versa. Where supply is relatively fixed, prices will move up, and this may cause a vicious circle to develop. Buyers, fearful of not being able to buy, will not only scramble to buy at higher prices, but may also attempt to buy more than they need, in order to hoard. Speculators seeing the opportunity to buy now, and sell later, at even higher prices, may become buyers, even though they have no need of the commodity themselves. At the same time, suppliers, seeing rapidly rising prices, may decide to hold back supply in order to be able to sell later at even higher prices. All of these factors contribute to pushing prices in an upward spiral far removed from the actual value or price of production of the commodity – i.e. a bubble.

The latter can already be seen in relation to oil. There are dozens of tankers sitting off the coast of Britain and other countries, full of oil, whose owners are keeping them there, simply watching the oil price rise, so that they can sell at a higher price later. The Price of Production for oil is probably between $80-100 a barrel. Below $80, although many established, low cost oil fields are profitable, it is not profitable to open up new expensive oil fields, for example in deep sea locations. Because the world has reached Peak Oil production, the amount of oil, produced in the low cost fields, is insufficient to meet normal world demand, certainly not capable of meeting the rapid increase in demand of the next few years, as China, India and other developing economies swallow up huge amounts for their own consumption. Above $100 a barrel demand begins to get choked off, both as a result of the effect on world economic growth, and because of substitution by consumers of other alternatives to oil. Last year, as the price of oil rose above $100 as booming economic growth around the world sent demand up, consumers began to hoard. China, in particular, was using its vast dollar reserves to buy oil in order to diversify away from a depreciating dollar into appreciating hard assets. But, as oil appeared a one way bet, because Peak Oil meant that oil producers could not ramp up production to meet this new demand – in fact Russian oil production was falling – speculators saw the chance to make a quick buck. They bought oil futures, thereby withdrawing even more supply from the market. The price bubbled up to $147 a barrel. Like all bubbles it burst, because eventually there was no bigger fool to buy at a higher price, and in particular, as I said at the time, Severe Financial Warning , the first warning tremors of the Credit Crunch were seen by the fact that Banks, Hedge Funds and other financial institutions, who had made large profits by such speculation, became forced sellers, in order to raise cash they increasingly could not raise from within the interbank markets.

Peak Gold

We appear to have reached a similar situation of “Peak Gold”. As an indication, the deepest mine in the world is a Gold Mine in South Africa. The mine is so deep that the temperatures inside it rise so high that it requires the electricity consumption of a small town just to cool it enough for it to be worked! That gives some idea of the costs of production of the Gold from it. Up until the turn of the century many Gold producers sold Gold short on the Futures markets, because its price had been continually falling. This provided them with a hedge against their rising costs and falling prices. For the last few years, pretty much all of the Gold producers are themselves buying Gold Futures in the expectation of continual rising prices. Some new Gold production is being established in Central Asia, particularly in Kazakhstan, but, not only will it take some years before this production is fully on stream, but also, compared to the existing level of production – let alone the existing reserves of Gold – the effects of this new production, on Supply, will be marginal.

In fact, Gold appears to be facing a perfect storm. To understand it, it is necessary to properly understand the role that Gold plays. In previous blogs Gold – Why Its price is Soaring I’ve tried to explain that role. Every commodity has an Exchange Value, which is expressed as a certain quantity of some other Use Value. 1 Yard of linen equals 10 lbs of cotton, 1 Yard of Linen equals 2lbs of potatoes, and so on. These equivalences, which are okay in relation to barter trade, are a restriction on market exchange, and so it becomes necessary to have some commodity which acts as a universal equivalent, a commodity everyone is prepared to accept as standing in the place of varying quantities of all these other commodities i.e. a Money Commodity. Although, many commodities, including salt, have fulfilled that role, the money commodity par excellence is Gold, because of its high value, its ability to be divided into precise aliquot amounts, its consistency of quality and so on.

Gold As Real Money

A certain weight of Gold, having a given Exchange Value, expressed as varying quantities of other Use Values, implies the reverse, the Exchange Value of every commodity can be expressed as a certain quantity of the Use Value Gold. These quantities then become the names of different amounts of money e.g. a Sovereign. However, it became apparent that, insofar as these coins like Sovereigns circulated, they became debased. Not only was their weight diminished by simple wear and tear, but it was also deliberately diminished by “clipping”, that is people would nibble pieces of gold from the coin. Yet, although the coins now did not contain the required amount of Gold (or silver in the case of silver coins), they still tended to be circulated at their full value! In effect, what was being circulated, was a token, which represented, in its name, a certain quantity of precious metal.

What gave these tokens their value was the fact that they were redeemable at any time against an equivalent amount of Gold or silver. Provided the tokens were only issued in line with the amount of gold or silver required for circulation then they could fulfil that function. However, in line with the laws of supply and demand, if the number of tokens was increased above that level then the value of each token had to be diminished in terms of how much Gold it actually represented. In terms of paper currencies, indeed, they had no intrinsic value of their own. They only had value because they were accepted in circulation. As Marx, put it,

“How many reams of paper cut into fragments can circulate as money? In this form the question is absurd. Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given…

“The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. 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….

“The intervention of the State which issues paper money with a legal rate of exchange – and we speak only of this type of paper money – seems to invalidate the economic law. The State, whose mint price merely provided a definite weight of gold with a name and whose mint merely imprinted its stamp on gold, seems now to transform paper into gold by the magic of its imprint. Because the pieces of paper have a legal rate of exchange, it is impossible to prevent the State from thrusting any arbitrarily chosen number of them into circulation and to imprint them at will with any monetary denomination such as £1, £5, or £20. Once the notes are in circulation it is impossible to drive them out, for the frontiers of the country limit their movement, on the one hand, and on the other hand they lose all value, both use-value and exchange-value, outside the sphere of circulation. Apart from their function they are useless scraps of paper. But this power of the State is mere illusion. It may throw any number of paper notes of any denomination into circulation but its control ceases with this mechanical act. As soon as the token of value or paper money enters the sphere of circulation it is subject to the inherent laws of this sphere….

“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. …

“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.”

A Contribution To A Critique of Political Economy.

Gold And World Money

Marx’s message is clear. If States – and fiat currencies had to eventually be the preserve of States to issue – printed more money tokens (notes and coins) than was necessary to meet the needs of circulation, then, because, unlike precious metal, these notes and coins would not be removed from circulation – hoarded, melted down for their intrinsic value – they would continue to circulate, but at a reduced actual value. More of them would be required than previously, as an equivalent of all commodities against which they were exchanged. In other words, there would be inflation. In a world, in which international payments were settled in Gold, this would be a problem inside the particular country, but not between countries, because this inflation would raise the price of Gold itself in relation to that currency. However, once international payments begin to be made not just in Gold, but in so called reserve currencies, first the pound, and later the dollar, obvious difficulties can arise.

A country like the US, whose currency acts as a reserve currency – that is a currency accepted as a means of payment in international trade – obtains a significant advantage. The very fact that its currency is used to make such payments means that it automatically is confronted with demand by other countries, who need it to make such payments. Such demand raises its value against other currencies. In turn, such a country can pay for its own foreign transactions by simply printing more of its own currency. The consequence of that was demonstrated in 1971, and is being demonstrated again today. In 1971, faced with massive printing of dollars, by the US, to pay for the Vietnam War, and repeated does of Keynesian stimulus, to counter act economic decline, President DeGaulle demanded payment for French exports to the US in Gold rather than dollars. He was entitled to do so, because each dollar was supposed to represent a given quantity of Gold. The US, under President Nixon, responded by ending the dollars convertibility into Gold. But, as Marx says, Governments can undertake the mechanical act of printing more currency with a given face value, but their control ends there. Once that currency enters circulation the laws of economics govern its actual value. It was this massive printing of dollars – and other currencies, during the 1970’s, to try to offset the effects of the onset of the new Long Wave decline – which resulted in their mutual devaluation, and the thirty fold increase in the price of real money – Gold – referred to earlier.

In fact, Gold in terms of its Value – its real terms exchange ratio against other commodities – hit its peak not in 1980, but in 1960, around 11 years after the beginning of the Post War Long Wave boom. This tends to be the pattern during the Long Wave cycle. In the Spring Phase of the cycle, primary products, like Gold, rise in price rapidly, because the spurt of economic growth raises demand for these products, whose supply cannot be quickly increased. In contrast, the majority of other commodities increase in supply rapidly and with falling marginal costs. That is because labour, for their production, tends to be in plentiful supply, and new inventions and techniques bring about big rises in productivity. But, by the time that the Summer Phase of the cycle begins around 12 years in, high primary product prices have driven frantic exploration and development of new supply, which begins to meet demand, and stabilise prices. At the same time, the first flush of productivity gains tends to slow down, and the reserves of labour used up, leading to the price of labour power being bid up, and workers, finding a new confidence, begin to take action to raise wages and conditions further. In new labour markets, workers quickly begin to create new labour movements etc. Consequently, the prices of primary products begin to fall relative to other commodities.

Perfect Storm

Its for this reason that I say Gold faces a perfect storm. On the one hand it is perfectly natural for its Value to have risen during this phase of the Long Wave. If it followed the pattern of the last wave then taking the beginning of that wave as 1999, I would expect to see it reach its real terms peak against other commodities in 2010, just as it reached its peak in 1960 11 years after the commencement of the boom in 1949. Of course, there is no mechanical relationship between the two, and there is scope for leeway by a year or so. But, as said earlier, the price of Gold reached its nominal peak in 1980, reflecting the destruction of paper currencies during the 1970’s, and the consequent hoarding of Gold, and speculation. Yet, during the 1950’s and 1960’s there had been no huge increases in money supply over and above what was required for circulation – which is why inflation was muted during that period, in fact there was some deflation – despite repeated bouts of Keynesian stimulus, during that period, to cut short the recessions that recurred every few years.

Compare that with now. Although, the early 80’s were marked by the utilisation of Austrian economic theories, which led to severe constrictions of money supply – under Paul Volcker in the US, and under the tutelage of Hayek in Great Britain – when those policies had had their effect in both driving inflation out of the system, and defeating the Labour Movements by direct confrontation, mass unemployment, and forcing employers to take on the workers because they could not raise prices, both Governments changed course. They dropped the Austrians, and adopted Chicago School Monetarism, which argued that in order to get the economy out of its doldrums it was necessary to increase money supply. They did, and on the back of it created large numbers of low paid, low status jobs, whilst at the same time scrapping financial regulation and creating the kind of climate of “shop till you drop”, and “retail therapy” mentality that was necessary to get people to take on increasing amounts of debt, and to spend it in the various new shopping malls, and retail parks where many of these low-paid, low status jobs had been created – often on the sites of former collieries or steel works – and which increasingly sold very low priced goods, now being bought from China.

It also created a sizeable number of very well-paid jobs symbolised by Harry Enfield’s “Loadsamoney” character, as deregulation turned the City of London into the world’s leading financial hub, through which trillions of pounds in transactions were funnelled as a new world economy was forged in which China, and other emerging Asian economies recirculated their increasing pools of dollars and sterling into Treasury Bills. Even in the 1980’s this infusion of liquidity led to Stock market and housing bubbles with the attendant bursting of those bubbles, the Stock Market crash of 1987, and the UK housing crash of 1989. And that policy of increasing liquidity, particularly in the US, and to a similar extent in the UK, continued throughout the 1990’s, each time some Stock Market or other asset correction appeared, let alone any serious economic decline.

The idea that neo-Liberalism meant that during the period from 1980 onwards, the State gave up economic intervention is not just a myth, it’s a downright fabrication. The State during that period became bigger than it has ever been, and intervened in economic activity more than it has ever done before in history. Only its mode of intervention changed, and even that was to do with what it saw as the best means by which to guarantee and increase the rate of profit, rather than any ideological shift, as the massive interventions to nationalise the banks and other institutions over the last year or so have demonstrated.

Gold Out Of Favour

After 1980, the price of Gold fell. Partly, that was due to the introduction of the Austrian economic policies referred to above. As paper currency was removed from circulation, so the value of that currency rose against Gold. But, part of the price of Gold, in 1980, was the kind of speculation referred to earlier, hoarding as people shun devaluing currencies, and actual speculation by the “smart money” who saw the possibility of capital gain. The curbing of money supply pricked the bubble. Even when money supply did begin to be increased rapidly again, Gold prices continued to fall. Part of that is explained by the factors relating to the relative prices of primary products and other commodities at that stage of the Long Wave, as described above. But, also by the late 80’s increased money supply was not leading to inflation, precisely because the money was flowing into the purchase of vast amounts of new commodities being imported from China and other Asian economies. And, that which did not, was being diverted into other forms of speculation such as on the Stock Market and in the housing market. There was no demand for Gold as Money, because there was no inflation of commodity prices, and China and other suppliers were happy to accept dollars rather than Gold, because they could recirculate those dollars into US Treasury Bills, thereby providing the US Government, and US consumers, with the necessary funds to be able to continue to consume all of the goods that China wanted to sell to them! Under such conditions it is the nature of Gold as a commodity in its own right with an intrinsic value, which determines its price, not its role as the money commodity. If anything, during such a period its price may be lower than its Value, precisely because the Gold in existence, especially that sitting in Central Bank vaults, acts as a huge overhang of supply on the market.

During this period Central Banks sitting on an asset that earned no interest, and which was depreciating in value, looked to dispose of it in return for foreign exchange, particularly dollars, which could be placed on deposit, and at least earn interest. Each sale brought a huge new quantity of supply on to the market thereby depressing its price. Its no wonder that the Gold producers themselves began to short gold, thereby introducing an element of speculation into its price in the opposite direction to that of a bubble. In short, Gold is only demanded as Money when faith has been lost in the prevailing money tokens. During such periods its price is determined by its Use Value as a commodity, its use for jewellery, and in industrial production, and so by its price of production. Its typical that Central Banks like the Bank of England began to dispose of large amounts of Gold just at the moment when its price actually began to rise, thereby losing billions of pounds in the process!

But, not only has the relative value of Gold been rising compared to other commodities during the last decade, but we have also an increasing loss of faith in money tokens, in particular in the dollar, whose role as world reserve currency is itself now being brought into question. Within economies, people do not demand Gold as Money for the purpose of conducting transactions. But, as Marx demonstrates the function of Money is not just to act as currency, as means of payment. Money also acts as a unit of account, and as a store of value. It is this last function of Money that leads to Gold being demanded, because as paper money becomes increasingly devalued people seek to store their wealth in something that will retain its value. They can as I suggested some time ago Buy Gold & Baked Beans buy other commodities like baked beans, which are storable and needed for consumption. That was one aspect of the hyper-inflation of Weimar Germany. But, the reason that Gold, and not Baked Beans assumed the role of Money Commodity was precisely that you would need a very big storehouse indeed, to hold the same value in baked beans that can be stored in a small quantity of Gold! In fact, I’d recommend reading that blog from just over two years ago, which accurately predicted what, in fact transpired.

Ripped Off

All of the people who are hurriedly sending in their gold jewellery in return for cash are getting doubly ripped off. Only a fraction of the value of jewellery actually consists of the gold or other precious metal content. The majority of the value consists of the labour-time of the jewellery workers who turn it into articles of consumption. Yet, the companies buying up the jewellery are only interested in the gold, which they are melting down, to turn into bullion, to meet the growing demand from smart money investors, and its only the gold content, therefore, they are paying for, less their costs and profit margin. But, those selling are getting ripped off from another angle. Even in the last couple of months gold has risen in price by 20%, by the time Joe Public jumps on the bandwagon the price will be much higher.

When I first decided it would be a good idea to start buying gold, in 2002, I had no idea how to go about it. I went to a couple of banks to enquire about buying gold coins or bullion, and was met by blank looks. I went to a local jeweller who confidently told me that it was a bad idea, because there was so much Gold about that the price would never rise, which is why he’d stopped buying Gold Bullion and coins several years before. The same jeweller, I noticed last week, is now running large adverts in the local paper asking people to sell him their gold jewellery and coins!!! In fact, buying physical Gold is fraught with problems. You can, I discovered, buy Gold Bullion from a number of dealers, but you need several thousand pounds to buy each ingot. You can buy Gold Sovereigns, for around £150 each, and Krugerrands for around £600 each. But, not only do you need to take into consideration the costs of storage, and insurance, but you also get screwed on buying and selling by between 5% and 7%, in the difference with the spot price of gold. There are alternatives; you can buy Gold Certificates from the Perth Mint in Australia amongst others. They hold the gold, and you just get a certificate for the amount you have bought. Alternatively, you can buy Gold through an Exchange Traded Fund (ETF), such as the Lyxor Gold Bullion Securities ETF. It is like owning a share, in this case each share is equivalent to a tenth of an ounce of Gold. The price of the shares goes up as the price of gold rises, and because its an ETF the price spread is very small. As more shares are demanded, so more Gold is bought to cover the increased number of shares.

Gold, Inflation and A New World Currency

The fact that such instruments have been developed, which enable ordinary savers to buy Gold, in itself will play an important role in the future rise in the price of Gold. Already 20%, of physical Gold purchases are by such ETF’s, and up to yet, there has been no real demand from retail investors. As I have written previously, the way that Governments will overcome their debt problems will be through a large dose of inflation. The oceans of paper money tokens, already printed, provide the means for accomplishing that, and once economic activity picks up more strongly in the coming months, the velocity of circulation of those money tokens will increase rapidly, fuelling rapid inflation – which will fuel increased demand in itself. Already, Mervyn King has warned that inflation will rise sharply in the coming months. Anyone with cash in the Bank will lose out, as paper money gets devalued rapidly. In the last week the dollar has again begun to fall rapidly, which has partly been the cause of Gold hitting new all-time highs.

The Chinese RMB cannot yet act as a new reserve currency, and the main prospect, the Euro, is itself suspect due to the liquidity pumped out by the ECB, and the fact that European Capital will squeal loudly, if it believes that its competitiveness is being threatened by a rapidly rising Euro relative to the dollar and the RMB, and Yen. The Euro is likely to become the new reserve currency, but only painfully, and over a number of years. The other alternative, the use of IMF Special Drawing Rights, is almost certainly a non-starter, because they could have fulfilled that function any time since the inception of the Bretton Woods Agreement. They could not, because any fiat currency, including a world reserve currency, requires a State standing behind it, and no world state exists. Its in that light that the developments in relation to the EU, and the need for a European State standing behind a European currency have to be viewed. The only money that can fill the vacuum is real money, Gold.

The price of Gold will rise because its value relative to other commodities is rising, but as demand for it as Money, as store of Value, and even increasingly as a means of international payments resumes its price will rise over and above that. As demand rises, whilst supply remains relatively fixed, especially as paper currencies are rapidly devalued, it will not just be smart money investors who pile into Gold, but ordinary savers looking to protect their savings, and increasingly speculators, driving its price parabolic. The real peak price of Gold achieved in 1960, will then be combined with the nominal peak price of Gold in 1980, into a single event in this cycle. The $7,500 per ounce figure, then might be a considerable underestimate of the price Gold might rise to this time round.

Understanding the Conjuncture

I’ve said before that we are in a Kondratiev Long Wave Boom that began in 1999 – See: Kondratiev Long Waves . The main features that characterise and lead to the Long Wave Boom can be summarised as: A wide range of potential new products and techniques deriving from new base technologies developed during the previous Innovation Cycle; the availability of abundant cheap Labour; the availability of abundant Capital manifested in relatively low interest rates; relatively low prices of primary products; and finally a relatively high rate of profit.

A look at every previous Long Wave Boom exhibits these features. Joseph Schumpeter, in his works on the economic cycle focuses on the role of the Innovation cycle. Other economists have pointed to similar features in the industrialisation process, for example, “The Take-off Into Self-Sustained Growth”, W.W. Rostow. A look at the first Long Wave Boom identified by Kondratiev that running from around 1790 to around 1817 is a good example. In the preceding period that had been perhaps 30 years – the kind of time period Rostow settles on – during which there was an accumulation of new inventions. All, of these are brought together as the real period of expansion takes place. But, a look at that time frame also shows that all of those other factors had come together too. The revolution in farming has made available cheap foodstuffs as well as other necessary products such as wool. The supply of Capital was present too as a result of a whole period of Capital Accumulation by Money and merchant Capitalists. As a consequence of the Enclosure Acts, and particularly the 1801 General Enclosure Act, a large supply of cheap labour was also thrown on to the market, as peasant framers were thrown off the land. That together with all the previous features, and a growing market ensured a high rate of profit.

The other feature of the Long Wave boom can also be seen in that example too. Almost every new Long Wave boom brings forward some new economic power to lead the development. Although, in 1790, Britain was by no means some economic backwater it should be remembered that even in the field on which that first part of the Industrial Revolution depended almost exclusively – textiles – Britain was far from being the world leader. In fact, even in 1800 the world leader in textile production was India, which provided 25%, of the world’s production. It was only the imposition of swingeing tariffs on Indian textile imports, the destruction of Indian village economy by British colonialism, and subsequently the introduction of steam power, which enabled Britain to replace India in that role.

Similar developments can be seen in the subsequent Long Wave cycles of the 19th and 20th centuries. The current one is no exception. After the defeat of the working class internationally during the 1980’s Capital steadily raised the Rate of Profit in the following 20 years. In 1999, raw material and food prices had reached historic lows. Not only were vast new reservoirs of cheap exploitable labour opened up in Asia, in Eastern Europe and elsewhere, but even within the developed economies large pools of labour, still suffering from the defeats of the 80’s were available as and when production began to rise. The higher rates of profit achieved during the period, the slow emergence of new economic powers whose economies focussed on saving and accumulation rather than consumption created a large supply of available Capital, and finally the huge and far-reaching developments made in a wide range of sciences had in the Innovation Cycle made available a range of base technologies greater in number, and more revolutionary in their consequences than anything previously seen in human history. The developments in Computer Technology with computing power doubling every 18 months, and the subsequent ability to fuse that computing power into the development of other areas of science, in bio-technology etc. meant that these developments went deeper and faster than anything seen in previous cycles. A look at some of those developments from DVD’s to the Internet, Genetically Modified Food to Gene Therapy, the wide application of mobile technology, the digitisation of the whole of life etc. indicates the revolutionary scope of these developments, not just in a plethora of new consumer goods just aching for Capital to find its way into their production, but, in revolutionary methods of production and distribution that slashes costs at a faster rate, and thereby makes possible the rapid take-up of new consumer goods, unheard of even for consumerism.

If we want to understand the current conjuncture we have to ask what of those conditions for the boom still exist, and how powerful do they remain. The first observable reaction to the new boom comes from the reaction of raw material prices. As production is ramped up, and demand for these commodities rises quickly, so prices rise, because during the preceding downturn no investment in new mines, quarried is undertaken. Supply is unable to respond to demand pushing prices higher. Eventually, these higher prices can act as a drag on further growth, but usually before that happens new supply from feverish investment in new mines and quarries resulting from the high prices and profits kicks in after about 12 years. A look at the current picture shows that as the new boom started in 1999, demand for materials rose sharply setting off a spiral of rising prices. That in turn started a goldrush of new investments in Kazakhstan, Latin America and parts of Africa like Angola and Congo opening up Gold and Copper mines, and quarries for every kind of industrial metal you can think of. But, it takes 7 years to bring a Copper Mine on stream, and so in the intervening period prices continued to rise. Oil followed suit, but with the added factor of Peak Oil.

The usual feature of new dynamic economies leading the Boom materialised in the form of China and India, and both began to mobilise the vast numbers of new workers needed from a dissolution of their respective peasantries. In the developed economies unemployment fell steadily, and due to Labour Market rigidities all developed economies sucked in large numbers of migrant workers to do the lower paid jobs that domestic workers shunned. In the meantime, to create the kind of workforces that these economies would need for the new types of production that they would be forced into with mass produced manufactured goods increasingly being produced in low-wage economies, the developed economies increased spending and pressure to engage in higher education, or skills training, in the same way that they had previously at the turn of the last century been forced to introduce state education to provide the kind of minimally educated workers that industrial production required.

In both cases low levels of worker organisation and lack of leadership meant that workers demands remained subdued. But, as both Trotsky and Hobsbawm have pointed out, one consequence of the Long Wave boom is that after a period, workers see that instead of regularly firing, employers are hiring.

See: Trotsky – The Curve of Capitalism Development and

Hobsbawm – “Industry and Empire”

They find they can bargain for higher wages, even if only by moving to a higher paying employer at first. Over time they become bolder, rank and file organisation and militancy rises, and eventually new leaders are thrown up. For much of the current decade that has not yet materialised. In the developed economies struggles remained largely defensive, particularly in Britain and the US whose huge debt overhang limited the strength of the upturn. But, in recent years there has been increasing signs of worker confidence and militancy in China and other Asian economies. In Europe too in France and Germany in particular the strikes have become more offensive than defensive in nature. Even in Britain the tanker drivers strike last year that won large pay increases was a first sign of an offensive rather than defensive aspect of workers struggle. But, as yet those struggles have not reached the kind of levels where as in the previous Long Wave Boom of the post war period they begin to constrict the Rate of Profit – for example see Glyn and Sutcliffe’s analysis of that during the 1960’s – “Workers and the Profit’s Squeeze” – Andrew Glyn and Bob Sutcliffe – See also Andrew Glyn

Nor, unfortunately, have we seen the kind of rank and file organisation of workers that emerged during the 1960’s yet – though this could also be due to changes in the structure of employment in developed economies, let alone the bringing forward of new leaders.

Despite rising, raw material prices, unit costs have largely fallen due both to an extension in production and subsequent economies of scale, but inevitably as a result of the rapid take-up of many of the new techniques and inventions referred to earlier. Roboticisation has taken over from automation in many factories and warehouses. In all aspects of life the introduction of computers and of the Internet into almost every home has revolutionised not just consumption, but production and distribution. From online shopping to online banking. You can even now book your doctors appointment and repeat prescriptions online, not to mention get your own diagnoses from a plethora of medical websites. If you have to go to the supermarket the till operators are already being replaced by self-service tills. RF tagging of products helps track inventories, as well as prevents theft. As the prices of food and other basic items have fallen in relative terms to incomes so whole new areas of consumption have open up to replace the income previously spent on them, whether it is the latest mobile phone with camera, games, Internet access and built in tooth brush, or whole new areas of leisure and entertainment, many stemming from the products arising from that Innovation Cycle.

In fact, from what we can see at the moment that process is still in its infancy. If we compare with the post-war boom then we would still only be in 1959, with all of the technological developments of the 1960’s ahead of us, except this time it’s the 1960’s on steroids. All of that means that even as raw materials rise, and wages rise the rate of profit is set to continue at high levels.
And that high rate of profit, together with the profits racked up by primary producers for their higher priced raw materials and foodstuffs has meant that Capital Accumulation has been rapid over the last 10 years. Vast sums of Capital have accumulated in various funds around the globe, some still waiting for an outlet into some new venture, keeping interest rates low, and thereby enhancing profits of enterprise further.

In short all of the factors that lead to and sustain the Long Wave boom not only remain in place, but remain robust.

What Happened in Pictures

Further, to my recent blogs, on the Economic Crisis, about how things got to where we are, and where they are going, I thought it would be useful to try to portray the movements that occurred in pictures.

Fig 1.



What I am trying to show, in Figure 1., is the relative movement of values, between different aspects of the economy, over the Long Period. Beginning at the bottom. The individual Exchange Values, of commodities, taken as a whole, always fall over time. The reason for that is simple. Over time, the development of technique brings about improvements in the productivity of Labour. Less labour-time is required for the production of every type of commodity – with some exceptions I will come to later – and so the individual exchange value of those commodities falls. It will be objected that rarely do we see periods of deflation. I will deal with that point again later.

Similarly, we see the exchange-value of Labour-power falling over time. Again this is not surprising. The Exchange-value of Labour power as for any other commodity is the labour-time required for its production. In essence, this means all the Labour-time, required to produce the necessities, for ensuring that the workers and their families can survive, and be reproduced as workers. As we have seen the exchange-value of all these other commodities falling, then, it is clear that the cost of reproducing Labour-power itself must fall. But, we also see that the rate of fall for Labour-power is less than that for commodities in general. There are two reasons for that. Firstly, over-time the requirements of Capitalists of what they want from workers changes. The more technological work becomes, the more complicated all other aspects of life become for the worker the more the Capitalist requires workers with a basic level – at least – of education. Particularly, when workers begin to learn to control their family size, and when Capitalists require some degree of continuity, it is important for them to have relatively healthy workforces, so that they do not have to continually recruit, and train new workers. An inherent aspect of the production of Labour-power, then, becomes the increasing need to include within its cost of production these needs for education, health and so on. Secondly, as Marx sets out in the Grundrisse, workers form a major and growing part of all consumers. Although, Capital exists to produce profit it can only do so if it along the way produces commodities that can be sold. But, as the prices of these commodities fall over time, as we have seen, workers can buy more of them. Yet, there is a limit to how many sausages a worker can eat. At some point, they will be more interested in spending some of their wages on some other commodity. The Capitalists, then, cannot continue producing sausages ad infinitum without regard for the potential market. At some point, they too must allocate some of their Capital to producing other commodities for the worker to consume.

Marx calls this the “civilising mission of Capital”. It is forced to steadily increase the range of commodities available to the worker for their consumption, to continually expand his horizons. These commodities do not have to be restrained to sausages or coats, but can be other types of commodities in the form of services, of education, of culture and so on. And as Marx says, it is all this which ultimately provides the worker with the basic tools by which to become himself the ruler of society.

I have included Gold because it has for a long time acted as the stable form of Value as a measure between the relations between other values. Clearly, that is not true in terms of its price, which varies greatly, but this can be explained by that price itself being determined partly by the fluctuations in those relative values, by the representation of Value by price set in terms of widely fluctuating paper currencies, and by the short-term fluctuations in price resulting from changes in its Supply and Demand.

Next, is Capital which we see rising in Value. The reason for that is clear as Marx set out. Apart from short periods of time, Capitalist economies grow. This growth involves an accumulation of Capital. Surplus Value, created by workers is partly consumed by Capitalists as unproductive consumption, but another large part is used productively as investment in new Capacity – new machines, new buildings, additional materials to be worked up, additional workers to work them up. Every £1,000 that the Capitalists invested now has a value of say £1,200. If this Capital is represented by a certain number of shares then clearly the value of these shares rises by 20%. Because the line for the value of Capital rises whilst the line for the Value of Labour-power falls a growing gulf necessarily opens between Capital and labour.

"Capital as not-Labour" and "Labour as Not-Capital"

Again, Marx explains the relevance of this in the Grundrisse, and its something on which many Marxists have fallen into confusion adopting not the position of Marx, but the position of Lassalle and his “Iron Law of Wages”, much criticised by Marx. Many Marxists quote Marx to the effect that he predicted that Capitalism would create a growing pool of misery and poverty. In fact, Roman Rosdolsky, who carried out, perhaps, the most exhaustive study, of Marx’s Capital, concluded that in over 1,000 references there was only one passage that could be interpreted in this way. The immiseration theory is not Marx’s, it is Lassalle’s. In order to understand what Marx is saying, and to understand the diagram above, it is necessary to turn again to what Marx says in the Grundrisse, and to understand the way he uses the term “poverty” and its opposite “affluence”. What Marx says, appears contradictory, if we take the usual meaning of these terms, but, Marx often uses terms in a more precise way than in normal usage – take his usage of the term Capital for instance. Logically, it is impossible for Marx to talk about the “Civilising Mission of Capital” as he does, as continually raising workers living standards and horizons, if he had an immiseration theory. In fact, what Marx says is that no matter how “affluent” workers might become i.e. how much their quantity and quality of consumption might rise, they continually become “poorer” in so far as they are continually deprived of the means of production, which move further and further from their reach as workers. They are consumption “rich”, and Capital “poor”. Indeed, the more their consumption needs expand, and the more they are deprived of Capital, the more they are dependent upon selling their Labour-power, the more actual wage slaves they become, the more tied to and dependent on Capital do they become.

As Marx puts it on p206 “purely subjective existence of labour, stripped of an objectivity. Labour as absolute poverty”, but Marx does not mean poverty in the normal sense here the worker might be rich in income terms what Marx means is then outlined, “poverty not as shortage, but as total exclusion of objective wealth.”

Some time ago in order to make the point I quoted a Chris Rock comedy routine I heard one evening.

The routine went something like this. “There are no wealthy black Americans. There are some RICH black Americans, but they aren’t WEALTHY. Bill Cosby is RICH from all the shit he does, but he ain’t wealthy. Now the white mother-fucker who writes the cheque to pay him for all that shit he does, NOW HE’s WEALTHY.” He went on in similar vein, before “The reason we ain’t wealthy is we spend all our money on rims. We might have the worst car on the block as long as its got good rims. Shit if we hadn’t got a car we’d put rims on our toaster. Now Bill Gates he ain’t got no rims, but he owns Microsoft.”

This is precisely the point that Marx makes. Workers can have high incomes (relatively), but if all that income is spent on consumption then the worker cannot become (WEALTHY) because they can’t accrue CAPITAL. But as Marx points out (though he bends the stick) workers wages are usually so low they can’t save, when they are raised they take the opportunity to expand the sphere of consumption and culture, and, to the extent they do save, the Savings Banks pay them low interest and lend it to Capitalists who use it to make much more money etc. It is only possible to break out of this if instead the savings become Capital.

He says, "… if the worker’s savings are not to remain merely the product of circulation - saved up money , which can be realised only by being converted sooner or later into the substantial content of wealth, pleasures etc. – then the saved up money would itself have to become capital, i.e. buy labour, relate to labour as use-value. It thus pre-supposes labour, which is not capital, and presupposes that labour has become its opposite – not labour. In order to become capital, it itself presupposes labour as not-capital as against Capital; hence it presupposes the establishment at another point of the contradiction it is supposed to overcome. If, then, in the original relation itself, the object and the product of the worker’s exchange – as product of mere exchange, it can be no other – were not use value, subsistence, satisfaction of direct needs, withdrawal from circulation of the equivalent put into it in order to be destroyed by consumption – then labour would confront capital not as labour, not as not-capital, but as capital. But capital, too, cannot confront capital if capital does not confront labour, since capital is only capital as not-labour; in this contradictory relation. Thus the concept and the relation of capital itself would be destroyed.”

And this concept of Labour which is not Labour, Capital which is not Capital is precisely the solution that Marx gives to the problem. He has here subverted the starting point of the Ideal Labour and the Ideal Capital by standing them on their head and relating them not to the Ideal but the material realities. The worker cannot get out of his situation, cannot but be reproduced as Labour through saving, but only through ownership of Capital. How does the worker become the owner of Capital rather than mere savings, precisely in the way Marx refers to in Capital III, in the Critique of the Gotha Programme, and in his Address to the First International, by the setting up of Co-operatives which by their nature are transitional forms because within them Labour is at the same time not-Labour, and Capital is at the same time not-Capital.

Finally, we see the Value of Land/property rising. The reason for this is simple. Although, Land has no Exchange-Value as such – because it has no cost of production – it is bought and sold, does have a price. This price Marx explains is derived from the Capitalisation of the Rent that the land would earn. Because, over time, the total volume of Surplus Value rises, whilst the quantity of land available is fixed the rent – which is merely paid as a portion of the Surplus Value to the landlord by the Capitalist – must rise.

The Two Points

I said I would deal with two points from earlier. Firstly, on the question of the falling exchange-values of commodities. Orthodox economics has as one of its central themes the concept of diminishing returns. It is argued that, at a certain point, the economies and efficiencies, that can be gained from increasing scale, turn into their opposite, and that, at this point, the marginal cost of producing a further unit of output begins to rise. In reality, there is no evidence that capitalist industry reaches this point. If it does in relation to a particular plant then the answer is simple – to build an additional, separate plant. All the evidence we have demonstrates that as production volumes rise, marginal costs fall. However, there are clearly some commodities for which this is not true, and there are periods of time for some commodities during which this is not true. For example, if the world really has, as many oil experts believe, reached “Peak Oil” i.e. the world cannot expand its total output from current levels, then, from here on in, the cost of producing each marginal barrel of oil will rise. It will require more labour-time to discover each new exploitable oil-field, more labour-time to develop the new types of technique and of machine required to extract oil from ever more difficult sources and so on.

The same can be true, for a time, even of similar resources that are not immediately in danger of running out, but which nevertheless require exploration to find them, and long drawn out periods of investment before production can begin e.g. the discovery and operation of new copper mines.

Secondly, I referred to the fact that although Exchange-Values of commodities fall over time we only rarely see periods of deflation i.e. of such falls in the general price level. The first things to say about that is that obviously the general price level covers a whole range of prices, and within it we do frequently see the prices of some types of products falling. But, this is not the real explanation. The real explanation is to look not at absolute price levels manifested in the ticket price of goods, but to look at their relative price level. The reality is that a fundamental requirement of a modern Capitalist economy is not stable prices, but modestly rising prices, which is why the MPC is told to target inflation not at zero, but at 2%. Those rising prices do not reflect real rises in the exchange values of commodities, but only a relative price rise measured in terms of the paper currency in which they are priced. In reality, it is not that the values of the commodities is rising, but that the value of the paper currency in which those prices are denominated is falling.

Why The Capitalist Economy Requires Inflation

I have set out previously how Marx’s theory explains the recent rise in the price of Gold, and in the same blog how Marx demonstrates the nature of Gold as real money, and the inverse relation to it which paper or other money tokens have dependent upon the quantity of them produced. See: Gold

The reason the Capitalist economy requires this steady devaluation of the currency is rooted in the way modern Capitalism works. In the model of the free, Capitalist Market, taught in school, all firms have to take the market price for their products. If one firm tries to charge a higher price it will find its customers abandon it for its competitors. Because no firm is very big, its output can easily be accommodated by other suppliers. But, if this has ever been a realistic picture of the way Capitalism worked, it certainly has not been so for more than a hundred years. In place of these multitude of tiny producers, production has been dominated by a small number of very large producers – oligopolists.

The US economist, Paul Sweezy, explained the consequence of this with his theory of the so called “kinked demand curve”. See: Kinked demand Curve

The consequence is that, where a firm needs to raise prices, to cover costs, in order to maintain its profits, it will be prepared to do so even if this means it might lose some market share. In reality, it will hope that its use of branding and other advertising techniques will minimise if not prevent such loss, because consumers will not see its competitors’ products as a direct substitute for its own. However, an oligopolist firm will NOT reduce its prices for the purpose of securing a greater market share over its rivals, because it can be confident that its competitors will follow suit, and so will begin a destructive price war, which will reduce the profits of all concerned. As David Laidler in his standard texbook on Economics, “An Introduction to Microeconomics”, says, this behaviour can, in fact, be observed through empirical study. So Monopoly Capitalism has a vested interest in avoiding such falls in nominal prices, especially at a global level where they can have the consequence, now associated with deflation, whereby consumers hold off spending in the knowledge that prices will be lower in the future, thereby sparking a downward spiral of economic activity and prices.

When the age of Monopoly Capitalism dawned then, at the end of the 19th Century, one of the things that these Monopolies required was a State institution such as a Central Bank whose task it was to so manage the issue of paper currency so as to ensure that nominal prices did not fall. We see the Federal Reserve, established in 1913, which from the beginning undertakes this function. There is another reason for having a Central Bank issue sufficient money tokens to devalue them when necessary. Falling commodity values, relative to the Value of Labour Power, are all well and good during periods in which Capital is expanding, and the volume and rate of Surplus Value is increasing. But, during periods when that is not the case, it is not as easy to push down wages as it is commodity values. Not only has a certain level of consumption become enshrined in the cost of production of Labour-Power, but workers will resist nominal wage cuts, even where the prices of commodities are falling. Keynes and other economists theorised this “stickiness” of wages in a downwards direction. If commodity prices fall, whilst wages rise, during such periods, the consequence is a squeeze on profits, and on the Rate of Profit. Capital found that the trick was to use what Keynes called “Money Illusion”. Workers will resist nominal wage cuts far more than real wage cuts. If Money wages rise, but rise by less than prices, or, more precisely, if unit labour costs rise less rapidly than prices, then Capital can continue to maintain the Rate of Profit. This is what Mises and Schumpeter euphemistically referred to as “forced saving”.

In fact, that is what has been witnessed over the last 25 years. In the US and UK, in particular, real wages were stagnant or falling even though nominal wages were rising. Commodity prices were falling too, in fact quite sharply, as a result of the new production from China and Asia. Both were not apparent, because during that time a huge amount of liquidity was pumped into the economy, vast quantities of money tokens and credit oozed out devaluing the money against these other prices giving them the appearance of stability or rising money prices.

Fig. 2 Shows the difference over this period.



The picture appears similar, but rather than values shows prices. It is really a question of degree. The main feature is that the rate of rise of Capital and of Land and Property is steeper. Why? The reason is to do with the liquidity. The liquidity pumped into the market enables the money illusion to be pulled off, for real wages to fall whilst nominal wages rise thereby enabling the Rate of Profit to be maintained or even to rise. So the diagram shows nominal wages rising slightly, whilst commodity prices rise slightly faster. But, the excess liquidity pumped into the system has another consequence. It is not all used for consumption – productive or unproductive – a large proportion of this liquidity finds its way into speculation. So, speculation in shares pushes up share prices way beyond what the underlying Capital Values actually justifies. Similar speculation in Land and property brings about a similar rise in its price.

Moreover, the picture becomes even more complicated. Marx argued that the only way for workers to break out of their condition was for them to cease being “Labour”, and to become also “Not-Labour” as set out above. That meant not just accumulating savings, but accumulating Capital. He most notably argued that that should be effected by the setting up of Co-operatives, but in Capital he also proclaimed that the Joint Stock Company was also a transitional form of enterprise to the new socialist society, precisely because its ownership could become diffuse. The modern equivalent is the Public Limited Company, and today millions of workers do own shares in these companies either directly, or through a Unit Trust, or else through their Pension Scheme. During the last period, as this huge quantity of liquidity pushed up residential property prices, even workers, through these various channels, participated in the speculation that drove not just property, but also share prices higher.

But, this bubble in asset prices was just as much a money illusion as that which enabled Capital to maintain and increase the Rate of Profit, by bringing about falling real wages. And as capitalist traders know there is always, at some point, a reversion to the mean. The Bubble had to be followed by a bust.

That is the process underway. It will inevitably see those asset prices which were inflated, Shares and Property, fall significantly – probably by more than they need to before coming back. The other main form of Capitalist Property – Bonds – are also likely to fall. Bonds are issued by companies and governments against debt. In risky times the price they can sell these Bonds for falls, and hence the Interest paid on them rises. At the moment Government Bonds are selling for high prices, paradoxically, for the simple reason that investors do not want to put their money anywhere else, because the risk is too great. If some governments begin to default on this debt – for example as Russia and some Latin American countries did in the 1990’s – then investors will begin to rush out of Bonds too, forcing their prices down, and interest rates up, leaving the poor Joe Public who has been sold some Unit Trust Bond Fund nursing huge Capital losses. Already, they are likely to suffer those kind of Capital losses on such Bonds and Funds issued by some of the large, but bankrupt companies like GM and Ford. In the meantime, the smart money will have got out and bought as much Gold as it can get its hands on.

The other danger, for anyone holding such Bonds, is that once the measures being taken to stave off recession begin to take effect then the huge volumes of liquidity pumped into the world economy can have no other consequence, but to cause inflation. In every such situation in the past where Government’s have accumulated huge debts – and this is the answer to the Tories arguments about how Brown’s borrowing will be repaid – they have cleared them by effectively paying back their creditors with funny money, with currency that has been seriously devalued through inflation. The smart money understands that and already has been concentrating its purchases of Bonds not on the long term Bonds, but on the short term Bonds of 3 month duration to minimise this risk. Again it will be Joe Public, or even Joe the Plumber, who will get screwed, left holding the long bonds in his Unit Trust and Pension Scheme.

Ultimately, this Casino, like every other, is rigged in the interests of the Casino owners, in this case the Capitalist class. Workers cannot compete in that Casino on the same basis as the capitalists as things stand. But, they can establish their own card school. They can set up Co-operatives that function not in accordance with the principles of gambling, but on the firm foundation of producing real wealth, the ownership of which, being in the hands of the workers that produce it, is not available for the Capitalist jackals to bet on. Instead of gambling their own money away, in a bet on whether this piece of fictitious Capital, represented by a share certificate, Bond certificate or property deed, might go up or down in price tomorrow, they can instead invest their money in such Co-operative enterprises, in buying real machinery, real materials and hiring real workers to produce real wealth to be shared out amongst them, strengthening their economic and social position compared to the capitalists.

Let, the Capitalists gamble away their wealth if they choose. Workers should instead begin to invest their Labour-power, and their savings in their own Co-operative enterprises, in Co-operative production, and banking, and services, in the establishment of a multiplicity of forms such as Credit Unions to meet the specific needs and requirements of workers in every specific situation, proving that there is a rational, credible alternative to the lunacy of the Capitalist Casino.

Tory Voodoo Economics

On the Andrew Marr programme, on BBC today, the Tory Shadow Chancellor came up with a lunatic idea. He argued that the Tories would introduce a fuel price escalator that would cut tax when oil prices rose, and raise tax when oil prices fell!!! Now, no doubt, there will be some people who will say what's wrong with that, we're paying a load of money for oil, so it would be good to reduce the costs a bit. But, though that might seem an attractive proposition, a little basic economics shows why it isn't.

The whole function of prices, in a capitalist economy - and we are after all living in a capitalist economy, and the Tories are the last people to want to change that - is that they act as a method of rationing. You can, of course, ration things by other means, such as was introduced during wartime, or such as was introduced in the Stalinist States, and, indeed, the way its organised in the NHS. But, generally speaking, that kind of bureaucratic and administrative rationing is very inefficient. For one thing, as long as things are produced by capitalist producers, those producers will seek to make profits. If the State tries to hold down prices and ration out goods, producers will respond by not investing - why would they risk their capital - or else a growing Black Market will develop, with real prices higher than the prices the State tries to impose. The State will then try to respond by bureaucratic and administrative means, which, in itself, means employing large numbers of bureaucrats and police etc.

The market rations things, ultimately, in a much more efficient manner. If the supply of things fails to increase enough to meet demand, the suppliers will take advantage to raise prices. As prices rise then consumers will respond by trying to reduce their demand for those goods. They will either buy less, or else they will look to buy alternatives, either buying margarine in place of butter, or else will buy smaller cars instead of gas guzzlers, or might even decide to use Public Transport or decide to walk or ride a bike. It's not a fair way of rationing, because the rich, or just people who have enough income or wealth to continue paying a higher price, will just pay the higher price, and put up with a reduction in their standard of living. Others can't afford to pay the higher prices, or else have to pay the higher prices, and have to give up other things instead. It's very unfair, but, the fact is, that capitalism, as a system, is itself unfair. The rich can pay to go to a private hospital, a private school, can eat better food, live in bigger houses, enjoy more holidays, wear better clothes, and so on. Simply complaining about the unfairness of capitalism, just in relation to some things, rather than capitalism as a whole, makes no sense.

The answer is not to complain, moralistically, about the unfairness of capitalism; the answer is to replace capitalism with socialism. Even then, as Karl Marx set out, in The Critique of the Gotha Programme, simply overturning capitalism will not immediately solve that problem. Overcoming that inequality requires not just ending capitalism, but also needs the raising of the production of output to such a level that everyone in society is able to have an adequate share of the basic requirements to live a comfortable, and equitable life. Until such time, even if everyone was paid the same rate of pay, there would be inequality, because everyone has different abilities. If someone is strong they might, for example, be able to produce as much as someone else, and yet only have to work half as hard as someone who is not so strong. If they are able to work twice as long, or to produce twice as much in the same amount of time, then, even with equal wages, for a given amount of work, they will earn twice as much.

So, the fact is that, for a long time, however much socialists want to create a fairer society, workers will have to continue to utilise the market as a means of encouraging workers to produce those things that society needs and wants - why otherwise would someone do a nasty job, spend a long time studying, or do a job that entails taking on a great deal of responsibility etc., and that means that also the market will continue to operate in rationing out what is produced for a large range of commodities. Increasingly, workers who own their own means of production, through their ownership and control over cooperative enterprises, housing and communities etc. will come together to integrate what they produce with what other cooperatives produce, and with what workers as a whole want and need. Once they have established control of their own state, they will be able to make decisions over important needs, such as health, or decisions over transport and other things which, for example, affect the environment, and determine what is produced outside the control of the market, diverting whatever resources are needed to ensure that production is sufficient to meet everyone's needs. That is the solution to the unfairness, but it requires first that workers take back ownership of the means of production, and from there begin to transform society. For now, that is a long way off, and we have to deal with the reality of capitalism.

Within that context, the proposals of the Tories amount to nothing more than voodoo economics. Let's look at the consequence of what they propose. Let's take the best scenario. Suppose the price of oil is actually falling. The reason could be because some new source of oil has been found so that it can be pumped out of the ground at a much lower cost than previously. It can be supplied at a sufficient level to meet the demand, and so competition forces prices down as a result of the reduced cost. The government then raises taxes so the lower cost is offset by this higher tax. The higher profit that would have gone to the oil company then goes to the capitalist state. The benefit that would have gone to consumers does not materialise because the lower cost is offset by the tax. But, furthermore because the tax goes to the state the oil company does not make the higher rate of profit that would otherwise lead to other capitalists moving into oil production and thereby bringing about the increase in supply that would make more oil available, and reduce the price. Now, in fact, that could be a good thing, because from the perspective of trying to improve the environment by discouraging people from using oil such a policy might have such an effect. But, then don't tell us that such a policy is designed to benefit hard pressed consumers!

The likelihood is, however, that the world has seen the last of cheap oil. Its running out and the cost of getting oil out of the ground is likely to just go up and up. But, what then is the result that will flow from cutting taxes as this price rises? It means that consumers will continue to demand oil rather than the higher price acting to ration it out, and thereby reduce demand. On the one hand the continued rise in the cost of production will reduce supply at any given price, while the reduction in tax will keep demand higher than it otherwise would have been. The consequence can only be that supply and demand are kept out of equilibrium, and prices are forced higher, with an increasing amount of profit going to the capitalists as they take advantage of lower tax to transfer what would have gone in tax into the pocket of the capitalists! But, how far are the Tories prepared to go with such a policy? In China, and elsewhere, the State does subsidise oil. But, as the price of oil has risen so the amount that has to be provided for such subsidies continues to rise. China has, in the last few weeks, been forced to slash the subsidy by 24%, and other economies are following suit. If, as seems likely, the price of oil continues to go up, then the Tories policy means that they will have to keep cutting taxes by more and more. What happens when the price of oil doubles from its current level? What happens when the Tories programme means that such increases mean that instead of the state receiving tax from the production and sale of oil, its price has risen so much that it actually ends up having to subsidise it??? Then, it will have to raise its taxes from elsewhere, and knowing the Tories they are more likely to take it from rises in VAT, the reintroduction of VAT on gas and electricity etc., in short to place the burden on those least able to pay.

The answer to the high price of oil is not cuts in taxes. Ultimately, the answer is to replace capitalism with socialism, but workers need a solution here and now not some time in the future. That answer means providing a more efficient means of travel than using cars. Moreover, even "Public" transport has proven itself inefficient, and expensive. Such transport is either produced by private capitalists, like Virgin, or, by what is often just as bad, by the capitalists' state in one form or another. Much better would be for workers to set up a cooperative public transport system, where workers themselves can provide an efficient and responsive transport system that is democratically controlled, and is geared to meet workers needs, rather than to make profits for private owners, or to provide a cushy well-paid job for bureaucrats. As long as transport remains in the hands of capitalists, whether as individuals or in the form of their state, transport will never operate in the interests of workers.

But, imagine that workers set up a cooperative transport system. Not only could it be set up to run in the interest of workers, but it could be flexible and efficient. It could be developed to meet the need, that has always been put forward in the past, to institute an integrated transport system, which will never happen as long as it requires the capitalists or their state to bring it about. But, more than that. An efficient, cooperative, transport system also requires efficient, cost effective means of transport too. A cooperative transport company could look to encourage cooperative vehicle producers to provide the necessary buses, and other vehicles. And that process could rapidly spread across Europe taking advantage of the division of labour to encourage the development of cooperative industries wherever the most efficient production can be achieved, and thereby integrating a whole range of cooperative industries and services across Europe. No longer would production be held back and restricted by capitalist producers who want to maximise profits, instead the latest techniques could be introduced quickly. Workers have the resources to do this. In Britain, and throughout Europe workers have billions of pounds in their pension funds. It is necessary to demand they have democratic control over them, so that they can utilise these funds to establish efficient, large scale, cooperative enterprises. There is no reason to wait for decades or hope for some revolutionary transformation to come about at the behest of some elitist organisation. Workers can begin to bring about that change now.

Workers and Inflation

On Friday Oil rose $10 a barrel or almost 10% in a single day, having risen sharply the previous day. All around the world food prices and other prices of basic goods bought by workers are soaring. According, to a report on the business channel CNBC the other day if prices in the US were measured in the same way they wee under Reagan inflation would be running at arund 12% a year. A similar figure was calculated for this country. Sme people are comparing the situation with the inflation of the 1970's. In fact the comparison is false. The inflation of the 1970's and 80's arose, because Capitalism had entered a Long Wave economic decline from the mid 1970's, which lasted until the end of the 90's. The inflation in the 70's was a result of pumping large amounts of liquidity into the economy at a time when goods were not being produced as their equivalent. Its what led to stagflation. Although, the major capitalist pwoers such as the US and UK, and Japan have continued over the last 20 years to pump huge amounts of liquidity into the system to prevent their economies going into deep recession prices remained low for most of that period because of vast quantities of commodities coming on to the market from China and other developing economies, and because large amounts of this liquidity went into inflating asset price bubbles such as in the Stock Market, and Property. But, this is not the 1970's. Despite all the doom and gloom on the new we are not entering an economic crisis. Rather we are at the beginning of a Long 20-30 year powerful boom. If you want an equivalent we are at the same kind of period as the mid 1950's. Then as now rapid economic growth, and the development of new dynamic economies (then Japan and Germany, now China, India, Brazil etc.) caused a huge increase in demand for basic resources and food pushing prices higher. Then as now a shortage of labour - particularly low paid labour for low stats, unskilled jobs - led to mass immigration to meet the requirements of Capitalism. Its not just Britain that has encouraged such migration, the US encourages migration form Mexico and Latin America to meet its need for cheap labour, and so do other European economies. It is this surge in demand outstripping the ability for supply to epxand fast enough that is the cause of this inflation, which is mopping up all of the excess liquidity pumped into the system over the last 20 years. Though oil is a special case due to the fact its running out, and we have probably hit world Peak Oil production i.e. we can't increase production from hereon in.

From a working class perspective this opens up great potential. For all the reasons that the last 25 years of economic downturn have weakened workers organisation and strength, the next 25 years of upturn will strengthen workers position. It always has in the past during such times. It will do so again.

I wrote this article a couple of years ago, and it has proven rather prophetic.

The world economy is booming. One of the largest investment firms in the world Bridgewater Associates has recently completely its regular analyses, which shows that for the first time since 1969, there is not one single economy in the world in recession. The IMF has just increased its forecast for world economic growth yet again. China where the Government has been trying to slow economic growth for fear of overheating has just put in economic growth yet again of over 10%, but that is put in the shade by the world’s fastest growing economies. Azerbaijan is forecast to grow by 26% this year, as is Angola as a result of the current high price of oil, Mauritania which does not have oil, but has gold and other raw materials is forecast to grow by 18%. I have given the background in this previous discussion - Kondratiev’s Long Wave Theory - but I want here to look at a more limited short term consequence.

Marx analysed Capital and noticed that it moved in cycles. Economists since have given a lot of thought to what causes these cycles. What comes out of Marx’s analysis is that these cycles are not like say those that cause sun spots. Natural cycles occur because of fairly fixed physical characteristics. Although economic and other social activity has some aspects, which are analogous it is the very fact of human intervention, which means that processes are mediated, and therefore less predictable. Moreover, within the realm of capitalist economic activity there is not just one economic cycle occurring, but several, each interrelated and affected by the other. So for example, at the beginning of the 19th century when the first such cycle was identified as occurring in 1825 this seem to coincide with the time when for the first time the real effects of the Industrial Revolution manifest itself. In the preceding period the groundwork for that was laid, in the preceding century many inventions are made for example spinning machines, the steam engine etc. but it is only at the beginning of the 19th century that these begin to play a major role, and in particular it is the introduction of the powerloom, and of steam power that has significant effects. Economic historians now believe that the extent of economic growth in the last third of the 18th century was considerably overstated, and that consequently economic growth earlier in the century understated, and this further illustrates the extent to which output rose in the first part of the 19th century.

The downturn in 1825, therefore, seems to be attributable to a classic overproduction, the fact that output grows so rapidly that it outstrips the market. In contrast to Say’s Law (which actually was not developed by Say) which say’s that unfettered markets automatically clear it was obvious that there came a point where goods could not be sold whatever the price. Orthodox economists would describe this in terms of diminishing marginal utility. At a certain point consumers have so much of a thing that they do not want any more of it, or no more of it at current prices, and for capitalists to sell it to them at a price they might (or might not) be tempted to buy it at, would mean that they would make a loss on the Capital they have already outlaid on producing those goods, or at least a diminished profit.
So here we have one form of cycle, one on which consumers simply reduce their consumption or slow down the rate of increase. Today capitalists try to avoid this by diversifaction of product ranges, advertising or marketing campaigns to boost flagging sales, and of course built in obsolescence as well as continually changing designs, models etc. and creating a need for new products, so that consumers throw away the old.

Alongside this cycle is another that which affects the capitalists own purchases of production goods. Marx seems to have believed this played a significant role in the periodicity of economic cycles. In particular he seems to have been interested in the work of others that had studied the extent to which, for example, a factory building would last, or that other long term productive capital such as machinery was depreciated over. Again orthodox economists include this today in their theories of crises. Say 10 number of firms replace 10% of their machines every year as they wear out, and each firm has 10 machines. Then the firm manufacturing these machines has a regular order each year for 10 machines. Now suppose that economic growth increases so that each firm now needs not only to buy a replacement machine, but to buy a new machine in order to increase output. A 10% increase in demand for each of these firms causing a 10% increase in its demand for machinery results in a 100% increase in demand for the machine manufacturer. Orthodox economists call this the “Accelerator Effect”, but combined with this is the “Multiplier Effect”. What this means is that the increase in demand for these Capital Goods then has a much bigger effect on the economy than simply this demand. The workers of the machine making company are doubled in size, the demand for materials by the company double, the profits of the company appropriated by the capitalist double perhaps too. All of these people receive incomes from this, which they go to spend, and in doing so they create a secondary effect of new demand for yet more products, and this too leads to more incomes and more spending. Calculated mathematically then if on average consumers spend 90% of their income, then, if say the initial increase in demand for new machines amounted to £1 million then a total of £10 million would be added to the economy. Of course, were the economy to go into reverse then the opposite is true. Each firm might decide that it does not need even to replace any machines if trade is slack, and then the machine manufacturer finds he has no business at all.
So a second cycle is set up depending upon the average length of time machines last. But this is more difficult. Not only are capitalists decisions on whether to buy new machines affected by them wearing out, but as seen above they also depend upon their perception of the state of demand for their products. Improving conditions might cause them to buy more, worsening conditions to buy none. There will tend then to arise a certain degree of synchronisity in these cycles because demand for machines will automatically ebb and flow with changes in the condition of the economy in general, and so capitalists will over time find that they all enter a renewal cycle for their machines around the same time. Another factor strengthens this synchronisity innovation. PC’s are a good example. Throughout, the 90’s there was a clear cycle of replacement for PC’s, and the reason was quite simple. Microsoft brought out a new version of its operating system every two years, and other software suppliers geared their products to it. In addition new chips were introduced on around the same frequency so that improved hardware enabled improved more demanding software to run, which in turn stimulated further hardware development etc. Businesses, geared their IT investment plans to this cycle of upgrades. The same is true of other types of machinery. But this also poses a further problem. A business that has recently bought a new milling machine might find itself having to junk it because a new invention makes it obsolete. If its competitors buy the new machine which is 50% more efficient, then they are forced to follow suit.

Thirdly, there is the credit cycle. The credit cycle goes through basically four different phases. At the beginning of an economic expansion the demand for credit rises because industrial capitalists need more money in order to expand their production, and the more they sell the more money they are outstanding until it is paid for. This increased demand for credit may not result in higher interest rates, though, because the increase in economic activity also results in more money entering circulation, and consequently an increase in money capital accumulated, particularly as in this early part of the expansion the first beneficiaries are likely to be capitalists who, using the inventions developed in the previous phase which increase productivity, as well as having access to a pool of available labour from the reserve army, see their profits rise significantly through both higher sales, and higher selling prices with constrained costs. In the second phase the demand for credit is reduced as the economic expansion slows, and a period of stability sets in. In the third phase economic slowdown begins. Consumers begin to reduce their purchases and begin to think about saving in case of future problems. Capitalists no longer see the need to buy more machines other than is required for replacements, and with input prices having risen as reserves of labour and materials were used up profits become squeezed. The demand for money and credit falls, resulting in lower interest rates. During this period capitalists may begin to look for more lucrative profits elsewhere such as in Stock Market speculation as cheap money makes this a more attractive proposition. Marx refers to this happening with the Railway Mania in the 19th century, but similar things happened during the 1920’s leading up to the Crash of 29, and the same thing happened in 2000. In the fourth phase economic activity begins to fall – and the diverting of financial resources from productive activity to speculation can be a cause of that. People begin to pay their bills later or default, firms desperate for sales offer extended credit terms etc. The demand for money and credit rises to finance this extension, and late payment causing interest rates to rise again briefly before collapsing as economic activity collapses.

In modern economies because the state intervenes heavily in the economy through monetary policy this credit cycle is modified. If the state considers that economic activity is declining it can artificially increase credit by reducing interest rates thereby encouraging consumers to reduce saving and increase consumption, and encouraging capitalist to increase investment. Similarly, as in the US, UK, and Europe at the moment, and shortly in Japan the State can increase interest rates to slow down economic expansion. But the extent to which this is effective depends. If the economy is on a serious downward, and deflationary spiral reducing interests rates may be ineffective. Keynes described it as like pushing on a string. If I’ve just lost my job I’m unlikely to be tempted by the many adverts telling me they will lend me money to buy a new car despite my economic position, CCJ’s and other bad credit record. If I’m a capitalist and can’t sell the warehouse full of stuff I’ve produced I’m not likely to borrow money to expand my production. Japan had interest rates at zero for a decade, but couldn’t get people to increase their consumption because with falling prices in the shops there was an incentive to keep your money in the bank, and buy what you needed later when it would be cheaper.
All of these cycles interact with one another giving the overall short term economic cycles observable under capitalism. A crises within capitalism can be sparked within any of these three areas, but as Marx points out the real source of the crisis is always located within the sphere of production, and stems from the separation within capitalism of production from consumption, a separation that exists under no other previous mode of production.

But as Kondratieff argues these short term cycles also play into a longer term cycle. That can be broken down as follows, I think. Rather like Marx’s argument about the length of time that factories last there is a similar argument in relation to raw materials. Mines and quarries tend to be rather large investments based around long pay back timescales. They are not like a Mars Bar plant where you can fairly quickly increase or reduce production. If you have invested several tens of million pounds in a new copper mine you expect it to keep producing at pretty much the same rate for the next 20 years or so, you can’t afford to have all that capital sitting being only partially employed so you keep producing, and if need be reduce the selling price, you hedge the future price against such falls through the commodity futures market etc. But for the same reason capitalists tend not to rush out and make such large investments of capital unless they believe that it is going to be profitable to do so. It takes 7 years to get a copper mine up and running, for example. So it is easy to see why a fairly long cycle should exist for such raw materials. What tends to happen is that a splurge of exploration happens when as now economic growth begins to accelerate, because this economic growth occurs at a time when all the existing mines and quarries have taken out all the easy stuff, their equipment has started to become a bit long in the tooth and out of date, and so not only can they not easily meet the increased demand, but doing so is expensive compared to a new mine with better reserves, and using more up to date equipment. But the exploration takes several years, and once found it then takes another 7 years before production begins. In the meantime, demand continues to increase as economic growth accelerates and raw material prices rise.

In the Kondratieff piece referred to earlier I argued that the world entered a new K upswing in 1999. I would point to the fact that everyday for the last year commodity prices have been hitting new all-time highs. Large increases in share prices are normally restricted to small companies that grow quickly, but in the last year some of the biggest companies in the world such as Rio Tinto, Anglo-American, BHP Billiton have seen their share price more or less double. It is these huge increases in commodity prices which is fuelling the economic growth of countries like Azerbaijan, Angola, and Mauritius referred to at the beginning. The same is true of many of the other countries rich in resources in Latin America, and the Caspian basin. Kazakhstan has been turned into almost a modern equivalent of the Californian gold rush as companies fall over themselves to start up oil production, gold and copper mines etc.

The second aspect is that during the down leg of the K cycle there is more incentive to develop new ideas. But rather like the exploration and development of new mines etc. such new ideas take time to formulate and develop. These new ideas get taken up as economic growth accelerates in the upswing both as new types of consumer products, and as new methods of production. So although the microchip was developed mainly during the 1980’s and 90’s as a baseline technology it is only in recent years that that technology has really begun to be adopted widely with PC’s being a consumable, the Internet developing as a new means of communication and basis for production and consumption, and the integration of these various technologies in mobile platforms etc. A similar explosion of biotechnology applications is also likely on the basis of the baseline technologies developed there. But these technologies have the opposite effect to that of raw materials. These new technologies enable a large increase in output at lower unit costs. In part this counteracts the increased costs of raw materials inputs.

Finally, there is labour. Over the period of the downswing Capital has more of the whip hand than it normally does. It has more reason to resist the demands of labour faced with falling rates of profit, and more severe, and more frequent recessions. In itself these press down on labour. So for example at the beginning of the downswing Capital and its state begins to press down more heavily on labour as happened in the Miners Strikes of the early 70’s, and the subsequent pay policies and public spending cuts through to Thatcher’s all out class war first against the steel workers then against the Miners. Once pushed back Capital then not only reduces the ability of Labour to fight back, but undermines its bargaining power, increases the reserve army not just in its permanent form, but through temporary and casual working etc. Wages and conditions are pushed back. As the economic expansion of the upswing begins this demoralised and weakened condition is not easily shaken off. Confidence has to be restored, organisation rebuilt, new leaders developed. It takes time, and with new more productive technology the demand for labour may not rise quickly, and may rise in new unorganised industries. Indeed each Kondratieff upswing has tended to see the emergence of a new economic powerhouse that challenges and replaces the former dominant economy – in the present case China appears to be fulfilling that role, and that may require the development of a whole new Labour Movement.

I think all of these elements can be identified in the present conjuncture, and that should give confidence to Marxists that once more the conditions are developing for militant working class struggles. How these struggles manifest themselves will differ. In China wages are rising by 10% plus per year, and there are clear signs that Chinese workers are beginning to become more organised. The same is true of workers in South Korea and other rapidly growing Asian economies. Under these conditions workers struggles are likely to take on increasingly an offensive nature. Yet in the US, the UK and Europe despite signs of economic growth it is anaemic compared to China and elsewhere. The reason is that these economies are hugely inefficient compared to China which combines the latest technology, with low wage labour. Consequently, we see Delphi declaring bankruptcy with GM looking to be not too far behind.

Delphi
GM

In Britain we see Peugeot closing Ryton etc. Britain and the US also have a problem with huge levels of public and private debt which has been run up as an alternative to their economies cratering during the downturn, but it now acts as a drag on recovery. As with the PCE in France, it is quite likely that workers struggles in these old economies are likely to have more of a defensive nature, but as the victory of the workers and students in France demonstrates, and following on from the victory against the neo-liberal EU Constitution, which no doubt also helped develop confidence for this current victory against neo-liberalism, there is an air of change beginning to sweep into the Labour Movement even in Europe. In the US too, the demonstrations against the regime’s attempts to bring in new Immigration Laws shows that within the lower depths things are beginning to stir.

Soon the nature of the struggles will noticeably change from being defensive to offensive struggles, and Marxists and Trade Union militants must be prepared to reorient to that situation, or there is a danger of being left behind the class. It will begin to manifest itself in another aspect of the Kondratieff cycle. During the last 20 years western governments have pumped huge amounts of liquidity into the economic system to reduce the effects of recession. As Marx points out when economies are growing rapidly they require increased amounts of money to be put in circulation in order to enable goods to circulate. When real money – gold – was used there was a self-correcting mechanism which threw out excess currency from circulation. But since economies have used fiat currencies in place of gold this mechanism no longer exists. Consequently, any increase in the amount of money tokens (paper money and coins) or credit over and above what is required for circulation leads to a devaluation of these tokens, and thereby inflation.

See: Gold and Money

This inflation has not been manifest because of two things. Firstly, the prices of consumer goods have been kept down because of imports from China, and other low cost producers which have sucked up a large amount of this excess liquidity, and is then recycled into Chinese Foreign reserves and loans back particularly to the US, hence the huge trade deficit of the US and UK. Secondly, the liquidity has gone into financial and other assets – in particular creating a house price bubble in the US and UK. However, there will come a point where the current economic expansion, having used up the readily available labour and other resources, and faced with demands from labour for wage increases, as the demand supply balance for labour tips more in favour of labour, will lead to pressure for higher prices. The Chinese Stalinists are already fearful of the imbalance between the cities and countryside, and are trying in the latest 5 year plan to direct resources to the country. One project is to drive a huge motorway through to Western China, both as a means of facilitating the transport of raw materials from Kazakhstan and other Central Asian countries, but also to stimulate economic development along its route into Central China. The rapidly rising living standards of Chinese workers are already fuelling a consumer boom, and increasingly the Stalinists will be forced to divert an increasing proportion of output to meet domestic consumer needs rather than the needs of western consumers. Combined with the likelihood in the next year or so of a revaluation of the Yuan the consequence is going to be a significant rise in consumer goods prices.

In short the next year or so is likely to see the return of inflation, and the current rise in the price of gold is a frontrunner of that. Inflation will make the current debates over pensions even more crucial because inflation quickly erodes the incomes of those on fixed earnings such as pensions. But inflation fulfils a special function for capitalism. It is the means by which it cons workers into falling real wages its means of achieving what Schumpeter and Mises euphemistically called “forced saving” i.e. the workers are forced to save by enabling the capitalist to make bigger profits.

Trotskyists developed the slogan “For a Sliding Scale of Wages” to respond to this kind of attack. It has been little used for the last 20 years or so both because workers have been too weak to enforce it, and because at least for the last decade or so inflation has been low. But during the 1970’s workers in Britain had a sliding scale of wages, ironically introduced by Ted Heath, and workers in Italy had the Scala Mobile for a long time, which protected them to some extent from inflation.
But its important also to understand the arguments behind the demand. The most obvious argument is that it sets out clearly a refusal of workers to pay for any aspects of the bosses system, and problems encountered by it. But during the inflation of the 1970’s and early 80’s there was another argument to be had. The argument that wages caused inflation. It is important for Marxists to nail that argument as completely wrong.

Marx sets out the argument in a pamphlet – “Wages, Price and Profit” in a polemic against Weston. Marx’s argument is straightforward, and one that can be argued even in the terms of orthodox economics. His more detailed explanation is given in the link above on Gold.

Marx says suppose that wages rise, what is the sequence of events that follows from this? The first thing is that workers have more money to spend, and so spend more on wage goods. This increased demand for wage goods might then cause a rise in their price. At the same time the capitalists employing these workers will in paying out more wages suffer a fall in profits so that they will have less money to spend. Because these capitalists have less money to spend their demand for luxury goods and capital goods will fall, which will cause the prices of these goods to fall also. But the higher prices of wage goods means that the producers of these goods will make higher profits, whilst the producers of luxury goods and capital goods will make lower profits because of their lower prices. Seeing this capitalists producing luxury goods and capital goods will switch production into the more profitable production of wage goods. The increase in the supply of wage goods will then reduce their prices, and the reduced supply of luxury goods and capital goods will increase their prices until such time is this adjustment brings about an equilibrium of supply and demand, and equal rates of profit in each of the three sectors.
Consequently, as Marx demonstrates an increase in wages does not cause inflation it merely causes a redistribution of value between workers and capitalists with a consequent reallocation of capital away from the production of the things capitalists spend their profits on, and towards the things workers spend their wages on.

It flows from this that if wage increases are not the cause of inflation then workers should not suffer as a result of inflation. It is necessary to ensure as a minimum that a sliding scale of wages is implemented so that any increase in prices calculated by committees of workers is automatically built into an increase in wages at the end of each month. Workers can then negotiate improvements in their pay over and above that as usual. But workers need also to demand such monthly indexation of pensions and benefits on behalf of those that cannot take action to ensure this themselves.