A Combined And Uneven Recovery

Last year, I argued that, by the middle of 2021, the global economy would be opening up from lock-outs, as populations developed herd immunity against COVID, and that the result would be a sharp increase in economic activity. That is what has happened. I also argued that this development would be combined and uneven, because, the sharpness of the economic growth, in the given conditions, would see large numbers of small businesses that had gone bust, and employees left unemployed, whilst other businesses would be unable to get the workers and materials they require, as they sought to expand to meet the demands of a rapidly growing market. That has happened too, though, again, as I suggested, the continuation of furlough schemes means its not fully apparent yet.

High street retailers, who were disappearing anyway, have disappeared at an even faster pace, as a result of the lockouts. The lockouts have simply accelerated many of the trends that were already in place, such as the shift to online retail, the increase in home working and so on. Although supermarkets were allowed to stay open, they saw a huge shift to people buying their weekly shopping online. Someone who worked as a shelf-stacker in a supermarket, cannot readily become a web designer, network administrator, or software engineer for the company, as these jobs increase, as part of the shift to online retailing. Although, the warehouses from which such online deliveries are made also require shelf-stackers, they require far fewer in proportion due to economies of scale, and use of robots.

Many of those that have been laid off, and existed on furlough are young people employed in catering, restaurants, bars and hospitality. The continuation of furlough schemes means we don't know yet how much damage has been done to employment in these areas, as a result of lockouts. Only when that ends, and people start to be made redundant, will we really know. The ending of lockouts means that there has been a sharp rise in trade in some of these areas, but it is coming at the same time when many venues have closed down. Where pubs, restaurants and so on have closed, the sharp rise, now, in demand simply manifests itself in the survivors getting an even bigger boost. They need to take on additional workers to cope, but again, economies of scale means that for every ten workers put on the dole from bars and restaurants that have closed, perhaps only 2 are taken on by the survivors that now need the additional staff.

The consequence is that, across economies, the rapid pace of the increase in activity is what is causing bottlenecks. That's not true just in Britain, but across the globe. Britain suffers worse, because of the damaging effects of Brexit, which means that the workers it needs, who would have come from Europe, are no longer available, and Brexit has also broken supply chains, increased delivery times and costs etc. As businesses seeing sharp rises in demand seek to get both labour and materials, and equipment, they are finding that either they are not available, or else they are having to pay much higher prices for them. That is one of the factors causing inflation to surge across the globe, as the rising demand is fuelled by all of the liquidity that central banks have put into the system over decades, and which governments have also been channelling, in the last year, to feed unproductive consumption.

In a global economy in which the Dollar acts as world currency, the vast amounts of liquidity that the Federal Reserve has pumped out, over the last thirty years, this rise in demand shows up in the rapid increase in demand for primary products such as copper, iron ore, as well as foodstuffs, all of which have seen prices rise by at least double, and in many cases treble or more. Timber prices, in the US, went from $200 to $1400 dollars. Marx defines raw materials not just as these primary products, but any material used in the production of some other commodity, for example, steel is not a primary product, but is defined by Marx as a raw material, because it is used in the process of making cars, trains, ships, machine and so on. The prices of all these raw materials has increased massively too, and, for some, even with huge price rises, there remains physical shortages, as, for example, with computer chips.

The consequence of these price rises, and physical shortages is to create a feedback loop. Physical shortages of computer chips, means that production of many commodities that require them, including vehicles, has not grown as fast as it would have done, or has even had to be slowed, with production lines closed, until supplies were located. Huge demand for copper, in China, partly spurred by the shift to electric vehicles, and development of alternative energy systems, away from fossil fuels, such as oil and gas, fed into the global surge in copper prices. But, when copper prices rose so fast, and to such high levels, it meant that consumers of copper had to scale back their own production, because they could not sustain demand for their output at prices that covered their increased costs, which would have led to losses.

Marx discusses such conditions of sharply rising input prices, and their effects of this kind in Capital III, Chapter 6. He also deals with it, in Theories of Surplus Value, Chapter 9, in examining the determinants of what would now be called the long wave cycle. We saw it after the new long wave uptrend began in 1999, in which these sharply rising prices led to an upsurge in development of new sources of primary products, which began to come fully on stream in 2012-14, and led to the sharp falls in prices of 2014. All of those new sources are still available, and so increasing production to meet the new upsurge in economic activity, is less problematic, it involves, more, the employment of additional circulating capital, and to an extent fixed capital, rather than a wholesale development of new mines, farms and so on. For example, oil prices, which had fallen as low as $25, have now risen to nearly $70, but they are not going to go back to their previous high levels of over $100, because all of the additional supply previously established, from shale and so on, can now be brought into play, as well as alternatives to oil playing an increasing role.

What it demonstrates is the way the excess liquidity, put into circulation by central banks, washes through the global economy, so that it is not simply a matter of a secular rise in prices and activity, but a process of combined and uneven development. Sharply rising demand from commodity producers causes primary product prices to rise sharply, as supply cannot be increased immediately. When prices rise too high, industrial consumers cut back demand, but the prices of primary products remain at their new high levels, with only minor pull backs. For example, recently, on Bloomberg, Cathie Wood, of Ark Investments, was keen to point to the fact that there had been, in recent days, a fall in some primary product prices, such as for timber. The reason for the keenness is due to the fact that Wood is a promoter of Bitcoin, whose price had crashed earlier that day. Part of the reason it had crashed, is that sharply rising global inflation is undermining the attempts of central banks to keep inflation low, and money printing high. Rising interest rates cause asset prices to crash, and for worthless speculative assets such as Bitcoin, that means the crashes are that much more spectacular.

Wood even talked about a “deflation” in primary product prices. Lets put that in context. The price of timber had risen from $200 to $1400, and the pull back in its price was merely to $1200. This “deflation” was, therefore, one in which the price of timber rose by 600% rather than 700%. In fact, after a pull back, the price of timber is rising again, just as pull backs in the prices of other primary products has been followed by their prices starting to rise again. Wood is correct that the role of technology means that the value of many commodities will continue to fall, but the main effect of rising productivity, for many established commodities, is already behind us. The big increases in productivity for those commodities occurred in the 1980's, and 90's. The main effect of new technologies in raising productivity, and reducing values is going to be in the realm of new consumer products and services. For example, she is correct in pointing to the role of AI, and further development of computing power in the development of genome sequencing, and development of genomic medicine, and so on. But, here, the main effect is going to be to develop whole new areas of the economy, for consumer spending, where none currently exists, and, thereby, to stimulate faster, more extensive, economic growth, and the consequent demand for capital, which will cause interest rates to rise, which will burst the speculative bubbles in all those speculative assets such as crypto currencies, financial assets and property.

The effect of the sharp rises in primary product prices is to swill huge waves of that liquidity, created by central banks, into those economies that produce those commodities, and so to increase economic activity in those areas. That means additional demand for end consumer goods and services. Higher wages for workers, in developed economies, means that demand for consumer goods and services also rises, and with liquidity continuing to swill into the economy, so firms find that they can charge higher prices for their output, so that input prices that were previously prohibited can now be accommodated, even if firms have to absorb some of the increased cost out of their rising money profits.

So, as with a rising tide, the waves wash in, and wash out again, but each time as they wash in, on average they wash just a bit higher, and as they wash out, they retreat just a bit less. Rising consumer prices feed into additional demand for inputs, which leads to rising input prices, until they cause a reaction in demand, but the additional demand for inputs and higher prices for them, washes through into rising monetary demand for end goods and services, which raises their prices further, creating additional demand for inputs, and so on. That continues until the increased liquidity has been absorbed and the general price level reflects the depreciation of the currency. But, currently, central banks continue to claim that the inflation that their liquidity injections have created, is only transitory, and so they are committed to injecting even more of it, like a junky, and so there appears no end, yet, in sight, to the continued rise in the inflation caused by that liquidity. That means that when the ending of the liquidity injections comes, it will be forced on them, and will be dramatic.

The Economic Content of Narodism, Chapter 4 - Part 31

Struve, because he has confronted the Narodniks on the ground of an abstract analysis of capital, falls into the same error as them. He accepts their terms of debate as being the question of the inevitability of capitalist development in Russia. If he had actually analysed the economic relations in Russia, on a Marxist basis, he would have found that the question itself is irrelevant. If he had done so, he would have found that capitalism already had developed, and so whether the development had been inevitable becomes pointless. It is only a matter then of an historical analysis of the factors that had led to that development. 

A prima facie examination of the Russian economy showed that it indeed clearly did have all the outward characteristics of capitalism, from large factories to railways to banks. It was this developed form of capitalism that the Narodniks wanted to present as the only capitalist sector in Russia, and that, as some kind of anomaly, an accidental development that was simply a consequence of the country departing from some other natural path of development. 

“It is the job of Marxists to prove that these heights are nothing more than the last step in the development of the commodity economy that took shape long ago in Russia and everywhere, in all branches of production, gives rise to the subordination of labour to capital.” (p 495-6) 

Struve, because he fails to analyse Russian economic relations in detail, falls into the same error as the Narodniks, seeing its capitalist development as something occurring in the future. It is the same error that the “anti-imperialists” make. And, they, like the Narodniks, see the large scale manifestation of capitalism, particularly where they are foreign owned, as something unnatural, accidental and imposed against some supposed natural path of development. Struve failed to see that the “people's production”, in handicraft industry, as well as in agriculture, was itself also already dominated by capital, and today's “anti-imperialists” make the same mistake in relation to developing economies. What they, Struve and the Narodniks failed to understand is that this latter capitalist production is simply less developed, less mature, and, thereby, reactionary compared to the large-scale capitalist production they aim their attacks against. 

Struve talks about the Russian peasant villages and individual farms alongside large capitalist farms. On the basis of the same legal categories that the Narodniks used in their analysis, Struve talks about the levelling tendencies being stronger than the differentiating influences. But, Lenin has shown that the legal categories were meaningless in the context of the actual already existing domination of capital, and production for the market. Those with money simply bought or rented additional land and labour. 

Struve notes that Vorontsov and Danielson are caught in a vicious circle in which capitalism requires expanding markets to develop, but capitalism ruins the producers, which they believe means that markets cannot expand. Lenin has already shown why this argument is false, by simply referring to Marx's schemas of reproduction, in Capital II. It was on the basis of these same schemas that Krasin had sought to show that capitalism could not continue to develop in Russia without foreign markets, because of the same impoverishment of the producers (See: On The So Called Market Question). Struve, however, seeks to resolve this vicious circle on the basis of his own Malthusianism. 

“The mistake of the authors mentioned is quite a different one: capitalism not only ruins, but splits the peasantry into a bourgeoisie and a proletariat. This process does not cut down the home market, but creates it: commodity economy grows at both poles of the differentiating peasantry, both among the “proletarian” peasantry, who are compelled to sell “free labour,” and among the bourgeois peasantry, who raise the technical level of their farms (machinery, equipment, fertilisers, etc. Cf. Mr. V. V.’s Progressive Trends in Peasant Farming) and develop their requirements. Despite the fact that this conception of the process is directly based on Marx’s theory of the relation between capitalism in industry and in agriculture, Mr. Struve ignores it—possibly because he has been led astray by Mr. V. V.’s “theory of markets.”” (p 497)

Back To Part 30

Forward To Part 32

Crypto Crap Crashes

Yesterday, I wrote that global inflation was rising, fuelled by the oceans of liquidity that central banks have pumped into the system, and which are now flowing out in huge tsunamis of monetary demand for commodities, causing prices to rise rise rapidly. I also pointed out that increasing demand for money-capital was causing interest rates to rise, which would reduce the inflated prices of assets from shares to bonds to property and Bitcoin. Sure enough, later that day, Iceland became the first European country to raise its official interest rates; China announced that it was introducing new restrictions on crypto-currencies like Bitcoin; and crypto-currencies promptly crashed by up to 40%, losing their owners around $500 billion!

Iceland raised its official interest rates, as its central bank became concerned about rising global inflation. In the last global financial meltdown, Iceland suffered very badly, so its perhaps not surprising that it has acted first in Europe. Where its led, others will soon follow, whatever they are saying now. Larry Summers has spoken out about the financial dangers created by the policy of excess liquidity having been continued for so long, and later, yesterday, Minutes of the Federal Reserve came out showing that, at its last meeting, there was discussion of starting to withdraw its current bond buying programme, which would, at least, end the additional liquidity being pumped in, if not yet, reducing it. Similar concerns are being expressed in European financial circles.

China has also seen the signs of inflation, and the impact on blowing up bubbles in its financial system, which is already viewed as being more or less simply a casino.

In theory, as Marx set out, in any such casino, the effects of financial crashes are just that some of the players lose huge chunks of their wealth, and others who made the right gamble take it off their hands. That happened to all those gulls who lost their shirts betting on Gamestop, and those who lost thousands of Dollars yesterday on the crash in crypto crap. But, as 1847, 1857 and 2008 demonstrated, in practice, very large financial crises can impact the real economy, not because this financial gambling itself has any connection to, or relevance for the real economy, but because, where large financial institutions themselves lose money, or worse go bust, their other functions in the real economy can be affected, leading to a break down of the money transmission systems, spikes in short-term interest rates, as credit crunches arise, and so on. China has seen crypto-crap as a symbol of this dangerous speculation, and stepped in to limit it. Combined with the previous comments of Elon Musk, who within a matter of weeks went from being a source of a surge in Bitcoin prices, as he announced he'd bought $1.5 billion of the stuff, and Tesla was accepting it in payment, became a source of its price dropping sharply, as he said Bitcoin mining was environmentally unsustainable, it was enough to crash the prices of all crypto-currencies.  It shows the dangerous and unstable nature of all this speculative crud.

Reminiscent of the first tremors of the stock market crash of 1929, various big hitters came out to support the crypto-crap, and try to stop the slide. Cathie Wood of Ark Investments came out to say that she still thought that Bitcoin could go to $500,000 per coin. Well, of course, it could. Indeed, it could go to $1 million, $10 million, or more per coin – in theory. It could, because, Bitcoin has no value, it is not a commodity, like say gold, and its price is determined solely on the basis of speculation, of demand and supply of it, and of what price the bigger fool is prepared to pay for it, in the expectation that some other bigger fool will come along prepared to pay even more. If we take, an actual commodity like gold, its price, in the short term, is also largely determined by such speculation. Its why, after rising to $800 an ounce, in 1980, it steadily fell, reaching $250 an ounce, in 1999, and then rose to nearly $2000 an ounce, in 2011. But, when the price of gold goes way above its price of production, it means that surplus profits can be made by gold miners, who then mine for more of it, seek more efficient means of extracting it, and so on. The additional supply of gold, then results in the speculative price being undermined, and the price falling back to its price of production.

That can't happen with Bitcoin. If its price rises, it simply encourages additional speculative demand. Unlike gold, the total amount of Bitcoin available for mining is absolutely limited, and most of it has already been mined. So, the supply cannot be rapidly increased in response to its rising price. Moreover, with gold or other commodities, it is possible to reduce the cost of mining by improved technology and so on. That is not possible with Bitcoin, and other crypto-crap. Finally, when gold was used as the money commodity, one of its advantages was that its composition is homogeneous, and it can be divided. So, if the value of gold increased substantially, it is possible to buy smaller quantities of it, and these smaller quantities can also be used then as coins and so on. That is not true of Bitcoin. If you want to buy one, you have to buy, or mine the whole thing, whether its price is $1 or $100,000. Its one reason it can never actually function as currency, and is simply a confected vehicle for speculation. So, yes, these factors mean that so long as there are gullible people prepared to hand over large amounts of good money for it, in the expectation that other gullible people will be prepared to hand over even more good money for it, in the future, this speculation necessarily leads to its price rising without limit, much as happened with tulip bulbs, and other objects of speculative manias. By the same token, when no bigger fool appears in the market to buy it, the price crashes even faster.

Yesterday, Bitcoin fell to $30,000. It was still at least $30,000 more than it was worth. The fact that with all the big Bitcoin promoters coming on to the media to boost it, the price rose to $40,000, still down more than 7%, and a third below its recent highs of over $60,000, does not change that, any more than, in 1929, after the first sell-offs, the actions of J.P. Morgan and others to raise the market, prevented it ultimately crashing. A few years ago, when Bitcoin was at $20,000, I predicted it would fall to zero. Its price in that year fell to $5000. It wasn't worth it then, and its certainly not worth it now.

There were also other indications of the rising global inflation, yesterday. Argentina is facing 50% inflation. One manifestation has been rising beef prices. The Argentine authorities have responded by banning meat exports. That, of course, means that this lack of supply from Argentina is likely to cause a further rise in global meat prices. Similar action by Argentina has been taken in the past, and it had negative consequences. The idea is that if Argentinian cattle producers can't export their beef, the supply into the domestic market will rise, so that the increased supply will depress domestic prices. But, the cattle producers are themselves facing that same 50% inflation causing their production costs to rise for wages, cattle feed, equipment and so on. So, with rapidly rising costs, but with falling prices for beef, the beef producers face making losses. The last time that happened, it simply resulted in some beef producers going bust, and others reducing their production. That then caused domestic prices of beef to rise again, but now with a much lower production of beef and cattle, which had a negative impact on the Argentinian economy, in which cattle form an important part.

In a similar vein, the UK government, desperate to try to salvage something from their Brexit disaster that has seen Britain's exports drop by huge amounts, and large parts of its crucial financial services industry decimated, has become split over a trade deal with Australia, in which Australia would have tariff free access to Britain for its cattle and sheep producers. Indicating the extent to which Brexit has undermined the negotiating power of Britain, the Australian exporters would see their exports to Britain expand by 83%, compared to just a 10% increase in British exports to Australia. Some Tory Ministers recognise that the impact will be to destroy British cattle and sheep farming, which will not be able to compete with their Australian rivals, who produce on scales more than ten times that of British farmers. That is particularly damaging for the Tories in Scotland and Wales, where existing opposition to Brexit is also fuelling increased demands for independence.

The Tories Misean cohort, of course, argue that Britain will benefit from the much lower prices of agricultural produce, though, if large numbers of people lose their jobs in the process, its hard to see how this is beneficial to them, and if food prices fell, the obvious consequence is that the bosses would simply see this as good reason to reduce wages, not to allow workers to enjoy it in higher living standards. Of course, there are advantages in terms of greater efficiencies, and lower costs from free trade, but that is precisely what the EU was designed to achieve, and what the Tories have taken Britain out of. Moreover, for any state, its not just those efficiencies that are determinant. A state has to take into consideration also its strategic interests, in case of war or other emergencies. A state will want to ensure that it is not reliant on others for feeding its population, for energy and so so on. It will have to protect and maintain such industries, even if it has to expend large amounts of its wealth to do so that could have been better used in other ways. Its again why Brexit was an insane idea, because for a relatively small state like Britain, having to expend these amounts to maintain such strategic industries, drains its resources that could have been better used in other ways. For a large state, like the EU, this does not apply, because it can obtain all of the advantages of free trade within its own borders, as well as the advantages of economies of scale from specialising production in favourable locations, and so on, whilst still being able to have the production from all the strategic industries it requires.

But, again, as global inflation rises, Brexit means that Britain will be put at an even greater disadvantage for these reasons, seeing its important industries undermined, and driven out of global markets, whilst its costs rise more sharply than for its competitors, and it is forced to divert resources that could have been used more effectively, instead into protection for its strategic industries. Brexit is such a ridiculous policy that it cannot possible survive in the long-term, and as rising inflation and rising interest rates brings about a crash in the speculative bubbles, whilst global economic growth increases spectacularly, that will become ever more apparent.

The Popular Front - Part 4 of 7

This division between a perspective of socialism that arises as a consequence of reforms over a long period, which reflects a gradual and inevitable growing over of capitalism into socialism, as against a revolutionary perspective is what leads to the division inside the Russian Social-democratic Labour Party into Bolsheviks and Mensheviks, and a similar division arises in other socialist parties. In Britain, there was no equivalent socialist party, but a similar division arose inside the Labour Party with the revolutionary wing being represented by the British Socialist Party, which changes its name to the British Communist Party. The division reaches a climax with the collapse into social patriotism of the socialist parties at the outbreak of World War I, and the subsequent proletarian revolution in Russia, in 1917, and a number of other countries across Europe, in 1918.

The division between social-democracy and reformist socialism, thereby, becomes obliterated. The former socialist parties retain the aim of Socialism in their constitutions, but it becomes purely formal, a goal pushed out to a distant future, with their main focus being simply to get elected to government to push mere reforms aimed at ameliorating the condition of the workers within capitalism, and, even then, only within the confines of what capitalism itself can afford, at any one time. But, this underlying contradiction is not apparent to the large mass of workers whose political development had taken place contemporaneously with the rapid growth of the Second International.

That occurred as a result of the long wave expansion of the European economy from 1890-1914. When that expansion stops, and a period of crisis erupts, and becomes manifest in the 1920's, with an increased willingness of capital to confront workers, the old Economistic/reformist solutions of the previous period are no longer feasible. In the long wave uptrend, the demand for labour made it possible for unskilled workers to raise wages and living standards, and on the basis of it to unionise. Alongside these improvements, and greater socio-economic weight, went the development of their political organisation represented by the parties of the Second International. The size of the working-class, means that, as soon as workers obtain the vote, these parties rapidly advance the representation of the workers in parliament. Parties committed to merely passing reforms that ameliorate the condition of workers, via an extension of welfarism and so on, is simply an extension of the trades union consciousness of bargaining within the system. In reality, this development of the welfare state, and greater state intervention, planning and regulation is simply a reflection of that transformation in the nature of capitalism itself noted by Marx, Engels, Kautsky and Lenin. It strengthens the idea that a continued upward development leads to further such reforms, until capitalism itself is reformed away.

That delusion was smashed in 1914, and, after a short economic recovery, following the ending of WWI, it continues to be shattered in the following years. Something similar happened, in the 1970's/80's, after the 1949/74 long wave uptrend came to an end. In Germany, the effects are heightened by the imposition of the Versailles Treaty. But, in Britain, the effects are also soon felt as miners and other workers face mass sackings, cuts in wages and so on. In place of the conditions of the preceding period, when living standards rose without a great deal of struggle, now even prolonged industrial struggle, and the combined efforts of workers across industries, such as via the Triple Alliance, was not enough to beat back the attacks on living standards. Although it confirmed Luxemburg's critique of Bernstein, it also showed the limitations of her own semi-syndicalist ideas put forward in The Mass Strike, and her view that such spontaneous actions by workers leads them inexorably towards a socialist class consciousness. Again, the same limitations were exposed in the Luxemburgists' strategy in the 1970/80/s, when the mantra of the IS/SWP, of “more militancy” that had been enough in the previous period of expansion, was woefully inadequate in conditions of crisis and retrenchment.

In Italy, as workers faced this onslaught, they began to occupy factories, and establish workers councils across cities, mirroring the developments of the Russian workers in 1905 and 1917. But, now, they were confronted by armed fascist gangs, supplementing the forces of the state. As the bourgeoisie and petty-bourgeoisie unite against the industrial proletariat, as these struggles develop, the working-class is inevitably led to the question of why its parties are divided, rather than presenting a common front against their enemies. This brings out, in sharp relief, the distinction between the United Front, and the Popular Front. It was, in fact, set out by Marx, in a speech to the Communist League in 1850, in relation to the Revolutions of 1848. It is where Marx sets out the basis of Permanent Revolution. He notes,

“At the moment, while the democratic petty bourgeois are everywhere oppressed, they preach to the proletariat general unity and reconciliation; they extend the hand of friendship, and seek to found a great opposition party which will embrace all shades of democratic opinion; that is, they seek to ensnare the workers in a party organization in which general social-democratic phrases prevail while their particular interests are kept hidden behind, and in which, for the sake of preserving the peace, the specific demands of the proletariat may not be presented. Such a unity would be to their advantage alone and to the complete disadvantage of the proletariat. The proletariat would lose all its hard-won independent position and be reduced once more to a mere appendage of official bourgeois democracy. This unity must therefore be resisted in the most decisive manner... In the event of a struggle against a common enemy a special alliance is unnecessary. As soon as such an enemy has to be fought directly, the interests of both parties will coincide for the moment and an association of momentary expedience will arise spontaneously in the future, as it has in the past.”

This momentary alliance, is not a parliamentary alliance, but an alliance in action. It is the foundation of the United Front, and its mantra of “March separately, strike together.” In essence, by the 1920's, the social-democratic parties of the Second International were liberal bourgeois parties, whose ideology best represented the objective interests of large-scale, socialised capital itself. They occupied the same position that Liberal parties occupied in the 19th century.

Back To Part 3

Forward To Part 5

UK Inflation Doubles in a Month

UK inflation has doubled in the last month, going from 0.7% to 1.5%, as against the same month last year. As I've pointed out previously, even this reading grossly understates the real level of inflation, because a) it is based upon a basket of goods many of which have been unavailable to consumers during lockouts, but misses out, or under-represents, other goods and services that consumer have bought during that period, whose prices have risen sharply, and b) because it is a backward looking measure, rather than measuring the way inflation is likely to end up on the basis of current trends. For example, if the month on month rise of 0.7% is projected forward for a year, that would give an annual rise in inflation of around 10%. Already, some measures of inflation taking into account the effects of lockouts have calculated annual inflation of around 10%. It rather blows out of the water the arguments put by Michael Roberts in a recent WW article. I will be responding to his article in detail in the near future.

Even on the basis of the existing measurement of inflation, it is flattered by the effects of a number of government measures. If the effects of these were removed, and they will end unless renewed, in coming months, inflation, last month, would have risen to 3.2%, as against the same month last year. That would be the highest in nine years. But its not the absolute level of inflation that is significant, here, but the rate of change. Its that which gives the indication of the future much higher levels of inflation that are coming, and indication that, contrary to the claims of the Federal Reserve and Bank of England, this is not simply transitory, but has already become embedded, and systemic. It illustrates, once more, contrary to Michael Roberts' argument, that as Marx described in A Contribution To The Critique of Political Economy, inflation is a monetary phenomenon.

Inflation arises when the money commodity, for example, gold, rapidly falls in value, and so its exchange value against all other commodities, the basis of their money price falls suddenly. That happened when the Spanish brought back gold and silver plundered from South and Central America, or when large new gold fields were opened up in California, Australia and Alaska. It also arises if gold is replaced as the money commodity by silver.

“Thus, if the value of gold, i.e. the labour-time required for its production, were to increase or to decrease, then the prices of commodities would rise or fall in inverse proportion and, provided the velocity remained unchanged, this general rise or fall in prices would necessitate a larger or smaller amount of gold for the circulation of the same amount of commodities. The result would be similar if the previous standard of value were to be replaced by a more valuable or a less valuable metal. For instance, when, in deference to its creditors and impelled by fear of the effect the discovery of gold in California and Australia might have, Holland replaced gold currency by silver currency, 14 to 15 times more silver was required than formerly was required of gold to circulate the same volume of commodities.”

(ibid)

If the currency unit is given a name, such as £1, then, as in the case of replacing gold with silver, here, nominal prices would rise to 14 or 15 times their previous nominal levels – inflation. But, the same applies when the currency takes the form not of the money commodity itself, but of tokens representing it, be those tokens gold, silver, or copper coins, or base metal coins, or paper notes. As Marx describes, in the case of these money tokens, it is no longer their material composition that is determinant, but the quantity of them put into circulation. Again, its not just a question of the quantity of tokens put into circulation, but this quantity relative to the value/social labour-time they purport to represent.

“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."

(ibid) 

In his article, Michael Roberts says that the amount of money in circulation is determined by the value of commodities it is to circulate. That is correct, as Marx sets out in A Contribution, and if too much money is put into circulation, it is removed either by being hoarded, or being melted down into bullion etc. However, as Marx sets out, this is no longer true in the case of money tokens, in which these conditions appear inverted. In other words, precisely because money tokens are themselves worthless (in the case of gold or silver coins they only have the value of their material content, which may be a fraction of their nominal value), as is apparent with paper notes, they cannot be withdrawn from circulation in the same way, and melted down for their intrinsic value. If too many of them are in circulation, then the effect becomes the same as if gold were replaced by silver as the money commodity. In other words, the value of the token becomes devalued, and so, as the measure of prices, the only consequence can be that prices themselves are increased.

Roberts is right that its not as simple as that, because, as Keynes also pointed out, simply putting more currency into circulation does not mean it will be taken up. If economic activity is depressed for good reason, simply reducing official interest rates or increasing liquidity is like pushing on a piece of string. The additional liquidity simply piles up in bank deposits, resulting in the velocity of circulation being slowed. But, the liquidity usually does find an outlet. If it isn't used for the purchase of commodities, it gets used for the purchase of assets, as happened from the 1980's, when increased liquidity fed directly into pushing up the prices of speculative assets such as shares, bonds and property. In other words, the inflation is simply manifested as an inflation, in fact hyper-inflation, of asset prices rather than commodity prices. After 1987, when the bubble in those asset prices burst, central banks deliberately diverted excess liquidity into the purchase of such assets, which form the main, almost sole, form in which the ruling class owns its wealth. Its measures to direct liquidity into the purchase of assets, simultaneously drained liquidity from the real economy, slowing its growth, and creating disinflationary conditions for commodity prices.

But, in current conditions, the liquidity has been directly channelled into financing consumption, and even unproductive consumption. It is that which has stimulated monetary demand for goods and services, and, as firms begin to open up once more, with existing stocks having been run down, they can only respond to a surge in monetary demand by raising prices, which the excess of liquidity sloshing around the system enables them to do. They have to respond by rapidly trying to find new additional workers, as well as new supplies of materials and so on, which acts to push up wages, and raw material prices. That has been seen in the doubling, and more, of nearly all raw material prices over recent weeks and months. That, in turn, stimulates economic activity further, which acts to increase demand for labour and materials even more, rapidly soaking up the excess liquidity already in existence, and so pushing price levels higher still.

With firms having run down balance sheets, over the last year, during lockouts, they have little in the way of accumulated profits or cash balances to cover these additional purchases. They have to borrow, and the huge amounts of liquidity enable that borrowing to occur stimulating the levels of liquidity, and of inflation even more. But, the increased borrowing, means that the demand for money-capital, relative to the supply of money-capital, as against the increase in liquidity, means that interest rates rise. Even in the highly manipulated bond markets, where central banks keep bond prices high, and so yields suppressed, via bond buying, this is becoming manifest, as even those bond prices have started to fall, and yields to rise. The rising interest rates, means that the capitalised value of assets is falling, leading to inevitable capital losses, for the owners of speculative assets – shares, bonds, property, Bitcoin etc. - despite attempt by central banks and governments to keep them inflated. As the penny drops that big capital losses are looming, owners of those assets will seek to get out ahead of it, and that will mean that even more liquidity, currently tied up in them, will be released, deflating asset prices, whilst inflating commodity prices.

Money will begin to flow into real productive activity, as booming monetary demand pushes up money profits, and that will create a virtuous circle, as the increased real investment in productive-capital will lead to more employment, more demand for goods and services and so on, but will further push up prices, whilst beginning to squeeze profit rates, as wage share rises. Firms needing to expand and invest so as not to lose out to competitors as the market expands rapidly, but seeing their profit rates falling, and so their ability to finance the expansion internally declining, will need to borrow more, pushing interest rates higher again. That will cause asset prices to crash even harder.

The Economic Content of Narodism, Chapter 4 - Part 30

V 

Lenin turns to Struve's criticism of Vorontsov's claims about the lack of markets in Russia. Struve begins by asking what Vorontsov means by capitalism. Its a relevant question, Lenin says, because Vorontsov and all Narodniks, have compared capitalism in Russia with its English form, rather than analysing the nature of Russian capitalism itself. Struve, however, does not give a comprehensive definition of capitalism, and what he does define is wrong. On the one hand, Struve focuses on just one element of capitalism – the domination of exchange economy - and, on the other, he focuses on a narrow definition of capitalism as seen in its more developed Western European form as “concentration of industrial production”. But, exchange economy in general, i.e. commodity production and exchange, as Marx and Engels describe, goes back 10,000 years. Money, which arises out of such commodity production and exchange, as the general commodity, as exchange-value incarnate, itself appears several thousand years ago. Exchange economy becomes dominant before industrial capital arises. At the same time, the concentrated industrial production that Struve describes, comes at the end of a process. Capitalist production arises several centuries before that. 

““Mr. V. V.,” says the author, “did not go into an analysis of the concept ’capitalism,’ but took it from Marx, who mainly had in view capitalism in the narrow sense, as the already fully established product of relations developing on the basis of the subordination of production to exchange” (247).” (p 494) 

As Lenin says, this is then wrong. Firstly, Marx, in Capital, gives a lengthy analysis of the way capitalism develops out of the existing generalised commodity production and exchange. It first takes the form not of industrial, but of merchant and usurer's capital, forms which themselves go back thousands of years, pre-dating generalised commodity production and exchange, but arises along with the creation of credit and money. He then shows how, on the basis of generalised commodity production, the creation of large, localised markets, and the development of technology, these antediluvian forms of capital begin to act not only to ruin and dispossess individual producers – which they had always done – but to bring about the concentration of the means of production, and to convert the ruined producers into wage labourers, thereby converting the means of production into productive-capital.

At the same time, the money-capital, and commodity-capital of the usurer and merchant becomes transformed into productive-capital. These capitalists now appropriate surplus value not (only) on the basis of unequal exchange, but increasingly (primarily) from the creation of surplus value in production, by wage-labour. It is this which constitutes primitive capital accumulation, as capitalist production emerges in the 15th century, and its on the basis of the production and appropriation of this surplus value, and its conversion into capital that the process of secondary accumulation of capital is set in motion. This process of capitalist production, but still on the basis of essentially handicraft industry goes on for centuries, before the large scale machine industry that Struve describes comes into existence. It is the end of that process, described by Marx, of capitalist production, not the starting point. 

“Mr. Struve himself narrows down the concept of capitalism when he says: “The object of Mr. V. V.’s study was the first steps of the national economy on the path from natural to commodity organisation.” He should have said: the last steps. Mr. V. V., as far as we know, only studied Russia’s post-Reform economy. The beginning of commodity production relates to the pre-Reform era, as Mr. Struve himself indicates (189-90), and even the capitalist organisation of the cotton industry took shape before the emancipation of the peasants. The Reform gave an impulse to the final development in this sense; it pushed the commodity form of labour-power and not the commodity form of the product of labour to the forefront; it sanctioned the domination of capitalist and not of commodity production. The hazy distinction between capitalism in the broad and in the narrow sense leads Mr. Struve apparently to regard Russian capitalism as something of the future and not of the present, not as something already and definitely established.” (p 494-5)

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The Popular Front - Part 3 of 7

The socialist parties, across Europe, however, have a different history, as a result of the later development of industrial capitalism and the industrial proletariat. By the time the labour movements in these countries have developed to a meaningful size, Marx and Engels had already formulated their ideas in The Communist Manifesto, and a range of other works. They built upon the political works and heritage of socialist and communist writers of the preceding period. The European socialist parties do not come out of an existing social-democratic party, or tradition, and are not limited by the bourgeois ideas of the trades unions, but are newly born out of the revolutionary ideas of Marx and Engels and their contemporaries. This division between socialists and social-democrats was highlighted in the revolutions of 1848. Marx in The Eighteenth Brumaire of Louis Bonaparte notes,

“During the June days all classes and parties had united in the party of Order against the proletarian class as the party of anarchy, of socialism, of communism.”

The social-democrats were one of the elements ranged against the proletarians.

“The peculiar character of social-democracy is epitomized in the fact that democratic-republican institutions are demanded as a means, not of doing away with two extremes, capital and wage labour, but of weakening their antagonism and transforming it into harmony. However different the means proposed for the attainment of this end may be, however much it may be trimmed with more or less revolutionary notions, the content remains the same. This content is the transformation of society in a democratic way, but a transformation within the bounds of the petty bourgeoisie.”

The epitome of this social-democratic ideology is the Fabians. Although often cited as one of the forces that led to the creation of the Labour Party, the Fabians were, themselves, opposed to the split from the Liberals, and creation of a separate workers' party. As Lenin pointed out, by the end of the 19th century, the big industrial bourgeoisie, itself, had come to the conclusion that it was inevitable that capitalism was being transformed into something else, with the competition of the earlier period being replaced by an increasing role of the state in planning and regulating society.

“The socialisation of labour by capital has advanced so far that even bourgeois literature loudly proclaims the necessity of the “planned organisation of the national economy.””

(The Economic Content of Narodism, Chapter 3, p 445-6)

This reality, understood by Marx, Engels, Kautsky and Lenin, unfortunately was not recognised by Luxemburg, leading her into a number of theoretical errors. For social-democrats this process leads automatically to a new society, in which the interests of capital and labour are harmoniously adjusted, and all that is required is for the machine to be properly managed by an enlightened elite. This idea runs like a thread through the ideas of the Fabians, and their fellow travellers such as Keynes, but also through the ideas of European socialists such as Bernstein. It was this ideology that Luxemburg polemicised against. As an elitist, top-down ideology, it has an immediate affinity with the state-socialist ideas of Lassalle.

Marx criticised those ideas in The Critique of the Gotha Programme, and, in the following years, Engels took up the cudgels against those same ideas whenever they manifested themselves. But, as Draper sets out, in The Two Souls of Socialism, the reality is that the ideas that underpinned the socialist parties that formed the Second International, owe at least as much to the ideas of Lassalle and to Fabianism as they do to the ideas of Marx and Engels. Unlike the Labour Party, these European socialist parties begin by openly avowing an allegiance to Marxism, and to the idea of creating socialism, but the elements of social-democracy inherent in their ideology inevitably leads them towards a perspective of socialism that is brought about by a process of reform rather than revolution. The main lines of this argument were set out by Rosa Luxemburg in her polemic against Bernstein, Reform or Revolution.

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