Response to Jehu on “Four Questions for LK on Money”

A Marxist called “Jehu” who writes at The Real Movement blog challenges me here with four questions:

Jehu, “Four Questions for LK on Money,” The Real Movement, February 20, 2016.

His four questions are as follows:

(1) Did not Marx predict the collapse of production on the basis of exchange value?

(2) Did this collapse occur in the 1930s just as Marx predicted it would?

(3) To save capitalism was it not necessary to sever gold from fiat?

(4) What was the implication of the collapse of the gold standard for Marx labor theory of value? Does it validate Marx’s theory of money or disprove it?

Before I answer these questions, however, a few other issues deserve a response.

Jesu writes:

“What makes Marx’s theory correct is that his theory predicted the breakdown of production on the basis of exchange value, i.e., money, almost 70 years before it happened. Moreover, Marx’s theory is the only theory that made this prediction.”
Jehu, “Four Questions for LK on Money,” The Real Movement, February 20, 2016.

This is wrong. Marx in Capital did not predict the “breakdown of production on the basis of exchange value.” His theories in volume 1 and volume 3 of Capital on the nature of exchange value badly contradict one another, as both early Marxists and Marx’s critics alike noticed even in the 1890s.

In volume 1, commodities tend to exchange at their true labour values (see here). But, in volume 3 (which Marx never wished published in his lifetime), commodity prices by necessity diverge from true labour values, but this is not why capitalism will collapse, as we will see below.

After many critics of Marx pointed out the contradiction between volume 1 and 3 (see here, here, here), Marxists scrambled to defend Marx from the charges of theoretical incoherence.

Engels was one of the first. Engels essentially re-wrote history (a dishonest tactic common to Marxists and communists) to defend Marx: in his “Supplement and Addendum” to Volume 3 of Capital published in 1895 (see Engels 1991 [1895]), Engels seized on a statement in Chapter 10 of volume 3 of Capital and defended volume 1 by saying that the law of value there only applied to the pre-modern world of commodity exchange before prices of production came to dominate modern capitalism (see here here, and here).

So Marx did not predict the “breakdown of production on the basis of exchange value.” According to Engels’ reinterpretation of Marx’s theory after the publication of volume 3, the breakdown of the “law of value” (the idea that commodities tend to exchange at pure labour values) happened between the 15th century and 19th century, depending on the development of the capitalist mode of production in various countries (Engels 1991 [1895]: 1034–1038, esp. 1035, 1044; Howard and King 1989: 49).

But this was just Marxist apologetics by Engels (for example, in Chapter 22 of volume 1, Marx is clearly applying his law of value to 19th century capitalism and Marx’s three laws on the relative movements of the value of labour-power and surplus value in Chapter 17 are based on the assumption that the law of value is true and holds in 19th century capitalism). The two volumes of Capital on the law of value were and are contradictory.

Contrary to what Jehu asserts, volume 1 of Capital does not predict “the trajectory of capitalism led to the breakdown of the relation between value and prices.”

Nor does volume 3. In volume 3 of Capital, prices in developed capitalism already diverge from true labour values because prices of production are the anchors for the price system.

Let us now take the four questions one by one.

(1) Did not Marx predict the collapse of production on the basis of exchange value?
Marx in volume 1 of Capital predicted the end of capitalism in a proletarian revolution, for a number of reasons.

First, the class of proletarians grows and grows under capitalism, swelling to huge numbers. There is also a huge concentration of capital and tendency to monopoly. The misery, oppression and exploitation of these proletarians grows and grows, and added to this is a large and also growing class of the industrial reserve army of labour (the unemployed workers), who are made unemployed by the increasing use of automation and machines (see Chapters 15 and 25 of volume 1 of Capital).

So Marx’s theory predicts a continuously soaring class of proletarians and a continuously growing rate of unemployment.

Eventually, the numbers of these oppressed workers grows to such numbers that they organise and overthrow capitalism, which has become intensely monopolistic.

This is made very clear in Marx’s prediction at the end of volume 1 of Capital:

“As soon as this process of [sc. capitalist] transformation has sufficiently decomposed the old society from, top to bottom, as soon as the labourers are turned into proletarians, their means of labour into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialisation of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralisation of capital. One capitalist always kills many. Hand in hand with this centralisation, or this expropriation of many capitalists by few, develop, on an ever extending scale, the co-operative form of the labour-process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economising of all means of production by their use as the means of production of combined, socialised labour, the entanglement of all peoples in the net of the world-market, and this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organised by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.” (Marx 1906: 836–837).

We must also note that the misery, oppression, slavery, degradation, and exploitation of the workers always grows, because:

(1) the tendency of capitalism is to keep the real wage at a subsistence level, which is the value of the maintenance and reproduction of labour-power (on this, see here);

(2) machines are supposed to increase the intensity and arduousness of work for the proletarians (see Chapter 15 of volume 1), and also increase the employment of women and children (although government laws can counter this latter trend to some extent);

(3) the industrial reserve army of labour (the unemployed) grows and grows, and helps to hold real wages in check.

(4) volume 3 of Capital adds to this the tendency of the profit rate to fall.

However, some modern Marxists now dispute just how important the tendency of the falling rate of profit was for the final collapse of capitalism in Marx’s theory, as the emphasis given to this may be more the result of Engels’ tendentious editing of volume 3 of Capital.

At any rate, these factors described above are why capitalism will collapse in Marx’s theory.

But this theory has been utterly discredited by history. The working class eventually stabilised and society was swelled by a growing and prosperous middle class and social mobility. Unemployment rates in capitalism are simply a cyclical result of the business cycle: even in the 19th century, unemployment rates did not grow and grow in the long run, as Marx’s theory predicts, but simply moved around a point somewhat above full employment, as John Maynard Keynes pointed out.

The long-run tendency of capitalism, even in the 19th century, was to massively increase the real wage, which has soared above subsistence level, even for workers (see here and here). The growing real wage and rising disposable income even of workers in capitalism also allowed a massive capacity for production of new commodities and new opportunities for employment (e.g., especially in services and middle class employment).

Highly developed and advanced Western capitalist states like Britain and the US proved the most resistant to communism and Marxism (contrary to Marx’s theory), and when communist revolutions broke out it was in backward Russia and China. Even the communist outbreaks in Germany and Italy at the end of the First World War were more the result of the collapse of those nations under the strain of war, and not in line with the vision Marx had predicted (as I noted here).

The Great Depression is not explained by Marx’s theory: on the contrary, the depression was just a particularly bad set of contingent circumstances producing the worst downturn in the business cycle in capitalism. It is explained by Keynesian theory and Minsky’s theory of financial markets, to which we can add debt deflation dynamics (though Keynes was well aware of debt deflation too).

Jehu states:

“First, to be clear, Marx never predicted a breakdown of capitalism; he predicted a breakdown of production on the basis of exchange value. … Because the relation between values and prices was severed by industrialized countries in the 1930s precisely to save capitalism, to prevent its total collapse. As the author fully knows, or should know, the economies of the industrial nations did actually collapse in the 1930s — we call this collapse the Great Depression. The historical evidence gathered from many sources shows the economies of these countries only began to recover once they left the gold standard and severed the values of commodities from their nominal (fiat) prices.”
Jehu, “Four Questions for LK on Money,” The Real Movement, February 20, 2016.

This is a blatant misunderstanding and perversion of Marx’s theory.

Marx did not predict the severing of the “relation between values and prices” after his time because, as we have seen, in volume 3 of Capital prices in 19th century capitalism already diverge from true labour values because prices of production had become the anchors for the price system.

In volume 1 of Capital where Marx does assume that commodities tend to exchange at true labour values, Marx makes no prediction of the severing of the “relation between values and prices,” and his theory of why capitalism will collapse there is not a theory of the severing of the “relation between values and prices.”

(2) Did this collapse occur in the 1930s just as Marx predicted it would?
No, Marx did not predict that capitalism after his time would collapse because of a severing of the “relation between values and prices.” See my answer in (1). Nor did Marx predict that the collapse would happen in the 1930s. While Marx did predict a collapse, he did so for other reasons, and did not put a precise time frame on the prediction. But Engels seems to have thought such a collapse was already well under way in the 1880s, and Engels argued that even in 1886 England was mired in a “permanent and chronic depression” which would not end until the proletarian revolution arrived (Marx 1906: 31).

(3) To save capitalism was it not necessary to sever gold from fiat?
To make capitalism much more efficient and its monetary system better designed, it was necessary in the 1930s to sever the monetary system from the gold standard, yes. Marx never predicted this. Marx was a metallist.

Marx’s theory is that paper money and credit money can never become detached from formal convertibility into gold (see here, here, here), since money ultimately must be some kind of produced commodity with a labour value.

(4) What was the implication of the collapse of the gold standard for Marx’s labor theory of value? Does it validate Marx’s theory of money or disprove it?
The collapse of commodity money means commodities cannot have prices as imagined in Marx’s labour theory of value in volume 1 of Capital, and refutes his theory of money, since Marx was a metallist.

Furthermore, Marx’s very definition of money was theoretically unsound.

The most sensible and empirically-supported definition of money relevant to the real world is that money is a social thing that has three functions, as follows:

(1) a medium of exchange;

(2) a unit of account, and

(3) store of purchasing power.

Fiat money performs these functions perfectly well. The very idea that money must ultimately of necessity be a produced commodity was a delusion and error of economic theory. Marx made that error, just like the Rothbardians or Austrian economists.

BIBLIOGRAPHY
Engels, F. 1991 [1895]. “Supplement and Addendum to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London. 1027–1047.

Howard, Michael Charles and John Edward King. 1989. A History of Marxian Economics. Volume I, 1883–1929. Princeton University Press, Princeton.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx rejected Fiat Money

This can be clearly seen from Marx’s statement in Chapter 3 of volume 1 of Capital:

“The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c, are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount of gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.

Paper-money is a token representing gold or money. The relation between it and the values of commodities is this, that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper-money represents gold, which like all other commodities has value, is it a symbol of value.” (Marx 1906: 143–144).

So what Marx is saying here is as follows:

(1) paper money represents gold to the same amount as its face value;

(2) the paper money has to be backed by the same amount of gold, and if the state pumped out vast amounts of paper money in excess of the gold reserves, the standard of value would collapse (or as Marx says, “There would no longer be any standard”);

(3) paper money represents gold and it is clearly implied here that it needs to be officially convertible into gold at a fixed rate.

This rules out fiat money, and it is obvious that Marx was a metallist.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

A Marxist agrees with me on the Labour Theory of Value and Fiat Money!

Well, sort of agrees in the post that can be read here:

Jehu, “Reply to LK: How Labor Theory of Value destroys Fiat ‘Money’,” The Real Movement, June 12, 2015.

My original post is here.

We must remember that for Marx money is a special commodity that itself must have a labour value so it can function as a universal medium of exchange and numéraire. That is the basis by which money can exchange for other produced commodities under the law of value in volume 1 of Capital. But fiat money utterly destroys this basis of Marx’s labour theory of value and his theory of exchange value in volume 1.

It would follow that the trendy modern Marxist idea of the MELT is entirely intellectually bankrupt too, under Marx’s dogmatic metallist theory of money.

In the post above, the Marxist author agrees that modern fiat money has destroyed the ability of money to properly reflect Marx’s labour values. How, then, could Marx’s theory still be right? The answer: modern currency is not really money at all! In addition, prices and labour values diverge as in volume 3, but now fiat money has destroyed even any relation between values and prices of production even as postulated in volume 3 of Capital, since this is (apparently) the trajectory of capitalism as supposedly prophesied by Marx.

What is the worth of this argument? It is refreshingly honest at the very least. But there is a strange fallacy of equivocation in the argument. The words “money” and “currency” are given different meanings: money means a produced commodity with the labour value used as a unit of account and “currency” merely a token symbol for the money commodity.

But actually the basic concept of money does not at all require either the metallist or Marxist mythology that it must be a produced commodity.

The basic definition of money is something which fulfils these three functions:

(1) a medium of exchange;

(2) a unit of account, and

(3) store of purchasing power.

The very idea that money must of necessity be a produced commodity was a delusion and error of economic theory. If fiat money is impossible, then our modern economies would have collapsed decades ago when money was severed from gold in the 1930s for domestic economic transactions, and certainly since the end of Bretton Woods (a system in which gold only had a role in the international payments system anyway).

Marx was fundamentally wrong about money and modern fiat money certainly explodes the law of value in volume 1 of Capital.

Fiat Money Destroys the Labour Theory of Value

Simple reflection on how Marx understood the nature of money as embedded in his labour theory of value in Part 1 of volume 1 of Capital leads to this conclusion.

Marx’s whole explanation of the emergence of money in Chapter 2 of Capital assumes that money must be a commodity. For Marx, as commodity exchange becomes developed and people produce things specifically for exchange, socially necessary labour time comes to determine exchange values (Marx 1990: 183–184), and the real value of commodity money arises not in the process of exchange but in the human labour expended in producing it (Marx 1990: 184–185).

In Chapter 3 of Capital Marx argues that money can only be a commodity that is the product of labour with an abstract socially necessary labour value so that it can be equated with labour values of other commodities in exchange:

“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.

It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).

“But only in so far as it is itself a product of labour, and, therefore, potentially variable in value, can gold serve as a measure of value.” (Marx 1906: 110).

So only if money is a special commodity that itself has a labour value can it function as a universal medium of exchange and numéraire. You couldn’t have a clearer expression of Marx’s view: money must by necessity be a produced commodity with a labour value in order to even function as money, because, in Marx’s view, all commodity exchange is founded on the fact that commodities (including money) are made commensurable by having quantitative labour values.

This is why Marx thinks that commodity money like gold or silver, when it is initially brought to market, is exchanged with other commodities with an equal socially necessary labour time value as a barter transaction:

“Money, like every other commodity, cannot express the magnitude of its value except relatively in other commodities. This value is determined by the labour-time required for its production, and is expressed by the quantity of any other commodity that costs the same amount of labour-time. Such quantitative determination of its relative value takes place at the source of its production by means of barter. When it steps into circulation as money, its value is already given. In the last decades of the 17th century it had already been shown that money is a commodity, but this step marks only the infancy of the analysis. The difficulty lies, not in comprehending that money is a commodity, but in discovering how, why and by what means a commodity becomes money.” (Marx 1906: 104).

“… gold and silver, just as they come out of the bowels of the earth, are forthwith the direct incarnation of all human labour. Hence the magic of money.” (Marx 1906: 105).

“In order that it may play the part of money, gold must of course enter the market at some point or other. This point is to be found at the source of production of the metal, at which place gold is bartered, as the immediate product of labour, for some other product of equal value. From that moment it always represents the realised price of some commodity.” (Marx 1906: 122).

But in the modern world virtually all commodities exchange for fiat money, which is very clearly not a reproducible commodity with a labour value in Marx’s sense. You cannot exchange a commodity for something with no labour value (that is, fiat money) and maintain Marx’s orthodox labour theory of value, for commodities exchange against a thing with no labour value in the conventional sense.

Fiat money is not produced by capitalists by hiring labour and paying wages in return for some quantity of abstract socially necessary labour time.

Is it possible to argue that central banks hire workers to produce fiat money with an abstract socially necessary labour time that explains fiat money’s exchange value? This will not save Marx: it is simply not possible to save the labour theory of value this way.

Fiat money – the high-powered money of modern economies – can be created at will from nothing by central bank employees and theoretically in whatever quantities are needed. Such fiat money can be created at will simply by typing key strokes into a computer, and the amount of labour needed to create $1 of fiat money is hardly different from that needed to create $1 million or $100 billion (namely, a few extra key strokes). Yet obviously one dollar of high-powered money and $1 million buy commodities with vastly different quantities of abstract socially necessary labour time in Marx’s sense of this concept. You cannot explain the exchange value of fiat money by appealing to the abstract socially necessary labour time needed to create it.

The labour theory of value as an explanation of modern prices cannot even get off the ground unless money is a produced commodity with a labour value, but, quite clearly, we live in a monetary economy where virtually all exchanges occur by exchanging fiat money for commodities, and fiat money has no labour value in Marx’s sense. In our world of fiat money, Marx’s labour theory of value – as presented in volume 1 of Capital – is intellectually bankrupt.

Could it be salvaged? It might be salvaged, but only with radical revisions, such as giving up the view that money needs to be a commodity. Marx might, for example, argue that money need not be a commodity at all but could still be used as a unit of account to measure and price socially necessary labour time in the way I have sketched here.

But even then that would not address the following problems:

(1) the problem of reducing all heterogeneous human labour to a homogeneous abstract socially necessary labour time unit;

(2) the question of why free human wage labour should have a special power that animals, slaves or machines do not have;

(3) the empirical reality that prices are not set by means of abstract socially necessary labour time, and

(4) the problem that surplus labour value (if that concept could even be adequately defended) would not really explain money profits, since money profits can exist in a slave-based economy and very probably even in an economy where machines did most of the work.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.

Wieser Advocated Fiat Money

That is, Friedrich von Wieser – the early Austrian economist who succeeded Menger at the University of Vienna from 1903 and who was the teacher of Friedrich August von Hayek – according to Jörg Guido Hülsmann:

“It is not surprising that Böhm-Bawerk and Mises came to radically different policy conclusions from Wieser and Schumpeter [sc. about the role of money]. Whereas Mises held that the stock of money was ultimately irrelevant, Wieser stressed that money’s function as a measuring rod must not be interfered with. Its value should be as stable as possible, and all destabilizing influences should be eliminated. Wieser suggested that one could optimize the national currency by abolishing commodity money and putting a pure paper money in its place. In fact, paper would be more stable because its value is not subject to the influence of the non-monetary demand for the monetary commodity.” (Hülsmann 2007: 235–236).

How times have changed.

But this confirms that there was a forgotten wing of the early Austrian school, whose views were different from modern Austrians, and Wieser was an important member of that wing.

BIBLIOGRAPHY
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.