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.