There is likely no exit from Quantitative Easing

by Jehu

There is a lot of talk in policy circles and among speculators on Wall Street that the Federal Reserve will begin to ‘taper off’ its wholesale counterfeiting of fiat dollars before the end of the year. Whether or not this happens, I think any attempt to taper off counterfeiting dollars bernankespeech_2325210bwill have to be reversed in short order.

The reason why tapering will likely not happen is not to be explained by any lack of hyperinflationary risks associated with the insane counterfeiting of dollars Bernanke is engaged in — the risk of hyperinflation is actually quite high. But this risk of hyperinflation is dwarfed by the even greater risks associated with not insanely counterfeiting: outright deflation that threatens the very existence of the mode of production itself.

Christina and David Romer have declared that the argument from some policy quarters that Federal Reserve monetary policy doesn’t matter is “the most dangerous idea in Federal Reserve history”.

Let’s see why this might be true.

If Weeks is to be believed, the aim of fascist state policy is ridiculously simple: prices of the products of labor should always rise faster than wages. Once this is understood, the lineage of neoclassical theory is obvious: it begins with the assumption that surplus value is created during the act of exchange, not during production. This is the mistaken notion of bourgeois political economy Marx critiqued in chapter five of Capital, when he stated,

“Suppose then, that by some inexplicable privilege, the seller is enabled to sell his commodities above their value, what is worth 100 for 110, in which case the price is nominally raised 10%.”

Marx goes on to show why, on this assumption, all sellers would sell their goods above their values and all buyers would lose out. Hence, sellers, when they later became buyers, would lose what they had previously gained as sellers. The same logic holds if all buyers pay less than the value of commodities — what the buyer gained when buying, would be lost when selling. On this basis, Marx explained the profit could not be made in the act of exchange but had to have its source in production.

The problem is this, under barbarism, if neoclassical economics is correct, this sort of process is precisely what is taking place. And, this presents a challenge for labor theory analysis that labor theorists are not predisposed to recognize. For labor theory, profits begin in production, but in neoclassical theory profits begin in exchange. This would not be a problem, except the fascist state is managing the economy employing neoclassical theory, not labor theory. This suggests that at least to some extent, neoclassical theory is a valid theoretical expression of what is actually taking place. It may not be consistent with labor theory, but it appears to be consistent with reality.

Labor theory has two options here: it can say, “Neoclassical theory is wrong, that’s not the way reality works.” Or it can say “Marx was wrong, labor theory is invalid.” We run into the same problem that we ran into with money: Marx said it had to be a commodity, neoclassical theory says it can be anything. The fact that labor theory says money has to be a commodity, does not in any way change the fact that the dollar is valueless scrip; it simply suggests the dollar is not money, but a fiction. Likewise, the fact that neoclassical theory says profits arise from exchange, while labor theory argues profits arise from production suggests neoclassical profits are not profits as labor theory defines this category, but fictions. Which is to say, under barbarism, the profit rate is always zero. If prices, no matter their amount, are always zero; profits must always be zero as well.

If all profits are fictions, how do these apparent profits arise in exchange?

In chapter 5 of Capital, Marx breaks down exchange and shows how under capitalism this act acquires a double identity. The same capitalist buyer/seller has, in fact, two identities within the same act of circulation:

“As capitalist, I buy commodities from A and sell them again to B, but as a simple owner of commodities, I sell them to B and then purchase fresh ones from A. A and B see no difference between the two sets of transactions.”

The capitalist appears on the surface in the circulation of commodities as just another buyer or seller of commodities, although he is not. For ‘profit’ to arise from circulation requires that what is true for the capitalist — that he buys commodities below their value or sells commodities above their values — is true for him alone and no other commodity buyer or seller. As buyer, the capitalist must always pay less for some commodity than its value; or as seller, he must charge more for his commodity than its value. In either case, this unequal exchange must be possible for him alone and no other buyer of seller.

Either of these conditions sit outside of the scope of the law of value and presuppose this law no longer regulates production. The conditions under which the capitalist can buy for less than the values of commodities or sell for more than their values is absolutely incompatible with the law of value, and must, therefore, imply the law of value no longer holds. The state itself has undertaken the management of the production of commodities and regulates this production according to it own despotic plan.

The point in the development of the capitalist mode of production where this complete breakdown of the law of value occurs was labeled capitalist breakdown by the classical Marxists. Henryk Grossman examined this breakdown and concluded that once this point was reached a way had to be found to continuously reduce wages below their value. Capitalist breakdown occurred, just as Grossman predicted, within months of publication of his paper in 1929. Grossman observed that at the point of capitalist breakdown:

“There is a growing shortage of surplus value and, under the given  conditions, a continuous overaccumulation. the only alternative is to violate the conditions postulated. Wages have to be cut in order to push the rate of surplus value even higher. This cut in wages would not be a purely temporary phenomenon that vanishes once equilibrium is re-established; it will have to be continuous. After year 36 either wages have to be cut continually and periodically or a reserve army must come into being.”

In short, at the point of capitalist breakdown, at point Marx referred to as absolute overaccumulation of capital, no additional capital invested produces any surplus value, and actually causes its fall. At this point, profitability depends on the ability to buy labor power below its value.

It was seven years before John Maynard Keynes gave this idea an expression within bourgeois economic theory and proposed monetary inflation could be used as a means to continuously cut wages the way Grossman described. Beginning with Keynes, therefore, neoclassical theory could assume that ‘profit’ could be created through exchange rather than, as labor theory argued, through production. But these ‘profits’ are entirely fictitious, produced in the form of a completely fictitious ‘money’, over which the state has control. They are profits accrued wholly from paying for labor power at wages that are less than its value. The whole of fascist state economic policy, therefore, is to achieve a continuous real devaluation of wages to create fictitious profits.

Keynes explains how this works in Part II, Section 3 of his general theory:

“Though the struggle over money-wages between individuals and groups is often believed to determine the general level of real wages, it is, in fact, concerned with a different object. Since there is imperfect mobility of labour, and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals, who consent to a reduction of money-wages relatively to others, will suffer a relative reduction in real wages, which is a sufficient justification for them to resist it. On the other hand it would be impracticable to resist every reduction of real wages, due to a change in the purchasing-power of money which affects all workers alike; and in fact reductions of real wages arising in this way are not, as a rule, resisted unless they proceed to an extreme degree. Moreover, a resistance to reductions in money-wages applying to particular industries does not raise the same insuperable bar to an increase in aggregate employment which would result from a similar resistance to every reduction in real wages.

In other words, the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups, and not its average amount per unit of employment, which depends, as we shall see, on a different set of forces. The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system.

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.”

Eventually, Keynes argued, labor unions would be exhausted trying to fight a persistent inflation of prices and give up. This is the essence of Keynesian economics, of which our Marxists are so enamored. Fiat currency became the new enclosure,  raised to the second power, for the working class: wages could be used to restrict the working class’s access to means to life itself.

It follows from this that the only commodity in the neoclassical system is labor power, and the only price are the wages of this labor power. Neoclassical theory is solely concerned with managing the continuous forcible devaluation of wages through inflation. The profits that result from this are purely fictitious and, therefore, create massive problems under the barbarism mode of production. Essentially, these profits only exist so long as the devaluation of wages can be continuously enforced through fascist state economic policy.

This is why deflation is such an urgent policy problem in Washington. The irrational printing of $85 billion per month by the Federal Reserve suggests that the danger of deflation is greater than hyperinflation. Hyperinflation might cause the loss of confidence in the dollar, but deflation threatens the mode of production itself. If the mode of production collapses, the dollar itself will collapse with it — so no good is to be expected by trying to protect it.

This is the background to the paper produced by the Romers: The argument monetary policy doesn’t matter in this crisis is virtually the same as saying the devaluation of wages doesn’t matter. But, as we see above, under barbarism without the forcible and continuous devaluation of wages there will be no profits.

So there is no exit from quantitative easing short of the collapse of several other currencies in the world market. (I’m looking at you, euro-zone.)