Part 2: How Larry Summers proved Marx was right about everything — (And why this is not necessarily good news)

by Jehu

3. So here is my question

Why would Summers go to all that effort just to prove Marx had been correct all along regarding how the capitalist mode of production works. Why did Larry Summers set out to prove that the herald of the communist specter, the co-founder of Scientific Socialism and the arch-nemesis of the bourgeoisie was absolutely correct in his description of the difference between the way commodity money operates and the way valueless state issued pieces of paper function. Was it because of some intellectual curiosity about an obscure empirical observation that, even by Summers’ own admission, was no longer even relevant? Was  it a platonic pursuit of truth?

Personally, I don’t know any communist who thinks the words “Larry Summers” should appear in the same sentence with the word, “truth”; and I am not buying that explanation either. The more likely answer would be that a proper understanding of how the mode of production works is necessary both if you want to accelerate capitalism’s development and if you want to devise effective policies to prevent it from collapsing.

A good example of an attempt to accelerate the development of the mode of production can be found in the Communist Manifesto, where Marx identifies ten measures a proletarian government would undertake, including public education, income taxes, nationalization of land and banks, etc. These measures were, according to Marx, designed,

“to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible.”

I want to direct your attention to the final part of that statement: the measures were designed “to increase the total productive forces as rapidly as possible.” This statement has been implicated in the present discussion on “Accelerationism”, because, it has been alleged, it is still possible to accelerate capitalist development today. That discussion aside, however, it is clear Marx thought certain measures could increase the development of the productive forces “as rapidly as possible”. I would suggest that it follows from this there are measures that could be undertaken to retard, within certain definite limits, the impact the development of the productive forces has on social relations, i.e., to maintain wage slavery in place long after it is productive even on the basis of capital’s own assumptions.

Assuming, for the sake of this argument that such a thing is even possible, how might we identify those measures? Obviously, identifying measures that might be taken to retard the impact of the development of the Image: Sand erodes beneath a houseproductive forces would be facilitated by an accurate understanding of the way the mode of production actually operates — an accurate understanding that could only be provided by labor theory. The fact that Larry Summers seems to have an accurate grasp of how money operates in the mode of production facilitates his effort to frustrate and retard its laws, just like a proper grasp of engineering can retard the inevitable collapse of a house standing on unstable ground. A good grasp of engineering cannot prevent the eventual collapse of the house entirely, but the event can be forestalled for some time.

In the long run the forces leading to the demise of capitalism must assert themselves, however, as Keynes observed, “But this long run is a misleading guide to current affairs. In the long run we are all dead.” There may be measures, however, which can be taken in the short run to prevent the collapse of capitalism. These measures would be best identified if one has an accurate understanding of the laws of the mode of production as provided by Marx.

Key to understanding Summers aim is to understand there are two contradictory laws undergirding the capitalist mode of production: the Law of Value and the Law of the Average Rate of Profit. These two laws do not simply exist side by side, they are irreconcilable. Adam Smith, Ricardo, and a host of economists tried to reconcile them to no avail. The first law applies to all forms of commodity production including capital, while the second law is peculiar to the capitalist mode alone. The first law states the price of any commodity is the socially necessary labor time required to produce it. The second law states a capitalistically produced commodity will have a price equal to its socially necessary labor time plus an average rate of profit.

No matter how you try to square these two laws they can never be equal: the price, v, will never equal the price, v+s. The contradiction between the two laws is resolved in practice by a constant pressure within the mode of production for expansion into new markets. This contradiction lends capital its dynamic, revolutionary character and compels it to expand and transform the whole of the world market. Outward expansion, however, does not fix the problem; it simply provides a means for an unfixable problem to continue indefinitely. Eventually, the mode of production runs into its limits and it must come crashing down. The manner in which this limit is expressed is that the s in v+s falls to zero. Since profit is the motive of production in a capitalist economy, without profit the mode of production grinds to a halt.

This insight is not original to Marx — Adam Smith and Ricardo both saw it as well. Perhaps not as clearly as Marx, but they saw it. Marx wrily commented on the reaction Ricardo had to this contradiction:

“What worries Ricardo is the fact that the rate of profit, the stimulating principle of capitalist production, the fundamental premise and driving force of accumulation, should be endangered by the development of production itself. And here the quantitative proportion means everything. There is, indeed, something deeper behind it, of which he is only vaguely aware. It comes to the surface here in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself — that it has its barrier, that it is relative, that it is not an absolute, but only a historical mode of production corresponding to a definite limited epoch in the development of the material requirements of production.”

So there is no real controversy over this point within economics, despite what economists might suggest. Capitalism has a limited lifespan and the existence of this limited lifespan has been known for two centuries. Which is to say, it has been known for two centuries that the price of a capitalistically produced commodity would fall from v+s to v; the “s” in v+s would go to zero, and the production of surplus value would end entirely. The folks in Washington are engaged in a desperate but hopeless salvage effort right now to prevent it from happening. Even now as I write this, Bernanke and his band of simpleton economists are desperately flailing about, searching for ways to prevent the collapse of capitalism, which effort has now descended to the level of such absolute insanity they are literally counterfeiting a trillion dollars a year to keep capitalism afloat.

This is why, after Marx, the marginalist economics dogma arises that value, and the law of value, does not exist. Rather than accepting that the s in v+s must go to zero, they argue v in v+s does not exist. In other words, wages, potentially, can be reduced indefinitely to subsidize profits by robbing them of their purchasing power through inflation. Which is to say, by constantly reducing the value represented by a given money wage, the profits of the capitalist class could be subsidized by state monetary and fiscal policies. Keynes put it this way:

“…it would be impracticable [for the working class] 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.”

The attack against the working class first appeared in the form of a theoretical criticism of Marx that he did not fix the contradiction identified by Adam Smith and Ricardo. The Austrian Bohm-Bawerk argued Marx did not fix the contradiction between v and v+s, but left it unresolved:

“I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker. And it seems to have been very generally accepted.”

What a fucking doofus. Bohm-Bawerk was hoping to open volume three of Capital and find that Marx had fixed the little problem of the falling rate of profit for the capitalists, but Marx explained the contradiction was real. There was only the “bare contradiction itself” and it was real. Nothing could fix it and there was no way to avoid its implications.

The rejection of value in Marginalist economics, however, is not the same as the rejection of Marx’s findings, as Summers proved with his 1988 paper. But Marginalist economics has an altogether different aim than Marx had: managing capitalism, i.e., preventing the end of wage slavery, preventing communism. As a practical matter Marginalist economists have to accept that the law value exists, however reluctantly and covertly, which they do as in Summers paper. At the same time they have to prevent or suppress its expression by a succession of measures designed to forcibly reduce wages, because it endangers the actual existence of capitalism.

This constant salvaging operation is facilitated by the actual development of the mode of production itself. As capitalism develops, market relations are progressively replaced by ever larger capitals operating according to a despotic plan. These capitals effectively abolish the law of value and replace it with centralized plans of production. On the other hand, these ever larger capitals make the problem of management more difficult and the crisis more extensive and intensive. As Bohm-Bawerk’s detailed criticism of Marx shows, bourgeois economists can read just like the rest of us and their reading list includes everything Marx and Engels wrote. So they know Marx and Engels predicted that the crisis would eventually force the state to assume control of production, since Marx and Engels made no secret of this prediction. And they knew the impact this prediction, once realized, would have on social relations in general:

It would set the stage for a final confrontation between the two classes over which would control the state power that had itself assumed control over the forces of production. That confrontation took place, leaving the total capital of society in the hands of the bourgeois state. As fantastic as this might seem, the state, I argue, is likely employing the insights of Karl Marx and Frederick Engels as well as the insights of labor theory generally to keep wage labor going.

4. Some closing thoughts on how Sam Williams goes wrong on Summers’ 1988 paper

A different assessment of the Summer’s paper can be found on the blog, Critique of Crisis Theory. Back in 2010, at my request (under the pseudonym “Charley”), the labor theorist, Sam Williams had a look at Summer’s paper. After explaining in detail why the so-called “Gibson’s paradox” is not actually a paradox but an empirical refutation of neoclassical theory, Williams turned his attention to Summers’ paper. His assessment, unlike mine, was that Summers paper failed “to plug a major hole in Marginalist economic theory”. I think this argument falls flat on several important points.

First, the difference between Williams and myself on this point is not whether Summers failed to explain the paradox in terms of Marginalist theory, but whether that was Summers’ intention in the first place. Summers’ intention, I believe, was to show the relation between prices, interest rates and profit no longer held under a fiat currency regime as it did under a commodity money regime. Another way of stating this conclusion is that prices, interest rates and profit do basically operate the way Marginalist theory says it does once a commodity money is no longer the standard of prices. This is what I believe Summers sought to demonstrate.

This conclusion is extremely important — to the extent of overshadowing all other conclusions — precisely because the fascist state controls the dollar whereas it did not and could not control the circulation of commodity money. Which means, unlike with a commodity money regime, the state has exclusive control over what serves as medium for the circulation of commodities. And this exclusive control is in place not just within the United States, but within the world market as a whole. Summers’ 1988 paper is, in other words, an attempt to bury Marx once and for all by showing conclusively that his theoretical conclusions, supported by centuries of empirical evidence, no longer held sway over the production of surplus value.

A critical piece of the evidence for this conclusion is to be found in Summers’ paper, where he states without fanfare:

“Omitting the monetary demand for gold, we see that the theory continues to hold in the same fashion.”

What does this cryptic statement mean exactly? Under a commodity money standard of price, the state has no control over the quantity of money in circulation. The circulation of money is a reflex of the prices of commodities that are being exchanged among members of society. When the circulation of commodities falls, so does the quantity of money in circulation; when it rises the quantity of money also rises. This tidal pull of commodity circulation on the circulation of commodity money into and out of hoards, however, is broken once commodity money is replaced by valueless fiat as Marx explained in volume 1 of Capital. Unlike the case with commodity money, if the circulation of commodities contracts and the quantity of fiat in circulation is unchanged, the mass of circulating currency will simply represent less value. Each individual unit of the fiat, therefore, will in turn represent less value. A century before Summers mastered his ABCs, Marx explained the effect fluctuations in the circulation of commodities has on debased fiat prices in circulation this way:

“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.”

Summers, it appears, was not trying to explain the relation between commodity money and prices, since that had already been explained by Marx and demonstrated conclusively by Gibson. Summers’ entire point was that this relation no longer held once Nixon stopped redeeming dollars for gold and ended the gold standard. In other words, once the gold standard was ended, the fascist state was in complete control of the medium of circulation of commodities in the world market.

Second, the question Summers’ paper raises, then, is what led to the collapse of the gold standard, which gave the US this “inexplicable privilege”. How did the US end up in possession of the world reserve currency? Summers never explains this, but he does point us in the right direction. Since he found the movement of commodity money into and out of hoards was determined by the rate of profit, this suggests the rate of profit must have fallen to such a level money would no longer circulate within the world market as capital. With gold and other commodity monies increasingly locked up in the hoards of central banks and private holders, something had to replace it as medium of circulation. Washington determined the dollar, without commodity backing, could serve this function as it had already done domestically for 40 years.

But there is an important caveat here: The law of value was still expressed. Its expression, however, was not to be found in the quantity of currency in circulation, but in the value represented by this currency. Monetarist theory argued gold had value only because it served as medium of circulation. Gold, they argued, had no value of its own. So that fucking simpleton Milton Friedman famously predicted once the US moved off the gold standard, gold would become a worthless metal. Friedman argued in 1967 that the gold standard amounted to a price subsidy for gold that would disappear once the dollar was no longer pegged to it:

“Gold is now a commodity whose price is supported by governmental action — like butter.”

But as it turns out, gold did have value of its own, and that value was suddenly expressed in an explosive devaluation of the dollar against gold. Within a decade after the end of Bretton Woods, the value represented by a dollar had fallen by 96%, from 1/35th of an ounce of gold to 1/872 of an ounce of gold. It wasn’t the dollar that was propping up gold and giving it its value, Washington’s manipulation of gold had been artificially propping up the purchasing power of the dollar.

To put it simply: In his 1988 paper, Larry Summers explained that the empirical data itself showed Friedman’s monetarist theory about the absence of intrinsic value of commodity money was unquestionably wrong and Marx’s labor theory was unquestionably right.

Third, Williams makes this very interesting observation in his blog on Summers’ work, which significance he does not appear to grasp:

“Like Marginalist in general, Summers confuses the rate of interest with the rate of profit. Remember, traditional Marginalist claim that when the economy is in equilibrium there is no profit, only interest.”

I find this observation by Williams interesting because neoclassical theory’s argument on this point can be restated this way: Once the rate of profit has fallen to zero, only fictitious profits — profits created by loaning out money-capital for purposes that do not produce surplus value — are possible. Essentially, neoclassical theory is stating once the rate of profit falls to zero, surplus value can only be realized in the form of interest on loaned money capital.

Fourth, what I particularly dislike in Williams argument is this statement:

“Summers reasons that since the demand for gold will drop when real long-term interest rates rise, prices defined in terms of gold will also rise, or as Summers puts it, the price of gold will fall relative to the prices of (most) other commodities.”

I think he could have better formulated this in terms of “the value represented in a fiat currency”. The ‘improved’ formulation would be this:

“Summers reasons that since the demand for gold will drop when real long-term interest rates rise, the value represented by a fiat dollar will also rise, or as Summers puts it, the price of gold will fall.”

When the so-called “price of gold” falls, a larger quantity of gold is represented in some definite quantity of dollars. This is what happened between 1981 and 2001, when the value represented by a dollar rose by about 370% although there was no change in the value of gold.

Fifth, William notes under the gold standard currencies were pegged to a definite quantity of gold, so prices expressed a definite quantity of gold. He then explains, in Summers’ argument “a rise in the (real) long-term rate of interest will mean a rise in the general price level.” I think this too is badly formulated, because Williams adopts the phrase, “general price level”. There is, so far as I can tell, no term, “general price level” in labor theory, but a “standard of prices”, measured in some definite unit of commodity money. What Williams calls “a rise in the general price level”, is actually a rise in quantity of value represented symbolically of a dollar — i.e., the so-called “purchasing power” of a dollar has risen. The opposite occurs when interest rates fall: the value represented by a dollar falls, and prices rise.

Summers conclusion can be stated in a way that is readily apparent to everyone and the clearly identifiable empirical record: When profits fall, the “price” of gold appears to rise, when profit rise, the “price” of gold appears to fall. Under the gold standard, however, the dollar is pegged to some definite quantity of gold, so no such movement of the “price” of gold occurs. In that case, gold flows out of hoards when profits increase, and back into hoards when profits decrease. There is no “change in the general price level” since there is no such thing as a “general price level”.

Sixth, Williams states:

“The quantity theory of money, the traditional theory supported by mainstream marginalism, claims that the general price level is simply determined by the ratio of money and the quantity of commodities. No distinction is made between real—gold—money, token money, and credit money.”

This actually is not true. As I showed in the first part of this series, neoclassical theory only consider money-capital to be money. Gold in a hoard is not considered money so far as neoclassical theory is concerned, but a “non-money” form. For neoclassical theory only money in circulation is money and this includes both fiat and credit money. Which is to say, in neoclassical theory only token of money are money, while money is not money. Money in its full sense — money at rest in a hoard — is still money in labor theory, but not neoclassical theory.

This is an important clue and should not be ignored because, as Williams argues, “For the Marginalist, money is simply whatever is used as >>currency<<.” (My emphasis) This is a very important distinction! It follows from this that,

“If the quantity of currency grows faster than the quantity of commodities, prices will rise. If the quantity of currency grows slower than the quantity of commodities, the general price level will decline.”

But, as Summers demonstrates, this is only true for a fiat currency regime — it does not hold for commodity money.

Seventh, Williams states:

“Summers tried to argue that Gibson’s paradox remained true even under the paper money dollar standard that replaced what was left of the international gold standard after 1971 if prices are measured in terms of gold rather than in terms of paper money.”

Although I agree with Summers, Williams does not:

“It is true that in the post-1971 world a fall in long-term interest rates … has often—but not always—been followed by a rise in the dollar gold price. This, in turn, is accompanied by a similar rise in the dollar price of primary commodities—such as oil, for example”

I think Williams is conflating several unrelated things. He seems to be conflating the “price” of gold with the prices of other so-called primary commodities. The so-called price of gold is not a price at all but a standard of prices. And if we just follow this price standard, we find the value represented in a dollar falls throughout the 1970s and rose throughout the 1980s and 1990s. This empirical data is consistent with a depression in the 1970s followed by a period of moderate expansion during the 1980s and 1990s.

Williams wants to treat gold as just another primary industrial commodity, but this is not at all what gold is — it is the money commodity. It is possible other commodities, such as oil in the 1970s, saw an increase in price along with gold, but the two are not directly related. With dollars detached from any definite relation with gold, the relation between the values of commodities and their prices has broken down. Prices no longer express the values of the commodities to which they are attached. This is basic labor theory: the value of a commodity can only be expressed as exchange value! If the currency in which prices are denominated is not tied to a commodity money, there is no standard for prices. Any price is therefore possible and all prices express the value of the commodity as zero.

The argument Williams seems to be employing here is that some quantity of currency acts as a sort of transparent pass-thru for relative prices of commodities. In this idea the relative values of commodities are expressed in proportional fiat currency prices. (For instance, if commodity X has twice the value of commodity Y, the currency price of X will be twice that of Y.) However, this is not in any sense true of fiat prices. Since no commodity’s value is expressed in currency prices all relative prices are irrational as well. To say there is no standard of price means there is no standard either absolutely or relatively.

In such a case we can only deal with the sum of all prices of all commodities taken together, not any particular commodity prices. We have to deal with the product of social labor as neoclassical economics does — according to the labor theorist John Weeks — i.e., as one commodity composed of all the millions of separate commodities produced in the economy. Which is to say, we are dealing with the product of one single all-encompassing expenditure of abstract homogenous labor, the employment of a single social labor power. As Weeks explains, in neoclassical theory:

“The standard approach in the neoclassical quantity-based monetary framework is to assume that the hypothetical economy has only one product”.

This one composite commodity has a single aggregate commodity price. The price of this composite commodity, denominated in a valueless fiat, represents some definite quantity of commodity money (gold, silver). By increasing the quantity of this valueless fiat, the fascist state can reduce the value represented by any given quantity of dollars — i.e., the wages of the entire working class. Since there is only one commodity, labor power, it follows there is only one “price” for this commodity. All the actual prices of individual commodities are entirely fictitious and have no meaning at all for analysis.

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