V: How Peter Jones demolished Andrew Kliman’s book in 22 brief pages

by Jehu

Does the collapse of the gold standard and the switch to commodity money have any implications for labor theory? The Brazil labor theorist, Paulani argues it does not:

“when, historically, the umbilical cord that linked the money form to the commodity form was cut (in 1971), the dollar value of goods shifted in relation to other currencies, but they kept between themselves the relations which their labour values (prices of production) produced earlier, backed in gold…”

According to Paulani, then, the prices of commodities may have no longer been convertible into gold after 1971, but they did not shift relative to each other. If, before the collapse of the gold standard, four candy bars exchanged for one pair of teatssocks, this much remained unchanged afterwards. Whether this is true is not the point, since, stated in this simplistic form, it can easily be disproven; however, many such changes can be written off to supply and demand “shocks” of one sort or another. Since any such shock is accidental, Paulani’s argument can be reduced this: whatever change did occur, they were accidental and did not result from the collapse of the gold standard. In fact, since relative prices fluctuated constantly even before the collapse of the gold standard, this is a reasonable explanation.

However this argument by Paulani in her 2014 paper is directly challenged by Peter Jones in his 2013 paper, The Falling Rate of Profit Explains Falling US Growth”. Jones argues the collapse of the gold standard directly explains the difficulty labor theorists are having substantiating Marx’s falling rate of profit thesis.

His argument in the paper is simple, even if he does not always seem to grasp it: When the gold standard collapsed, the fascist state gained the power to affect the rate of profit in dollars terms simply by running deficits — by substituting deficits for taxation, the state appears to create value out of nothing.

The sort of persistent state deficit spending to which Jones refers does not really begin to appear until after the collapse of the gold standard in 1971; and it only appears as a power of one country: The United States.

This is because the collapse of Bretton Woods was not just the collapse of the gold standard, nor was it simply a domestic event in the US; the collapse of Bretton Woods effectively left the US in control of the world reserve currency. As a result of the collapse of Bretton Woods, the most universally recognized means of exchange within the world market is essentially the private property of the fascist state in Washington.

Thus, the collapse of the gold standard has far-reaching implications that labor theorists have yet to examine critically. These implications are of such magnitude as to make decades of labor theorists’ analyses of Marx’s falling rate of profit thesis as worthless as the paper on which US dollars are printed.

Stated baldly, if Peter Jones is correct, the fascist state can artificially increase the nominal rate of profit through its control over inconvertible fiat currency!

Jones’s fascinating thought experiment

Here is an illustration, in the form of a thought experiment, of a very big, but almost unnoticed, defect in Andrew Kliman’s effort to calculate the rate of profit, as well as the efforts of many other labor theorists:

Suppose there was a state that had the virtually unlimited capacity to accumulate debt. How would this unlimited capacity to accumulate debt during a crisis affect the calculation of the rate of profit? Jones thinks the virtually unlimited capacity to borrow capital during a crisis creates the false perception that an increase in government borrowing can create new value out of nothing. And this effect may be making it more difficult to calculate the nominal rate of profit reliably.

“suppose we … assume a $C increase in government spending funded by an increase in borrowing, with no tax cut. In this case, corporate profits before- and after-tax will both be unaffected by the increase in government spending. Yet government expenditure of surplus value has increased, without any increase in the total surplus value produced.”

The hypothetical example posed by Jones is critical to the debate over the rate of profit, because, after the depression of the 1970s, we find US deficit spending exploding beginning with the Reagan administration and continuing almost uninterrupted until today. At the same time the empirical data necessary to calculate the rate of profit becomes increasingly ambiguous. Is the deficit spending of the fascist state having any effect on the rate of profit Kliman and other labor theorists tried to calculate? And, if the answer to that question is yes, what exactly is that impact?

Peter Jones thinks this is a distinct possibility:

“I am not sure to what extent this scenario describes what happened in the US since the 1980s, or how we might test its realism. We know that deficits have been rising, the dividends share of after-tax corporate profit has been rising, and that after-tax measures of the rate of profit impart a more upward (or less downward) trajectory to the rate of profit than before-tax measures. So it is at least a plausible explanation.

And Jones thinks the problem may be located in the calculation of the total surplus value produced:

“This problem concerns the numerator of the rate of profit. Implicitly, existing measures assume that debt-financed government spending is not a drain on the surplus value available to the corporate sector (among other problems) because they do not account for the way in which borrowing and lending can affect incomes without affecting the production and expenditure of surplus value. In so doing, they incorporate what I call ‘fictitious profits’ (and fictitious losses) in the numerator of the rate of profit.”

In another example, Jones assumes the fascists in Washington decide to reduce corporate taxes. However, instead of raising taxes on the working class directly to finance tax cuts for the rich, they simply run a deficit. The tax cut reduces fascist state revenue by x dollars, and Washington issues treasury bonds for this amount that are purchased by the capitalists using their tax cuts as means to purchase the bonds. Thus, the debt increase appears to be self-funded: the state cuts taxes on the capitalists, who take their tax cut and purchase the treasury bonds necessary to finance the tax cut. Taxes on the capital are replaced by credit extended by the capitalists to the fascist state.

To add insult to injury, the state then begin to pay the capitalists interest on the former tax revenue it handed back to them.

“Money” without exchange value and profits without surplus value

These examples create a paradox for conventional labor theory analysis: there has been no increase in the production of surplus value, yet both the revenue of the fascist state and even the profits of the capitalists can rise as if by magic. This makes it appear as though the fascist state can be a source of additional surplus value.

Jones argues that the increase in corporate profit by means of state deficit spending is not addressed by conventional labor theorists’ approach to the rate of profit:

“The important point here is that this could be a real effect of a shift towards deficit financing. But it is not one that Marx’s law is designed to explain. In the example above, there is no change in either the socially necessary labour time performed by productive workers, productive workers’ consumption (or their wages), or the expenditure of surplus value by any sector. So there is no change in the production or distribution of value. Nor is there any change in the rate of growth. But this measure of the rate of profit nevertheless increases, along with dividends.”

Although Carchedi never realized he was discussing it, he raised the same point as Jones in his paper, “Could Keynes end the slump? Introducing the Marxist multiplier”:

“Some Keynesian authors propose to stimulate demand neither through redistribution nor through investments but by increasing the quantity of money. The assumption is that the ultimate cause of crises is lack of demand so that a higher quantity of money in circulation would stimulate demand. The argument against this view is not so much whether these policies are inflationary (as Austrian economists hold) or not.

This is one of the reasons why the state may decide to borrow the capital needed for public works rather than expropriating it from capital. But eventually debts must be repaid. The Keynesian argument is that debts can be repaid when, due to these policies, the economy restarts and the appropriation of the surplus value needed for debt repayment does not threaten the recovery. But this is wishful thinking.”

In his own paper, Carchedi assumes Jones’s deficit spending gap will eventually have to be closed when the state raises taxes to pay for it deficit spending. At that point, the false prosperity created by deficit spending will come to an end. However, Carchedi’s superficially reasonable assumption may just be the same sort of wishful thinking that Carchedi accuses the Keynesians of engaging in.


Carchedi is a competent enough labor theorist to know the fascist state cannot create surplus value out of nothing. However, he never figures out what the state is actually doing. And this is mostly because Carchedi — like most labor theorists — has no idea what the fascist state does at all and never makes an effort to figure it out.

Absolute overproduction of capital

So, what is the source of the additional profits? Since the state produces neither value nor surplus value, it only consumes value produced elsewhere in the economy by productive capitals. It can access this surplus value either by taxing it or borrowing it. If it borrows the surplus value from the capitalists, says Carchedi, it must eventually raise taxes to repay it. But here Carchedi runs into an unexpected result of Marx’s falling rate of profits thesis itself.

Carchedi assumes the capital borrowed by the fascist state can be employed for production of surplus value when it is repaid by the state. But is this true? One of the results of Marx’s thesis on the falling rate of profit is that the fall itself generates a mass of excess capital that cannot be employed productively. If the surplus value cannot be employed productively, the capitalist have every reason to roll over their loans to the state: it is a very lucrative (and perhaps the only remaining) means for self-expansion of capital available. In other words, rolling over loans extended to the fascist state might be the only alternative to letting the excess capital sit around idle.

This might be the situation when capital encounters what Marx called ‘absolute overproduction of capital’. In condition of absolute overproduction of capital, according to Marx, no additional investment of capital can add to the mass of profits. Jones makes a critical mistake here, when he assumes persistent fascist state deficit spending is not explained by “Marx’s law”. In fact, it was explained by Marx in chapter 15 of volume 3 of Capital, but labor theorists have stubbornly refused to accept the explanation: absolute overproduction of capital:

“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

According to Marx, in conditions of absolute overproduction of capital, a portion of the existing capital of society would be forced to stand idle, along with a portion of the existing population of workers. No further investment of capital would occur, because this additional investment would yield no additional profit for the capitalist class.

However, as I will show next, almost all labor theorists — including Kliman –reject Marx’s argument  in volume 3 as a “hypothetical exercise”.