It’s not very often that I agree with Keynesians about anything, but this post, Fiat Money Destroys the Labour Theory of Value, comes real close. The writer of the post, LK, who has a surprisingly good grasp of labor theory basics, argues that fiat money destroys labor theory of value and I completely agree with him/her on this point.
“Marx’s whole explanation of the emergence of money in Chapter 2 of Capital assumes that money must be a commodity. … 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.”
If Marx appears to be demonstrably wrong about anything in economics, this is likely the single most glaring example. However being wrong about money is not like being wrong about your prediction for GDP next year. Everything Marx argues in Capital is built on his arguments in the first three chapters, including his analysis of money. For Marx to be wrong about money has implications at least as profound as establishing beyond all doubt that value has nothing to do with labor. It is not as though Marxists could admit labor is not the source of value, but maintain Marx was still right “overall”. In that same sense, there is no way you can pretend Marx was wrong about money being a commodity, but right about most everything else. You can’t do it and LK isn’t going to let Marxist economists try to put that weak bullshit over on us.
Money plays an absolutely critical role in labor theory because it is the only means by which our own labor can become an alien power standing over against us. If money does not work the way Marx says it works, capital itself is impossible. This has to make Marxists uncomfortable because, as LK argues:
“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.”
LK gives what I think is incontrovertible evidence for this view: Fiat contains only a vanishingly small quantity of living human labor.
“[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.”
“In our world of fiat money, Marx’s labour theory of value – as presented in volume 1 of Capital – is intellectually bankrupt.”
Surprise! Marxists agree with LK about money
Now LK is not the first person to raise this objection, nor does he make a particularly unique and damning argument. Anitra Nelson undertook an examination of every reference Marx made to money precisely to find any possible evidence for an exception to Marx’s apparently absolute position on commodity money. Moreover, she was not the first to make this sort of examination, nor is she likely to be the last, but everyone who has seriously examined this aspect of Marx’s theory has concluded Marx himself held to a theory in which money is a commodity. Anitra Nelson has exhaustively shown that, in Marx’s writing on money over his entire career, once he arrived at the conclusion money must be a commodity, Marx never deviated from it. Nelson doesn’t say ‘maybe’ or ‘perhaps’; this is her definitive conclusion and one she arrived at although it contradicts her own view.
Even the supporters of the bizarre Monetary Equivalent of Labor Time theory of money (MELT), like Fred Moseley, never raise questions about the results of Nelson’s research or try to suggest Marx was leaning in another direction. Even though the MELT folks argue that Marx’s theory contains a way for the role of money to be played by fiat, they sheepishly admit this was not Marx’s view. Marx was wrong, they argue — although none of them would be so bold as to make this argument directly — because “Marx overlooked the implications of his theory” or “he was a product of his time” or some nonsense of this sort. Which essentially means that Marxist economists actually agree with LK that If Marx’s story on money is that it has to be a commodity, and if his theory only works the way he said it does if money is a commodity, Marx was wrong.
So why would the supporters of MELT continue to insist on the validity of labor theory, when they clearly don’t agree with Marx on a piece of that theory that, if it is not true, invalidates the theory?
First, to be clear, a theory is not worthless simply because it has been disproven. Even if Marx was wrong, his theory would be a success if we could demonstrate conclusively that it is wrong. Even if we knew Marx was wrong, we would now know more than we did before, which is cool. Before Darwin, there was Lamarck; before Einstein there was Newton. Lamarck and Newton were wrong, but the way they were wrong tells us something and made Darwin and Einstein possible and necessary. Almost no one I know ever says, “Fuck Newton, he was wrong.” His theories are even still taught, despite the fact they are wrong.
Second, there is an important reason why LK and Marxist economists, not Marx, are wrong: Just because fiat isn’t a commodity does not, by any means, prove fiat actually is money. This entire controversy hangs critically on the definition of money. According to Marx’s theory,
“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.”
For Marx, fiat is not and never was money. It is a token of money. This is critical, because Marx never argues in Capital that fiat currency had to be a commodity; he said money had to be a commodity. While LK and the MELT Marxists insist fiat currency is money; Marx insisted fiat was only a token of money, a placeholder (if you will) for money itself in circulation. While a token of money is not money, commodity money could itself enter circulation and function as a token of itself. Money could directly fill the function of currency in its own bodily form, but a mere paper token, like fiat currency, could never be money.
This approach, I argue, allows us to broaden the discussion beyond simply asking the question, “Does money have to be a commodity”. Having established that a token currency did not have to be money, i.e., a commodity, we can now ask a more important question: How did a mere token of money take on a life of its own and begin to function as if it is money in place of a money commodity?
Money and its token
First, of course, we have to define what we mean by this phrase, “a life of its own”. Under the gold standard, the token of money to act in place of money had to be pegged to some definite quantity-weight of the real thing. In the case of the dollar, the state was expected to maintain its currency so that quantity-weight of one troy ounce its token could be redeemed for 22.67 dollars. Or, to put in more familiar terms, anyone with $22.67 could enter a bank and redeem their valueless paper dollars for one ounce of gold. If the state over issued its currency, (counterfeited it), the peg or price standard would reflect this by depreciating. If the state issued too few dollars the opposite would occur: fewer dollars would be exchanged for one ounce of gold.
In the period of the gold standard, everyone knew the paper dollars had no real value and it was only the convertibility of dollars for gold that maintained public confidence in the purchasing power of the currency. The treasury was forced to regulate its issuance of dollars to maintain a stable peg to gold. Whenever the state deviated from its proper role as issuer of the currency, this would be expressed by an alteration of prices. Over issue of the currency would set in motion forces that would lead to the divergence of currency prices and prices denominated in gold. This, as everyone knows, was particularly evident during times of military conflict when the state over issued to finance its military operations. After the conflict, the state had to impose measures to remove the excess currency from circulation.
For a token of money to take on a life of its own simply means the state no longer tries to maintain some fixed and definite relation between some definite quantity of dollars and some definite quantity-weight of a commodity money. In the case of the United States, this means at a certain point the federal government no longer tried to maintain the price standard at 22.67 dollars to one troy ounce of gold. Before the US went off the gold standard you could buy or sell a commodity either with one troy ounce of gold or 22.67 dollars. After it happened, gold could no longer be used in trade by law — you could only use dollars. This change, as important as it was, did not (and could not) convert paper dollars into money; it simply relieved the state of the burden of redeeming its worthless tokens for real commodity money.
We can see here that what LK loosely calls money is not and never was money as labor theory defines it and could not become money by any reasonable definition of money. It was always only a token of money, a placeholder for money within the circulation of commodities. To make their argument against labor theory stick, LK and Marxist supporters of MELT have to show how and under what circumstances the federal government exiting the gold standard magically transformed its fiat tokens into money.
I would argue that what actually happened was the degradation of the precision of the language regarding money, so that “currency” becomes “money”. This is understandable for the average person who may not even know there is a real difference between money and currency, but to then dump this common sense confusion into a scientific debate over the validity of labor theory is bizarre.
The mystery of inconvertible fiat currency
So, we now know Marx’s argument is not invalidated by the fact that paper dollars are not a commodity, because Marx never held currency had to be a commodity in the first place. Only Marxist knuckleheads, like Fred Moseley, ever believed currency had to be a commodity or even pegged to a commodity. There is in fact no place in the law of value as proposed by Marx where he ever states currency had to be pegged to a commodity money. What he actually states is this: If the currency is not pegged to a definite quantity of commodity money, there would be no price standard.
And that is the real mystery of the post-gold standard world — the one which LK is trying to uncover with his argument. How can the law of value operate if prices do not have any relation to values or the socially necessary labor time required for production of commodities? To ask the question almost answers it: The gold standard is abolished precisely to prevent the prices of commodities from reflecting their values. If you do not want the values of commodities to be expressed in their prices within circulation, the easiest way to do this is simply end the gold standard. Preventing commodities from expressing their values in their prices might be necessary once the values of commodities and their prices of production are now irreconcilably at loggerheads within the mode of production.
As many people know in Marx’s ‘transformation problem’, prices of production do not seem to be consistent with the prices of the same commodities based on their labor values. The labor value price of any commodity is v; while its capitalistic production price is v+s. Do the math: v = v+s, only when s = 0 or v = 0. When s = 0, v = v+0 = v. And, since labor power is the only source of surplus value, when v = 0, s must be 0 by definition, because if no living human labor is employed in the production process, no surplus value can be produced.
The so-called transformation problem states that prices in the capitalistic mode of production contains a contradiction that cannot be resolved. To overcome this contradiction, you have to suppress the values of commodities within circulation and this is just what debased fiat does.
In a later post, I will show why Marx’s labor theory of value actually predicts inconvertible fiat currency and the necessity for the state to suppress the expression of the values of commodities in exchange.