Why Marxist can’t explain the collapse of Keynesian economic policies

by Jehu

Part Three

“Instead of understanding so-called ‘labour values’ as ontologically prior to money prices, the position adopted here is that order and regularity in the inter-relations of units of capitalist production is possible only because there is a form of value, namely money, as a precondition for it. Only once this form of commensurating products obtains is there any meaning to the supposition of a law of value rooted in labour time and appearing as price. The money-form structures such determinations as socially necessary labour time, deciding to what degree actual labour times are socially validated, or replaced by socially imputed amounts of labour.” –Chris Arthur, Value and Money

The collapse of Keynesian state management of the economy has never been explained by Marxists. Instead we have witnessed one Marxist scholar after another suggesting a return to Keynesian policies is both possible and necessary. In this part of the series, I will show why Keynesian policies ultimately collapsed. And, moreover, all talk of a return to the so-called Keynesian social state is a fantasy.

How did Marxists miss the biggest catastrophe of the post-war 20th century?

Marxist scholars had every reason to suspect a world historical event occurred when Nixon took the dollar off the gold standard. We know they were well aware of the implications of the collapse of Bretton Woods: First, we have the words of George Caffentzis who, with his comrades, wondered aloud if the end of the gold standard implied the end  of capitalism or Marxism. Second, the collapse of Bretton Woods was followed by decade of unrelenting inflation and persistent high unemployment. Third, the inflation that erupted in the aftermath of the collapse of Bretton Woods is remarkable for its consistency with Marx’s argument on money and the relation between money and state issued inconvertible fiat currency. Fourth, by this time Martin Nicholas had translated the Grundrisse into English, making Marx’s prediction of a collapse of production on the basis of exchange value available to a wide audience for the first time.

Marxists were thus presented with a generational opportunity to verify or falsify a critical prediction of Marx’s theory in real time. This exercise would go well beyond a simplistic argument that credit money could never detach itself from gold, to understanding the profound implications of inconvertible state issued currency that went well beyond the rampant inflation of the 1970s depression.

Why would this be true?

The answer goes to the heart of the difference between money and money-capital. The mystery presented by the circulation of capital is that, like the circulation of commodities, it consists of nothing more than a series of acts of selling and buying, yet, unlike the case for simple commodity exchange, in the movement of capital one buys before selling. Second, the circulation of capital, unlike the circulation of simple commodities, begins and ends with money. Third, unlike the circulation of commodities, where the exchange value of a commodity is consumed and must then be replaced, the circulation of capital is continuous. Finally, and most critical for our analysis, since capital remains continuously in circulation, it must, of necessity, take the form of a mere token of money.

Capital and the token of money

Most bourgeois simpletons do not realize money is not itself capital and can only actually become capital through a historically specific purchase, the buying of labor power. Thus, on the one hand, the purchase of a commodity, labor power, actually precedes the sale of a commodity, of capital in the form of another commodity. On the other hand, from the beginning of its actual movement, capital strips off its bodily form: it is is not money in the full sense of the term but only a token of money. What this means is that the very form capital takes when in circulation (a token) cannot itself express the value of labor power unless it is pegged to a definite quantity of a commodity money.

Thus, when Nixon took the dollar off the gold standard this had no direct impact on the circulation of, and constant self-expansion of, capital. However, without gold as standard of price, the currency has no capacity to express the value of the very commodity purchased at the start of the movement of capital, labor power, which makes real capital out of capital. What serves as means of exchange in a class society is not neutral; which means, Marxist scholars like Moseley who assert inconvertible fiat dollars can serve the same function as gold are ignoring even the most basic and immediate economic interest of the working class: to sell its labor power at its value. This error is obvious only within the premises of labor theory whether Moseley realized it or not. Had Caffentzis and his comrades simply worked the social implications of Marx’s argument through to its logical conclusion at any point during the past 40 years, they could not have escaped the significance of the collapse of Bretton Woods for the class struggle.

If that is not awful enough, the second implication is even worse: Since the circulation of capital begins and ends with money, the state, which Marx and Engels called a committee for managing the affairs of the capitalist class, could take control of the entire process of capitalist self-expansion simply by replacing gold with its currency. Contrary to common sense opinion, the capitalist state does not have to lay direct hold to the means of production to manage capitalism, because, within the logic of the capitalist mode of production, the only real concern is the production of value and surplus value, not the production of material use values.

The significance the collapse of the gold standard had for the class struggle in the United States is thus undeniable and this impact can be seen in the actual empirical data: Since 1971, real wages, denominated in gold rather than valueless inconvertible fiat, have collapsed:

The collapse of the average daily wage following the so-called Nixon shock of 1971

Thus, the implications of the collapse of the gold standard go well beyond the potential for hyperinflation outlined in the earlier posts. It is true that this collapse verified Marx’s prediction in the Grundrisse that production on the basis of exchange value would collapse. And it is true that the collapse of production on the basis of exchange value generated unprecedented peacetime inflation as Marx predicted. However, the impact of the collapse of production on the basis of exchange value also had a huge and immediate impact on the class struggle itself. Yet, the social repercussions of the collapse of production on the basis of exchange value have never once been seriously examined in detail by Marxist scholars, although they have been frantically trying to come to grips with the economic consequences of that collapse.

The movement of capital

In its movement, capital begins with the money and the exchange of money for the commodity, labor power. This is a simple exchange of money for a commodity like any other, except the currency in the exchange has no exchange value. Since it has no exchange value, it cannot be the measure of the value of the labor power for which it is exchanged. Yet, this valueless means still functions as capital, as self-expanding value. How is this possible? Simple, capital in its movement is essentially the circulation of money. However, in circulation, money is not money in its full sense, but only a token of money. Thus capital can function as capital in the full sense of this term, while being no more than a token of money in reality. When money is actually functioning as capital, it is no more than a token of money, but when money is money in its full sense, it is no more than a lifeless hoard of gold, incapable of self-expansion. The separation of the token from money in 1971 meant the dollar could not become money, could not be redeemed for gold from the state, but had no impact whatsoever on its capacity to function as capital. At the same time, the dollar lost its capacity to express the value of the labor power for which it was to be exchanged. The price of this labor power — the wage — no longer ideally expressed the value of the commodity.

So far as I can tell from the literature, I am the first person to explicitly note this implication of the collapse of the gold standard. In terms of the class struggle, what serves as money is not neutral as most Marxists assume — state issued inconvertible fiat currency is not just a means of exchange; it is a weapon in the hands of capital against labor.

The circulation of capital begins with the purchase of labor power, but this in no way implies all such purchases of labor power are intended to produce profit. Simply paying a wage in no way implies the labor power purchased is to be employed productively in the capitalistic sense of that term. To be employed productively means the labor power is actually consumed in a production process that results in the production of surplus value. However, it is also possible labor power can be consumed without ever entering a production process or in a production process the product of which is not intended to become self-expanding value. This is always the case, for example, with production of military hardware. In the case of the production of military hardware, both value of the labor power and the means of production which went into the production of the hardware is consumed unproductively (in the full capitalistic sense).

Unproductive labor and money

For consumption of labor power that is intended to be unproductive, a valueless inconvertible fiat is required. The labor power, which is consumed without producing either value or surplus value, is purchased using a currency that itself has no value. There is, therefore, nothing of value paid out in the first place to be replaced in the production process. No value has been produced during the consumption of the labor power, but no value has been paid for it also. In this situation, the exchange of labor power for wages is entirely fictitious. All that actually has occurred is the consumption of a quantum of unemployed labor power, which could not be sold otherwise.

Why is this important to our analysis? Because, as Marx explains in volume 3, the falling rate of profit has two significant consequences, excess capital and massive unemployment:

“A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.”

According to Marx, the falling rate of profit produces a mass of idle capital and large scale unemployment. It is obvious from this that the state can issue counterfeit currency having no value at all to simply absorb the great mass of unemployed labor power and put it to work for unproductive purposes — for purposes that are intended to produce no additional value or surplus value. However, the state can only issue inconvertible fiat to purchase labor power and other commodities because the crisis produces overproduction of capital in the form of commodities and a very large population of unemployed.

Which is to say, Keynesian policies work precisely because Marx was right about the causes of capitalist crises. Marx predicted that crises produced by the falling rate of profit would result in idled capital and massive unemployment, and Keynesian policies work by counterfeiting currency out of nothing to absorb the two superfluous masses unproductively.

How Keynesian policies work according to labor theory

According to Marx, the circuit of money-capital is as follows:

M — C … P … C’ — M’

Briefly: Money (M) is exchanged for labor power (C), which undergoes consumption in the capitalist production process (P); resulting in new commodities (C’) that have more value than entered the process. The new commodities (C’) are then sold for more money (M’) than was initially invested. The difference between M and M’ is the surplus value or profit falling to the capitalist.

Given this circuit, how then do Keynesian policies work?

In Marx’s model of absolute overaccumulation the difference between M and M’ equals zero, or, it may even be negative. Which is to say, realization of the surplus value created during the production process has halted, resulting in a crisis. However, the capitalist process of value self-expansion begins with M and ends with M’. With the breakdown of production on the basis of exchange value, the inconvertible fiat of the state is severed from commodity money. Once the gold standard died, the state was in complete control of what served as money in exchange.

This means, if the difference between M and M’ is zero, the state can step in with its counterfeit and purchase the excess capital. This happened, for example, during the Great Depression with the first Agriculture Adjustment Act of 1933. Washington simply stepped in and purchased the excess crops of farmers at “market prices”, i.e., at prices that made the crops profitable. The circuit, M > M’, was subsidized by an injection of inconvertible fiat currency to raise the rate of profit. On the other hand, since the Great Depression also generated massive unemployment, Washington intervened at M’ by employing the unemployed. This is what occurred with the Works Progress Administration. In this case Washington simply stepped in with its inconvertible fiat and paid workers to chisel dead presidents into the side of a big rock.

Critical to the state’s ability to respond to a crisis of overproduction of capital is its ability to counterfeit its currency. This ability is facilitated by removing the currency from the gold standard, either indirectly — by outlawing private ownership of gold — or directly, by floating the currency against gold. However, as we have seen, the detachment of the currency from gold had consequences predicted by Marx in part one of Capital – hyperinflation. In the simplest Keynesian model I discussed above, the state simply injects additional currency into circulation by purchasing the excess capital and surplus labor power generated by the falling rate of profit. However, this by no means fixes the problem of the falling rate of profit; in fact, it only adds to it by extending the process. With the state absorbing the excess capital and unemployed workers, capital gets back to work generating more excess capital and unemployed. The state is forced to intervene again to absorb an even larger mass of excess capital and unemployed workers. And, each time it does this, it has to counterfeit more currency.

Keynesian policies collapse into hyperinflation

The growing mass of currency in circulation in relation to the requirements of material production only exacerbates the imbalance between the quantity of currency in circulation and the value of the capital in circulation. When this occurred in the 1970s depression, the Federal Reserve was forced on at least five occasions to intervene to prevent inflation from sliding out of control. Contrary to bourgeois simpletons, the inflation wasn’t caused by the oil shock or by wages, but by the constant injection of new inconvertible fiat by the state to prevent massive devaluation of capital. This injection was in turn made necessary by the falling rate of profit, which threatened to produce idle capital and unemployed workers. The very same forces that made Keynesian policies possible, now sealed the fate of Keynesianism.

Thus we find that between 1970 and 1982 the Federal Reserve was forced to raise its policy rate no less than five time to control inflation

Fed Fund rate 1970 to 1982 (St. Louis Federal Reserve)

Fed Fund rate 1970 to 1982 (St. Louis Federal Reserve)

At its height, the policy rate was more than 19%, compared to just 0.25% today. Throughout the 1970s we can see the erratic, “stop and go”, policies of the Federal Reserve as it tries unsuccessfully to combat inflation. The attempts by the state to fight the depression forced greater quantities of currency into circulation and accelerating the depreciation of the purchasing power of the currency, while the Fed periodically intervened to shut down inflation by choking off economic activity. Between 1970 and 1982, this generates at least four separate recessions, about one every three years. The recessions are themselves coming on top of a deep and prolonged depression that lasted the entire period. By 1980, the Volcker Fed was forced to cripple the economy to finally tame inflation, ending Keynesian economic policy for good.

Thus, the collapse of Keynesian policy did not begin with Reagan, as the dominant Left narrative would have you believe; it began with Carter and his own Fed chairman. And we find the same ugly pattern of class warfare, in its own peculiar form, within the Labour Party of Great Britain, as the Labour government spent most of the 1970s trying to limit pay increases to offset inflation on pretext the wages increases themselves caused the inflation.

The collapse of Keynesianism and the emergence of neoliberalism is not to be explained by a broken social contract between labor and capital. Rather, it is to be explained by the fact that the underlying causes of the depression of the 1970s, the overaccumulation of capital, were not addressed by the Keynesian policies adopted to combat it, but simply converted into uncontrolled inflation. Instead of excess capital and a massive population of unemployed workers, the state intervened aggressively, producing excess currency. To contain the impact of the excess currency, the state ultimately was forced to choke off all credit and cripple the economy.

The solution to the now global crisis of overaccumulation of capital was not to be found within any nation state, no matter its control over the domestic process of production of value and surplus value. Keynesian (fascist state) economic management had collapsed into a global hyperinflation; the age of neoliberalism had begun.