That time when Ben Bernanke admitted Marx was right and John Milios was wrong

by Jehu

So what do we know regarding the validity of SYRIZA economist John Milios’ criticism of Marx’s alleged theory of crisis?

  • First, we know Marx never had a theory of crisis. This has long been acknowledged by almost all scholars of Marx’s theory.
  • Second, we know Marx predicted the collapse of production on the basis of exchange value. However, this fact is ignored by almost all scholars of Marx’s theory.
  • Third, we know Keynes agreed with Marx on what caused the Great Depression: the improvement in the productivity of labor.

ben-bernanke-goes-hardcore-doveKeynes hypothesis of the cause of the Great Depression, which is fully consistent with Marx’s theory, completely disagrees with the dominant explanations of crises advanced by the underconsumptionists, the falling rate of profit school and the “multi-causal” school of Milios, Harvey and Heinrich. Keynes, like Marx, locates the cause of crises in the constant reduction of socially necessary labor time required for production of commodities.

What remains to be established are two additional points:

  1. Was the Great Depression actually the collapse of production on the basis of exchange value that Marx predicted?
  2. If the answer to that question is ‘Yes’, was Keynes’ solution offered to this breakdown anticipated by Marx?

Was the Great Depression the predicted breakdown of production on the basis of exchange value?

To answer this question it would help to define what is meant by that ungainly phrase, breakdown of production on the basis of exchange value. By “production on the basis of exchange value”, Marx meant only production and exchange of commodities. He explains this mode of production in Part 1 of volume 1 of Capital; it is the subject of the first three chapters of the book.

To put it bluntly, I think it would be fair to say this is the least understood section of all of Marx’s Capital; however, if Marx predicted the breakdown of commodity production and exchange, he was predicting the breakdown of the very system of production he explains in Part I of Capital.

But what is exchange value? In Part I of Capital Marx calls exchange value, “the phenomenal form” of the value contained in the commodity. This phenomenal form is critical, because we cannot directly apprehend value contained in commodities by any other means. Effectively, if an object has no exchange value, it has no value — at least for us. And if the object has no value, it is not a commodity as Marx defined that term. We can, therefore, think of the production on the basis of exchange value as simple commodity production. Thus, when Marx predicted collapse of production on the basis of exchange value, he is basically predicted the collapse of commodity production.

Here is the theoretical difficulty: nothing says the commodity has no value, we just have no means to apprehend it. To give an analogy: we cannot detect a black hole because light cannot escape it. We have no means to detect a black hole, but does this mean the black hole does not exist? That the matter contained in the star has disappeared? No. It simply means we can’t say what happened to the matter. The laws of physics breakdown at the horizon of the black hole.

The breakdown of production on the basis of exchange value is similar: We can’t say if commodities have value simply because labor theory must breakdown at the horizon of the event. Just as the light from the star no longer can escape the gravity of the star and it ‘vanishes’, the value of the commodity no longer can express itself as exchange value and the commodity character of the object vanishes. Labor theory of value has nothing to say about what happens after the collapse of production on the basis of exchange value, because the law of value no longer exists.

Exchange value versus directly social production

This might sound heretical, but it is actually how every factory operates and it is how the Soviet Union operated. Labor in a factory is not directed by the law of value but by a despotic scientific plan imposed on the workers by the management. Of course, relations between many factories is still governed by the law of value. However, each factory can be considered a tiny black hole where the law of value no longer operates — i.e., where directly social production holds sway. The process of accumulation enlarges each of these tiny black holes until at some point there is a sudden and massive implosion. Essentially, this is what Marx was predicting would happen to society. If we substitute the term, “capitals”, for the term, “factories”, it become clearer what sort of event Marx was describing: something akin to the collapse of capitalism as that term is popularly understood.

In Marx’s theory, the value of a commodity is expressed as exchange value, however in section 3 of chapter one, we find the exchange value of one commodity is expressed in the use value of another commodity. The use value of the second commodity becomes the measure of the value of the first. Marx shows how this develops over time to give rise to the money commodity. As the money commodity, the use value of one commodity serves to express the values of all other commodities. It becomes the universally accepted form of exchange value in all of society.

Assuming this is true, it should be obvious that a breakdown of production on the basis of exchange value must involve the money commodity. It would help at this point if we temporarily substituted the term, “commodity money”, for the term “exchange value” in Marx original prediction. In that case we have a new formulation: Marx’s theory predicted that production on the basis of commodity money would collapse.

Is this a valid reformulation of Marx’s argument? In section 3 of chapter one, Marx defines exchange value this way:

“The first peculiarity that strikes us, in considering the form of the equivalent, is this: use value becomes the form of manifestation,  the phenomenal form of its opposite, value.”

Marx appears to be stating here that exchange value must take the form of the use value (its physical material) of a second commodity. There is no such thing as exchange value apart from the physical material of another commodity. It would seem to me that I am completely justified in substituting “exchange value” with “commodity money” in Marx’s prediction; however, I want to call attention to this substitution so others can tear my argument apart.

My argument should not be truncated to say gold must be money; it only means money must be a commodity. Nor should it imply that money becomes what the state says it is; rather, it is the opposite: the state must recognize what society deems money. Society deems what serves as money, the state REdeems its worthless token for this money.

The sudden collapse of commodity money circulation

The breakdown of production on the basis of commodity money (exchange value) thus logically begins with the refusal of the state to redeem its valueless tokens for money. Now, why would the state do this? How does it acquire the power to impose its own token on society? Since society deems what is money and the state only redeems its tokens for money, the cause must begin with society, not the state. Moreover, society did not just wake up one day and decide to accept the state’s token instead of commodity money. Something must have taken place previously that prevented commodity money from circulating as money.

Well, if you look at the minutes of the Fed’s meetings after 1929, you will find many references to the dearth of commodity money in circulation. This document, for instance, taken from October 1930 meeting of the Federal Reserve, reports the loss of $700,000,000 of free gold from the reserve system. According to the minutes of the Federal Reserve at that meeting,

“The most important question which the System faces at present  is the problem of bank failures and hoarding of currency.”

Although Marxist scholars have made very little use of it, a full record of the time can be found at the St. Louis Federal Reserve. Even a cursory examination of the historical material will demonstrate beyond all possibility of dispute that production on the basis of exchange value (commodity production) completely collapsed during the Great Depression, just as Marx predicted.

And why was this? According to former Federal Reserve chairman, Ben Bernanke, the gold standard mysteriously “malfunctioned”, leading to money becoming massively “non-neutral”. This pseudo-explanation is laughable, but it confirm my intuition that production on the basis of exchange value collapsed as Marx predicted. In any case, in 2004, Bernanke explained what the massive non-neutrality of commodity money actually looked like on the ground:

“The banking crisis had highly detrimental effects on the broader economy. Friedman and Schwartz emphasized the effects of bank failures on the money supply. Because bank deposits are a form of money, the closing of many banks greatly exacerbated the decline in the money supply. Moreover, afraid to leave their funds in banks, people hoarded cash, for example by burying their savings in coffee cans in the back yard. Hoarding effectively removed money from circulation, adding further to the deflationary pressures. Moreover, as I emphasized in early research of my own (Bernanke, 1983), the virtual shutting down of the U.S. banking system also deprived the economy of an important source of credit and other services normally provided by banks.”

By the time of the Great Depression, commodity money (exchange value) became an obstacle to capitalist production for profit.

The paradox of the collapse of commodity production

If capital is a form of commodity production, how does commodity production and exchange become an obstacle to capitalist production? This argument would seem to involve a paradox, i.e., a reasonable statement that leads to a self-contradictory conclusion. However, the apparently self-contradictory conclusion that commodity production becomes an obstacle to capital only expresses what we already know to be true: capital itself is a self-contradictory mode of production. Marx describes it this way in the same passage where he makes his prediction of a collapse of commodity production:

“Capital itself is the moving contradiction, [in] that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as sole measure and source of wealth. Hence it diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary.”

Simply stated: the capitalist makes a profit by constantly reducing the labor time required from production of commodities, but (unknowingly) uses labor time as the measure of the value of his social wealth. Capital thus operates by progressively eradicating the very thing that creates capital — labor. When, for instance, Tugan-Baranovsky argued capital could abolish labor without a collapse, he was arguing capital could abolish the very thing that creates capital without collapsing. The “catastrophists” quite naturally looked at him as if he was insane — but they were polite folks, so they just called him a revisionist. Today, silly people like John Milios, who adopts Tugan-Baranovsky argument in place of Marx’s theory, are not called revisionists; instead, they are appointed to help devise economic policy for SYRIZA.