Schrödinger’s Capital: Why the value-form school never publishes supporting empirical data on money

NOTE 10: What is the value of empirical evidence?

According to Arthur (2003):

“The primary function of gold money is to ‘posit the presupposition’ that commodities count as values.   This it does in virtue of the price-form, not because as a material body it has any such magical powers.   So a substitute material may be found in paper, if this is granted forced circulation by the State,   and hence acquires the key determination of immediate exchangeability.”

Money, according to Arthur, plays a purely symbolic role in that it introduces the assumption use values in a commodity producing   community are values. The use values become values because they are exchanged for the value-form, money, not because they contain any intrinsic value. What the prices (exchange values) of commodities tell us is that the object has been exchanged for a money, nothing more.

Arthur criticizes Marx for trying to deduce the existence of value from the prices (exchange value) of the commodities. Marx looks at the prices of commodities and deduces that something must lie behind these prices. Marx then make what David Harvey calls an a priori assertion that the labor times of commodities lie behind there exchange values. Harvey explains Marx’s method this way:

“It’s crucial to understand that [Marx] is constructing an argument on the basis of an already determined conclusion. This makes for a cryptic beginning to his whole argument, and the temptation for the reader is to be either so bemused or irritated by the arbitrariness of it all as to give up by chapter 3.”

Arthur’s case against Marx in a nutshell

When Arthur looks at prices, he concludes the only satisfactory explanation for the prices of commodities is that they all have been exchanged for money. Clearly, says Arthur, prices are not themselves evidence of a physical substance laying behind the prices called value. Clearly, says Arthur, prices are not themselves evidence of a substance secreted by concrete labor that can be called abstract labor.

Since, by Marx’s own admission, all actual labors are concrete, particular and useful, we cannot appeal to these heterogeneous useful labors as the source of homogenous abstract labor that Marx calls value. If then money prices tell us anything, it can only be that the value of any commodity is synonymous with its price — a point Arthur never states in so many words. Commodities become values by reason of their being exchanged for the commodity that itself epitomizes value in a commodity producing community, money.

Now Arthur is not simply being an academic asshole here. He is wrestling with real theoretical conundrum. Since 1971, world money has been an valueless, inconvertible, state-issued currency. Nobody has advanced any idea how this can happen under the assumptions of Marx’s labor theory. Marx himself insisted throughout his entire career that, in the role of world money, money must be bullion.

But world money is today — and since 1971 — the U.S, dollar. It does not matter how you explain this contradiction between Marx’s theory and the world market, you can’t reconcile the two. If world money is the dollar, Marx is wrong. His explanation of money is wrong and his deduction that value lay behind exchange value (prices) is probably wrong as well. If money prices of commodities are not “caused” by value, the prices themselves must (somehow) simply socially define the commodities as values.

The implications of Arthur’s argument

Armed with this argument, Arthur makes a rather startling assertion: Since money is what makes homogenous abstract values of these heterogeneous use values in practice, and since it does this during the act of exchange of the commodity for a socially valid money-form, Arthur argues that what serves in the function of money, gold or paper, is not important; the function is.

This would be true so long as two conditions are fulfilled, says Arthur: first, Arthur notes the thing serving as money can be  valueless piece of paper because it never really exits from circulation, never falls out of circulation to gather in hoards. Second, the assertion a paper currency can fill the functions of money as well as gold is a valid conclusion only insofar as inflation is ignored.

Thus Arthur indirectly admits that if the object serving as money can fall out of circulation or the paper currency serving as money is irredeemable prone to depreciation, paper money’s role in this function is problematic. And this presents a huge fatal defect in Arthur’s argument, because these are precisely the ways paper currency and commodity money differ.

Value and the circulation of money

Since commodity money has value and paper currency does not, Marx comes to his own conclusion: In a crisis, says Marx, commodity money can and will fall out of circulation and become a lifeless hoard, while currency will not do this.

This is because, in a crisis, the aggregate values of the commodities in circulation fall. In Marx’s theory of money, the circulation of commodity money is simply a reflex of the circulation of commodities and is determined by the value of the commodities in circulation. As the aggregate values of commodities increase, the value of the quantity of money in circulation increases (ignoring velocity). As the aggregate prices of commodities fall, so too does the value of the quantity of commodity money in circulation (again, ignoring velocity).

This mechanism, however, is only true because commodity money itself has value. Since the values of commodities determines the value of the money in circulation, as the first rises and falls, the second rises and falls with it. Money thus flows out of hoards and into circulation when the aggregate values of commodities increase and flows out of circulation and into hoards when the values of commodities decrease. Commodity money thus enters and exits circulation — and this is particularly true of a depression when you get a steep and sudden fall in the amount of total output.

In an insightful bit of quantum theoretical deduction, Marx explains how the movement of commodities and the movement of money might be coordinated although the commodities and money themselves have no physical properties which can explain this coordinated movement. The coordination of the circulation commodities and money arise not from their common physical properties — because there are none — but from their common social property as products of labor.

Marx’s counter-intuitive conclusion

In a depression the distinction between paper currency and money becomes the most apparent: Because paper currency has no value, it does not fall out of circulation like commodity money. Thus, when the value of the commodities falls owing to the depression, there is a steep and sudden change in the ratio of the quantity of paper currency in circulation to values of commodities in circulation. According to Marx, this change is oddly enough expressed in sharply rising paper currency prices during a depression.

Marx’s theory of money makes a prediction that is hugely counter-intuitive: Although we would expect prices to fall during depressions because of a glut of commodities in the market, with paper currency they will not fall. In a crisis of overproduction, paper currency prices of commodities will rise rather than fall.

To be absolutely clear: No other theory of money, including value-form theory, makes this prediction. but Marx’s labor theory.

Unfortunately, Arthur misses both arguments made by Marx regarding the behavior of money and the behavior of prices in  depression. First, he assumes (a priori) that money never exits circulation — which Marx explicitly asserted it does. Second, he ignores paper currency purchasing power depreciation in a downturn, which Marx explicitly states is the price consequence of paper currency never exiting circulation during depressions.

Again why does Arthur never provide empirical evidence for his claims?

Marx theory of money is predictive and thus allows us to confirm or disproves his argument. Yet Arthur never advances any evidence. Allow me to remedy this defect.

Marx’s argument simply states, during depressions the quantity of commodities in circulation falls. So the quantity of commodity money necessary to complete transactions should fall as well. However, since paper currencies never exit circulation, the depression instead will be expressed in rising prices.

The first big test of Marx’s theory had to wait more than 100 years: the period of the 1970s was a well known period of stagflation with conditions remarkably close to those Marx discussed: After the gold standard collapsed and Nixon withdrew from Bretton Woods, just as Marx predicted, we see falling output combined with rapidly rising prices.

This is what nominal (dollar denominated) GDP looks like since the collapse of the gold standard in 1971

United States: Nominal GDP, denominated in fiat dollars, 1970 to 2010

And here is that same GDP in a commodity money (gold):

United States: Nominal GDP, denominated in gold, 1970 to 2010

Note that for the period 1970 to 1980 dollar denominated GDP consistently rises, while in gold denominated values, it plunges.

The 1970s was period of rampant inflation and high levels of unemployment, which nearly every Marxist scholar calls a crisis. Only Marx’s theory of money can explain how you get persistent high levels of employment and persistent high levels of inflation.

Value-form theorists need to publish data

Arthur’s argument on money requires us to ignore the critical distinctions that must be made between commodity money and paper currency, when it is just these critical differences that provides the basis for evaluating his claims.  Now, either Marxism is a science — and its claims can be proven empirically — or it is political horseshit. Yet, Arthur never once offers any valid empirical data to support a single claim he makes about money, paper currency and value.

He does not clearly present his theory of money beside Marx’s theory of money in a way that the two can be compared empirically.

So, no one ever asks,

• Does commodity money really remain in circulation as Arthur argues?
• Does paper currency remain in circulation during depressions?
• If commodity money does not remains in circulation, but paper currency does remain in circulation, how can we demonstrate this?
• How would this difference be expressed in the behavior of prices in periods of depression, where the quantity of commodities in circulation falls?

These are all testable statements. The sort of testable statements Arthur and the value-form school avoids. I think this is because the value-form school scholars are charlatans — Arthur, Harvey, Heinrich and the lot of them. To refute my claim, all these folks have to do is offer empirical evidence that commodity money and paper currency behave alike in a crisis.

To put together his book, Piketty drew on data stretching back hundreds of years. Certainly from that data Arthur, Harvey or Heinrich and any other value-form scholar can dig out evidence to support their claims.

The anti-imperialist implications of Arthur’s claims

If the claims of the value-form school cannot be substantiated with empirical evidence, this is a critical problem for the value-form school because in his 2003 paper Arthur makes a disturbing assertion:

“[A] substitute material [for commodity money] may be found in paper, if this is granted forced circulation by the State, and hence acquires the key determination of immediate exchangeability.”

This argument by Arthur may appear to only concern money, but in fact, it concerns a critical point of anti-imperialist struggle today within the world market. Countries like China, Brazil, Russia and others are claiming the dollar is not neutral, but allows the US an unfair competitive advantage because it alone controls the world reserve currency and can exploit this control to its benefit. If it is allowed to stand, Arthur’s argument that it does not matter what serves as money places Marxism on the side of United States imperialism against all other countries of the world market. For these countries, the dollar is not the same as a commodity money serving a world money, but Arthur seems to have no care for this problem.

Moreover, the problem with Arthur’s argument is not just international, as I will show next.