Declining Values, Rising Prices: Toward a labor theory explanation of inflation

by Jehu

You probably never noticed this, but Marxist economists have been using Milton Friedman’s explanation for inflation, rather than developing their own. This is because, to discard Friedman’s explanation, they will have to develop an explanation premised on labor, not money. Post-war Marxist academics by and large don’t think labor explains anything about capitalism or, at best, is a redundant category to money.

Now borrowing arguments from bourgeois simpletons is not, of itself, a problem — Marx did it himself. But I have two problems with borrowing Friedman’s argument: first, and personally, I hate Friedman and want nothing more than to prove him to be an incompetent simpleton. I regret having shared the same air on this earth with Friedman for many decades. My absolute hatred for Friedman, utter rejection of everything he stood for and complete revulsion at his very existence forces me to reject any argument with which he is credited.

Second, (and, hopefully, a little less irrational), Friedman’s argument has obvious flaws that cannot be ignored by Marxists. Friedman’s argument requires us to believe that by increasing the supply of currency in circulation the state can increase the prices of commodities:

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.”

Milton Friedman, ‘The Counter-Revolution in Monetary Theory’ (1970)

The problem with this argument is not just that state policy causes inflation, Friedman’s argument requires us to believe that inflation arises from exchange relation not from production relations. The assertion that inflation is caused by state currency counterfeiting may be true, of course, but it does not sit well with Marx’s labor theory of value, which proposes that exchange relations are the expression of production relations. To accept Friedman, we would have to reject Marx’s theory of prices.

If money is an expression of socially necessary labor time, and socially necessary labor time is expended during production, logic suggests the explanation for price inflation begins not with exchange but with production, not with money but with labor.

But here is the difficulty with deriving price inflation from labor: inflation means rising prices, while the labor theory premises of capitalist production assume the labor embodied in commodities generally falls. If you begin with production and the diminishing expenditure of labor, you have to explain how the falling labor content of commodities can come to be expressed in rising prices for the commodities. You have to explain, in other words, what would cause prices to move inverse to labor content of commodities. Now, that is a heavy lift for labor theory and, frankly, most Marxist academics today are not up to the job; so they prefer instead to rely on Friedman’s monetary explanation instead of taking the time to develop a native labor theory explanation. An argument that is native to labor theory would initially assume that labor values determine the prices of commodities, but only up to a certain point in the development of the productive forces of the capitalist mode of production. After this point, prices would increasingly diverge from their labor values and even rise as the value content of commodities fall.

What would cause prices to suddenly flip and begin moving inversely to the labor values of commodities? The closest explanation we have for this sudden and bizarre change in the behavior of prices is offered by Marx in Capital, v3, c15: absolute over accumulation, of which Marx has this to say:

“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.”

In other words, Marx is suggesting there is an absolute limit to capitalist accumulation that cannot be exceeded by the mode of production. Once capital encounters this limit, any additional investment would cause the mass of profit to fall, rather than increase.

Now, here is the really huge problem with this argument by Marx: no Marxist academic today thinks this can happen. All Marxist academics I have read, from the ‘hard-line’ orthodox school of academics like Kliman to the neoMarxist school of academics like Simon Clarke agree that Marx was not serious about this idea of an absolute limit on accumulation. Marx, they argue, was only speaking hypothetically to illustrate his point; proposing a scenario, he never really imagined could happen.

My own problem with Kliman, Clarke, et al is that this is the only possible way to explain the paradoxical behavior of values and prices without invoking Friedman’s simple-minded quantity theory of money. If Marx was indeed speaking hypothetically, we are left with Friedman’s monetary argument and this makes me sad. So, if there is any possibility of proving that incompetent simpleton to be a fraud and a charlatan, I prefer to adopt it.

Textural support for the idea Marx was not speaking hypothetically only exists in the very weak form of an odd quip Marx makes when he defines what he means by the term absolute overaccumulation:

“Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital. To appreciate what this over-accumulation is (its closer analysis follows later), one need only assume it to be absolute. When would over-production of capital be absolute? Overproduction which would affect not just one or another, or a few important spheres of production, but would be absolute in its full scope, hence would extend to all fields of production?

Note, in the above quote from Marx, the parenthetical statement, “its closer analysis follows later”. If Marx was only speaking hypothetically, why would he intend to examine absolute overaccumulation more closely later on in Capital, v3? One possible interpretation of his statement is that Marx wasn’t speaking hypothetically; he fully intended to show there was an absolute limit on capitalist accumulation.

Not surprising, both Grossman and Postone —  the two greatest Marxist thinkers of the postwar period — provide arguments that agree with me — not with Kliman and Clarke.

For Grossman, absolute over accumulation leads to a situation that labor power (a commodity) has to be sold below its value. For Postone, the development of the forces of production lead to the accumulation of superfluous labor time. I believe either of these conclusions can be the starting point of an argument to explain how declining the value content of commodities might  result in rising prices for the commodities.

Grossman’s argument basically states socially necessary labor time no longer determines the price paid for labor power; while Postone’s argument basically states that aggregate labor time doesn’t fall as we previously assumed. Thus each agrees that, at a certain point in the development of the forces of production bound up with capital socially necessary labor time no longer determines either actual labor time or prices.

If prices don’t express the socially necessary labor time required for production of commodities, they must now increasingly express the actual labor time of society. As the actual labor time of society increases relative to socially necessary labor time required for production of commodities, prices must increase relative to the values of the commodities.

Notice that no role in inflation is given to the state’s counterfeiting of the currency. This is because state counterfeiting is determined by the expansion of unnecessary labor time and does not cause it. The state’s monetary and fiscal policies are determined not determining. Since aggregate labor time is increasing, the state must increase the quantity of currency in circulation or a crash will occur.