Critical comments on Vytautas Liutkus’ “Marxist Political Economy in the Age of Inflation” (Part One)

by Jehu


I have been reading an paper, Marxist Political Economy in the Age of Inflation, by Marxist theorist, Vytautas Liutkus. At least in part, the writer seems to offer an explanation for post-World War 2 inflation in the monetary system that is consistent with Marx’s labor theory of value. In doing so, he makes an effort to, in his words,

“… develop further our examination of the historical evolution of the credit-system – with particular emphasis on the emerging importance of the role played by the central banks – until this system, initially built upon gold as the money-commodity, is finally stripped of all material direct links with the precious metals.”

Intrigued by his effort — I follow his work a lot — I began making notes on it, collected below. This is part one of that reading.


The format is as follows:

Excerpts from VL’s paper are in quotes.

[My comments on that text follow in brackets]:


If, on the other hand, the possibility of getting and disposing of the commodity, i.e. the money-commodity gold, at fixed prices is obstructed, this stands for the suspension of the connection of the money-standard with this commodity containing inherent value.

[When a state no longer redeems its currency for commodity money, this implies a suspension of the price standard for that currency. The state has effectively suspended the standard of prices for its currency.]

That is, the value represented by the currency unit, the dollar for instance, is no longer held constant by this connection and is free to float independently.

[The currency no longer represents (i.e., stands in place of, stands in for) the value of a definite weight of commodity money; it is literally suspended in air with no support. Prices denominated in the currency no longer have any standard at all. But VL should not just stop here: it is not just the currency that is floating freely here in relation to a definite weight of gold; commodity prices are also floating freely in relation to the value of each commodity. The price of a commodity no longer expresses the value of that commodity. In a monetary system, commodities are not directly exchanged for each other; they are exchange for the medium of circulation. But, in this instance, the medium itself, the currency, no longer has any real relation to its standard.]

If there is no fixed price at which some institution or the state itself is willing to sell me gold at all times, then the demand and supply of this commodity will determine the price I will be forced to pay, and at the same time it will determine the value represented by the money-standard of the country, which I may hold in my hands in the form of banknotes.

[The moment VL introduces the phrase “demand and supply” into the discussion, we know he is off the rails. What he is actually saying is that he doesn’t know how prices (prices in general, not just the ‘price’ of the commodity money, i.e., the price standard) find their level once the currency is detached from commodity money. (VL knows, or should know, that money has no price.)]

We find this illustrated quite well by the market relations at the time when the Bretton Woods international system was about to become obsolete.

[VL now insists that he is going to prove the so-called price of money, and thus the prices of other commodities, is now determined by supply and demand.]

Firstly, it must be mentioned that this system was in the final analysis a rather limited form of the gold standard, for the fixed price of the money-commodity gold did not apply to the economic world outside the international currency relations among the states.

[I think what VL should say here is that by the time Bretton Woods comes into force, the only real remaining currency in the world market was the dollar; it was, in fact, the only currency that actually represented the value of a commodity money. The remaining currencies were national fictions — recognized as such only in relation to their peg to the dollar. No other country dared peg its own currency directly to a commodity money. France, for instance, could have pegged its currency to gold, but it dared not.]

Consequently, there was the possibility for a disparity to appear between the price set by the Bretton Woods institution of $35 per ounce and the price of gold in the open market.

[This too is wrongly put. The possibility of a disparity between the price-standard set by the state, what VL wrongly calls the “market price” for the commodity serving as the money is already known to be inherent in the price-form. The state does not establish a price standard for its currency simply by announcing it to the world. The state has to enforce that standard precisely by intervening in the market to redeem its currency to enforce this standard. If it does not, there is no real standard.]

If I was only able to buy an ounce of gold for $40, because the US Treasury would not be selling gold for its statutory price to me, namely for $35, then no matter what all the legal tenets were to say, the price of gold for me would stand at $40 per ounce.

[If the state does not manage its currency to maintain an established standard of price, there is no price standard, no matter what the official policy states. Side by side with the official standard of prices, a defacto standard arises in the world market. This sort dual price standard actually emerged in the Confederacy during the Civil War and it did so again during the Bretton Woods period.]

And this would also indicate the value represented by the dollar, which in this case would have lost its value and would equally be subject to further depreciation.

[Again, I think VL states this wrongly, or, at least, I would not have put it this way. The dollar did not lose its value, since it had no value of its own to lose. Rather, commodity prices denominated in dollars lost their standard. Since the currency never had any value, it had nothing to lose. The dollar merely represented the value of a definite quantity of commodity money in circulation, and this only so long as the state enforced the standard. However, even in this case, there is no necessary reason for further depreciation of the standard of prices to take place. This means the fascists deliberately and willfully allowed the standard of prices to depreciate. They were entirely aware of what was taking place and approved of the depreciation. Since the dollar was always a valueless piece of paper, they knew that by not defending the price standard, the purchasing power of the currency would decline over time.]


I pick up where VL continues his observations:

This rise in the market price of gold, hence at the same time the depreciation of the money-standard or the currency unit, for instance dollar, pound, franc, euro, etc., will tend to lead to upward price adjustments, which we have already touched upon at various places in our work.

[If you have a hard time making sense of this statement, you are not alone.]

[In the first place, money, i.e., gold, has no price — market or otherwise. What VL is discussing here is the progressive secular devaluation of a currency against gold in the bullion markets. If the dollar was progressively devalued against the pound or the euro in the foreign exchange markets, we would not say the ‘price’ of the pound or the euro has risen. Rather, we would say the dollar was being continuously devalued against the pound or euro. In this case, albeit unofficially, the dollar was being progressively devalued against gold in bullion markets despite the official price standard for the currency. How and why this is taking place in the lead up to the collapse of Bretton Woods need to be explained, not treated as if it were some mysterious occurrence.]

[But even if this were to happen, this would not lead to a generalized rise in prices — inflation. If the dollar was quietly allowed to devalue against the pound, the prices of imports from the UK would rise. However, prices of goods other goods not sourced from the UK would remain stable. There might even be a fall in goods imported from the UK. Isn’t this so? Otherwise, how do tariffs work?]

As we can see, this tendency towards the increase in the prices of production was contained under the gold standard by the fixed price of the commodity which was functioning as money.

[Contained? Just the opposite: competitive devaluation of the currency allowed nations to to accomplish at a single stroke what had before taken a hodgepodge of tariffs to accomplish. And that benefit was two-fold: a state could not only force its competitors out of its home market, it could penetrate their home market by driving down its prices in terms of their currencies.]

Of course, as we have shown in our examples, the arbitrary action of the monetary authorities could also have devalued the money-standard by declaring a new fixed buying and selling price for gold.

[Yes, the state could, and did, devalue (or revalue) its currency against gold, as the US did in 1933. But this too is not inflation. The state merely set a new standard of prices. Under the gold standard, the state was forced to maintain a fixed standard of prices. When it did not maintain this fixed standard of prices — i.e., if the state over-issued or under-issued currency — two price regimes emerged in the market for commodities actually emerged in the market, one for gold, the other for the currency. In this way, the state’s poor management of its currency was exposed. But this was not inflation. Prices denominated in physical units of gold remain stable, but in currency they rose or fell, reflecting the state’s mismanagement. Under the gold standard, the state was forced to intervene to manage its currency. It no longer does this. On the other hand, the national capitals could use the state power to set the standard of price as a weapon in competition with rival national capitals, much as domestic capitals engaged in prices wars within domestic markets.]

Only this or an increase in productivity in the gold mining industry could have resulted in the price inflation of commodities.

[Finally, if the labor time required to produce an ounce of gold fell (or increased), while the rest of commodities remained unchanged, this would lead to higher (or lower) prices. But even this is not inflation or deflation as VL argues; it is a change in the general level of prices owing to a change in the value of money-commodity.]

And we were able to witness this when referring to the French and Belgian stabilizations, as well as to the US decision to raise internal prices through the gold purchasing policy.

[VL refers to an incident in the 1920s-1930s when France and Belgium set their price standards exceptionally low to support their export industries. This, in fact, seems to be a case of competitive devaluation as mentioned above.]

However, in these cases the boundaries of inflation were limited, since the price levels were then subsequently held stable through the connection existing between the money-standards and the commodity performing the function of money.

[VL says inflation was limited in these cases. In fact, he is wrong on both scores: none of them are inflation and none of them were limited. Obviously, inflation is unlimited secular increases in prices. VL is falling victim to the bourgeois economist’s obsession with merely superficial changes in the price level and not the essence of inflation. Moreover, inflation is peculiar to capitalist mode of production. It might help to think of inflation as a generalized (or absolute) crisis of the prices system. This would suggest its cause, like that of all capitalistic crises, is to be found not in exchange, in the credit system, but in the process of accumulation.]

On the other hand, the price inflation that has been in place ever since the so-called ‘Nixon shock’ has no definite boundaries and the tendency for the prices to be pushed upwards has been operating undisturbed.

[As VL says here, we are dealing not with an episodic tendency for prices to be pushed upwards, but a secular and irreversible rise in the prices of commodities — to which I must add — even as the values of those same commodities are falling.]

The same amount of commodities with the same amount of inherent value, or containing the same amount of human labour, is expressed in constantly increasing money-standard prices, hence it is clear that this implies the ever present depreciation of these money standards.

[And then he disappoints us. Far more than the mere depreciation of the price standard is at work here: VL does not seem to realize that the labor time required to produce automobiles, to take one example, has fallen from forty hours to just six hours, yet the prices of automobiles have dramatically increased over the same period. This is what has to be explained. The depreciation of the currency accompanies the devaluation of capital!]

This account for the fact that at the time when Marx and Engels were publishing their economic manuscripts, or under the gold standard of the 19th century, the improvements in the productive powers of the society were largely expressed in declining prices, which in turn would make space for wage reductions in order to increase the profitability of capital; while in our days, on the other hand, this same phenomenon tends to be expressed in wages remaining constant and even slightly increasing due to the above mentioned inflation, while the prices of commodities do not tend to decline so visibly (as a result of the technical advance), but rather to move along the wage levels so that the purchasing power of the working population remains largely on the same level.

[This is nonsense. Under the gold standard, the state was forced to maintain a fixed standard of prices. When it did not maintain this fixed standard of prices, two price regimes emerged in the market for commodities. In this way, the state’s poor management of its currency was exposed. But this is not inflation. Prices denominated in physical units of gold remain stable, but in currency they rise or fall.

Now it is obvious that, in recent decades, the state has deliberately managed its currency to enforce a steady rise in the prices of commodities in order to prevent prices from ever falling. In the United States, which owns the world reserve currency, a parallel regime of commodity money prices is unable to emerge, because the state has the power to abrogate, not the purchase and sale of gold, but contracts and commercial transactions denominated in gold when these contracts challenge the state’s power to regulate the monetary system. Inflation is, therefore, a state policy, a counter-tendency operating much like those listed in chapter 14 of volume 3, but not itself a tendency of the mode of production, which remains, as before, largely expressed in declining prices as the productive power of social labor increases.]

Paul Mattick seems to grapple somewhat very closely with the correct solution to this problem when he says:

“Gold is not just commodity money; because it has industrial and other uses, it is also a commodity in the simple sense of the term. Its value (and hence its price) depends on the productivity of gold production and also on the supply and demand relationships of gold. For gold and the currencies based on it to remain stable, it was necessary to control the price of gold. Originally the money value of gold and its value as a commodity were the same, but at times the commodity value exceeded the money value, and money gold was converted back into commodity gold. To keep the price of gold at a given level, that price had to be stable not only in money terms but also on the gold market. This meant that wherever the supply of gold exceeded its market demand, the excess had to be bought up by monetary authorities, whether they had need for it or not. In this way the commodity value of gold was determined by its money value.”

[Ignoring all the odd, tortured language in the above quote, all Mattick is saying here is that the state must intervene in the gold market to enforce its currency standard of price. The ebbs and flows of economic activity force it to do this.]

“The postwar chaos of exchange rates was replaced by a system of fixed exchange rates in parity with the gold-backed dollar, and the dollar was appointed to the status of international money and a reserve currency. Because the dollar could be exchanged for a gold equivalent, its function as a reserve currency gave it the same status as gold. There was, however, always the danger that the price of gold would rise, which would cause all currencies to depreciate.”

[Again, Mattick’s tortured language is a problem. He presents a distorted picture of what was happening at the time. Bretton Woods was not just relation between several currencies. It was first and foremost the relation between several national capitals. Each national capital was managed by its nation state. Each nation state issued its own currency. Of these currencies, only the dollar was actually pegged to a definite quantity of gold. Gold remained the money of the world. The dollar, in other words, was the only true currency out of what was otherwise a collection of paper fictions according to the strict assumptions of Marx’s labor theory of value. Not a single other country dared peg its currency directly to gold and compete directly with the dollar. The dollar enjoyed a privileged position as the result of this fact. The US did not accumulate the currencies of its ‘partners’, which were only used internally to manage their national capitals; but its ‘partners’ accessed credit denominated in dollars to rebuild their economies and profited from exports to the USA to accumulate dollar reserves. This to is important, because, as the ‘partners’ recovered from the devastation of the war, the balance of trade began to shift away from the US and the ‘partners’ begin to accumulate excess dollars which they then wanted to redeem for gold, bringing pressure for devaluation on the official dollar standard of prices. What Mattick calls “the danger that the price of gold would rise” was, in fact, growing pressure on the US from the world market to devalue the dollar.]

Unfortunately, he fails to move beyond these observations and leaves the reader with very inadequate notions of inflation.

[Unfortunately, for some reason VL entirely misses the above observations by Mattick.]

For instance:

“The latter problem can be answered by inflationary means, which, however, cannot alter the accumulation difficulties that lay at the roots of the crisis. For capital inflation has a rationale only insofar as it contributes to expansion of profits on both domestic and foreign markets; it loses this rationale as the rate of inflation increases. Inflation must therefore be controlled, and this is done most effectively by deficit financing through state loans.”

[According to Mattick, then, at the root of the crisis of the prices system is the overaccumulation of capital! Inflation of prices would be a solution if it could add to profits, but this inflation would not address the underlying overaccumulation of capital. Further, it has to be managed to avoid spinning out of control, through deficit spending — which, according to MMT, bleeds off the excess currency in circulation even as the state adds to it!]

[In fact, Mattick should have realized that this Keynes-inspired was a non-starter. The state cannot “contribute to expansion of profits” in any way whatsoever, since it produces nothing. In labor theory, as Mattick well knew, profit is identical with surplus value. The state does not produce surplus value, but only consumes it as revenue. Thus, Mattick knew — or should have realized — that what the state can do at best is borrow and unproductively consume already existing excess capital to temporarily relieve the overaccumulation of capital. If this was what Mattick meant by “contributing to expansion of profits”, he should have stated it explicitly. Had he done this, he would have completely reframed the debate among Marxists at the time.]

Mattick wants to see inflation only in terms of a means of cheapening the labour power and increasing the profitability of capital.

[And, of course, forty years later, VL misses Mattick’s point too. He thinks inflation is the aim of state policy, not a symptom — as if capital is motivated by higher prices, not higher profits! Mattick was implicitly arguing that the state had to forcibly devalue the mass of excess capital!]

We have seen here that this is fully compatible with the existence of the gold standard as well, for instance when the US devalued dollar in 1934.

[What occurred in 1934 was not simply devaluation of the currency, but the forcible devaluation of the entire national capital. But this was a one-time event. However, as Grossman explained, and Mattick clearly knew, after breakdown such forcible devaluation (of the national capital, not merely of the currency) as occurred in 1933-34 would have to be continuous. And this is precisely what began to happen after 1971.]

End of part one.