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

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. This is my second post on VL’s paper.


Let me briefly summarize the previous post.

In the excepts from his paper that I quoted in detail, Vytautas Liutkus (VL) seems to give two basic reasons why inflation can occur under a commodity money regime:

The first reason inflation might occur under a commodity money regime is the simplest: there is a decrease in the socially necessary labor time required for production of the commodity serving as the money, while the labor times of all other commodities remain unchanged. Since the value of the money has fallen relative to the values of all other commodities, it would take more physical units of the money to purchase the same quantity of other commodities. Thus prices, denominated in the commodity money and any currency tied to this money, would rise.

It appears to me that VL does not think this first reason accounts for the inflation we are seeing since 1971.

The second reason inflation might occur is that the state explicitly devalues its currency against the money commodity itself, as the US did in 1933. In this case, the state sets a new standard of prices, either explicitly or through negligence. Prices denominated in physical units of gold remain stable, but prices denominated in the currency rise, reflecting the state’s policy change. However, at least after the explicit change in the standard of price, the state is still forced to intervene to manage its currency.

Although a more plausible ground for rising prices, VL thinks actual or de-facto change in the standard of prices is too limited to be the cause of inflation as well. The price inflation we have experienced since the collapse of Bretton Woods has been both secular and unlimited. As we know, in 1971, one troy ounce of gold was officially represented by 35 dollars; it now commands about 1,800 dollars in the bullion market. The US dollar now represents less than two percent of the value it did in 1971. The same inflationary spiral can be seen in the prices of all other currencies and commodities over that same period; their prices have risen steadily over the years, despite the decline in the values of these commodities over the same period.

VL seems to conclude that the cause of this generalized inflation must be the progressive depreciation of the standard of price, (he sometimes refers to this a the money standard), i.e., the depreciation of the currency serving as medium of circulation in place of money. This progressive depreciation is secondary to the end of the gold standard.

He observes that, contrary to the 19th century, when the rising productivity of social labor was largely expressed in declining prices and wages, presently, rising productivity of social labor is largely expressed in flat to slightly increasing wages and prices.

VL thinks Mattick Sr. comes close to agreeing with him on this point.

According to Mattick there is always a danger in a free floating currency regime that the so-called “price” of the commodity serving as money will diverge from its value. Under the gold standard, the state had to actively intervene to maintain its standard of prices. A free floating currency, because this standard is no longer managed, always presented authorities with a danger of depreciation against commodity money.

However, as VL shows, Mattick ultimately locates the cause of inflation not in the tendency of a free floating currency to depreciate against commodity money, but in capitalist accumulation itself. For Mattick, inflation is the policy of the state to cope with the difficulties arising from the falling rate of profit and the crisis. Inflation cannot fix the crisis, but, if managed well, it can contribute to expansion of profits on both domestic and foreign markets.

On this point, VL and Mattick part ways.

I think Mattick has the better argument for inflation overall, but VL lands some important and telling blows against Mattick’s argument, as we will see in this part of my post.


Despite Mattick pointing to the problem of overaccumulation of capital as the driving force behind inflation, VL remains totally focused on monetary explanations to the exclusion of even investigating this possible influence. He warns us away from Mattick’s argument that price inflation expresses overaccumulation of capital:

Hence, one does not get any closer to the essence of the post-1960s price inflation by stating that:

“The creeping inflation that accompanied the economic boom also was the vehicle that carried it along but it was also a sign of an imminent contradiction insofar as continuance of the boom was contingent on an accelerating inflation rate. Inflation is an expression of inadequate profits that must be offset by price and money policies. Therefore in the developing capitalist countries, Brazil, for example, inflation is the measure chosen to bring profits into line with the pace of accumulation, i.e., to accelerate expansion at the expense of working-class consumption, to promote exports, or to do both at once. Thus under any circumstances inflation spells the need for higher profits, whether this be the need of a particular capital entity to obtain profits or a general effort to add steam to accumulation.”

[It can be seen here that VL remains fixated on inflation as a simple price phenomenon and ignores Mattick’s point that inflation points to a deeper problem of overaccumulation. Rising commodity prices are, of course, produced by a boom, a period of capitalistic expansion, but, Mattick’s argues, the boom, in turn, depends on the further inflation of prices. Mattick, therefore, suggests a growing insufficiency of profit may be managed by continuous increases in the prices of goods. In my opinion, VL is rightly skeptical of Mattick’s explanation. But, rather than building on Mattick’s argument and coming forward with a better explanation for inflation rooted in overaccumulation of capital and the falling rate of profit, for some strange reason VL retreats back to monetary explanations for inflation.]

Finally, one more aspect must also be mentioned at this point, in order to avoid any unnecessary misinterpretations. We have seen in the case of Great Britain during the World War I that the suspension of the gold standard, even though not in a full legal force, did not immediately result in the depreciation of the pound sterling in terms of gold, or in terms of the dollar, which was in fact at that time as good as gold.

[Here VL is going to show that the Bretton Woods system was not, in and of itself, a likely source of the post-war inflation we have experienced for the last decades.]

It was possible for Britain to achieve this through the dollar-sterling pegging operations, the means for which we have already enumerated.

[By ‘this’, VL appears to mean a stable non-inflationary environment.]

The value of the money-standards of various countries as well as the level of internal prices can be kept stable through the stable rates of exchange among the currencies, as long as at least one currency unit remains attached to the money-commodity, as was the dollar during the 1914-18 hostilities.

[In other words, even during the Bretton Woods period, so long as the dollar was pegged to gold, stable prices could be maintained if other states, in turn, pegged their currencies to the dollar.]

This was in essence also fulfilled under the Bretton Woods system as long as the open market price for gold remained at the level fixed by the international agreement, and also as long as the money-standards of other countries remained pegged to the dollar.

[As above.]

But this pegging of currencies must not be regarded as the key instrument for maintaining the value represented by the credit-money banknotes, namely money-standards, constant.

[However, even if all currencies were pegged in this fashion, this would not be sufficient to hold the various credit monies of the various national capitals constant. This, I believe, is a fair criticism of Mattick’s argument.]

One must avoid the mistake of assuming that even when the last gold-standard is suspended and there remains no country with a fixed price of the money-commodity, the stable rates of exchange by themselves are enough to protect from the inflation that we have been experiencing during the last four decades or so.

[As VL argues here, the fixed exchange rates between national currencies and the actual exchange rate between the credit monies of these nation states may differ markedly. The former is determined by the legal fiat; while the latter is determined by the actual material economic relations between these national capitals within the world market. There is no reason for us to believe the first accurately reflects the second.]

Hence, it was not the fact that currencies were allowed to float freely in relation to one another that brought about the subsequent tendency of rising prices – although without a doubt this contributed significantly to the currency – money-standard – depreciations in various countries and to varying degrees, and as a result also to divergent price and wage levels – but it was the fact that gold (or any other commodity) no longer had a fixed price, which paved the way for the floating values of all of the numerous money-standards on the planet.

[And here VL crashes and burns! Oh, the horror!]

Without a doubt, one might argue that had the currencies remained at pegged rates even after the dissolution of the Bretton Woods system, the inflation, at least regarding a number of countries, including the US or Britain for instance, would not have reached the level that it stands at today.

[VL never asks himself an important question here: Even if the gold standard had remained in place, would the fixed exchange rates between national currencies remained unchanged? Would these fixed exchange rates and the actual exchange rates between the credit monies of these nation states remained unchanged? In other words, — and even leaving the problem of inflation to one side for a moment — was the composition of capital the same among all of these countries? Was their rate of profit the same? If not, what might we expect to happen?]

Yet, the path for this inflation was in the end cleared simply by failing to keep the value represented by the last money standard supposedly based on gold, i.e. dollar, constant. In other words, by failing to maintain the fixed price for gold – the commodity that historically was bound to emerge as money and which today, quite ironically, no longer performs any monetary functions, except perhaps for measuring the historical depreciations of various national money-standards.

[Now, let’s add in the problem of a free floating exchange rate regime to a situation where we have a diverse group of national capitals, each with its own organic composition of capital, rate of profit, national credit money system and national currency. Most of which VL has failed to take into account in his discussion of inflation.]

This is the solution, on the basis of the law of value, of the monetary phenomenon of the last 40 years that seems to have been rather vaguely understood in various circles of economic studies – namely the historical inflation after the dollar was eventually taken off the gold standard in the 1970s.

[However, VL insists that, of all the items listed above, it was the absence of common standard of price that produces the inflation we have witnessed since 1971.]

As it is clear from the course of our analysis of the historical development of the monetary superstructure of the capitalist mode of production, which has been epitomized in the credit system with the sole note-issuing central institution as its pivot, this inflation is not caused by an excessive amount of notes in circulation, for this circulation merely reflects the circulation needs of commodities and values, i.e. prices.

[VL argues that the cause of inflation is not to be found in an excess of currency beyond the needs required by the circulation of commodities, but he introduces no mechanism to explain inflation.]

The central bank of the modern credit-system can not issue notes into circulation above the existing requirements.

[This is an odd statement for VL to make here. While it is true that the central bank cannot simply force excess currency into circulation — people actually have to borrow a bank’s money — the state is not limited to its central bank for this purpose. It can and does directly inject vast sums of state-issued currency into circulation simply by purchasing wage labor and commodities. Later, it can withdraw some or all of this injection from circulation through taxes or borrowing.]

Consequently, as if to recapitulate, it is wrong to assume that inconvertible banknotes, which once had been convertible into gold at a fixed rate, fall under the laws of state issued paper money, for these banknotes, alongside the deposits and credit accounts, are the instrument of the credit, or banking system, which is a much more advanced and complex mechanism.

[This is probably true to the extent VL states it, but once the state has spent its currency into circulation, it is then able to make use of this same credit system to withdraw an equal amount of inconvertible banknotes from circulation, so as to maintain a stable non-accelerating inflation environment.]

Moreover, these ‘inconvertible’ banknotes still as a matter of fact remain convertible, yet no longer at a fixed rate, but according to the price fluctuations in the market.

[Yes, completely true! But what makes inconvertible banknotes inconvertible — and not just in scare-quotes? It is not that gold no longer serves as money, but that it no longer serves as money-capital. And why is this? Is it not because the owners of gold will no longer use it for such mundane purposes as investment in variable and constant capital. Gold remains buried in vaults as a hoard, never circulating. It has become money in the full sense of the term: a lifeless hoard of shiny metal, useless for any purpose but to measure the decline of state issued fiat.]

[Commodity money cannot become capital!]

To sum up, this latest phenomenon of inflation is merely the reflection of the tendency to raise the prices of production and consequently wages, or the reverse – that is to raise the prices of production as a result of wage increases – all of which are features of the competition among capitals for a larger share of the surplus-value, as well as of the struggle between capital and labour for the appropriation of the value produced.

[I am having a hard time seeing how this definition of inflation is an improvement of Mattick’s definition: namely, “Inflation is an expression of inadequate profits that must be offset by price and money policies.”]

However, when the money-standard within the credit-system is based upon a commodity with an inherent value, this implies a constant and stable price of this commodity; and this subsequently holds the price levels at the same level. Precisely this link, this connection, is missing in the analysis by Paul Mattick. For the gold standard checks the price inflation, or the depreciation of the currency unit, through the fixed price of the gold commodity.

[VL makes this argument as if he has now settled everything: “There would be no inflation if we still had the gold standard!” Okay. Let’s grant him this. Now, if there were no inflation, what then is the outcome of “the competition among capitals for a larger share of the surplus-value, as well as of the struggle between capital and labour for the appropriation of the value produced.” I don’t necessarily disagree with the narrow point here, I just think VL has to explain what he thinks must happen if inflation is prevented by a return to a commodity money regime.]

And this in turn impedes the following:

“If profit does not increase relative to the invested capital and increased production, yet the level of production made possible by credit is to be sustained, the distribution of the social product between capital and labor must be altered to ensure the profitability of capital. If prices rise faster than wages, then what could not be extracted from the workers in production is taken from them in the circulation process. This is at once the cause and the consequence of the expansion of money and credit, so that an inflationary growth in profits appears as accelerating inflation.”

[No sooner asked than answered, I suppose. VL cites Mattick in his argument that a commodity money regime would impede the forcible devaluation of wages.]

Apart from this, the role played by gold in maintaining the rates of exchange under the gold standard stable must also be fully accounted for, since indeed the absence of this balancing item in the international trade has greatly contributed both to the levels and to the variations of inflation in different countries. In this case the demand and supply of commodities, the adjustments in their prices of production according to the general rate of profit, as well as the fluctuations in the exchange rates – all of these are very intricately connected with this recent inflation, so catchy to the public eye. And these economic aspects are all connected precisely through the law of value.

And this last statement is mere hand-waving. In fact, VL is at an impasse. He knows that somehow the mode of accumulation is implicated in inflation, but, like Mattick, he has no plausible mechanism to describe it. We are thus left with the idea that had the gold standard not been abolished by society, inflation could not occur.

End of part two.