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

by Jehu

I have been reading a paper, Marxist Political Economy in the Age of Inflation, by Marxist theorist, Vytautas Liutkus (VL). 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 fourth post on VL’s paper.


As anyone reading this post likely knows, unlike bourgeois neoclassical economic theory, Marx’s labor theory of value begins with production not exchange, when describing the normal operation of the capitalist mode of production.

In bourgeois economics, newly produced commodities enter circulation without value. After this, the forces of supply and demand establish an equilibrium price for them at the time of sale. Ideally, this equilibrium price includes, among other things, the wages paid to the workers, the profit of the capitalist and the costs of necessary inputs.

In labor theory, the process is a bit more complicated.

The capitalist purchases the labor power of the worker and the necessary means of production. Under his direction, the two are combined in an act of production that creates a social product. A portion of this social product simply embodies the value (i.e., the socially necessary labor time) originally advanced by the capitalist for the labor power of the workers and the means of production. Another portion embodies an increment of surplus value (i.e., an increment of unpaid surplus labor time). This social product enters into circulation as commodities.  When it is sold, the surplus value produced in the act of creating commodities is realized in the exchange as profit.


How does this difference play out in the bourgeois economic theory and labor theory notions of inflation?

Well, for one thing, bourgeois economic theory really has no notion of inflation of the sort we have experienced in the past ninety years or so.

According to the Wikipedia, in bourgeois theory, inflation is defined this way:

“In economics, inflation (or less frequently, price inflation) is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time.”

All discussion of the causes of inflation in bourgeois economic focuses on disturbances in the monetary system and some of these have been discussed in the previous posts:

  • a change in the the so-called ‘price’ of money (owing to increased productivity or gluts);
  • a change in the supply of the currency unit relative to the money (devaluation); or,
  • debasement of the monetary unit itself by adding base metals and even replacing money with an inconvertible currency.

The prevailing prejudice explanation of inflation in bourgeois economic is probably best stated by Friedman, who argued:

Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.

The idea, I have read, is not original to Friedman, but was first advanced by John Stuart Mills in the form of the equation:


Where M is money, V is velocity, P is price and Q is the quantity of goods.

In the equation, a change in any of three variables — a rise in M or V, or a fall in Q — other than price might account for inflation.

Basically, this is all bourgeois economics has to say about inflation.


As you might expect, with Marx’s labor theory of value the problem of inflation is a far more complex — although you might not realize this from the comments VL makes on Mattick.

The problem is so complex, in fact, that we probably should map it out in stages, so we can see what it actually involves in terms of obstacles to a proof that is consistent with the law of value.

To begin with, and as VL suggests in his discussion of Mattick’s essay, inflation poses a big problem for labor theory of value. Mattick proposes that, after the mode of production encounters absolute overproduction of capital, inflation can, somehow, be used to redistribute the social product from capital to labor to avoid breakdown resulting from a fall in the rate of profit to zero.

VL responds that, even if this were true, such inflation would be impeded by the gold standard. A commodity money standard, like the gold standard, checks price inflation and the depreciation of the currency. In fact, even a modified gold standard, like the Bretton Woods system, with its fixed exchange rates pegged to the dollar, should have prevented inflation, because the dollar, which stood at the center of the system of the fixed currency exchange rates, was itself fixed to gold. VL, therefore, concludes that inflation, as bourgeois economic theory defines it, is far more limited in a commodity money system.

It follows that the collapse of the gold standard has to be implicated in the problem:

“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.”

Yet, VL also understands that the gold standard is a mere legal formality and in no way determines actual material relations:

“…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.”

Indeed, even after Bretton Woods collapses and inflation is unleashed, VL argues that the law of value continues determine material economic relations:

“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.”

It would appear, then, that Mattick was wrong. Nothing much was changed by the collapse of Bretton Woods and the commodity money standard.

It would appear.

But is this true?

Although many post-war Marxists dispute this, Marx and Engels were working on the assumption that what we call simple or non-capitalist commodity production existed for about 5,000 to 7,000 years before the rise of capitalism. During this entire period of time, one or another particular commodity has served in the role of money for at least this long.

The function of this commodity, the money commodity, was to express the value of all other commodities in unit of its own material. It could perform this function because it was commodity like them, having a two-fold character like all other commodities. Over time, the use value of this commodity became to express the value of (or socially necessary labor time required to produce) other commodities.

According to Marx:

“Money as measure of value”, wrote Marx in Capital, “is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.”

However, for reasons no one has satisfactorily explained to this day, beginning around 1930, in one country after another, commodity money disappeared from circulation and was replaced by debased state-issued currencies.

I have to clarify this last statement so that there is no confusion: governments DID NOT remove gold from circulation beginning in the 1930s, the owners of gold — including governments — removed their gold from circulation voluntarily. Governments were then forced to replace commodity money in circulation with their debased paper currencies.

No one has ever explained why this sudden mass withdrawal of commodity money from circulation happened!

By 1971, not a single country within the world market retained a currency pegged to a commodity money — not one. The United States dollar was the last major currency pegged directly to the gold and when the US withdrew from the Bretton Woods agreement, no nation remained that redeemed its currency for gold.

The collapse of the Bretton Woods system was, therefore, not just the end of a short-lived monetary agreement among several imperialist powers. Still less was it simply the end of the age of the gold standard itself. Far more than the mere extinction of John Maynard Keynes’ “barbarous relic”, five thousand years of world history was brought to a close in a matter of four decades!

Thus, the first problem labor theory runs into in explaining inflation is explaining why, all of a sudden, and without any warning, commodity money, after being the unequaled expression of the value of commodities for at least the last 5000 years, entirely disappeared from circulation throughout the entire world market within the space of about forty years!

VL has stated that the inflation we are experiencing would be unlikely had the gold standard continued. It follows then that since the owners of commodity money have withdrawn the commodity money from circulation everywhere within the world market and inflation has been rampant for several decades, VL has the task of explaining why this happened after commodity money had so long served as the preeminent material to express the value of commodities, the universal measure of value, more or less continuously for millennia.

It is not enough just to say that commodity money now only serves to measure “the historical depreciations of various national money-standards.”  We also have to explain how the law of value rendered the historically primary functions of commodity money obsolete, superfluous.

I think this point cannot be emphasized enough, because, although VL does try to distinguish between the state-issued currency system and the banking and credit system, he, like Mattick, very often appears to frame the disappearance of commodity money from circulation as though the end of its historical functions was a matter of state policy.

At least, this is the impression I get from this quote:

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. 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.

I get the impression from VL, perhaps erroneous, that he thinks Washington chose to let the dollar float against gold — in the same sense that FDR chose to devalue the dollar by 70% in 1933.

In fact, there was no choice in the matter here. The world market was blindly pressing for a devaluation of the dollar in both 1933 and 1971. Washington could not avoid this. The 1971 collapse of Bretton Woods was, like FDR’s devaluation of 1933, an unintended devaluation shock of unimaginable magnitude.

We can see, then, that before we can even begin to explain how inflation might alter the distribution of the social product between capital and labor to ensure the profitability of capital, we must first address the bar set by VL and explain, in a manner consistent with Marx’s labor theory of value, how the money commodity comes to be replaced by a state-issued currency.

And it must explain how this happens not in just this or that country, as a matter of state policy, but through the working out of the immanent contradictions of the capitalist mode of production, throughout the entire world market and in a matter of just four decades or less.


How might we explain the sudden disappearance of commodity money from circulation?

The first step might be to revisit Marx’s quote that I cited above:

Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.

The argument Marx makes here is pretty straight forward. Money expresses the socially necessary labor time embodied in the commodity. Money is, in other words, exchange value in its most developed form. Exchange value, in turn, is merely the value of one commodity expressed in the body of another commodity — hence, Marx’s insistence that, in the final analysis, money must be a commodity.

The collapse of the Bretton Woods agreement challenges this dictum and, therefore, labor theory itself.

But does it?

In contrast to VL, who argues the dollar was taken off the gold standard, Ben Bernanke, former chairman of the U.S. Federal Reserve, bizarrely theorizes that perhaps as early as 1928 the gold standard first “malfunctioned”, becoming “non-neutral” and producing deflation and depression — although, he admits, he had yet to show a clear mechanism for how this could happen:

“If the argument as it has been made so far has a weak link, however, it is probably the explanation of how the deflation induced by the malfunctioning gold standard caused depression; that is, what was the source of this massive monetary non-neutrality? The goal of our paper is to try to understand better the mechanisms by which deflation may have induced depression in the 1930s.”

Bernanke’s bizarre theory, which seems to be the prevalent view among bourgeois simpletons today —  that the gold standard malfunctioned in the 1930s, may be the flip side of Mattick’s argument that inflation was a policy designed to address a crisis of  capitalist profitability in the 1930s. What interests me here is not whether Bernanke ever found his smoking gun for monetary causes of the Great Depression — we pretty much know he did not, because no such cause exists — but that he presents us with evidence that the state in officially devaluing the dollar in 1933 was only compensating for an already ongoing contraction of the money supply by the owners of commodity money.

But I may have presented the state here as if it stands outside of society — let’s fix this.

The state is also an owner of gold, like every other owner. Its currency is merely a representative of some definite amount of commodity money in circulation. Now, how much would this currency be worth if the treasury of the state were depleted of its commodity money and the currency unable to be redeemed on demand?

Zilch, right?

Indeed, Paul Krugman won the Nobel Memorial Prize in Economic Sciences for describing how the reserve assets of a state can be rapidly depleted by frenzied speculative attacks during a currency crisis. We can easily adapt this model to understanding how the central bank systems world wide were hammered by runs during the onset of the Great Depression, as holders of state-issued paper currency converted this paper into gold — all done in hopes of preserving their capital until the dust settled from the economic catastrophe. According to Federal Reserve minutes from 1931, just such a run on the Reserve assets was already raging at the onset of the Great depression.

And the available research indicates central banks of the time, particularly the U.S. and France, who together controlled about 60% of the world supply of the metal in 1930, behaved just like other holders of commodity money and began to hoard commodity money, just as did private owners.

Whatever the cause of inflation turns out to be, the process that ultimately leads to the end of the age of commodity money begins, not with a general and nominal rise of prices, but with an abrupt material economic devaluation of the entire national capital as one country after another slid into depression.

This is what Bernanke bizarrely calls a “deflation induced by the malfunctioning gold standard.”

The actions of the state, far from being an independent variable in this story, is likely to prove no more than a blind reaction to this depression. Rather than being the cause of inflation, the state is simply — and blindly — responding to an ongoing material economic devaluation shock. That reaction is informed by the bourgeois notion — cited at the beginning of this post — that commodities have no value of their own, but acquire their prices after they enter into circulation through the operation of the forces of supply and demand.

With labor theory it is otherwise: the sudden contraction of the supply of money in circulation is no surprise, since the Great Depression involved a sharp and sudden contraction in the production and circulation of the commodities, the exchange of which commodities among the producers themselves, the supply of money merely served to facilitate. As the value of the mass of commodities in circulation contracted with the onset of the depression, the mass of money necessary for to express their values in exchange contracted proportionately. A definite portion of money in circulation — in various forms — was converted into commodity money and withdrawn from circulation.

It is this contraction of the money supply, not the least bit surprising to labor theorists, that leads Bernanke to declare that the gold standard had malfunctioned.

End of part four