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

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 fifth post on VL’s paper.


Quick recap:

Previously, I argued that a theory of inflation that would be consistent with Marx’s labor theory of value is not as simple and straightforward as it seems. I suggested it would take a roadmap of sorts to get there. The reason for this is probably obvious: in Marx’s labor theory of value, unlike bourgeois economics, a description of the way the mode of production works begins with production, not exchange.

This fact hints that an explanation of inflation that would be consistent with labor theory likely should begin on the production side of the mode of production as well.

This where VL’s discussion of Paul Mattick’s ideas on inflation enter the picture. Mattick proposes that inflation is an expression of a crisis of profitability; part and parcel of an effort to raise the rate of profit. VL, while not disagreeing directly with Mattick on this point, points out that, first, such a strategy could only be possible once the gold standard was abolished. Second, VL points out that, even with the abolition of the gold standard, inflation would not alter the distribution of the social product between classes.

In the previous post, I offered a hypothesis to answer VL’s objection regarding the end of the gold standard that did not depend on state policy, but relied instead on Mattick’s idea that inflation has its roots in capitalist crisis, specifically in the Great Depression of the 1930s. Evidence shows that the owners of commodity money, including national governments, abruptly began to withdraw commodity from circulation beginning around the 1930s and hoarding it. This is a process that continued until 1971, when the last remaining currency tied to a commodity money, the dollar, was finally debased by the United States.

But this was only step one of our roadmap in answer to the objections raised by VL: accounting for the end of the age of commodity money. This accounting does not yet explain inflation, although it provides a necessary precondition for inflation. Still less does it explain how inflation might be used to alter the distribution of the social product between capital and labor to raise the rate of profit above zero — an argument made by Mattick in his essay.

The critical next step on our roadmap may be to discuss the implications of the withdrawal of commodity money from circulation for the mode of production because some of them may not be so obvious.


To do this, I will have to ask you to indulge me a bit as I enter a rather long quote from Marx into the record. It is a single paragraph, but I am going to break it into a series of sections. I hope the relevance of this quote will be obvious to the reader. In any case, I will be discussing it as I go along:

In Capital, volume 3, chapter 15, Section I, Marx says this

“The creation of this surplus-value makes up the direct process of production, which, as we have said, has no other limits but those mentioned above. As soon as all the surplus-labour it was possible to squeeze out has been embodied in commodities, surplus-value has been produced. But this production of surplus-value completes but the first act of the capitalist process of production — the direct production process. Capital has absorbed so and so much unpaid labour. With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital.

I am going to designate the total labor time squeezed from the workers, including the mass of surplus labor time, mentioned by Marx above, with the designation “L”. Thus, “L” includes also an increment of surplus labor time, “sL”, which is composed of the surplus labor time of the workers.

I am going to designate the second mass mentioned by Marx in this quote, “PP”. It is that portion of the total mass of labor time, L, actually realized in the market, including the surplus labor time, sL, previously squeezed directly from the workers during the process of production.

Surprisingly, there is nothing in labor theory that says L = PP!

They are, in fact, two different magnitudes of labor time. One is the mass of labor time actually extracted from the workers’ labor power during the act of production. The other is the mass of labor time actually realized for the commodities produced by this act of production in the market. Thus, the real possibility exists that capital cannot realize all of the surplus labor time extracted from the worker.

So, what occurs when this happens — as, in fact, it did happened during the Great Depression?

Well, for one thing, we now have two huge, unequal magnitudes of socially necessary labor time.

The first is all the labor time and surplus-labor time it was possible to squeeze out of the workers that has been embodied in commodities, piled up in warehouses, fields, and in the form of raw materials, factories, etc.

The second is basically that portion of those same use values that were actually sold, “i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value.” [Marx]

And the two masses didn’t equal. The second mass of socially necessary labor time was decidedly less than the first mass of socially necessary labor time by a magnitude — enough, in fact, so that both the rate and the mass of profit fell dramatically.

In any case, they were both still huge masses of socially necessary labor time by all the premises of labor theory of value.


So, let’s look at that quote from Marx on money one more time:

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.

Fair enough, but when the Great Depression broke out society now had two massive and unequal durations of labor time to be expressed.

Now, according to Marx’s theory, which mass of socially necessary labor time cited above should money express? Should money express the mass of socially necessary labor time actually expended? Or should it express the mass of socially necessary labor time realized in the market?

We know the answer to this.

“That’s a trick question, Jehu.”

Money can only express the values of commodities in an exchange. It does not matter how many cars are produced; it is only the cars that are actually sold that count in terms of exchange value. Hence, the term, “exchange value”. This means, for purposes of labor theory of value, only the mass of use-values actually sold — actually realized as commodities in the market — counts as values. The remaining unsold portion of the social product has no exchange value and, therefore, do not counts as values.

So, what happened to all of that expended labor time that resulted in use-values that went unsold? Did it suddenly and without warning get converted into superfluous labor time retrospectively?


And, No … sorta.

In chapter 15 of volume 3, Marx explains that even under the extreme conditions of absolute over-production of capital, absolute over-production is not … uh, well, absolute, absolute over-production. It is, he argues, absolute over-production only in so far as the means of production serve as capital.

Which is a fair bit of qualification, if you ask me.

You do have over-production of means of production and basic necessities of life. But side-by-side with this, you also have unemployment and the formation of huge population of surplus workers. There is this huge gap: even as too much of everything is produced to be sold at a profit, too little of everything is produced to satisfy the needs of the great mass of society. Even as too much capital is invested to be employed profitable, not enough means of production is produced to employ the population. Even as too many are unemployed, large portions of the population are actually incapable of working. Some workers are forced to live off the labour of others. Others workers survive on the most miserable types of work. Fantastic breakthroughs in science and technology occur with increasing frequency, while millions of people actually flip hamburgers by hand or run cash registers for a living. Innovation is stifled and working hours actually lengthen.

So, yeah, there’s absolute over-production of capital, but only to the extent it must function as capital. In reality, there is too little of everything society really needs. Which is to say, the remaining portion of the total labor time of society, which produced commodities that were unsold during the Great Depression, may very well have been superfluous insofar as this labor time produced had no value, but it did not necessarily follow that this labor time was not socially necessary in the material sense of the phrase.

How is this possible?

According to Marx’s labor theory, value can only manifest itself in an exchange:

… the common substance that manifests itself in the exchange value of commodities, whenever they are exchanged, is their value.

It is reasonable to assume, therefore, that if an otherwise useful object cannot be sold in the market, it likely has no value even if it meets all the other criteria for value. This is not unusual. We expect this, for instance, during times of over-production of commodities like the period I am discussing.

By contrast, Marx defines the term socially necessary labor time not with regards to the conditions of exchange of the commodity, but solely with regards to its conditions of expenditure in the act of production:

The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.

Thus, I think it is possible to argue that labor time expended on production of a commodity can be socially necessary but the commodity itself still to be absent any value. This can even be a necessary requirement of certain modes of production, such as, for instance, when cooperative producers directly work together to produce a commodity. The products of their separate labors never take the form of commodities among them and, hence, do not appear as values as they circulate between them until sold in the form of the final product in the market. For all this, their labors remain governed by the requirements of socially necessary labor time as cited above.

Which bring us to this odd historical fork between use-value and exchange-value that occurred during the Great Depression.

During the depression, a portion of socially necessary labor time no longer assumed the phenomenal form of money, i.e., of exchange value in its most developed form. This doesn’t necessarily mean the labor time actually expended on production of commodities was not socially necessary, but it did mean the expended labor created a social product that lacked value.

Now, this wasn’t the first time socially necessary labor produced a use-value for exchange that, it turned out, had no value when it was brought to the market. Every crisis results in a mass of unsold commodities, idled factories and farms, and bankrupt firms. But this was the first time in the history of the capitalist mode of production that this problem had to be resolved by a world historical movement of society: the effective abolition of the domestic use of commodity money throughout the entire world market.

According to bourgeois researchers, it was only after each nation state capitulated to the law of value and severed its national currency from commodity money that its national capital stopped its catastrophic free fall:

“According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, The UK and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. … The connection between leaving the gold standard as a strong predictor of that country’s severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries.

–Wikipedia, The Great Depression


Now, the question might be asked, why did severing national currencies from commodity money work to end the catastrophic collapse of national economies?

Had the gold standard indeed malfunctioned, as former Fed Chairman Ben Bernanke suggested? And what does that even mean? How, exactly, did the gold standard force the contraction of the money supply as has been suggested by other bourgeois simpletons? If neither commodities nor gold have intrinsic value, as bourgeois economists maintain, why would the contraction of the circulation of commodities during a depression have any effect on the circulation of gold-based currencies?

These are all the questions thrown up by bourgeois economists’ explanation for inflation. They are questions for which I have little patience. Instead, I take as a given the empirical observation that, with the effective exit of the gold standard by most industrialized countries in the 1930s, the contraction phase of the Great Depression appears to have ended.

Thus, the question still remains for us why each country’s recovery from the contraction phase of the Great Depression appears to coincide with that country’s effective exit from the gold standard?

One possible answer is that, as each country effectively left the gold standard, the only medium of exchange left in circulation was the state-issued currency of that country. And, unlike gold or other commodity monies, state-issued currencies really have no value. Since these currencies have no value, and were no longer pegged to a commodity money that do have value, the owners of the currencies have incentive not to hoard them, because their capital denominated in state-issued currency … er, depreciates.

Which, when you think about it, is really counter-intuitive if you’re trying to raise the rate of profit.

Let’s suppose the rate of profit was actually zero at the time of the Great Depression. Now, this calamity involves the contraction of commodity production. Consistent with the contraction of the production of commodities, you now also get this massive withdrawal of money from circulation as fewer values demand few units of the money to express their value in exchanges. In response, nation-states, one after another, go off the gold standard to preserve their treasuries and they too start hoarding gold. What is left in circulation is a bunch of valueless paper currency that no one wants to hold because they know it will depreciate.

Now, add this depreciation of the currency to the zero rate of profit and what do you get? I borrowed a supercomputer from a friend and did the math. This is what I got:

“Less than zero.”

If the problem that leads to inflation is the crisis produced by law of the tendency of the rate of profit to fall, how does inflation fix this? Isn’t capital just digging a deeper hole for itself by adding inflation to the problem of overaccumulation of capital?

Suppose you are an American capitalist, for instance. It is April 4, 1933. You have just converted your commodity capital into actual cash upon sale in the market and find you have realized a zero rate of profit on your invested capital for all your bother.

You’re pissed, right?

Well, it gets worse.

The next day, you go into the office and discover that your capital has been forcibly devalued a further 70%, because, today, FDR signed Executive Order 6102, which devalued the dollar from 20.67 per troy ounce of gold to 35 per troy ounce of gold. Which mean, your zero rate of profit has just been turned into a massive loss by a stroke of FDR’s pen.

You open the big picture window in your office and stare down to the street below from the ledge.

How is this a recipe for raising the rate of profit?

Or, perhaps, I’m missing something very important here.

End of Part Five