The Real Movement

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Tag: ben bernanke

Schrödinger’s Capital: How commodity money died (and the value-form school missed it)

NOTE 8: “Money never finally exits circulation”?

Again with Chris Arthur and his amazing 2003 paper.

Perhaps some might think I am being unfair in castigating Arthur for his historical ignorance when it comes to his discussion of money.

Well, let me put that thought to rest right now.

In the previous note I pointed out that Arthur makes the argument inconvertible fiat currency behaves the same commodity money does without ever once introducing a single piece of empirical evidence to support his claim. But this is not his only claim that actual historical investigation will disprove.

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The hidden conflict within the fascist state for control of economic policy (5)

I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part five of the series; part one, part two,  part three and part four can be found here. I hope it also will have some use to readers.

Part Five: The dollar and the increasing possibility of 21st Century Currency Warfare

Can monetary policy be rescued from oblivion? Probably not. There are just too many difficulties with the idea of negative interest rates on currency.

As I explained in part four of this series, Haldane proposes that the way around the zero lower bound on monetary policy may be to impose a negative interest rate on the holders of state issued currency. If a way could be found to force the holders of currency to pay interest on the currency in their bank accounts, wallets, pockets — and even in their mattresses — the distinction between credit money and currency could be forcibly imposed on society by the state despite a zero interest rate environment.

Once stripped of its deceptive wrapping as mere monetary policy, what Haldane is proposing is the outright expropriation of your savings account, your checking account and even the currency in your wallet and cookie jar. This goes well beyond monetary policy and begins to encroach on the limits of national economic policy itself. Under the most charitable interpretation, his proposal is well into the sphere of fiscal, even currency, policy despite the attempt to conceal it behind protective coloration as a negative interest rate on currency.

For the moment, however, let’s ignore this potential objection to his proposal. Instead, let’s treat it as a proposal for a measure similar to what FDR did in 1933: pure and simple devaluation of the currency.

What are the difficulties to be considered?

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The hidden conflict within the fascist state for control of economic policy (4)

I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part four of the series; part one, part two and part three can be found here. I hope it also will have some use to readers.

Part Four: The desperate search for an exit from failed monetary policy

“I think we got the Recovery Act right. The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.” Larry Summers, Washington Post, November 8, 2009

“We didn’t think it would take that long.” Ben Bernanke, USA Today, October 5, 2015

The disappointment with the weak impact of counterfeiting the currency was admitted by Bernanke in a recent interview. This was not supposed to happen according to the dominant monetary theory, and Ben Bernanke in particular, where the prices of commodities are a function of the supply of currency in circulation. According to Bernanke’s “quantity theory of money”, the government had this technology, the printing press, which it could use to manage the US national capital. In fact, following the financial crisis, the policy rate went to zero without providing any real stimulus at all.

The chief economist of the Bank of England, Andrew Haldane, gave a speech in September on the problems faced by monetary policy. Although Haldane never mentions Larry Summers, his speech addresses the same concerns Summers raised in his own November 2013 “secular stagnation” speech. The problem is that monetary policy, on which the United States has relied since 1979, has run into a dead end, the zero lower bound. Had Washington not stepped in and provided a multi-year, multi-trillion dollar fiscal stimulus, capitalism likely would have collapsed. No one will admit it, but this is in fact what has happened after the 2008-2009 financial crisis.

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Why Keynes predicted a 15 hour workweek, but Marx did not

One final question raised by John Milios’ paper on crisis theory remains to be addressed.

I have shown that Keynes’ explanation of the Great Depression was identical to that underlying Marx’s prediction that commodity production would collapse, namely the constant reduction of the socially necessary labor time required for production of commodities.

3026617I have also shown that the Great Depression took the form predicted by Marx: a collapse of production on the basis of exchange value. If, as Marx’s theory asserts, exchange value must take the form of commodity money, we should expect the collapse of production on the basis of exchange value to express itself as a crisis of commodity money. The minutes of the Federal Reserve from the outbreak of the Great Depression does indeed indicate that commodity money stopped circulating in the “economy” after 1929.

Keynes failed prediction

Moreover, Keynes initially argued this crisis made necessary both the reduction of hours of labor as well as existing “social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties”. In other words, Keynes thought the Great Depression established the immanent economic necessity for an end to a society founded on wage slavery. If the critical question debated by the classical Marxists was whether or not Marx had established the immanent economic necessity for socialism, Keynes appears to suggest he did — although he never mentions Marx in his essay.

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That time when Ben Bernanke admitted Marx was right and John Milios was wrong

So what do we know regarding the validity of SYRIZA economist John Milios’ criticism of Marx’s alleged theory of crisis?

  • First, we know Marx never had a theory of crisis. This has long been acknowledged by almost all scholars of Marx’s theory.
  • Second, we know Marx predicted the collapse of production on the basis of exchange value. However, this fact is ignored by almost all scholars of Marx’s theory.
  • Third, we know Keynes agreed with Marx on what caused the Great Depression: the improvement in the productivity of labor.

ben-bernanke-goes-hardcore-doveKeynes hypothesis of the cause of the Great Depression, which is fully consistent with Marx’s theory, completely disagrees with the dominant explanations of crises advanced by the underconsumptionists, the falling rate of profit school and the “multi-causal” school of Milios, Harvey and Heinrich. Keynes, like Marx, locates the cause of crises in the constant reduction of socially necessary labor time required for production of commodities.

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A policy framework that kills capitalism, rather than fixing it

albert-einsteinI am in the process of reading a book with a very long title, Black hole: how an idea abandoned by Newtonians, hated by Einstein, and gambled on by Hawking became loved by Marcia Bartusiak.

According to Bartusiak,  few scientists believed Einstein’s theory had any practical use before mid-century. Einstein’s theory wasn’t even taught in most universities and Newton’s theory was thought to be adequate:

“After the flurry of excitement in 1919, when a famous solar eclipse measurement triumphantly provided the proof for Einstein’s general theory of relativity, the noted physicist’s new outlook on gravity came to be largely ignored. Isaac Newton’s take on gravity worked just fine in our everyday world of low velocities and normal stars, so why be concerned with the minuscule adjustments that general relativity offered? What was its use? “Einstein’s predictions refer to such minute departures from the Newtonian theory,” noted one critic, “that I do not see what all the fuss is about.” After a while, Einstein’s revised vision of gravity appeared to have no particular relevance at all. By the time that Einstein died, in 1955, general relativity was in the doldrums.”

As I read Bartusiak’s book it occurred to me that much the same is true of Marx’s theory. Marx’s labor theory of value, although a giant step beyond the classical theorists of his time, and despite initially producing a huge wave of revolutionary fervor, has mostly been ignored at least since the 1930s.

The depression that never ended

In his own book, Austerity, the history of a dangerous idea, Mark Blyth argues that Marxists in Germany in the 1930s assumed the Great Depression be like any previous crisis– it would devalue excess capital and establish a basis for a new expansion. Although Blyth is only speaking of the SPD he may have a point. Every previous crisis had unfolded that way. Why would the Great Depression be different? No one at the time knew things had changed forever, nor how they had changed forever. Most of all no one seems to have realized that only with the Great Depression did Marx’s theory really become relevant to policy.

Most economists, even Marxist economists, are not accustomed to thinking about labor theory as a policy framework. Even for self-identified Marxists like SYRIZA in Greece or the SWP in Britain Keynes not Marx provides the policy framework. This leads to the sort of theoretical contradictions highlighted by SYRIZA MP and Marxist economist Costas Lapavitsas that the Keynesian policies he advocates are designed to save capital not kill it:

“Keynes is not Marx, and Keynesianism is not Marxism. Of course there’s a gulf between them, and it’s pretty much as you have said. Marxism is about overturning capitalism and heading towards socialism. It has always been about that, and it will remain about that. Keynesianism is not about that. It’s about improving capitalism and even rescuing it from itself. That’s exactly right.”

Hence in an ironic turn of a phrase usually applied by Stalinists to Trotskyists, Marxists appear to oppose capitalism everywhere but where it exists. If you ask Marxists what they would actually do once elected they could hardly give you anything more Marxist than SYRIZA’S Thessaloniki programme. The program that Marxists run on in elections is not their complete program, of course, and they will emphasize this, but it is their ‘immediate’ program to ‘address the crisis’; while their full program is overthrow of capitalism.

I would argue this sort of division between immediate and full program is what became obsolete in the 1930s.

The breakdown of marginalist school theory

How does this relate to Bartsiak’s insightful observation about Einstein’s theory? When scientists began to test the limits of Newton’s theory its limitations became apparent and Einstein’s theory became necessary. Bartusiak observed that Newton’s theory was good enough to get us to the moon and back, but broke down after that. In a similar sense, marginalist theory worked up until the Great Depression, but proved incapable of addressing the sort of mass unemployment that erupted in the 1930s.

Marx’s theory certainly predicted the emergence of mass unemployment, but this prediction, although interesting, was irrelevant until capitalism reached a certain point in its development. Up until that point, economists could ignore the contradiction between production on the basis of exchange value and production for profit. Which is to say, they could ignore the contradiction between values of commodities and their capitalistic prices of production. Even if this contradiction existed, as a practical matter the mode of production was motivated by profit, not by exchange value. As a practical matter, if you want to transform values into prices, said Paul A. Samuelson:

“It’s easy, you erase [Marx’s labor] values and replace them with prices of production”.

This is how things stood until the Great Depression, when, as former Federal Reserve Chairman Ben Bernanke put it, the gold standard mysteriously “malfunctioned”; transmitting the shock of absolute overaccumulation throughout the entire world market. Capitalism, in short, had gone to the moon and back, but it was now on the frontier of an economy where marginalism was inadequate.

Why would Marx’s theory be particularly relevant beginning with the Great Depression? First, because in Marx’s theory capitalism constantly reduces the socially necessary labor time required for production of commodities. The reduction of the socially necessary labor time required for production of commodities is the reduction of the values of commodities. Second, and simultaneously, capitalism constantly extends the labor time of the social producers so as to maximize its profits. With the values of individual commodities declining, and the total labor time of society increasing, the mass of commodities produced during the labor day grows phenomenally.

It is true that new consumer needs are created by, and new export markets open up to, this massive torrent of commodities, but eventually, as Keynes observed, the growing productive capacity of social labor outstrips any and all new uses for labor. Commodities can no longer be sold at their prices of production, because the average rate of profit has fallen to zero. The capitalist mode of production has reached the limits of the expansion of capital, of production of surplus value, production for profit.

In Marx’s labor theory, the capitalist price of a commodity is some duration of living labor, divided into necessary and surplus labor time. This gives us the mathematical expression, v+s. This is opposed to the simple labor value of a commodity, whose price is mathematically expressed as v. The capitalist commodity production price is maintained by extending the labor of the worker beyond the point necessary given the technological development of the productive forces. This extension is mathematically expressed as s — i.e., surplus value or surplus labor time. So long as the labor time of the social producers can be extended beyond what is necessary for their material need, surplus value is created.

Thus, at the point where capitalistically produced commodities can no longer be sold at their prices of production, the labor time of the social producers can no longer be extended beyond that duration necessary to satisfy their material needs. The surplus labor time of the social producers, no matter how great or materially necessary, produces no new value. Since capitalist production is the production of surplus value, it halts, and must of necessity halt, at the point where labor no longer produces value.

Animal spirits versus labor time

This cessation of production is not a subjective phenomenon; the result of animal spirits, or inadequate demand; nor is it the result of malinvestment, overproduction of commodities or too little money or some other nonsense. The source of the collapse of capitalist production is too much capital, i.e., the production of surplus value, production for profit. Capital suffocates on its own capacity for self-expansion. So soon as capital has successfully reconstructed society in its image, the means by which it overturns the old society — by extending the labor time of the producers and increasing the productivity of labor — becomes a weapon turned against itself.

Like Einstein’s theory in the natural sciences, Marx’s theory only proved significant when society had actually crossed the threshold of absolute overaccumulation. Until that time, capitalist production went through crises, but these crises were simply momentary forcible adjustments that paved the way for new capitalist expansions. When the Great Depression hit, everyone thought it would end up the same way — a short-term forcible readjustment of capitalist production. In fact, the depression never ended; it just went on and on without any let up. As in the case of Greece today, no one realized something had changed permanently with the way capitalism worked.

When it comes to policy, Marx’s argument is not well understood even by Marxist economists and certainly not by anyone else. To understand why this is true, doesn’t take much analysis. We can all agree that Marx essentially called for the abolition of wage labor. This call by Marx is typically cast in a political context: The working class must seize political power and employ its position as the new ruling class to work out its emancipation. There is, in fact, nothing about this political interpretation of Marx’s theory that is wrong or even misunderstood, per se.

However, what most people overlook is that Marx did not make this argument out of the blue, i.e., he was not describing his peculiar blueprint for society, nor a vision of the future that could be imposed by political measures. For Marx, capitalism was already in the process of abolishing labor by developing the productive forces of society. The proletariat could not abolish labor unless, simply because it wanted to end wage slavery, any more than slaves could abolish slavery simply because they wanted to be free.

What the proletariat had that slaves did not is that the capitalist mode of production itself was already headed toward abolition of wage slavery — something that was never true of slavery. The proletariat could accelerate the process already under way in the capitalist mode of production, because the way capital accomplished the abolition of labor periodically created obstacles to that historical result. Properly armed with theory, the working class could remove those obstacles and emancipate itself. Simply removing the obstacles to the development of social labor was sufficient to accelerating the process.

Every crisis is a crisis of overwork

The biggest obstacle to development of the productive forces was the tendency toward overaccumulation of capital. But the overaccumulation of capital resulted solely from the extension of hours of labor of the social producers beyond that duration socially necessary for production of commodities. Marx’s theory states that the solution to any crisis of capitalism is simply to reduce hours of labor.

Perhaps, he got this wrong; perhaps he dropped a stitch somewhere. In that case, those who accuse Marx of getting it wrong have to explain why every crisis is accompanied by a general social demand for Keynesian stimulus to achieve full employment. If hours of labor are not the problem, why does the fascist state have to create jobs to maintain full employment? Why does every crisis generate political calls for job creation or a subsistence stipend for those without jobs? Why do even the opponents of the working class drape their proposals in the flag of job creation?

If Marx’s theory is correct, the only policy any Marxist needs to advocate “to address the crisis” is a reduction of hours of labor. But the reduction of hours of labor is itself only the progressive abolition of wage slavery itself. Thus, the immediate program of Marxists to “address the crisis” is EXACTLY the same as their full program; there is no longer the contradiction of an immediate program to address a capitalist crisis that saves capitalism rather than killing it.

Are Marxists calling for a return to fascist state management in Greece?

Anyone who thinks Greece should leave the euro might want to revisit the Argentina depression of 1998-2002. According to Wikipedia, at the height of the depression almost 60% of the country lived below the poverty line. Argentina was forced to default on its debt, unemployment rose to 25% and the state froze all bank accounts for 12 months.

golden-dawn-greece-730The parallel to Greece is significant because although Argentina never was a member of a common currency, at the outset of the crisis, its currency, the peso, was fixed 1-1 to the dollar. The parallel between Greece and Argentina is that the euro also acts like a fixed exchange among many different national currencies. Thus, if Greece were to exit the euro common currency system, it would essentially be like floating the drachma against the mark, franc, and so forth. If this is true, at least in theory, the exit of Argentina from its fixed exchange with the dollar at the beginning of its own 1998 crisis may throw light on what Grexit would mean for the Greece working class.

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Bernanke’s ‘Septaper’ Debacle

Why didn’t the Fed begin tapering yesterday? Matt O’Brien (twitter: @ObsoleteDogma) thinks he knows:

“The short version is it didn’t make sense. The longer version is it didn’t make sense, because the recovery is still rotten — and might get even more so.”

The cause of this rottenness is clear for O’Brien:

“The Fed won’t be willing to withdraw any stimulus until House Republicans give up their fantasy of using a government shutdown or debt default as leverage to defund Obamacare.”

Ben Bernanke Holds News Conference After Fed Interest Rate AnnouncementThis is a rather unconvincing explanation in my opinion. In 2002, Bernanke looked at Japan and asked why, if he was recommending quantitative easing if deflation struck the US,  quantitative easing didn’t work for Japan. He came up with an interesting explanation: Japan was rocked by an economic and political crisis in addition to deflation:

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Pushing On A String? – The logic of state management of capitalism

“‘Pushing on a string’ is particularly used to illustrate limitations of monetary policy, particularly that the money multiplier is an inequality, a limit on money creation, not an equality.” –Wikipedia

So here are the questions I have been contemplating for the past week or so: When simpleton economists suggest policies to manage “the economy”, what in their view do they think is being managed? How do they Yellen-Summers-picconceptualize both the “economy” itself and the tools they employ to manage it? What, if any, are the vulnerabilities (defects) of this form of management that is being expressed in the current debate among mainstream (neoclassical) economists? In particular, what are the choices being expressed in the debate over who should replace Bernanke as chair of the Federal Reserve Bank?

To be sure, I am not trying to offer a polemic against mainstream economics in this essay but to understand this policy in its own right, as well as to restate it in a form that is comprehensible within a labor theory framework as i understand that framework.

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Part 2: How Larry Summers proved Marx was right about everything — (And why this is not necessarily good news)

3. So here is my question

Why would Summers go to all that effort just to prove Marx had been correct all along regarding how the capitalist mode of production works. Why did Larry Summers set out to prove that the herald of the communist specter, the co-founder of Scientific Socialism and the arch-nemesis of the bourgeoisie was absolutely correct in his description of the difference between the way commodity money operates and the way valueless state issued pieces of paper function. Was it because of some intellectual curiosity about an obscure empirical observation that, even by Summers’ own admission, was no longer even relevant? Was  it a platonic pursuit of truth?

Personally, I don’t know any communist who thinks the words “Larry Summers” should appear in the same sentence with the word, “truth”; and I am not buying that explanation either. The more likely answer would be that a proper understanding of how the mode of production works is necessary both if you want to accelerate capitalism’s development and if you want to devise effective policies to prevent it from collapsing.

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