The Bloody Rise of the Dollar System

The current dollar-centered international monetary system is the result of a century of competition among the capitalist nations, especially the imperialist countries. The competition that led to the current dollar system was not only economic but also political and not least military. The military competition took the form of not one but two of the bloodiest wars in world history.

Relationship between economic, political and military competition

Although there is not a one-to-one relationship between political-military and economic competition among capitalist countries, political-military competition is ultimately rooted in economic competition. So in examining competition among capitalist countries, we first have to look at economic competition. What are the economic laws that govern competition and trade among different capitalist countries?

First, let’s review the laws that do not govern international trade under the capitalist system. Using the quantity theory of money and, at least implicitly, Say’s Law, the (bourgeois) economists picture competition among capitalist nations as a friendly game in which everybody emerges the winner. Within each country, according to the economists, “full employment” reigns.

According to the modern marginalist economists, under perfect competition each “factor of production”—land represented by landowners, capital represented by capitalists, and labor represented by workers—gets back in rent on land, interest on capital, and the wages of labor precisely the value each creates. Our economists claim that as long as “perfect competition” exists, no “factor of production” can exploit another factor of production.

Similarly in world trade, every country benefits by “free trade.” According to the theory of comparative advantage, each country concentrates its production on what it is comparatively best at, not necessarily absolutely best at. According to this theory, even if a given country has a below-average level of labor productivity in every branch of production, there will always be some branch where it will enjoy a comparative advantage enabling it to prevail in international competition.

Therefore, if we are to believe the economists, countries that are deficient in modern productive forces benefit from international trade just as much as the countries that monopolize the world’s most advanced productive forces. The result, the economists claim, is the most efficient system of global production that the prevailing technical and natural conditions of production allow.

Dean Baker on the Price of Oil

Recently, Mrzine, the online magazine of the Monthly Review Foundation, published the testimony of the left Keynesian economist Dean Baker to the U.S Congress. Baker attempted in his testimony to refute the claims made by right-wing bourgeois economists that the spike in oil and gasoline prices earlier this year was caused by the U.S. Federal Reserve Board’s policy of “quantitative easing.”

What is “quantitative easing”? And why has the U.S. Federal Reserve System, which under the dollar system acts in effect as the world’s central bank, been following such a policy?

Last year, the outbreak of the European sovereign debt crisis, followed by a distinct pause in the global economic recovery, brought fears of a renewed global recession. The U.S. Federal Reserve Board announced that it would purchase $600 billion worth of U.S. bonds in a bid to stave off a “double-dip” global recession. Or what comes to exactly the same thing, the Fed in effect announced that it was going to transform $600 billion in U.S. government debt into green U.S. paper dollars—or their electronic equivalent.

Since last December when the quantitative easing program actually kicked in—it had been announced earlier—the quantity of token money denominated in U.S. dollars has jumped by more than 35 percent. To put this number into perspective, during the prosperous post-World War II years, the quantity of U.S. token money rarely grew more than 3 percent per year.

Between May 21, 2010, and April 29, 2011, oil prices jumped almost 62 percent, peaking out at over $113 per barrel. In response, gasoline prices have soared. World food prices have also increased sharply in terms of the depreciated U.S. dollar.

Even before the explosion in the quantity of dollar token money began, speculators anticipating the expected increase in token dollars began to push up the dollar price of gold, oil and primary food commodities. The dollar price of gold rose from $1,177 per troy ounce on May 21, 2010, to $1,556 per troy ounce on April 29, 2011. Or what comes to exactly the same thing, the U.S. dollar in terms of gold was devalued against gold by more than 24 percent in the same period.

When speculators expect a change in the quantity, or rate of growth of the quantity, of token money, they act accordingly, causing currency prices of gold and primary commodities to change even before the expected change actually occurs. If the expected change fails to materialize, markets will then react sharply in the opposite direction. This is exactly what happened in late 2008. But this was not the case in 2010 and 2011, since this time the expected changes in the quantity of dollar token money have indeed fully materialized.

So it would seem on this issue that the right-wing bourgeois economists who blame the U.S. Federal Reserve System for the spiking oil, gasoline and food prices have a point, though the alternative might well have been a renewed global recession.

However, in his congressional testimony the progressive economist Dean Baker challenged the view that the Federal Reserve policies have had much to do with this year’s spiking oil and gasoline prices. (Baker didn’t deal with the question of food prices in his congressional testimony.) Since the MRzine editors decided that Baker’s testimony was worth publishing, it is worth examining Baker’s arguments in some detail.

Presumably, MRzine published Dean Baker’s testimony because the editors believe that Baker is the kind of left Keynesian that Marxists can and should be working with as part of Monthly Review’s general policy of attempting to push the U.S. economics profession back toward Keynesianism, which dominated it in the years immediately after World War II, as opposed to the neo-liberal theories that have dominated since the 1970s. Indeed, Baker as an economist is probably about as far to the left as you can get in the U.S. and still be a bourgeois economist. It is therefore instructive to examine Baker’s approach to the question of the recent rise in oil and gasoline prices.

A Keynesian Takes on Karl Marx

In this reply, unless otherwise noted, text in italics and in brackets in Marx quotes is carried over from the version taken from the Marxist Internet Archive.

A friend N has asked if there is any difference between “the over-accumulation of capital” and “the overproduction of commodities.” Another friend M sent me a critical article by leading American Keynesian economist Brad DeLong on Chapter 17 of Marx’s “Theories of Surplus Value.” DeLong’s article is titled “Marx’s Half Baked Crisis Theory and His Theories of Surplus Value, Chapter 17.”

It so happens that in Chapter 17 Marx deals with the relationship between the “overproduction of capital”—also called the “over-accumulation of capital”—and “the overproduction of commodities.” The economists of Marx’s time—the middle years of the 19th century—admitted the “overproduction of capital”—equivalent to the over-accumulation of capital—while denying the “overproduction of commodities.”

Therefore, DeLong’s critique of Marx and N’s question about the relationship between the overproduction of commodities and the over-accumulation of capital are connected by Chapter 17 of “Theories of Surplus Value,” the target of Brad DeLong. It is therefore possible to deal with DeLong’s critique and N’s question in a single reply.

Are Marx and Keynes Compatible Pt 8

Sweezy attempts to develop a theory of crises in ‘Theory of Capitalist Development’

In “Monopoly Capital,” Sweezy (and Baran) treated crises and the industrial cycle only in passing. In contrast, in “The Theory of Capitalist Development” Sweezy examined Marxist crisis theory in considerable detail. Even today, “The Theory of Capitalist Development” can be recommended for anybody interested in the development of Marxist crisis theory in the first part of the 20th century.

In his survey, Sweezey examined the writings of such Marxists as Kautsky, Hilferding, Rosa Luxemburg and Henryk Grossman. Sweezy found essentially three crisis theories among these early 20th-century Marxists.

One was put forward by Karl Kautksy around the turn of the 20th century. It involved the question of whether capitalism was evolving toward a state of chronic depression.

What is sometimes called the “Great Depression” of 1873-1896 had come to an end, and the world capitalist economy was entering a phase of rapid economic expansion. According to Kautsky, it was the existence of agrarian markets still dominated by pre-capitalist simple commodity production that explained capitalism’s continued ability to grow.

However, as capitalism continued to develop, these markets would be expected to decline in importance and the world capitalist economy would, if socialist revolution did not intervene, sink into a state of more or less permanent depression. This would mark the end of capitalism’s ability to develop the productive forces of humanity.

Therefore, according to Kautsky, the cyclical crises and their associated depressions were heralds of the approaching state of permanent depression. As such, they were reminders that capitalist production was historically limited and would inevitably give way to a higher mode of production.

Later, in 1912, Rosa Luxemburg attempted to prove Kautsky’s turn-of-the-century views in a rigorous way in her “Accumulation of Capital.” Luxemburg believed that she had indeed proven that assuming that all production is capitalist—that is, there are no more simple commodity producers—expanded capitalist reproduction would be a mathematical impossibility. And remember that according to Marx capitalism can only exist as expanded reproduction.

Are Marx and Keynes Compatible? Pt 7

Last week, I examined the letter Baran sent to Sweezy in 1960 that dealt with the concept of the “economic surplus.” Over the next two weeks, I will examine the letter Sweezy sent to Baran dated September 25, 1962, which deals with monopoly, capitalist stagnation and Keynes.

Sweezy and stagnation

Sweezy described himself as a “stagnationist.” In his mature writings, he came to believe that the “default” condition of monopoly capitalism is a state of “stagnation.” But what exactly did Sweezy mean by “stagnation”? To understand what he meant, we have to understand the traditional marginalism that formed the starting point of Sweezy’s economic studies.

Marginalist, or “neoclassical,” economics claims that a capitalist economy has a strong tendency toward full employment of both the means of production and workers. Remember, the marginalists hold that, assuming there are no unions or social legislation, the capitalist economy will have as its normal condition a situation of full employment of both the means of production and workers.

When Sweezy began his economic studies at Harvard before both the New Deal and the rise of the CIO (Congress of Industrial Organizations), there was virtually no social legislation or social insurance of any kind in the United States. The union movement was very weak and, outside of mining, in basic large-scale industries was virtually nonexistent.

Therefore, according to marginalist theory the U.S. economy should have been very close to a situation of full employment of both the means of production and the workers. But in the early 1930s as Sweezy was studying economics at Harvard, the U.S. was facing an extreme crisis of mass unemployment. Clearly, there was something very wrong with the economics that Sweezy was learning.

Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 2

Marx, Okishio and Kliman and the rate of profit

The more interesting part of Kliman’s book “Reclaiming Marx’s ‘Capital’” is actually not his non-treatment of the transformation problem but rather his treatment of the laws that govern the rate of profit. Of special concern for Kliman is the so-called Okishio theorem, which supposedly refutes Marx’s law of the tendency of the rate of profit to fall.

The Okishio theorem, which was clearly inspired by the “neo-Ricardians,” is named after the Japanese economist Nobuo Okishio, who developed it. Okishio began as a bourgeois marginalist mathematical economist but evolved toward Marx. Unfortunately, somewhere along the way he seems to have fallen into the “neo-Ricardian” swamp, which the Japanese economist perhaps confused with Marxism—apologies to Ricardo, who developed the law of labor value as far as he could rather than scrap it like the misnamed “neo-Ricardians” have done.

According to the Okishio theorem, as long as the real wage remains unchanged it will never be in the interest of an individual capitalist to adopt a method of production that will cause the rate of profit to fall. Marx showed that the real wage—the use values of the commodities the workers buy with the money they receive in exchange for their labor power—is determined by what is necessary to reproduce their labor power.

Marx explained that the real wage consists of two fractions. One is an absolute minimum that is required to biologically reproduce the workers’ labor power. The real wage can never fall below this level for any prolonged period of time. If it did, the working class would die out and surplus value production would cease. The second fraction is the historical-moral component, which depends on the history of a given country and the course of the class struggle. The latter fraction of the real wage enables the workers to a certain extent to participate in the fruits of the development of civilization.

By contrast, Okishio assumed that the real wage of the workers would never change. Okishio then went on to prove mathematically that assuming this unchanged real wage it would never be in the interest of an individual capitalist to adopt a method of production that would actually lower the rate of profit. Assuming this unchanged real wage, the only innovations that would be adopted by the capitalists would be those that would raise the rate of profit.

Making these assumptions and using a “neo-Ricardian” model, Okishio drew the conclusion that Marx’s law of the tendency of the rate of profit to fall was internally inconsistent and therefore invalid. Okishio’s conclusion is very disturbing to Andrew Kliman, because Kliman’s theory of crises depends entirely on a falling rate of profit and not on the problem of realizing surplus value. Therefore, from Kliman’s point of view, if the Okishio theorem cannot be disproved, capitalism should be able, at least in theory, to develop without crises.

Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 1

[The following is the first of a two-part reply to a reader’s question. Since the reply had to be broken into two parts due to its length, part 2 will be posted two weeks after this part appears. My plan is to return to a monthly schedule after that.]

A while back a reader asked what I thought about the work of Andrew Kliman. Kliman is the author of a book entitled “Reclaiming Marx’s ‘Capital,’” published in 2007. In this book, Kliman, a professor of economics at Pace University, attempts to answer the claims by the so-called “neo-Ricardian” economists that Marx’s “Capital” is internally inconsistent. According to the “neo-Ricardians,” Marx was not successful in his attempts to solve the internal contradictions of Ricardo’s law of labor value.

The modern “neo-Ricardian” school is largely inspired by the work of the Italian-British economist and Ricardo scholar Piero Saffra (1898-1983). But elements of the “neo-Ricardian” critique can be traced back to early 20th-century Russian economist V. K. Dmitriev. Other prominent economists and writers often associated with this school include the German Ladislaus von Bortkiewicz (1868-1931) and the British Ian Steedman.

The Japanese economist Nobuo Okishio (1927-2003), best known for the “Okishio theorem”—much more on this in the second part of this reply—evolved from marginalism to a form of “critical Marxism” that was strongly influenced by the “neo-Ricardian” school.

In the late 20th century, the most prominent “neo-Ricardian” was perhaps Britain’s Ian Steedman. While Sraffa centered his fire on neoclassical marginalism, Steedman has aimed his at Marx. His best-known work is “Marx after Sraffa.” The “neo-Ricardian” attack on Marx centers on the so-called transformation problem and the Okishio theorem.

The Okishio theorem allegedly disproves mathematically Marx’s law of the tendency of the rate of profit to fall. The transformation problem is more fundamental than the Okishio theorem, since it involves the truth or fallacy of the law of labor value itself. I will therefore deal with the transformation problem in the first part of this reply and the Okishio theorem in the second part. However, Andrew Kliman seems to be more interested in the Okishio theorem for reasons that will soon become clear.

I have already dealt with the transformation problem in an earlier reply. But here I will take another look at it in the light of Kliman’s work.

Why Capitalism Requires Expanded Reproduction

A friend Nick wants to know why capitalism can only exist as expanded reproduction. In Volume II of “Capital,” Marx developed the diagrams for both simple and expanded reproduction. Why can’t capitalism function as a system of simple reproduction?

I examined the question of simple and expanded reproduction in my main posts, especially here and here. Here I want to focus on the question of why capitalism can’t exist as a system of simple reproduction. Didn’t Marx, after all, create a mathematical model that shows exactly how simple capitalist reproduction works? Yet in many places throughout “Capital,” Marx emphasized that capitalism can exist only as expanded reproduction.

Without going into detail, let’s review the basics of Marx’s diagrams of simple and expanded reproduction.

First, Marx assumed a pure capitalism. He was not interested in other modes of production such as simple commodity production that in the real world exist side by side with capitalist production.

Second, Marx was interested only in the two most economically important fractions of the two major classes in capitalist society. These are the industrial capitalists—defined as the capitalists who purchase the labor power of productive-of-surplus-value workers—on one side, and the industrial workers—the workers who produce surplus value—on the other. The non-industrial capitalists such as merchants and money capitalists and non-productive workers—workers who do not produce surplus value—play no role in the diagrams.

Simple reproduction

In Marx’s diagram, or mathematical model, of simple reproduction, the accumulation of capital is absent. The total social capital is simply conserved, not accumulated. All the surplus value produced by the working class is consumed in the form of items of personal consumption by the capitalist class. This consumption consists of what Marx called necessities, items that are also consumed by the working class, and luxury items that are consumed by the capitalist class alone.

The economy simply reproduces itself without any change. As machines are used up, they are replaced by identical machines. Raw materials and auxiliary materials that are consumed are replaced by identical raw and auxiliary materials. As workers die or retire, they are replaced by other workers with identical skills.

The market and the monetary system in Marx’s diagrams of reproduction

Many Marxists when they produce diagrams of simple reproduction—as well as expanded reproduction—simply leave out the question of money and the market. By leaving out money, they imply a system of barter where commodities exchange directly with commodities. They therefore build Says’s so-called law—that commodities are purchased by means of commodities, and therefore a general overproduction of commodities is impossible—right into the foundations of their model. Attempts to explain crises on the basis of mathematical models of either simple or expanded reproduction that leave out money are doomed to failure from the start.

Productive Versus Unproductive Labor

Reader Mike Treen—who is a trade union leader in New Zealand—has some questions regarding what is and what is not productive labor. He gives specific examples, and asks whether the labor in question is productive or unproductive labor. I will examine his questions below.

First, I will begin with some general remarks.

The classical economists, Marx, and productive versus unproductive labor

The classical bourgeois political economists made a distinction between productive and unproductive labor. Marx’s greatly improved theory of value and surplus value brings into crystal-clear focus what is meant by unproductive and productive labor under the capitalist mode of production.

What is the aim of capitalist production? It is the production of an ever greater mass of profit. But profit is only the money form of surplus value. Therefore, as far as the capitalist system is concerned, labor is only productive if it creates a surplus value. It is not enough that labor creates value—that is, abstract labor embodied in a material commodity or service—but rather in addition it must create a surplus value.

Marx’s criticism of Adam Smith

The classical economists considered the labor of personal servants to be unproductive in the capitalist sense—the only sense they were interested in. They were quite correct in this. But this caused Adam Smith, in Marx’s view, to make an incorrect generalization. Smith held that only labor that makes material commodities, as opposed to services, is productive labor.

Suppose that I am a rich man—it doesn’t matter whether I am a capitalist or a landlord—who decides to hire workers to produce a piece of furniture that I will use only as an article of personal consumption. In this case, even though the workers who I hire produce a material use value and perform surplus labor (labor over and above the value of their labor power), their labor will not take the form of value because the furniture will not be exchanged. It will never be sold on the market. Since no value is produced, no surplus value can be produced either. Therefore, the fact that the labor of the workers produces a tangible material use value does not make their labor productive in the capitalist sense of the word.

But what about the opposite situation? What happens if I as a theatre owner who runs my theatre as a profit-making enterprise hire an opera singer with the intention of her giving live performances that I allow only money-paying customers to attend? Is the labor of the opera singer productive in the capitalist sense? Does it produce surplus value?

Financialization and Marx — Pt 2. Can the Capitalists Share Surplus Value with the Working Class?

In the last reply, I explained that skilled workers though they receive higher wages than unskilled workers do not appropriate any surplus value. On the contrary, their higher wages reflect the higher value of their labor power.

A single commodity labor power is actually an abstraction. In the real world, there are different types of labor powers—plumbers, carpenters, jewelers, assemblers, and so on with different values. However, from the viewpoint of the industrial capitalists, these different types of labor powers have the same use value, they all produce surplus value.

If one type of labor power, say that of carpenters, had a lower rate of surplus value than other types of labor power, the demand for the commodity carpenter labor power would drop causing the wages of carpenters to drop and raising the rate of surplus value.

Likewise, if the rate of surplus value was higher for carpenter labor power than average, the demand for the commodity carpenter labor power would rise. This would cause the wages of carpenters to rise, lowering the rate of surplus value on carpenter labor power. Therefore, over time—assuming the absence of monopolies—the rate of surplus value produced by each type of labor power tends towards equality with all other types of labor power.

It is extremely inconvenient to treat each type of the commodity labor power as a different type of commodity. So in order to simplify, we make an abstraction. We view each type of skilled commodity labor power as a collection of simple labor powers. Each individual member of the collection—simple labor power—produces on average in an hour an hour of abstract labor—the very substance of value once it becomes embodied in a commodity.

Similarly, a very unskilled type of labor power would represent a fraction of a simple labor power. It might take a number of these labor powers to add up a single simple labor power.

This situation doesn’t exist in reality—it is an abstraction. However, once we make this abstraction, which is made daily though unconsciously in the market place, we simplify the problem greatly. After all, practical businesspeople often talk about “labor” costs without making a distinction between the particular types of “labor.” When businesspeople talk about “labor,” they—and the vulgar economists as well—mean the costs of labor power, since they buy the workers’ ability to work and not “labor.”

Therefore, instead of using the term simple labor power, we simply have to refer to the commodity labor power. I believe that when Marx used the term labor power without qualification, that is what he meant.

Were the higher values of the labor powers of the skilled workers the underlying cause of the betrayal of August 4, 1914?