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Marx's Economics for Anarchists - Chapter 2

category international | economy | opinion / analysis author Friday October 07, 2011 02:20author by Wayne Price - personal opinionauthor email drwdprice at aol dot com

The Labor Theory of Value

The 2nd chapter of Marx's Economics for Anarchists: An Anarchist's Introduction to Marx's Critique of Political Economy. This chapter covers Marx's methodology, alienation and fetishism, the nature of value, the nature of surplus value, and the relation between value and price.
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The Labor Theory of Value


Marx’s Method

Before confronting Marx’s theory, it is important to say something about his method. I am not going to discuss “dialectical materialism.” Instead, I will start with Marx’s belief that what we empirically perceive with our senses is just the surface of reality. The sun truly appears to go from east to west in the sky, over the flat earth, and we rightly guide ourselves by this when we travel for most distances — but there is more to reality.

When I touch the top of a table, it feels hard and solid, and it is (it resists the pressure of my hand). But it is also true that the table is mostly empty space composed of whirling subatomic particles. So too with society. There is surface and there is depth beneath the surface. Both are valid parts of reality.

How do we find out, scientifically, what is behind the obvious surface? We cannot bring the economy into a laboratory, nor can we do controlled experiments (not ethically, anyway). Marx’s method is abstraction. Mentally he abstracts (takes out) aspects of the whole gestalt while temporarily ignoring other aspects of complex reality. The very field of economics is an abstraction, because it separates out (in our minds) processes of production and consumption from other social processes, such as art and culture.

Using abstractions, he built mental models of the economy For example, he postulated a society with just an industrial capitalist class and the modern working class, but with no landlords, no peasants, no merchant capitalists, no bankers, no middle classes, etc. Creating such a model (of a capitalism which never existed and never will exist), he explored how it might work. He wound it up and saw how it goes. Gradually he added more and more aspects of the actual society to his models (such as other classes). Hopefully this gives insight into how the complex, messy, real whole society works. It is abstraction which has permitted Marx’s critique of economics to remain relevant, after a century and a half. Capitalism still survives and its basic structure is still in operation.

What Marx was looking for is the underlying, recurring, patterns of mass behavior which are called economic “laws”. But these laws never appear in pure form in the actual society, being interfered with, mediated, and countered by other forces. They show up in the long run, overall, and in modified form. I will show this when I examine the “law of value” and the “falling rate of profit”. Therefore Marx repeatedly said that economic “laws” are more properly seen as “tendencies”. To see how they really work out, each situation must be analyzed in its concreteness

Three Factors?

In bourgeois economics, production (in every economic system) requires three “factors”. These are land (not just soil but all natural resources), labor (people), and capital (here meaning tools, machines, buildings, etc.). Each factor must be paid for: today this means rent for land, wages for labor, and interest for capital. Since all three factors contribute to production and all are paid for, there is supposedly no exploitation.

Yet, if this three-factor model applies to all societies, it must apply to feudalism, to classical slavery, and to whatever sort of society existed in ancient China. But these were exploitative societies. A few lived on the labor of the many. A minimum amount of the people’s work went to feed and clothe themselves and a maximum of their work went to support the ruling classes.

Marx claimed that this was also true for the modern working class, the “proletariat” (a term from ancient Rome, where it meant “those who [do nothing but] breed”). Capitalism looked, on the surface, like a society based on equality, but Marx sought to demonstrate (by his critique) that it was as exploitative a system as slavery — that the capitalist class also lived off the surplus labor of the workers.

Alienation and Fetishism

Fundamental to Marx’s views was the concept of alienation (estrangement). As he saw it, what made people human was our capacity to produce, to create what we need out of the environment, using our physical and mental labor. But under capitalism, in particular, workers are forced to labor, not for themselves but for someone else, indeed for something else, namely capital. The harder they work, the stronger and richer becomes capital which rules over them, drains them of their energy, and increases its power, due to their efforts. This is alienated labor. All the institutions of society are alienated, powers ruling over the working class due to what the working class has given them. People are reified (thing-ified) while things are seen as alive.

This is similar to “projective identification” (a social psychological form of alienation). People feel empty, hollow, and weak. They project their actual inner strength into some symbol or institution: the flag, the leader, a nation, a football team, or their version of God. By identifying (joining) with this image, they can reaccess their strenth and feel whole again, for a while.

Fans feel great when “their team” wins, sad when it loses. Patriotic US workers, suffering in their daily lives, cheer themselves up by chanting in groups, “USA! USA! We’re Number One!” Religious people feel good when they relate to their version of God, perhaps in opposition to other people’s God. People at the bottom of society look up to leaders (on the left or on the right) who claim to be able to fix things for them. Projective identification may be harmless (when cheering a sports team) or vicious (when worshipping leaders such as Hitler).

The great US socialist, Eugene V. Debs, summed up the problem of this alienated worship of leaders, in 1905, “Too long have the workers of the world waited for some Moses to lead them out of bondage. I would not lead you out if I could; for if you could be led out, you could be led back again. I would have you make up your minds there is nothing that you cannot do for yourselves.” This is the same as Marx’s “The emancipation of the working class must be won by the workers themselves.

Focusing on political economy, Marx discussed the “fetishism” of commodities. Early people worshipped idols and special objects (fetishes), regarding them as real, powerful, personalities. So too do people in bourgeois society treat objects as if they were alive and powerful. They treat commodities as active agents which exchange with each other. They treat “land” and “capital” as subjective beings which interact with “labor.” Marx’s critique sees through the alienation to the reality that it is people who are interacting with each other, through their use of machines and objects, and not the other way around.

The Nature of Value

Commodities — objects produced for sale — have two aspects. Each commodity is a specific object. It has its own use, as a baseball or hammer, or whatever, and it was made in a specific way with specific machines and a specific labor process. But also, each commodity is worth a certain amount of money. Numbers can be attached to each object, not referring to its weight, say, but to its value: $1, $10, or $1 million. To coin a word, every commodity is money-fiable. This is important, because the capitalist management of a business does not really care what the use (“use-value” or “utility”) is of the commodities they make. They are not going to play with the baseballs or build with the hammers they produce. They only care that someone else finds the baseball or hammer useful and therefore is willing to buy it. But for themselves, the capitalists only want money. They produce baseballs and hammers in order to end up with more money than they started out with when they hired workers and bought machinery and raw materials. That is, they seek to expand the total value they have, not to increase society’s share of useful goods. This is why capitalists are willing to kill the last whales. When they are done, they could take their profits and invest in something else to make more money, such as cutting down redwoods.

What then is this value which all commodities have, which makes them able to have a monetary value (price)? There is something which is not money in itself but which can be expressed in money. Some claim that it is generalized utility (use-value). But air is the most useful stuff around, and it has no price. Theories have been developed to get around this, mixing utility with scarcity and with satiety (the theory of “marginal utility”). But the use value of any object (aside from air) is very subjective. Even regarding food and drink, which all must have, people vary enormously in their tastes. How then does a society develop a unified set of prices for all objects? And, to repeat, the capitalist producers are not really interested in the utility of their products, once they know that someone else will want them.

Scarcity and utility may make a difference in the short run. Some years ago there was a sudden mass desire for a particular toy for Christmas presents: the Tickle-Me Elmo doll. Unfortunately, the producers had not made enough for the market. So the price shot up. But over time, as producers saw that something was wanted and there are not enough of it, they expanded production of the dolls until they matched demand (or went beyond it). That is, the tendency of capitalist production, over time, is to match supply to demand, overcoming scarcity.

Of course, there are some things which remain scarce, no matter how much money is offered. There will be no more Rembrandts (although market pressure does inspire forgers). Paintings are not a major part of the economy, but other things may be. I will discuss monopoly later (both natural — as in the Rembrandts — and artificial — as in diamonds which are kept artificially rare). This becomes a serious problem when non-renewable natural resources are treated by the capitalist economy as though they were commodities of which more could be produced at need (like the whales or oil). This is how capitalism operates.

Marx said that what commodities had in common was labor. People worked to produce them. Commodities could be regarded as if they were condensed versions of the work which went into them. This is not the whole of his analysis of value and price, but it is the beginning of it.

Marx did not make an elaborate argument for his labor theory of value. At the time, he did not have to. Almost every political economist of note he read already had some version of a labor theory of value. He built on them, with significant modifications. At the time, unlike our automated present, the ratio of human labor to tools and machines was heavy on the labor side. It seemed intuitively obvious that labor was what created wealth. And theories of the centrality of human labor in producing value was used by the bourgeoisie to attack their enemies, the landlord-aristocracy, as unnecessary parasites.

Eventually, the capitalists became established as the ruling class and the labor theory of value had been used (by Marx and others) to attack them as unnecessary parasites. (And the ratio of machinery to labor expanded hugely.) So professional (bourgeois) economists abandoned the labor theory of value, first for “marginal utility”. Then they mostly gave up having any sort of value theory. They stuck to the surface level of prices and ignored the issue of underlying value. Practicing businesspeople had never been interested in value theories anyway.

From Value to Price

Value , then, is the foundation of monetary price. (I am using “value” and “exchange value” interchangeably, although they could be distinguished, with value as pure labor-time, and exchange value as value which also has a use-value.) In determining the value of a commodity, what matters to the market is not how much labor actually went into a specific object, but how much socially necessary labor went to make it. Labor is mostly measured in time, the time it takes to make something. A factory with obsolete machinery will take more labor time to make a commodity than will a plant with up-to-date machinery. The commodities made the old-fashioned way, with more labor, will not have higher prices (representing more labor) than those made in the modern way, with less labor. Customers will only buy commodities at the cheaper price, and therefore the goods made the old way will have to sell at the new price too. Most of the commodities will sell according to the average socially necessary labor incorporated into the average product on the market. The extra labor used up by using the old methods of production will be wasted. Further, if more of the commodity is produced than there is a market for, the labor spent in making the extra goods is also wasted and does not count.

It is an observable fact that commodities made with new methods, using less labor, tend to be cheaper than before. This is sometimes hidden by other factors, such as the (temporary) monopoly held by the more advanced producers, which is eventually countered as other producers get the new machinery. Also general inflation raises all prices. Objects made by more efficient, new, methods may increase in price slower than the rate of overall inflation.

The labor that goes into a product has a dual aspect. One is the “concrete labor” that makes the specific object, with its specific uses. The other is better seen as “abstract labor”, a fraction of the total labor used in the whole society, which is translated into exchange value (expressed in money). There is a tendency for all labor to be turned into abstract labor by modern capitalist industry, as it deskills individual jobs. More importantly, the trend of capitalism is for every commodity to be made, not by one craftsperson at a bench, but by the labor of a large number of people, in a sense by the whole society. It is impossible to really say how much each individual worker adds to a product which has gone through a whole factory, beginning with the raw materials which had been worked up by masses of other workers (a point made by Kropotkin). Each commodity really represents a fraction of the total labor of the collective workers of society.

When industrial capitalists invest in what is necessary to produce commodities, for example, baseballs, what they buy can be lumped into two categories. First is the raw materials which will be worked up into the final product and the tools and machines which will be used. Then there is the labor power of the workers who are hired to make the product.

The first category (materials and machinery) already has some value, since it was previously made by labor. When used in production, it passes its value onto the new commodities. The value of the leather or other covering is entirely passed along to the ball. 5 hours (or $10) of leather becomes part of the value of the ball. This is also true of the gasoline which is used up in running the machines; it too passes on its total value to the balls. Machines and tools do not pass on their total value, since they are not used up in making each baseball. But they are partially used up (depreciated) each time they are used, and this value is passed on to the commodity. (The capitalists will add a cost to the price of the balls to create a fund for buying new machines when the old ones are worn out.) However, this passing along of values does not create any new values, and certainly cannot produce any profits. Therefore this part of the investment is called “constant capital”, because it does not create any new capital. The completely used-up raw material and gasoline is called “circulating constant capital”. The machines and tools, which are only used up slowly. are called “fixed constant capital”.

But the labor power of the workers is different. Once engaged, the workers’ labor changes things. As it turns leather and rubber into baseballs, it adds value to the product, value which did not exist before. It lays the basis for profitable production. Therefore it is called “variable capital”. Constant plus variable capital together is called the “cost of production”.

The Most Peculiar Commodity

Before going further in understanding the relation of value and price, I have to discuss the unusual commodity which is at the heart of capitalist production. This is the commodity of “labor power”, which is the ability of the worker to work. “Labor” as such is not a commodity, because it is a process. The workers face the capitalists who buy their commodities, their capacity to work, to use their hands and muscles, their brains and nerves, in the service of capital. Labor power is an unusual commodity in several ways. It is attached, so to speak, to human beings with minds and consciousness, which they must subordinate to the production process. It alone expends human labor, which is the only way of creating new value.

How is it determined what is the value of this unusual commodity? Following the law of value, its worth (expressed in wages or salaries) is determined by the amount of socially necessary labor which goes into producing it. The classical political economists expected capitalism to drive down workers’ wages to a biological minimum: how much is necessary to keep workers alive and to breed a new generation of workers? This is a rock-bottom, minimal standard.

Marx added that there are also cultural, “moral,” factors which capitalists must take into consideration. On the one hand, modern industry requires a level of education and culture which was unnecessary when capitalism began. On the other, working people in each society are used to a certain level of food, clothing, shelter, culture, and entertainment. This is based on their country’s history, which includes past struggles to prevent themselves from being driven down to a biological minimum.

Some workers are much more skilled than others, usually workers who have had years of training. This includes skilled blue collar workers but also many white collar “professionals” who, like other workers, labor collectively for bosses who give them orders. Marx says that the economy treats the value of their labor power as worth several times that of the general value of unskilled labor power, due to their years of training. Their labor is worth a multiple of unskilled workers’ labor. In any case, the labor market smooths out all the differences in wages and salaries, turning them into monetary prices, part of the overall labor costs of capitalist society.

The capitalists may regard the workers’ standard of living as “too high” (that is, too costly in wages and in taxes for public services). The capitalists would like to lower the working class’ standard of living, to redefine the value of the commodity labor power. But the bosses must be careful, not to provoke resistance from the workers if they are attacked too directly. (Also there are capitalists who sell to the domestic market and who may object to lowering the wages of other firms’ workers.) But when the economy hits a crisis, the capitalist class may feel that it is necessary to attack the standard of living of the working class, that is, to lower the value of the commodity labor power — if they can.

This attack on the value of the workers’ labor power has been going on in the US and other industrialized countries for several decades now. If it cannot be done through peaceful, “democratic” means, the capitalists may turn to fascism in order to attack the workers’ standard of living.

Freedom and Equality under Capitalism

Unlike previous toilers, modern workers are “free” in two ways. First, they are not owned by a master or lord; they are not slaves. They are also “free” in that they do not own land like farmers (nor are they owned with the land like serfs), nor do they own shops and tools, like artisans in pre-industrial times. They are “free” to refuse to work, but in that case they and their families will either starve, or, at least, be driven to the wretched bottom of society. To live they must sell their labor power to the owners of machinery, buildings, and tools. Then they are integrated into a collective labor process which points the way to new forms of struggle and a possible new form of society.

On the surface, in the market, the free workers meet the capitalists as apparent equals. The capitalists sell their commodities of clothing or whatever to the workers, who buy it with money. Similarly, the workers sell their commodity, of labor power, to the capitalists, who pay them money. Therefore profits are not gained through “theft” but by an apparent exchange of equalities. All are equal, as we would expect from bourgeois democracy where each citizen is supposed to be equal to all others, with one vote in elections, regardless of race, religion, country of origin, or gender. This equality is only formal, however. As Anatole France put it, in 1894, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread”.

But once the workers enter the workplace, even the formal equality is gone. Now the capitalists (or their managers) are in charge, giving orders, and the workers are subordinate, following orders. Whether or not workers can vote in government elections every few years, inside the workplace, for most of their waking lives, they live under despotism. Except for the few with unions, they have no rights. They can be fired at any time for almost any reason. (Every year many are fired for union organizing; this is illegal but difficult to prove.) Here too, Marx’s critique of political economy looks behind the surface of equality to the reality of capitalist despotism.

Surplus Value to Profit

Before continuing the relation of price to underlying value, it is necessary to discuss the nature of profit. Where does profit come from?

One common view is that it comes from the process of selling. Each capitalist tries to buy needed materials cheap and to sell finished commodities dear — at as high a rate as the market will bear. So profits seem to come from selling commodities above their values. While this may happen for individual firms, it is not an explanation for the whole capitalist class. For each capitalist who sells a product at a price above value, there is someone (a consumer or another capitalist) who is losing money by paying extra for it. This includes the same capitalist who buys needed materials to make that final product. Everyone cannot sell commodities at a higher-than-justified level. The ratios between commodities would stay the same. The result would be inflation of prices, but not the creation of profit. Profit must come from the field of production, not circulation.

Another approach is made by both bourgeois economists and non-Marxist radical economists. Their answer seems obvious: profits come by the expansion of production. Combining land, labor, and capital results in producing more commodities than previously existed. That “more” is the profit.

Suppose the workers in a factory produce (arbitrarily) 100 baseballs in five hours, but then new machinery lets them produce 200 baseballs in five hours. Does this create a profit of 100 extra baseballs (a 100% rate of profit)? It does create more use-values in terms of more baseballs. But the capitalist owners are not interested in creating more useful things for people. They want more exchange value (in the form of money). If twice the number of baseballs are now produced in the same time, each baseball will be cheaper than before, perhaps 50% cheaper. Ignoring the costs of the raw material, whereas 100 baseballs used to be worth 5 hours of labor, now 200 baseballs are worth 5 hours of labor. There is more utility but not more exchange value, and therefore no profit.

For Marx, profit, like monetary prices, is based on labor time. The workers toil for an agreed-upon amount of time, let us say 8 hours a day. At a certain point in time, they will have produced commodities with enough value to pay for their wages, that is, the equivalent of their commodity of labor power. After, say, two hours, they have produced enough baseballs (or whatever) which, when sold, would pay for their families’ food, clothing, shelter, education, and cultural needs. (That is, the value of the product they have now produced is equal to the value of their commodity labor power.) But they do not stop working after two hours. They continue to work, with a break for meals, for 8 hours. Those final hours are unpaid. This work is done for free, just as much as slaves or serfs did free work for their lords. The extra labor produces extra value, described as “surplus value” (in Marx’s German, “Mehrwert”).

It is from this surplus value that the capitalists divide out the profits of industrial enterprises, the profits of retail merchants, the interest on bank loans, ground rent to landowners, the costs of advertising, the taxes paid to the government, etc. From this surplus value comes the income of the capitalist class, to be used for buying luxuries and mostly for reinvesting in industry — to expand constant and variable capital for the next cycle of production.

There are two basic ways in which the capitalists can increase the amount of surplus value they pump out of the workers. One way, called “absolute surplus value”, is to increase the length of the working day. Since necessary labor (what is necessary to pay for the value of the commodity labor power) stays the same, the amount of surplus value will increase. This was the method used mostly in the beginning of industrial capitalism. Workers, including child laborers, worked 12 or 14 or more hours a day. One problem with this is that it tended to physically weaken the working class, in effect paying them less than the biological minimum. However, this method is still used, through compulsory overtime in many industries.

The other method produced “relative surplus value”. Without lowering the amount the workers are paid, the amount of time they spend producing this wage-equivalent is decreased. This may be done by speed-up of the assembly line, by time-and-motion studies (Taylorism), by increased productivity through better machinery, or in other ways. There are limits to both methods. The basic one is that the day is limited; even Superman could not work more than 24 hours in a day! Lesser mortals would reach their biological limits, from lengthened days or from speed-up, well before that.

Therefore the value of an individual commodity is the cost of constant capital (previously created by labor, now passed onto the finished product) + variable capital (new value created by labor and paid for) + surplus value (new value created by labor but not paid for). This is true for the individual commodity and for the mass of commodities (one baseball or thousands of baseballs).

From Value to Price of Production

However, this conception creates a problem. The ratio of exploitation is that of surplus value to variable capital. Capitalists care about this; they want to get as much labor out of the workers as possible. But what they are most concerned with is the ratio of surplus value to their total investment, which is constant capital + variable capital. They do not care, nor are they even aware of the fact, that only living labor (variable capital) can create surplus value.

Imagine two factories with the same number of workers working the same hours at the same rate of pay (that is, they have the same rate of exploitation, of surplus value to variable capital). The two factories will produce the same amount of surplus value. Will the capitalist owners get the same profits? Not necessarily. The two factories produce two different commodities, requiring different machinery and raw materials. Therefore each has a different amount of constant capital (dead labor). One has a lot, one has a little. Here “profit” is defined as the surplus value as a proportion of the total investment (cost of production, meaning constant + variable capital). The capitalist with the large amount of constant capital will have a lower total profit than the one with the lesser amount of constant capital, even though the rate of exploitation (surplus value to variable capital) is the same.

However, this is not true. Industrial capitalists do not get smaller profits because they use more efficient, productive, machinery. If they did, it would not pay capitalists to innovate by investing in better, more productive, machinery. The economy would stagnate.

Marx solves this dilemma this way: industrial production which gets high rates of profit (because of extra surplus value produced or any other reason) attract other capitalists. These new capitalists invest in the profitable industry and expand production of its commodities. This competition drives down prices and therefore drives down profits. Eventually the profits are no longer especially high; they are about the level of the average rate of profit. The same thing, in reverse, happens in industries which have especially low rates of profit (due to needing large amounts of constant capital or for any other reason). Capitalists will withdraw from that industry, or they will just produce less. With fewer commodities being available to the market, the price will go up and so will the rate of profit per item. Eventually its profit rate will also be approximately at the average rate of profit.

The way it works out, it is as though all the surplus value produced is pooled together and each capitalist producer gets to share in it, not according to their number of workers but according to their amount of invested capital (variable + constant capital). Marx calls this “capitalist communism”. There is an average rate of profit, which is the ratio of the total surplus value of a society to the total invested capital of society.

The total value of a commodity is reconceptualized as the “price of production”. This includes variable capital + constant capital + an average profit. Actual prices fluctuate due to the multiple pressures of supply and demand in the market, but they fluctuate around the price of production. Capitalists will not sell commodities for less than they cost to make (constant + variable capital) nor below the average rate of profit (at least not for long!). And selling them above the average rate of profit only attracts others to compete by underselling through lower prices.

One other factor may influence prices. This is monopoly. If one firm dominates an industry, for whatever reason, or if a few firms do, they can set prices and not worry about competitors selling at lower prices. (that is, in bourgeois economic terms, they are “price makers” rather than “price takers”). They can sell above the average rate of profit, taking an extra large share of the total capitalist class’ surplus value. There are limits to this also. I will discuss monopoly further in a later chapter.

This, then, is a simplified version of Marx’s concept of how values get to be expressed as prices and how surplus value gets to be expressed as profits. Anti-Marxist economists focus on this topic as a central problem. They call this the “transformation problem,” although Marx does not actually see labor-time values as being “transformed” into monetary prices. Rather he presents price and labor-time as two ways of expressing value. The “price of production” is a reconfiguration of commodities’ labor-time values, not the abolition of their values.

As this is an introductory text, I am not going to review the attacks on Marx’s value theory and the Marxist responses (see references in the appendix). Marx was not really interested in specific prices. He was not a “microeconomist.” He held that the total of all society’s values, measured by socially-necessary labor time, was equal to the total of society’s prices (a concept similar to the “Gross Domestic Product”). As mentioned, he held that the total of the surplus value was equal to the total of all profits, and that this could be used to find the average rate of profit. These were his key concepts.

For Marx, the essential, defining, concept of capitalism is not competition, private property, nor stocks-and-bonds. It is the capital/labor relationship. On the one hand is capital, self-expanding value, driven (by class conflict and by competition) to expand, and grow, to accumulate ever more value. (If a company does not continually expand, it will eventually be beaten by its competitors and go broke.) Capital is represented by its agents, the bourgeoisie and their managers. On the other is the proletariat, those who have nothing but their ability to labor, by muscle and brain. They sell their labor-power to the agents of capital, who proceed to pump surplus value out of them by working them as hard as possible while paying them as little as possible (at or below the value of their labor power). This is a relationship; without capitalists there are no proletarians; without such modern workers, there are no capitalists.

Money

Of course value, when expressed as price, requires the existence of money. Money is both a measure of value and a store of value. Originally, humans used only valuable things for money: cattle, or belts of shells. After a long history, they settled on gold and silver. These are rare metals which are found and dug up by labor. They had original use-values in that they were used for decorations. They last indefinitely, without rusting. They are easily divided into small units and easily merged back into larger ones. Small units may represent a lot of value. Since gold and silver may be adulterated with other metals, governments produced official coins, guaranteed in weight and degree of purity (then the governments would start cheating on the value of their coins, causing inflation).

In pre-capitalist societies, money was peripheral. Most objects were made for family use or were traded with neighbors. Only a few commodities were sold on a market. But under capitalism, in order to live we rely on acquiring commodities for everything, from everyone, throughout the world. Now money is an essential intermediary, the “universal equivalent”, which holds all of society together in a “cash nexus”.

As capitalism developed, it became inconvenient for merchants to lug around large quantities of metal. There developed banks, which held the gold. They provided banknotes which could be circulated and then turned in for hard money when desired. These notes were “as good as gold.” Today — skipping a long history — the state issues fiat money, that is, unbacked paper money. It is supported by nothing but the confidence people have in the health of the economy. Unlike gold (or cattle), it has only a “fictitious value”, but no intrinsic value. The more money is available, the less “value” each unit has.


For Chapter 1 of Marx's Economics for Anarchists, see:

Related Link: http://www.anarkismo.net/article/20585

Comments (3 of 3)

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author by Barry Brooks - Retiredpublication date Sat Oct 08, 2011 23:28author email durable at earthlink dot netauthor address author phone

The quantity theory of money is misleading, because it holds that the more money is available, the less “value” each unit has.

When money is created by a bank loan, that could be deflationary or inflationary depending on the type of loan. A loan to increase supply will have the opposite effect from a loan to increase demand.

Milton Friedman's book "Studies in the quantity theory of money" has a graph showing that during the German hyper-inflation the real value of the currency fell to 5% of its former value. Being a believer in the quantity theory, Milton goes on to puzzle over that inconsistent data.

Likewise, the confederate currency was increased at a rate lower than the inflation rate causing the purchasing power of the money to fall. Is that how the quantity theory works?

Money is never thrown from airplanes, or anything like it. It would be a good idea to dump crackpot theories from our airplane.

Barry Brooks

Related Link: http://home.earthlink.net/~durable/
author by ajohnstone - socialist parrty of great britainpublication date Tue Oct 11, 2011 15:58author email alanjjohnstone at yahoo dot co dot ukauthor address scotlandauthor phone na

i think Marx and Marxists generally consider only M0, (currency) in quantifying money but not M1 ( currency plus bank deposits).

An article that may be of interest since it deals with Marx v Friedman directly

Was Marx a monetarist? http://www.marxists.org/archive/hardcastle/marxmonetari...t.htm

i am finding these articles on Anarkismo very thought provoking.

Related Link: http://theoryandpractice.org.uk/content/alternative-capitalism
author by Waynepublication date Wed Oct 12, 2011 14:04author address author phone

Marx did not believe that the quantitative theory of money applied, because in his day money was either gold or paper backed by gold--that is, something created through labor and having value. Fiat money, unbacked by anything concrete, does follow the quantitative rule. But what I should have written was that , all other things beng equal, the more money per commodities, the less "value" each monetary unit has.

Of course, much depends on many mediations and countertendencies. For example, Confederate money lost value due to the Confederacy losing the Civil War! People coiuld see that its money would soon be completeliy worthless.

I am pleased that comrade Johnstone finds these articles thought provoking. Chapter 3 will be oiut soon.

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