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Posted in Economics tagged Economics, Marxism at 14:17 by Matthijs Krul
In the context of the current crisis, with „quantitative easing‟ to the tune of hundreds of billions of dollars on the one hand and the rush to liquidity that accompanies financial crises on the other, it may be useful to take a look at how Marx‟s economic theory relate to issues of money and monetary policy. The aim here is to provide a clear and understandable overview of what Marx‟s theory of money was, how it relates to our current-day monetary system internationally, and how this relates to his value analysis generally. I will not aim to say anything particularly new or original, nor go into everything in the depth it really deserves, but I will limit myself to providing a general popular overview, as much as the rather abstract nature of the subject allows. Modern-day neoclassical economics has often been particularly criticized for the weakness, or really nonexistence, of a serious theory of money. For neoclassical economics, all that matters about money is the fact that it is generally accepted and functions to reduce transaction costs in exchange (when compared to barter). This is the story of money generally presented in high school economics textbooks, where eventually people get tired of having their goods spoil and having to carry heavy items around and decide to mutually accept something tangible and not particularly productively useful, like gold, in order to facilitate exchange. This allows division, savings, and so forth, and thereby is beneficial to this simple economy and helps make it sophisticated. Usually the bridge between gold as a measure and paper money is not even made, and the story boils down to nothing more sophisticated than saying that money is generally accepted because it is generally accepted. Even in more serious and academic neoclassical economics, it is rare to see any systematic attempt at drawing a theory of money into a larger framework of an economy; money usually is nothing other than anumeraire, i.e. a number for counting, considerations of its independent role limit themselves to theories of inflation and its consequences, and money and crisis theory are seldom related at all. As Dan Lavoie has pointed out:
Neoclassical models often employ so sterile a concept of money as to preclude the development of an adequate explanation of the gross macro-economic disorders we call crises.
(1) Most of neoclassical economics relies at the macro level on Walrasian general equilibrium theory, in which one way or the other all supply and all demand must match; but while Walras was quite aware that this
all they can do is drive up the numéraire. and if we are not to ascribe every crisis to a „no true Scotsman‟ style failure to follow some necessary (but apparently avoidable) logic of the market. but rather on a perception of the man as an icon of social-democratic politics on the one hand. Neither are ideas to be sneezed at by any means. While for neoclassical economics the „neutrality of money‟. and compare them with other theories of disequilibrium. One must also understand and address his economic theories. to become popular again. without an independent role. without at all making any substantial difference. and skepticism about laissez-faire in the finance „industry‟ on the other hand. Yet crises occur. This applies to money supply as much as to anything else. distorting the expectations in the market. Austrian economics makes much hay out of their positions on monetary theory. Their most famous disciple in particular about monetary theory in recent years is the American libertarian politician Ron Paul. This is all the more so for Keynes since most people‟s basic understanding of him is not at all based on knowledge of his actual economic doctrines. Although his theories were written off by most liberals as being proven wrong and/or hopelessly outdated after the „stagflation crisis‟ of the 1970s. It makes sense in such times for theories that understand disequilibrium. including state support to increase employment. as the Austrians do. or at least the possibility of disequilibrium. The most influential current-day proponent of this viewpoint is of course John Maynard. the Lord Keynes. i. .(2) Hence their desire for the gold standard and their never-abating struggle against what they see as the evils of inflation consequent on the creation of central banks issuing fiat money – from their point of view. whose platform of isolationism in foreign policy is as unorthodox nowadays as is his explicit insistence in domestic policy on the return of the gold standard. stating that in reality there is only a theory of prices. The result of there being no seriously integrated theory of money in neoclassical economics has somewhat oddly been that this field has been ceded for the most part to the Austrian school of economics. Austrian monetary theory really denies that there is or can be such a thing as a theory of money. but other than such policy ideas as „free banking‟ and the obsession with the gold standard. which I think its proponents themselves consider one of its foremost salient points. its effective irrelevance in terms of playing an independent role in economic theory. is merely a long-run assumption. for Austrian economics this is an absolute necessity. we must take the possibility of disequilibrium seriously. the significance of this seems to have faded from view since. In fact.e.reduced money to no more than a numeraire. the core of the theory in fact is (as it is in most other respects) „more Romish than the Pope‟ on the issue of general equilibrium. and that this was unrealistic. but it will not do to claim to be a Keynesian just because it happens to be politically convenient. he has opportunistically come into vogue again as those same liberal bankers and economists now have been driven into the defensive in the wake of one of capitalism‟s most serious crises since 1932.
to understand the role . More strongly. deciding to do without it and replacing it with some other means of exchange). although this comes at the expense of being able to fully address all the aspects of Marx‟s theory and its pros and cons compared to the neoclassical and post-Keynesian one. I shall endeavour to keep it simple.e. has even emphasized the importance of money as a social factor more generally. The point here is that it is simply not the case that a capitalist.(5) On the contrary. the possibility of people. For the postKeynesians. modern economy can be represented as if it is an enormously complicated barter auction in the manner the Walrasian tradition presents it (although full well aware that this is a simplification). which when unrealized will cause capitalist crisis. namely macroeconomics. Keynes created a disequilibrium economics in which money plays an independent functional role. too abstract and too dry to sustain the interest of even those few who would want to read about economic theory in the first place. Sraffa and some Marx. and finally as a commodity with special properties. which at least implicitly recognizes that instability would otherwise be inherent. Marx sets out by rejecting the idea that there is no significant qualitative difference between a barter economy and a capitalist one. it is then of prime importance to analyze the economy by what has been dubbed „Monetary Analysis‟. which has built on Keynes but also attempted to integrate to some extent ideas now truly heterodox in current economic literature such as those of Ricardo. and ridicules the notion that money is just a “cunning device” for overcoming the “technical difficulties” presented by barter. other than producing a monetary theory of price and wage stickiness. he more or less singlehandedly unfettered the left hand of neoclassical economics. in times of crisis. just like labour power is a commodity with special properties. Keynes‟ analysis of money‟s social role here however does not actually lead to very far-reaching conclusions. and raising at least the very possibility of the substitution elasticity of money (i. which since then has not known what the right hand (microeconomics) has been doing. For this reason. one in which money is analyzed historically. in other words.Keynes made some major steps in moving toward a realistic analysis of capitalist monetary theory by abandoning Say‟s Law (i.e. the post-Keynesian tradition. By doing so. Marx‟s monetary theory is perhaps his least discussed and least appreciated sub-theory in the whole of Marxist economics. of inflation.. rather than „Real Analysis‟.(4) Yet it has so far only been Marx who has presented a truly integrated theory of money. while the latter branch is unconcerned with this. as Paul Krugman and others perhaps would have us. as a commodity among other commodities in capitalism. supply creates its own demand) and accepting the possibility of a „general glut‟ of commodities. we should not all now become Keynesians again. whereby money is an integral part of the system. quite likely because monetary theory generally is often seen as too complicated.(3) However. The former branch of economics has maintained the possibility at least of disequilibrium by emphasizing the need for „stabilizing the economy‟ by means of monetary policy. in which money is non-neutral even in the long term.
that is. Here we have then money as an accepted measure of exchange value. for which currencies are exchangeable at the central bank. and if there are very many commodities. Marx assumes throughout Capital that this commodity money exists and that it takes the form of gold. so also is the conversion of one special commodity into money.(6)) Money of course has existed for a very long time. that there be one commodity which functions as the measure of exchange of all the rest: this is the money commodity. starting from the vantage point of its role as accepted measure of value. that commodity exchange is the way people as economic actors relate to each other in such an economy. there is a humongous amount of different standards of exchange value. and finds no rest until it is once and for all satisfied by the differentiation of commodities into commodities and money. but Marx sees the unfolding of the monetization of the economy exactly as the unfolding of the law of value in those economies. (If not. between use-value and value. therefore. Now for any commodity to be exchangeable with another. so too does money become the life-blood of commerce. as the conversion of products into commodities is being accomplished. It makes sense. is no. At the same rate. As Marx puts it in Capital: The historical progress and extension of exchange develops the contrast. becomes a fetter on the full unfolding of the value economy. the gradual dominance of the commodity form as the means of reproduction of mankind‟s social relations. this fetish of the Austrian economists. (7) This is Marx‟s historical theory of money. this is not at all the case today in the world market nor in any specific national market. one would obtain the same indexing problems economic historians have nowadays when attempting to create an equivalent measure of value for commodities at different historical periods. Needless to say. Does this then invalidate Marx‟s theory as an outdated metallic one? The answer. There will be times when the economy is growing and yet the private supply of gold is not. When the capitalist economy fully develops. then. and thereby exchange value the dominant measure (rather than the utility or use value of individual items). and over time the development of credit and thereby the finance industry will cause a tremendous . it is necessary to compare their relative values. a commodity produced for this purpose. this means that when each commodity is the measure of value of all the others. As commodity exchange becomes dominant. latent in commodities. freely produced in the capitalist market.money plays in a specifically capitalist economy it is essential to understand that such an economy is characterized by general commodity exchange. urges on the establishment of an independent form of value. the gold standard. The necessity for a giving external expression to this contrast for the purposes of commercial intercourse. and in pre-capitalist societies. as Marx then sets out to explain the different other functions and further development of money under capitalism. of course.
(10) This then also constitutes a barrier to capitalist expansion.(8) The result then is that the gold standard works as a strong deflationary drag on economic growth. this combines the possibility of a world money with the gold standard. credit bills and the like. capitalist accumulation. It must therefore be overcome. as we have seen. i. the state entirely replaces the innate connection between money and commodity-value. The result is that one is left with two forms of money that prevail: the one is fiat money. Moreover. and on the credit system.(9) How then does this work. Marx. they must be universalizable as a measure of exchange value. there is no single state there that sets price numéraires and authorizes fiat money. which is (usually) worthless paper functioning as money because of the guarantee by a particular state that it shall be accepted as a measure of value. This then irrevocably forced world capital into the second solution. This does away also with the Austrian illusion of „free banking‟. banknotes. Again. and this then of course also implies . where the US dollar remained on the gold standard and all other major currencies were controvertible with the US dollar according to set (bandwidths of) exchange ratios. the point of capitalism for the capitalists becomes the accumulation of money. as such symbolic money expands. rather than the accumulation of wealth in the form of use values. it is abandoned. namely a world money as fiat money. The demand for money therefore massively increases as capitalism comes fully into being. since individual currencies lose their function as standards of local exchange value and become mere gold bullion.e. and private issuing of banknotes contradicts this. still assuming gold standards. i. i. However. the American President Nixon abandoned the gold standard in 1973. the convertibility with gold becomes totally obsolete for the purposes of money and accumulation. to the universalization of the value logic (even though it can give ample opportunity for individual capitalists to make money on currency arbitrage). The state over time tends to take over this latter form. a commodity like any other. One possible solution is to have one currency remain controvertible with gold. states therefore that there can be no „world money‟. So one private issuer must take the form of the state authority as issuer. this still leaves the major currency with the problem of the gold standard as described above. which then becomes the central bank to which all other banks are subjected. because for these private banknotes to function fully as money in a developed capitalist economy. with money functioning as the measure of value.e. which takes the form of private claims on banks. and the other is credit money. something which will become in particular problematic during a crisis period when the gold standard‟s severe deflationary effect makes itself felt. which a gold standard cannot match.expansion of the available capital at any given time. however. Commodity money is replaced by symbolic money. and to make all other currencies effectively bound to this one currency on the basis of a controvertibility of their own. by authorizing fiat money.e. soon. at the level of the world market? After all. This system was historically the Bretton-Woods system. and it is overcome. Over time. For this reason. which can overcome temporally the restrictions that gold convertibility imposes.
but as with any element of the capitalist economy it is impossible for the value connection to disappear entirely. we must finally consider what makes money so special within a capitalist economy. In order to sum up Marx‟s theory of money. As Park describes it so well. the hoardingdishoarding role of money necessarily implies the possibility of disequilibrium.e. a crisis of the ability of the „world state‟ to maintain its currency. Here we see the fundamental contradiction that affects fiat money – it is by nature an attempt to dislodge money from its basis in commodity values. what makes it different from other commodities in Marx‟s theory. the United States has ever since endeavoured to play this role on the world stage. Whenever there is a time of crisis.(11) Since there exists uncertainty about future investment and future circumstances in the market. and capitalism only exists in and through constant movement to accumulate. and some of the current crisis can be understood as a currency crisis. the ability to hoard and to dishoard money. as capital.a world state with the power to maintain its guarantees for this currency. it is subject to changes in the expectations about future investment. does play a real role when we look at the role gold plays as a reserve money. whether in cash or in credit. It is in these times that the demand for the specific fiat money falls. and equally. the Euro. nonneutralizable by any monetary policy. money‟s potential role as capital makes it contradictory in nature: it is always “held in order to be spent. especially if the crisis is severe and international in nature. Since in Marx‟s conception capital is nothing other than value in motion. the creditworthiness of the state and its backing of fiat money may come into question. and spent in order to be held by another”. and the demand for gold increases as a universal substitute for symbolic money. a commodity money that can play the role of universal exchange value in a time when fiat money‟s value has collapsed. both the US dollar and the new competitor world money. But that is a subject for a separate essay. it is important to note that Marx‟s assumption of a gold standard. As a result. any expenditure of money as capital is nothing else but a dishoarding of money. any stock of money is nothing other than a hoard waiting to be thrown into circulation at a convenient time.(12) All of these considerations apply to fiat money as much as to commodity money. This special dual nature is the time factor in money. But fitting Marx‟s conception of commodities‟ dual nature. Marx and Keynes have in common. However. money itself has a separate dual nature next to the „normal‟ dual nature of all commodities. just like national governments do for their own fiat money. for the purpose of accumulation.”(13) . Again. “even though the labour-value dimension as an anchor of the value of money is severed from the monetary system its effect seems to linger on behind the scene. This identification of uncertainty as inherent in money because of its role in private investment. in other words. We have noted that one such thing is the role of demand for money. i. while as we have seen not strictly necessary within his theory. in order that capitalist expansion isn‟t limited in boom times by the restricted nature of a gold or even silver standard.
in order that a vicious cycle be avoided where the expectation of inflation leads to a lower estimate of the credibility of the currency‟s value. i. as we have just explained. they miss the reasons why capital has „moved on‟ since then. a measure of value. A gold standard is highly deflationary. the psychology plays an important role.So although the move to fiat money overcomes the restrictive corsage of the gold standard. The existence of the state and its role as guarantor of money and crusader against inflation then is. this threatens the credibility of the state and the value of its money. as Park has pointed out. etc. and a store of wealth. Money is a medium of exchange. Since the only thing underwriting the value of the fiat money. As with all their romanticism about the supposed unspoilt Paradise of the free market in the 19th century. there is a constant risk of such credibility coming into question. The central banks of the different capitalist states with fiat money are forced to hunt down and repress inflation more severely than the Medieval heretics ever were. leading to more inflation. Fiat money plays a similar role in that.e. This puts it miles ahead of any competing theory in its ability to „link up‟ money as a social phenomenon with other social phenomena such as the state. translates . the psychology of expectations. and thereby its real usefulness as universalised exchange value.(15) What does this imply then in terms of monetary policy? We have seen that the romantic reactionary critique of fiat money by Ron Paul and other proponents of the Austrian school is beside the point. completely endogenous to Marx‟s theory of money. again. whereby the uniting aspect of both is the contradiction in capitalism between the need of capital to expand indefinitely and the need for money to be universalizable exchange value. the fictitious capital evaporates. and all three of these are important and interdependent. and so forth. Repressing this inflation then requires a contractionary approach. and a severe crisis occurs. a demand for liquidity becomes paramount. and moreover analyzes each of them as a counterpart of the other. even up to accepting certain high levels of inflation as a semi-permanent „feature‟. bound to real value production and its realization in trade. the private nature of investment. is state credibility. it also (as the Austrian economists never let us forget) introduces chronic inflation into the system. when the expansion of fiat money exceeds in a critical mass the real production and realization of value. even beyond Keynes. as would have occurred automatically under a gold standard system – the difference with the gold standard of course still being the ability to expand during boom times and the much greater freedom for states to choose and adapt policies to combat the threat of inflation and loss of credibility. Here. and the result is severe inflation.(14) Marx‟s theory of money besides is able to encompass both metallic and non-metallic money. functioning as fictitious capital. exceeds in a certain critical mass the real production of new value. In this sense. fiat money plays an analogous role to credit in the theory of crisis: financial crisis occurs when the expansion of pure credit. Some exogenous or endogenous shock then causes a sudden reverse in the trend. Yet one important strength of Marx‟s theory of money is exactly that it does not fully equate the two.
edu/fileadmin/pdf/conference_papers/newschool/Park_2010. NY 1967).virtually any internal or external shock into crisis. p. in:The Quarterly Journal of Austrian Economics 9:4 (2006). of which his theory of money is an essential part.edu/~cottrell/old_papers/pkme.wfu. p. see: Hyun Woong Park. 63. 10.g. and restricts the ability of capital to expand during boom times. (New York. This creates the problem of systematic inflation on the one hand. 7. p. Capital Vol. “Endogeneity of Money and the State in Marx‟s Theory of Non-Commodity Money”: http://www. it is capital‟s own expansion that then causes it to run into the barriers it has set itself. 16. p. Quoted in: Steve Shuklian. 11) Lavoie. 16. 86-87. p. This is Marx‟s general theory of capitalist crisis. At the same time. 56. p. 6) Lavoie. “A Simple Model of the Theory of Money Prices”. 15) Lavoie. . in: Cambridge Journal of Economics 7:1 (1983). 1) Dan Lavoie. NY 1970). and more significantly the possibility of monetary crisis analogous with financial and credit crisis on the other hand. “Post-Keynesian Monetary Economics: A Critical Survey”. 11. 8) For these and following points. 13) Park.pdf. 2) See e. p. I. 12) Lavoie. 9-10. Marshall University Working Paper 00-02-A.com/responses-toreaders%E2%80%94austrian-economics-versus-marxism/are-keynes-and-marx-compatible/are-keynesand-marx-compatible-pt-2/. Joseph Salerno. In both cases. p. p.umass. A Contribution to the Critique of Political Economy (New York.wordpress. 64._noncommodity_mo ney.. p. although how bad inflation actually is (especially as against unemployment) is a disputed topic.pdf. 12. 9) Park. 7) Karl Marx. p. p.peri. 51. p. 39. see http://critiqueofcrisistheory. but at the cost of running the risk that it „loses sight‟ of the necessary connection between money and the real movement of value. “Karl Marx on the Foundations of Monetary Theory”. 4) Allin Cottrell. 60. p. 60. “Some Strengths in Marx‟s Disequilibrium Theory of Money”. 5) Karl Marx.ecn. 16-17. in: Cambridge Journal of Economics 18:3 (1998): http://ricardo. 10) Park. p. fiat money overcomes the latter restriction. 14) Park. 3) For this point.
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