What causes inflation?

[the last donut of the night]

I'm not too well read-up on economics, so could someone here explain to me (in layman's terms) what causes inflation?

[Bronco]

Well there's two main typed os inflation. The first is cost push; where the costs of producing goods increases to such an extent that the firm has to up their prices accordingly. If the cost of importing raw materials increase then the price of oil is likely to rise. The second is demand-pull; where an increase in demand for a product causes an increase in price as suppliers are unable to keep up, there's effectively too much money chasing too few goods.

Friedman had a different theory on inflation, he came up with the Quantity Theory of Money which argued that it's caused by changes in the money supply and that the two have a direct relationship. His theory relies on a few assumptions though, and it's been criticised a lot by Keynesians, Thatcher tried to use it to reduce inflation here in the UK in the 80's but it didnt prove as effective as was hoped, it did basically no good actually

[Tommy4ever]

Bronco pretty much got it spot on.

I'll just chip in with a couple extra points:

Cost Push inflation - as the costs of production rise the bourgeiosie increase prices in order to maintain their profit levels

The two biggest forms of cost push inflation come from wages and raw materials.

Demand Pull - when demand grows faster than supply. Demand pull inflation is often a major problem in fast growing economies. For example, inflation is over 5% in China (thats rather bad) and is starting to get out of control. Countries often look to reduce their growth rates if they are suffering from this sort of inflation.

Money Supply - Friedman's idea. To keep it simple this sort of inflation is dependent upon the amount of money in the economy and the velocity at which it moves around the economy. So when cash and credit are flowing freely and at a fast rate this is inflationary.

Oh yeah, one last big cause of inflation - speculation! You'd be suprised at just how big an impact speculation can have on commodity prices. This is a form of demand pull inflation but is slightly different in that it is often powered not by logic but just by how people in the commodity markets are feeling at the time. Rumors, expectations and the general mood of the market can play a greater role than economic realities.

[jake williams]

The two answers above are basically correct.

It's not really controversial though that money supply has an effect on inflation. The relationship isn't exactly perfect, but almost by definition money in circulation will increase inflation. If you have a given number of goods sold, X, and the amount of money spent on them goes up from Y to Z, then the average price will have to go up. Now, the number of goods might go up too, and that's the hope, but this isn't always the case. In fact, given that we've had fairly stable positive inflation for some time, the money spent is going up faster in absolute, but not relative, terms compared to the "abstract units" of goods sold.

[robbo203]

The argument that inflation is due to "cost push" or "demand pull" factors was essentially demolished by Marx in his spat with Comrade Weston in Value Price and Profit. In fact, it surprises me that people here on a site like this can even put forward such ideas. This is the classic argument that capitalist governments have used against workers putting forward claims for higher wages - that it will lead to "inflation". Thats rubbish. In fact, inflation or a rise in the general price level caused by the excess printing of inconvertible currency is a tool used by governments to undercut the value of workers wages who then have the nerve to suggest that the problem is the greedy workers causing inflation with their "cost push" demands. As Marx showed in the above pamphlet increased wages do not and cannot increase the general price level. What they do is cut into profit margins and this is why the capitalists dont like increased wages

It is important that we get the facts and the theory of inflation correct. The organisation that has probably done most to promote a marxian theory of inflation is the SPGB and its companion parties in the WSM - particularly in the person of Edgar Hardcastle who was one of the foremost Marxian economists in the world and has a site at Marxist.Org http://www.marxists.org/archive/hardcastle/index.htm Here is just one article randomly selected on the subject from the SPGB site but its worth visiting this site http://www.worldsocialism.org/spgb/ and having a good old nosey yourself. It has tons of material on all sorts of things...
__________________________________________________ _________________
http://www.worldsocialism.org/spgb/etheory/Early90's/html/90Inflation.html


Inflation: the endless farce
Every Prime Minister since the War has pledged himself or herself to tackle inflation as a top priority but rising prices have been with us continuously for half a century. Every year since 1938 prices have gone up and are still going up. The price level on average is about 24 times what it was before the war.
It was not always so. From 1850 to 1914 prices were stable; there were moderate fluctuations but the price level in 1914 was almost exactly the same as it had been 64 years earlier. And in 1919 the government decided to bring prices down and there was a fall of over 30 per cent between 1920 and 1925.
One of the rules of the game is that the party in opposition blames the government; that is, until it becomes the government itself, when it blames someone else, the greedy workers or the greedy shopkeepers and manufacturers; or the lenders of money not being greedy enough (according to the Chancellor of the Exchequer it is low interest rates that cause inflation).
There is a short answer to these glib excuses. Between 1850 and 1914 average wage rates went up by nearly 90 per cent, more than keeping up with the steadily rising productivity in industry - but no inflation.
If shop-keepers and manufacturers have the power, as well as the will to push up prices, why no inflation before 1914? And how come they allowed prices to fall heavily between 1920 and 1925?
As for interest rates, compared with the present 15 per cent bank minimum lending rate, the rates before 1914 were mostly between 3 per cent and 5 per cent - but no inflation.
Control of currency issue the key
It was not an accident that governments before 1914 and in the year 1919 knew how to stabilise prices, how to raise them and how to lower them. They, or their advisers, knew that the key to the situation is the amount of currency (notes and coins) in circulation. If this is kept in line with the needs of the growth of production, population, etc. prices will be stabilised. If currency is arbitrarily increased prices will go up. If arbitrarily reduced, prices will go down.
Before 1914 stability was maintained through the gold standard which closely controlled the issue of currency by the Bank of England. In 1920-25, on government instructions, the currency in circulation was cut. (The Bank burned £66 millions worth of notes).
Since 1938 there has been no control. Additional notes and coin have been issued in a continuous stream. The amount of currency in circulation with the public in 1938 was £442 million. It is now more than thirty times as much, at £14,388 million, and is still steadily increasing. The bath has been slopping over for fifty years and one dotty thing the Labour and Tory plumbers have been agreed about is that they need not turn off the tap. So why couldn’t they ask their professional advisers what to do? They did, but those advisers had all picked up the same dotty notion from the same original source. As early as 1923, in his Monetary Reform, the economist J. M. Keynes had argued that it is not necessary to have direct control of the amount of notes and coin.
Degeneration of Monetary theory
How monetary theory degenerated was told by Edwin Cannan, at that time Emeritus Professor of Political Economy at the University of London, in his Modern Currency and the Regulation of its Value [1931). Referring to what he called “the bank-deposit theory of prices”, he wrote (p.88):
“Within, I think, the last forty years a practice has grown up among the people who talk and write on such subjects, of regarding the amount which bankers are bound to pay to their customers on demand or at short notice as a mass of ‘bank-money’ or of ‘credit’ which must be added to the total of the currency (of notes and coin ) whenever variations in the quantity of money are being thought of as influencing prices. This is one of the most obstructive of all modern monetary delusions.”
Cannan went on to show that this alleged mass of “bank-money” does not exist:
“with the exception of a small amount of currency which they keep ready to meet any likely demands on the part of their customers, the banks have ... paid away money as they receive it, buying land and buildings for the conduct of their business with some of it, and investing or lending all the rest.”
Cannan’s warning was not listened to. In the same year, 1931, the bank-deposit theory of prices received official endorsement from the MacMillan Committee Report of the Committee of Finance and Industry (p.34). In its report the Committee rejected the idea that deposits in banks are cash deposited by customers, and argued that:
“the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on overdraft ... a bank creates a credit in its books which is the equivalent of a deposit.”
Keynes was a member of the Committee and was credited with having drafted that section of the Report.
The Committee “proved” that, on a deposit of only £1,000 cash, a bank could lend £9,000. Their method of proof was a masterpiece of rigged argument. They assumed that only one bank existed. This, they argued, really made no material difference. But also, and without saying that they were doing so, they assumed a prolonged series of lending operations which would take several months and in all that time no-one ever withdrew cash from the bank. Cash was assumed to go into the bank but no depositor or borrower took any cash out. It was a kind of bank that never existed in the real world.
If the doctrine had been based on reality its significance in relation to prices would be obvious. If an individual with £1,000 spent it or lent it the measure of its influence on prices would be just £1,000. If lent to a bank which re-lent it, its influence on prices would be multiplied by nine. What is more the MacMillan Committee’s arithmetic was related to the 10 per cent cash reserve banks ordinarily maintained at that time. As the bank cash reserve is now only about 1 per cent of total deposits the multiplier now would be not nine, but ninety-nine.
In recent years there has been a seeming conflict of views on inflation between the followers of Keynes and their rivals, the so-called monetarists. It is a phoney war. The high-priest of Monetarism, Professor Milton Friedman, suffers from the same delusion about the mystical powers of the banks as did Keynes, as will be seen in Free to Choose (by Milton and Rose Friedman, p.298).
Unlike the politicians and many economists, the professional bankers ridiculed the Keynes-MacMillan Committee monetary doctrine. They knew that banks do not have this fanciful power to “create deposits”. One banker, Walter Leaf, Chairman of the Westminster Bank, had this to say:
“The banks can lend no more than they can borrow - in fact not nearly so much. If anyone in the deposit banking system can be called a ‘creator of credit’ it is the depositor; for the banks are strictly limited in their operations by the amount which the depositor thinks fit to leave with them.” (Banking, Home University Library, p.102).
Walter Leaf’s Westminster Bank is now the National Westminster. In the Financial Times (9 April 1984) it published as an advertisement a survey of its operations during 1983. Under the heading “Financial Highlights 1983” the following item appeared:
Money Lodged £55,200 Million
Money Lent £45,200 Million


No nonsense about receiving £55,000 million from depositors and lending 9 or 99 times as much.
Confusion about money supply
Government monetary policies have gone through several phases. From 1945 to the 1970s the Labour and Tory Parties both believed, with Keynes, that the cure for unemployment is for the government to run a budget surplus. (The present Tory government policy of using a big budget surplus to pay off the national debt is what the former Labour Prime Minister Lord Wilson specified in 1957 as the cure for inflation).
In 1977 the Callaghan Labour government, faced with prices and unemployment both rising fast, and the obvious impossibility of running a budget deficit and a budget surplus at the same time, threw overboard the Keynesian doctrine and adopted as their price policy studying the movements of what they call “money supply”.
The favourite for several years was the index called M3 which is made up predominantly of bank deposits though it also included the relatively minor element of the currency. The latest M3 figures are:
Bank Deposits £225,260 millions
Currency £14,384 millions
Total £239,644 millions


Eventually the Thatcher government lost confidence in the usefulness of M3 and the Treasury has just decided to stop publication. The Thatcher government’s interest was then transferred to M0, which, unlike M3, is predominantly made up of the currency. But the government and its advisers have quite failed to see the point of the achievement of stable prices by the gold standard, and the reduction of prices in 1920-1925. It is not a question of just "watching” M0 but of actually restricting the issue of notes and coin, something the government is not doing and has not indicated the intention of doing. The amount of currency in circulation is still going up.
The politician who has for years taken an active interest in inflation is Enoch Powell. His line has been to criticise governments for their refusal to recognise that they and they alone are responsible for inflation. He argues that the prime cause of inflation is that government expenditure is too high:
“Nobody knows so well as the Bank of England ... that the expenditure of Government itself is the prime factor in causing mounting inflation” (from a speech on 11 November 1966).
He resigned from the Tory government in 1958 over that issue, though he served as a Minister again from 1960 to 1963. And during all the period 1955-1963 the government was pumping out more and more currency, pushing up prices. So Powell was just as much responsible for inflation as any other Minister. He has never understood the real cause of inflation. He shares the same delusion about banks’ supposed power to create deposits as Keynes and Professor Milton Friedman. He claims to see a difference between the government borrowing from “the public” and borrowing from the banks. In an article in Intercity (July/August 1989) he wrote:
“Only the banking system can provide purchasing power to one section of the public without the equivalent purchasing power having been transferred to it by another section.”
This is nonsense. The banks can’t create purchasing power. As Walter Leaf rightly pointed out, the only way the banks can be enabled to lend is to persuade “the public” to lend to the banks, in the form of deposits.
Why inflation started
The question arises why do governments go in for inflation. In this country the three big inflations have started in wars, the Napoleonic wars and the two world wars.
It is a mistake to think that the British government’s interest in inflation is to provide revenue by printing notes, though this could happen as it has in some other countries. What happened in the three wars was that the government had to call in all the gold in circulation and in bank vaults to pay for desperately needed imports of food and war materials, which made continuation of a gold-backed currency impossible. The amounts of revenue the government actually gets from increasing the note issue is too trivial to count in relation to government expenditure. In the current year the £800 million from additional notes in circulation is less than one half of one per cent of Government expenditure of £181,000 millions.
Another issue of interest is who gains by inflation and who loses. Long experience supports the view that borrowers, including the industrial capitalists, gain under inflation by repaying loans in depreciating currency, and lenders do well from deflation. Bankers being both borrowers and lenders, generally prefer stable prices. Some property-owners to whom inflation has been disastrous are those who bought and held certain government and local government stocks the market price for which is now only £30 for each £100 nominal.
It is an error to suppose that inflation is bad for the workers. It is no harder (and no easier) for organised workers to raise their standard of living when prices are rising than when they are falling or stable: it all depends on the varying conditions in the labour market. In the great majority of years in the half-century of inflation wage rates have risen more than prices. And it happened when prices were falling sharply between 1920 and 1925 that wages fell more than prices. The workers were worse off.
One last word about the supposed evils or benefits that will flow from ending inflation. It will not have the effect either of causing unemployment and trade depression or of preventing them. Capitalism goes its own way irrespective of governments’ monetary policies.
(April 1990)

[Dave B]

Actually it was Karl that advanced the money supply theory of inflation a hundred years before Friedman.

And it was a much more creditable analysis given that the gold standard still operated and that proper fiat or paper money not backed by gold was comparatively unusual.

Exceptions I think were at the time, or had been, Russia, Prussia(?) and China although there had been ‘experiments’ with it in the past elsewhere.

As in France I think.

And he didn’t have the no-brainer examples of Germany in the 1920’s to draw upon.

Also of note in the same article quoted from below Karl includes the velocity of money idea which is also an integral part of Friedmans theory.

Although Karl admitted that he robbed that idea from elsewhere.



Karl Marx: Critique of Political Economy
c. Coins and Tokens of Value



Let us assume that £14 million is the amount of gold required for the circulation of commodities and that the State throws 210 million notes each called £1 into circulation: these 210 million would then stand for a total of gold worth £14 million. The effect would be the same as if the notes issued by the State were to represent a metal whose value was one-fifteenth that of gold or that each note was intended to represent one-fifteenth of the previous weight of gold. This would have changed nothing but the nomenclature of the standard of prices, which is of course purely conventional, quite irrespective of whether it was brought about directly by a change in the monetary standard or indirectly by an increase in the number of paper notes issued in accordance with a new lower standard. As the name pound sterling would now indicate one-fifteenth of the previous quantity of gold, all commodity-prices would be fifteen times higher and 210 million pound notes would now be indeed just as necessary as 14 million had previously been. The decrease in the quantity of gold which each individual token of value represented would be proportional to the increased aggregate value of these tokens. The rise of prices would be merely a reaction of the process of circulation, which forcibly placed the tokens of value on a par with the quantity of gold which they are supposed to replace in the sphere of circulation.

http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_2c.htm



There is a Friedman tpye of interpretation for comparison below.

http://www.marketoracle.co.uk/Article4482.html

The standard equation depending on how you want to interpret it is;


P=MV,

Where P would be the [total] ‘price’ of products that are (to be) exchanged over a period, for convenience a week perhaps.

M being the number of ‘objects’, ‘tokens’ or units that are to perform these transactions, ie the money supply, and V being the rate or ‘velocity’ (as an average) at which these ‘objects’ and ‘tokens’ are used in exchange.

(It depends a bit on how exactly you want to choose to look at it)


A viewpoint at the moment, that is held by some Friedmanists, is that as the rate of interest on money capital is low people are sitting on hoards of cash that is in ‘stagnant pools’ in banks and that is dragging down the (average) ‘velocity’ money. Which is negating the inflationary effect of the increase in money supply that we see in ‘quantitative easing’.

Or in other words M is going up as fast as V is going down so there is no change.

Or perhaps in other words, if you increase the money supply and that just results in the overall effect of people absorbing it by hoarding it under their bed then nothing changes.

But that is storing up trouble as when or if we reach a critical turning point and money starts to loose its ‘exchange’ value all that hoarded cash will come out to buy stuff that isn’t falling in value.


Then that money will be thrown back into circulation, velocity will increase, prices will increase more and money will devalue even further and so on in a vicious cycle.

Actually we are beginning to see this over the last few years with Indian and Chinese workers demonstrating a traditional clarity of thought that evades their betters. That paper money is in fact worth nothing and buying gold and silver, that as something that has embodied labour in it, is value.

Ignoring perhaps the somewhat spurious use value of gold.

All other things ignored, and there are many, an ounce of platinum will always be worth so much beer, bottles of wine and bags of crisps. Which is more than you can say for a state issued piece of paper with a picture of Adam Smith on it.


I haven’t read the stuff put up by Robbo from my own people, I am sure it was interesting.

..

[robbo203]

I haven’t read the stuff put up by Robbo from my own people, I am sure it was interesting.

..


Hi Dave


Here's another you might find of interest - with more detail

http://www.worldsocialism.org/spgb/education/Marxian%20theory%20of%20inflation.html

[flobdob]

The argument that inflation is due to "cost push" or "demand pull" factors was essentially demolished by Marx in his spat with Comrade Weston in Value Price and Profit. In fact, it surprises me that people here on a site like this can even put forward such ideas. This is the classic argument that capitalist governments have used against workers putting forward claims for higher wages - that it will lead to "inflation". Thats rubbish. In fact, inflation or a rise in the general price level caused by the excess printing of inconvertible currency is a tool used by governments to undercut the value of workers wages who then have the nerve to suggest that the problem is the greedy workers causing inflation with their "cost push" demands. As Marx showed in the above pamphlet increased wages do not and cannot increase the general price level. What they do is cut into profit margins and this is why the capitalists dont like increased wages

Absolutely spot on. Inflation is a result of the inherent tendency of a declining rate in profit - it is a product of capitalist crisis, not of workers.

Yaffe and Bullock wrote a very good article on this (http://www.marxists.org/subject/economy/authors/yaffed/1979/index.htm).

[robbo203]

Absolutely spot on. Inflation is a result of the inherent tendency of a declining rate in profit - it is a product of capitalist crisis, not of workers.

Yaffe and Bullock wrote a very good article on this (http://www.marxists.org/subject/economy/authors/yaffed/1979/index.htm).


Well, no, inflation has nothing to do with any "inherent tendency for the rate of profit to decline". Inflation is a purely monetary phenomenon and in the Marxian view, arises from the excess issue of inconvertible currency.

I didnt read all of the Yaffe and Bullock article - it is very long - so you can correct me if I am wrong but my impression is that it has fallen for precisely the same erroneous cost-push explanation of inflation as those who hold that rising wages lead to rising prices. The article seems to attribute inflation to increasing state expenditures (paid for out of taxation and borrowing) and the associated growth of unproductive labour necessitated by the development of capitalism itself. It is not entirely clear what the authors are saying but they seem to be suggesting that more money needs to be printed and put into circulation in order to pay for such expenditures

But this is confusing cause and effect. If the excess currency was not introduced into the economy there would be no inflation and the value of money would remain unchanged. But that does not means these proposed state expenditures could not be made. It just means the nominal cost of these expenditures would be less but in real terms they would still be a burden on the capitalist class no less and no more than if there was inflation. In other words you could have precisely the same phenomenon happening - increasing state expenditures etc - with zero inflation - so that more of the surplus value would be siphoned off via taxation leaving less in real terms for capital accumulation and the private consumption of capitalists. Its a zero sum thing in other words

Needless to say there is a limit to how far the state can do this without killing the goose that lays the golden eggs. It cannot risk jeopardising the profitablity of industry upon which state revenue is itself dependent and so it is always a question of striking a right balance between the need to maintain profitability and the other needs imposed on the state to maintain and administer capitalism in a wider sense (e.g. the need to maintain law and order).

This can be done without inflation if necessary but inflation is useful for the capitalist state since it allows the state to undermine the value of workers wages to the advantage of profit while enabling the said state to present the "greedy workers" as the cause of inflation when it is government alone that is the cause through its control of the note issue

[chegitz guevara]

Inflation gnomes sneak out at night and raise prices.

[Thirsty Crow]

This is the classic argument that capitalist governments have used against workers putting forward claims for higher wages - that it will lead to "inflation". Thats rubbish. I

Okay, I'm curious, from what you wrote it seems to me that Friedman basically agreed with Marx on this question, inflation being a phenomenon attributable to monetary policy.
Though, knowing who Friedman was, I cannot help but wonder how did he incorporate this specific view into his general anti-worker framework?

[robbo203]

Okay, I'm curious, from what you wrote it seems to me that Friedman basically agreed with Marx on this question, inflation being a phenomenon attributable to monetary policy.
Though, knowing who Friedman was, I cannot help but wonder how did he incorporate this specific view into his general anti-worker framework?


An interesting question. However, it needs to be understood that while there are some similarities between a monetarist theory of inflation and a marxist theory, they are nevertheless quite different

Firstly Friedman included bank deposits in his defintion of money supply which makes quite a difference. Secondly, he , unlike Marx subscribed to what has been called the mystical theory of banking - the idea that banks can simply create credit off their own bat.

Thirdly and most importantly as the article I provided a link for, noted

Marx’s explanation is solidly based on the labour theory of value. The monetarists have no theory as to what would be the right amount of paper money that would need to be issued to avoid inflation. Marx has, and it is based on the underlying value-relation between the money-commodity (gold) and all other commodities
http://www.worldsocialism.org/spgb/education/Marxian%20theory%20of%20inflation.html


Monetarists would maintain that inflation is caused excessive public spending resulting in the the government printing more money to pay for it. This is confusing cause and effect much like the articl by Yaffe and Bullock appears to do. It is quite possible for state spending to increase in with zero inflation but it would entail a reductiuon in the amount of surplus value available to the capitalist class for reinvestment. A zero sum game in other words

So while a monetarist would agree that wages increases do not themselves cause inflation insofar as inflation is a purely monetary problem they would maintain that increased expendiitures by the state on so called social wage are inflationary insofar as it allegedly requiires the the government to print money to pay for them . However, the real effect is much the same - to oppose any increase in the share of social product by workers and if possible to reduce it in the interests of the capitalists

That might perhaps go some way to answering the question you asked. You might also want to look at the Hardcastle site which contains some interesting articles on this and other matters

http://www.marxists.org/archive/hardcastle/index.htm

[syndicat]

A good example of worker ability to raise wages with productivity contributing to declining profits is the capitalist profits crisis of the '70s. Due to the working class rebellions of the '30s and other pressures, capital was forced to make various concessions that took the form of extensive collective bargaining, legal wage minimums and various forms of the social wage. Throughout the period from the late '40s to the '70s, workers in the USA were able to use self-activity and existing structures to push up their wages in keeping with rising productivity. The growth in the social wage during that period, combined with this combativity, and combined with the costs of imperial war and intensified inter-capitalist competition (excess capacity), brought about a major profits decline. This was what then motivated the switch to the neo-liberal model.

Inflation did happen in the USA in the '70s, but very rapid government spending, especially military Keynesianism, put too much money into circulation relative to what was being produced for sale. Hence the devaluation of units of currency, i.e. inflation. Inflation also contributed to the profits crisis because it devalues the loans that are the principle asset of financial corporations.

If capitalists could just push up prices to keep their profits up, why would they fight to keep inflation down?

[robbo203]

Since monetarism was mentioned in connection with Marx I thought I should post this article which Ive just come across - from the Socialist Standard January 1983

http://www.worldsocialism.org/spgb/archive/monetarism%281983%29.pdf
__________________________________________________



Was Marx a monetarist?

Margaret Thatcher, and other supporters of the Monetarist doctrine of Professor Milton Friedman, must
have been surprised and even alarmed to hear that Marx was a fellow Monetarist. In a recent interview,
Friedman said: “Let me inform you that among my fellow Monetarists were Karl Marx and leaders of
Communist China” (Observer, 26 September). Thatcher need have no fear. There is not a word of truth in
the Professor’s statement as it affects Marx.
Friedman’s reason for his belief about Marx was given in his definition of Monetarism:
“Monetarism, he explained, was a new name for the Quantity Theory of Money which
dealt with the relationships between the quantity of money and economic variables such as price level,
interest rates and unemployment.”
Friedman is saying that Marx’s money theory was the same as the quantity theory of money, and that
Monetarism is merely a new name for it. Friedman is wrong on all counts. Marx’s money theory was an
application of his labour theory of value, which the quantity theorists and the Monetarists both reject. Marx
did not share the belief of the Monetarists that unemployment and its rise to peak levels in depressions
arises out of an inflationary monetary policy and could be avoided by a different policy.
And Friedman’s Monetarism is not a new name for Marx’s money theory, or for the quantity theory, but a
new name for a quite different theory, the “Bank-deposit Theory of Prices”, which holds that the price level
is determined by the rise and fall of bank deposits. Both Marx and the quantity theorists were completely
opposed to it. The principal thing that Marx and the quantity theorists had in common, and which
differentiates them from the Monetarists, is that by “money” they meant only the notes and coins in
circulation, the currency.
For Friedman and other Monetarists, as for the bank-deposit theorists, “money” includes, along with the
relatively small amount of currency, the much larger amount of bank deposits. Professor Edwin Cannan, in
his book Modern Currency and the Regulation of its Value, published in 1931, had a chapter entitled “The
Bank-deposit Theory of Prices”. Cannan’s description of that theory showed it to be exactly the same as the
theory now advanced by Friedman under the name Monetarism. Cannan was of course opposed to it.
Marx and the quantity theorists made it quite clear that by “money”, in connection with prices, they meant
only the currency. In Capital vol. 1 (Kerr edition, p.143), Marx dealt with inflation in terms of the “‘bits of
paper”, put into circulation by the state, “on which their various denominations, say £1, £2, £5 etc. are
printed”. Nothing about bank deposits being the factor determining the price level.
The economist, Professor Alfred Marshall, in his Money, Credit & Commerce (Macmillan, 1904) stated the
quantity theory as “the relation between the volume of currency and the level of prices”. Professor Cannan
did the same. Cannan is of special interest because not only did he show the fallacy of the bank-deposit
theory now advocated by Friedman, but also put in a plea for the retention of the distinctive word
“currency” and not allow it to be displaced by the word “money”. He warned of the confusion that would
be created if his plea went unheeded. Friedman’s mistaken belief that Marx was a Monetarist illustrates
Cannan’s point.
What the Monetarists mean by “money” or “money supply” they obtain from the figures published each
month in the official journal Financial Statistics, which, however, adds to the confusion by compiling not
one figure, but six different figures, ranging at present from £36,124m up to £143,154m. They all consist
predominantly of bank deposits except that the top one also includes “shares and deposits with Building
Societies”. The figures differ because they include different categories of bank deposits. Fifty years ago
Cannan foretold what would happen. Once they had started by including bank “sight deposits”,
withdrawable on demand, they would, he said, be unable to find good reason for excluding the “time
deposits” (withdrawable only on giving notice, usually seven days), of the commercial banks and savings
banks, and would probably end up by throwing in the Building Societies. too which is what they have done.
The Monetarists disagreed among themselves about which of the six sets of “money” figures is the
appropriate one. The only thing the Monetarists are agreed about is a rejection, as the relevant factor, of the
currency figures used by Marx and the quantity theorists. (The present currency circulation is £10,741m.)
Friedman is not the only one to get into a muddle by confusing “currency” with bank deposits.
The editor of the Times (23 September 1976) quoted the economist Jevons as having defined the quantity
theory in terms of “an expansion of the currency”. Returning to the subject later on (7 April 1977) he again
quoted Jevons, but this time he altered the word “currency” to “money supply”, by which he, the editor,
meant predominantly bank deposits. It was not what Jevons said or intended.
The confusion of the Monetarists extends to giving a new meaning to the simple phrase “printing money”.
To Marx, Marshall and Cannan it meant “printing notes”; as no doubt it still does to most people. But when
Denis Healey, as Chancellor of the Exchequer in the Callaghan Labour Government, said that the
government “are not printing money now”, and was asked to reconcile it with the fact that the Bank of
England was busily engaged in printing and putting into circulation hundreds of millions of pounds of
additional notes, the Treasury, on his behalf, explained that “printing money does not mean printing notes .
. . but issuing Treasury Bills to the banks” (that is, government borrowing from the banks).
This had its farcical aspect. Two years after Healey made his speech, the Prime Minister, James Callaghan,
talking on the same topic, said that the government were not going “to get more bank notes printed”.
Apparently Callaghan could not believe that “printing money” meant something different from what most
people thought it meant. Nobody had told him that his Monetarist advisers had given it a new meaning.
The question has to be considered whether the Monetarist bank-deposit theory is valid. Does the price level
rise and fall with the total of bank deposits? Many examples could be given to show that it is not valid.
Between 1878 (the first year for which figures of total bank deposits are available) and 1914, bank deposits
increased by 119 per cent. Prices did not rise at all, but fell by seven per cent. And in 1931, Cannan in his
book Modern Currency pointed out that at that time “prices continued to wax and wane with currencies
and to exhibit towards the variation of bank deposits complete indifference” (p.95).
Another question concerns the relationship between the total currency in circulation and the total of bank
deposits. If the two kept in line, rising and falling together and by the same percentage, it might be argued
that it does not matter whether guidance is looked for in changes in the volume of currency or in changes in
the amount of bank deposits. But there is not such co-relationship. Between 1970 and 1975 Sterling
deposits in the banks in- creased by 120 per cent but the currency in circulation increased by only 80 per
cent. (If bank deposits in currencies other than Sterling are included the discrepancy was wider still).
Since the Callaghan government, six years ago, adopted the Monetarist policy continued by Thatcher they
have operated in the belief that “by controlling the money supply”, that is bank deposits, they could control
the rise of prices. But which of the several different sets of figures should they use? If all the six moved
together, and by the same percentage, any one would be as good as any other. But they do not keep in line
with each other. They change by different percentages and at times some are rising while others are falling.
The one generally favoured by British governments has been Sterling M3 which consists predominantly of
bank deposits in Sterling (excluding deposits in British banks in other currencies). But in practice the
governments found that they could not control it. Repeatedly they would announce the limits within which
they planned to keep the “money supply”, only to find their planned limits exceeded. The American
government had the same experience.
The Chancellor of the Exchequer, Geoffrey Howe, admitted this at the Lord Mayor’s dinner. He spoke of
the Government’s anxiety “when it focused on Sterling M3 which promptly nearly went out of control”
(Financial Times, 22 October). So he said he had favoured not concentrating on only one of the six but
looking at all of them. But he also admitted that “occasionally all the money measures together did not give
a clear message of what was happening” (Times 22 October).
The truth is that the monetarists cannot make up their minds what exactly they mean by “money supply”,
and they cannot control it. And even if they could, that would not give them control of the price level.
Underlying Monetarist doctrine there is still another fundamental conflict between Monetarism and Marx’s
money theory and Cannan’s quantity theory. For Marx and Cannan bank deposits are sums of money lent
to banks by depositors. They held the same view as that of the banker Walter Leaf in his book Banking

(1926, p.102):
“The banks can lend no more than they can borrow—in fact not nearly so much. If anyone in the
deposit banking system can be called a ‘creator of credit’ it is the depositor: for the banks are strictly
limited in their lending operations by the amount which the depositor thinks fit to leave with them.”
Opposed to this is a theory described by Cannon as “the mystical school of banking theorists”, which holds
that the bulk of bank deposits are “created” by the banks themselves. One of the believers in the “mystical”
theory was Major Douglas, founder of the Social Credit Movement, with his statement that the banks can
“create unfold wealth by the stroke of a pen”.
Another “mystic” is Professor Friedman. In the book Free to Choose, written jointly with his wife, dealing
with inflation, they considered who are and who are not “the culprits”.
“None of the alleged culprits possess a printing press on which it can turn out those piece of paper we
carry in our pockets; none can legally authorise a book-keeper to make entries in ledgers that are the
equivalent of those pieces of paper.”
In view of the belief of the Keynesians and the Monetarists that they are in opposite camps it is relevant to
recall that Keynes also was a “mystic”. Like the Monetarists he urged abandonment of the policy of
directly controlling the amount of money, and was responsible for drafting the statement in the 1931 Report
of the Committee on Finance and Industry that “the bulk of deposits arise out of the action of the banks
themselves.”
The Monetarist policy of the governments in the past six years has been based on the idea that, through
money market operations, the government can control the amount of bank deposits alleged to be “created”
by making “entries in ledgers”. If this is a fallacy, as it is, how is it that the Thatcher government can claim
some success in reducing the rate at which prices are rising?
In the first place comparison should be made with the performance of the Lloyd George government in the
twenties. They not only halted inflation but, within months, there was an actual fall of prices. The
government’s advisers at the time were not Monetarists, and the government halted inflation by curtailing
the note issue. The present government, like the Callaghan government, has maintained an excess note
issue, vainly hoping to reduce inflation by the impossible idea of “controlling” bank deposits.
That prices are now rising less rapidly is due to the depression. As Marx showed, prices rise in a boom and
fall in a depression quite apart from the currency factor. The difference between the twenties and now is
that, at that time, two factors (curtailment of the note issue, and the depression) were both affecting the
price level in the same direction, downwards. This time they are working in opposite directions.
Government policy is pushing prices up while the depression is operating to make the rise of prices less
than it would otherwise be.
One last word. Marx, unlike the Monetarists and unlike at least some of the quantity theorists, never
supposed that getting rid of inflation would solve workers’ problems.
(January 1983)

[Tomhet]

Competition and SCARCITY, two absolute plagues of capitalism..

[robbo203]

Competition and SCARCITY, two absolute plagues of capitalism..


Think about this logically. How on earth can "competition" and "scarcity" cause inflation? I do wish people would read some of the stuff Ive posted here because some of the information provided is actually pretty useful for sorting out this whole question of inflation. Like this for example

During the 19th century in Britain they never exceeded 25 per cent, and the general price level in 1914 was no higher than in 1814.
http://www.worldsocialism.org/spgb/e...inflation.html (http://www.worldsocialism.org/spgb/e...inflation.html)


So the general price level in the UK in 1914 was more or less the same as in 1814. Now - would you seriously be trying to tell us there was no "competition and scarcity" over the course of these 100 years? And what happened in the 1920s when for a few years prices actually fell? Was society wallowing in abundance, perhaps? Of course not.

Please read some of this stuff and see for yourself what the facts show

[ckaihatsu]

[One] big cause of inflation - speculation! You'd be suprised at just how big an impact speculation can have on commodity prices. This is a form of demand pull inflation but is slightly different in that it is often powered not by logic but just by how people in the commodity markets are feeling at the time. Rumors, expectations and the general mood of the market can play a greater role than economic realities.


Speculation, however *technically* defined, manifests in the real world as the "frontier" outlying environment of investments that are far from being safe "sure things". (Why would anyone undertake something unnecessarily risky if they could get the same result *without* sticking their necks out?)

In a world economy of overall slowing growth (GDP), the positive, growth-oriented investment opportunities will increasingly dry up and bring the thorny "frontier" ever closer. This, then, is the edge of the shadier realm of capitalism that we've been forced to know since about the mid-'60s and definitely during the past decade: government underwriting of corporate-hyped favored stocks, global financial casino-type gambling, government bailouts of worthless leveraged investments based on underlying junk-bond-type assets, skyrocketing prices for basic consumer products ('commodities' markets) since nothing "sexy" is left to invest in, etc.

So we could justifiably define inflation as the inflated prices from those particular markets that have become "hot" simply by the piling-on of successive waves of buyers according to whatever is considered "in" and "trendy" for the moment, outside of the parched landscape of *productive* (manufacturing) real-growth investments.

[Lynx]

NAIRU, the Non-Accelerating Inflationary Rate of Unemployment, is the real villain here.

[Sir Comradical]

I was going to say 'when demand outstrips supply' but clearly I have a bit more reading to do.

[robbo203]

I was going to say 'when demand outstrips supply' but clearly I have a bit more reading to do.

Can I recommend Value Price and Profit

http://www.marxists.org/archive/marx/works/1865/value-price-profit/

[ckaihatsu]

NAIRU, the Non-Accelerating Inflationary Rate of Unemployment, is the real villain here.


It's sad to see this on RevLeft because it's the perfect encapsulation of the *bourgeois* class-war position against the working class.





In monetarist economics, particularly the work of Milton Friedman, NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment,[1] and refers to a level of unemployment below which inflation rises. It is widely used in mainstream economics.

http://en.wikipedia.org/wiki/NAIRU


A "level of unemployment below which inflation rises" is actually a *political* argument because it is inherently limiting any "solutions" to within the construct of capitalist economics alone -- an economics that is all about the exploitation of labor by capital, no matter how "reformed".

This argument contends that the increased cost of doing business from rising wages -- from increased employment -- must be passed onto the consumer, thus resulting in a rise in prices, or inflation.

The *political* part here is the sly sleight-of-hand diversion of causation onto a path that burdens the *consumer*, implicitly blaming the *worker* for this natural-seeming chain of causation that ends with inflated prices.

In fact it's actually a fork-in-the-road wherein a decision must be made as to *how exactly* to pay for increased wages. Burdening the consumer is *not* an automatic given, because *another* option exists: Charge the cost to *business*.

Business will continue to exist, of course, without a proletarian revolution, and will probably go crying to government to cover its risks and/or for a bailout, anyway, regardless of how this-way-or-that-way business happens to be getting done.








Marx did not share the belief of the Monetarists that unemployment and its rise to peak levels in depressions arises out of an inflationary monetary policy and could be avoided by a different policy.





The argument that inflation is due to "cost push" or "demand pull" factors was essentially demolished by Marx in his spat with Comrade Weston in Value Price and Profit. In fact, it surprises me that people here on a site like this can even put forward such ideas. This is the classic argument that capitalist governments have used against workers putting forward claims for higher wages - that it will lead to "inflation". Thats rubbish. In fact, inflation or a rise in the general price level caused by the excess printing of inconvertible currency is a tool used by governments to undercut the value of workers wages who then have the nerve to suggest that the problem is the greedy workers causing inflation with their "cost push" demands. As Marx showed in the above pamphlet increased wages do not and cannot increase the general price level. What they do is cut into profit margins and this is why the capitalists dont like increased wages


[11] Labor & Capital, Wages & Dividends

http://postimage.org/image/1bygthl38/

[Dave B]

I think it is testimony to the power of Karl’s labour theory of value that he speculated and accurately predicted with a ‘what if’ as regards the over issue or printing of fiat paper money as regards inflation.

Even if even for him then there had been a few empirical examples to draw from, but nothing like the more clear cut examples later in modern capitalism ie in Germany in the 1920’s.

And something then even children and my mother can understand.

When you get inflation through the over issue of paper money and the ‘fixed’ workers wages buys less and less. Then the workers struggle to get more paper money in order to buy the same amount of stuff as they could before.

And then the workers are blamed for causing a problem which they are merely responding to.

With the idea that they are pushing up their paper wages and therefore factory gate prices rather than just struggling to maintain their buying power.

When governments effectively print money they obviously generate buying power, but not quite out of thin air. If they now have ‘found’ new buying power, then in the sense of you can’t get something out of nothing then some others have lost that much buying power.

If I have the buying power of £10,000, in cash savings, and then it is only worth the buying power £9000 then I have been robbed, or lost it.

If I want to find the culprit I might suspect the person who seems to have ‘found’ multiples of £1000 in buying power, in the government printing presses.

[Sir Comradical]

Can I recommend Value Price and Profit

http://www.marxists.org/archive/marx/works/1865/value-price-profit/

Already printing it out...

[robbo203]

It's sad to see this on RevLeft because it's the perfect encapsulation of the *bourgeois* class-war position against the working class.





A "level of unemployment below which inflation rises" is actually a *political* argument because it is inherently limiting any "solutions" to within the construct of capitalist economics alone -- an economics that is all about the exploitation of labor by capital, no matter how "reformed".

This argument contends that the increased cost of doing business from rising wages -- from increased employment -- must be passed onto the consumer, thus resulting in a rise in prices, or inflation.

It needs to be emphasised once again that increased wages do NOT cause inflation; they are if anything a symptom of inflation. They can even increase without there being any inflation at all

FACT:

"Between 1850 and 1914 average wage rates went up by nearly 90 per cent, more than keeping up with the steadily rising productivity in industry - but no inflation"

http://www.worldsocialism.org/spgb/e...Inflation.html (http://www.worldsocialism.org/spgb/etheory/Early90's/html/90Inflation.html)

[Dave B]

In fact you can’t have inflation if you are on the gold standard, according to the Marxist theory of value, provided increases in productivity are fairly uniform across all branches of industry.

Particularly as it effects the industry producing the universal money commodity ie gold.

Thus lets say;

In 1850

1 hours of labour (produces or) = 1 ounce of gold = 100 Kg of coal

And 1914 productivity has increased 100% in both the gold and coal mines, and therefore;

1 hour of labour (produces or) = 2 ounces of gold = 200kg of coal


Note in 1914 as;

2 ounces of gold = 200kg of coal

then as in 1850;

1 ounce of gold = 100 Kg of coal

Or in other words 100kg of coal costs one gold sovereign or a £, in both 1850 and 1914 *. No inflation there then.

If for a bit of realism, and throwing some complications into it as well, we assume that in 1850 that the working day was 12 hours and the rate of exploitation was 100%

Then in 1850 the worker would work 10 hours

Gets paid for 5 hours

And gets paid 5 ounces of gold and be able to buy 500Kg of coal.


In 1914 his working day can be reduced to 8 hours and for convenience we can keep the rate of exploitation the same, so;


In 1914

He works 8 hours

Gets paid 4 hours.

8 ounces of gold

and can buy 800kg of coal.


You can actually get inflation and deflation when on the gold standard if there is a variation in the productivity in gold production in relation to the rest of industry. Which can occur with the discovery of natural sources hich require significantly less labour time to extract.

You can say that ‘wages’ or the buying power of wages has increased from 500kg of coal to 800kg of coal, but that is just a reflection or effect of increased productivity.


* actually a £ or a sovereign is or was about ¼ of an ounce of gold, you can do it with silver dollars if you like which are or were 1 ounce I think.

[Dave B]

FACT:

"Between 1850 and 1914 average wage rates went up by nearly 90 per cent, more than keeping up with the steadily rising productivity in industry - but no inflation"
l (http://www.worldsocialism.org/spgb/etheory/Early90%27s/html/90Inflation.html)


Robbo introduces an interesting point, as it is possible for the buying power of wages to increase faster than the increase in productivity if the rate of exploitation falls.


There is some evidence cited in Das capital, by Fred I think in volume III, that the rate of exploitation was falling over ( his part of ) that time period.

What actually determines the rate of exploitation is an interesting point and in capital there isn’t really an adequate explanation for it.

I seem to remember that Adam Smith in a round about way suggested that it was dependent on the ratio of capital to available labour power (or the number of workers).

Karl didn’t like the idea as it whiffed of Malthusianism.

[Lynx]

It's sad to see this on RevLeft because it's the perfect encapsulation of the *bourgeois* class-war position against the working class.

A "level of unemployment below which inflation rises" is actually a *political* argument because it is inherently limiting any "solutions" to within the construct of capitalist economics alone -- an economics that is all about the exploitation of labor by capital, no matter how "reformed".

This argument contends that the increased cost of doing business from rising wages -- from increased employment -- must be passed onto the consumer, thus resulting in a rise in prices, or inflation.

The *political* part here is the sly sleight-of-hand diversion of causation onto a path that burdens the *consumer*, implicitly blaming the *worker* for this natural-seeming chain of causation that ends with inflated prices.

In fact it's actually a fork-in-the-road wherein a decision must be made as to *how exactly* to pay for increased wages. Burdening the consumer is *not* an automatic given, because *another* option exists: Charge the cost to *business*.

Business will continue to exist, of course, without a proletarian revolution, and will probably go crying to government to cover its risks and/or for a bailout, anyway, regardless of how this-way-or-that-way business happens to be getting done.
Thanks to NAIRU we have high unemployment masquerading as full employment - which is achieved by design through government policy!

An alternative is the NAIBER (non-accelerating-inflation-buffer employment ratio), which in policy terms is a Job Guarantee (http://en.wikipedia.org/wiki/Job_guarantee).