Inflation as employment of unproductive capital

[Comrade #138672]

Inflation is usually attributed to "an excessive growth of the money supply" by bourgeois economists. I have read, however, that this is merely appearance and that the underlying cause of inflation, at least according to the labor theory of value, is the employment of unproductive capital.

How does this work, though? According to Keynesianism, capital must be employed unproductively by the state, in order to avoid and escape major crises. The key problem here is to increase profits. How is this even possible, when the capital is employed unproductively, i.e. generating no surplus-value?

Sure, I get that the goods produced by the employment of productive capital have to surrender a part of their surplus-value to the employment of unproductive capital, resulting in an increase in prices. But, then, where do the additional profits come from? Why would capitalists even bother?

[tallguy]

Inflation is usually attributed to "an excessive growth of the money supply" by bourgeois economists. I have read, however, that this is merely appearance and that the underlying cause of inflation, at least according to the labor theory of value, is the employment of unproductive capital.

How does this work, though? According to Keynesianism, capital must be employed unproductively by the state, in order to avoid and escape major crises. The key problem here is to increase profits. How is this even possible, when the capital is employed unproductively, i.e. generating no surplus-value?

Sure, I get that the goods produced by the employment of productive capital have to surrender a part of their surplus-value to the employment of unproductive capital, resulting in an increase in prices. But, then, where do the additional profits come from? Why would capitalists even bother?
Inflation does indeed refer to to an inflation of the money supply. The consequent price rises of goods and services that must be exchanged for the now, debased supply of money, rise to meet its debased value. It's simple supply and demand. The next question is why the money supply is allowed/engineered to run ahead of demand in this way. The first reason is simple, when the times are good, the money makers get greedy. when the times are bad, the money makers try to inflate the debts way. too fast, and we get Weimar. too slow and we get the great depression. So, they aim for the Goldilocks zone of the money supply not being to hot nor too cold. Meanwhile, the rich, who have most of their exchangeable assets in the form of real world commodities, couldn't to care less what happens to the money supply since their assets will hold their value relative to that supply. on the other hand, the rest of us, who have most of our exchangeable assets in the form of the monetary salary we must earn from month to month, get screwed as we see the exchange value of that asset drop as inflation causes prices to rise faster than our earnings increase.

What a surprise, not.

[Comrade #138672]

But, if I understand the labor theory of value correctly, then the growth of the money supply does not necessarily have to be inflationary, if it is accompanied by an increase in value, which means that the increase in money is used to employ capital productively.

[tallguy]

But, if I understand the labor theory of value correctly, then the growth of the money supply does not necessarily have to be inflationary, if it is accompanied by an increase in value, which means that the increase in money is used to employ capital productively.The inflation of the money supply will only not lead to consequent price rises in the goods and services being exchanged for it if the following is present;

1) A growth in the real world availability of primary resources to enable the growth of goods and services to happen in a manner that matches the growth of the money supply

2) A growth in the real world demand for those goods and services.

Number (2) can be kept going with advertising creating artificial needs. Number (1) is going to break capitalism.

[Comrade #138672]

The inflation of the money supply will only not lead to consequent price rises in the goods and services being exchanged for it if the following is present;

1) A growth in the real world availability of primary resources to enable the growth of goods and services to happen in a manner that matches the growth of the money supply

2) A growth in the real world demand for those goods and services.

Number (2) can be kept going with advertising creating artificial needs. Number (1) is going to break capitalism.But then you avoid talking about the production process itself. I want to go beyond the superficial supply/demand analysis. What is it about the capitalist production itself that causes inflation? Why is capital (sometimes) employed unproductively and how does this guarantee profits while at the same time sacrificing them? To what extent can capital be employed unproductively?

[ckaihatsu]

But then you avoid talking about the production process itself. I want to go beyond the superficial supply/demand analysis. What is it about the capitalist production itself that causes inflation?


"Inflation" -- a rise in prices across-the-board -- is not necessarily a *bad* thing, though I think that the public has been conditioned to recoil at the mere mention of the word because of its particular instance in the U.S. in the '70s when the ruling class was hit with a 'perfect storm' -- strong social justice and labor movements along with the expense of a prolonged Vietnam War, *and* a stagnating economy.

So the anxiety is really over *that* -- a particular economic condition of stagnation and inflation, or 'stagflation'.

But 'inflation' could just mean 'an expanding economy', which is more the case for 'developing' countries like the BRICS, where their overall growth -- though not necessarily wages -- is expanding along with prices.

I don't think capitalism *inherently* causes inflation, unless you mean the auxiliary dynamics of economic expansionism or single-country collapsed-state hyperinflation (and neo-colonialism).





Why is capital (sometimes) employed unproductively and how does this guarantee profits while at the same time sacrificing them? To what extent can capital be employed unproductively?


Nothing about deficit-spending *guarantees* a return to a healthy economy, as we're seeing these days -- Keynesianism has been the monetary policy of choice, since at least 2000, with a prolonged period of government-funded bailouts of various sectors (dotcom, telecom, energy, etc.), the 2007 housing bubble, the banks bailout of 2008, and the post-'08 housing bubble and stock market bubble, offhand.

It could be argued that these government supply-side subsidies do guarantee *profits*, since they're simply handouts from public funds to corporate balance sheets -- hence bubbles.

[Vladimir Innit Lenin]

capitalism doesn't cause inflation. Rather, inflation is a natural consequence of a money supply predicated on a medium of exchange that is not linked to a fixed point of value, for example the gold standard. Of course, this is not the whole explanation, because even when the currency was backed by gold, there was inflation, sometimes rampant.

But in general, we can see the rise of credit money (i.e. money that doesn't exist physically, but appears 'in the books' so to speak, as debt or borrowing + interest) as a consequence of currency losing its relationship to a fixed point of value.

And ckaihatsu is right, inflation is really nothing to fear. When economies begin to suffer from un-natural levels of inflation (let us say double-digit inflation every year for a number of years), this often leads to a wage-price spiral, where wage demands increase to keep up with prices, pushing prices up further etc. People spend less because their expectation is that prices will definitely rise in the short-term future, and so it is not the workers who suffer (as their wage demands will continue to increase due to their expectations of future price increases), but the capitalists, for both the reason that continuous and rapid increases in prices will precipitate a loss of demand in their products, and that inflation decreases the pound-for-pound value of money, thereby hurting their financial stock assets' value.

[ckaihatsu]

[I]nflation is really nothing to fear.


I'll piggyback on this to add that really the *converse* is the case -- it's *deflation* that's no good for wage-earners, because in such a case -- like today -- businesses are *hoarding* cash and *not* investing in growth, as for employment. Instead, capital is 'running for cover' and looking to simply *retain value* at the lowest risks possible to wait out a no-growth economy. Flights of capital in this way are what cause bubbles, or the over-valuation of certain assets, like Bitcoin -- which, incidentally, are of no use to workers since it's just money that's effectively taken out of circulation.