Steve.Keen at Steve.Keen at
Tue Feb 7 12:41:36 MST 1995

Boddhisatva recently posted a comment on inflation which
included the proposition of "a separate economy in
profit instruments":

|Inflation buoys the value of existing capital, by raising
|the value of the present product of old machines.  It softens
|the blow of economic crisis, and slow-down.  But where, one asks,
|does the upwards pressure on prices come from, if, as in the
|present American case, wages (and therefore aggregate demand)
|are stalled or falling.  There must be a systemic mechanism
|other than consumer demand to inflate prices.
|        I posit that there exists a separate economy in profit
|instrunments.  This economy could drive up the present
|valuation of existing capital, as capital expansion decreases.
|Businesses which are not expanding cannot issue new stock,
|cannot borrow at higher rates, and cannot promise greater,
|future profits.  Thus they would decrease the supply of
|profit instrunments, and therefore the demand of speculators
|would require greater profitability from the existing capital.
|If this market is separate enough, and efficient enough,
|this could create a systemic condition where all firms would
|seek to raise prices, and lower wages, without attention to
|the stagnant, or falling consu
mer demand level. (Unless
|central banks raised the rate of return on debt instrunments,
|or, of course, until crisis came)

|        This analysis is completely Marxian...

Indeed, perhaps more so that Boddhisatva realises! As some
long term members of this list are aware, my interpretation of
Marx revolves around what I call the "dialectic of the
commodity", a concept of tension between use-value and
exchange-value which Marx first developed in the
_Grundrisse_. In a debate on this list I have suggested its
(negative) impact on the labor theory of value; but it had
positive impacts as well, one of which was to posit just the
kind of "separate economy" Boddhisatva does.

In normal commodity exchange, the purchaser pays the
exchange-value, and gets its use-value. But what about
the situation where what is being "purchased" is capital
itself? The following quote is from Capital III,  p. 352:

|"What, now, does the industrial capitalist pay, and what is,
|therefore, the price of the loaned capital?... What the buyer
|of an ordinary commodity, buys is its use-value; what he
|pays for is its value. What the borrower of money buys is
|likewise its use-value as capital; but what does he pay for?
|Surely not its price, or value, as in the case of ordinary

Thus Marx's dialectic of commodities leads to a dialectic
of money, for if the rules of exchange that apply to goods
in general applied to money, you could "buy" a dollar note
for a cent.

There is thus a dialectical reason why the forces which
set the price of commodities (basically, their cost of
production) is not the same force that sets the price of
money, and by extension, assets which are purchased
because are expected to generate a flow of money.

Here the price is set by the (expected) use-value of
the assets, which (except for money itself) will vary
over the trade cycle, providing an independent basis
for inflation to commodity cost pressures.

Steve Keen


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