Deflation

Jurriaan Bendien bendien at tomaatnet.nl
Sat Jul 12 02:51:54 MDT 2003


I wrote:

> To increase the general price level, basically you
> need to find a way to
> raise the level of demand by consumers and
> producers, in a careful way, so
> that it does not get out of hand and implode again.

You replied:

Deflation is not a realisation problem determined by
"underconsumption" or any other issue arising at the
level of circulation.  Rising inequality and trade
problems are symptoms not causes.  We don't need to
invoke Keynes: the problem is not lack of effective
demand but lack of surplus value (an issue arising, of
course, at the level of production).  The problem is
the underproduction of valorisable capital and the
overproduction of unprofitable capital.  Deflation
appears because (due to the low level of social
productivity) it is unprofitable to employ more
people, and hence less effective demand appears in the
market, while great pools of idle labour and moribund
capital exist everywhere.

Reply:

I am not committed to an "underconsumptionist" explanation of crises,
because underconsumptionists fail to explain satisfactorily why a
maldistribution of incomes occurs in the first place, so that a lack of
monetarily effective demand exists. Even then, underconsumptionists usually
do not distinguish clearly between demand for particular types of usevalues,
for example capital goods (Dept 1) and consumer goods (Dept 2), and their
interrelationship. I think you are basically correct in saying that "Rising
inequality and trade problems are symptoms not causes." But in itself that
doesn't say much, because if you have that inequality and those trade
problems, then these can also be the cause of other things, such as
underconsumption. From the point of view of the growth of the contemporary
capitalist world economy, the lack of monetarily effective demand (buying
power), particularly by ordinary consumers, is overall the most serious
problem, that places an gigantic brake on economic growth, and Immanuel
Wallerstein is quite correct to point this out. But now you have to explain
why that lack of monetarily effective demand manifests itself in the first
place, how that comes about. There are Neanderthal Marxists and
Fundamentalist Marxists who deny the existence of realisation problems,
tacitly they commit themselves to Say's Law and suggest that if
surplus-value has been produced in the production process, that the output
containing it will automatically be sold. But Marx does not agree with this
at all, and both Marx and Keynes are totally correct to reject Say's Law,
according to which supply will always find its own demand. This alleged
"Law" is false for numerous reasons, but even if it was true, the time
interval between the supply of goods by the producer and the sale of the
goods to the final consumer is crucial. You could even say that Say's Law is
based on a misunderstanding of what markets are. For Marx, capitalist
production is, as he writes, the "contradictory unity of production and
circulation". If value has been added in production, but the output cannot
be sold, then you are no further ahead, you cannot claim the surplus-value
that the output contains. When you say "the problem is not lack of effective
demand but lack of surplus value" this is meaningless, because the two go
hand in hand, they imply each other. The dispute about whether the
capitalist crisis is primarily a problem of "overaccumulation of capital",
or an "overproduction of commodities" is meaningless, because "commodities"
are just a form that capital takes, namely commodity capital. The
overaccumulation of capital really implies, that you can no longer reinvest
realised profits at the previously ruling rate of profit, but only at a
lower rate of profit. In the most extreme case, it implies that the total
mass of produced surplus-value declines, but if this is so, this would
simultaneously mean an absolute overproduction of commodities in relation to
monetarily effective demand. You can always invest somewhere, but in this
case you no longer get the same return on investment that you used to get.
The rate of return can however be manipulated by e.g. altering monetary and
credit conditions, and as Keynes quite correctly points out, if interest
rates increase, this will ceteris paribus always lower the incentive to
invest in production, both because it makes borrowing capital more
expensive, and because at a certain point you make just as much money by
keeping your capital in the bank - why bother to take the risk and invest in
production in that case ? Likewise, monetarily effective demand can also be
manipulated through altering the provision of credit, currency values and
taxation for instance. You argue "The problem is the underproduction of
valorisable capital and the overproduction of unprofitable capital". This is
meaningless, because according to Marx, valorisation refers to the accretion
of value within the labour process, through the application of living labour
which adds value to the output. The valorisation and realisation of capital
are not the same at all. Valorisation may occur, but realisation may not
occur, because output is not sold, in which case no surplus-value is
realised even though value has been added in production. I do not know what
you mean by the "overproduction of unprofitable capital". There is no such
thing as unprofitable capital, since capital is money applied to make more
money, and if it does not make more money, it does not function as capital,
it is only an asset with a constant or declining value. The issue concerns
rather the relative magnitude of profit that is made on capital. Falls in
the general price level, which means a decline in prices of goods and
services across the board, occurred at times in crises when the gold
standard was still operated. This is what you would expect, given the
operation of the law of value in the capitalist setting, as a longrun
tendency, it is ultimately an expression of the rising productivity of
labour and the consequent fall in the unit values of commodities. During the
gold rushes in Australia and New Zealand in the 19th century, for example,
the general price level would increase. But in modern times, the expansion
of credit money and the supply of currency is much less regulated and
controllable. During the long post-war boom, Churchill remarked, the Western
world "sailed to prosperity on an ocean of debt", leading to high inflation.
The result was stagflation, namely inflation coupled to economic stagnation,
something Keynesians could not explain very well. Marxist economists could,
because they are much better aware that you cannot force an investor to
invest where they don't want to invest. And of course in Marxist theory, the
profit rate will fall purely as a result of a sustained period of business
expansion.  The result of that was a much more stringent monetary and credit
regime in the OECD countries at least, and an austerity offensive on the
working class. The rate of surplus-value was increased, profitability
increased again, but real wages lagged behind, remained constant or even
fell. However to explain the conjunctural fall in the general price level in
the USA consequent to deflationary policies requires attention to a lot of
different factors, and I am not able to make a good assessment of that. In
Marx's theory, as I said, you would expect that to happen, ceteris paribus,
as a longterm trend, if a strict credit regime is operated. All I am saying
is that a conjunctural fall in the general price level is not the same as
the general historical tendency.

You wrote:

This is an index of the hegemon's weakness, because
the US is incapable of sustained growth or of
capitalising the world economy.

Reply:

Well, actually, in the 1990s the US economy did experience strong and
sustained growth, but as you say, a not inconsiderable part of that growth
was due to foreign capital investment.

You wrote:

Such accumulation crises cannot be resolved and
profitability restored until the devaluation of
constant capital, the destruction of fixed capital, a
transformed resource base and the introduction of new
productive technologies allowing restructuration of
the labour-process and the composition of labour.

Reply:

Yes, that is the standard Marxist story, but what interests me is the
specific form that it could take. Since about 1980, a massive
restructuration process has already taken place. The rate of surplus-value
rose significantly, the general and industrial rate of profit rose
significantly, but still economic growth remains rather sluggish, and if you
look as disaggregate data, the economic activity that accounts for that
growth is more in the "non-productive" than in the productive sectors. And
then you have to ask, what form of restructuring would make a decisive
difference ? What new technologies could lead to a cumulative process of
expansion, rather than exascerbating unemployment even more ? In my opinion,
we are dealing with a situation of permanent excess of capital, which
despite rationalisation, is leading to a reorientation of production to
non-productive activity, luxury consumption and armaments production.
Meantime, social inequality is constantly increasing, and the very ability
of workers to organise and agitate for better pay and conditions is
restricted more and more.

You wrote:

These cheapen the cost of capital and allow
surplus-value to grow.  Until then, as Gary and others
have said, whatever stimuli and Keynesian policies are
implemented will only result in a brief acceleration
before the economy hits the stagflationary wall,
because this sort of arbitrary demand management does
not solve the underlying problem, and will only
produce inflation followed by recessionary crises.

Reply:

The point is that even just to implement a left-Keynesian policy, you would
require an increase in the ability of workers to organise and agitate for
better pay and conditions, through unions and political parties. There would
in other words have to be some political will, some political project, to
implement it. But even in Brazil, where the WP is very large, this is not ha
ppening. In which case, you wonder what kind of social reformism could make
a genuine difference. Of course, Marxists are often full of revolutionary
rhetoric. But if you cannot even make significant gains on bread-and-butter
issues, and you cannot organise mass workingclass political parties, and if
you do, they still cannot have much effect, well then what can you do ? This
is where I was referring to the theme of "how low can you go", how far must
living standards fall, how much does real unemployment have to rise, and how
much political repression must occur, before cumulative economic growth can
return.

You wrote:

Unfortunately no path-breaking series of innovations
has occurred which would allow the transformation of
the mode of production in order to allow for new
growth.


Reply:

This is absolutely untrue. The innovations are there, it is just that they
are not generally applied, there are lots of obstacles to that happening.

You wrote:

The form of imperial hegemony is the
political and social instantiation of the
accumulation-regime on a global level, so this is a
crisis of US imperialism.  The US guarantees the world
system of existing production relations, but cannot
renew the exhausted structures of production because
of an insufficient capital base and insufficient
energy resources.

Reply:

This is false as well. Leftists tend to focus on US imperialism, because of
its military power. But EU imperialism and Japanese imperialism are
economically speaking very important as well. The shares of world GDP by the
USA and the EU are a little over 20 percent each, Japan accounts for about 8
percent. The share of world exports of the USA and Europe are about 15
percent each, as against 6 percent for Japan. American dollars are used in
half of world trade, Euros in about a third, Japan about 5 percent. American
imperialism doesn't really have the power that leftists think it has, it
just has a lot of military power, but military power of itself does not
solve many economic problems, beyond generating profits for the
military-industrial complex, and in fact creates new ones. In many respects,
the EU economies are really stronger. There is no "insufficient capital
base", there is an abundance of capital, it is just not applied in the
expansion of real production, that is all. There are plenty of energy
alternatives to oil, it is just that currently there exists no great
incentive to use them on a large scale.

You wrote:

Jurriaan's "Schumpeterian"
technological revolution may be impossible, and the
Bushies have considered this fact.  US strategy is to
seize control of West and Central Asia before
presumably confronting China, as it must, but this
doesn't solve the underlying problem and in fact only
politicises the crisis, allowing an opening for
radicalisation and revolution.

Reply:

It may be that such a technological revolution is possible only in a
socialist transformation of society. There exist plenty technologies today
which could revolutionise social life and generate new growth, they are just
not applied on a mass scale, that is all, the economic incentive does not
exist. If socialists aren't even interested in those alternatives, of
course, they make that prospect less likely, and leave the terrain to the
Greens. There is nothing much to be gained from a war with China, because
the average Chinese has very little buying power. A German worker would earn
something like 15 times what a Chinese worker earns, with better social
security and health benefits. If you consider the current problems generated
by the war against Iraq, just imagine the effects of a war with China - a
country of over a billion people.

Cheers

J.








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