money and debt

2 10 2012

If we look at the history of money we can see that there is a very importance difference between commodity money & credit/debt, says duvinrouge.
During the days of barter being able to exchange your items for a precious metal made sense because these metals acted as a store of value. You didn’t have to decide then & there what you wanted to consume. This progress to money is simply the exchange value of all other goods in terms of the thing acting as the universal equivalent, such as a gold or silver. Goods had prices which were weights of gold (or silver or whatever).


But why should prices be at particular weights of gold? Why should a pair of shoes have a price say 10 times the price of a pair of socks? It’s not just supply & demand. Behind supply & demand is the labour time that goes into production. Any capital, e.g. machines, raw commodities, had to first be produced by labour, even if this is just picking the cotton. This is why Marx, & before him Ricardo & inconsistently Adam Smith, recognised labour as being behind the value expressed by prices. But Marx didn’t accept the simple view that particular commodity prices expressed the actual concrete labour time that had gone into their production. Marx recognised the market. It is the market that allocates labour time & because capitalists have to produce before they can bring their goods to the market, they may actually waste labour time producing something the market (capitalist society) doesn’t want. Hence we have the term socially necessary labour time. This is why microeconomics & the subjective theory of value called marginalism is useful at the individual commodity level but useless when in comes to modelling the economy as a whole. This is because aggregate prices is the expression of total labour value. A society only has so much labour time to allocate. Hence there is an objective foundation for value & so money & prices. This is why Marxist crisis theory is still streets ahead of modern macroeconomics in understanding the nature of capitalism & why it is prone to crisis.

Today though commodity money is history. There has long been credit & fractional reserve banking, but now we have fiat money. But lets first deal with credit. It can be argued that it is credit that explains the abstract business cycle. Not necessarily every boom & bust, but in general banks tend to over issue credit (which is actually claims on future labour time) whilst times are good, only to find that debt saturation has been reached & borrowers can’t pay back all their debt. The credit crunch causes a financial crisis & then a recession. Some capitalists lose their shirts & others pick up their businesses at fire-sale prices. Capital is devalued & the cycle continues. This can occur even when there’s a gold standard.


Now that there’s a fiat money regime when the banks over-lend the central banks can come to their rescue & buy up their debts & in the process issue more money. This is why Quantative Easing is central to what is going on today. We’re now on to QE3 & the ECB is going to buy long term government bonds. Already the major currencies in terms of gold have been debased. Commodity price inflation was one of the main causes of the Arab Uprisings. That is QE was a key factor in the US losing an important ally in the Middle East – Mubarak.
So although today’s money has lost its connection with commodity money it can’t lose its connection with value. That is labour value. Now aggregate prices exceed values. But these claims on future labour time cannot be realised. The capital devaluation must come. No doubt this will take the form of a stockmarket collapse & further substantial falls in property prices & other assets that attempt to act as stores of value, e.g. government debt, alongside rapid price increases in necessities such as food & energy. This means that the Arab upheavals are just a foretaste. World revolution is an increasing possibility.

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One response

8 05 2013
Bill Jefferies

The subjective theory of value is not useful. There must be an objective standard against which subjective valuations are made. The subjective theory has no objective standard and so it has no subjective one either. Paradoxical.


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