impressions about money, in the absence of facts

Readers, there was a fantastic programme on the radio yesterday about James Joyce, which reminded me of Joyce's Q&A style, in the penultimate chapter of Ulysses, and how it's a fantastic vehicle for generating cheap content, and reproducing arguments without having to pretend expertise, and since my argument has foundered only on the limits of my understanding, its continuation in Q&A form at least registers these limits.

Criticisms

I've noticed some inadequacies with regard to your treatment of economic issues, for example, GDP is meant to have its own "deflator" based on the quantities of products actually produced. It's one thing to go against this procedure, but at least you could have explained it.

That's right. I don't think I ever claimed any special knowledge or aptitude with regard to economics, it just seems important that someone or other gets a handle on this. With the GDP figures, firstly, the relationship between wages and output is correct even in terms of the official values. A 2% fall in employment with 0% wage increases is still exceeded by a 4.5% fall in output. Secondly, the goverment's figures don't seem right anyway.

Based on intuition?

Yes, but workable theories probably always start from intuition, and the thing is to make them stand up based on evidence, and in the absence of intuition. It seems like inflation was around 8% last year and around 4% this year. But is GDP even a realistic metric? Is the UK a production economy anymore? What exactly does it produce? Monster Munch and landmines - what else? The receipt of tribute, conceived as a commodity.

But they have a formal system: chipsticks fell 5%, grenades fell 4%, ergo GDP fell 4.5%

Keynes says somewhere that only one man in one thousand will notice if money is debauched (I am not that man). It's probably the same principle with the GDP figures, it's complicated, uninteresting and not an explicit secret. Few people would think it was relevant anyway, if there was some sort of revelation - if it was revealed that they'd inflated GDP by increasing the contribution to it from Victorian houses by 50% because they're now worth more, and increasing the contribution from grenades by 50%, because they contain more white phosphorous for the same money.

Maybe Keynes is describing the actual state of affairs: a vast conspiracy to tax money by printing money, like in Zimbabwe. But the adulteration or not of the money supply would be a question involving evidence, rather than just intuition. The point is, you would need to check the record, which is public domain, basically?

I can't spend my life auditing the UK government, for nothing! I have neither the talent or experience, I'm just saying that the money supply is a relevant social question. The thing with Keynes is interesting, because it would make his pantheon of apostates, Silvio Gesell and whoever, secular saints in an era of moderate Zimbabwean monetary expansion. They would have had a vague intuition of what was happening, and nowhere to go with it. It would have been that, all you can do is to put on the green shirt of the monetary crank. Anyway, this is sort of a counterfactual.

These days all money is credit money, where the central bank holds corresponding securities. They don't literally print money. Are you aware of this? And they expand and contract the money supply by buying and selling securities in open market operations.

yes. In conclusion - "Monetary cranks" up to Ron Paul are or were right about the political aspect of changes in the money supply. This part of their critique is valid. They do not seem to have dealt with Keynes' objections to "real" money, i.e. money backed by gold or whatever, either by accepting Keynes' arguments or demonstrating why they are wrong.

Anyway, there was the £200bn quantitive easing program recently, perhaps you could explain how that worked, in terms of corresponding securities etc?

Not really. Didn't George Osborne put together some sort of reassuring plumbing metaphor in the pages of The Sun?

Again, it's the problem of financial arcana. With regard to monetary policy, we need to know how much is involved in open market operations, whether the central bank is working to raise or lower the natural rate of interest, and how the rates filter through, from central bank rate to an average lending rate and how this relates to the rate of profit. Also, how much is gained or lost each year through these securities.

Perhaps you could read Mishkin's textbook of monetary policy: it builds to an understanding of the ISLM model of fiscal and monetary policy?

I have real reservations about economic literature. They always want to philosophise about expectations and such, not institutions and practices. Their style is like that of habitual cannabis smokers. A stone is dropped into a well, on it is written "expectations"...

This is about F Mishkin? The former board member of the Federal Reserve?

not really, economists generally. They draw a formal model of an imaginary world, and they see their conclusions jump from the page; they immediately think they apply to real reality, for example the doxa about the rate of profit equalling the rate of growth from J von Neumann. Hicks' ISLM model deliberately or accidentally alters Keynes' theory, and then this gets carried over into the literature, as if this was what Keynes' theory was.

I think that's enough cheap content for one day. I understand your point about Hicks centres on "n" being conceived as a relationship mediating between a fixed money supply and the schedule of real investments, as if for Hicks "n" "knew" how much money there was, whereas for Keynes this isn't an issue, since Keynes allegedly has a concept of non circulating money. Perhaps you could produce a diagram, using Microsoft Paint, showing circulating money "A", non circulating money "B", and savings and investments, to throw some light on this issue.

recession notebook 1.

The UK has two measures for inflation, the CPI and the RPI, which have diverged as the economy has become more and more tied up with housing speculation. The Retail Price Index has a stronger asset price bias, and serves as a better index for calculating wealth. The Consumer Price Index is less exposed to asset price fluctuations and serves as a better index for measuring production.

Between the second quarter of 2008 and the second quarter of 2009, UK output fell 4.5% in nominal terms, and 6.5% with output adjusted to CPI prices. At the same time the workforce has been reduced by 2%, as 650,000 people have lost their jobs.

So, while workers who managed to keep their jobs are somewhat worse off, as price inflation has exceeded wage increases, workers' "share" of overall production relative to capitalists' "share" of production has actually increased. I mentioned last year that this would probably happen, and that big capital would logically seek to reverse this movement through inflation. The government has certainly instituted classic inflationary policies: tax cuts, targeted corporate aid, reduced interests rates, even printing money, but this hasn't chased through as yet to increased prices.

In arguing that labour's share of production would hold, I mentioned Marx's theory of rigid real wages alongside Keynes' theory of rigid money wages. I was wrong to insist on real wage rigidity, for the simple reason that reduced productivity in a recession, in the absence of money wage increases, will inevitably reduce real wages in the short term. In the medium term, cutting into "conventional minimum" real wages will damage productivity, so these ought to be as "defensible" as Keynes' money wages. The conventional minimum real wage is also partly determined by social and psychological factors, so workers might accept a lower real wage temporarily in a recession, without this reduction sabotaging productivity.

The situation I described above, with labour taking a greater share of reduced production, goes against another of Keynes' hypotheses: that the schedule of the marginal efficacy of capital is likely to be downward sloping. In effect, British capitalism has not been driven back "uphill" surrendering unprofitable sectors, and defending a more profitable hinterland. On the contrary, British capitalism has lost productivity overall. It has retreated downhill, becoming less profitable as it has shrunk. Like Kafka's giant mole, it scuttles back into its burrow.

Predictably enough, some banking interests have actually become more profitable as a result of these upheavals.

These are the government's statistics:

nominal GDP

workforce

CPI index

Mattick's opinion

"SOMEHOW, AND FOR REASONS known only to himself, Paul A. Samuelson cannot leave Marx alone. His latest concern in this respect is an attempt to have the last word in a long-drawn controversy regarding the relation between value and price in the Marxian system."

Paul Mattick's opinion on the "transformation problem". To be honest, this made me screw up my face more than Samuelson's parade of greek letters.

the transformation problem 2

This is an illustration of some accounts figures for a single capitalist firm or aggregate of firms, with the red lines illustrating the ratios between these figures

a - accounting rule: assets equals liabilities

b - rate of profit on capital

c - capitalisation rate

d - mark up, or rate of surplus

e - rate of exploitation

f - organic composition of costs (Marx's "organic composition of capital" relates wages to total assets)

Samuelson's argument involves an example in which firms' capitalisation is equal to their total costs over the period in question. This is the same assumption that Marx makes in his example of production price calculation in Capital part three. In reality, capitalisation rates are likely to vary between industries depending on the turnover of stock, depreciation of assets and funding for new assets, cash to pay wages etc, credit extended and received, "good will".

Samuelson proves that for the "hard" version of the labour theory of value to hold, given a positive rate of interest, the rate of exploitation would have to be the same for all firms. It could be argued that different sorts of work cannot possibly produce the same rate of exploitation. For example, if someone packing boxes could be made to generate 10% more profit for the same remuneration, how could the same transformation apply to different sorts of work, like driving a van, sewing shirts, repairing car engines? Or, if we can be sure that some firms have some monopoly power, won't this show up in higher rates of exploitation?

Samuelson's example suggests another reason, that because a, b and c are fixed ratios, d (mark up) must be a fixed ratio. If e (rate of exploitation) is also a fixed ratio then f (organic composition of costs) must also be a fixed ratio. This is a different thing from Marx's "organic composition of capital", which represents the ratio between labour costs and total capital.

Because of this "tradition" of drawing up examples where capital is taken to be equal to costs, certain commentators, like the Soviet Union analyst Alec Nove, sometimes discuss Marx's "organic composition of capital" as if this meant the same thing as "organic composition of costs". This is not the case if rates of capitalisation vary.

Marx's concepts of constant and variable capital aren't really tenable, because a firm's fund out of which labour costs are paid, and which represents the capitalisation of these costs, isn't necessarily distinct from the firm's other cash funds. The same bank account will generally be used for non labour costs and taxation. Hence, variable capital, taken as the average amount of the labour fund isn't really measurable. Also, labour isn't an "asset" in capitalism, it's merely funded out of a firm's stock of cash, which is.

A further disparity occurs in public companies, where the profit rate ought to relate to the market value of the stock, whereas the organic composition of capital will relate to the company's assets, which could be much less. Although arguably, the market value of companies' stock should only exceed the value of their assets in conditions of complete or partial monopoly.

the marxist transformation problem

I sort of assumed that Marx's labour theory value just meant that all costs could be decomposed into wages and profits, the sum of which is called "labour". But it seems reasonable to think that for each product produced, the decomposition of wages and profits will have the same ratio, i.e. the price of any product produced under perfect competition will be in proportion to the labour expended on it. Paul Samuelson's refutation of the theory of labour proportional prices* is a consistant centre of ideas around the "marxist transformation problem". Below, I try to give an example of how Samuelson's algebraic proof might be played out, using made up numbers. The value of capital is equivalent to funding for the costs incurred, which are all paid at the same time, and the rate of profit is 25%.

Suppose an economy consists of three sectors, of which the first supplies producers' goods to the other two:

First Sector

Capital £160

Revenue £200
Wages £160
Costs
Profit £40

All these goods are sold to capitalists in the consumer goods industries, sectors two and three.

Second Sector

Capital £200

Revenue £250
Wages £50
Costs £150
Profit £50


Third Sector

Capital £200

Revenue £250
Wages £150
Costs £50
Profit £50

The costs paid by sectors two and three represent the income of sector one. This income can be broken down into wages and profit at the rate of 4 : 1. Hence sector two's costs represent £30 of profit and £120 of wages for sector one, and sector three's costs represent £10 of profit and £40 of wages for sector one. Of the total wages cost expended across all three sectors in producing consumer goods, £170 was input into the products of sector two, and £190 into the products of sector three. Since labour is homogenous, the ratio of the wage costs of any two sectors of the economy is the same as the ratio of labour input.

The ratio of the value of the output of second sector to the value of the output of third sector...

...by the price of total output is 250 : 250

...by labour inputs is 170 : 190

This shows that the Ricardian labour theory of value, where commodities' "relative values will be governed by the relative quantities of labour bestowed on their production" is not realistic. The exceptions to this rule, where the theory does hold, are where the interest rate is zero or where all sectors of the economy have the same ratio between direct wages and profit.

Essentially, what skews the values of any output from a value proportionate to the labour input, is that the mere use of the capitalists' assets, themselves products of labour, is exchangeable for other products of labour. That is, the conditions of capitalist production prevent the exchange of commodities at values proportionate to their labour inputs.

*see the Wikipedia page on the transformation problem for Samuelson's argument

keynesianism 3

The investment and saving schedules theorised by Keynes are meant to represent inflows and outflows of money to or from the real economy over a period of time. Keynes' conception of economic self-correction means the sums of money and their peridisation are not important. An imbalance, according to Keynes, will expand or contract the economy until parity is reached. If government sought to reduce interest rates and expand production permanently via public spending, it would be necessary for this spending to be constituted as a periodised flow also. Funding of this flow of spending would have to come from the ex nihil creation of money. Public works are not a necessary form of this government spending, which could just as well take the form of gratuities handed over to the richest members of the community. Keynes' considers it prudent to fund workers through public works, rather than capitalists, as they are likely to spend rather than save more of their income, and in order to avoid labour unrest. Zimbabwe owes its fabled misery to the adoption of such an expansionary monetary policy.

There remains the idea of adopting a temporary policy of public works financed from outside the supply of circulating money. Such a policy might serve to bridge a temporary slump within the business cycle, maintain output above what it otherwise would be, and by consequence save productive plant that would otherwise be destroyed. Such a policy might reasonably be funded through intertemporal taxation or private sector loans. Whether such a policy would work depends on the validity of the postulates underlying the neoclassical theory: e.g. the idea of perfect competition. Nitzan and Bichler show how firms with market power raised their prices, in relative terms, during the deflationary crisis of the Great Depression.

Keynes has caused a great deal of confusion with his ideas about investment and the investment multiplier. Keynes argues, following Richard Kahn, that a increase in investment at any level of interest will be met by a much larger expansion of production. The money taken from the non-circulating fund is supposed to cause an expansion of production, up to the point where money outflows once again equal money inflows. Ex nihil goverment spending would do the same thing, up to the point where it had to be funded from the real economy, or inflation broke down the condition of money wage rigidity. Government spending is not, however, the same thing as investment in productive plant. Keynes' theory does not seek to ascertain how much money will be spent on investment in productive plant, merely how much money from non-circulating funds will be used this way. It does show how an increase in government spending, through its influence on interest rates, could choke off investment from this second source of funds.

keynesianism 2

One might have expected that Keynes' General Theory, insofar as it examines how various shocks would impact on an economy in which the money supply does not expand and new plant can be bought but not put into use, could hardly serve as the basis for political initiatives. Nothing could be further from the truth. In order for something like Keynes' theory to serve as a guide to policymaking it is necessary for Keynes' short term model to be extended to a medium term model, in which more variables are subject to change. Keynes offers no clue as to how, for instance, the medium term rate of profit on marginal capital might show the same tendency to decline as the short term rate of profit. He certainly does offers policy makers encouragement to use his theory in precisely this way.

Keynes believes that output and employment can be increased if capitalists are prepared to produce at a lower rate of interest. The increased employment of available resources, including labour, ought can be thought of as a general improvement. Keynes thinks this reduction in the operative rate of interest can be effected in two ways:

1. Increasing the propensity to invest at every rate of interest - shifting schedule "N" down and to the right

2. Increasing the propensity to consume at every level of income - shifting schedule "S" down and to the left

These are surely long term or medium term goals for an administration, and incorporating these changes into Keynes' short term model is, at best, stretching a point. Keynes' model implicitly rules out the use of new industrial plant, and the effect of this increase in capacity on output and interest, as beyond its scope. This feature of capitalist production is excised for formal reasons, even though policy proposals are made, the efficacy of which certainly depend on the growth path of capitalist production.

The ideas mentioned above about psychological propensities to save or invest are the basis for Keynes' reverie about ancient Egypt, which:

"was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance".

This is probably only half serious, because ancient Egypt evidently was not a fancy dress version of bourgeois England. Keynes' point is that the relatively low amount of saving in ancient Egypt, i.e. hoarding of gold, would have reduced "the interest rate", whatever that was, and increased output. This counterfactual story is not just picturesque, however, because it serves as a rhetorical support for the most celebrated keynesian policy: wholly wasteful loan expenditure.

keynesianism 1

The specific situation analysed by Keynes, in which a market economy fails to achieve full employent, is based on the the validity of Keynes observations about the rigidity of money wages. An economy with a fixed supply of currency, perhaps based on a more or less fixed supply of gold, would certainly be exposed to deflationary forces if individuals decided to withdraw more and more currency from circulation. If money wages are fixed, monetary deflation will probably be reconfiguered as a contraction of the real economy. The simplest solution to this problem, put into practice by governments everywhere since the abandonment of the gold standard, is for government to progressively inflate the money supply, and so prevent workers from making real wage gains by defending a current money wage. Even Milton Friedman considered this the most realistic response to a deflationary crisis as severe as that of the great depression. Keynes claims to have developed a general theory of the capitalist economy, supplementing the restricted theory of the classical economists (for Keynes, principally Smith, Ricardo and Marshall), which tacitly assumed that the interest rate would be equal to Keynes' "neutal rate" of interest, or a rate of interest maintaining employment "at some specified constant level". In the context of the abandonment of the gold standard, the notion that the economy is subject to deflationary pressure on account of its restricted supply of money is no longer so credible. Keynes' theory itself can be taken as a description of the special case of an economy in which the government does not permit itself to expand the money supply.

The great difficulty with Keynes, and part of the reason why his books are still read, is that while he talking about one thing, he might be alluding to something else. So people think, perhaps he could have meant that real wages were fundamentally stable, or that the interest rate on productive capital might fall for a different reason, or that the medium term processes of the economy might behave like the short term processes, etc etc.