Critisticuffs on Inflation
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> The only part of your story that creates purchasing power is the bit where the loans are repaid through new economic activity realising value. The rest is smoke and mirrors.
It is this “smoke and mirrors”, i.e. debt being an asset, that brought us a global economic crisis from which the world economy has yet to recover.
> Banks have no special powers beyond those granted by the state (which are, thus, really state powers). I’ve, in the past, told the story of fractional reserve banking using a shoe shop (that bought and sold on credit).
The power of an employer to extract surplus value rests on the State granting this employer the right to private property. The legal title does not explain the economic substance.
> Just like the IOUs I can issue, and you can issue. When we do so, we do not create spending power, we simply realise spending power that is available elsewhere.
The economics of the promissory notes I issue is that they’re not worth the paper they’re written on. The economics of the promissory notes created by industrial capitalists, commercial capitalists, financial capitalists and the State is that they are promises of future income because the capitalist mode of production roars. We criticised this mistake of identifying the economics of a capitalist loan with that of a consumer loan in our piece, page 8 of https://critisticuffs.org/texts/inflation.pdf:
“There is a fundamental difference between credit taken by businesses to run and expand their business and the sort of credit payday lenders offer. The former interest charge partakes in the success of capitalist enterprises, the latter squeezes the already insufficient income of the borrower. The former allows the debtor to grow their income which allows them to repay the loan with interest, the latter takes from the limited income of the debtor. The former partakes in the enrichment of the debtor, the latter impoverishes them. (This qualitative difference in the economic substance of the debt relation finds expression in the quantitative difference of interest rates. Payday lenders charge about 1,250% per year, credit cards about 20%, personal loans about 8%. The BoE rate in August 2022 was 1.75% per year)”
> The £100 worth of goods were created in the real economy. Existing wealth moved around.
It is ironic to say “£100 worth of goods were created in the real economy” as a punchline in a discussion about *inflation*.
To explain this, let’s keep everything as is but re-introduce Frederick. Frederick has £100 worth of cash that he earned from selling something. Frederick and Alice both approach Eve to buy her £100 worth of goods. Frederick’s ability to pay is constrained by the £100 he earned. Alice’s ability to pay is derived from the expectation that she can pay in the future. But there’s only £100 worth of goods for sale by Frederick. Frederick can use this increased effective demand to sell his commodities for more each. Maybe he gets away with charging £200 in total for those goods, maybe that wouldn’t work with Alice’s expectations of what she’ll realise on the market herself eventually. But the fact remains that Frederick is now confronted by more effective demand than without Alice having received her loan. If that translates into inflation then further depends on whether this sort of credit creation is widespread to the point of being universal (every capitalist is an “Alice”) and what Alice manages to do with those goods in contrast to Frederick.
> If purchasing power (the ability to circulate commodities) is something created by banks issuing credit (possibly it is), how is this different to value and what is the relationship between the two?
First, a very general short answer: Value is the material wealth produced in capitalist societies considered in the abstract. Purchasing power is *access to* this wealth, command over it, if you like.
In more detail:
Early in Chapter 1 Marx arrives at that the ability of a commodity to access social wealth (be exchanged for it) — “exchange value” — is a result of it itself being a bit of this social wealth: “value”. A commodity can be exchanged against other bits of social wealth because it is itself a bit of social wealth. However, the next step follows almost immediately, in Section 3. Commodities need to express their existence as values. To express their participation in social wealth they need to be exchanged for money. That is being a valuable thing and being ability to pay, purchasing power or power of access are two different things. The value form analysis establishes that for value to appear commodities have to “elect” a master: money. At the end of Section 3 of Chapter 1 the “task” for a commodity is no longer to realise its value but to become money, value pure and simple, immediate social wealth.
(One could say that the value form analysis establishes an awkward result for the capitalist mode of production, it is all about abstract wealth but then makes everything dependent on something as mundane as a yellow metal. With debt as an asset, promissory notes, commerce frees itself from these shackles in a fashion. However, it keeps collapsing back to them until central banks replace gold money with their own creations.)
In the money form – social wealth existing in the abstract immediately – the need and desire arises to do with it the only thing that can be done with it: grow it. This is the transition to capital (first surplus value, then accumulation). In Volume 2 we then learn how capital reproduces its own conditions. In the beginning of Volume 3 the rule of capital over the reproduction process is completed with the establishment of the average rate of profit where a sum of money can demand a rate of return on average.
This permits the next transition: capital itself becomes a commodity, a “valuable thing” that can be traded. Its ability to augment itself can be bought and sold: credit and interest. Now this asset, the entitlement to a return, is in itself a valuable thing and functions not only as purchasing power (corporate takeovers are done with shares, bank loans buy commodities, etc.) but as an asset in the vaults of banks.
Debt being an asset means capital – the power of value to augment itself – as a thing, as a tradable commodity. When Alice pays with a promissory note (or with a promise to pay by her bank) this is premised on the title to future payments being a valuable thing.
(Side-note: the above might be too short or too long, too informal or too pedantic for you. It’s hard for me to gauge the “right level” to pitch an answer at.)
“It is this “smoke and mirrors”, i.e. debt being an asset, that brought us a global economic crisis from which the world economy has yet to recover.”
That wasn’t the cause of the 2008 crisis, it was just the way it manifested, investment went into financial services largely because there wasn’t a decent return on investment elsewhere (and because lots of governments had inflated their way out of the Asian Tigers crisis).
“But the fact remains that Frederick is now confronted by more effective demand than without Alice having received her loan. ”
This is the key point, in our model, as intermediaries, any loans to Alice have at least frozen, if not withdrawn effective demand from elsewhere in the economy: generalised price rises only become possible, then, through an actual fall in the value of money.
“We criticised this mistake of identifying the economics of a capitalist loan with that of a consumer loan in our piece”.
So why are we talking about loans of £100 to Alice and not tens of not millions of pounds of loans to big capitalist enterprises? Long term loans which won’t enter into the daily clearing process. These couldn’t be covered on the interbank lending market or by loans from the central bank. In fact many of such loans will be made by investment banks, which are not clearing banks.
There can be no doubt that such loans are not made from money that a bank didn’t already have.
Part 1 of Rudolf Hilferding’s 1910 book Finance Capital is a quite good analysis from a Marxian point of view of promissory notes and “bank credit” at that time when gold was the international currency, as it was too 50 years previously in Marx’s time.
As someone from Austria he also dealt with the situation of a currency, such as was then the case in the Austro-Hungarian empire, that was not convertible into gold (or silver) at a fixed rate (the situation everywhere today) and of how the over-issue of such a currency led to its depreciation.
He had no doubt that banks couldn’t lend what they didn’t have. His view was that the money banks lent to capitalists came from the past profits of capitalists (that they didn’t want to to re-invest for the time being) or from the idle money of the non-capitalist privileged (eg landowners).
https://www.marxists.org/archive/hilferding/1910/finkap/index.htm
> So why are we talking about loans of £100 to Alice and not tens of not millions of pounds of loans to big capitalist enterprises?
You will find that we did talk about capitalist enterprises in the piece we are discussing here.
To understand who “Alice” and “Bob” are see e.g. https://en.wikipedia.org/wiki/Alice_and_Bob They are ways to avoid saying “Customer A” or “Business A” to make a text more readable. Apologies if that caused confusion.
As for the rest of your post, I struggle to see how it connects.
> That wasn’t the cause of the 2008 crisis, it was just the way it manifested, investment went into financial services largely because there wasn’t a decent return on investment elsewhere (and because lots of governments had inflated their way out of the Asian Tigers crisis).
I wasn’t talking about cause. I was talking about that when the “smoke and mirrors” in the vaults of Lehman collapsed that took down the world economy with it. You might take this as a starting point to study how something so imaginary – “smoke and mirrors” – can bring industrial capital into a deep crisis.
To avoid getting side-tracked into “what caused the financial crisis of 2007/2008”, let me just quickly point out that Kittens criticised the position you put forward in https://gegen-kapital-und-nation.org/en/financial-crisis-2008ff/ Incidentally, I already quoted a paragraph arguing against the idea in your post in https://www.worldsocialism.org/spgb/forum/topic/critisticuffs-on-inflation/page/4/#post-235219
(Also in Kittens #0 was a longer piece on that idea: https://gegen-kapital-und-nation.org/en/surface-tension/ Maybe that is more helpful, but looking back at those pieces I’d recommend “Financial Crisis 2008ff” over “Surface Tension” now.)
I don’t wish to derail this exchange, but after following it, I am none the wiser which analysis is correct but more importantly, I find difficulty in recognising the relevance to fellow workers in these troubled times of economic uncertainty which are leading to austerity cuts and attacks upon the unions defense of members level and quality of life.
Can someone explain why it matters what Alice, Frederick, Eve, Bob and all the others do with their £100. In a way, who cares in what way the trillions of pounds moves around the money market since you and I haven’t got any of it in the real sense.
Can someone please explain how it is affecting the present cost of living crisis in the simplest of language?
Which of the explanations, Criticuffs or the SPGB, explain best what is happening globally where working people are once again paying the price with their increased poverty?
I know the media talk of inflation, and it has been referred to on this thread, but I still am not clear on either Critistcuff’s or SPGB’s answer to its cause…much less any cure.
It all remains something of an abstraction or academic to me. How does it relate to people ditching capitalism and seeking revolutionary change?
Treat me as a very typical member of the working class, who has not read Marx’s Capital from cover to cover.
As for the rest of your post, I struggle to see how it connects.
You want me to save you the trouble of re-reading Hilferding by quoting what he wrote? Ok, here goes.
“we should be on guard against the error of double counting with regard to the capital which banks supply to producers by discounting their bills. The greater part of bank deposits belong to the productive capitalists who, as the banking system evolves, keep the whole of their liquid money capital in the banks. This money capital, as we have seen, is the basis for the circulation of bills. But it is that class’s own capital, and the class does not receive any new capital through the discounting of bills. All that has happened is that capital in one money form (as a private promise to pay) has been replaced by capital in another money form (as a promise to pay by the bank, ultimately in cash).”
“We have seen earlier how credit money originates in circulation. We are now dealing with money which lies idle. But money can only perform the functions of money, and can do so only in circulation. Credit, therefore, can do no more than put non-circulating money into circulation. As capitalist credit, however, it puts money into circulation only in order to withdraw more money. It puts money into circulation as money capital in order to convert it into productive capital. Thus it expands the scale of production, and this expansion presupposes the expansion of circulation. The scale of circulation is enlarged not by the injection of new money, but simply by the utilization of old, previously idle money for the purposes of circulation.”
“Austria had an inconvertible paper currency from 1859. Silver guilders were at a premium in relation to paper. More paper was issued than was required in circulation. A condition was thus brought about similar to the one described above. The purchasing power of a guilder no longer depended on the value of silver, but on the value of commodities in circulation. If the value of the quantity of commodities in circulation equalled 500,000,000 guilders but 600,000,000 paper guilders were printed, the paper guilders would then purchase the same volume of commodities as were formerly purchased by 5/6ths of that quantity of paper money.”
Alan,
I think, in terms of cost of living, knowing what does and doesn’t cause general price increases is important: especially, as some political movements (to be clear, not Cristicuffs) latch on to currency crankery and the idea that the government or the banks can just create money, so why don’t they do it in a way that helps us? Also, I think it’s worth the effort to focus on the exploitation in the workplace, and move away from analyses that ‘blame the bankers’ and other financiers, when they are a subordinate part of the problem.
There is also the question of reform: to what extent can a government change/control the situation.
finally, the key question, does pushing wages up fuel an inflationary spiral? Since we believe the answer is no, it’s important to be able to have an account of why workers can push their wages up despite the naive idea that is widespread that that would fuel inflation. So a convincing and correct model of inflation is needed for basic propaganda.
On the difference between SPGB & Cristicuffs, in practical terms, we’ve seen inflation (*as such*) as a creature of state policy, and I believe articles (by Hardy) in the past have stated the government of the day can stop inflation pretty much dead *if they want to* whereas Cristicuffs see if as emerging more, AFAICS, from the Chaos of the financial casino.
As they state: “an increase in credit volumes does not directly translate to a proportional devaluation of money, in the sense of a simple quantity mismatch: more money confronting the same heap of commodities, but this increased credit volume may be the fundamental reason for an increased heap of commodities. The rate of inflation is thus explained by the motley competition of capitals for solvent demand and credit and how quickly they turn this credit into additional commodities.”
Now, I think what they describe there does occur (and is the usual trigger point for economic crises) but I think it doesn’t cause general inflation.
YMS, I appreciate you taking the time to respond.
It is because I am finding the exchanges on this topic difficult to directly relate to the important points you mention that posted my message.
It seemed to me the working-class pain and why it is being exacerbated is what is missing in the discussion.
I look for answers to offer the people I work and live alongside that both they and myself can comprehend.
You may think it is simplifying things to talk in theory about Bob and Alice but it is not succeeding because I still cannot link it to the real economy and its impact on my daily life through price rises, wage cuts and imposition of austerity on social and welfare services.
Possessing only a superficial understanding of political economy, the significance of any difference in analysis is lost by me.
I agree we must look behind the curtain and not accept the media’s stereotypical villains such as the banksters or the Gnomes of Zurich as they were called in the days of my youth. And we should be cautious about simplistic populist answers.
However, I am pleased it is a comradely debate and both sides seeking clarification and hopefully can reach a reconciliation of differences.
Alan,
the short version is that inflation is not a top priority problem for working people, as we can push wages up to match, the issue is for pensioners and people on benefits (there is a side issue on the way in which inflation erodes savings, and thus helps keep workers trapped in their condition). So, organise in unions, and make sure benefits get linked at least to inflation, but better, to wages.
You’re right, we have to bring it back to class struggle.
“Can someone please explain how it is affecting the present cost of living crisis in the simplest of language?”
I don’t think the current cost of living crisis is actually caused by the kind of “inflation” we are talking about here (a fall in the value of money) but by something else, namely rises in the international price of gas and oil and basic foodstuffs which has been caused by various geo-political conflicts.
In common parlance “inflation” is used to describe any rise in prices, but we are talking about something more specific here.
> Can someone please explain how it is affecting the present cost of living crisis in the simplest of language?
>
> Which of the explanations, Criticuffs or the SPGB, explain best what is happening globally where working people are once again paying the price with their increased poverty?
>
> I know the media talk of inflation, and it has been referred to on this thread, but I still am not clear on either Critistcuff’s or SPGB’s answer to its cause…much less any cure.
>
> It all remains something of an abstraction or academic to me. How does it relate to people ditching capitalism and seeking revolutionary change?I’d agree that the explanation of inflation is a bit academic (see also an early post by ALB quoting a Critisticuffs e-mail as “FWIW We don’t think it is terribly important politically”.) So in that sense I’d say you can safely ignore this discussion unless you somehow want to go down this rabbit hole of resolving this somewhat interesting theoretical riddle.
As for a “cure”, on a rather high-level I don’t see much of a difference between what the SPGB is saying and what Critisticuffs are saying: the reason why we are poor and stressed is the capitalist mode of production, attributing that to finance capital or money instead is a mistake.
What makes this discussion a wee bit more relevant than suggested by the previous two paragraphs is that I’d say it reveals some important misunderstandings or errors about how industrial capital accumulates (through debt), how finance capital accumulates (debts are accumulated as assets) and how those two are related (the success of the former is the foundation of the latter, the latter is the judge of the former).
These errors affect e.g. how you then go about arguing about austerity (which is motivated by finance capital’s judgements of the finances of the state under a framework maintained by the state) and about (financial) crises.
To give you an example, see e.g. https://critisticuffs.org/texts/covid-19-and-crisis-20 (it’s short). If you deny the centrality of debt to a capitalist economy and that the maintenance of this debt as an asset is a significant policy goal for states around the world, you’ll have trouble understanding the crisis and crisis measures by the state.
Actually, you might find https://critisticuffs.org/economic-crisis-june-2020.pdf useful (it’s a bit long). It tries to explain the fundamentals of finance capital using the crisis of 2007/2008, the fundamentals of sovereign debt using the 2010 sovereign debt crisis and central banks/currencies using the central bank crisis interventions since then. This gives the conditions under which then Covid-19 hit and the piece then gives crises interventions of states in response. It concludes with (quoting in full as an illustration for how these explanations translate to political conclusions):
> This debt-financed crisis mitigation programme will increase the mountains of debt on all sides. Future growth must then justify this.
>
> Two possible development paths are currently being discussed in the business press.
>
> – There will be a V-shaped recovery. Now a quarter of significant economic collapse, then, if the pandemic measures are eased, first a slow and then a more significant upswing.
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> – There will be a severe disaster for all sectors of the economy in all countries.
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> On the first: If this were to happen, it would escalate the hardship of the global economy from the period between 2012-2019. The upswing would anyway only express that the production capacities that have been cut back are increasingly being restarted. A new credit-financed global economy will not yet come about in this way. It remains to be seen what the planned reconstruction programme of the EU states will achieve. If it comes to that, sovereign debts will at least rise considerably, and only then will we see what economic growth this will bring.
>
> On the second: If the financial markets speculate against one of the world’s currencies, then the only thing that helps is the mutual assurance of the world money central banks to lend to each other without restriction. This may well not happen due to the competition between economies. This threatens produce a local slump, which is guaranteed to have an impact on the other regions. How strong, we will then see. Alternatively, the world money central banks give each other unlimited credit and then finance capital speculates against all world money. Then everything is fucked.
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> Either way, it is clear that the working class will be liable for the successful economic growth as well as for the crisis.
>
> Money and private property are not clever mechanisms for the supply of goods in a society based on the division of labour, but the basic principles under which material life, work, the division of labour and the means of production are bent – within developed capitalism then in the complicated but appropriate way this text has explained.This thread has thrown up all kinds of questions about the fundamentals of finance capital: capital becomes a commodity (credit), capitalist accumulation is driven by credit, central banks vs government, double entry bookkeeping, promises to pay replace money and create ability to pay, what are the assets in bank vaults.
As mentioned above, figuring out inflation is perhaps not the most important issue, but getting to grips with finance capital is useful regardless of what that means for inflation. Austerity 2.0, related to sovereign debt, seems to be coming, central banks compete against each other in anticipation of the coming slump/crisis etc. With crises come silly ideas about positive money, finance regulation etc. Agitators for a rational organisation of production need to be able to explain that those ideas are wrong.
From our/my experience I can recommend starting a reading group on finance capital. Here, something along these lines worked for us: We read one paragraph at a time, out loud. Then one of us phrases it in their own words and we discuss if we can settle on what the paragraph claims. Following that we discuss if the argument and the result are correct. If not, we discuss if the claim is incorrect or the argument, i.e. if an alternative argument arrives at the same correct claim or not. Rinse and repeat. Sorry if that’s a weirdly detailed and rigid description, I just wanted to emphasise how slow we take/took this on our end.
As for texts to pick:
1. One option is to read the BoE or Bundesbank pieces together. They have the advantage of being rather accessible. On the other hand, central banks are invested in saying “everything is great and when they aren’t then it is a question of liquidity”. Also, this wouldn’t allow you to rely on your knowledge from, say, Volume 1 of Capital.
2. Read the GegenStandpunkt book on Finance Capital: https://en.gegenstandpunkt.com/books/finance-capital-2nd-revised-edition This is comprehensive, builds on Marx but is hard going, very dense. You do eventually get used to the writing style but it’s a difficult text. It also assumes quite a bit of knowledge about the accumulation of industrial capital.
3. Read Volume 3 of Capital, i.e. the classic. While the earlier chapters in Volume 3 are quite developed, many chapters on finance capital are drafts and it shows. In addition, translating between banking in Marx’s day and today can be daunting, I for one struggled with this and these chapters quite a bit. Also, this, of course, requires a good working knowledge of Volumes 1 and 2, so the entire project would take years if not a decade to complete.
4. Of course, I think the Critisticuffs and Groups against Capital and Nation pieces are accessible and correct.
– https://antinational.org/media/pdfs/en/financial-crisis-2008ff.pdf
– https://gegen-kapital-und-nation.org/media/sovereign-debt.pdf
– https://critisticuffs.org/economic-crisis-june-2020.pdf
– https://critisticuffs.org/texts/inflation.pdf
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