An Economic Debate

 Paul Mattick Jnr is a Marxist economist who we admire as we did his father before him. However, even comrades can disagree when it comes to analysing capitalism.

In a recent article, ‘Magic Money’ that can be read at the magazine ‘The Brooklyn Rail’ Money Magic – The Brooklyn Rail where he criticises Keynsianism. In the article, Mattick  suggests that businesses cause inflation (a rise in the general price level) by raising prices:

“Businesses defended their bottom lines by raising prices…. Prices increased throughout the economy as different business sectors struggled to make others pay the costs of the debt: the dread stimulus-induced inflation.“

But businesses normally charge what the market will bear and how can the market bear an increase in prices when trade is bad in a recession? It can’t. So another explanation must be sought. The one we have offered is that inflation is caused by the government overissuing an inconvertible currency (what the Americans call “fiat money”); this causes the currency to depreciate reflected in a rise in the price level, Hence the result of Keynesian policies was inflation in a recession — “stagflation”

Mattick explains well enough why and how “quantitative easing” raises stock market prices. Nevertheless, his explanation as to why it has not caused general inflation is still based on the assumption that businesses have the ability to raise – or not raise — prices at will.

His argument is that, because businesses are making capital gains from the stock exchange boom QE generates, they don’t need to raise prices

“Basically, none of this costs business anything, while the rise in stock prices disproportionately benefits the small super-wealthy minority who disproportionately own stocks, so there is no motivation to raise prices—especially under the deflationary conditions of a global business slowdown—producing an inflation-free expansion”.

So, he is saying that businesses are choosing not to raise prices even though they could do. But why would they not do so if they could since that would enable them to make more profit, which after all is their primary “motivation”?

The fact is that businesses don’t have a choice in the matter. They sell at a price that the market can bear and in a recession the market will not bear an increase. Mattick in fact undermines his whole argument by adding “especially under the deflationary  conditions of a global business slowdown.” Precisely. In other words, they don’t raise prices even with QE because they can’t. It’s not that they choose not to since they are already making enough money from capital gains on the stock market, but because they can’t.

The reason why QE hasn’t led to general inflation is that the extra money is injected only into the financial system but not into the general economy. So it inflates only the price of shares not prices generally, as explained in this article

It is government policy to inflate the general price level by about 2 percent a year. This they do by increasing  the supply of “basic money” (M0) in the usual way of allowing banks to withdraw money from their accounts with the Bank of England in the form of bank notes.

 

Mattick responded to this criticism with the comment:

‘I  wish these critics would address the issue in the [Brooklyn] Rail. They forget, of course, the “oil crisis”, a successful attempt to increase prices by restricting supply, which forced a general price increase. But it is also generally recognized that increased taxation and interest rates also impelled businesses to raise prices.’

 

In response to Adam Buick’s reply published in the Brooklyn Rail, elaborating on those above remarks, Paul Mattick responded:

“Adam Buick accepts the monetarist explanation of inflation as due to an excess of money relative to economic growth, the 20th-century version of what in the 18th century was called the quantity theory of money (roundly criticized by Karl Marx in his own theory of money). This conception is a natural correlate to the idea that, apart from distortions due to governmental monetary policy, prices are normally set by “what the market … will bear” as businesses compete for maximum profits.

The reality of business life is not as simple as this picture suggests. Prices are affected by a multitude of factors besides supply and demand, including subsidies, quasi-monopoly positions of producers, and international exchange rates, as well as government credit and money policies. To take some recent extreme examples: Amazon, founded in 1995, did not make a profit until 2001, devoting its efforts in the meantime to driving other book purveyors out of business by keeping its prices ultra-low. Uber has followed this model, regularly posting multibillion dollar quarterly losses. On the other hand, prices (and profits) in the healthcare sector have risen steadily thanks to a complex system of government subsidy and other forms of business protection. To return to the stagflation years, the increased price of oil engineered by Organization of the Petroleum Exporting Countries (OPEC) in 1973—almost 10 years after a decline in corporate profits had become visible—was transmitted throughout the fossil fuel-based economy, despite the serious downturn often blamed on the “oil shock.” In 1974, while the recession was in full flood, according to the US Department of Commerce 60 percent of profits of American firms were “inventory profits,” measured by the difference between the prices paid for materials used and the (increasing) prices of finished products.

During the post-World War II period government economic policy became an increasingly important aspect of the capitalist economy, affecting the workings of the market mechanism (which had never really existed as a pure phenomenon). Worried about a resurgence of social unrest should unemployment and other forms of social misery increase too much, governments continued the expansionary monetary and fiscal policies evolved during the Depression and the war. In Europe, much government spending took the form of an enlarged welfare state, while the US put its money more into war and production for war, which combined an enlargement of production with keeping the world safe for democracy. Production for government use—although it merely redistributed already-produced profit to favored companies—maintained sufficient demand for business in general, experiencing declining profits and taxed to pay for government spending, to raise prices competitively in an attempt to boost bottom lines. Contrary to Adam Buick’s conception of inflation, all prices do not rise simultaneously, and in particular the price of labor power, wages, rises more slowly than commodity prices, improving business profitability.

At the present time, in contrast, already very low wage rates, historically low rates of business taxation, and a stagnant, low-growth economy have removed earlier “cost-push” reasons for price increases for many firms. Hence we have an expansion of the money supply, this time feeding financial speculation rather than industrial production, with a low level of general inflation.”

Mattick’s first error, Buick explains, is about Marx and the Quantity Theory of Money. He did indeed “roundly  criticise” it where gold and/or a paper currency convertible on demand into a fixed amount of gold was the currency. He argued that it only applied when there was an inconvertible paper currency

Paul Mattick is right that the prices of commodities can rise for all sorts of reasons other than a depreciation of the currency but this does not alter the argument that over-issuing an inconvertible paper currency does cause a rise in the general price level. Obviously, contrary to what he supposed to be the argument, this does not happen immediately it one go; it spreads throughout the economy as sellers have occasion to increase their prices.

Here is what Marx wrote in chapter 3 section 2c of volume 1 of Capital, alluding “here only to inconvertible paper money issued by the State and having compulsory circulation”:

”The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.”

It appears Mattick hasn’t noted that passage that says that as soon as money becomes inconvertible the position is effectively reversed!

Also questioned is Mattick’s comment that

‘Contrary to Adam Buick’s conception of inflation, all prices do not rise simultaneously, and in particular the price of labor power, wages, rises more slowly than commodity prices, improving business profitability.’

Firstly, a general rise in the price level doesn’t mean every price rises at the same time or indeed at the same rate. In slumps in particular, some prices can still fall against the general trend. But it’s the last part of that sentence that’s really odd – does he have any empirical evidence for it? Despite setbacks in recent times, we all know real wages have risen enormously since the inception of capitalism. But have commodity prices kept pace in real terms? There’s been a long term increase in average real commodity prices (presuming this is what he means) but it’s well behind long-term real wage growth in most advanced countries from what I’ve seen, though admittedly it’s difficult to get exact comparative data. Similarly business profitability (rate of profit?) hasn’t increased over the long-term, even if the accumulated stock of capital has increased hugely.

Also, his example of Amazon/Uber is an example of companies setting prices below the market rate (and being able to do so because of their disruptive business model and the scale of capital invested in them). Prices rising from government protection are rents, and even they are limited, ultimately, by the extent of effective demand in the economy.