Date: Thu, 31 Jul 1997 11:11:59 +0100
From: Lew <Lew-AT-dialogues.demon.co.uk>
Subject: Re: M-TH: Labor Theory of Value and Keynesianism



Marx explained inflation on the basis of his labour theory of value.
With convertibility (into gold) the price level is determined by the
total amount of gold in circulation. Although prices rise and fall
according to market conditions, there is no inflation (a sustained
increase in the general price level). But with inconvertibility the
required level of currency is determined by the total amount of
commodities in circulation. If there is an issue of currency in excess
of this amount, prices rise. 

Under the Gold Standard paper money was "as good as gold" because of its
convertibility. Although prices rose during booms and fell during
periods of bad trade, the general price level in the UK in 1914 was
lower than that of 1820. Marx argued that if an inconvertible currency
was issued in excess of that needed for economic transactions to take
place, prices would rise. In 1914 the government came off the Gold
Standard in order to increase expenditure on the war effort, and prices
rose enormously.

Keyenes described Marx's *Capital* as "an obsolete economic textbook,
which I know to be not only scientifically erroneous but without
interest or application for the modern world" (*A Short View of Russia*
1925). Keynes' *General Theory* argued that it was no longer necessary
"to watch and control the creation of currency" and that it only needs
the government to "manage the economy in such a way as to maintain
demand" to avoid slumps.

Keynesian remedies of increased state expenditure and budget deficits
were put into practice from l933 onwards in the USA by the Democratic
administration under Roosevelt. Unemployment fell for a time, but no
more so than in the UK, which had not yet gone Keynesian and operated
directly opposite policies, and l938 saw the arrival of a brand new
slump in the USA which was only to abate during the Second World War. 

The period since Second World War has coincided with the "Golden Age" of
capitalism (circa 1950-1970) and this has misled many Keynesians into
thinking that their demand management policies were responsinle.
However, the UK and the USA had achieved a relatively advantageous
position in world markets for many commodities, with rivals like France
and Germany economically devastated. The Keynesian economist, Joan
Robinson, admitted that the post-war boom would have happened anyway and
for this reason.

By about 1970 the classic trade cycle began to reassert itself. Attempts
by many governments to buoy up demand, boost production and offset
recessions have not been successful. Giving people more money to spend
in this manner does not lead to increased production, but increased
prices. This was seen in 1974 when the newly elected Labour government
tried to spend its way out of an economic crisis. They spent more,
borrowed more - and crucially - expanded the note issue (it increased by
nearly a fifth in one single year alone). The result was not falling
unemployment and a buoyant economy. On the contrary, unemployment rose
from 600,000 in 1974 until it had reached over 1,600,000 in 1977. The
expansion of the note issue failed to stimulate production and curtail
job losses, but coupled with the hike in oil prices, it did result in
massive increases in the Retail Price Index, which was registering
nearly 27 per cent by mid-1975. This attempt at spending your way out of
a recession has been repeated in other countries and with similar
results, France under Mitterand in 1981-2 being a notable example.

The Thatcher-Reagan administrations formally abandoned Keynesian
economics, but continued to inflate the currency. Although discredited
by experience, Keynesian assumptions are still accepted by the major
political parties, Treasury officials and economists. Criticism of
Keynes is common on the Left; but what is not so common is a statement
of what they believe monetary policy should be. Since the alternatives
are either some form of "sound money" (remember monetarism?) or the
policies of increased spending which can be grouped under the heading of
Keynesianism, they have yet to face up to the implications of their own
analysis. 
-- 
Lew


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