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Monday, March 11, 2013


As I plod on through this obscure series of arguments I have launched, completely without any idea where they will end, it occurs to me that there is a portion of the exposition that I have omitted, perhaps because it is so familiar to me that I have a hard time remembering that the rest of the world does not inhabit my head.  Briefly, in Chapter I of Capital, Marx offers us an extended and quite obscure discourse about the "relative and equivalent forms of value," in the course of which he works his way from the simplest case of an exchange of linen for coats [quantities not even specified] to the full blown emergence of a list of prices of commodities in which each commodity is set equal to some amount of gold understood as money.  This part of Chapter I is so difficult to understand that some commentators, most notably Louis Althusser, actually recommend to readers that they skip all of Chapter I and come back to it only after they are adequately marinated in Marx's terminology and point of view.  I have fully explained this part of Chapter I in the third chapter of Moneybags Must be So Lucky, under the provocative title "Mrs. Feinschmeck's Blintzes, or Notes on the Crackpot Categories of Bourgeois Political Economy."  [I am, I do believe, the first person ever actually to make perfectly clear sense of Marx's argument, but as the immortal Rodney Dangerfield used to say, I don't get no respect.]

What I am attempting in this series of posts is to pick up Marx's argument where he left it, and carry the analysis forward from the concept of commodity money [i.e., gold as numeraire] to the full development of paper money, completely unhinged from any connection to gold or any other produced commodity.  Understanding the nature of money thus conceived is of course essential to any understanding of modern financial capitalism.  I am quite sure that I cannot offer a full account of that phenomenon, but I am cautiously hopeful that this series of posts will at least serve to clarify things in a preliminary way so that others more knowledgeable than I can pick up the analysis and carry it to completion.

Now let me return to my slow, careful exposition.  I have been struggling these past few days with the problem of typing into WORD my equations and formalizations, and it is so bloody time-consuming, even assuming it can be transferred to my blog, that it literally impedes my thought processes.  So I have made a decision.  I am going to expound what I have to say in words, not symbols.  Should I actually reach a point at which something is to be gained by symbolic representations of my arguments, I will deal with it then .

So, we are at the crucial point where something resembling money first enters the picture.  The discussions in classical political economy [and, I think, in modern economic theory as well] are ambiguous, because they fail to distinguish sharply between someone's legal holding, or ownership, of specific identifiable physical quantities of various commodities [this chair, that pair of boots, just this ounce of gold, etc.] and a person's right to take possession of a specified amount of some commodity [as identified by legally defined categories and measures.]  If a country is on the gold standard [as the United States once was], then a piece of legal tender with a face value of one hundred dollars gives its owner a legal right to present that one hundred dollar bill at a government mint or depository and receive a quantity of gold worth $100 at whatever is the legally defined rate for gold.  But even in this rather elementary case of a country on the gold standard, the possession of the one hundred dollar bill does not of course give its owner a legally enforceable right to any quantity of any commodity other than gold.  It does give the owner the right to settle debts with that hundred dollar bill -- other economic agents are required to accept it in payment of debts.  But only if the owner of the bill can find a commodity owner willing to sell some quantity of the commodity can the owner of the bill exchange it for the commodity.  As for the quantity of the commodity in that exchange, that is left to the "higgling and jiggling of the marketplace."  So it is entirely possible to be in legal possession of a goodly store of paper money backed by the government and exchangeable for gold and yet not at all be able to buy food or clothing or shelter.

What has happened here?

The first thing that has happened is that a distinction has been introduced between what we may call a person's holdings and what we may now call that person's possessions.  Reverting to the banking house that issues certificates of deposit, the issuing of the certificate has not altered the vector of outputs, and hence it has not altered any economic agent's holdings [if we may now use the term "holdings" to refer to the set of actual individual specified items that the legal person legally owns].  But the issuing of the certificate has created two new legal entities that must be included in the list of an economic agent's possessions.  Ownership of the gold passes from the depositor to the banking house.  The banking house, upon issuing the certificate of entitlement, incurs a debt;  and the depositor, upon receiving the certificate of entitlement, acquires a credit.  The debt is a legal obligation to turn over a specific quantity and quality of gold to the depositor on demand;  and the credit is a legal right to demand [and to obtain] that specified quantity and quality of gold from the banking house.

Debts and credits are not physical quantities of goods, as are all the items in any legal agent's holdings.  They are legal obligations and rights -- what today it is fashionable to call "social constructions."  They exist only within the context of a system of laws and regulations [or perhaps socially enforceable customs.] 

Let us suppose that the state arrogates to itself the right to create and enforce such legal rights and obligations, memorialized on bits of paper.  Obviously, traders of commodities in the market may now start to exchange their commodities for such bits of paper, rather than for other commodities.  Since we are assuming a society-wide consistent system of relative prices, including the ratios in which commodities exchange for gold, very quickly we will see developing a system of payment and exchange that looks very much like what we now call money.

Well, it should be clear where this is heading.  Traders may decide to hold their slips of paper beyond the period of exchange between the periods of production, confident that will be able to exchange them for commodities at some future time.   This will create certain imbalances in the supply of and demand for commodities.  If too many commodity producers decide to hold onto their chits instead of swapping them for commodities during the trading period, there will be a glut of commodities on the market.  This will trigger the characteristic cycle of booms and busts that Marx, and all other observers of the mid-nineteenth century economic scene, had come to know and fear [or embrace, if they were, like Marx, hoping for a crash followed by a revolution.]  All of this takes place while the economy is still on the gold standard, which is to say, when the chits of paper, now called money, can still be cashed in on demand for specified amounts of gold. 

I have gone in at such interminable length about elementary and obvious matters because I want to identify the precise point at which the analyses of both the classical political economists and of their neo-classical marginalist successors part company with reality.  The equations I put forward in my lengthy essay on Marx's economic theories had absolutely no place in them for what we are now calling money.  If you go back and look at them, you will see that there is no symbol in them that stands for a quantum of money.  There are prices, of course:  the price of corn, pc, the price of iron, pi, the price of theology books, pb, and the money wage, w.  But these "prices" are simply ratios of the specified commodity to a standard quantity of the commodity chosen as numeraire, in the case of my equations corn.  The debts and credits that we introduced into our discussion above, and that we would have to include in the vector representing the possessions of the economic agents, do not appear in the equations.  In the sense that we understand the word "money," there is no money in classical political economy.

One might think that this failure is purely a consequence of the relative lack of sophistication of the classical political economists, who, after all, did not have the advantage of having studied the subject from Paul Samuelson's famous textbook.  But that would be a mistake, for money, properly understood, makes no appearance at all even in the supremely sophisticated, thoroughly mathematicized equations of the Microeconomic theorists who are the envy and pride of the modern Economics profession.  [When I had just begun my study of the dismal science, I observed with some puzzlement to a bright UMass Econ grad student that there did not seem to be any money in the Micro I was studying.  "Of course not," he replied, as though I had commented that the stable with the pile of manure in it did not seem to have a pony.  Radical critic of all things capitalist though he was, he did not seem to think this was a black mark against Micro.]

If we make it through the first semester of Introductory Economics, which is typically devoted to Microeconomics [intersecting supply and demand curves, elasticity of demand, and all that cool stuff], and stumble into the Spring semester course on Macroeconomics, all of a sudden money is everywhere.  The economy-wide quantity of money is a big topic in Macro, and it turns out that there are even different kinds of money -- M0, M1, M2, and M3 among others.  But no one ever troubles to explain how this money, which was so conspicuously absent from the Fall semester, managed to find its way into Economics over Christmas break.

This is as far as I have managed to get in my meditation on money.  It is clear to me that money is a social construction -- a mystification, in Marx's terms.  It is not a mere accounting convention, nor is it an arbitrary numeraire in a system of relative prices.  I cannot really imagine a complex economy functioning without money, even in a socialist system of social relations. 

Well, I leave it to others to ignore this or carry it forward.  I think perhaps I should return to commenting on the passing scene.


GTChristie said...

Seems to me you have pointed to, in so many words, the commoditization of money.
So now we hear sober economic policy discussions of "money supply" for instance, which your analysis might reveal as windbagging an abstraction of a mystification *LOL*

Robert Paul Wolff said...

Indeed, indeed. What we need is for someone to carry the analysis forward so that we really understand the transition to finance capital and all. Or, as I suggested at the very end of my partial essay, we need a rigorous link between micro and macro. I have to believe there is work out there of which I am just unaware. Anyone?

Magpie said...

I think the problem with money and classical political economics can be traced back at least to Adam Smith:

Wealth of Nations (Chapter III. Of the accumulation of capital, or of productive and unproductive labour) contains a clear foretaste for what would later be known as Say’s Law.

Smith was discussing his theory of capital accumulation. For Smith, the foremost feature of an economy was its capacity to grow, to produce surplus (i.e. outputs in excess of inputs). But, why do capitals grow?

“Capitals are increased by parsimony, and diminished by prodigality and misconduct.

“Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so (...).”

So, savings was, in Smith’s view, what makes capital grow (i.e. to accumulate): what’s not consumed, is saved.

However, “what is annually saved, is as regularly consumed as what is annually spent, and nearly in the same time too: but it is consumed by a different set of people. That portion of his revenue which a rich man
annually spends, is, in most cases, consumed by idle guests and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as, for the sake of the profit, it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people: by labourers, manufacturers, and artificers, who reproduce, with a profit, the value of their annual consumption.”

In other words, Smith implicitly **assumed**, without actually reasoning, as an obvious fact that whatever was not consumed would be "immediately employed as a capital".

From this many have inferred, erroneously in my opinion, that Smith was necessarily speaking of barter.

In any case, both Smith and many of his modern interpreters assumed "Traders may decide to hold their slips of paper beyond the period of exchange between the periods of production, confident that will be able to exchange them for commodities at some future time" could not happen.

It was J.B. Say who, to my knowledge, for the first time gave the rationale Smith never gave: commodities and money are perishable, they may lose value with time. That's why commodities are never hoarded: what is not consumed (i.e. what is saved) is immediately invested. There is no third option (i.e. hoarding).

In other words: S = I.

As it turns out, Smith's assumption and Say's rationalization are not necessarily right, your guess is right.

In that mistaken scheme of things, money (and financial assets, more generally) cannot act as a store of wealth.