Fiat Money is Logically Prior to Capital

The title of this post may seem bold, but even if readers disagree with what follows, I think it can serve as an interesting basis for discussion. I have very much appreciated the quality and diversity of comments in recent threads. The motivation for this post derives from aspects of earlier discussions regarding: (i) the political possibilities under a flexible exchange-rate fiat currency regime, which are arguably implicit in the MMT framework; and (ii) Kalecki’s skepticism concerning the viability of sustained full employment under capitalism, which is one example of how political possibilities might be argued to be less open than I have suggested in recent posts.

The Logic of Capital

At the outset, I should clarify what I mean in the title by the term “capital”. At the most fundamental level, I am referring in Marx’s sense to the social relation capital. This refers to a relation between people in which a social surplus produced in excess of the culturally determined subsistence requirements of the working class is privately appropriated by the capitalist class in a monetary form as surplus value. Here, the working class is defined to include all those who must attempt to sell their labor power (capacity to work) to an employer in exchange for a wage or salary, or who depend on the wage or salary income of somebody who does. The capitalist class includes those who have no need to sell their labor power and can rely entirely on appropriated surplus value either directly (profit income) or indirectly as a share out of surplus value, for example in the form of interest or rent. Of course, for a lot of social research it would be useful to divide members of the working and capitalist classes into further sub-categories, but for present purposes the twofold distinction between a working class and a capitalist class is sufficient.

The flipside of the social relation capital is wage labor (including wage and salary labor). The social relation capital is predicated on the existence of wage labor. It is the feature that labor power can be bought and sold as a commodity that gives rise to the particular form in which the social surplus takes under commodity production – surplus value. That is, the surplus takes a monetary – not just a real or material – form.

In Marx’s theory, the value of a commodity is the amount of labor time required for its reproduction. The value of the commodity labor power is therefore the amount of labor time required to reproduce the capacity to work of the working class. This is conceived as a culturally determined (not absolute) level of subsistence. Provided the working class can be reproduced in less labor time than is actually worked, a surplus will remain for the capitalist class in value form. This surplus value is the monetary equivalent of the labor undertaken in excess of what was strictly necessary to reproduce the working class.

“Capitalism” refers to a system in which the production of commodities for exchange under conditions of wage labor and private appropriation of surplus value is the dominant social relation. We could imagine at one extreme pure capitalism, in which all production and exchange is dictated by commodity relations and the social relation capital. At the other extreme, there would be no wage labor or private appropriation of the surplus in value form. Labor power would cease to be a commodity. In between the two extremes are a wide variety of social possibilities that blend a mix of capitalist and non-capitalist social relations. There is no hard and fast rule for determining when a system is capitalist, but loosely speaking, the system is usually considered capitalist if capital is the social relation that dominates production.

Under capitalism, the motive for private-sector activity is profit. The reason for this is that, in the sphere of capitalist social relations, capitalists make the decisions over what and how much production takes place, and their decisions are made on the basis of expected profitability. Marx expressed this motive as M – C – M’. A monetary magnitude, M, will be converted by capitalists into commodities, C, for the purposes of production in an effort to obtain a larger monetary magnitude, M’, in exchange (M’ > M). In other words, capitalists will only be willing to make monetary outlays to employ workers and purchase plant, equipment and raw materials if they expect to end up with a profit. This gives rise to another meaning of the term capital. In addition to the social relation, the term also refers to the accumulated value, at a given point in time, that has been appropriated by capitalists through the extraction of surplus value.

But now we have introduced another notoriously ambiguous concept – “money”. For Marx, monetary magnitudes are the equivalents of definite quantities of value (quantities of labor time). For example, if nominal income is $100 and total employment is reckoned at 100 hours of labor time, $1 represents 1 hour of labor time. Skilled labor is reduced to multiples of ‘simple’ labor in such calculations. If a commodity requires 10 hours of social labor time to be produced, its value can be expressed equivalently as $10 or 10 hours of labor time.

For Marx, under competitive conditions there is a tendency for profit rates to equalize across sectors. Free competition, here, refers to the mobility of money capital, and has no necessary relation to the neoclassical notion of perfect competition between small price-taking firms. Competition, in Marx’s sense, requires the free flow of investment dollars between the various branches of commodity production on the basis of profitability.

Because of the tendency for profit rates to equalize across sectors under competitive conditions, the price of a commodity in exchange will generally differ from its value. Nevertheless, Marx held that, in aggregate, the sum of all values (total value) will equal the sum of all prices (total price), total surplus value will equal total profit, and the average value rate of profit will equal the average price rate of profit.

In Marx’s analysis, money capital is the result of past surplus labor (‘dead labor’). It comprises the accumulated surpluses of prior periods. In initiating new production, capitalists combine dead labor (plant, equipment, raw materials) and ‘living labor’. This initiation of production requires capitalists to make outlays on constant capital (c, dead labor) and variable capital (v, wage payments to living labor). These outlays are risky for capitalists because they must be made with no guarantee of a profit at the end of the process. The outlays will be made on the basis of expected profitability, but these expectations might be disappointed, and the expected profits not realized in monetary form.

So investment decisions by capitalists depend on expected profitability. Under pure capitalism, social benefits and costs would be assessed purely on this basis. This is what is meant by “the logic of capital”. Since profitability depends on effective demand, and effective demand for a particular commodity is contingent on income distribution, a purely capitalistic social system would be receptive to the desires of the community only to the degree that these desires were expressed through private spending decisions. The poor would have few means to express their desires for various goods and services – e.g. education, health care, basic amenities – because supplying for these needs would not be profitable for capitalists, who are captive to competitive imperatives and in no position to indulge altruistic impulses. Similarly, the employment of society’s accumulated plant, equipment, infrastructure, knowledge and technology would be decided by capitalists strictly on the basis of expected profitability.

Society is Logically Prior to Capital

Of course, in reality, society does not allow itself to be completely dictated to by the logic of capital. Even where the logic of capital is allowed to operate, its influence is attenuated. Workers and capitalists alike are freed in some degree to act according to broader considerations. Regulatory measures delimit the socially acceptable scope and nature of competition. For instance, in advanced economies, the abolition of child labor not only exempts children from the rigors of wage labor but frees capitalists to behave more humanely than would be feasible (for capitalists) in the absence of such an abolition. Society also alters the distribution of income produced under private market conditions through the introduction of tax-transfer measures and broadens considerably the goods and services produced through public sector activity, as well as through subsidies and tax breaks for particular kinds of private-sector activity and not-for-profit production.

Given that society ultimately determines how much leeway will be given to the logic of capital, this post could just as easily have been entitled “Society is Logically Prior to Capital”. It is conceivable for society to exist without capital, and it has existed without it in the past. Society is therefore not contingent on capital for its existence, and could do without it altogether if it so desired. To the extent it allows capital, it can do so on its own terms.

From the perspective of Marx’s analysis, the reality of a mixed economy does not alter anything fundamental to the determination of value. Marx’s explanation of value pertains only to goods and services produced as commodities for exchange in private markets. Clearly, the government’s budget deficit adds to aggregate profit, but the way it does so is through the impact of government expenditure and taxation on the level of demand for goods and services produced as commodities. Provided this production occurs under competitive conditions – which, again, for Marx means free mobility of money capital – prices will tend to move to levels determined by cost price (c + v) and the average rate of profit. Government expenditure will act just like any other component of demand in its effects on prices and output. Taxes will act like other withdrawals from the circular flow of income, which subtract from the overall level of demand.

Although society can be regarded as logically prior to capital, my focus here is somewhat narrower and more specific. My suggestion is that society’s choice of monetary regime is logically prior – and not contingent on – capital. Society is logically prior to money, and society’s chosen system of money is logically prior to capital. Further, my suggestion is that the choice of monetary regime will influence the degree to which society is able to remain master over the dictates of capital to the extent this is deemed appropriate through democratic processes.

Social Implications of Alternative Monetary Regimes

We have seen that it is clearly possible for society in a monetary economy to conduct itself along principles not entirely dictated by the logic of capital. We know it is possible because in monetary economies there has been, in varying degrees, a mix of private and public sector activity, redistribution of private market incomes, and regulations defining the permissible limits of competitive profit-making behavior. But it also seems likely that the autonomy society retains for determining its preferred private-public mix will vary with the monetary system it erects. It seems, on the basis of MMT, that a modern monetary system – meaning a floating exchange-rate fiat currency system – offers greater flexibility than some other regimes when it comes to the range of social alternatives that could be sustained without ultimately running into insurmountable opposition from the capitalist class.

The gold standard, a commodity-backed monetary system such as Bretton Woods, the common currency arrangement of the EMU, and fixed exchange rate regimes all seem to impose greater constraints on the type of social arrangements that are sustainable in monetary economies. The obstacles imposed under these alternative regimes can be warded off for a time – and indeed have been, sometimes for decades, in the introduction of various welfare-state measures – but ultimately the logic of capital undermines the ongoing viability of these alternatives to narrow profit-driven behavior, simply because capitalists if they can help it will not stand for anything not directly serving their economic interests. These same pressures have been allowed to hold sway also in modern monetary systems since the breakdown of Bretton Woods, though in this case MMT would seem to indicate that the constraints have been self-imposed and in many cases imaginary, in that they are based on a misunderstanding of the possibilities opened up by fiat money operating under a floating exchange rate.

One critical difference concerns interest rates on government debt. In a modern monetary system, interest rates are ultimately a policy variable. Private markets cannot dictate the terms on which a sovereign currency issuer creates its own liabilities. The maturity of the public debt that the government issues, and the rate of interest it pays on its debt, is strictly a matter of policy. This means that in a modern monetary system private markets cannot in themselves inhibit democratically determined courses of action, irrespective of the expected return (however conceived) of the productive activity set in motion by the government policy. Such activity can only be inhibited by private markets if, by design, market pressures are allowed to have an impact. These pressures might be allowed in the form of self-imposed constraints on government spending, or they might be introduced deliberately through policy design (e.g. the democratic process might indicate a market-based solution such as a carbon emissions trading scheme). By contrast, in other monetary systems, private markets can exert greater influence on interest rates on government debt, particularly in the case of trade-deficit nations.

A consequence of this difference is that fiscal policy, which need not face any revenue constraint in a modern monetary system, will often be much more restricted in alternative monetary regimes. For this reason, a modern monetary system seems to offer greater freedom to determine through democratic means the appropriate mix of public and private sector activity.

These considerations can briefly be related to Kalecki’s skepticism over the possibility of maintaining full employment under capitalism. In contrast with a modern monetary system, in more limited regimes capitalists are in a stronger position to dictate the terms under which productive activity takes place. If they oppose a government’s attempt to maintain full employment, market influenced hikes in interest rates on government debt and market imposed constraints on fiscal policy can come into play. In a modern monetary system, it is different. Even though capitalists are still likely to oppose full employment, they could not prevent a determined democratically elected government from pursuing the will of the general population. The operative factor would then become the strength of the democratic pressure exerted by general populations for full employment relative to the political power of the capitalist class.

It is perhaps this aspect of a modern monetary system that is sometimes perceived as “left wing” by critics of fiat money. That is, under fiat money with an exchange rate that floats, capitalists are unable to dictate the mix of public and private activity in the same way they can attempt to influence it under more restrictive monetary regimes. However, all this really means is that, in principle, the desired mix of public and private activity can be determined democratically, as an expression of the will of the community as a whole, rather than the will of a particular class. There would be nothing to prevent a community from expressing a desire for small government and a private-sector dominated market economy under a modern monetary system. It is in this sense that I think the social possibilities under a modern monetary system are truly open.

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30 thoughts on “Fiat Money is Logically Prior to Capital

  1. Very interesting, but well beyond my knowledge and comprehension.

    How do you relate all of this to the generalized identity S = I?

    If that is non-zero, it means equity, saving, and ownership.

    Somebody must own.

    If not “capitalists”, who?

    And if its zero, what then?

  2. Peter,

    I sometimes think that these 2 words, ‘money’ and ‘capital’, have lost all relevant meaning for today. (I do understand the position of Capital on a Balance Sheet though 😉

    I dont know if these words have just been perverted over time to the current point of uselessness, or if the world has passed them by.

    Both are confusing to me anyway.

    I look at the world in which Marx wrote Capital: pre-steel, pre-electricity, pre-petroleum, pre-information and wonder how useful it is to look at things thru Marx’s 150 yr old lens.

    Seems like he lived thru a period of backbreaking hand labor used to dig coal out of the ground, hand dig canals, hand dig rail beds and lay iron track, cut down trees for heavy timbers, manual farming, beasts of burden, sail craft, etc… a very backbreaking labor time in human history. Probably no greater a period in western human history that was dominated by backbreaking human physical toil. And then you had the enterprise as the dominant organizational form on top of all of that toil.

    This constant vision of heavy, sweaty human toil under separate human management perhaps would tend to dominate ones socio-economic analysis if you had to live thru that period; I dont know how applicable it still is for us today.


  3. JKH: In Marx’s theory, aggregate profit equals aggregate surplus value, so in profit terms, we could use Kalecki’s profit equation:

    P = Cp + I + BD + NX – Sw

    Here, Cp is consumption out of profits, I is private investment, BD is the budget deficit, NX is net exports, and Sw is saving out of wages.

    (This is a rearrangement of the sectoral balances identity, which can be seen by noting that P – Cp + Sw is saving out of profit plus saving out of wages, or simply saving, S. However, Kalecki attributes a particular understanding of causation to the profit equation, basically Keynesian in nature, in which it is autonomous expenditures that determine income and withdrawals from the circular flow.)

    Assume for simplicity a closed economy (meaning NX = 0) in which saving out of wages is zero in aggregate. Initially, imagine all production and provision of goods and services is private, the government runs a balanced budget, and there is full employment. In that case:

    P = Cp + I

    and I and S (= P – Cp) are at a level consistent with full employment. Since all production is private, all workers receive wages or salaries from private employers, and since provision is private and workers in aggregate are assumed for simplicity not to save, all wages cycle back to the capitalist class as a whole as consumption out of wages. So, in aggregate, wages neither add to, nor subtract from, profit.

    We can imagine that the government’s balanced budget simply entails taxes and transfers (negative taxes) to redistribute private market income, implying G = T = 0. If the transfers go to workers, they are consumed and end up with the capitalist class as a whole. If the transfers go to capitalists (e.g. subsidies for particular types of production), they also end up with the capitalist class as a whole. Taxes, in contrast, subtract from private incomes, and therefore do not end up with the capitalist class as a whole. Since the budget is balanced, the net impact on aggregate profit is zero.

    So, in this scenario, profit will equal the sum of capitalist expenditures (consumption out of profit plus private investment). These expenditures go to other capitalists and so to the capitalist class as a whole.

    Now imagine, to continue with the scenario, that a government is voted in on a program of providing free public transport. For simplicity, we can assume full employment is maintained and the budget remains balanced. However, taxes and government spending will need to be higher (bigger government). The higher taxes are necessary to make room for the public sector production and provision of free public transport, since there is already full employment at the time of the election. There will need to be a reduction in private expenditure, either consumption or investment, to free up resources for the public sector activity.

    The result will be less private income but a freely accessible service (the public transport). One or more of consumption out of profit, consumption out of wages, or private investment will fall as a result of the higher taxes that are imposed on the full-employment economy. It will still be the case that profit, in our simplified scenario, equals the sum of capitalist expenditures, but these will be smaller than before.

    In other words, to the extent the economy is operated on the basis of private production and provision for profit (what I called “the logic of capital”), a surplus is appropriated in value (monetary) form. However, to the extent activities are taken out of this sphere and provided for free, the social surplus will not be converted into a value form.

    But my main point in this post was not about the rightness or wrongness of a privately appropriated surplus. I was focused on the extent to which society is free to choose its preferred mix of private sector and public sector activity, and free to choose the extent to which it wants economic activity to be guided by the profit motive. Deciding on the appropriate mix is an ideological and political matter. I was considering society’s capacity to decide through democratic processes and suggesting that a flexible exchange-rate fiat currency system enables a great deal of freedom in this choice. It seems amenable to a wide range of different social choices, from small to large government, and from activity predominantly guided by the profit motive to activity predominantly run on other principles.

  4. Matt: Thanks for your comment. You are certainly not alone in thinking Marx’s theory of value is irrelevant or unhelpful. Personally, I do find it useful in understanding the nature of economic activity run along different principles. In particular, I find it useful in considering aspects of a society dominated by profit-driven behavior and in comparing these aspects to other social possibilities.

    By “capital”, first and foremost I mean the social relation in which the social surplus (which all societies beyond a certain level of development produce) is appropriated by a class of private individuals in value or monetary form. In this sense, the accumulation of such surpluses in value or monetary form can be regarded at a point in time as the existing stock of capital. A lot of the stock may actually currently be in physical form (e.g. plant and equipment that are still in the process of depreciating), and some of this capital will be converted back into money form when – according to Marx’s theory – value of the plant and equipment is transferred to the new commodity being produced.

    To me, it does seem to make sense to see a large component of economic activity as production and provision for privately appropriated profit (surplus value) for the purpose of accumulating “capital”.

    Even so, I guess the main point of my post can be understood without reference to “capital”. If we agree that quite a lot of production and provision is private and guided by the profit motive, then that is enough to consider the main issue addressed in my post, which is the degree of freedom society has in determining how much it will allow economic activity to be run on the basis of the profit motive and how much it will prefer to be guided by different principles. My suggestion, as I mentioned in the reply to JKH, is that there is considerable freedom in a flexible exchange-rate fiat currency system for society to make its choice. More so, I think, than in other monetary systems currently in existence.

  5. Thanks for the link, Matt. I saw your comments over at Mike Norman Economics. Marx, for obvious reasons, focused on the gold standard. I think his basic view on money (as representing an amount of socially necessary labor time) could be made compatible with MMT. I am still not sure on this point.

  6. Surplus theory originated with Ricardo and was later developed by Sraff. The use of surplus theory as a theory of price morphed into the cost limit of price. Surplus theory is not a good theory of price but is a good analysis of production.

    On it’s own, surplus theory cannot explain how to achieve full employment and neither can MMT. MMT stops at explaining how full employment can be funded but doesn’t explain how governments should spend money. Using surplus theory and disequilibrium theories, it appears that the way to achieve full employment is by achieving an increasing surplus. Evolution has managed to achieve this consistently over a period of billions of years. Information theory has been used to demonstrate that evolution is a process of genetic information gain, therefore each generation produces an information surplus.

    Evolution is often portrayed as a single process, however evolution evolves new processes as well as new individuals. Information gain has accelerated as the initial process of mutation has been enhanced by permutation, sexual selection and intelligence. It’s even arguable that the human ability to manipulate information is a new meta-evolutionary process.

    Information gain is a form of accumulation of real capital. According to Paul Romer, this is the most important form of capital and this is how governments should invest surplus labour (the unemployed). Train more people. Employ more teachers. Allow people to study. Allow people to conduct research. Allow people to try and fail because this is also learning. According to evolutionary principles, the most important research is the meta-research, i.e. research about how best to conduct and fund research.

  7. Great observation, Hacky. I have been saying something similar for some time, but you have put it an the correct perspective in my view. I reposted you comment at Mike Norman Economics here.

  8. Hi Peter,

    Fascinating stuff, and way too much for me to digest all at once, but here are a few reactions:

    Why does Marx put so much emphasis on monetary accumulation? Not all of the surplus that is produced need be in that form. Isn’t some in the form of fixed capital goods? Doesn’t the value of those goods go into a firm’s accounting?

    I can understand the idea that the drive to accumulate monetary profits is written into the operating instructions, so to speak, of a firm. Firms have owners that give the firm directions and a scorecard. They keep score in money and demand that the firms accumulate money for them. But that just pushes the problem back. Why do the owners want the firm to accumulate money for them, as opposed to some other good? I think maybe Marxist analysis could benefit by the addition of later concepts – including from the dread neoclassicals, and then the Keynesians – about the subjectivity of value, liquidity, transaction motives, etc.?

    I think this is interesting in the MMT context because it all goes into understanding how it is even possible for there to be a fiat currency. How does a government succeed in getting all those capitalists, who desire to accumulate capital in the form of money, to accumulate the state’s money?

    Like Matt mentioned, I also find the Marxian theory of value to be somewhat distracting. It seems to me like an extra metaphysical appendage that isn’t doing any explanatory work. I don’t understand why we can’t appeal to prices “all the way down”, while accepting that the values assigned to things differ, at least somewhat, from individual to individual.

  9. Thanks Tom Hickey.. I should take my time in future and check for spelling mistakes before posting. It’s always embarrassing to notice a mistake when it’s too late to change it.

  10. Dan, yes, the surplus certainly takes both a physical and value form in Marx’s analysis. The relevance of the latter, as you mention, is that it is seen as the driver of capitalist productive investment. The motivation for undertaking real productive activity is seen as the hope of converting the physical surplus back into monetary form.

    This is not intended to suggest that M-C-M’ should be the goal of society. I agree, for example, with Hacky’s point that the accumulation of knowledge or information is one of the most important things we can achieve as a society. My point, though, is that to the extent we allow productive activity to be based on the “logic of capital” (in the sense used in the post), the production of knowledge will only be encouraged when it can be converted into a monetary surplus by capitalists. To the extent we allow the logic of capital to hold sway, the type of knowledge produced and access to this knowledge will be shaped by the extent to which profitability for capitalists is served.

    Throughout history there has always been much more production than just production that follows the logic of capital. We don’t have to confine ourselves to activities that follow the logic of capital, and we don’t. The capacity to pick and choose when the logic of capital is allowed to hold sway (whether this is not at all or a lot) is enhanced by currency sovereignty. My view is that it leaves the options completely open.

    This is important not only in terms of full employment or income equality but also environmental sustainability. The fact that the rate of interest on government debt (or reserves) is purely a matter of policy for a sovereign currency issuer means that any activity that is deemed socially productive – even when it may be unproductive for capital, or even destructive of capital – is feasible. We could have negative growth alongside increased leisure and full employment. Or we could have positive growth but not in environmentally destructive ways by altering the activities the sovereign currency issuer initiates or encourages with its spending.

  11. Dan, you wrote:

    I can understand the idea that the drive to accumulate monetary profits is written into the operating instructions, so to speak, of a firm. Firms have owners that give the firm directions and a scorecard. They keep score in money and demand that the firms accumulate money for them. But that just pushes the problem back. Why do the owners want the firm to accumulate money for them, as opposed to some other good? I think maybe Marxist analysis could benefit by the addition of later concepts …

    I very much agree that there are insights from later work, especially from Keynes, Kalecki and MMT, that are important, including from a Marxist perspective.

    From Marx’s perspective, capitalists want money because with it they can command a certain amount of labor time, and labor is the source of new value, and hence surplus value. But, as you ask, why are capitalists motivated to obtain surplus value rather than a physical surplus?

    I think interest (on private debt) is the reason money drives much behavior. To service private debt, it is necessary to turn the sum of money borrowed into a larger sum (this, of course, runs up against real barriers, resulting in fictitious capital, etc.). Also, I think chartalism provides an important piece of the puzzle, although if I recall correctly you find this less convincing. To me, it explains why there is (at least to an extent) a demand for the currency issuer’s money rather than some other money.

    So, for me, to put it simply:

    Q1. Why do capitalists want this money? A. Taxation drives this choice.

    Q2. Why do capitalists want any money? A. Private interest means they need to turn a sum of money into a greater sum.

    It is true that we could conceive of everything being exchanged in physical form. Borrowing cows might require a repayment in a larger number of cows. Borrowing a particular machine might require paying back a larger amount of this particular machine. People can do this, but to the extent the tax obligation ultimately requires a conversion to the currency issuer’s money, there will be a demand for that money. From a Marxist perspective, it is also the case that the accumulation of private wealth involves accumulating claims on other humans. Slave owners accumulated slaves, whereas capitalists accumulate claims on society’s labor time (money).

  12. re. Dan Kervick (a couple of points)

    If you go back to ancient Greek writers there is no difference between an economic good and a moral good. They thought a good is just something that is good. In the 19th century, value was not completely divorced from morality. Utilitarianism was a moral theory before it was an economic theory and value theories echo the utilitarian vs. deontological moral debate (Bentham vs. Kant).

    Eventually surplus theory ditched value theories, though I don’t believe Marx ever did. My view is that surplus has to be defined as capital goods plus luxury consumption because surplus stock is overproduction (not a true surplus) and any other financial surplus is fictional capital (not a true surplus either). I think surplus theory could accommodate labour, energy, resource or mixed accounting.

    You might like this paper on the possibility of Marxist accounting..

    I don’t believe that information can ever be symmetrical but that doesn’t detract from the paper.

    Another take on implementing fair labour would be something like this..

    In my view the asymmetry and disequilibrium in mutualist and federalist theory are parallels to the asymmetry and disequilibrium that exist in life processes. That’s a separate issue though.

  13. “Q2. Why do capitalists want any money? A. Private interest means they need to turn a sum of money into a greater sum.”

    I don’t know if I find this convincing. In the LTV, the three forms of surplus value are the profit of enterprise, interest, and rent. All three, however, still represent labor time and thus originate in the sphere of production. Thus the profit of enterprise, some argue, represents an approximate social baseline for surplus value (discounting relatively minor factors like lone entrepreneurs operating on credit), and an effective long-term upper limit for the rate of interest. That is, if the rate of interest equals or exceeds the rate of profit, then the profit of enterprise is effectively being swallowed up by interest, and thus the incentive to produce is crushed in favor of the incentive to lend.

    I’m not saying that interest can’t be an incentive for a capitalist to try to increase his profitability. I’m just saying it doesn’t seem like it warrants the nigh-axiomatic quality you appear to be giving it. During times of minimal leverage and low interest, such as periods of recovery following a major crisis, capitalists are still driven to accumulate – and usually find themselves far more successful in light of the restored rate of profit.

    If capitalist behavior can be explained just as well without interest, one might as well invoke Occam’s razor to dispense with it as a universal cause.

  14. “But, as you ask, why are capitalists motivated to obtain surplus value rather than a physical surplus?”

    Money, actually financial wealth, is a claim on real wealth, either existing or to be produced. “Money” is the most liquid claim and are claims like govt and high grade corp securities are very close, i.e., they can be converted real goods for consumption or real assets at will.

    Financial assets are “universal storage bins.” That’s why rich people hate inflation. It decreases purchasing power of stored financial stock, just like grain has to be protected from pests and mold and precious metals, gems, etc, from thieves. For them, money as a store of value is a very big deal.

  15. Hedlund: Welcome, and thanks for chiming in. Your comment is a good one and I take your point regarding interest. I think Tom gives a better answer to Dan’s question about the desire to accumulate money.

  16. Let me expand on what I said above. “Income” and “wealth” (net worth) are defined concepts in accounting and economics, but they need to be articulated wrt what Confucius call “rectification of terms.”

    For the wealthy, “wealth” equals their portfolios, which are always in flux depending on conditions, either managed by the owner or professional management. The basic categories are cash position, govt securities, e.g., US Treasuries, UK gilts, non-govt securities, e.g., corp bonds, equities, other financial instruments like REITs, commodities, precious metals, RE, and property, like art, etc. Portfolio shifting is constantly going on, and this is a matter of considerable attention for many if not most wealthy people who like to “count their money.”

    Cash and money-like vehicles are used primarily as liquidity reserves waiting to be shifted to higher earnings portfolio choices, depending on conditions. Wealthy people don’t like to hold cash, which doesn’t earn anything, and therefore will use interest-bearing securities that are highly liquid instead. But interest is mostly a hedge against inflation and it is taxed, moreover. SO these vehicles, too, are generally transitional to higher earning assets.

    “Income,” too, must be parsed. I prefer to think of wealth as a stock resented by the portfolio and the flow that increases it as revenue, reserving “income” for revenue from “work” (time-based). The revenue not from work I regard as rent. Obviously, wealthy people want to increase the ratio of rent to work to obtain leisure to the degree that work doesn’t have a non-monetary qualitative benefit like fame or power.

    Looked at in this way, “profit” is generally rent, since owners that work receive owner income. For example, in this view the mom and pop store makes no profit since the revenue is exclusively owner income.

    The contribution to productive gain comes from work, the rest is extraction through rent (“surplus value” = “superfluous value”).

    Modern governments have the exclusive right constitutionally to issue their unit of account as the nation’s currency. Having this right, they possess the ability to create unlimited capital at zero cost to them, with the only restrictions on this being available resources. This constraint manifests nominally as inflation and the fx rate.

    Why is it, then, that private capital created by the financial sector, which can only be created through government delegating its money creation power, holds precedence economically over work, when it is rent-based and therefore extractive?

    Why did some ancient and medieval peoples forbid interest, which Islam continues to do today?

  17. I’m confused as to which context the discussion has gone. In the real world people have to earn money in order to pay tax because it’s a legal requirement. The theoretical concept of value in the labour theory of value is an abstraction to represent all types of things that people want and need, with money being the most convenient translation for the abstraction of value.

    From a government perspective ‘return on investment’ may not be measurable but may still exist. This goes back to the original premise, i.e. the logic of capital is financial return on investment but returns that are not financial may still be worthwhile.

  18. “This goes back to the original premise, i.e. the logic of capital is financial return on investment but returns that are not financial may still be worthwhile.”

    I would say that “the original premise, i.e. the logic of capital is financial return” is flat out wrong, and all that actually matters is “returns that are not financial,” that is the stuff that primary investment of capital produces.

    Numbers are just bookkeeping and have no substantial meaning other than what the real things they represent. When numbers are given substantial meaning in themselves, then pseudo-problems arise. A lot of the economic and political problem is focusing on pseudo-problems like deficits and debts as absolutes. These supposed problems are artificially created rather than real challenges.

  19. I’m still a little confused about the context of the discussion (Marx or personal opinions). Marx talks about the miser who protects himself from risk by not spending and compares this to the capitalist who spends in order to receive more money back. In the context of the financial system, there are a lot of pseudo-problems out there which I generally refer to as fictitious capital. In the real world (as opposed to Marxist theory), I see fictitious capital combining with ‘logic of capital’ to cause investment substitution away from producing real value and this is what’s breaking capitalism. This isn’t really the standard standard Marxist ‘tendency of the rate of profit to fall’. One example is that people thought they could make more money from house price inflation than they could make by investing in production.

    My personal opinion is that real capital accumulation is a process of information gain (not even close to Marx), but I’m talking about real capital (capital goods) and I consider the main form of real capital to be human capital. In the economic sense this is knowing how to do things (Paul Romer’s recipes). I can get a return on investment by doing the housework but this doesn’t accumulate any real capital. If I read a book (or a blog) then I get ideas and there’s real capital accumulation.

    My view on surplus theory is that it’s hard to combine with financial accounting because of the problems of fictitious capital. I think it can still work with labour accounting but Marx didn’t like this concept when he considered the concept of ‘labour money’. Marx’s view on labour money and socially necessary labour is fair enough. If I’m sharing a house and I do the housework then it’s fair to expect someone else to do the housework tomorrow. Writing a bad poem isn’t sufficient payment even if it takes just as long to do. My current view is that the labour-money problem of socially necessary labour can be resolved by private markets or trust chains. The reality though, is that labour-money is killed stone dead by the tax system (governments won’t accept bad poems either). However, I believe that labour-equity is still viable. My ideas around labour accounting use equity rather than exchange.

    Sorry if there are too many personal opinions in this post. I’m not sure how ‘on-topic’ I’m supposed to be. On a side note.. a while ago it made headline news in the UK that someone in Australia tried to pay a bill with a drawing of a spider. I believe it was refused as payment but recognised as an adequate drawing of a spider.

  20. Hackey says: ” I’m not sure how ‘on-topic’ I’m supposed to be.”


    I know, let’s play a game! Since I find it endearing that Australians actually believe the rest of us know what time and date they operate under, let’s see how close we can get. I’ll go first:

    6:32 P.M., Sept 7, 2023

    My advanced calculation has a margin of error of +/- 6 months. Given that, Australians already know how the economic crisis turns out and this is why they all wear jumpsuits. So SPILL.

  21. Hacky: I want there to be leeway to explore ideas such as those you are raising for discussion. Numerous regular commentators are jiving off the initial posts and taking them in interesting and sometimes surprising directions, which I think is good. Often the discussion goes outside areas in which I have sufficient knowledge to contribute. In those cases, I follow the links provided and learn something. Your perspective is a welcome addition to the mix.

    I think I can see what you mean in this particular discussion. My post reflects my understanding of Marx’s theory as pertaining to how “value” is determined under capitalism, at least to the extent that the logic of capital is allowed to hold sway, rather than as pertaining to how value should be conceived or determined. But in thinking about the social possibilities, the latter question is actually the more important one. Basically, I find Marx’s theory of value helpful for understanding aspects of capitalism. But I don’t think his theory of value, as I interpret it, tells us much about how value should be determined. Your perspective, on the other hand, can potentially address that question, and so is of interest to me, and I think to others. It may be that you are taking elements of Marx’s theory and extending them, or you may have a different interpretation of Marx’s theory. Either way, it is fine and interesting to discuss. Tom also appears to have interesting views on the question of how value should be determined and possibly also interprets Marx’s theory differently to the way I do. As long as we keep clear when we are interpreting Marx (or some other thinker) and when we are attempting to develop our own ideas there shouldn’t be a problem, although there will no doubt be some back-and-forth when one intention is initially mistaken for the other.

  22. The problem of interpretation is endemic in all disciplines, since the original author’s intended meaning is often open to different ways of construction. This encompasses the vast majority of published work in the history of philosophy, theology and other abstract fields in which language is not formalized. Technical specificity is one of the reasons for formalization, for example.

    Most great thinkers in the history of philosophy and theology have interpreted the great ones of the past whom they drew on in ways that favor the views they were putting forward and seeking authority for. This is recognized and no one holds them to account for being flaky, since it is not possible to establish a definitive interpretation of a text, although some interpretations can be ruled out textually for a variety of reasons. But all one can do positively is establish the plausibility of an interpretation and offer arguments showing that one’s interpretation is more probable than others.

    For example, I wrote a controversial work on the teaching of Jesus, in which I also put forward controversial interpretations of other thinkers and teachers, East and West, based on a reading consistent with an interpretation of perennial wisdom. It’s an alternative interpretation, and all interpretations are based on selection of method and key assumptions. Some would argue that it is based on “supernaturalism,” whereas I would counter than it is based on an extension of naturalism to include consciousness instead of denying it, ignoring it, or reducing it to “an epiphenomenon of matter,” which is just begging the question.

    So unless one wishes to enter the lists and debate the history of thought, putting forward and defending an original interpretation, along with methodology and assumptions, one is left to pick and choice among existing interpretations, again for one’s own subjective reasons where there is disagreement among experts objectively.

    The other choice is to use previous ideas as one interprets them in developing something of relevance to the present day. In this sense Marx still speaks to us and continues to influence us, even though we may not be able to establish his actual meaning as he intended it.

    One problem is that scholars are guided chiefly by textual evidence. For example, awhile ago I was arguing with Gavin Kennedy, an Adam Smith scholar, over the influence of 18th century Deism on Adam’s Smith’s “invisible hand” and Isaac Newton’s naturalistic physics. It seems clear that these concepts pervaded each other in the minds of the 18th century English intelligentsia. Smith was resistant to this claim since he knew of no textual evidence showing or implying this in Smith’s work. Who is correct here? All we can say is that the methods applied are different and yield different conclusions.

  23. Interesting. Regarding the plausibility aspect, Andrew Kliman’s main argument in favor of a temporal single-system interpretation (TSSI) of Marx’s theory of value in Reclaiming Marx’s Capital is that because it is able to replicate Marx’s key results on price-value relations, while a simultaneist dual-system interpretation does not, the TSSI is the more plausible of the two interpretations.

  24. @ peterc

    Yes, that’ how argument goes. For example, my argument for the plausibility of the perennial interpretation of Jesus’s teaching is that there is widespread testimony around the world and across time to experiences that are natural but not normal, leading to the conclusion that that there are non-normal natural states of consciousness. Moreover, there is also widespread testimony of a structure of such experience, , culminating in an all-encompassing non-dual state. Furthermore, this is set forth as a spiritual path to perfection, along with an articulation of means for following this path. My contention is that it is possible to interpret Jesus’ teaching as an instantiation of this “perennial wisdom” as a universal teaching about unfolding the potential of consciousness as a natural phenomenon, even though it is often couched in religious language that suggests the supernatural. Since this interpretation is at least a plausible as others based on historical evidence, it should be accepted as more probable on the criterion of being more universal and comprehensive. It’s also simpler and more parsimonious, not requiring appeal to supernaturalism. There are also theoretical and predictive aspects to perennial wisom, and many teachers have called it “spiritual science” since the theory can be tested in the laboratory of one’s consciousness by following prescribed means under the direction of an expert.

    Of course, others will attack the argument, marshaling their evidence and a new debate begins within the discipline.

    Just because the proponent of TSSI believe to have shown that their interpretation is more plausible than others doesn’t mean the debate is over in Marxism, for example, or that normative Christianity is going to roll over. That doesn’t happen until virtually everyone in the discipline agrees, and in disciplines that that not been sufficiently formalized, that may never happen. Wrong opinions can persist for a long time when the are embedded institutionally, for example.

    The hurdle that heterodox economists face is that the discipline by and large accepts New Classicalism or a variant like New Keynesianism. One can be sure that one is correct in one’s dissenting interpretation, but until the overwhelming majority agrees, it’s just a heterodox view at the margin. The weight of “authority” is one the other side. But we know that arguments from authority carry no weight logically.

  25. It may be useful to consider the programming concept of indirection when describing value and money. Indirection simplifies a problem by using indirect reference.

    In a barter transaction the value of an onion may be 2 carrots. Price is therefore a ratio of values crystallised in a transaction with value itself being subjective and impossible to measure directly. It could be argued that I just quantified value as ‘2 carrots’ or ‘an onion’, however these are indirect measures. If price is a ratio of values then how can price be understood in relation to all goods? This brings in the concept of indirection, mentioned above. Money indirectly references all price ratios. By doing this, money also enables the existence of markets and allows individual ratios to be aggregated. Unfortunately money references price, i.e. value ratios. It doesn’t directly quantify value. This is why the ‘preciousss’ money and value are ‘tricksy’. I know this is very basic but I thought it might be useful to introduce the concept of indirection.

    Value also appears to be normative. The sociological concept of value consensus can be broadened in scope taking value theory back to its roots, i.e. the ancient concept of a good being merely something which is beneficial. Value is something which is ‘normal’ but not in the sense of statistics. People are socialised in norms therefore a value consensus is maintained by socialisation, not just aggregation. Philosophy, sociology and politics are important in establishing norms and values. The difficulty in challenging orthodoxy is not just being right, but also understanding and challenging norms.

    I’d also like to mention the incompleteness theorem and the impossibility of disproving orthodox theories by using orthodox theories. This also ties in with the benefit of using institutional sociology as well as other perspectives that can challenge orthodox economics. I’ll probably elaborate on this later at some point. It might also be interesting, at some point, to discuss measurement theory and why money is not a good measure.

  26. As a form of price indirection, money should track aggregate value but the problem of measuring value hasn’t been solved, only the problem of exchange. Value is still only measured indirectly through price and price is now measured in money and the price of money cannot be measured by money because that would be ridiculous. Therefore the concept of inflation is another layer of indirection to solve the problem of money/value ratio which was caused by the introduction of indirection in the first place. Erm.. Didn’t I just say that would be ridiculous? These problems exist before anyone even starts talking about banking.

    I’m sceptical that problems of price will ever be solved. Fortunately value doesn’t rely on price for its existence. Price is a consequence of trade. Alternative forms of social organisation must be possible. In terms of government action at this time, the issue is how to spend, i.e. how can spending create more value than the money spent. In terms of individual action the issue is how can individuals co-operate in order to create value within the current institutional constraints without resorting to trade.

  27. I think I just said that money is a form of price indirection, not a measure of price and not a measure of value, hence the inherent instability of money. Price in its raw barter form is not unstable. Price stability must therefore be artificially created via control. This suggests the use of control theory which is inferred from stability theory. I think this is what Steve Keen is aiming for.

    My preference is for social alternatives.

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