3. THE CONDITIONS FOR AUTOCENTRIC ACCUMULATION: THE ROLE OF THE MONETARY SYSTEM

Monetary theory is the favored sphere of an “economic science” that applies itself only to pseudo-problems. For money conceals the essential relations, namely, production relations, and brings to the forefront relations that are superficial, namely, exchange rela­tions.

The subjective theory of value can answer the question of the value of money only in a tautological way: the value of money, it says, is that of the goods it enables one to.buy. Actually, money fulfils four essential functions: it is the instrument by which value is measured; it is the concrete instrument of circulation; it is the licensed instrument of legal tender; and it is the instrument by means of which value is stored. Marginalist theory emphasizes the role of money as circulation medium, from which it derives all the other functions. Keynesian theory emphasizes money’s function as “means of hoarding,” regarding this as the most specific function of money. Present-day economists (Lindahl, Myrdal, Lundberg, Harrod) ascribe a complementary, though secondary, role to the two functions in the mechanisms of accumulation, while the Chicago school (Milton Friedman) goes back to the quantity theory. Marx (whose position is shared to some extent by Joseph Schumpeter) is the only economist to have opened the way to a real discussion on the role of money in accumulation..

From Classical Thinking to Keynes and Milton Friedman

Paradoxically, the economic thinking called “classical” by Keynes attributes, like the Keynesian doctrine itself, a decisive role in the mechanisms of economic development to the rate of interest, and a quite negligible one to the banking system.

Saving and investment are, for the writers whom Keynes attacks, real factors in the economy. However, the monetary form in which these quantities are expressed adds a new cause of maladjustment to the real causes of possible disequilibrium. There is alleged to be a “natural” rate Ofinterest that ensures economic equilibrium. The amount of saving made available, allowing for “preference for the present” is held to be, at this rate, equal to the amount of investment demanded, allowing for the productivity of capital.

Now, not only is this analysis tautological, since neither Fisher nor Bbhm-Bawerk established the existence of the productivity of capital on any foundation other than “preference for the present,” so that the so-called natural rate of interest is nothing more than the rate of depreciation of the future, but the mechanism of deter­mination of the “natural” rate of interest, at the point where the curves of supply of saving and demand for saving intersect, actually explains nothing at all. Keynes showed this very clearly: when the demand for capital changes (some innovation calling for larger investments), then incomes change, and therefore likewise the supply of saving. By resorting to history in order to solve the problem — the supply of capital available today is said to be determined by the distribution and amount of income that existed yesterday — the logical difficulty' is dodged.

In any case, the first marginalists paid no attention to monetary- conditions. It “went without saying” for them that monetary condi­tions caused the rate of the money market to “tend” toward the “natural” rate. Wicksell opened a new era when he showed how cumulative processes in the banking mechanisms allowed the mone­tary rate to diverge from the natural rate. This analysis, taken up later by Myrdal, Keynes, and Cassel, served to explain economic cycles.

The underlying assumption here is that the rate of interest dictates the amount of saving as well as that of investment.

In Keynes the same contrast is found between the excessive role attributed to the rate of interest and the passive role attributed to the banking system. The imbalance between saving and invest­ment is ultimately ascribed to liquidity preference, which prevents the rate of interest from falling below a minimum level: the rate of interest is determined by the state of liquidity preference, allowing for the volume of money supplied by the banks. Equilib­rium forces then determine relative prices such that the marginal efficiency of different capitals is in every case equal to this rate. From that moment onward there is no longer any gap between the rate of interest and the efficiency of capital, and consequently there is no further net investment. The equilibrium state of the Swedish school has been attained, in which, the monetary rate being equal to the natural rate, profits are nil. But this equilibrium may well be an equilibrium of underemployment. Indeed, whatever the volume of money, the rate of interest cannot, owing to liquidity preference, fall below a certain level. The banking system is then quite helpless. This is why many Keynesians condemn the policy of monetary expansion, which when the rate of interest has reached its minimum level, cannot but engender inflation, even without full employment.

This analysis is based on the idea of liquidity preference, that is, of propensity to hoard. What is meant by the “need for liquidity”? On the one hand,- it is the need to have cash in hand with which to finance current transactions. To what extent is an entrepreneur prepared to pay out the funds needed to keep his current production going? Clearly he will do this until the point is reached at which these charges reduce his profit to zero.

What is especially disappointing in Keynes’s theory, though, is that the banking system appears in it as being ineffectual not merely beyond a certain point — but at all levels..One might think that money plays a passive role, in the sense that its supply is adapted to the need for liquidity. Now, Keynes considers that this supply is rigid. It is this rigidity that, faced with a fluctuating demand, determines the current variations in the rate of interest. True, variations in this rate are sometimes due to the quantity of money becoming adapted to demand. But these difficulties are only temporary and cannot explain the average level at which this rate remains over a long period.

The Adjustment of Issue to Needs

The first question to be answered is how the adaptation of MV (quantity of money multiplied by velocity of circulation) to PT (level of prices multiplied by volume of transactions) takes place. Total saving does not constitute a homogeneous mass: we must distinguish the creative saving represented by the amount of money put on one side by entrepreneurs with a view to subsequent expansion of production from the reserve saving represented by the money put on one side either by consumers with a view to future expenditure on ultimate consumer goods, or by entrepreneurs in order to finance all the productive expenditure needed to ensure the present level of production and the normal disposal of this production.

It is this volume of liquidities that constitutes the primary social need for money. The banking system adjusts the amount of money in circulation to this need by means of short-term credit.

The whole question is whether or not this social need for money is predetermined: that is, if we assume habits of payment to be stable (which is true in the short run, though in the long run the improvement in banking techniques speeds up the circu­lation of money, in view of the increasing need for this to be done), whether or not the size of the national income is pre­determined, or, in other, words, whether or not the levels of economic activity and prices are predetermined. If, indeed, the banks can modify these levels by injections or withdrawals of money, then to say that the banking system “adjusts the quantity of money available to the need for it’’ is meaningless.

Here, too, we need to know whether, fundamentally, the level of activity and the level of prices are determined by the quantity of money, or whether these levels ultimately depend on other economic factors. Keynes says that the quantity of money supplied fulfils the function of an independent primary variable. This assumption is baseless. But a more serious question is this: what forces determine the level of marginal efficiency of capital? Keynes has nothing to say on that point. Actually, this efficiency, which is nothing but the profitability of investments, is directly bound up with the degree of correspondence between society’s capacity to produce and its capacity to consume. If the capacity to produce ever became greater than the capacity to consume, the profitability of investments would soon sink to zero, so.that, whatever the level of the rate of interest might be, economic.activity^-woQld'Cqntract.

Fundamentally, then, the level of'economic activity depends on something otherTfia∏Ξ⅛fi⅛l⅜ιanfitjΠif^πιoney.

The quantity theory associated the value of money closely with the quantity of money. Although this mechanical connection as shown in Fisher’s equation has today been abandoned, it does not follow that every trace of “quantitativism” has been eliminated/ from economic theory. There has even been an attempt to rescue the quantity theory by showing its link with the subjective theory of value. Thus, Von Mises declares that, when the quantity of money increases, this means that certain incomes have increased and, since the marginal utility of money declines for individuals when their incomes increase, prices increase in their turn. Is this reasoning well-founded? When the quantity of money increases, it. is usually the case that production has increased, for the additional money has entered into the economy through concrete channels. To an increased demand there corresponds an increased supply.

Economic theory seems'to have taken a quite new path, that of studying the function fulfilled by money of satisfying the "need for liquidity.” Has liquidity analysis radically eliminated the quantity theory? There is reason to doubt this. In the Keynesian model, the supply of money and the rate of interest being given, the level of liquidity preference determines the proportion of money that will be hoarded (and, consequently, the proportion that will be "active”). As the rate of interest determines the volume of invest­ment (because the marginal efficiency of capital is an independent variable that does not depend on the quantity of money) and thereby the volume of the national income, all the factors in the economic system are present except the general level of prices, which must be determined, according to the quantity-theory' formula, by the ratio between the real national income and the quantity of active money. Keynes therefore remains, so to speak, a second- degree quantity theorist. This is why, when the effect of liquidity preference ceases to be felt, pure and simple quantitativism reasserts itself. This way of looking at the matter, in which the quantity of money is a factor to which the other factors adapt themselves (for Keynes the quantity of money determines both the level of the national income and that of prices, instead of determining the latter alone, as the “classicists” hold) rather than being itself a variable dependent on the demand for money (in other words, on the level of income and prices), has made it easy to integrate the Keynesian system into the classical system. This integration, carried out by Modigliani in a general model, is liable to all the reproaches directed by Nogaro at the quantity theory. An antiquantitativist position is, in fact, incompatible with any theory of general equi­librium, since there has to be an independent variahle_jn_ the system. The Chicago^- SchooTTMilton Friedman) has made this return to the quantity theory. It is then led, once the quantita- tivist assumption has been accepted, to orient all its investigations in the only direction open to an empiricism that condemns itself to seeing only appearances: seeking for direct correlations between the quantity of money and sundry variables of the system (“per­manent income”), “psychological” analysis of the “desire for cash,” and other pseudo-problems.

If, then, all forms of qUantitativism are rejected, the problem of how the"value ^σf^Tnoney~Γs determined remains to be solved. This befrTg'^soΓ we can distinguish between two cases: that ot a currency convertible into gold and that of an inconvertible one. In the first case it is certain that the cost of production of gold plays a decisive role in the mechanism whereby the general price level is determined. If, however, the currency is inconvertible, then'the safety barrier constituted by the value of gold is no longer present. Up to this point no expansion of credit could “exceed” the limit of needs because the∙credit offered would not have been asked for by the entrepreneurs. Only in the form of a distribution of pur­chasing power without any real backing (issue of paper money in wartime, for example) could the quantity of money be increased. The increase in prices, resulting from imbalance between income and production and not from the quantity of money, makes it necessary to abandon convertibility. When the banks no longer buy gold at a fixed price, the expansion of credit, or issue of purchasing power, can then take place without any limit, since the price of gold is drawn into the general upward movement. The fundamental dependence of the supply of money upon the demand for it seems therefore to have been eliminated.

Credit inflation has become possible, at least within the confines of an independent national monetary system. In fact, because inflation entails changes in the external balance of payments (usually causing a deficit), and on the scale of the worldwide capitalist system gold continues to be the ultimate means of payment, a country’s national economic policy then runs the risk of clashing with that of other countries.

The Role of Money in the Process of Accumulation

The monetary system thus passively fulfils an important “tech­nical” function: that of adjusting the supply of money to the need for it expressed in a “state of equilibrium,” that is, on the assumption of simple reproduction. It also fulfils another function, much more decisive in character, although totally ignored by con­ventional theory — that of making expanded reproduction possible.' This I call the “active” function of money, thereby directing attention to the role of the monetary institutions that fulfil the function of the planner who, looking to the future, adjusts supply to demand in a dynamic way.

Capitalist accumulation requires, in fact, an increasing quantity of money not just because the gross national product is increasing but also because in order that the transformation of saving into investment may take place, it is. constantly necessary that new money be introduced into the circuit before the gross national product has increased. New investment has no outlet yet at the moment when it is made, since all the outlets existing at a given moment cannot exceed the volume of production at that moment. But new investment will soon create this new outlet by expanding production. In order to invest, however, the entrepreneur needs to possess a certain amount of money. It therefore seems that some previously existing outlet must enable him to sell that part of his product the value of which is destined to expand production, so as to “realize” in money form the “saving” he has accomplished, his extra capital. The problem appears insoluble, for the entre­preneur can find no such outlet, since the outlets available at the time when he wants to sell cannot exceed the volume of present production, and the entrepreneur has to find today an outlet equal to the volume of tomorrow’s production. In reality, it is enough for an extra quantity of money equal to the value destined for accumulation (which will create its own outlet tomorrow) to be placed today in the entrepreneur’s hands — from whatever source this money may come.

Analyzing Marx’s schemas of expanded reproduction, Rosa Luxemburg thought she had discovered that dynamic equilibrium is possible only if external outlets (external, that is, to the capitalist mode) exist as a precondition, so that when the capitalist mode has conquered the whole world it must find itself up against an insurmountable obstacle, and so automatically collapse. Rosa Luxemburg’s mistake was that she did not take account of the role played by money as the means of restoring dynamic equilibrium.

Let us take Marx’s own example, with a model of expanded reproduction in which half of the surplus value produced in Department I (production of means of production) and a fifth of that produced in Department II (production of consumer goods) is “saved" during the first phase, to be “invested” at the beginning of the second, by being added to constant capital (C) and variable capital (V) in proportions identical with those of the first phase. We thus have here an extensive model of expanded reproduction, without any technical progress (without any change in the organic composition [C∕V] of any of the branches between one phase and the other), made possible through an increase in the labor power available.

For the first phase we have:

I 4,000 C₁ + 1,000 V₁ + 1,000 S₁ (400 ScI + 100 SvI + 500 S'₁ )

= 6,000 Ml

II 1,000 C₂ + 750 V₂ + 750 S₂ (100 Sc₂ + 50 Sv₂ + 600 S'₂)

= 3,000 M2.

I have broken down the surplus value generated in each branch into its three elements: that which is saved for the purpose of accumulation in the same branch, realized in the form of a further investment in means of production (Sc); that which is saved for the purpose of a subsequent purchase of additional labor power (Sv); and that which is consumed (S'). These elements are put between parentheses.

The production of means of production during this period (6,000) exceeds the demand expressed at the same time (4,000 + 1,500) by the amount of the surplus value produced in I and not consumed (500). Similarly, the production of consumer goods (3,000) exceeds the demand expressed during this period (1,000 + 750 + 500 + 600) by the amount of the surplus value produced in II and not consumed (150).

During the next phase, however, the equilibrium equations become:

I 4,400 C₁ +1,100 V₁ +1,100 S₁

II 1,000 C₂ + 800 V₂ + 800 S₂

Over and above simple renewal of the means of production, the demand for extension of the productive apparatus at the beginning of the second phase absorbs the excess production of I during the first phase. In fact, (4,400 ÷ 1,600) - (4,000 + 1,500) — 500. Similarly, the demand for consumer goods that results, during the second phase, from an increase in the amount of labor power employed absorbs the excess production of the first phase, since (1,100 + 800)- (1,000 + 750) = 150.

Thus, part of the first phase’s production is absorbed during the second phase, and so on.

The assumptions made in Marx’s example — different rates of accumulation in the two Departments, and unchanged organic compositions — are not essential. Anne-Marie Laulagnet has shown that dynamic equilibrium is possible provided that certain propor­tions are observed, even if we assume an equal rate of accumulation in the two Departments and organic compositions that gradually increase from one phase to another.

This model shows that there is no problem of “necessary external outlets” but only one of credit. Entrepreneurs must have at their disposal, during a given phase, monetary means that they will not in fact cover until, during the next phase, their produc­tion can be realized. Such realization will be possible if certain proportions (between M₁ and M₂, C₁ and C₂, etc.) are observed from one phase to the next.

If these proportions are kept to during the second phase, the entrepreneurs will be able to pay back at the end of this phase the advances they had previously been given, provided that the monetary system makes them a fresh advance, bigger than the previous one, corresponding to the requirements for equilibrium during the third phase, and so on.

Dynamic equilibrium is possible without external outlets provided that a continually increasing amount of money (at constant prices) is injected into the system. This quantity of new money reaches the entrepreneur either through the production of gold or through the banks. Marx analyzed the channels whereby additional gold makes its way. into the economy a century ago in Capital and Critique of Political Economy, and I shall not go over that ground again. I will merely say that new gold production makes possible a special kind of sale: the gold producer buys the products of other entrepreneurs out of his profits (which are in the form of gold), either in order to consume them or to expand his produc­tion. The entrepreneurs are thus able to sell their “surplus product” (in which their real saving is embodied) and to realize in money form the value destined for the development of their industries. With this money they can purchase means of production and hire workers. The outlet existed potentially, but a special monetary mechanism was needed in order that it might be realized. Today it is through the channel of credit that the quantity of extra money is created ex nihilo by the banks. Schumpeter has shown how this money put at the disposal of entrepreneurs enables production to be expanded.

Even this service rendered by the banking system is not, how­ever, fundamental in character. It is, indeed, only when the invest­ment has created its own outlet that the advance can be repaid. If this does not occur, the issuing of money does not solve the problem of the absence of any outlet for the extra production.

The monetary system thus fulfils a delicate task, taking care to keep entrepreneurs’ expectations within “reasonable” limits and calculating the probabilities of dynamic equilibrium. It plays the role of a planner watching over the maintenance of dynamic sectoral equilibria. This is why the capitalist system devised, at its very start, the centralization of credit. Credit existed before capi­talism, but it was capitalism that organized centralized banking, made universal the Use of bank money, and instituted a central­ized system of fiduciary issue on the national scale as an essential condition for accumulation.

The Conditions in Which the Contemporary Monetary System Functions: Creeping Inflation

The quantity theory claims that only an increase in the volume of money can bring about a general increase in prices. The facts of history, when hastily considered, do seem to justify this theory — though the fall in the real cost of production of gold due to the discovery of richer mines suffices to explain the great price move­ments of the nineteenth century. After 1914 Aftalion was to show that the rate of exchange can also determine general price move­ments. It is now accepted that a general rise can be caused by rigidity in supply due to some bottleneck in relation to expanding overall monetary demand. A situation like this is frequent in time of war, of war preparation, or of reconstruction, when the production of consumer goods is limited or operates in conditions of increasing costs, while incomes to which there is no real equivalent are dis­tributed by the state. It is also maintained that the struggle waged between social groups over their share of the national income can, when the mechanisms of competition are functioning badly, create a climate of general increase in prices. In all these cases, monetary expansion follows the price rise and does not precede it.

This being so, economists, perhaps out of desire to break away from the quantity theory, have managed to forget the case that in former times specially interested them, namely, the one in which an issue of money in excess of needs choked the channels of cir­culation and brought about a price rise. This is the only case that deserves to be called inflation, for it is the only one in which the rise in prices has a monetary origin.

Inflation is impossible within the framework of convertibility into gold. There may well be general increases in prices under this system, as a result of a fall in the relative cost of producing gold or of a rise in the real cost of producing goods in general, but it is impossible to conceive that the channels of circulation should be choked in such cases. Credits are, in fact, granted by the banks in response to demand. These credits serve to finance new invest­ment. This new investment either creates its own outlet — and the borrower is able to pay back the banker (and when this happens there is no increase in prices, because production has grown in the same proportion as the income distributed) — or else it does not do this, and there is a crisis. In so far as the bank does not wish to suspend convertibility, it will avoid granting credit beyond a certain limit, because it knows that, for real reasons of imbalance between production and consumption, new investment beyond a certain point can no longer create its own outlet, even if the borrower were prepared to pay a high rate of interest.

As for gold, this too is incapable of choking the channels of circulation. If the rate of production of new gold increases, then either the central bank, which buys this gold at a fixed price, sees its reserves increasing without any increase in the credit it makes available, or else hoarders buy this gold in order to meet their needs. In any case, gold is put into circulation by the producers, who sell it.

While in this case there is no inflation, the situation is not the same when convertibility is abolished.

Fundamentally, it is the changes that have occurred in the conditions of competition that have radically altered the course of the general movement of prices. During the nineteenth century, in so far as competition constituted the rule and monopoly the exception, an entrepreneur was unable to increase his prices, because he would have lost his customers. Under these conditions the banks could not issue "too much credit” because, on the one hand, since entrepreneurs did not expect an increase in prices, they had no need of extra liquidities, and, on the other, the central bank, concerned to safeguard convertibility, prevented the commercial banks from granting credits in excess of the need for liquidities. Convertibility could thus be suspended only in excep­tional situations, when the state issued purchasing power in paper money without any real equivalent.

In addition to this, competition, by generalizing new tech­niques, brought about a fall in real costs that was reflected in a chronic tendency for prices to fall. This tendency was offset by shorter bouts of general price increase, which were due to sharp reductions in the cost of producing gold. If we study the curve of wholesale prices between 1800 and 1900 we do not observe that “long wave” that Kondratiev caused to emerge by means of a skillful manipulation of statistics. This does not mean that, in certain periods that were more frequently interrupted by wars, a tendency to increased prices did not sometimes offset the general downward tendency that formed the backdrop of the century as a whole. At other periods a mighty wave of innovations may have served, on the contrary, to intensify this downward movement of prices.

In the twentieth century conditions have changed. Monopolies dominate the principal branches of production. Now, monopolies are not obliged to lower their prices. Competition between them proceeds by other methods. It was thus the resistance of prices, in the new structural conditions, to any downward movement that made it impossible to get back to the gold standard after the First World War. The first wave of difficulties that occurred swept convertibility clean away.

Since then there has been no barrier to increase in prices. Does this mean that this increase will be continuous? No, for if entrepreneurs want to raise the price level, they have to apply to the banks for increases in the credits that the latter allow to them. Since convertibility has been abolished, the central bank is free to agree or to refuse to follow such a policy. In this limited sense, management of money and credit has become a reality unknown to the previous century.

But in the event that the central bank follows a policy that accords with the wishes of the entrepreneurs, will the increase in prices go on indefinitely? We may well ask why the monopolies do not wish to keep on raising prices, why the increase in prices has not been continuous since 1914, why periods of price stabilization succeed periods of sharp increase (apart, of course, from periods when the price increase is due not to the behavior of entre­preneurs but to real causes: increase in costs of production, or disproportion between money incomes distributed and actual pro­duction, such as occurs in wartime). If the increase in prices does not go on uninterruptedly, this is because there is a level of real wages that ensures the sale of what is produced at a price yielding the maximum profit. In the last century wages constituted a fixed datum, like prices, against which the entrepreneur, isolated from his competitors, could do nothing. Today the situation is not the same. The monopolist tries to influence these two formerly inde­pendent factors. To the extent that the workers refuse to allow their real income to be reduced so as to be adjusted to this level, “wage inflation” is inevitable. But who is to be blamed for the rise in prices? The workers who refuse to let their wages be adjusted to the level that best suits the entrepreneurs, or the entrepreneurs who refuse to adjust their profits to the level of wages acceptable to the workers?

The struggle between classes over the division of income goes forward today in a Settingwherethe confrontation between monopo­lies and trade unions is given institutional form. In so far as the ∣ working class accepts the “rules of the game,” in other words, the I ideology of social-democracy, adjustment of real wages to a.certain i level calculated so as to ensure equilibrium in autocentric growth becomes the subject of a social contract. This adjustment is secured through regular increases in nominal wages. Only if these increases are too big do they induce price increases. “Creeping in­flation” is thus the mode of expression of the fundamental laws governing equilibrium in autocentric growth in our time. The system demands the abolition of convertibility and adjustment of the external value of the currency when rates of inflation have been more rapid than in other countries.