One of the little discussed problem with Andrew Kliman’s attempt to empirically verify Marx’s falling rate of profit thesis is that he is working with inconvertible fiat dollars (dollars which no longer can be redeemed for gold) and dollar prices — in the form of GDP, wages, profits, etc. — and these prices are not labor values as Marx defined the term. How Kliman handled this problem in his analysis of the empirical data is a story in itself.

In his paper, “The Law of the Tendential Fall in the Rate of Profit as a Theory of Crises”, Gugliemo Carchedi answered critics who argue the falling rate of profit thesis cannot be empirically substantiated because Marx was discussing values not prices in his thesis. Fiat prices, however, are not values and have no relation to the values or socially necessary labor times required to produce commodities.

Notice how Carchedi admits the critics of the falling rate of profit thesis are correct in their argument on this point:

“Sixth critique. The Law cannot be empirically substantiated. There are three variants on this theme. … Third variant, empirical studies quantify the ARP in terms of the money expression of outputs and thus of use values. But this is not what Marx intended. This is true. However, it is possible to convert official data into value, i.e. labour, quantities. In essence, the key is the relation between the number of hours or of labour units and the sum of money profits plus wages paid at the end of year 1. These are known quantities. The ratio between the two quantities gives the monetary expression of one unit of labour (or of one hour).”

In other words, Carchedi concedes that prices denominated in dollars are NOT values, but he suggests the supporters of the falling rate of profit thesis has a work around for this: the so-called Monetary Expression of Labor Time (MELT).

According to Carchedi then, if we could add the total wage bill to the total profits of capital and divide this sum by the number of hours worked, we could find an hour of social labor time expressed in some quantity of inconvertible dollars.

Carchedi might be understood to be saying we can convert dollar prices into values — indeed it appears Carchedi thinks this himself — but, as I will show, Carchedi’s statement does not mean this at all. To understand why Carchedi is wrong, I have to make a digression at this point and talk a bit about the history of the so-called MELT theory.

Fred Moseley and the monetary expression of labor time

In 2004, the labor theorist, Fred Moseley, published a paper, The ‘Monetary Expression of Labor Time’ in the case of Non-Commodity Money” arguing that Marx was wrong when he assumed inconvertible fiat paper could not fulfill the function of money as measure of value. Typical of a certain sort of Marxist who makes a career out of proving Marx wrong, Moseley formulated his argument as a defense of Marx against … well, against Marx:

“It is well known that Marx assumed in Capital that money is a produced commodity, such as gold. However, the question remains open: was this assumption an essential part of Marx’s theory or just a historical contingency, which Marx assumed because he was trying to explain the actual capitalist economy in the 19th century. Some critics have argued that money must be a commodity in Marx’s theory as a theoretical necessity (e.g. Lavoie 1986), and argue that the fact that money is no longer a commodity in today’s economy contradicts Marx’s theory. These critics conclude that Marx’s theory of money is invalid, or is no longer applicable to modern capitalism with non-commodity money.”

Thus begins Moseley’s attempt to circumvent Marx’s own theory of money on the grounds Marx’s theory that money must be a commodity is not actually Marx’s theory of money at all but a 19th century misunderstanding. In his paper, Moseley began with the assumption that post-1971 inconvertible fiat dollars are a “non-commodity money”, i.e., he began with the assumption, not that dollars were tokens of money, but were money itself. Acccording to the common wisdom, the employment of inconvertible fiat as “money” does not force us to question whether this fiat is actually money; instead it must force us to question whether Marx’s theory really required a commodity money as has long been assumed.

And why is this?

Well, because we use an inconvertible fiat to buy groceries, of course. The problem with this sort of reasoning, however, as Moseley admits, is that Marx never said commodity money was necessary to serve as means of exchange in daily transactions; he only argued that commodity money was necessary to serve in the function of measure of the values of commodities.

And why was this?

In the opening chapter of Capital, Marx makes a very important assertion: the values of commodities cannot be directly observed. since these values have nothing to do with the physical qualities of the commodities. We can only infer the existence of value in one commodity indirectly in the physical form of another commodity for which it is exchanged. The value of one commodity can only be expressed as some definite physical quantity of another commodity:

“We have seen that when commodities are exchanged, their exchange value manifests itself as something totally independent of their use value. But if we abstract from their use value, there remains their Value as defined above. Therefore, the common substance that manifests itself in the exchange value of commodities, whenever they are exchanged, is their value. The progress of our investigation will show that exchange value is the only form in which the value of commodities can manifest itself or be expressed.”

It is a fundamental premise of labor theory that the value of one commodity can only be expressed in the physical material of another commodity. Despite this unambiguous statement by Marx in Capital, in his 2004 paper, Moseley wrote:

“money does not have to be a commodity in Marx’s theory, even in its function of measure of value. The measure of value does not itself have to possess value. Inconvertible paper money (not backed by gold in any way) can also function as the measure of value.”

Moseley based his argument on the idea that so long as the inconvertible fiat is accepted as money by other members of society it could also fill the function of money as measure of the value of commodities:

“In order to function as the measure of value, a particular thing must be accepted by commodity-owners as the general equivalent, i.e. as directly exchangeable with all other commodities.”

Which is to say, according to Moseley, an inconvertible fiat can express the value of a loaf of bread because it is accepted as means to buy groceries.

Now, just five short sentences before this statement Moseley admitted that Marx believed a token of commodity money could be used to buy groceries — the object serving as money in a transaction did not have to be a commodity; however Marx never made any such exception for the function of money as measure of the value of commodities.

Here is the thing that causes so much confusion about money: In the many roles money plays in society, some of these functions require the physical presence of money in its commodity form (a hoard, for instance), while other functions require only a token placeholder for the commodity money (a transaction) and still others required only the conceptual presence of money — money as an idea (prices on a restaurant menu). Money can take a numbers of commoditiy forms (gold or silver, for instance), a number of token forms (paper or base metals tokens), or only exist as an idea on a supermarket label. This bewildering array of real, token and even entirely imaginary money forms leads to the commonplace presumption that money can be anything — even dancing electrons on a computer terminal.

However, until 1971, what held all of these various money forms together and made them a consistent expression of the socially necessary labor time of society was the fact that they all were tied, legally or not, to a commodity money of one sort or another. This all began to change with the Great Depression of the 1930s.

The Great Depression and money

It seems rather an obvious statement that in order to buy groceries a money has to be accepted as the general equivalent of the commodities to be purchased. But Marx clearly imposed no such limit on money’s function as measure of value: Which is to say, as measure of the value of commodities, it does not matter in the least whether the money is legally accepted as means in an exchange — what mattered was that it was a commodity just like all the other commodities. Above all else, to serve a measure of value, money had to be a commodity, because the value of one commodity can only be expressed in the physical material of another commodity.

According to Moseley, for some not very clear reason commodity money’s function as measure of value began to break down around the time of the Great Depression when the state made the capitalist accept its inconvertible fiat as money. According to Moseley, this event made credit money the general equivalent in the place of gold and commodity monies generally. Since, again, according to Moseley, credit money is now the “the general equivalent and … measure of value”, this raises a very important question:

“if social labor is represented by paper money that is not convertible into gold, then what determines the quantity of money that represents an hour of social labor in the economy as a whole (since it can no longer be determined by the gold produced in an hour, as in the case of commodity money)?”

Let’s parse this question:

First, Moseley states:

“if social labor is represented by paper money that is not convertible into gold…”

Then he poses the question:

“… what determines the quantity of money [Moseley means inconvertible fiat] that represents an hour of social labor in the economy as a whole”?

In regards to the first part of Moseley’s question, who said “social labor is represented by paper money”? All we know at the outset is that the prices of commodities are denominated in an token currency that is no longer backed by a commodity money. As a token, dollars did not represent social labor directly, but only be reason of their peg to gold. It was gold that expressed the value of the commodities as some definite amount of its own material.

Once these state issued tokens are severed from a commodity, how can we say they “represent” social labor any longer? When a currency is severed from a commodity money, it is also severed from the social labor contained in a money commodity. Since inconvertible fiat is not in any way tied to social labor, there is no quantity of this fiat that represents an hour of social labor.

In labor theory, we know very well that the quantity of a commodity money circulating in the economy is determined by the values of the commodities being exchanged among members of society. When the value of these commodities increase, so does the quantity of money; when they decrease, so does the quantity of money.

As we will see inconvertible fiat does not behave like this at all.

Money is just a medium for the circulation of commodities and in no way determines the exchange value of the commodities being exchanged; rather, the quantity of money moving through the economy is determined by the exchange values of the commodities moving through it.

Gold wasn’t replaced by fiat because it was difficult for the state to maintain a peg to the dollar and gold; it fell out of circulation because, suddenly and without warning, the exchange values of the commodities in circulation within the economy fell. The collapse in the value of commodities at the onset of the Great Depression led to the withdrawal of billions of ounces of gold from circulation, just as Marx predicted.

A mass of excess gold could no longer function as money — as universal equivalent. In particular, the mass of excess gold could no longer become capital, which is only possible if it can buy labor power. During the Great Depression no capitalist in the advanced countries would part with gold to buy labor power — and this had nothing to do with the peg between dollars and gold. Because of overproduction of capital, the profit rate fell to a level that made capitalist production impossible and a very large mass of money capital superfluous.

Thus, gold was not replaced by inconvertible fiat in the Great Depression, rather state issued fiat could no longer be exchanged for gold. And why was this? For the same reason the capitalists would not part with their gold to buy labor power, of course — nobody was exchanging their gold for anything else; they were hoarding it until conditions for profitable investment reemerged.

Since no one was exchanging their gold for anything else, the state was forced to sever the dollar peg to gold. The state no more wanted to redeem its worthless tokens for its stock of gold than the capitalists wanted to buy labor power with their gold. Gold stopped circulating as money throughout the entire industrial world. The state’s response to the Great Depression was to stop redeeming its tokens and hold onto its gold too — just as everyone else was doing.

What determines the quantity of inconvertible fiat?

When the state stopped redeeming its worthless tokens for gold what determined the quantity of worthless fiat in circulation? Since inconvertible fiat has no value, how then is the quantity of currency in circulation determined? This is the question Moseley was trying to ask in his paper, but he confuses the question by posing it in a very dishonest fashion.

The answer is obvious: the quantity of inconvertible fiat in circulation is determined by the monetary policy of the fascist state — but the implications of this fact appears to be too complex for labor theorists like Moseley to grasp, so I will return to it later. For the moment, we need only to grasp that, since fiat dollars are not commodity money, they do not behave like commodity money.

Inconvertible fiat does not behave like money

In labor theory, money is an expression of the value of commodities, of the social labor time required for their production. State issued fiat, by contrast, is not an expression of value, but a token of money. Which is to say, fiat does not itself represent social labor, but only represents some commodity money in circulation.

Moseley never asks if inconvertible fiat can represent social labor on its own; he simply makes the assumption it can because it is used as means of exchange in a transaction. Thus. he poses his question in a way that assumes an inconvertible currency can in fact represent social labor the way gold did before it was severed from dollars.

Having argued that Marx was wrong to assert that money had to be a commodity, Moseley sets out to show why Marx was wrong using Marx’s own discussion of inconvertible fiat. His argument on this point is bizarre beyond belief: In a clear rejection of decades of criticism of bourgeois economists by labor theorists, Moseley argued that in the case of inconvertible fiat Marx essentially held to a variant of the bourgeois quantity theory of money!

“in the case of inconvertible fiat money, Marx’s theory is similar to the quantity theory of money, in the sense that the quantity of money is independent of prices and determines prices (in part).”

Now, the way Moseley twists Marx’s own words on this point is truly precious: Marx sums his view up in a quote Moseley uses:

“No greater quantity [of value] is capable of being represented. If the quantity of paper money represents twice the amount of gold available, then in practice £1 will be the money-name not of 1/4 of an ounce of gold, but of 1/8 of an ounce.”

In the above quote, Marx argues that no matter how much valueless fiat is forced into circulation, this fiat can only represent the amount of gold that can replace it; which means, fiat has no impact on the value of the commodities produced and exchanged. Marx’s concern in this passage is how much value is represented by fiat. And his answer is that it can only represent the amount of a commodity money that would replace it in circulation.

According to Marx, the fascist state can print dollars all day long and this will not have any impact on the value of output. All that results from forcing dollars into circulation by Federal Reserve Bank counterfeiting is the further depreciation of the inconvertible fiat dollars, i.e., inflation.

In other words, while a commodity money falls out of circulation when the sum values of commodities decrease in a crisis of overproduction, Marx believed a decrease in the sum values of commodities in circulation under an inconvertible fiat regime only led to the depreciation of the currency itself — i.e., to inflation of prices. Inconvertible fiat currency did not behave like commodity money at all. It did not move into and out of circulation with the ebbs and flows of commerce. Instead, its purchasing power simply rose and fell with the fluctuations in commerce.

Marx had a very good reason for this conclusion: the American Civil War.

During the US Civil War, both sides issued inconvertible fiat to finance their respective war efforts. Once this fiat entered circulation as the respective state paid for war-related goods, it led to inflation of currency prices and two prices structures emerged: one for fiat and the other for gold. According to Wikipedia:

“As a result of this redundancy of the [confederate] currency, its value collapsed. Gold was quoted at a premium in Confederate notes in April 1861. By the end of that year, a paper dollar was quoted at 90 cents in gold; during 1862 that figure fell to 40 cents; during 1863, to 6 cents; and still lower during the last two years of the war.”

When the state counterfeits its fiat currency, it only depreciates its purchasing power — this is the point Marx was making. However, Moseley wants to use this point to refute Marx, so here is his conclusion:

“Therefore, in the case of inconvertible fiat money, Marx’s theory is similar to the quantity theory of money, in the sense that the quantity of money is independent of prices and determines prices (in part).”

When I say Marxists are some dishonest motherfuckers, Moseley shows why I have good reason for that statement: Marx never says that the quantity of money is independent of the prices of commodities; what he says is that the quantity of inconvertible fiat and fiat prices have nothing to do with the values of the commodities in circulation. The state can add as much inconvertible fiat to circulation as it wants, but this counterfeiting has no impact on the value of the commodities in circulation, it only produces inflation:

“If the quantity of paper money represents twice the amount of gold available, then in practice £1 will be the money-name not of 1/4 of an ounce of gold, but of 1/8 of an ounce.”

Which means what? If the state forces twice the amount of currency into circulation than is necessary, the price of a 1/4 ounce of gold will rise from £1 to £2. By the same token, if the values of commodities in circulation should fall by half in a crisis, and the quantity of currency is unchanged, the prices of the commodities will increase, despite the fall in their values. Since the quantity of inconvertible fiat in circulation is not determined by the values of the commodities in circulation, it does not and cannot behave like commodity money in a crisis.

Simply put: inconvertible fiat is not money, does not behave like money, and must not be accepted as money in labor theory analysis. Despite this, Moseley refers to inconvertible fiat prices as the “monetary expression of labor time”, when prices denominated in an inconvertible fiat have no relation whatsoever to labor time.

As a matter of fact, the term, “monetary expression of labor time” did not even apply to gold or any other commodity money. As every beginner taking up the study of Capital quickly learns, gold was not the expression of labor time but the expression of value. And, as Moseley knows very well, in Capital, value is not defined as labor time in general, but as socially necessary labor time. There is a lot of labor time expended in our society that produces no value at all. If labor time per se was value, as Ricardians insist, the term would be meaningless when applied to a capitalistic economy.

Thus, if the advocates of Moseley’s MELT wish to distinguish socially necessary labor time from labor time in general, they have to jump through still another set of hoops: distinguishing labor that produces value from labor that is unproductive.

I will turn to this critical defect embedded in Kliman’s analysis next.

Afterword on this post

I refer to Fred Moseley’s 2004 paper, because, from what I can tell, it is one of the most widely cited documents on the problem of prices in the debate over the rate of profit. This means Moseley’s argument that a commodity money is not necessary in analyuzing the rate of profit is, in one way or another, being imported into the very heart of the debate over the rate of profit. In particular, Moseley’s argument enters into Kliman’s calculation of the rate of profit as means to determine the value of output. (Column O on his spreadsheet.)

So, when Kliman tries to determine the value of output in order to calculate the rate of profit, he is relying on two very questionable sources: The CPI/PCE inflation measures of the Bureau of Labor Statistics — which I have already discussed here — and Fred Moseley’s MELT argument. Most people who read Kliman’s book probably have no idea these two questionable concepts are embedded in his analysis of the empirical data. With the Bureau of Labor Statistic’s consumer price index and personal consumption expenditures, we find that use value is being used as the measure of value. With Moseley’s MELT, we get a valueless fiat as the measure of value. Together, the two mean that Kliman is calculating his rate of profit on the basis of utility, or the use values of commodities, not their values.