“‘Pushing on a string’ is particularly used to illustrate limitations of monetary policy, particularly that the money multiplier is an inequality, a limit on money creation, not an equality.” –Wikipedia

So here are the questions I have been contemplating for the past week or so: When simpleton economists suggest policies to manage “the economy”, what in their view do they think is being managed? How do they conceptualize both the “economy” itself and the tools they employ to manage it? What, if any, are the vulnerabilities (defects) of this form of management that is being expressed in the current debate among mainstream (neoclassical) economists? In particular, what are the choices being expressed in the debate over who should replace Bernanke as chair of the Federal Reserve Bank?

To be sure, I am not trying to offer a polemic against mainstream economics in this essay but to understand this policy in its own right, as well as to restate it in a form that is comprehensible within a labor theory framework as i understand that framework.

1. Managing production by controlling exchange

Although clearly the various national states are trying to manage the mode of production, they do not directly seek to manage production itself, but only to manage the exchange relations founded on the mode of production. The big controversy economists now are debating is what should be the target of management policy: money supply, interest rates, GDP, or employment. The problem is complicated by the fact that money supply, interest rates, GDP and employment are not “the economy” itself, but simply visible manifestations of the thing actually being managed: the total social capital. Clearly there is so much disagreement among the simpletons because these manifestations of the national capital are not the same thing as the national capital itself. They are expressions of the mode of production in the reflexive form of exchange relations.

The methods employed by the fascist state often leads to the mistaken notion that the mode of production is not, in fact, being managed at all, or that the aim of this management is to impose some sort of neoliberal free market regime on “the economy”. Since, in contrast to the defunct Soviet mode of production, fascist state management is effected by control over exchange relations, rather than detailed, direct and centralized management of the production of use values, many communists fall into the error of thinking the aim of policy is to spread market relations, not the centralization of control over the production of surplus value itself.

This fallacy can be found in its fully expressed form in the writings of the Marxist writer Ben Noys, who argues so-called neoliberal policies are designed to impose market relations and competition on society:

“What is the precise nature, then, of neo-liberalism? Of course,the obvious objection to the ‘anti-state’ vision of neo-liberalism is that neo-liberalism itself is a continual form of state intervention,usually summarised in the phrase ‘socialism for the rich, capitalism for the poor’. Foucault notes that neo-liberalism concedes this: ‘neo-liberal government intervention is no less dense, frequent, active,and continuous than in any other system.’ The difference,however, is the point of application. It intervenes on society ‘so that competitive mechanisms can play a regulatory role at every moment and every point in society and by intervening in this way its objective will become possible, that is to say, a general regulation of society by the market.’ Therefore, we miss the point if we simply leave a critique of neo-liberalism at the point of saying ‘neo-liberalism is as statist as other governmental forms’. Instead, the necessity if to analyse how neo-liberalism creates a new form of governmentality in which the state performs a different function: permeating society to subject it to the economic.”

In fact, nothing could be further from the truth. The aim of fascist state management of the production of surplus value is no less than it was for the defunct Soviet state: to bring the entire act of social labor under its control, to centralize the management of production — only the method of control in this case is effected through indirect, rather than direct, means. This implies, at the same time, the commodifcation, to the extent possible, of all social relations. However, even as the state seeks to impose market relations and competition on society, this imposition is itself predicated on its absolute control over what serves as money in commodity transactions. Far from being “anti-statist”, commodification is being imposed on society precisely because the fascist state controls what serves as money in every transaction that take place.

To give an example: In his General Theory, Keynes seems to have been concerned with maximizing the level of employment of labor power for the production of surplus value. But his effort to determine how the level of labor power employment can be increased came down to an argument that there was, in theory, a difference between nominal, i.e., currency denominated, wages and “real” wages, i.e., the actual value of a basket of wage goods this currency could purchase. To maximize the employment of labor power for the production of surplus value, Keynes suggested policy makers not look at employment itself, but focus on the difference between the real and the nominal wages paid for labor power.

Keynes makes three central points in his argument: First, the working class, like most of society, thinks about its subsistence in relative money terms, not in terms of its absolute value. They will, therefore, fight against any attempt to reduce their nominal wages, but will tend to ignore the purchasing power of these money wages unless the currency is depreciated too rapidly, leading to a loss in confidence of the currency:

“Though the struggle over money-wages between individuals and groups is often believed to determine the general level of real wages, it is, in fact, concerned with a different object. Since there is imperfect mobility of labour, and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals, who consent to a reduction of money-wages relatively to others, will suffer a relative reduction in real wages, which is a sufficient justification for them to resist it. On the other hand it would be impracticable to resist every reduction of real wages, due to a change in the purchasing-power of money which affects all workers alike; and in fact reductions of real wages arising in this way are not, as a rule, resisted unless they proceed to an extreme degree. Moreover, a resistance to reductions in money-wages applying to particular industries does not raise the same insuperable bar to an increase in aggregate employment which would result from a similar resistance to every reduction in real wages.

Second, Keynes argued the struggle over wages is about the distribution of real wages among the working class, not the absolute level of real wages itself. Workers will fight to protect their own money wages against reduction, but the real wage is determined not by money wages, but by what these wages can actually buy:

In other words, the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups, and not its average amount per unit of employment, which depends, as we shall see, on a different set of forces. The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system.

Third, as a result, the working class will not fight reductions in its real wages as long as its nominal wages remain intact, provided they can find a job:

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.”

Thus, for Keynes, the fullest possible employment of labor power for the purpose of producing surplus value could be achieved, if the focus of the state was directed at depreciating the value represented symbolically in money wages through its absolute control over what serves as money in the aftermath of the replacement of commodity money by state issued inconvertible fiat, rather than outright reduction of these money wages.

Consistent with Keynes’ approach to employment, it appears that what economists think is being managed today is not money supply, interest rates, or gross domestic product, but the difference between real and nominal measures of these things, i.e., the difference between real and nominal GDP, real and nominal interest rates, etc. — in short, they appear to be trying to achieve some definite level of inflation, i.e., a managed depreciation of the value represented by currency. This method of management of the national capital via exchange relations presents four essential difficulties for Washington that might not be apparent to communist activists of all variants (Marxist, anarchist and libertarian) unless viewed from the standpoint of labor theory.

First, it would be well to remember that in contrast to the conceptions of the mode of production held by simpleton economists, labor theory says capitalism is a mode of production founded on the production of surplus value, whose production is expressed in the quantity of money in circulation, interest rates, GDP and employment of labor power. In labor theory, in other words, all the things the simpletons propose to employ to manage the economy are reflexive manifestations of the mode of production of surplus value. However economists reject any idea of value and surplus value and, therefore, take the reflexive expression of surplus production — e.g., an increase in the quantity of money in circulation — as the cause of “economic growth”. The problem, however, is that when growth slows — and the danger of deflation looms — labor theory suggests this is because the rate of profit has fallen; the simpletons, on the other hand, have no useful explanation for why employment, money supply, interest rates and GDP suddenly contracts; they only know that for some unknown reason “economic growth” reverses, i.e., we get a recession. As is typical of this approach, the economists look not to overproduction of capital as the source of the contraction, but to a lack of money demand.

Second, because economists are addressing not the actual process of production, but the reflexive expression of this process as it is manifested in exchange relations, there is a notable lag between the process of production and the expression of this process in exchange relations. The capitalist, like the producer of simple commodities, undertakes to produce a commodity at one point in time, but only discovers whether there is an actual social need for his commodity at a later point when he actually takes it to the market for sale. Policy changes to address the problem in the form of a lack of demand for his commodity trails even this discovery, perhaps by months or even years.

Third, even in the best of circumstances not all nations have access to these tools. As we shall see, not all nation states can effectively control the process of production by indirect means, since they lack control over the appropriate monetary and fiscal policy tools that allow such indirect management. These tools do not exist in a vacuum, but presuppose the national capital operates more or less in isolation from the world market — a condition of self-sufficiency that is rapidly going the way of the dinosaurs — or has some peculiar advantage.

Fourth, the problem of fascist state management becomes even more complicated when, as at present, the tools that have been used more or less since 1933 to manage the national capital — so-called fiscal and monetary policies — suffer catastrophic failure — a condition that is usually referred to by economists as the problem of monetary policy at the zero lower bound on policy interest rates. The simpletons are at present engaged in fierce debate over what sets of policies should replace these failed tools.

In the following sections of this essay, I will look at each of these complications in turn.