Yesterday, I showed why the inflation\deflation debate is concerned with the consumption of labor power and the debt of capitalist firms. Deflation carries a risk firms will not increase their employment and may go bankrupt because falling prices put pressure on profits.

My post led to the following response on reddit’s Socialism page:

“Too tired to read article but debt becomes worse with deflation because in real terms it is worth more (the corollary is that you can inflate debt away, since the debt which is constant becomes less in real terms after inflation. [Krugman] wrote a good op ed about that on April 4th, called oligarchs and money if memory serves). Aside from that this article seems a little wacky”

So does Krugman’s recent post to his New York Times blog contradict my argument? Well, let’s see:

“Many people understand that a falling price level is a bad thing; nobody wants to turn into Japan, which has struggled with deflation since the 1990s. What’s less understood is that there isn’t a red line at zero: an economy with 0.5 percent inflation is going to have many of the same problems as an economy with 0.5 percent deflation. That’s why the I.M.F. warned that “lowflation” is putting Europe at risk of Japanese-style stagnation, even though literal deflation hasn’t happened (yet). Moderate inflation turns out to serve several useful purposes. It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices in the face of shifting demand.” [my emphasis]

Notice how Krugman employs the more neutral and ambiguous phrase, “making it easier to adjust wages”, rather than the more definitive phrase, “making it easier to reduce wages”. In any case, why does Krugman think deflation is a “bad thing”?

“[As] the latest I.M.F. report shows, there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash rather than put funds to work, thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.”

Which is to say, Krugman is not concerned with the effect deflation has on wages, but the effect it has on the profits of investors. If falling prices add pressure to profits, investors hoard cash rather than invest it, raising the risk of a depression. Deflation does not have a direct negative impact on wages, falling profits produced by deflation have a negative impact on wages.

This is important to point out since many activists like the commenter may be taken in by arguments of economists like Krugman that deflation is a bad thing. The only reason why deflation is a bad thing in Krugman’s argument is that the capitalist cannot make a profit.

But what activists are in the streets demanding more profits for capitalists? Are you getting beat up, pepper sprayed, spied on and jailed by the fascist state because you are demanding the “right” of capitalists to have more profits? This isn’t why activists are in the streets; they are in the streets to protest the increasing concentration of wealth in the hands of the capitalists.

I challenge anyone to find any argument in Krugman’s post for deflation being bad for the worker. In fact, Krugman says the opposite:

“But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment?”

The only “asset” the workers owns is her labor power. In other words, so long as the worker has a job, who is going to protest that her wages have less purchasing power? The argument made to the working class by Krugman is that they must accept that their wages will buy less in return for having a job. This argument is really an effective one, since it begins with the logical assumption that most of society needs a job to eat.

However the argument runs into the problem that capitalism constantly improves the productivity of labor. As the productivity of labor improves, commodities require less labor to produce and the prices of the commodities fall. Thus improvement in the productivity of labor leads to deflation.

The source of the deflation in capitalism is not a mystery to Krugman nor any other simpleton economist; capitalism causes deflation by constantly reducing the labor necessary for production of commodities. But simpletons like Krugman want us to believe deflation leads to less demand for labor when the exact opposite is true; deflation results from the fact that less labor is necessary for production of commodities.

However, while it may be true that capitalism causes deflation and unemployment, Krugman is right that workers will accept lower wages for a job. We have seen this both in the Boeing negotiations last year and in the restructuring of General Motors in 2009. It really doesn’t matter that this is a false choice so long as the working class believes it is the only choice available.

To put this another way: the working class knows how capitalism works without reading a single line of Das Kapital. The capitulation of the working class to the laws of the capitalist mode of production is not a sign of ignorance of those laws, but implies profound familiarity with those laws. This is important to understand because it may seem as though all we have to do is explain to the working class “How capitalism works”. Once we explain to the masses “How capitalism works”, they will rally to the barricades and pull down all existing relations. The workers at Boeing and GM know all too well how capitalism works — which is what motivated their abject capitulation to the demands of the companies’.

The working class, like the capitalists, look at their predicament through the lens of capitalist relations of production. Through that lens the deck is stacked in favor of the capitalists, not the workers. The capitalists and their state appeal to the working class through this lens and they do this precisely because they know how the deck is stacked in the favor of the capitalists and to the disadvantage of the workers.