Economic Explanation of Inflation

Anonymous (@) 8 years, 10 months ago

A few months ago a wrote this article for a political economy publication I occasionally write for. I’m considering a re-write in order to broaden and clarify the principles I’m writing about. Please let me know if this segment of the article is clear, or what aspects I can explain better etc. Also please feel free to ask me any questions you may have on the subject matter. Thank you :)

To begin this explanation of inflation, we must first discuss what causes inflation and what inflation is. Any true explanation of inflation must start with profit motive. The mode of production or production motive in capitalism is production for profit. This means that the capitalist motive for production is to receive greater value than that which was invested in production. This value is represented as capital, which is represented on the market as currency which are bonds of value. Since the motive of production is to receive greater value than that which you invested, it becomes necessary that when the capitalists produce a product a bond of value, or currency, must be created to represent the market value of the product, this creation of market value (as dictated by supply and demand speculation), increase the total value which exists on the market. This creates a situation in which the capitalist has more bonds of value, but a smaller percentage of the total market value. To clarify if you have 1 dollar, in a system which contains 100 dollars, you have 1/100th of the markets value, but if the system expands to 200 dollars, then you only have 1/200th of the total market value. In essence the value of the currency decreases in direct proportion to the expansion of the market, this is inflation. This creates a situation in which the more the worker produces, the less value each product has. Which means the worker himself produces less market value per hour while simultaneously producing more products per hour. This effectively reduces the value of the worker, thoroughly commoditizing labor. For example if you have a worker that produces chairs, and he/she produces five chairs in market of only ten chairs, then they have produced fifty percent of the total market value of chairs. Then the worker produces ten chairs, and the other chair producers then produce twenty more chairs, the worker now only produced thirty three percent of the market value of chairs, even though they produced more chairs, they produced less market value. That means the value of the workers labor decreases in direct proportion to the amount of products he produces. As Marx said, “the more the worker produces the more he is alienated from his products.” In Marxist terms value only comes from two things labor, and resources. So when a capitalist system inevitably becomes inflated do to the speculative supply and demand market valuation, one of the implications is that the cost of production rises, because the currency bonds of value now represent a smaller percentage of market value. This means the capitalist is forced to leverage more value from the workers by paying them less, and/or increasing their productivity per hour. In Marxist terms that means that more surplus and necessary value is being leveraged out of the worker. Because remember all value comes from labor and resources, so market value or capital gain value comes from leveraging the necessary and surplus value of the laborer, and from exploiting and leveraging the worlds resources. In essence, since value only comes from labor and resources, the capitalist gains value by taking the value the worker produces, and in order to stay solvent do to inflation the percentage of value taken must continue to rise. Eventually as history has shown the capitalist system becomes so inflated, that it becomes too expensive to produce leading to an economic collapse, and the detrimental process of capital destruction which manifests in many ways. In modern times this over inflated market has led to the creation of the financial sector, or financial capital. The financial sector uses fractional reserve banking, to create value out of thin air in order to lend it to the capitalist producers, in order that they afford to produce. This cause hyperinflation, and only delays the inevitable economic collapse.

September 2, 2013 at 11:13 pm
Egarim (363)C (@egarim) 8 years, 10 months ago ago

“To clarify if you have 1 dollar, in a system which contains 100 dollars, you have 1/100th of the markets value, but if the system expands to 200 dollars, then you only have 1/200th of the total market value. In essence the value of the currency decreases in direct proportion to the expansion of the market, this is inflation.”

Simple enough idea and basically covers the entire economic problem: print without limit and you destroy the very meaning of value.

A thing cannot be valuable, at least not in the market or trade sense, if there is a limitless amount of it at hand.

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Anonymous (170) (@) 8 years, 10 months ago ago

@egarim, Yes exactly. Except it just doesn’t occur within one market, since all the the markets within one currency are connected, inflation in one market causes inflation in the others.

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, This is awesome man.

Is the interest on money just a form of this, or the underlying cause, or a structural similarity?

For instance: Person A and Person B lends 100 golden coins from the bank with a 20% interest rate a year. After a year there are now only 200 golden coins in circulation. If person A wants to pay his interest, he has to get 20 golden coins from person B to break even. Now person B has only 80 golden coins and is 40 coins in debt. Where do these 40 coins come from? The bank has to print new money, thereby devaluing all already existing money. (There are now 240 coins in existence relative to 200, each coin is worth less).

Btw. I would love to have a basic introduction to capitalism featured on the main blog. Would any of you make a write up, similar to OP, but a bit more detailed explanations/examples?

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, Thanks man!

Well it’s a little bit of both. For starters, remember the production motive in capitalism is profit. So the banks have no economic motive to lend money unless they make a profit by doing so. In order to make a profit they would calculate the inflation rate and the desired percentage of profit, to create the interest rate. So interest rate is a function of bank policy or necessity (percentage of profit), and the inflation rate.

Exactly the banking system has to create the currency necessary to cover the debt and put it in the system.

I hope that clarifies :)

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, Thank you for the clarification. Some more questions:

Does the interest on money cause the profit motive? Since everyone who uses money in an interest system loses money over time through inflation, everyone has to make profit just to break even. Or, put it in another way, would a different money system, one not based on interest but perhaps where money loses it value over time, undermine capitalism?

What are the consequences of alienation in this attention capitalistic society?

Is there any way around this inside capitalism, or do we need something completely different?

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, The profit motive is not caused by the bank loan interest, it is caused by the private ownership of the means of production. The capitalist own the means of production due to the way in which the productive forces evolved throughout history. Which means essential the capitalist lets society produce products for it’s consumption, but only in exchange for profit, or a value gain (outside of the inherent production costs). Why because the capitalists, and the technicians that allow the capitalist economy and society to exist don’t themselves produces, and need the value (products) of labor to consume. To understand this more in depth research the labor theory of value, they have some good videos on youtube that explains it.

It’s the economic realization of profit, that is supply an demand speculative market valuation that cause inflation. And the profit motive plus inflation that causes interest rates on bank loans.

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, Thanks, very enlightening.

Could you post the videos here?

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, Sorry I forgot about your other questions.

Well Marx says (paraphrasing), that not only will they market value the laborer produces decrease as his/her productivity increases, and not only will he be alienated from his products (unable to afford them), but the working class grows, because the necessity of the capitalist to increase the productivity per hour increases, due to the falling market value being producer per hour (so knew laborers are acquired). At the same time the number of capitalist decrease due to the competitive anarchy of the market, the competition for profit in an ever more inflated market. Capitalism as well goes into crisis, when production becomes to costly due to inflation, and destruction of capital becomes. This is historically accomplished by creating military industrial complexes, essentially war industry, which simultaneously destroys capital (creating markets for re-building), but it creates a market for the machines and necessities of war. As well as creating a financial sector which essentially loans producer (out of thin air) the money to produce, artificially keeping the capitalist economy solvent.

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, Well since the problem is speculative market valuation, and that originates from the profit motive. Then the solution that’s required is a different production motive (such as human need), and different valuation parameters (such as products valued by labor and resources). To be viable these changes would necessitate workers means of production and a centrally planned economy. Which in effect eliminates capitalism.

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, And planned obsolescence is another way to destroy capital?

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, Do you think we could run HE in a non-capitalistic manner?

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, http://www.youtube.com/watch?v=3wkO3qsZY_U. This will get you started on Marxian economics, it’s a good video for the fundamentals.

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, As production costs rise with inflation, planned obsolescence is a strategy to reduce the cost of production, mainly by using cheaper materials in production. Which reduces the quality of the product.

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, Well you can’t exist outside the market unless you have an alternative system. But there are cooperative models, that while they exist within the market (and suffer the negative effects), is a step in the right direction in terms of organizing another system.

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, Great questions man. Give me any other questions you have, and I’ll get to them when I can. :)

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@imhotep, Could you summarize capitalism in this way “no cultural form can exist that does not make profit or has to be in some way condoned by another form that does?”

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DoThatThing4 (21) (@thatguy46and2) 8 years, 10 months ago ago

@martijn, I really enjoyed reading Sacred Economics by Charles Einstein. He proposed that money is a symbol of appreciation that is to say, you gave me a gift so let me give you something that represents the ability to receive gifts. This takes the fear out of lending and spending but is also much more personal than the typical “I have money so hear my demands” attitude.
I like the other suggestion he had about how banks should lend on a negative interest rate. This suggests that time can ultimately forgive the principle, but the risk to the person is reduced because the longer the loan repayment time frame goes on, the lower the principle is going to be. So, I think this would encourage more people to take risks. There should still be credit ratings which I think is a numerical value of a person’s character. This also takes care of the buying power problem because it takes money out of circulation, meanwhile the bank is able to create more money with out having run-away inflation. It would be the same thing for bank accounts; that is they would have negative intrest rates. This system puts an obvious weight on the intrinsic power of products and services and could lead to the exploitation of the environment so the natural resources of our planet need to have safeguards to protect the thing which really matters: Planet Home.
These thoughts are inspired by Mr. Einstein.

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flofy (0) (@flofy90) 8 years, 10 months ago ago

@imhotep, I agree with you: capitalism is a flawed system. But i think you’re oversimplifying basic economic laws and missing some key principles of monetary policy. The problem with capitalism is not that easy to explain, if it was it would only take a couple of years (or even months) for a capitalist system to colapse. You have some good points, and i know is really hard to simplify something as complex as an economic system, i think you have to expand more in your ideas and take more factors into account.

P.S. Sorry for my english as you can probably tell is not my native language.

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Martijn Schirp (112,780)A (@martijn) 8 years, 10 months ago ago

@thatguy46and2, Eisenstein? Yeh, its still really high on my reading list after Jordan raved about it. Good points, but I have to increase my knowledge on that to make any statement on it.

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Anonymous (170) (@) 8 years, 10 months ago ago

@martijn, If I understand correctly, cultural forms can and have existed outside the profit mode of production. But in modern times, capitalism is needed in the initial phase of industrial development, to build up the working class and the means of production. However the market stagnates due to inflation, the productive forces must be destroyed to keep the system viable, that along with the inherent inability to meet the needs of the majority, creates the conditions that require the development of an alternative system.

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Anonymous (170) (@) 8 years, 10 months ago ago

@flofy90, You are right in that it is an incomplete critique of capitalism. My intention was to only explain inflation, and the economic implications of inflation. I am considering posting a full critique of capitalism. Actually in smaller economic system it does take shorter amounts of time to collapse, the sucre in Ecuador for instance, destabilized and inflated very rapidly, and quite frequently. In larger systems the methods for decreasing the costs of production, and decreasing the inflation itself, like exploitation of labor, exploitation of resources, planned obsolescence, along with financial capital, and military industrial complex (as tool for capital destruction). Used in tandem in a large system greatly increase the amount of time the market stays viable. Even so the market has collapsed many times in our history, if I’m not mistaken it has happened more than four times (in the U.S.). Each with devastating effects. Ultimately my analysis might sound simplified but it’s not, it is an inter disciplinary dialectical economic analysis, which makes complex concepts more understandable. Ultimately economics is less complex than physics, which brings to mind what Einstein said. If you can’t explain a theory to a child, than it’s not a good theory (paraphrasing). Ultimately every topic associated could be analysed in more depth, and analysed in specific conditions. But my intent was abstract laws of the movements of capital.

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Veil (4) (@Veil) 8 years, 10 months ago ago

@thatguy46and2, There is no reason for a bank to lend on negative interest. None.

They would need to be supported by taxes, because they would make no money whatsoever.
The rest of the book is golden, but ultimately Eisenstein’s ‘Solution’ would never actually work no incentive for a bank to lend under a negative-interest economy.

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Anonymous (170) (@) 8 years, 10 months ago ago

@thatguy46and2, I personally don’t see how these reformation of capital could make it anymore viable. It sounds like a philosophy that is not coherent with the laws of capital, so are really impossible to implement. They come from a misunderstanding market laws, which is not surprising since bourgeois economic sciences are purposefully convoluted.

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Anonymous (170) (@) 8 years, 10 months ago ago

@Veil, Agreed!

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james (20) (@jamesjohnson) 8 years, 10 months ago ago

@imhotep, @martijn,

“To clarify if you have 1 dollar, in a system which contains 100 dollars, you have 1/100th of the markets value, but if the system expands to 200 dollars, then you only have 1/200th of the total market value. In essence the value of the currency decreases in direct proportion to the expansion of the market, this is inflation. ”

I see what you are trying to say hear, but it is misleading. The act of expanding the market value from $100 to $200 is NOT inflation and inflation has nothing to do with total market value. The total market value of everything in the world is constantly increasing as people create value. If your scenario were true then everyone would be getting poorer and poorer as time goes on.

Inflation is the general increase in prices that results in a loss of purchasing power. It is currently measured by, among other things, the Consumer Price Index (CPI), which tracks the price of a bundle of specific goods to see how the price changes over time.

What you meant to say, and what could be reasonably inferred by your quoted paragraph is this. Suppose that there is 1 good in an economy and that good costed $1. If that good, suddenly costed $2 – then you’re purchasing power as a consumer has halved and you have just experienced 100% inflation.

Source: Economics major, work in finance

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