Economic Explanation of Inflation

Anonymous (@) 8 years, 11 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
james (20) (@jamesjohnson) 8 years, 11 months ago ago

“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.”

No offense, but the majority of your post is flat wrong, but I take issue with this the most. I really enjoy the discourse on HE, but some people enthusiastically adhere to certain conspiracies that don’t make a lick of sense. This aversion to the fractional banking system is one of them.

Disclaimer: I’m not going to go real deep into this because I don’t have much time, but just wanted to get this little bit out there.

Do you not understand, that without fractional banking the economic growth of the entire world would have been stunted EXPONENTIALLY. Our standard of living would be so much lower, technological innovation would be non-existent, and we would essentially still be living in the dark ages.

Why? Because with a full reserve banking system (antithesis of fractional banking) there is no capital creation because there is no credit (other than microcredit essential). Thus, investment in infrastructure projects, technological feats, higher learning, etc are non-existent. You are basically talking about a subsistence economy. So if you would rather trade financial stability – the one advantage of full reserve banking – for our modern standard of living (which by the way has been positively increasing for the last several hundred years) then be my guest and go back to the dark ages.

As for me, I’ll stick with the fractional banking and deal with the booms and the busts just like everyone else. If you want me to elaborate more – I will when I have time

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Veil (4) (@Veil) 8 years, 11 months ago ago

@jamesjohnson, You should read Sacred Economics… Charles talks about what you’re discussing – ‘growth’ and so forth, and specifically says that naturally, things need to be subsistent.

Infinite growth on a finite planet is a fantasy.

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Anonymous (170) (@) 8 years, 11 months ago ago

@jamesjohnson, People are constantly getting poorer my friend. ”Inflation is the general increase in prices that results in a loss of purchasing power.” This is an implication of what I described, maybe I didn’t make it clear enough. I have actually minored in economics and majored in physics. The phenomena of inflation in Marxist terms is known as ”falling rate of profit,” which obviously necessitates the the raising of prices, but there is a cap on how high you can raise the prices, and that cap is how much the consumer can pay based on his wages. I can write a more detailed description of how this phenomena affects the U.S. to clarify for you. Also I’m sure this is correct, so maybe you should ask a professor.

”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.” This is a way to measure inflation but it isn’t an explanation for the CAUSE of inflation. Which you need to refute if you claim it’s incorrect.

The majority of new jobs, are minimum wage jobs, if the minimum wage had been raised at the rate of inflation it would be over sixteen dollars. Which proves people (workers), are getting poorer, but the capitalist raises his profit margins to compensate, so he doesn’t get poorer, mainly because he leverages more value from the worker, and uses or acquires cheaper resources. I think you misunderstood my article, probably because it is a mix of classical market economics and Marxian economics, which you probably haven’t learned in school. I suggest you ask me some more questions and I’ll answer.

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Anonymous (170) (@) 8 years, 11 months ago ago

@jamesjohnson, LOL I don’t know how you said I’m wrong, and then go on to say the same thing I said afterward in a slightly different way. I said the financial sector keeps the over inflated market viable, as in it keeps it growing, if the market is viable it’s obviously growing. And the reason I brought it up, is capital growth traditional is a result of the capitalists profit the capitalist makes on his investment. He then re-invests in production. When the market gets so inflated he can’t afford reinvest, the fractional reserve system is convenient for lending the capitalist the necessary capital to invest. I suggest you re-read everything I’ve wrote cause you’ve only supported what I’ve said. We should have a discussion about it, and I’m sure you’ll understand.

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Egarim (363)C (@egarim) 8 years, 11 months ago ago

@imhotep,

Of course, I understand what you mean and it is certainly an issue we all currently face even if we are not actively aware of it.

My understanding is that the situation for all of us is only going to escalate until some logical changes are set in motion.

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james (20) (@jamesjohnson) 8 years, 11 months ago ago

@imhotep,
The relationship between increasing the money supply and inflation is not a causal one. They may teach that in elementary economics because quite frankly it is a lot less messy. However, that rests on a lot of assumptions that are never true in practice.

Yes, it is true that minimum wage is losing ground to the cost of living, especially in the United States. However, I think this has more to do with a fundamental paradigmatic shift that modern economies are undergoing. There are a confluence of factors that are keeping unskilled wages from growing with the cost of living: low demand for unskilled workers, increased technological productivity, increased labor productivity, and a recent recession which had trimmed off the prior excess. The supply and demand of labor drives the wage rate not the whims of the capitalists sticking it to the working man.

Also, are you advocating a full reserve banking system instead? Because if so, the outcome of that is certainly much worse than inflation. A full reserve banking system always ends in deflation and then necessarily depression. It is not a viable option at all unless you are talking about a subsistence economy.

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Anonymous (170) (@) 8 years, 11 months ago ago

@jamesjohnson, I do think the growth of the market and the accompanying increase of the money supply is causally linked to inflation, I proved it mathematically (although in a simplified form). Not to mention, my analysis has an internal logical consistency beyond the mathematics, in light of that it takes an ulterior mathematical and logical analysis to disprove it. So the obvious question would be, why isn’t the growth of the market and subsequent growth of the money supply causal linked to inflation? What is your explanation for the cause of inflation?

”The supply and demand of labor drives the wage rate not the whims of the capitalists sticking it to the working man.”

Once again it seems like you’re agreeing with me. I said the more a laborer produces, the the more the market value of a single product decreases (speculative supply and demand market valuation). So the amount of market value the laborer produces per hour decrease, unless his hourly productivity rate increases at the rate of the devaluation of the product. From the perspective of the capitalist the moment it becomes cheaper to higher more workers to increase productivity, rather implement technology to increase the productivity of a single worker, that’s what they do. This causes a situation where the single worker produces less market value per hour (and is paid less considering the worker is paid based on how much market value he/she produces), while simultaneously producing more products per hour, and the amount of such workers increase in order to increase the total productivity rate the capitalist needs to stay solvent. So I didn’t say the capitalist fucks over the worker because he is a cruel heartless bastards (although there are many cases where they are), I said the capitalist continually is forced to take more and more of the laborers surplus value in order to stay solvent in a climate of monetary and productive devaluation, as well as higher more workers. And by the way the demand for skilled labor is what’s decreasing and the demand for unskilled labor is increasing. That is why increasingly more college educated people cannot find jobs, and have to take minimum or low wage jobs, because that is the only type of job actually increasing in this stage of our economy, for the reasons I just explained.

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Anonymous (170) (@) 8 years, 11 months ago ago

@jamesjohnson, ”Also, are you advocating a full reserve banking system instead? Because if so, the outcome of that is certainly much worse than inflation. A full reserve banking system always ends in deflation and then necessarily depression. It is not a viable option at all unless you are talking about a subsistence economy.”

Actually I’m not advocating a full reserve banking system. I agree that fractional reserve banking is the preferable solution within the system. I was merely describing the economic situation that produced the necessity for a fractional reserve banking system, and how said banking system solves the problem in a limited temporary manner. It must be said however that fractional reserve banking destroys the meaning and merit of wealth, and causes its specific brand of economic chaos, which the worker feels and pays for more than the capitalists.

If I am advocating a solution it’s outside of the market (outside of capital), and therefore outside of market economics. The obvious solution would be to create a economic system without inflation, and therefore free of the cause of inflation, which is speculative supply and demand market valuation.

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Anonymous (170) (@) 8 years, 11 months ago ago

@jamesjohnson, One thing classical economist need to understand is they don’t have all the answers, as evidenced by the ongoing economic crisis. They especially don’t understand what causes the crisis, it is necessary to look outside of classical economics to understand these things. I suggest you watch the video series I posted, which is basically a Harvard trained classical economist, explaining Marxian economics.

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lunacharski (11) (@lunacharski) 8 years, 11 months ago ago

Just a quick response, here is a good link that goes into the Marxist theory of crisis. Also worth watching on this is “The Law of Value” series, which in my opinion is the best lay explanation of Marxist economic theory one can come across.
http://kapitalism101.wordpress.com/tag/crisis-theory/

http://kapitalism101.wordpress.com/2010/04/28/law-of-value-introduction/

Understanding the operation of the Law of Value in a capitalist economy is fundamental to understanding crisis

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