An impossible decision

Official inflation figures are based on the changing prices of consumer goods and services. Keeping these figures as low as possible is the task of central banks and statisticians. The first try to regulate the amount of money in circulation and to control demand, the second pick and choose what to include in their statistics. Inflation is considered bad because it devalues fixed income assets such as bonds, and because it incites labour to demand wage rises, which in turn puts up prices and risks spiralling. On the positive side, money is spent not saved and demand is buoyant, as opposed to deflation, where money is held waiting for a better deal and demand is slack.

Inflation is about wages, the living costs of labour and capital’s compelling need of surplus value for rent, interest and dividends. When the price of consumption increases, rising wages are cancelled out, static wages are reduced and bond holders are out of pocket, while capital gains are restored or multiplied. The diminishing exchange value of currency is a consequence of the continual struggle over the sharing of added value between capital and labour. The rate of inflation rises and falls, but it has not been negative in the US since the 1950s. In monetary terms the cost of living just goes up and up, but other prices can go up and down with no apparent effect on currency.

Shares and real estate are markets where prices fluctuate all the time. Sometimes they rise excessively and are called bubbles. Sometimes they drop excessively and are said to crash. But their long term trends move up faster than inflation and wages, as though they were disconnected. Property is the concern of capital and surplus value, not of labour. Should labour manage not to spend its entire wages, it is supposed to lend these savings to banks and governments more or less for free. Labour’s adventures into the property markets of shares and real estate are the wind of bubbles, whose deflations result in capital accumulation for some and lost wealth for many.

Outside of amateurish speculation, the prices of shares and real estate are determined by the return they bring on investment. And because capital has the capacity to move around, this rate of return tends to be the same for rent, interest and dividends. Moving capital from a lower to a higher return will push down the price of the first and hence increase its rate of return, and push up the price of the second and hence reduce its rate of return. However, when the rate of return of interest is kept artificially low, share prices rise in consequence just as artificially. As for real estate, despite its present post-subprime doldrums and huge stocks, low rates of return elsewhere help keep prices synthetically high.

Added value is divided between wages and surplus value. The first is the income of labour and determines the price of consumption. The second is the income of capital and determines the price of investments. Both incomes have the same origin but their finalities are different. Both come from the production and sale of goods and services, but only the former affects their prices and the exchange value of currency. The income of labour is the cost of its renewal. The income of capital is surplus value, which is a part of the value added by labour to the cost of investment renewals. Labour gets the cost of its renewal. Capital gets more than the cost of its renewal and can thereby accumulate. However, many authors have logically explained that capital accumulation is not an indefinite process (1). At some point in time the chains of production, raw materials and infrastructure are assembled and the end products need to be consumed. Machines to make machines to make machines to make machines, is a series that has limits. And in an age of mass production, the consumption must concern as many people as possible, ideally everyone on the planet.

In times of growth capital accumulates throughout society. When growth falters capital concentrates in fewer hands. For capital to accumulate, it must employ more labour without an increase in overall consumption, though a different distribution usually occurs. If more labour is employed and the cost of its renewal is unchanged, the proportion of surplus value increases automatically. Once the investment is in place its production requires consumption, which supposes a reduction of surplus value. To avoid this, the extra consumption can be sent abroad and exchanged for investments, for raw materials, machine tools, etc. This procedure benefits some nations and disadvantages the others. Some invest and others consume, some employ more labour and accumulate wealth while the rest are jobless and undeveloped. And it can absorb just so much consumption, at which point consumer credit is introduced to take up the relay. But credit for consumption has an exponential expansion that cannot last long. All of which means that maintaining the high proportions of surplus value that are inherent to the first stages of a growth cycle is doomed to failure and can lead to chaos.

When surplus value is invested in extra production, it ultimately increases consumer supply and the necessary increase in demand means its own reduction. But surplus value can also be invested in existing production. Shares and real estate change hands, companies and buildings are bought and sold. This goes on all the time, but it predominates in phases of capital concentration. When the resort to consumer credit has run its course and demand contracts, the weak become preys for the strong, the middle stratum of society is pushed down into precariousness and the spectrum of wealth is split by a deepening divide. (Any resemblance with the present situation is not a coincidence).

In the past, wage and price inflation would cancel debt and stimulate demand. That is no longer an option. Then the debt was long term at fixed interest, and it was held by the nation’s citizenry. Inflating it away caused mild political reactions and the occasional electoral reversal. Nowadays debt is short term and can multiply interest to match inflation, and a large portion is held by foreigners who might decide to retaliate commercially. And, anyway, the global network of production, trade and consumption is so intricate that nations can no longer decide alone their wage policies. The trouble is that at the post-credit stage of the cycle, raising wages is the only way to get consumer demand going again. And the only way to avoid the disturbing effects of inflation is to increase wages to the detriment of surplus value. Faced with such a dilemma, it is easy to see why the world’s leaders are so hesitant. None of them dare break the sacrosanct rule of property rights to rent, interest, dividends, patents and copy.

1. For example this recent piece by Alan Nasser : http://www.counterpunch.org/2013/05/03/the-economics-of-over-ripe-capitalism/