Preface

Commenting on the proceedings of the 1977 convention of the American Economic Association, an editorial in The New York Times lamented the fact that "today's economists seem mere dabblers in the sweep of intellectual history. They may be richly rewarded by business for their stabs at forecasting and their analyses of government regulation or floating exchange rates. But where are the attacks on the biggest problem of our time: achieving growth without spiralling inflation?... Most economists were dismal scientists when they arrived. Despite the drinks and the chats, they were unchanged when they left three days later."

The economists are in a dismal state precisely because they look upon their discipline as a science whereas it is actually no more than a sophisticated apology for the social and economic status quo They evidently do not perceive the real nature of their profession and thus are deeply disturbed by the growing discrepancy between their theories and reality. Because the "economic weather" had favored them for such a long time, they may have really imagined that the mathematization of economics had turned their pre-occupations with price and market relations into a positive science. As Thomas Balogh remarked in a paper delivered in 1975 at University College, London, "there were as many equations as there were unknowns, and these it was claimed could capture reality and enable objective and positive advice to be given to political leaders. Inequality would be diminished and individuals protected against exceptional hardship. Economics would, moreover, produce testable theses, and enable the production of 'policy menus,' which would provide us with a solid basis for scientific decision-making and quantified 'trade-offs,' i.e., in plain English, 'choices.' The consumption function, the accelerator, Okun's 'law' of the relation of income to employment, the Phillips curve linking wages to unemployment, linear programming, etc. now all shown up for the nonsense that they were - would at last have raised the economist to the level of physicist. How long ago this all seems now.

Economics is no longer seen as an exact science. As an "inexact" one its predictive powers are highly questionable, thus disqualifying the "stabs at forecasting" that were to justify its existence. Predictions are "probability statements" that commit the forecaster to nothing at all. His guess is as good as any other, for no one knows how the dice will fall. Economics is back at its starting point - submission to Adam Smith's "invisible hand" -without the consoling illusion of its beneficiary results. However, the dilemma of economics is still not traced to the economic system itself but to the incompleteness of the science of economics, which has not as yet found ways and means to make the demonstrably unworkable economy workable.

The current, more direct concern of economics is the combination of economic stagnation with inflation, which destroyed both Keynesian theory and the neo-Keynesian synthesis that had passed as the standard theory of economics. It is to this aspect of the matter that the following collection of articles devotes itself, taking the point of view of critical political economy.

Although these articles must speak for themselves, it should be pointed out that they were written for different occasions and that they address different audiences. It was thus inevitable that they repeat some basic statements without which each item would in itself be less comprehensible. But this necessity may prove an asset rather than an annoyance, since it shows up the interconnections between the phenomenal world of capitalism and its underlying social production relations.

With the exception of one, all the articles relate to the main issues of today, namely, the role of government, or the state, in economic affairs with reference to both the so-called mixed economies and the state-capitalist systems. The exception deals with the Great Depression of 1929 and the New Deal, which initiated the era of large-scale governmental intervention in the economy of the United States.

Chapter 1: The Crisis of The Mixed Economy

To understand the present economic situation and where it is going, one must take a look into the events of the recent past.

Developments since the end of World War II have taken place entirely within a new kind of capitalism calling itself a "mixed economy." This implies state economic interventions that differ from the interventionist policies of the past century in extent hut not so much in the means applied.

State interventions under a mixed economy find their reasons as well as their limits in the conditions of existence and accumulation of private capital. Quite apart from the instruments of power that the state uses to secure social stability on the domestic front and to support national interests in international competition, it exercised economic functions as well, e.g., as a means of obtaining revenue (customs policies and state monopolies over certain branches of industry, etc.) or of creating the general conditions of production the burden for which private capital either did not or could not assume itself (e.g., construction of roads, harbors, railroads, posts, and so on, i.e., what in the economic jargon is called infrastructure.

Thus in limited measure the state is also a producer of surplus value and is therefore able to pay for a portion of its expenditures with its own profits. To the extent that the production of state enterprises enters into general competition, it differs in no way from private production; and the state share in total surplus value depends on the mass of capital it invests and on the average rate of profit.

State monopoly over certain products and services may lead to monopolistic profits, but this is only another form of consumer taxation.

For historical and other reasons the relationship between state and private production is changeable and, moreover, varies from country to country. State enterprises may he turned over to private concerns, and private enterprises may be nationalized; the state may be a shareholder in private concerns or keep them alive through subsidies. The interpenetration of private and state production occurs in a variety of combinations. and the state share need not be restricted to the infrastructure. In the industrially developing countries state participation in production is often relatively extensive, as for example, in Italy, an archetypal country in this respect, where state-owned production[1] competing with private capital represents 1 5 percent of total production. Yet no matter j how much state production may expand, it can never be more than a minor fraction of total production if it is not to call into question the very existence of a market economy. In all countries, therefore, a "mixed economy," to the extent that it is a mixture, leaves the private enterprise nature of the economy intact.

Even an increase in state production through expansion of the infrastructure can change nothing, since this expansion takes place within the framework of capitalist accumulation, which reproduces the relationship between state and private production in consonance with accumulation needs. Expanding automobile production entails the construction of new highways, and growing air traffic requires more airports, etc., if expansion of the economy as a whole is not to lag behind the infrastructure. Though it is correct to say that state-organized creation of the general conditions of production benefits private capital, albeit quite unevenly, this does not mean that it improves the profitability of capital beyond the costs of the infrastructure. Since the costs of the infrastructure are borne by private capital, the infrastructure depends on the profitability of capital, not vice versa.

The general conditions of production demonstrate the unsocial nature of capitalist production, namely, that it is impossible for the general needs of society to be taken care of by private production. The capitalist ideal would be for every form of production, even production for the infrastructure, to be run privately. As, however, this is in practical terms impossible, capital leaves it to the state to balance private production with social production. Capital must still, however, bear the costs of this production, and it is therefore little interested in expanding the infrastructure beyond the narrow scope it finds useful. The result is that, in general, infrastructural production lags behind production for the market - a state often lamented in the economic literature as an irremediable contradiction between private wealth and public poverty.

In a crisis situation state-induced production is not primarily production for further expansion of the infrastructure in anticipation of and preparation for expected future capitalist accumulation. Its purpose is to create jobs immediately, with a view toward increasing general demand. In order not to compound further the existing problems of private production, state-induced production must concentrate on things outside of the market and on public spending, which may partly go toward expanding the general conditions of production and partly be used up in "public consumption." This type of state-induced production must be distinguished from the state production that already exists, whether it is geared to the creation of the general conditions of production or to the general market.

Private production is not on that account driven out of business by state production; the latter is merely a policy undertaken to combat crisis. It is financed by a state budget deficit, even if in the end this only means an added tax burden apportioned to the private sector over the long term. The state must strive to expand total production beyond its own production capacities, which is why when we investigate the effect of state-induced production, normal state production may be disregarded.

The state does not have any means of production of its own to cover the additional state-induced production. Even for production of the general conditions of production, the state must for the most part rely on the services of private enterprise, which are then paid for from taxes and state loans. To the extent that the general conditions of production are a prerequisite for capitalist production for profit, their cost is objectively a part of the costs of capitalist production. Where this is not the case, the costs of state-induced production must be subtracted from total surplus value and cannot be included in either capitalist consumption or capitalist accumulation.

Crisis brings capitalist accumulation to a halt, and at the level of the market this shows up as overproduction and unemployment. Crisis occurs because profits are not sufficient to meet the expansion needs of the existing capital structure. In this situation any further deductions from the mass of surplus value, which is already inadequate, can only worsen the predicament of capital. Any increase in demand through public works projects must therefore be financed by state loans, and the additional state-induced production shows up as a mounting public debt.

That government spending is for the most part covered by deductions from the mass of surplus value is brought to light by taxation. Capital is always demanding a reduction in its tax burden. However, it is not necessary to balance the state budget every year; debts incurred during a depression may be paid off during times of prosperity. If they are not, the interest on state loans constitutes an additional tax burden which, however, may be stabilized at a low level by expanding production. As long as social production expands faster than the state debt, the latter poses no serious problem for the economy. If the opposite is the case, the state debt becomes a burden on the economy and another obstacle to the resumption of accumulation.

State-induced production to make up for deficient demand was initially conceived as a temporary relief measure for waiting out the depression on a safer note until the next business upswing, and it was therefore used only in limited measure. If capital could not create the conditions for a new economic upswing from its own resources, expansion of the infrastructure through public works would be of little use to it. Two empty harbors are no better than one, and two highways without traffic no better than one without traffic. During the Great Depression public works reduced unemployment but did not eliminate it, and the long depression ended with World War II, not with a new economic upswing. It took the war to bring about full employment without capitalist accumulation. Capital was not only destroyed in terms of values, it was also destroyed physically. In the United States as well accumulation came to a halt when about half of production went into "public consumption," that is, wartime production. Nonetheless this arrest of accumulation and the enormous destruction of capital created the conditions for the economic boom of the postwar period.

Periodic crises have been a part of capitalism as long as it has existed, but because capital does develop, the periods of crisis differ, if not in essence, at least in outward form. The postwar boom was such a surprise because it came right on the heels of the long years of depression, which had deeply shaken confidence in the ability of capital to survive and grow. How was this boom to be explained? The Marxist theory of Crisis explains it by the fact that capital was once more able to restore the vital link between profit and accumulation which had been lost. The worldwide destruction of capital values and the changes it wrought in the structure of capital, together with the expansion of surplus value made possible by technical improvements in the means of production, permitted the capital that had survived and the capital that had been newly created to achieve a rate of profit sufficient for capital to expand. Thus the new boom, like all those in the past, was seen as the outcome of the crisis situation preceding it, which in turn was seen as a disproportionality between the creation of profit and the accumulation requirements of capital.

At issue here was the contradiction, inherent in the production of surplus value, that the amount of capital invested in wages decreases relative to the amount of capital invested in means of production, so that total surplus value accordingly diminishes relative to total capital. Capital accumulation is not only a necessity born of competition, it also derives from the never ending struggle against the tendential decline in the rate of profit inherent in the capitalist mode of production, and this struggle grows more difficult as accumulation proceeds. While surplus value is, on the one hand, increased by accumulation, and on the other hand, accumulation causes the rate of profit to decline, at any particular time actual profits may fail to reach the level required for further accumulation. Since Marx describes this process in Capital, we need not repeat the description here. It will suffice to point out that prosperity and depression constitute the contradictory outward garb of the development of the social forces of production under conditions of capital production.

Bourgeois economic theory sees these events in a different light. For it price relations on the market, not production and production relations, are the essential factors to be considered.

The great crisis of 1929 forced the abandonment of the equilibrium theory of a self-regulating economy. The crisis was interpreted as based on a lack of effective demand due to a decline in consumer needs showing up as a lack of new investments and hence unemployment. But this peculiar explanation aside, bourgeois theory also agreed that production had to be stimulated if the crisis, which seemed to have set in permanently, was to be overcome. If this was not achieved of itself from profit-deter-mined market relations, state interventions could be used to stimulate production - the full employment of the war years was a persuasive. example of this. Since it seemed that capital was no longer capable of extracting itself from the crisis by means of its own resources, and since the continuation and deepening of the crisis began to undermine social stability, both bourgeois practitioners and theoreticians opted for an interventionist policy to prime the pump, as it were and eliminate unemployment.

If profitable expansion of production was not possible, expansion independent of profit was; and although this could not promote capital accumulation directly, it could perhaps get production going again. Production even without profit seemed better than standing still, especially when it was tied to the expectation that it would provide the impetus for the resumption of the accumulation process.

The multiplier effect theory was invented to substantiate this reasoning. The notion of a multiplier had appeared before,[2] although it had not been taken as seriously or formulated as precisely as by R. F. Kahn and J. M. Keynes. Their particular formulation aside, it is obvious that any significant new investment, no matter of what kind, must increase production if it is not immediately offset by the withdrawal of other investments, and that, moreover, this added production will also generate some surplus value. If the additional surplus value is reinvested in means of production and labor power, capital accumulation also increases.

But surplus value is transformed into additional capital only when existing capital is profitable enough to justify further capitalist expansion. The crisis was a sign that capital was not profitable enough to allow for more accumulation. And since state production yields no profit, its effect on profitable production in the private sector can only very marginally increase total surplus value. Although surplus value expands in the private sector as a result of state induced production, this growth itself must be measured against the production costs of the latter to determine if it can actually influence the social surplus value positively.

To avoid misunderstandings we should point out that just as creditors of the state debt obtain their interest, so do the private enterprises engaged in state induced production receive an average, and often an above-average, profit. These interests and profits, however, are not generated via the market but through state purchases of the output the state itself set into motion, i.e., the added output, which includes surplus value, is "exchanged" for a capitalist surplus value in money form that had been created at an earlier period. The money which flows from the hands of capital to the state returns from whence it came in an amount commensurate with the volume of state-induced production. In other words, surplus value that was already part of capital is "exchanged" for state induced output.

Money becomes capital by being transformed into means of production and labor power used for the production of surplus value; this process, which constitutes capital accumulation, is reproduced continuously. In themselves money and means of production have none of the properties of capital; they first acquire such properties through the production of surplus value. Money and means of production lie idle during times of crisis because nowhere would their employment yield sufficient surplus value. But though they are not utilized, they still remain private property that the state must appropriate to begin state induced production.

The latter comes under the heading of neither private consumption nor capitalist accumulation. However, consumption also expands with production via the surplus value "realized" through state-induced production and through the wages of the workers employed in producing the increased output, as well as through the effects of state induced production on production in general. The final product, however, which ends up in public consumption, still embodies the totality of its production costs. If, for example, the American space research program costs $20 billion, this sum represents a portion of the state budget that must be raised by society as a whole.

It cannot be capitalized, whatever ultimate technical benefit may accrue to commodity-producing capital from the achievements of space research. It must also be taken into account that while in capitalist production existing capital is amortized within a certain period by the commodities it produces, and in this way survives to expand by way of the surplus value, under state- induced production, production of surplus value and amortization of capital can take place only through the state budget, i.e., via the surplus value extracted from the private sector.

However, state-induced production and private production are so complexly interwoven that no clear-cut line can be drawn between them. Enterprises operate in both sectors at the same time and make as little distinction as does economic theory between income coming from state-induced production and that accruing from production for the private sector. National income is calculated on the basis of total production, without regard for the origin or the destination of its individual components. But if the state budget grows more rapidly than total income, the gap between profitless and profitable production widens. The fact that in the capitalist countries about one third of the national income goes into the state budget and is supplemented by deficit financing shows that more and more of the total surplus value is being kept out of private capital formation.

Conversely, if national income grows more rapidly than the state budget and the state debt, it means that the proportion of state-induced production within total production is on the decrease, and that capitalist accumulation may be correspondingly enlarged. It must, however, be remembered that at issue here is a state-induced production undertaken to compensate for sagging private production, and not just the expansion of state spending in itself which may also have other reasons, e.g., the exigencies of war or imperialist policies.

The imperialist rivalries of nationally organized capital have also given birth to a state apparatus which, in close collaboration with the capital entities benefiting from state induced production, has established itself in a relatively independent position of power it secures by maintaining and expanding its control over the economy Thus it is not always clear to what extent continuing expansion of the state budget derives from the objective need for state-induced production and to what extent it is forced on society by special interests allied to the state.

By far the greater part of state-induced production is in the war and armaments industry, i.e., production for public consumption. This production is at once a cause and the expression of the low expansion. Specifically, on the one hand it can be claimed that public consumption detracts from accumulation, yet it is also arguable that without it economic activity would be even more depressed than it actually is. Since war and armaments have so far in fact been inseparable from capital, it is impossible to ascertain to what extent curbs on state-induced production would further capital accumulation or diminish productive activity.

Though this question may resist an empirical answer, we can nonetheless explore it theoretically. Assuming that there are no objective obstacles in the way of capitalist accumulation, which could grow by the available mass of surplus value, any loss of surplus value through public consumption would mean less accumulation. In principle the less consumption there is of any kind, the more can be accumulated. This may be the case, but not necessarily so. The profit requirements of further accumulation may surpass the actual surplus value obtained at the expense of consumption because of an existing discrepancy between the existing capital structure and the given rate of exploitation, so that only a change in the structure of capital and an increase in labor productivity can expand the value of capital. Under such conditions curbs I on public consumption would have no effect on accumulation capitalist crisis would then be needed to effect the social changes under which capital could continue the accumulation process.

The resurgence of economic activity following World War II was not due to state-induced production alone; a far weightier factor was the fact that despite increased public consumption, capital was once again able to emerge from the depression to begin a new era of prosperity. As already stated, the changes wrought in the international structure of capital by war and depression, rapid technological advances, and a cutback in consumption on a world scale led to a high rate of accumulation in several countries at once. The restoration of the war-devastated infrastructure and the resumption of capital reproduction, neglected during the war, together with a steady, relatively high level of public consumption necessitated by continuing imperialist power politics, produced the "economic miracles" in the reconstruction countries and saw American capital expand across the globe. But all this says no more than that the surplus value generated in production was sufficient to meet the needs of both capitalist accumulation and public spending.

But capitalism's regaining of its own internal dynamic had to contend with the theory of a generally static capitalism, developed during the depression, according to which full employment could only be achieved through state intervention. The fact that some countries were approaching while others, for the time at least, were enjoying full employment was proof enough for the "new economics" that the state does in fact possess the power to eliminate the capitalist business cycle. By means of monetary and fiscal policies it was possible at any time, it was asserted, for the state to transform a flagging economy into its opposite and to maintain employment at any desired level. Two ways were presumably available to do this; indirect, through easing credit terms to the private sector, and direct, through public spending made possible by deficit financing. And since the new upswing had been marred by periods of recession that were overcome by stepping up state spending, the view that a market economy could be steered by the state and that capitalist crises were things of the past set in more firmly.

If the cause of crises lies in an arrest of the accumulation process, which occurs when the portion of surplus value not earmarked for consumption is not invested in more means of production and labor power, production and employment must necessarily decrease. The repercussions on the overall workings of capital, however, go far beyond the actual cutback effected in production. The extremely intricate market relations cause the cut-backs in production to widen into a general crisis. State-induced augmentation of production and its effect on market relations can doubtless check an ensuing economic recession, provided it is a limited one easily dealt with by limited means. And indeed, the snags that have arisen periodically in the economy during the post-war period have been overcome by countervailing measures from the state. It does not follow, however, that this will continue to be the case for all time to come. It tells us only that the beginning signs of crisis have appeared in a situation in which a fall-off in private production could still be offset by compensatory expansion of public expenditures. Actually, the extremely long period of depression before World War II was followed by an extremely long period of boom whose internal fluctuations the state had been able to control in a positive fashion. These were fluctuations occurring in a general upswing and not in a general crisis resulting from overaccumulation. We have not yet had enough experience to enable us to determine whether it is within the means of the state under capitalism to cope with such a crisis, although the limits to state intervention are clearly discernible.

The surplus value from past production periods, which either remains in money form or is embodied in idle means of production because of the crisis, has lost its capital function. It can regain this function only via the production of profit. When this possibility is closed, the state is able to appropriate uninvested money and thus employ unused means of production. But this does not restore their capital function. The money and means of production thereby mobilized are transformed into products that are used up in public consumption and hence drop out of the reproduction process of total capital.

Whatever else may arise from this process, production geared to public consumption ceases being surplus-value production in the form of additional money and means of production. The surplus value of the larger capital employed is now smaller relative to the total capital. A portion of the already accumulated capital has thereby not only lost its capital function, it also ceases being unused capital. Whereas, however, the destruction of capital during a crisis alters the relationship between total profits and total capital in such a way that the reduced value of capital raises the rate of profit at the expense of the destroyed capital, in the case of state-induced production for public consumption, the profit and interest claims of the money and means of production therein employed remain unchanged - as if this kind of production was actually production for profit and as if the destruction of capital in public consumption had not occurred. Thus in the end this kind of production does not result in the improvement in the rate of profit that ensues during a crisis as a result of the destruction of capital values and the claims on the social profit attached to them; rather capital is destroyed while its profit claims, which can only be met out of the total social surplus value. are maintained.

That portion of the total profits of the private sector which accrues to capital entities participating in state-induced production must be subtracted from total profits as it derives from tax revenues; this entails a decrease in the profit rate of productive, i.e., profitable, capital and hence a setback for accumulation. However, these capital entities can compensate for their diminished profits by raising prices, thereby shifting the burden of the costs of state-induced production to society.

Thus this stepped-up public spending takes on the form of price inflation resulting from the attempt to dump the costs of combating the crisis on the population at large, i.e., the working population.

The profitability of private capital is thereby maintained without assuming a further accumulation of capital. All that is accomplished by this route is that more workers are put to work at the expense of the total income of the working population. This is achieved by inflationary means rather than by the deflationary path chosen in the past, which progressively increased unemployment. But since there are definite limits to the burdens the workers can bear, and the drop in real wages due to price inflation meets with their resistance, the financing of public spending at the expense of the working class sooner or later reaches a limit it cannot exceed. From this point onward public consumption can only continue to grow at the expense of capital.

If capital accumulation is not resumed, the crisis deepens and unemployment grows. State-induced production must then expand if it is to continue in its compensatory The effect is growing pressure on the profit rate of productive capital, which makes the resumption of accumulation ever more difficult, thereby prolonging the depression. If the expansion of state-induced production does not stop, it too becomes a factor aggravating the crisis, although it had originally been intended as a means to beat it, and indeed for a time actually did function as such. But it had this effect only with regard to total material production, without enhancing capital accumulation. It did not yield enough profits to accomplish more than an increase of production through decreasing profitability of capital. As depression continues, even this ability will be lost; as state-induced production expands, private production must decrease and, as a consequence, will lose the ability to cover increased public spending.

The cyclical movement of capital has so far prevented a crisis from setting in permanently, and there is no empirical evidence that profitless production is possible only at the expense of profitable production and is therefore limited by the latter. The point to be gained here, however, is the insight that capital cannot accumulate without sufficient profit. An increase in production without a corresponding increase in profit is of no use to capital as capital, even though for political reasons it may be of use to capitalist society. Even the immediate positive effect state-induced production has on the private sector may be cancelled by the enlarged continuation of compensatory state production. If capital does not autonomously move on to resume accumulation on its own terms, the impetus given to it by state-induced production will gradually lose its driving force, until it finally becomes an obstacle to accumulation.

Production in the state sector is tied to the profits of the private sector, and its expansion is contingent on the latter's increase. If this does not occur, the situation of the private sector can only continue to grow worse, until it makes further expansion of the state sector objectively impossible. But private capital, which still controls society even in a "mixed economy," would stop expansion in the public sector long before it reached its objective limits. State-induced production is allowed to expand only to the extent this can be borne by capital, i.e., so long as it does not call into question the continued existence and growth of capital. It may therefore only be regarded as a temporary measure that at a specific point in capitalist decline must be stopped, thereby ceasing to be a factor working against this decline.

Actually, and apart from war production, the expansion of state-induced production has taken place not while capitalism was standing relatively still but during an upswing, which was viewed as the fruit of a mixed economy. But the reality of the situation was just the opposite. The upswing resulting from the restoration of profitability was large enough so that even though public consumption continued to grow steadily, a state of relative prosperity, seen in capitalist terms, was achieved. Since the task of state economic policy was to expand lagging production, the economic upswing should have resulted in a contraction of stated-induced production; this, however, was not the case. To be sure, relative to the overall growth in production, the expansion of the state sector proceeded at a slower pace, the practice of budgetary deficits was curtailed, and the size of these deficits was reduced; the state deficit, however, continued to rise, although more slowly than before. As far as expansion of the private sector was concerned, this situation seemed to be ideal not only from the standpoint of current economic theory but also for capital itself, as well as for those with vested interests in public spending.

But the capital growth that went on independently despite relatively high public consumption remained in large measure under the influence of state economic policy i.e., its monetary and credit, if not so much its fiscal, aspects. The whole of capitalist production had long been based on the credit mechanism. But credit not only remained dependent on the maintenance of a given level of profitability, it was also limited in its expansion by state controls over money and credit, although these limits were flexible. Through credit production can be expanded beyond the limits to which it is subject if there is no credit. Thus additional state-induced production is made possible by credit. i.e., by state debt and similarly production in the private sector can be expanded by widening the credit mechanism. Through its power to create money and extend credit, the state is able to expand or contract the basis of credit in various ways. The credit volume and interest rates can in large measure be controlled, bank lending stimulated, and production accordingly expanded by a cheap money policy, by increasing the money supply, by the discount policy of the central bank, and by the "open market policy," as it is called.

The boom was accompanied by rapid growth in the money supply and in credit, which sewed in two respects. First, it helped to expand production, and second, it effected a reapportionment of social income in favor of capital. Every expansion of credit tends toward inflation, and a systematic, state-encouraged money and credit expansion is particularly inflationary. To top all this off there is also the inflationary influence of profitless state-induced production. But inflation, which at first only crept along as the boom proceeded apace, was accepted as the price that had to be j paid for economic growth and was thought to be manageable. In U any case growth with inflation was to be preferred to a stagnant, deflationary economy; indeed, it was argued, the inflation that went along with growth was only the expression of the secret, discovered by the "new economics," of permanent full employment and economic stability.

Actually, the increasing rate of inflation pointed to an internal weakness of the boom; namely, it allowed the state neither to cut off its expansive money and credit policy nor to cut back on public spending to any significant extent. Every contraction of credit and every reduction in the money supply, and indeed every decrease in public consumption, had an immediate negative effect on the course of the economy and were discarded in favor of a resumption of an inflationary policy. Thus the waves of prosperity that followed World War II turned out to be movements that depended to some extent on state monetary and fiscal policies, although in a few countries they had been able to raise general demand to the level of full employment.

Obviously money and credit policies can themselves change nothing with regard to profitability or insufficient profits. Profits come only from production, from the surplus value produced by workers. If the surplus value is sufficient for expanded reproduction of capital, a period of capitalist prosperity sets in. But if capitalist expansion must be primed by money and credit policies to stimulate demand, it is not long before it becomes clear that something is wrong with production for profit. The expansion of credit has always been taken as a sign of a coming crisis, in the sense that it reflected the attempt of individual capital entities to expand despite sharpening competition, and hence to survive the crisis. Credit has always been a means of capital concentration whenever profitability falls. Although the expansion of credit has staved off crisis for a short time, it has never prevented it, since ultimately it is the real relationship between total profits and the needs of social capital to expand in value which is the decisive factor, and that cannot be altered by credit.

It is not credit but only the increase in production made possible by it that increases surplus value. It is then the rate of exploitation which determines credit expansion. To stimulate the general demand, the expansive state-imposed money and credit policies must increase profit. If profit does not increase relative to the invested capital and increased production, yet the level of production made possible by credit is to be sustained, the distribution of the social product between capital and labor must be altered to ensure the profitability of capital. If prices rise faster than wages, then could not be extracted from the workers in production is taken from them in the circulation process. This is at once the cause and the consequence of the expansion of money and credit, so that an inflationary growth in profits appears as accelerating inflation.

To the extent that an expansive monetary and credit policy served to increase profits, it furthered capital production, although it was at the same time a sign of inadequate profitability, albeit concealed, and added to the state debt a private debt that was many times greater. The steady growth of debt could be sustained only if capital accumulation could progress uninterrupted by way of credit expansion. Once accumulation stops, the expansion of production through monetary and credit policies stops as well, and their progressive effect is transformed into its opposite. But since accumulation entails a falling rate of profit, management of the economy by way of monetary and credit policies and by means of state-induced production must eventually find its end in the contradictions of the accumulation process.

Another weakness inherent in the postwar boom was the fact that it was unevenly distributed among the various capitalist countries, to say nothing of the negative effects it had on the underdeveloped nations. Although the latter consequence was favorable to growth in the capitalist countries, in that it guaranteed a cheap source of raw materials to the developed countries, it was also a sign that the boom was not strong enough to envelop the entire world economy and thereby become general. The accumulation rate was high only in the Western European countries and Japan; in the United States it remained below its historical average, while the rest of the world for the most part stagnated. But the pace of investments promoted by government policies in Western Europe and Japan did bring about an exceptional and long-lasting prosperity. The overall standard of living rose as a consequence of a rapid increase in labor productivity and the particular structure of European and Japanese capital. Although the high growth rates hit snags from time to time, setbacks were quickly overcome. In the United States, however, full employment and full utilization of production capacity were not achieved.

The creeping inflation that accompanied the economic boom also was the vehicle that carried it along but it was also a sign of an immanent contradiction insofar as continuance of the boom was contingent on an accelerating inflation rate. Inflation is an expression of inadequate profits that must be offset by price and money policies. Therefore in the developing capitalist countries, Brazil, for example, inflation is the measure chosen to bring profits into line with the pace of accumulation, i.e., to accelerate expansion at the expense of working-class consumption, to promote exports, or to do both at once. Thus under any circumstances inflation spells the need for higher profits, whether this be the need of a particular capital entity to obtain profits or a general effort to add steam to accumulation.

Capitalist accumulation is a struggle between labor and capital, and within certain definite limits this struggle determines how much surplus value is produced. At the same time however, accumulation is capital's competitive struggle at the national and international levels to determine how surplus value is to be apportioned. Monetary policy affects both these contests. Inflation makes labor cheaper, which improves the ability of national capital to compete, although only when the inflation rates vary from country to country, which in turn is dependent on the class struggle in the different countries and on the particular economic position of each nation within the world economy as a whole. The international struggle of competition is also waged over monetary policy. At the same time, however, the bourgeoisie is interested in easing competition, so that attempts are made continually to bring some order into monetary and credit relations through international agreements.

The capitalist economy is a world economy whose existence assumes competition. Competition drives capital concentration forward both nationally and internationally. But the progressive elimination of competition at the national level only makes all the contradictions inherent in the system more acute, since accumulation, expressed in concentration, intensifies the pressure on the profit rate and hence harshens all social conflicts; in like manner, rather than being a sign of diminishing capitalist antagonisms, the international concentration of capital merely gives these antagonisms a more overtly imperialist character, as evidenced so far by two world wars and a number of localized wars.

Like the capitalist crisis imperialist rivalry is both the cause and effect of the capitalist economy and cannot be separated from capital's need to accumulate. Thus the postwar boom must not be seen just abstractly, as a consequence of capital's cyclic movement, but as the result as well of changes wrought in the political forces by World War II and the effects these changes had on international competition the boom was also in large measure determined by the rivalries emerging among the victorious powers, who were faced with the task of consolidating their conquests and further extending their positions of power.

There can be no question that the relatively rapid reconstruction of the capitalist economies of Western Europe and Japan was primed initially by American aid, offered out of imperialistic considerations; not only were credits granted, but the export potential of these countries received a powerful shot in the arm from the far-ranging imperialist ambitions of the United States. The relatively low rate of accumulation in the United States and the reduced profit rate occasioned by war and armaments production forced American capital to export capital to countries where more abundant profits awaited them, which further augmented their already inflated rates of investment. But this feverish activity, together with the unabating expansion of credit in the United States, caused inflation to spread to one country after another, until it finally became a world phenomenon.

As economic growth in Japan and Western Europe proceeded, the relations of these countries with the world market, and with the United States in particular, changed. The labor productivity gap between the United States and the other capitalist countries, which depended on the volume of capital invested and on the ends to which it was put, grew narrower, and America's dominant share in world trade shrunk correspondingly, until the United States found itself with a negative balance of trade on its hands. The bal-ance of payments had already been negative for quite some time because of the cost of imperialist politics and the initial one-way flow of capital exports. Thus European expansion was partly made possible by America's negative balance of payments and attendant inflationary monetary and credit policies. American monetary policy became an instrument of imperialist expansion not only to secure U.S. spheres of influence in world power politics but also to enlarge direct investments in other countries, especially in growing Western Europe.

From the standpoint of the world economy as a whole, it makes no difference in what nation capital is accumulated, even though from a national perspective this same process will look different. As long as capital can move freely, it invests where it expects the highest profits are to be had and accordingly stimulates general economic activity in favor of the invested capital. Since all capitalist countries export and import capital, one can only say apropos of the extraordinarily large volume of American capital ex-port that the United States merely took advantage of the existing opportunity to gain a foothold in other countries, and that this opportunity emerged from the peculiarities of the postwar situation and from state monetary and credit policies. The direct foreign investments and the volume in which they occurred only accelerated the general inflation that was already under way in the United States. Nonetheless these processes, if they did not contain the secret to the boom itself, in any event were the expression of its pronounced inflationary character.

All the ups and downs of the most recent past and present on the market throughout the world economy are traceable to these processes. It is only the market, of course, to which capital can relate and to which it must react in one way or another. It is also only market processes which the state seeks to influence in whatever ways it deems beneficial or necessary.

Yet the underlying state of things in the sphere of profitable production remains closed to scrutiny and practical action, although it is the factor that determines the course of accumulation. By its nature the capitalist mode of production precludes empirical insight into the production relations of the society as a whole, and the market becomes the point of reference for all capitalist decisions, although these decisions are still subject to the influence of processes taking place in the production sphere. They still must be implemented at the level of the market, however, on the terms set by competition, so that one is left with no way of knowing whether such decisions correspond to realities in the production sphere. Whatever the circumstances, all movements of individual capital, and hence of capital as a totality, are aimed at maintaining a state of expanding profits and hence correspond to processes in the production sphere, without this guaranteeing that they will be successful. The quest for profits is not enough to ensure getting them, and only the surplus value currently being produced to meet the expansion needs of already accumulated capital can produce profits; but the magnitude of this surplus value is an unknown quantity and is only indirectly expressed in the ups and downs of the business cycle.

The business cycle in the Western countries was, it is true, marred by inflation, but it also brought about an economic growth that in the public eye meant prosperity and aroused expectations of a continued and perhaps permanent boom. The accelerating inflation rate, however, was an unmistakable sign that to maintain the level of profitability needed to continue economic growth would require increased reliance on government expansion of money and credit, and that without these government measures, growth would slacken. Thus continued economic growth depended on state money and policies, and to clear the way for them, all the encumbrances that had been placed in its way by past developments had to be removed. The first measure to this end, therefore, was the abolition of commodity money at the national level, later to be followed internationally by the abolition of the gold convertibilitv of the international reserve currency.

Production continued to decline and unemployment to increase, while inflation proceeded unabated, until it finally became evident that the crisis-prone nature of capitalist accumulation could not be eliminated bv state manipulations of the economy. The growing inflation rate, which was but the outward reflection of a credit expansion based partly on the anticipation of future profits, was also unable to prevent the decline in real profits. Expansive monetary and credit policies only drove prices upward without notably increasing production. With profits falling capitalists were reluctant to invest and resorted to price rises to recoup their losses. The monopolies' power to fix prices arbitrarily facilitated this process, which was already contained in embryo in money and credit policies. The growing inflation rate threatened to develop into a gallop ultimately as pernicious to a capitalist economy as was a state of crisis made worse by deflation. Inflation can, of course, be abolished by reversing monetary and credit policies not so, however, the shortage of profits, which accelerates price inflation. Any restriction on the expansion of money and credit is reflected in a further decline in economic activity and in rising unemployment. Governments, therefore, are reluctant to effect a radical reversal in their money and credit policies. Since, however, the crisis is now a tangible reality despite the expansive money and credit policies, governments have a choice between two evils and take what appears to them the lesser of the two in the given circumstances. Brakes are applied to inflation by contracting credit and reducing the supply of money or by state price and wage regulations, although at a critical point the government will revert from deflationary measures back to an inflationary policy. Through applying alternative doses of deflation and inflation efforts are made to arrest the inflationary process and at the same time prevent rapid economic disintegration, in the hopes that sooner or later profitability will improve and the economic recession will be brought to a halt.

The level of integration reached in the world economy ensures that the manifestations of crisis and boom take on international dimensions, although they may appear in one particular country first. The positive effect of the European and Japanese upswing on American capital expansion was reflected, for example, in the spread of multinational corporations, with their higher level of profitability. But every downturn also internationalizes, irrespective of its point of origin. In all the capitalist countries (and not only in the United States), profits over the last five years have been lower than at any other time in the postwar period, with systematic price rises being the means resorted to in attempts to prop them up or boost them Once this process has been set in motion and further supported by government money and credit policies, prices soar cumulatively upward, affecting all capital entities alike The result is not only rising prices on finished products but also a continuing revaluation of capital, the covering of higher production costs in advance by means of capital depreciations, the application of different inflation rates in calculations to secure profits, and overpricing to reduce the increased risk to business brought about by inflation.

The cause of accelerating inflation is not a supply that lags behind demand but a shortage of profits that drives prices up quite independently of supply and demand relations. Even where demand actually is lagging, prices do not fall but on the contrary adjust to this reduced demand by rising further The need for expanding profits is so great that the supply may be reduced by contrived means, as, for example, was recently done by the international oil industry, which was able to boost its falling profits by holding back on production. Just as each individual capital entity within a country seeks ruthlessly to maintain and to enlarge its share in the contracting sum of social surplus value by pricing measures, at the international level this process assumes an even more blatant form, since the instruments of political power can also be used to supplement international competition. Thus among the first signs of a looming crisis is sharpened international competition, in which each country seeks with all the means at its disposal to secure or increase its share in world profits.

The cooling off of the postwar boom and the ineffectiveness, now becoming apparent, of the monetary and credit policies that had borne it along have brought about some extensive political changes within individual capitalist countries and on a world scale. The first measures taken were aimed at toning down competition by allaying imperialist antagonisms. One of the reasons for American opposition to the war in Indochina on the part of capital was undoubtedly the enormous public consumption, to which there seemed to be no limits and, moreover, no prospects of being offset by real profits in the future. To some capitalists, at least, the growing public spending appeared to hamstring economic expansion and reduce their ability to compete internationally. The end of the war required at least a short-term accord with the rival powers in Southeast Asia. The imperialist contradictions between Russia and China, which also bore on Asia, provided the chance for America to withdraw on the basis of the status quo, and the imperialist solution to Asian power politics was put off until some future time. It was hoped that the pacification of the world situation would relieve at least some of the more threatening signs of crisis by enabling economic relations to expand - a view that the former adversaries in the cold war shared, despite their other differences.

In market theory the removal of political restrictions on world trade should bring at least a partial improvement in the economic situation and moreover, avert a catastrophic crash that could easily plunge a politically explosive world into a third world war. But a crisis that has its origins in production cannot be prevented by measures confined to the level of trade and commerce. Indeed, trade itself becomes an aggravating factor in the crisis when each nation is obliged to tend to its own special interests in opposition to those of other countries. So it happens that the removal of trade restrictions of one kind is attended by the creation of restrictions of another kind, e.g., tariff policies, import prohibitions, the breaking of regional and international agreements, and a growing chaos in all economic relations. The internationalization of economics which the boom had promoted is forced to reverse its course, and once again priority is given to national interests, as the world economy sinks into further disarray.

All the signs of a deepening crisis are currently at hand, but how far they will develop cannot be foretold. They could conceivably assume the catastrophic proportions of the last great crisis; but it is more likely that the economy will go into a slow process of decline, since the state has not exhausted all its means of influencing it. If state measures are not sufficient to induce a new upswing, they are at any rate still capable of preventing a period of precipitous decline at the cost of the future of capitalism. There are limits, however, to how far this policy can go, and the scope of the crisis determines where exactly these limits lie.

Notes

1. Through the Istituto per la Riconstruzione Industrielle (IRI) the Italian government owns numerous financial and industrial enterprises, including Alfa Romeo, Alitalia, steel works, oil, telephone and telegraph. radio, television, and banks. IRI enterprises do not differ essentially from private enterprises. They partake of the general capital market. Shares can be bought and sold on the stock exchange.

2. The multiplier effect released through public works was mentioned by 0. T. Mallery shortly before and after World War I. he pointed out that public works not only increase employment but that this increase, by creating additional buying power, leads to additional employment ("A National Policy; Public Works to Stabilize Employment," in The Annals of theAmerican Academy of Political and Social Science, January 1919). Likewise David Friday, "Maintaining Productive Output: a Problem of Reconstruction," in Journal of Political Economy, January 1919.1. M. Clark investigated the role of the multiplier and published his results in Economics of Planning public Works, 1935.

Chapter 2: Deflationary Inflation

It is popular nowadays to distinguish between the inflation of time past and a new kind of inflation, which accordingly requires a new explanation, although in its monetary aspects inflation has the same features now as before: rising prices or the diminishing buying power of money. While its opposite, deflation, was viewed as contracted demand resulting in falling prices, inflation was explained by insufficient supply, driving prices up. Since, however, in this view it is the commodity market that determines price formation, little attention was paid to monetary policy. Money was seen merely as a veil concealing real processes, obfuscating them, but altering little in their essential nature.

This theory was also accompanied by the illusion, still lingering today, that the quantity of money in circulation in the economy has an important influence on commodity prices and that price stability depends on an equilibrium between the quantity of money and the total volume of goods. The modern advocates of the quantity theory of money also attribute deflation and inflation to a too slow or too rapid growth in the supply of money, and as a remedy to these anomalies they propose the creation of money adjusted proportionally to actual economic growth.

Thus in money theory the economic cycle is represented as an expansion and contraction of the money supply and of credit not commensurate with the real situation. But it was expected that the equilibrium mechanism of the market would ultimately steer things back to normal. The crisis of the thirties, however, which seemed to have taken hold for good, put an end once and for all to any notions of such an automatic self-establishing equilibrium. In Keynes's view, which dominated bourgeois economic theory in the years that followed, the laws of the market were no longer capable of bringing about economic equilibrium with full employment. A developed capitalist economy, claimed Keynes, made for a decline in effective demand and 'with it a fall-off in investments and growing unemployment. Although this theory was designed specifically to explain economic stagnation during the period between the two world wars, it was quickly given universal status and regarded as the last word in the science of economics; to avoid the deflationary state of the depression and to restore economic equilibrium with full employment, state measures were needed to stimulate overall demand.

Central manipulation of the amount of money in circulation and of the amount of credit was not sufficient for such purposes, claimed Keynes. Instead, fiscal means, e.g., deficit financing of public spending and adjustments in the exchange rates, were needed. The inflationary monetary and fiscal policies that such measures entailed would prove to be what was needed to beat the crisis. However, an inflationary course must not lead to a demand that exceeded what the production capacity could supply. It must come to a halt when full employment was achieved in a new price equilibrium.

Every capitalist crisis, no matter what its imputed causes, manifests itself in a declining accumulation of capital. The share of social production earmarked for expansion is considerably reduced or even fully eliminated, curtailing total social production in the process. Seen from the restricted view of the market, however, this process appears as overproduction of goods or insufficient demand. The depression that resulted was a deflationary process which affected both prices and production, but which at the same time brought about substantial changes in the economic structure and prepared the way for a new economic boom. The depression became an instrument for overcoming economic crisis, and although not deliberately encouraged, it was passively allowed to run its course.

Inflation implied the creation of money by the state, which impaired the price mechanism. This was seen as a violation of the laws of the market, caused not by factors inherent in the economic system but by an arbitrary monetary policy. Inflation was resorted to in order to finance wars beyond what was possible with tax revenue alone or in order to eliminate excess state debts and hence indebtedness in general. However, in economic crisis situations there had been a general reliance on the restorative effects of deflationary depression until the twentieth century.

As capital grew it created obstacles to its own further expansion. Its periodic crises became more and more oppressive and persisted long enough to create a real danger that the deflationary process would lead to social upheaval rather than to a new boom. To prevent this from happening, state economic interventions were in order in the great crisis that followed the 1929 crash; their theoretical justification came later. This interventionist policy sought to achieve by inflationary means what seemed no longer attainable by deflationary methods.

Following traditional theory, Keynes assumed that the interest rate was dependent on the quantity of money in circulation. An increase in the money supply would decrease the interest rate and spur new investments, which in turn would increase employment and raise prices and profits. Since the state had the power to create more money, it was a matter of government decision whether the way to economic recovery would be through lower interest rates. However, the profitability of capital had already fallen so far that even a reduction in interest rates would not be sufficient stimulus new investments. It would therefore be necessary to make up for the defective private demand by creating more public demand. However, since an increase in public spending by way of taxation would cut even more into the profits of the private sector, it would have to be financed through state deficits.

Deficit financing would increase the amount of money in circulation without necessarily leading to inflation. The technique, of course, was not to print more money, which would depreciate the currency, but merely to expand state credit which would absorb idle private capital and finance the increased public demand. This added demand would, it was expected, stimulate the economy as a whole sufficiently to bring it out of the depression and into a boom, which in turn would enlarge the state's tax revenue to such a degree that it would be able to pay off its depression incurred debts in a new period of prosperity.

In the light of bourgeois economic theory, and especially its theory of money, it seemed quite plausible that by increasing the money supply and public demand simultaneously, an interrupted process of accumulation might be set into motion again. The co-ordinated employment of monetary and fiscal policies would not only counteract the deflationary trend of the crisis, they would in addition initiate a new period of upswing, which although containing inflationary tendencies, need not degenerate into a real inflation as long as unused money and real capital were still available. The specter of inflation would loom only if anew disproportionality arose between the means of payment and commodity production. But this was a real possibility only when full employment was reached, and then it could be combated by state-initiated deflationary policies. In short, it was imagined that a theory and practical policy had finally been found which would place the economic cycle under conscious state control.

Bourgeois economics begins and ends with market relations, and hence it can only obliquely touch on the production processes underlying market events. These processes it sees as being determined by demand. In Keynes's theory it is a relatively declining demand for consumer goods that brings about a decreasing demand for capita] goods. Under such conditions further investments can only reduce profits, and for that reason they are not made. The way back to full employment would require, first, improving the profit rate of private capital, and second, filling a chronic lack of investments by stated-induced production. In the light of the experience of the great economic crisis, the second of these measures seemed to be a precondition for the first, although it was still not clear whether state-induced demand was a temporary or permanent necessity in a modern market economy. Keynes himself thought that the future of capitalist economy depended on increasing state control.

In the bourgeois conception the economy appears as a circular process in which total income must equal total expenditures. It was therefore immaterial what specifically went into total income and total expenditures. The social distribution of income is presumed to be determined by the various contributions of the different factors of production to total production. Since, however, not all income is consumed, the cycle can only really be completed when the saved income is reinvested. The upshot is that state-induced production, regardless of what ends it may serve, is able to reduce or eliminate completely any discrepancy that may arise between total income and total expenditure. But this requires that the state be given the power to dispose of the saved -but not invested - capital. In its hands money capital that was not being used to expand real capital could restore equilibrium to economic cycle.

With this conception the bourgeois world deprives itself of any realistic insight into the economic process in general and into the problem of inflation in particular. Just as it does not distinguish between social production as such and specific capitalist production, so too it does not distinguish between productive and unproductive capitalist production. Any kind of production for which there is a demand on the market enjoys equal status as far as it is concerned, and any kind of demand appearing on the market finds its match in production. It does not distinguish, therefore, between demand created by capitalist production for profit and demand created by public spending. The latter, too, is a demand that private capital can meet with an adequate supply and reap the profits accruing therefrom. The growing state debt aside, the economy is revived by the increased public demand, which in turn has a positive influence on private market demand. The growing amount of money in circulation and expanding income are balanced by an undifferentiated and expanding production on the expenditure side of the ledger, which could partly or wholly eliminate unemployment.

The only vulnerable point in this description of events was the growing public debt; for this there is no equivalent in the production sphere, since the additional government demand consists of goods and services that enter public consumption and therewith impede the expansion of real capital in proportion to their magnitude. The mere expansion of production without a proportional increase in profit is equivalent to a partial destruction of capital, since some of the capital used ceases to be productive, i.e., ceases to produce additional capital.

The inability, whether conscious or unconscious, of bourgeois economic theory to understand this point forces it to entertain the ungrounded and empirically unverifiable expectation that the acceleration principle, as it is called, and the multiplier effect of new investments can bring about the desired economic revival in which total production will grow more rapidly relative to state-induced production, so as ultimately to bring state-induced demand back down to its normal level. In any event, the growing public debt entailed no risks as long as total production increased more rapidly than did the public debt.

In contrast to the autonomous expansion of capital, however, state-induced expansion of total production is characterised by the fact that a portion of the profits on which it is based derives from public loans rather than from increased production.

If this kind of economic pump priming has become a necessity, it is still limited by the limitations of state credit. As state-induced production goes into public consumption, it cannot serve accumulation; and as the profits accruing to private capital from state loans are not newly created but merely represent already existing money capital, only the share of total profits obtained in the private sector is available for capital accumulation. Not only is the profit accruing to private capital from state-induced production a part of total production, but the share of total production that appears to generate this profit is also lost to capitalist accumulation by being allocated to public consumption.

Thus public spending means a growing public debt, which ultimately can only be financed and paid off by profit-creating capital. The profits of earlier production periods, which in the sterile form of money capital have lost their function as capital, are eaten up by state-induced production and appear to the entrepreneurs and creditors engaged in state-induced production as profits and interest. This process is both real and illusory. It is real for individual capitals but illusory from the standpoint of the social capital, since the profits that fall to the individual producer do not owe their existence to production itself but to the consumption of money capital placed at the disposal of the state. Thus in bourgeois theory the elimination of a state budget deficit is feasible only on the expectation of some future surplus, i.e., a prosperity that would allow the state debt to be paid off. This would require future profits that must not only be adequate to the further demands of accumulation but, in addition, large enough to replace the money capital used up in public consumption. If this capital is not replaced, it would mean that some capital had been expropriated by the state for public ends. From the standpoint of capital as a whole, this would mean that some existing capital had been swallowed up by the crisis, and state deficit financing would therefore have achieved the same result as capital destruction achieved by deflationary depressions in the past.

In contrast to deflationary depression, however, this process appears outwardly as expanding production The more production expands, the more must the profitability of capital be backed up by state deficits, i.e., by more loans. But since idle money capital is a given finite magnitude, the process breaks down at the point where the state must be refused further loans. At this point the process could be continued only through an arbitrary proliferation of paper money, until it finally erupted into open inflation.

Deficit financing is also an inflationary process, although it can be held in check by the limitations imposed on the state debt. It is inflationary because the social profit corresponds to an increased production only apparently; in reality it is insufficient. Capital that lies idle because of insufficient profitability enters capital circulation through the monetary effects of the public debt, where it helps to expand production, but not profits, proportionately. In relation to the total capital, of which money capital is a part, the increased amount of money in circulation stands in contrast to a profit mass out of proportion to it, since a portion of accrued profits derives not from production but from a transfer of already existing capital to the profits column.

Since, however, capitalist economy is production for profit, which must be measured in terms of total capital and must be adequate to the needs of capital accumulation, for the individual capitals the discrepancy between expanded total production and the total profits actually produced manifests itself as a fall in the rate of profit, which, however, can be offset by commensurate price increases as long as production is expanding and competition is hence not as sharp. While neither profit nor interest accrues from state investments, as a part of total production, the individual capitals, participating in state-induced production, do yield both; this contradiction resolves itself, on the one hand, through a different redistribution of total profits among individual capitals, and on the other hand insofar as the competitive averaging of rate of profit still asserts itself through a fall in the general rate of profit, which then is offset by rising prices. The social costs of state-induced production are then distributed over the population at large in the form of price inflation.

The rise in commodity prices occurring hand in hand with expanding production is thus the capitalist response to the pressure put on the general rate of profit by state-induced demand. State intervention is, of course, itself a crisis phenomenon and would not occur were capital capable of expanding on its own. But like the crisis itself, this "crisis solution" is marked by the reduction of profits, although it manifests itself in rising, not falling, prices.

It an "excess" of capital unable to find profitable employ-ment appears as a general shortage of money, and hence as deficient demand, then profits fall along with commodity prices. The fall in prices can be arrested and its course reversed by state interventions. In the past the approach was to reduce supply, i.e., use-values were not produced or were simply destroyed. However, since it is not supply and demand which, along with prices, determines the level of profits, these measures proved ineffective. The problem had to be tackled from the profit side.

At any price level enterprise profits represent the difference between costs and market prices. Every firm seeks to reduce costs to maintain its profits. The costs a firm can influence directly are the costs of wages: it may simply lower them, or it may try to improve the productivity of labor. The magnitude of the average rate of profit is determined by the total surplus value created by labor in relation to total capital. A crisis implies a decline in the' general rate of profit, which for the time being renders the further growth of total capital inadmissible. Under such conditions every enterprise intensifies its efforts to maintain, and where possible to increase, its profits by reducing costs. This sharpens competition, which in turn further obstructs restoration of the required level of profitability and prolongs the depression and the destruction of capital. Nonetheless, even as capital as a whole is contracting, the strivings of individual capital entities bring about an expansion, if at a slower pace, of total surplus value. The larger mass of surplus value relative to the reduced value of total capital raises the rate of profit, and further accumulation becomes possible. Firms that cannot enlarge their profits stand on the brink of bankruptcy. On the other hand, surviving capital entities have a broader field over which to range. This process effectively amounts to the concentration of capital and is itself an instrument for expanding profits.

These so-called microeconomic changes have their repercussions at the macroeconomic level, and through the instrumentality of crisis they restore the profit rates needed for further capital accumulation. If this were not so, the crisis cycle would be incomprehensible. State interventions into the economy, on the other hand, are applied directly to the macroeconomic level, to find a shortcut to the slow-paced regulatory results of the micro-economic process. Their aim, too, is to increase profits, but they hope to achieve this through the circulation process. Keynes himself saw that to reduce wages by inflationary means was not only easier, it could also be accomplished more generally than if one had to rely on the independent action of numberless individual firms.

A general price rise, along with a slower rise in wages, must increase profits so long as at the same time the general demand is also increased through deficit financing of public spending. Without this last measure, designed to blunt the edge of competition, the wage reductions might readily prove to be unsatisfactory and the economic pinch grow worse.

Otherwise commodities (including labor power) would only be tagged with higher prices without the profitability of capital having been changed in the least. Since, however, not all commodity prices rise at a uniform rate, and moreover, it is extremely difficult if not impossible for the price of labor power to keep pace with the general price rises, price inflation ultimately results in an improvement in capitalist profitability.

Thus by means of an inflationary money and pricing policy, both production and income distribution are modified, because the ratio of wages to profits shifts in favor of the latter. This is controlled inflation when the determination and limitation of the amount of money in circulation is left to the discretion of the state. Controlled inflation, originally conceived as a means to get through a crisis, soon became, at least for economists, a precondition for economic growth as such. Even if a steady state of full employment were achieved, demand could be further expanded, they said, by a "dampened inflation," with the effect that debts would suffer a steady devaluation, thereby spurring investment.

The English economist Phillips undertook some statistical investigations in an attempt to demonstrate that a close empirical correlation existed between the employment level and inflation; the result of his efforts subsequently became one of the bulwarks of bourgeois economic theory under the name of the Phillips curve.[1] This curve shows that a rising level of employment was always accompanied by a rise in prices, while growing unemployment was accompanied by a price decline. Thus it seemed that full employment went hand in hand with inflation. Since the employment level depended on demand, it would follow that inflation was a consequence of rising demand, which drives prices, along with wages, upward. Demand-induced or wage inflation would rule out full employment with price stability, although it should allow the option between combating inflation by means of unemployment or combating unemployment by means of inflation.

Although the significance of these questionable statistical findings, for which no theory was ever offered in explanation, was disputed, they did, however, offer a demonstration, if a somewhat troubled one, of the efficacy of state economic controls. The goal was no longer economic equilibrium with price stability but the restoration of an "inflationary equilibrium" in which inflation rode the back of full employment.

Still economists considered the social costs thereby incurred to be a small price to pay for a growing, full-employment economy, especially if inflation could be kept within socially optimum bounds by skillful manipulation of the labor market. It could not, however, be determined whether the wage increases that were so evident a part of prosperity were matched by price rises. But no statistical demonstration is needed to show that wages improve as the demand for labor increases. Wage increases, however, are kept within limits by the industrial reserve army, which never completely disappears, and by the need for adequate profitability - an indispensable condition for accumulation and hence for a rising demand for labor. The simple fact that capital accumulation will take place during a period of prosperity is proof in itself that capital has maintained its profitability despite rising wages.

An economic boom not only drives prices up, it also improves the productivity of labor, which actually should lower prices. According to bourgeois theory, under conditions of general competition, if production costs are reduced, prices, including the price of labor, should fall as well, without real wages necessarily being diminished in like measure. More consumer goods should mean lower prices, so that, although money wages should decline, buying power would remain intact. If wages did not decline, or if they declined more slowly than the general price level, this would be at the expense of other factors of production. But then economic equilibrium, supposedly sustained by the price mechanism, would be upset, and either wages would have to be forced downward or the prices of goods raised to restore it. In this view, therefore, price inflation is ultimately the result of a faulty wage policy.

But the illusion of a pricing mechanism kept in equilibrium by general competition was soon discarded, to be replaced in the bourgeois camp by theories of monopoly price fixing and state intervention. Yet monopolies themselves were held only partly to blame for monopolistic price formation, namely, where price fixing exceeded the average level of profit. But because monopolies were able to reap excess profits through price fixing, they could also afford to accept monopolistically fixed wages, which increased costs. In this way monopoly capital and monopolized labor worked together to drive prices up. Once this demand, wage, or cost-induced inflation had taken root, it would accelerate steadily unless it was arrested by state intervention. The answer to inflation was thus a price and wage policy that would restore stability.

State control of prices and wages could, at least in theory, curb inflation without thereby relieving the conditions that had led to inflation. For if capital is to have a free hand to expand itself, it must have sufficient profits. in a monopoly-dominated capitalist economy, capital accumulation must take place through the monopolies. Monopoly profits reflect the need for profits higher than those obtained under conditions of competition. Monopolies ire the outgrowth of progressive concentration and centralization of capital through competition, but neither they nor competition can alter the given mass of profit. Neither form of competition, monopoly or pure, does more than distribute total social profit. A price and wage policy that made monopolistic profit impossible would also undermine capital accumulation.

Monopoly profits come from circulation, not from production. Of course, capitalist excess profits come from processes in production sphere as well, when there is an above-average rise in labor productivity; the reduced costs then enable firms to earn higher than average profits on their products. But this form of excess profits is only temporary and disappears again when the improved production methods become more general. Monopoly profit differs from this form of continually vanishing and reappearing excess profit in that under monopoly, competition has been largely abolished. A monopoly profit rate is achieved through control of prices. in order, however, for profits to multiply of themselves, the production relations between values and surplus value must shift in favor of the latter. Profits must be produced, and it is only those profits actual produced that determine capital accumulation and accordingly the state of the economy in general.

If the progressive monopolization of capital is a reflection of and response to the increasing profit difficulties of accumulation, it is clear that the partial elimination of competition can hardly be expected to increase social profit. Monopoly profits are created at the expense of individual capitals still caught up in competition, which forces them also to raise prices to avoid losses. Thus all prices become in a sense more or less monopoly prices, although the degree to which this is so will vary widely, which indeed provides the whole process with some "sense"; namely, the reapportionment that it effects in social production in favor of capital expansion. Nor is any of this contradicted by the observation, often heard, that monopolies impede rather than promote capital accumulation, as supposedly evidenced by all the idle production capacity. But this argument says no more than that during periods of economic stagnation, monopolies strive to keep themselves alive at the expense of weaker capital entities and at the expense of the population at large. To reproduce itself as capital, monopoly capital must also accumulate; and it therefore endeavors, through a monopolistic price policy, to effect a further division of profit and wages in circulation to add to the primary separation between wages and profit in the production process.

Although monopoly price formation must, like capital accumulation, arrive at a dead end, it has at first some positive effects. Like the spurious profits generated by production induced by public spending, monopoly profits stimulate the economy precisely because they are obtained by the roundabout way of price inflation. Thus, on the one hand, we have state-induced production, and on the other, the need to promote capital accumulation by way of further monopolization: in either case the result is inflation.

After World War II bourgeois economics deluded itself that it not only had discovered the secret of crisis, but also that it possessed the means to nip any further crisis in the bud; the expansion of capital, therefore, which was taking place largely on its own momentum, certainly was not designed to undermine the conviction that any economic recession could be countermanded with the proven anti-cyclical measures. This conviction persisted until the advent of deflationary inflation, where growing & unemployment was accompanied by an accelerating rate of inflation.

The first response to this situation was almost automatic: the Keynesian tactic of a wage freeze. Together with high interest rates, this freeze artificially maintained prices, reduced the profitability of capital, and hindered its expansion. The frozen wages of depression stood in contrast to the rising wages of the "full-employment" period, which were blamed for the "wage-price spiral." It had, indeed, been acknowledged for some time that full employment could have inflationary effects, but they were, it was argued, the signs of prosperity and should be seen in a positive light. That things had actually developed differently was due not to the system itself but to factors stemming from outside it, namely, the irrational mania of the workers to get more out of the system than was in it.

This understandable and widespread nonsense,[2] which of course from the viewpoint of capital makes quite good sense, would not even be worthy of special comment were it not often encountered in supposedly "leftist" explanations of the crisis.[3] Under conditions of full employment, whether brought about by the autonomous movement of capital or by state-induced production, or both simultaneously, it is obviously more difficult to cut back wages or prevent their rise. It is also clear that the organized workers are able to improve their wages through economic struggles. Finally, it is evident that under such conditions capitalists seek in some cases to avoid conflicts by granting pay raises, which they can then recoup by raising prices correspondingly. Nor is there need to dispute that the successes of organized labor in this domain also often enable unorganized workers to improve their situation as well: in a period of boom wages are generally able to follow prices upward.

But in a period of recession profits decline. If wages do not fall in pace with profits, the depression deepens. To get out of depression it is not enough to bring the fall in wages in line with the fall in profits; profits must be augmented at the expense of wages. n the past in crisis situations, the heightened competition among workers for jobs led to a reduction in wages. The institutionalization and monopolization of economic labor organizations, it is claimed, has now made this impossible. For the bourgeoisie even the defense of existing wage level sufficient to explain both crisis and inflation.

It is quite possible and indeed undoubtedly also often the case, that a wage policy favorable to capital cannot be put through. In any event, bourgeois statisticians have no difficulty proving that both money wages and real wages increased and often exceeded the increase in productivity. But other statistics exist as well showing that what workers gain in wages is taken from them again later in the circulation process.[4] Whatever else such statistics may mean,, they are no acceptable empirical demonstration that inflation is due to wages, or that the opposite is the case. First, price relations tell us nothing about the value and surplus value relations underlying them; yet in the end they determine the state of the economy Second, profits may actually be higher when wages are also up than when they arc low if the share of surplus value in the total value of production is sufficiently large Indeed, this surplus value rests not only on the extremely limited statistically discernible increase in labor productivity, it also depends on the total surplus value produced on a world scale in proportion to world capital as total capital and for this there are no statistics available even apart from these considerations, however, the very existence of an economic boom demonstrates that however wages go profits increase more rapidly than he share of labor in the social product True, the postwar boom was accompanied by creeping, though uneven, inflation[5] from the very outset But the reason for this lay not with rising wages which went beyond the increase in labor productivity, but with the fact that the boom and its continued existence were possible only because of inflationary price policies, which, moreover, had over a relatively long period of time been used liberally and effectively to maintain the wage profit relation necessary for economic expansion. But why has this accumulation period, in contrast to earlier booms, been so consistently inflationary? In the economic cycles of the past century, every crisis was preceded by the inflationary phenomena of a heated up economy. Wages, prices, and interest rates rose. A wide expansion of credit concealed a decline in profitability that had already begun, thereby delaying the end of the boom.

In other words, capital now "accumulates," though profits are inadequate, without this at first being evident owing to the mechanism of the state debt. There is no direct pressure to reduce wages, since the profitability of capital can remain at a steady level even as wages rise as long as as demand is sufficiently inflated by state-induced production.

If capital were unable to increase its profitability on its own, the state-induced upswing would soon have to come to an end. An autonomous expansion of profit, however, is possible only by way 'of an increase in labor productivity, i.e., a higher rate of exploitation of labor, which relatively depreciates labor's value. As this is difficult to achieve under full-employment conditions, capital attempts to obtain the profits it requires for accumulation by way of price formation. The result is the same: a growing share of total production falls to capital, while proportionately less goes to the work force.

Not only does the relationship between wages and profits change, the distribution of the social product generally shifts in favor of capital accumulation The social layers with fixed incomes, which find it difficult, if not impossible, to adjust to the inflationary trend, must give up more of their income to capital. The savings of the "little man" are eaten up progressively as the value of productive capital rises in pace with inflation. It was this process of creeping inflation which contained the secret of prosperity. The disadvantages of inflation seemed for the time being to be offset by the advantages of economic boom.

Although the dependence of capitalist prosperity on capital accumulation is immanent to the system, it is not recognized by bourgeois economic theory. For bourgeois economists inflation is caused by a demand in excess of production, or even by the immoderate claims of the workers, although the very universality of inflation is a patent contradiction of this view; indeed, inflation plagues even countries with extremely low wages, where there is no monopoly of labor and where demand lags far behind supply. Inflation occurs in depressions, where one would expect deflation. The international character of inflation is proof enough that inflation involves more than merely the erratic consequences of high wages in a few countries.

Now, however, 'when inflation and crisis exist side by side in the leading capitalist countries, the contention that inflation is a consequence of full employment and demand outstripping supply is no longer tenable. The only thing left to blame, therefore, is high wages. And despite all the monopolization of labor, or perhaps even because of it, the bourgeoisie still finds rising unemployment a good taskmaster. Wage contracts, often long term, have with a few unimportant exceptions made it impossible to counteract the burden of steeply rising prices or to make up for past omissions through wildcat strikes; all the more reason, therefore, to take advantage of the all-pervasive depression to reap inflationary profits. One must, so one hears in quite a number of trade unions, face the facts: inflation eats away at any wage rise, making continued demands meaningless. What is now necessary to get out of the depression is a responsible wage policy, i.e., capital must be given the chance to regain its lost profitability.[6]

It is of course clear that if wages are down, prices can be reduced; but although possible, ,this need not become a reality. Prices depend on other things besides "market relations" and "factor costs," e.g., indirect taxes, subsidies, stabilization programs, and monopolistic manipulations. Even where production is steadily declining, where there is mass unemployment, and where wages are at starvation levels, prices can still continue to climb into the blue beyond; and indeed in the past they have done so, with the ultimate result that inflation degenerates into hyperinflation. Even before inflation gets out of control, depression, which drives wage costs down, is not sufficient to put an end to rising prices. In any event the most recent anti-inflationary policies have had very disappointing results, which moreover are all the more questionable in tat they have led to situations compelling a recourse to inflation to keep the social fabric intact.

State deflationary or inflationary policies are not measures to control the economy so much as reactions to processes that ,are already beyond control. The real development of capital is determined by the law of value, i.e., capital profitability and capital accumulation. State interventions are aimed merely at superficial market phenomena whose root causes are to be found in the production sphere, that is, in production relations. State reactions are therefore just as blind as these processes themselves; if they coincide at all with the events underlying developments on the market, it is by pure chance.

State interventions may fail to measure up to expectations, or they may lead even to adverse results. Whatever the case, the theories associated with them are discredited and therefore lose their ideological function. With no explanation for the present inflation forthcoming, the only thing left in store is a regression to an earlier standpoint, already abandoned once: namely, the empty hope that the equilibrium mechanisms of the market will turn out after all to have some clout left in them. Specifically, it is now asserted by some that all state intervention into the economy should be rejected, with perhaps the exception of "correct" monetary policy, such as advocated by Milton Friedman, and to opt, once again, for a cure "by way of depression in order to reach a new boom. It is said the idea that the prevailing inflation finds no explanation in economic theory is pare nihilism. Likewise, the idea that it cannot be ended. All that is here required is a consistent monetary and fiscal policy, which curtails for a considerable length of time economic activity. Here of course lies the difficulty, namely, the necessary political determination. The responsible authorities have to make up their minds as to whether or not the majority of the population is ready to make the required sacrifices.[7]

Thus all the old disproven and discredited theories are revived to explain inflation and are expected to provide the key to its solution. The facts of the present inflation must be completely overlooked in the process, however; this inflation, like each of its predecessors, is no accident hut the result of a quite definite economic policy. Inflation must be created, even if under the pressure of economic and political processes that originate not in conscious acts hut from a compulsive need to accumulate capital.

World War I destroyed the customary world market relations as well as the relations among the national currencies, which were based on the gold standard. Under the gold standard fluctuations in the value of each individual currency were held within very narrow limits. If a nation elected to adopt inflationary means to combat an economic downturn, it had to free itself from these restrictions. Once the gold standard was abandoned, a monetary policy relatively independent of the world market could be adopted. But inflation remained withal a national affair that could be dealt with or not by individual governments as they saw fit. The different nations have thus tried to solve their profit problems in different ways, and inflation acquired a distinctly international character only after World War II.

World War II put a temporary end to capital accumulation. Half of international production was production for public consumption, which devoured both men and materials. Profits were written as state debts. To avoid an inflationary surge, rationing and forced saving were the policies adopted, although the rigor with which such measures were applied varied from one belligerent country to another. At war's end the world was not only a different place, it was totally impoverished. Only the United States, which was the least touched by the ravages of war and which even before the war had already assumed the number one position among the world's capitalist powers, was able to resume the accumulation process on the basis of an essentially unchanged capital structure. The other industrial countries had to resume again from a much lower level and had to go through a long period of accelerated accumulation before they once again regained their ability to compete. The restoration of the world market and of currency convertibility forced a series of currency reforms, often quite radical, and the Bretton Woods agreements, concluded while the war was still in progress, introduced a modified gold standard.

The postwar period witnessed a growing internationalization of capitalist production, which picked up steam rapidly and stimulated world trade. The autarchic tendencies of the pre-war period, when each country endeavored to find a way out of its own problems at the expense of others, even to the point of imperialist wars of conquest, came to a temporary end in post-war events when the United States assumed hegemony over the world market. The "free world market"' was reborn out of the expanding American economy, helped along by the Marshall Plan and the export of private capital. Capital that could not be invested with adequate profitability in the United States itself found better conditions for value expansion in the nations engaged in reconstruction.

Until August 15, 1971, the international monetary system was based on the dollar, which was itself linked to a fixed price for gold, and the parities of other currencies were based on it. With other currencies tied firmly to the dollar and the dollar a reserve currency, the United States could settle its international payments obligations by expanding the dollar reserves of other countries. As long as the dollar's gold backing was felt to be secure, the export of dollars stimulated the world economy. Although the Americans acquired whole industries and national concerns developed into multinationals, these corporations were not only tolerated, they were even coveted as a means to get the European economy moving again. Between 1950 and 1970 direct U.S. investments increased tenfold, and in value terms the output of the multinational corporations exceeded total American exports by more than three times. This was part of the process that, together with the high accumulation rates attained in Europe, produced the long period of Western prosperity.

Since U.S. production made up approximately half of the total production of the capitalist world, changes taking place in its domestic economy were bound to make themselves felt throughout the rest of the world. To attain profit rates adequate to the needs of further accumulation, the share of American capital in total world production and in world trade had to be enlarged. This, of course, was true of all capitalist countries. At issue was how the surplus value produced worldwide was to be divided up. The postwar situation offered American capital a special opportunity to increase its share in world profits and at the same time put the devastated world economy back on its feet.

The war had also created new state capitalist countries that were very difficult to bring into the "free market economy" and in any case were anything but conducive to the expansion of private capital; hand in hand with the restoration of Western capital, therefore, went the attempt to contain the expansion of state-capitalist countries. The postwar period evolved in the atmosphere of the cold war, inaugurated by the first test of power, the Korean War, whose outcome remained indecisive.

The cold war laid claim to a large portion of public consumption. State debt, which had already grown to extreme proportions, grew further, if now more slowly and within narrower limits, and placed the profitability of capital under pressure. Originating in the United States, inflation pursued its onward course, until it finally embraced the entire world. It is impossible to say whether the postwar boom was responsible for the full, or near-full, employment achieved in the different countries, or to what extent this had continued to be dependent on state-induced production. In the United States, in any event, production capacity was never fully utilized at any time throughout this entire period, and unemployment stabilized at around 4 percent of wage earners. World-wide, however, private capital expanded rapidly thanks to the rapid increase in labor productivity, an accelerating capital concentration worldwide, and an inflationary price policy.

However, one element contributing to the economic boom, the accompanying inflation, also revealed an inner weakness behind the outward prosperity, a weakness, moreover, that also emerged in the fact that this prosperity did not take hold in equal measure in all countries. It is of no importance, if it can be ascertained at all, whether it was the extremely high costs of imperialist policy which put the accumulation rate in the United States behind that in the other expanding countries, or whether this would have occurred in any event. However it may be, it is useless even to pose such a question, since imperialism cannot be separated from nationally organized capital. Since, however, public consumption always detracts from accumulation, the continuation of vast public spending necessitated by imperialist policy only made inflation worse.

How true this is becomes evident when we note how the average rate of inflation has accelerated since 1965. Because the American economy was already relatively stagnant, the only means of financing the costly war in Indochina and the ever growing demands of an imperialist world policy was more deficits and hence more inflation. As long as exchange rates were fixed, the growing inflation rate had to extend itself to other countries. The American balance-of-payments deficit continued to grow, enlarging the dollar reserves of other countries, and with it came more inflation.

Since a U.S. deficit meant a surplus for other countries, they initially felt no pressing concern to counter the accompanying inflationary tendencies, although American deficits in large measure meant a reduction in American, and hence in world profits. The growing dollar reserves of European countries helped to finance the American deficit, which meant an internationally accelerating inflation rate, but also a steady depreciation of monetary reserves. Under these conditions international competition, which also is fought out by way of monetary policies, could affect the diverse inflation rates, but not inflation itself.

For a capitalist economy the ideal state would be simultaneous domestic and external equilibrium, with stable prices and an even balance of payments. Keynes's theory' essentially retained this ideal picture, except that it proposed to achieve this equilibrium through state interventions. While, however, domestic equilibrium is dependent on national monetary and fiscal policies, the external equilibrium of all countries would depend on the national monetary and fiscal policies of the U.S., as long as the world monetary system was based on the dollar with fixed currency exchange rates. Of course, this meant that the economic independence of every other country' was largely undermined. Attempts to check inflation domestically would be at the price of impairing a nation's capacity to compete at the international level and hence could not be very extensively undertaken. Thus economic control at the national level was greatly impaired by the capitalist integration on the international scale.

As a world wide phenomenon inflation was evidently a product of the accumulation difficulties due to the peculiarities of capitalist postwar expansion. The inflationary course concealed these difficulties, but it did not eliminate them; and although it was largely caused by the specific situation in the United States and was further tied in with the dollar's status as an international reserve currency, the breakdown of the Bretton Woods system and the return to free or floating exchange rates has demonstrated that there was more to inflation than the disintegrating effect of an international monetary system made obsolete by the growth of the world economy. Indeed, the system of flexible exchange rates has had no effect at all on the inflationary course.

The worldwide economic integration of national economies, and particularly of their capital markets, internationalized capital movements and price relations. World trade and the creation of international capitalist corporations made inflation a worldwide phenomenon. The increase in surplus value by way of inflation is facilitated by state monetary policy without being directly determined by it. No simple and obvious relationship exists between a country's monetary policy and that policy's economic repercussions, which may be modified extensively by relatively independent, autonomously unfolding economic processes. Once inflation gets started, however, it continues its course in relative independence of anything governments may consider doing, not only by way of price rises, which accelerate it further, but also by means of the greater involvement of international capital markets, the creation of additional sources of money and credit - such as the Euro dollar market - or even by the simple expansion of commercial credits. In this way inflation disguises itself as a shortage of investment capital, an insufficient liquidity, which seemingly cannot be satiated despite the inflationary increase in the money supply.

The large capital concerns still try to increase their share in total world profits by acquiring direct control of major shares of world production in addition to the profits they secure for themselves by the inflationary route. Such procedures are no more than capital concentration by way of international competition. In the process, however, capital markets are also internationalized, which means that they are no longer under any government's control.

For instance, government restrictions on the export of capital to firm up the American payments balance were largely ignored because capital could be gained in the Euro-money and Eurocredit markets.

The Eurodollar market arose initially from the activities of U.S. banks outside of the United States. Over the last ten years their deposits abroad have grown from $10 to $185 billion. Other currencies were also traded, but the dollar predominated, representing 70 percent of total deposits. Apart from private credit transactions, the central banks of a number of countries also invest excess or unwanted reserves in the Eurodollar market or borrow from it to bridge over payments difficulties. The Eurodollar is preferred because it is under no government controls and operates with no reserve regulations, and hence can offer better terms to both borrower and lender.

Although significantly smaller than the American capital market, the Eurodollar market is still larger than the capital markets of other countries and is therefore able to avoid or find ways around government monetary and credit policies. Since it consists mainly of dollar deposits, there is of course a close correlation between the creation of money in the United States and the expansion of Eurodollars. While in the national banking systems the extent of the multiplier effect of any additional supply of money is twofold or threefold at most because of reserve regulations, the Eurodollar is under no such restrictions. The multiplier effect of the Eurodollar thus permits a much broader expansion of credit and contributes further to the purely speculative character of capital movements, as well as to the inflationary trend.

With inflation the price of money also rises. Since interest rates, however, are dependent on the rate of profit, they are able to contribute to inflation only slightly. Higher interest rates are not a sign that money has become dearer; rather they indicate that money has depreciated in value. The real interest rates usually remain unchanged, augmented only by the existing and expected inflation rates due to general price rises. Nonetheless even relatively stable interest rates are a burden for capital when profits are declining. Committed capital, which does not have the power to set prices monopolistically, can also find a steady interest rate intolerable. Thus under both inflationary and deflationary depression, bankruptcies multiply.

The cost of credit, whether high or low, should not be ascribed too much significance. Interest rates, which are included in capital production costs, constitute only a small percentage of total costs. In addition firms have long financed their own capital formation from their own proceeds. This presumably cuts into dividends, but it only means that a larger share of the accrued profits is used for accumulation purposes while a correspondingly smaller share goes to capitalist consumption. This tells us nothing about the absolute size of either of these shares, which, if profits are sufficient, may both increase together. If profits are inadequate, both can also be amassed by means of increased prices, whereby "internal financing" becomes a form of accumulation by means of inflation.

But it is not genuine accumulation. As this type of self financing" expands, the ability of other capitals to accumulate is correspondingly impaired. The total mass of profit available to the world economy remains where it is Capital self financing like capital monopolization, implies then no more than a redistribution of total profits by way of price manipulations Although high rates of profit may be achieved by means of arbitrary pricing policies, they imply an increasing rate of inflation, which sooner or later will also affect the privileged capital unfavorably. This does not mean that inflation stops, but only that henceforth it will not be a direct aid in expanding the privileged capitals. It will, at best, serve the maintenance of their profits under conditions of stagnation and decline.

Competition destroys capital, but it also improves the profitability of the capital that comes out on top in the struggle. Yet this does not mean that total social profits have grown in any significant measure - that is only possible through an increase in surplus value. Surplus value, however, can grow in only two ways:

through an increase in the rate of exploitation, and by increasing the number of workers. But these two ways proceed along parallel courses only under certain conditions; their inherent tendency is to develop in opposing directions. Greater exploitation means that more products are produced with less expenditure of labor, i.e., there is an increase in the productivity of labor achieved through improved means of production and better methods of capitalist accumulation. Under these conditions the absolute number of workers may increase as well, but their number relative to accumulating capital decreases. Since surplus value is really only surplus labor, surplus value also decreases relative to the increase in capital and leads to a tendential decline in the rate of profit and the reduction of the pace of capital accumulation.

Under capitalism nothing in this situation can be changed, no matter how many other modifications are made elsewhere in the system. Like any previous boom, the most recent one also contained the seeds of its own decline. But whereas previously the decline was due mainly to a decrease in the mass of surplus value relative to the accumulated total capital, in the present period labor productivity in the industrial countries has increased to such an extent as to increase the costs of circulation disproportionately to production, and thus to accelerate the reduction of the rate of profit. Since production cannot be separated from distribution, only the total reproduction process of capital can tell us anything about its actual profitability. But in the past the proportion of workers engaged in production relative to those employed in circulation was more favorable to profit than it is today. As productivity in the production sphere has increased vastly, the number of workers employed in production has declined, while the number of those employed in distribution has risen disproportionately. But because so far it has not been possible to increase labor productivity in circulation to the same extent as in production, the tendential decline in the profit rate accompanying capital expansion has accelerated. The shift from capitalist productive labor to capitalist unproductive labor has been an important factor in the inflationary process.

With the steadily growing pressure on the profit rate, due to a variety of causes, the postwar expansion had to come to a halt despite all its inflationary props. The high profits that had been amassed down to the very last have turned out to be largely phantom profits deriving more from inflation than from production. Over the last two years, or instance, the high profits of many American firms have consisted of "inventory profits," i.e., profits stemming from the difference arising between the previous lower costs of the materials used in production and the current price of the finished product, which effects the present price of the materials used. According to U.S. Department of Commerce statistics, these "inventory profits" reached more than $37 billion in 1974, or 60 percent of the total profit increment.[8] But this process is non-repeating unless the rate of inflation increases steadily, and even then it is so only for goods that require quite long production times. But whatever the case, the rate of accumulation is the indicator of profitability, and in its terms even the high profits turn out to be inadequate.

Inflation has no future; during an economic upswing it can add fuel to the process, but it must be kept within certain limits if the profits it makes possible are not to vanish again into thin air. If an accelerating inflation rate gets out of control, its "positive" effect turns into its opposite. The chaos so characteristic of capitalism then becomes even more chaotic; internationally this shows up as recurrent monetary crises, with a resulting disintegration of world trade. Although the average annual world inflation rate was recently estimated at 12 percent, it affects each country quite differently depending on its competitive position on the world market. Persistent fluctuations in national currencies, said to make the squaring of international payments balances easier, miscarry, not only on the world market but also with regard to the continuing erosion of the national economies. The allegedly anti-inflationary Special Drawing Rights (SDR) of the International Monetary Fund, were designed to remedy a purported lack of liquidity; they were a system for squaring payments balances by means of uncovered mutual obligations; but it also proved to be merely one more inflationary measure, just like the dollar after its gold convertibility was abolished. As international economic relations become more and more difficult to see through and defy attempts to calculate business activity, capital is flowing across borders on a colossal scale in an attempt to glean profits from the monetary chaos and the particular difficulties of each country, insofar as they are not attainable by any other means.

Even under the best conditions, a steadily rising inflation rate leads eventually to economic stagnation. Inflation must then be halted at the point where it begins to have a negative effect on the economy. Just as governments add steam to inflation by their monetary and fiscal policies, contrary measures can slow its course. However, it is not within the power of governments to bring inflation totally to heel, since price inflation will continue despite deflationary government measures. This being the case, depression is aggravated in two directions: on the one hand, because of a stepped up general economic decline, and on the other, because of the multiplying social conflicts generated by the inflationary distribution of income.

Depression, like an upswing, sets limits to inflation. But any limit can be overstepped if one is willing to accept or is unable to avoid the attendant social risks; the hyper-inflations of the past are ample testimony to this. But the risk is far greater when inflation is worldwide than when it is isolated within individual countries, as has been the case in the past. The bourgeoisie therefore tries to check it, but it can only do so by accepting lower profits, reducing public spending, and allowing depression to deepen. In 1974, for instance, total U.S. production fell by 10.4 percent, utilization of production capacity fell to 68 percent, and the official unemployment rate was 8.7 percent.

The economic situation of the last five years, which has been less serious, still required a 50 percent increase in public spending and budgetary deficits in excess of $100 billion. Without this public spending the economic decline would probably have been more considerable. As the depression spreads, the only way remaining to counteract its political consequences will be new state loans, which are even now beginning to dominate the capital market. Deficits of $125 billion for 1975 and 1976 are being considered, which will inevitably expand the money supply further As the hopes that the depression will have a deflationary effect fade, they are replaced by prospects of a new boom contrived by inflationary means. Where all this will lead cannot be forecast with certainty, but at least one thing is sure: the present crisis, with its peculiar deflationary inflation, will keep the world in a perpetual state of unrest that could easily lead to catastrophe.

Notes

1. A. N. Phillips, "The Relation between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1862-1957," in Economica, vol.25, no.100, December 1958, pp.283-99

2. From the extensive literature on this topic, see John Hicks, The Crisis in Keynesian Economics, Oxford, 1974, especially the chapter "Wages and Inflation"; also, Aubrey Jones, The New Inflation, Harmondsworth, 1973.

3. Z. B. A. Glyn and B. Suteliffe, Bntish Capitalism, Workers and the P'ofit Squeeze, London, 1972.

4. According to B. Jackson, H. A. Turner, and F. Wilkinson (see Do Trade Unions Cause Inflation?, Cambridge University Press, 1972), the total income of American workers in money wages rose by 4.7 percent annually between 1966 and 1970. The increase reduced to 0.8 percent in real income terms, and after tax deductions there turned out to be an annual decrease of 0.3 percent. in August 1974 A. F. Burns, Director of the U.S. Federal Reserve Board, observed that "over the last year the real income of workers in the United States fell by 5 percent" (The New York Times, August 16, 1974).

5. "From 1950 to 1960 the annual depreciation of money was 2.1 percent in the United States, 3.9 percent in England, 2.1 percent in Germany, 5.4 percent in France, 10.8 percent in Israel, 17.6 percent in Brazil, 36.6 percent in Bolivia, etc. There was no county whose money did not depreciate, although the rate of inflation varied widely from country to country" (First National City Bank, Monthly Economic Letter, New York, July 1974.

6. In this capital once again finds grounds for a cautious optimism, e.g., in the view of Ernst Wolf Mommsen, chairman of the board of F. Krupp GmbH, who states, "since I now all those concerned, in particular the trade unions and corporations, have learned the lesson of the past two or three years, it would be wrong to keep putting through new nominal raises in prices and wages and to act as if alongside these nominal rises real rises are still possible in previous measures. The new wage statistics in the Federal Republic are a responsible step in the direction of keeping the nation's economy healthy and sound. The readiness of the trade unions to act, and finally after three years of stagnation to re-stimulate the investment capacity of German industry, must be evaluated positively. This has strengthened the willingness of German industry to invest and improve again our job security" (Frankfurter Allgemeine Zeitung, April 14, 1975).

7. Monthly Economic Letter; New York, First National City Bank, July 1974, p. 3.

8. New York Times, August 4, 1974.

Chapter 3: The Destruction of Money

Money as a means of exchange and as a hoard of wealth appears in many forms; as such it is as old as commerce itself and is encountered in the most diverse kinds of societies. Under capitalism, in addition to these general functions, it also exercises the specific function of embodying the social relations of production. In capitalist commodity production the commodity of labor power is exchanged for money. The purchaser of this special commodity uses it to enlarge his capital, measured in money terms. The primary aim of production is, accordingly, not the creation of goods for use; rather, it is only a means, albeit an indispensable one, for transforming a given quantity of capital into a larger quantity. Production of this sort is possible because labor power, as a commodity, has the ability to produce more than capitalists must pay for it; the basis of production, then, is the social relation between wage labor and capital.

In the circulation process capital alternately assumes commodity form and money form as it accumulates. Commodities and means of production may be transformed into money and vice versa, so that possession of capital is expressed as possession of money. Therefore money must itself be a commodity and be comparable in value with other commodities. In commodity exchange based on capitalist property relations, the division of social production into paid and unpaid labor assumes the character of value relations expressed in money terms. Although profit derives from unpaid labor time expended in production, to the capita