[OPE-L:1313] Re: Gold & credit money

Costas Lapavitsas (CL5@soas.ac.uk)
Tue, 5 Mar 1996 02:20:53 -0800

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Some comments on Makoto's [1312] very useful remarks on gold

> The result of transformation alters
> the cost (through transformed prices of wage goods and means of production
> for gold producers) of producing a quater of ounce of gold. However, the
> system of prices of production must in eauilibrium give a general rate of
> profit also for gold production in such a solution. Otherwise, the
> production of gold would be urged to expand more rapidly (when its rate of
> profit is hihgher), or to reduce (when its rate fo profit lower than
> average).

In the Bortkiewicz/Sweezy context, therefore, the transformation
process for the gold industry must be expressed as the production on
average of such extra output per period as is directly equal (in mint
price terms) to the average profit. This output will not contain the
direct equivalent in value, ie, in your example x quarter ounces
times 1/2 hours). Thus, though the nominal price of gold remains 1,
that is in effect its production price. Would you agree?

> Although there is no realization problem for gold, the rate of profit
> for its producers would fluctate according to the result of transoformation
> from values to prices of production, or more generally to the changes in
> prices. The difficult issue, as I have argued in The Basic Theory of
> Capitalism, is to estblish the exact and clear-cut logic to find out how
> increased production of gold (in case of a higher rate of profit for gold
> production) would evetually result in the rise of general level of prices
> so as to cause a rise in cost of production of gold (of the same
> aoumnt and the same denomination, a pound) in a capitalistic dynamism,
> especially when a naive quantity theory is refused. Can the reation be
> established through a business cycle or does it take a long wave(s) of
> price changes?

One possibility might be that the higher profit rate has resulted
from technical change or from the discovery of more fertile mines.
The per unit value of gold will probably fall, leading to higher
prices and lowering gold industry profitability. The process will be
slow and it will reflect the accounting property of gold. However, it
is not clear that Quantity Theory effects will emerge.

Another possibility might be that the per unit value of gold has
remained the same. The attraction of capitals to the gold industry
will result in higher output. In a Ricardian framework, the extra
output will enter circulation, leading to price rises, which lower
gold industry profitability. The main balancing mechanism in this
schema, however, is the export of gold to take advantage of its
unchanged value abroad. Prices thus fall and the profitability of the
gold industry bounces back. So long as the per unit value of gold
remains constant, capital will be moving into the gold industry, gold
will be exported, and there will be a permanent balance of trade
deficit. The answer must be, as you suggest, that less fertile,
marginal mines are opened, raising the per unit value of gold, and
reducing gold industry profitability, without any assumptions
about the composition of capital. The same process could also
contribute to the re-establishment of equilibrium in the first case.

In Marx's schema the main balancing mechanism is, it seems to me, the
hoarding of gold, rather than its export. So long as the per unit
value of gold remains the same, capital will be moving into the
gold industry and gold hoards will be expanding. Since prices are not
rising, the profitability of the gold industry remains above
average. Equilibrium will be restored, as above, when less fertile
mines are opened. Is this a credible picture of capitalist gold
production and the role of golg as money? Most definitely not, and I
don't think that Marx would have claimed that. Long before the hoards
became enormous the capitalists would have lent the money. The
Marxian approach, therefore, leads us directly to credit and to re-
establishment of equilibrium through credit phenomena, as you imply
by mentioning the business cycle. That is why, I feel, it is superior
to the narrow (but analytically beautiful) Ricardian model.