[OPE-L:5357] Re: OPE-L:5136 - Duncan's reply

Duncan K. Foley (dkf2@columbia.edu)
Tue, 5 Aug 1997 20:11:50 -0700 (PDT)

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>Here is my reply to Duncan's [OPE-L:5340]:
>I agree with Duncan that in Marx's theory an expansion of credit can
>lead to rising prices only in the very short run; in the long run it
>will lead to an expansion of output with constant prices. But let us
>look at the competitive mechanisms how this long run result is brought
>about. In my reading of Marx, this long run result is usually
>achieved in the following cyclical movement: prices rise although the
>money stock is not rising. (I am ignoring here the fact that the
>money supply is very elastic because the economic agents hoard gold --
>at a certain point all these hoards are in circulation and I am
>assuming this point has already been reached.) This rise in prices
>without an increase of the money stock is possible in the prosperity
>phase of the cycle because the velocity of money rises faster than the

Does this formulation import the quantity of money theory of prices through
the backdoor? Why couldn't there be a boom in gold production which would
lower gold prices?

>But at some point, when the cyclical expansion runs into
>either supply bottlenecks or insufficient demand, velocity declines,
>and then there is suddenly a shortage of means of circulation, and
>everything grinds to a halt. After the crash, a price level asserts
>itself which is governed by the relative value of gold versus other
>commodities. I.e., in the long run, the price level is determined by
>the value of gold.

I think this is a good description of what happens in the gold standard
business cycle. But isn't the rise of commodity prices primarily a
_speculative_ phenomenon? And, as such, doesn't it lead to a deviation of
the market prices from the prices of production? Couldn't speculation also
force prices downward from the prices of production?

>There may be other mechanisms too which lead to similar results, but I
>have the impression that this is the most basic mechanism Marx had in
>mind. Now if we are not on the gold standard, then this harsh
>automatic readjustment no longer takes place. Prices tend to rise in
>the prosperity phase, and the Central Bank has to make the judgment
>whether the economy is "overheating" or not, i.e., whether there is
>more purchasing power than there is real value created

Again, I get a whiff of the quantity of money theory of prices here...

>, and if they
>think there is overheating, then they will restrict the supply of
>credit, and thus reduce purchasing power and maintain the price level.

Wouldn't it be more consistent with your first paragraph to argue that the
reduction in credit will reduce demand, not the rate of increase of prices?

>Or they will use fiscal policy to reduce aggregate demand. The result
>which Marx assumed as given, that demand and supply ultimately balance
>each other in such a way that prices hover around labor values, is now
>a result artificially created by state intervention into the economy.

Once the debt of the State is devalued, aren't all the money prices
adjusted in the same proportions?


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu