I didn’t explain in my last blog why I think it’s important not to try to explain away the accumulation of money. The reason is that acknowledging it for what it is allows for a monetary theory of production – a monetary theory, that is, of capitalism. And I think we need one.
Standard Theory of Capitalism
Start with what I used to believe – a theory of capitalism in which there is no urge to accumulation for its own sake. Capitalists just produce goods in order to exchange them for goods they’d prefer to have. Say’s Law holds: supply creates its own demand, since nobody supplies goods to the market except to make money for buying goods from the market. Money is pretty irrelevant; it’s just a ‘veil over barter’.
The capitalist exchanges the stuff she produces for the stuff she wants, plus what she uses to produce more stuff. Whatever she doesn’t spend on consumption, she spends on producing, and she produces, ultimately, for the purpose of consuming later. Saving is either the result of some kind of obstacle to consumption or induced by the payment of interest, which is the fee paid by those who need stuff for production to those who would otherwise prefer to consume it now (or put it to less productive use).
Growth is a function of growing productivity, which comes from population growth – more labour for producing stuff – and technological improvement – greater productivity from labour as it’s combined with more efficient machinery.
Growth is the normal state of this system. There will arise occasional structural problems that interrupt the normal trend towards increasing productivity: failure of capitalists to instantly adjust to changes in technology or labour conditions. But once these are resolved the ordinary process of steadily increasing capitalist production will continue.
The problem with this story is that it leaves out money, which, again, is reduced to a mere veil over barter. But, well, there is money. Also it fails to account for the capitalist’s desire to accumulate money. These two facts cry out for inclusion in the explanation of capitalism. An explanation that includes them is, I think inevitably, a monetary theory of capitalism.
Monetary Theory of Capitalism
The capitalist begins with money, which is really just debt: a promise to supply newly produced commodities worth a certain amount to the market. Schumpeter’s explanation is pretty good here. In order to produce stuff, the capitalist must temporarily make some stuff (capital) unavailable to everyone else. The money the capitalist borrows and spends signifies a promise to compensate for this temporary sequestration of resources with the provision of newly-produced stuff (commodities) in the future.
Money is thus also a claim on future production: to hold money is to hold a claim on some promised future product. But the capitalist wants to accumulate money: she wants to increase her own claim on future production. Thus her intention isn’t just to produce goods and exchange them for goods. Her intention is to produce goods and realise a higher monetary value from them than what she paid to produce them. The goal is money, not goods. This is the notion that I found almost impossible to understand in the past, and which I was impressed with my students’ ability to readily absorb.
What I’ve described, of course, is just Marx’s famous M-C-M’ circuit (money-produced commodities-more money). Every capitalist is trying to go from M to M’ – from money to more money. This, however, is impossible unless others are taking on new debts. After all, the attempt to go from M to M’ is an attempt to run a financial surplus. It is impossible to have a net surplus without a corresponding deficit somewhere else – this is a mere matter of accounting: assets must equal liabilities.
The new debts are those taken on by new capitalists entering into production. Since they must repay these debts with interest, they also must get more money from selling the commodities they produce than they spend on producing them. In this way there is a tight monetary circle of production: the accumulation of money by capitalists is financed by other capitalists taking on new debts, and the servicing of these debts requires further accumulation.
This is what really drives growth. Capitalists, in order to accumulate money, must constantly find new opportunities for increasing productivity. Population growth and better technology may be the sources of growth (among others). But the force driving the exploitation of these sources is the drive for accumulation. In the old story – the standard economic story that I used to believe – accumulation, the taking of profit, was a mere byproduct of growth. On this story, growth is generated by the drive for accumulation.
This is important because it shows why money is important. Production requires a constant increase in debt (which, again, is just money). Growth in debt is the counterpart in accounting terms of capitalist accumulation. But lending requires trust – faith in the debtor’s ability to realise a sufficient profit to repay the debt with interest. Where trust runs out for whatever reason, new debt stops being issued. This prevents capitalists, as a whole, from running their desired surplus. The accumulation of capital is interrupted, and so, as a direct result, is the process of capitalist production. It’s called a recession, or something more euphemistic like a ‘growth-correction’.
The latter euphemism embodies a travesty of the facts. There is no reason to think that growth is the normal state of capitalism. Even if we take population growth and improving technology as given, the crucial element of trust is far more contingent. If, as in the lead-up to 2008, the financial system is abused for every manner of fraud, trust may take a very long time to recover. Calling (as some of us have been known to do) for the government to provide a fiscal solution – issuing enough money to support the continued process of accumulation – is essentially just asking the government to supply the missing trust. It is to ask the government to believe that newly-issued money, appropriately spent, can be used for new production rather than just causing inflation. This is no different from asking a bank to believe that the money it lends will generate an income stream from which the debt can be serviced, rather than merely being lost in default.
(Inflation is, after all, the currency-issuer’s version of default, though this takes me beyond the point I want to make here. A sensible government’s fiscal policy will be to ensure that the new money it issues will generate new production and thus growth; it can then tax this higher level of income to make sure that the new issuance of money doesn’t lead to inflation. Making sure that the result is production rather than inflation is thus the government’s version of underwriting a loan.)
The Future of Capitalism
Anyway, since capitalism runs on accumulation, we ought to ask: Is accumulation a bad thing? It would be an unfortunate arrangement if our entire economic system was grounded on an intolerable human vice. I don’t know about the morality. I’m not a moral philosopher (on either reading). Economically, though, I think accumulation is fine, so long as there is sufficient trust to support the corresponding new debt that accumulation makes necessary. Trust and greed need to exist in balance. If they do, I see no problem. Marx’s theory that capitalist accumulation is somehow unsustainable, independently of the issue of debt, I’m afraid I don’t understand. But whether or not we can persevere in a system in which trust sponsors greed… that I don’t know.