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The Value of Money

The Value of Money

Prabhat Patnaik
Copyright Date: 2009
Pages: 280
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  • Book Info
    The Value of Money
    Book Description:

    Why is money more valuable than the paper on which it is printed? Monetarists link the value of money to its supply and demand, believing the latter depends on the total value of the commodities it circulates. According to Prabhat Patnaik, this logic is flawed. In his view, in any nonbarter economy, the value we assign to money is determined independently of its supply and demand.

    Through an original and provocative critique of monetarism, Patnaik advances a revolutionary understanding of macroeconomics that highlights the "propertyist" position of Karl Marx and John Maynard Keynes. Unlike the usual division between "classical" economists (e.g., David Ricardo and Marx) and the "marginalists" (e.g., Carl Menger, William Stanley Jevons, and Léon Walras), Patnaik places "monetarists," including Ricardo, on one side, while grouping propertyist writers like Marx, Keynes, and Rosa Luxemburg on the other. This second group subscribes to the idea that the value of money is given from outside the realm of supply and demand, therefore making money a form in which wealth is held. The fact that money is held as wealth in turn gives rise to the possibility of deficiency of aggregate demand under capitalism.

    It is no accident that this possibility was highlighted by Marx and Keynes while going largely unrecognized by Ricardo and contemporary monetarists. At the same time, Patnaik points to a weakness in the Marx-Keynes tradition-namely, its lack of any satisfactory explanation of why the value of money, determined from outside the realm of supply and demand, remains relatively stable over long stretches of time. The answer to this question lies in the fact that capitalism is not a self-contained system but is born from a precapitalist setting with which it interacts and where it creates massive labor reserves that, in turn, impart stability to the value of money. Patnaik's theory of money, then, is also a theory of imperialism, and he concludes with a discussion of the contemporary international monetary system, which he terms the "oil-dollar" standard.

    eISBN: 978-0-231-51921-2
    Subjects: History, Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-x)
  4. Introduction
    (pp. xi-xxii)

    It is an intriguing aspect of our daily life that intrinsically worthless bits of paper, which we call money, appear to possess value and are exchanged against useful objects. The purpose of this book is to examine the social arrangement underlying this fact. While this social arrangement is none other than the entire social arrangement underlying capitalism, there is a point in starting our investigation from the “money end.” This is because an important part of the overall social arrangement that may not always be apparent when we start from the concept of “capital” emerges with greater clarity when we...

  5. 1 The Great Divide in Economics
    (pp. 1-12)

    The circumstances of its birth have left an indelible imprint on the development of economics as a subject. When Adam Smith wrote The Wealth of Nations, his objective was, among other things, to provide the theoretical basis for the removal of the fetters imposed on the emergence of the bourgeois mode of production by the feudal-mercantilist policies of the state. To this end, he showed that a bourgeois civil society, taken as a “complete system” in itself—that is, in isolation both from the state and from its specific surroundings—constituted in its spontaneous operation a “benevolent” and self-acting economic...

  6. Part 1 The Infirmity of Monetarism

    • 2 The Monetarist Theory
      (pp. 15-21)

      What exactly constitutes monetarism is a question that needs careful examination. Different writers on the subject emphasize different aspects of monetarism. Among those who are avowedly monetarist there is no homogeneity of views either, with Friedman (1966), for instance, professing to be a Marshallian as against the array of contemporary monetarists all of whom would swear by Walras. And on top of all this, since our characterization of monetarism is an inclusive one, which, departing from the usual dichotomies but with sufficient justification, puts Walras and Ricardo together within this single tradition, a precise delineation of the differentia specifica of...

    • 3 Equilibrium and Historical Time
      (pp. 22-34)

      The real theoretical innovation of the Keynesian revolution, according to Joan Robinson (1966), relates to the treatment of time: the short period of time that was its focus of analysis was located emphatically between a past that was given and unalterable and a future that was unknown. This, she believed, was the differentia specifica of the Keynes-Kalecki breakthrough.

      Some may question this claim. In comparison with the neoclassical tradition of his day, which tended to deal in terms of logical rather than historical time, this might well have been the innovation introduced by Keynes; but, the Walrasian system, as opposed...

    • 4 The Modus Operandi of Monetarist Theory
      (pp. 35-42)

      It was suggested in chapter 2 that monetarist theory must be distinguished from what is commonly understood as monetarism. The latter term is commonly associated with the proposition that the level of money income is determined by the quantity of money in the economy, or, alternatively, that the rate of growth of money income depends essentially on the rate of growth of money supply (the rate of growth of the income velocity of circulation of money being either zero or exogenously determined). But monetarist theory is more complex. It consists in the belief, first, that the world is characterized by...

    • 5 The Cash Transactions Approach to Monetarism
      (pp. 43-55)

      The cash balance approach to monetarism is not logically sustainable. Once we stop making unreal and logically untenable assumptions about a constant (Cambridge) k, or about real balances per se providing a certain utility to the consumer, on a par with consumption, whose magnitude moreover is independent of expectations about the future, there is no way that we can build a consistent monetarist story on the basis of the cash balance approach. A positive and finite value of money can be explained in an equilibrium situation on the basis of this approach only if there are inelastic price expectations. But...

    • 6 An Excursus on Rational-Expectation Equilibria
      (pp. 56-69)

      The assumption of rational expectations has been much in vogue of late. Expectations can, of course, be assumed to be “rational” about any economic variable, but what has been striking about the recent intellectual fashion is the assumption that expectations about the state of the economy are rational, which amounts to saying that economic agents have perfect foresight about the states of the economy on future dates (subject however to random error, and except insofar as completely novel circumstances, which have not been experienced in the past, and hence about which nothing has been learned, do not arise). The coming...

    • 7 An Excursus on Methodological Individualism
      (pp. 70-77)

      The arguments presented in the preceding chapters entail a fundamental critique of methodological individualism, a critique that is best made explicit instead of having to be inferred from arguments relating to other themes. The purpose of this chapter is to do so.

      Methodological individualism encompasses at least three crucial elements: ontological individualism, that is, an acceptance of the individual as the preeminent existent category in society; epistemological individualism, that is, an acceptance of the individual as the preeminent analytical category in social theory; and (perhaps implicit in the first two elements but worth emphasizing separately) an acceptance of the view...

    • 8 An Excursus on Walrasian Equilibrium and Capitalist Production
      (pp. 78-84)

      The argument so far has sought to establish the following: First, the historicity of time, which manifests itself in terms of inherited commitments from the past and uncertain expectations about the future, makes the Walrasian equilibrium an untenable stylization of the economic universe; second, the introduction of money further accentuates the logical problems associated with this concept of equilibrium, so that the view that the value of money is determined, like that of any other commodity, by its demand and supply, is untenable; third, the concept of a rational expectation equilibrium is afflicted, in addition, by a logically contradictory view...

  7. Part 2 The Superiority of Propertyism

    • 9 A Critique of Ricardo’s Theory of Money
      (pp. 87-97)

      I talked in chapter 1 of a Ricardo-Walras tradition in economics and contrasted it with the Marx-Keynes-Kalecki tradition. This would at first sight appear strange, for the Ricardian notion of equilibrium price is so much at variance with the Walrasian notion that they may almost be said to occupy diametrically opposite poles. But Ricardo’s equilibrium price was the “center of gravity” toward which his “market prices” tended to gravitate. And it is these “market prices” that have a family resemblance with the Walrasian equilibrium prices. To be sure, even these two are not identical. In fact, as already mentioned in...

    • 10 Marx on the Value of Money
      (pp. 98-111)

      Marx shared with Ricardo the idea that money has a positive and finite value, because, being a produced commodity, it requires, directly and indirectly, the expenditure of a positive and finite amount of labor on its production, which can be compared with what is expended upon the production of any other produced commodity.¹ Apart from this basic commonness of perception, which arose from the fact that both saw money as commodity money, he differed from Ricardo on the determination of the value of money both in the short run and in the long run. To say that both saw money...

    • 11 An Excursus on Marx’s Theory of Value
      (pp. 112-123)

      There are few subjects in economics that have been discussed so thoroughly as Marx’s value theory. An attempt to do so yet again may appear at the very least to be unnecessary, if not a tax on the reader’s patience. But the reason for doing so here is, as mentioned earlier, the fact that Marx’s value theory, like Marx’s monetary theory, has been systematically misunderstood. It has been systematically assumed that in the analytical structure of the theory there is no basic difference between Marx’s and Ricardo’s views. This is incorrect. Like Marx’s monetary theory, Marx’s value theory too must...

    • 12 Marx’s Solution to a Dilemma
      (pp. 124-135)

      We argued earlier that the Ricardian theory of value, which takes money as simply another commodity whose relative price vis-à-vis the world of nonmoney commodities is determined exactly like that of any other commodity, necessarily entails (in the short run) a belief in the quantity theory of money. This in turn presumes that the only role of money is that of a circulating medium and thereby precludes any possibility of overproduction crises. The fact that Ricardo believed in Say’s law was not a mere coincidence. It was logically entailed in his theory of value. But this theoretical totality, embracing his...

    • 13 Alternative Interpretations of Keynes
      (pp. 136-148)

      We saw earlier that against the Walrasian tradition, according to which the value of money, like that of any other commodity, is determined by demand and supply in any period, there is an alternative tradition that holds that the value of money is given from “outside” the realm of demand and supply; I called this the Marx-Keynes tradition. But while Marx saw this “outside” determination in terms of the quantity of labor directly and indirectly embodied in a unit of the money commodity as compared to a unit of the nonmoney commodity (taken as an aggregate), Keynes saw it as...

    • 14 A Digression on a Keynesian Dilemma
      (pp. 149-160)

      In chapter 12 we examined a Marxian dilemma, namely that while Marx’s theory of money opened up, theoretically, the possibility of generalized overproduction, his theory of value, into which his theory of money was integrated, presupposed given production coefficients (thus apparently excluding any effect of demand on output). Marx’s resolution of this problem took the form of postulating that the production coefficients, which underlay his theory of value, related to an “average” situation that obtained through fluctuations induced by demand movements, which in turn presupposed that movements in either direction away from the “average” were spontaneously self-correcting. This resolution, however,...

    • 15 Marx, Keynes, and Propertyism
      (pp. 161-166)

      In the realm of economic theory, narrowly defined, Karl Marx made two revolutionary advances: one relates to his theory of surplus value, and the other to his theory of money. The fact that surplus value is appropriated even when there is equivalent exchange among “free” agents entering into a voluntary contract, the fact that it arises in the sphere of production and is only realized in the sphere of circulation, the fact that it arises because labor power becomes a commodity, and the fact that its arising in the sphere of production implies that the Darwinian struggle for survival among...

  8. Part 3 The Incompleteness of Propertyism

    • 16 The Incompleteness of Propertyism
      (pp. 169-176)

      What determines the value of money relative to the world of nonmoney commodities in any period? And why does money have a positive and finite value? Economists have answered these related questions in two distinct ways. The monetarists provide one answer that, in its modern version, has its roots in the Walrasian system; it states that the value of money, like that of any other commodity, depends upon its demand and supply. There is of course a basic difference between money and any other commodity. This consists in the fact that for any other commodity (other than free goods) there...

    • 17 A Solution to the Incompleteness
      (pp. 177-186)

      Chapter 16 argues that while the propertyist tradition was superior to the Walrasian-monetarist one, both by virtue of its avoiding the logical flaws of the latter and in terms of its ability to cognize and explain certain observed facts about capitalism, such as generalized overproduction, which the latter was theoretically incapable of perceiving, it nonetheless was theoretically incomplete. To explain this incompleteness we defined two thresholds, a lower and an upper threshold, to the level of activity in the economy. If the economy falls below the lower threshold, then the magnitude of realized profits (and hence ipso facto the rate...

    • 18 Capitalism as a Mode of Production
      (pp. 187-196)

      The resolution of the dilemma that lies at the center of propertyism, in both its Marxist and Keynesian versions, consists in visualizing capitalism not as a closed self-contained system but as one ensconced within a precapitalist setting. The recognition of this as a fact of outstanding importance characterizes Marxist theory. But this fact is not given any space within the theoretical system. Indeed, there is a paradox at the center of Marxist theory. Nobody wrote as perceptively on the working of colonialism as Karl Marx did, not just on its overall historical implications, but also on the mechanics of its...

    • 19 Money in the World Economy
      (pp. 197-210)

      I have so far confined this discussion to a universe of one single unified capitalist economy. In such an economy, I argued, the value of money had to be given from outside the realm of demand and supply. Such outside determination of the value of money not only undermined Say’s law and opened up the possibility of generalized ex ante overproduction, but it also entailed that the system was basically a demand-constrained one. I then argued that for such a system to be viable, in the sense of remaining within a range of activity levels where it earned the “minimum...

    • 20 Capitalism and Imperialism
      (pp. 211-226)

      Our inquiry into the value of money has brought us a long way. A recapitulation of some of the important signposts along this journey may be useful here. The standard explanation of the value of money, which has a long lineage going back at least to David Hume but in its modern form is rooted in the concept of a Walrasian equilibrium, is in terms of demand and supply. This “monetarist” explanation states that the excess demand for money is a function, representable by a downward-sloping curve, of the value of money relative to the world of nonmoney commodities; the...

  9. Notes
    (pp. 227-242)
  10. Bibliography
    (pp. 243-246)
  11. Index
    (pp. 247-256)