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
output. 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.
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, 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.
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.
Hans.
-- Hans G. Ehrbar ehrbar@econ.utah.edu Economics Department (801) 581 7797 1645 E. Central Campus Dr. Front (801) 581 7481 Salt Lake City UT 84112-9300 (801) 585 5649 (FAX)