Several great divides in economic theories including that between liberal traditions of the ‘classical’ school and ‘marginalist’ theories of neo-classical tradition could not capture the essential division in the theoretical constructs of analysing capitalism. This is between those theories conceive capitalism as an isolated system achieving beneficent equilibrium spontaneously, facing no constraint on demand and those recognizing the problem of over-production or ‘realisation’ as intrinsic to capitalism. Prabhat Patnaik’s book The Value of Money explores the rift from the vantage point of money, how the value of money is determined in contesting paradigms broadly defined by the author as ‘monetarism’ and ‘propertyist’ tradition. There are twenty chapters along with an introduction that briefly sets the stage of the debate as well as an account of the main thesis argued in the text divided in three sections. The book provides a rigorous critique of the monetarist view that assumes a conceptual universe characterized by Walrasian equilibrium in which the market for money ‘clears’ and the value of money is determined by the equilibrium price in terms of the non-money goods.
The author argues the superiority of Marx-Kalecki-Keynes tradition that postulates capitalism as a demand constrained system and the value of money is determined ‘outside’ the realm of demand and supply. At a more fundamental level the book provides an analysis of the question that remained partially answered even in the propertyist tradition: if demand constraint is intrinsic to capitalism and if the activity level of the economy is determined by the state of aggregate demand then what mechanism exists in the system that ensures range of activity lying between the upper threshold defined by the ‘inflationary barrier’ and the lower threshold of a rate of profit below that is not acceptable to the capitalists. Herein lies perhaps the original contribution of the book, moving beyond the traditional notion of capitalist mode of production to the more encompassing view of capitalism—a system which was never closed or isolated rather ensconced within a pre-capitalist milieu deriving stimulus by continuously interacting and hegemonizing a distant ‘reserve market’.
Monetarism in its various strands as Professor Patnaik argues fails to provide a valid description for the capitalist economy precisely because it either views money only as a medium of circulation or even if in some sense it recognizes the form of wealth role of money, assumes price expectations are such that they ensure existence and stability of the equilibrium. In order to define a functional relation that says demand for money solely depends on and is an increasing function of money income, the Walrasian notion of ‘temporary equilibrium’ underlying monetarism takes recourse to two different routes: The Cambridge version of ‘cash balance approach’ and the second is the ‘cash transaction approach’. The author argues that the first is logically flawed because of its internal inconsistency arising from the fact that in the absence of inelastic price expectations we cannot arrive at a positive finite equilibrium value of money; on the other hand this goes against the assumption of unit elastic expectations essential for the postulate of ‘neutrality of money’. Regarding the second that says demand for money depends on the total value of transactions, the author argues that in a tatonement process time distance between sale and purchase and hence transaction demand is incompatible with Walrasian equilibrium. Although the Clower approach reconciles the existence of transaction demand for money within the Walrasian framework postulating a constant time lag between realization and expenditure of sales there is no justification for why it should be so. The author suggests that Walrasian equilibrium becomes problematic and can only exist by accident once we recognize the legacy of pre-determined payment commitments, in other words, the analytical structure fails to fully accommodate historical time.
In a separate chapter Professor Patnaik reveals the inconsistency of rational expectations equilibrium that is premised on the assumption that identical ‘rational’ individuals having ‘perfect foresight’ gives rise to a social optimum by Ramsay type optimization exercise. The inconsistency lies in the fact that such theories are based on unrealistic premises that individuals are assumed to be identical and isolated and even then without any explicit collusion can behave as a miniature version of society giving rise to a social optimum. The author critiques monetarism and the underlying Walrasian framework at a more fundamental level. The simultaneous clearing of markets both for money and non-money commodities postulated in such theories precludes any possibilities of overproduction. The author argues that this perception has its roots in methodological individualism that primarily assumes coincidence of individual intentions and social outcomes and this is why monetarism in its theoretical structure never recognizes ‘anarchy’ or realization crisis. However, this leads to a very unrealistic characterization of capitalism. It amounts to not recognizing ‘involuntary unemployment’ or ‘reserve army of labour’ that not only acts as a device to push down wages but also performs a ‘disciplining’ role without which capitalist production becomes impossible.
The second part of the book explores the superiority of the ‘propertyist’ tradition, although it begins with a critique of Ricardo’s theory of money. The author recognizes the fact that the Ricardian notion of equilibrium prices as those determined by the conditions of production—the ‘centre of gravity’ towards which the ‘market prices’ tend to gravitate is different from the Walrasian notion. Nevertheless in the short-run according to Ricardo the value of money is determined by its supply and relative demand, hence Ricardo was a propertyist in the long run and monetarist in the short-run. The inconsistency of Ricardian theory of money, as Professor Patnaik argues stems from the analytical structure itself. Deviations of actual prices from equilibrium prices are not supposed to generate any expectation in Ricardian system, which is logically untenable. And once expectations are introduced, the Ricardian system becomes unsustainable because then there should be some holding of money other than the purposes of transactions. Both Marx and Keynes recognized ‘hoard’ or idle balances of money and held the view that value of money is given from ‘outside’ the realm of demand and supply. In Marx it is determined in terms of labour embodied in a unit of money as compared to a unit of non-money commodity and in Keynes the value of money in terms of commodities is institutionally determined by the money wage rate fixed from outside. In this context, the author draws in the debate on Marxian transformation of values into prices and asks for an altogether different reading of Marx’s theory of value which is generally assumed to be Ricardian in its analytical structure. Professor Patnaik refutes the usual critique arrived from interpretations of Marx’s transformation problem suggesting that a complete price-system can be obtained without the value-system once a distributional parameter is specified. He argues that the core of the labour theory of value is that it brings in ‘labour values’ in constructing the price system, it is essential since if wages are paid in terms of money and money does not enter into the profit equalization process as Marx postulated, then equilibrium prices cannot be determined without specifying the value of money. The author however raises the issue of apparent inconsistency in Marx’s position. If the possibility of overproduction is recognized and if the output is determined by the strength of demand in any period then the production coefficients assumed to be constant in terms of ‘normal’ activity level in Marx’s transformation problem becomes problematic and so also the notion of ‘centre of gravity’. This was not a problem to Keynesians because Keynes does not have a theory of value and according to him the economy can settle ‘anywhere’ depending on the level of aggregate demand. But this position in any case does not explain the viability of the system, hence, according to Professor Patnaik the propertyist tradition remains incomplete. Although Marx conceived the theoretical necessity of output lying between a range bounded from below, he does not provide a convincing theory of how it is ensured in capitalism.
The incompleteness of propertyism—the dilemma that arises because of recognizing the possibility of generalized overproduction and at the same time locating it within a context of self-regulating cyclical fluctuations arises precisely because of conceiving capitalism as a closed system. Capitalism being a demand-constrained system has a tendency to move away further from the central position and there is obviously no spontaneous mechanism that ensures the functioning of the system within the upper bounds of inflationary barrier and lower bounds of activity related to the minimum acceptable rate of profit to the capitalists. The coherence and the viability of capitalism can only be explained when the capitalist sector is ensconced with a pre-capitalist setting, when the distant reserve army consisting of a vast pauperizing mass created within the pre-capitalist sector and geographically separated from the reserve army at the core plays the role not only of containing real wages but also stabilizing the wage-unit and hence the value of money. Professor Patnaik’s theorizing of engagement with pre-capitalist sector bears resemblance to Rosa Luxemburg’s argument of the theoretical impossibility of capitalism existing in isolation but it is different in the sense that the necessity of engagement does not arise in order to realize the entire unconsumed surplus of the core as argued by the former; rather it provides a ‘reserve market’ that stimulates investment. The author further discusses that fixing the value of money either in terms of ‘labour embodied’ or ‘labour commanded’ is theoretically conceivable in a single economy but to have a notion of money in a world having several national economies is difficult. In that case the author argues that the currency of the leading capitalist country, i.e. the country that posseses a level of activity that ensures a minimum level of profit and ensures that having a considerable amount of hegemony over pre-capitalist adjunct without inflicting accelerating inflation, would be the medium of wealth-holding. In this context the price of oil becomes important as since the mid-seventies the prices of non-oil primary commodities have on an average fallen in both absolute terms and relative to manufacturing price as well. Moreover in the age of globalized finance in the absence of demand management factors those can affect the stability of the global currency becomes weak and the only threat to the leading currency arises from a persistent rise in oil prices. This perhaps explains the pressing necessity on behalf of the leading capitalist power to establish control over oil resources which is not only to meet the resource requirements of the advanced capitalist countries but more importantly to maintain the stability of the oil-dollar standard and hence the monetary stability of the entire capitalist world.
Besides being an ingenious critique of monetarism the book provides a comprehensive understanding of capitalism especially in the Marxist tradition through the prism of the value of money. The theoretical structure and organizing principle of Capital based on a conceptual autonomy of capitalist production is a method of rational abstraction followed by Marx to theoretically delineate the capital-labour relation specific to capitalism. The theoretical structure was never identical with the history of capitalist development; rather it points only to indications where historical investigation must enter into. The abstract notion of reproduction of capitalist relations in concrete historical contexts assuming diverse forms of engagement with pre-capitalist relations has been widely discussed in Marxist literature, but in Professor Patnaik’s analysis this is not only investigating the interplay of structure and contingency, it enters into the analytical core of understanding the dynamics of capitalism. However, in this book pre-capitalism is defined in terms of vast segments of pauperized mass basically engaging in wage relation as ‘price-takers’. This seems to be too restrictive. How capital grafts its own logic of exploitation upon pre-capitalist social forms, how the various contingents of the ‘distant reserve army’ including wage and non-wage labour and various social forms are drawn into the purpose of providing a cushion to capitalism is perhaps an area of wider research. In this context Prabhat Patnaik’s conceptualization of imperialism seems to be minimalist. The expansionary nature of capitalism and its hegemonizing of pre-capitalist segments is intrinsic to capitalist reproduction and hence the author argues capitalism has always been imperialistic in the inclusive sense of the term. True indeed, the expansionary nature of capitalism is what gives rise to imperialism but reducing the concept of imperialism to this minimal notion in some sense undermines the political economy of a definite phase of capitalism that Lenin defined. It is not only the stage of monopoly capital but a rentier state, a parasitic stage of capitalism inflicted with intense contradiction but which at the same time acts as ‘the driving force of the transitional period of history which began from the time of the final victory of world finance capital’.
That both price and output stability in capitalism can be combined only if there is a social class whose ex ante claims are squeezeable was the central thesis of Prabhat Patnaik’s earlier book Accumulation and Stability under Capitalism. But revealing its necessity by looking into it from the vantage point of money gives us a more comprehensive understanding of the Marxist theory of crisis. In fact we come across two different treatments of capitalist crisis in Marx: one is premised on the notion of circular flow and argues that even if Say’s Law holds accumulation cannot proceed without any limit because of the falling tendency of the rate of profit and the dynamics of this tendency and its counteracting forces gives rise to cycles and crisis. The second flows from Marx’s monetary theory that unveils the dual nature of exchange specific to money economy and the ever-present possibilities of endogenous crisis that primarily emerges because of the separation of purchase and sale and the overstretching of the contract-credit system. These two apparently isolated systems can be tied into a single whole when we conceive the crisis as caused by the unity of the falling tendency of the rate of profit and the oversensitive contract-credit system that entails the problem of realization. This is looking into the crisis as codetermined by the limits arising both in the sphere of production and circulation—moving from the ‘abstract forms of crisis’ to its concrete actualization. The avoidance of such a crisis not only requires a positive rate of profit that can be maintained even if the rate of profit is falling but an acceptable net rate of profit that helps avoid innumerable ruptures in contract commitments. What becomes crucial in this respect is maintaining the stability of the value of money and how capitalism maintains this is the novel contribution of the book. It also in that way reconciles the apparent dichotomy in the Marxian scheme of crisis and pushes the frontiers of knowledge to a great extent in understanding capitalism.
Satyaki Roy is Assistant Professor at the Institute for Studies in Industrial Development, New Delhi.