On the power imbalance between Capital and Labour, how money is created and when does additional money lead to inflation and when not?
In the first article to this series, we described how unwanted money created by the banking system tends to gets stuck on the balance sheets of firms, where they begin to impede the circular flow of the economy, were it not for Central Bank or fiscal policies to get that flow going again (taxation is one way Governments help to redistribute that money back into the hands of consumers. Increasing money supply, another).
The power imbalance between Capital and Labour
Primary capital owners then get to decide how to distribute out all that unwanted money in the form of dividends, share buy-backs, executive pay and–Capitalist is thinking now: “do we still have some money left over for wages? . . . do we really have to?” Guess where the power for the distribution of income lies? Labour is largely powerless in this environment to gain a foothold on this increased bounty. This is especially so as this merry go round is first started off as an increase in investment loans that results in more and more capital investments relative to a level of sustainable long run employment. In other words, over time more goods will be able to be produced with less labour, so you bet there is less labour market pressure as the ranks of the unemployed swell. Marx used to refer to these ranks as the ‘Industrial Reserve Army’ ready to be mobilized when required for expansion into new Colonial markets.
Depending on which side the political pendulum is on, labour also sometimes gets to wield some power over the ‘spoils’. However, by increasing their incomes, they also increase the costs to firms. So why go through all that trouble of increasing the money supply for the purposes of creating a battle over spoils that would not have been there to be fought over had that additional money that nobody wanted to hold, not been created in the first place?
The whole economic act is actually one of self-sabotage. Consumer prices come under increasing pressure over time as more output can be produced with less labour, with less labour in turn leading to less income for consumption. Demand was driven by too much investment relative to long run sustainable employment. A fall in consumption and demand are inevitable. That is why we have Business Cycles.
Of course, the Central Bank is there to save the day, but instead of solving the real problem (why is too much capital being produced relative to long run sustainable employment?–a question that Economists incidentally seldom ask), they only add to the problem. Heard of “saving a debt problem with more debt.” The problem is that Economists actually believe statements like that. Some Economists of course prefer to rephrase it a little: “Providing the necessary liquidity” comes to mind. Or “there is never a debt problem because, see, for as much debt that is created, deposits are created in equal measure . . . and we, the Central Bankers of the World, are not responsible for the distribution of that debt/deposits and wealth”. Pontius Pilate could not have said it better himself.
How money is created
I think we need to back up here again a bit: according to common economic wisdom, there is no debt problem if for every debt that is created there is a deposit created of equal measure. Bear with me, for we are now down in the boiler room of the money making machine. Money is created when you borrow money from the bank, you spend it and the person you just purchased from, deposits that money you borrowed into another bank account.
Voilà! You have more money in the form of deposits in circulation. Note that the increase in money supply is entirely dependent on the demand for debt (and the bank manager’s discretion), a demand that is easily tweaked by the Central Bank by simply dropping the interest rate. It has nothing to do with any actual demand for money, i.e., the $10 or $12 you may wish to have in your pocket or bank balance as float.
BY BOB MORIARTY