The Flawed ‘Logic’ of Capital

My last two posts, Capital Rule: Interest Rates, Inflation and The RBA ,and Inflation is a Conflict looked at how inflation is a conflict over national income (GDP) and the tools used to ameloriate the conflict (monetary policy) between labour and capital benefit capitalist. The labouring class over the neoliberal era are almost powerless to protect their real earnings. I used the excellent article Inflation and Marxist Theory by Pat Devine published by the British Communist Party in Marxism Today, 1974 that analysed this dynamic from an understanding that inflation isn’t a monetary phenomenon but a result of conflict.

I’m not a formally trained economist but with enough ‘self study’ you can easily see the nonsense paraded by our political elite that use language to frame inflation as some external phenomena and how they are working tirelessly to ‘fight’ it.

If our governments were concerned about rising prices, why didn’t our governments keep (or restore) free childcare, that had a negative impact on the consumer price index as it removed that costs from households, why hasn’t the government decided to keep gas for domestic purposes for our short term energy problems on the east coast and claimed ‘sovereign risk’ as a reason why it can’t.

CHRIS BOWEN: Well, those contracts are private, and the mechanism is about uncontracted gas by and large. And you know, you do have to be careful about sovereign risk and you can’t create sovereign risk. That’s a challenge.

Sovereign Risk is a term used to describe the risk of governments defaulting on their own debt. A nonsensical proposition when you understand the difference between the currency issuer and currency user. When you can grasp that, you can see the governments decision is about protecting the profits of a corporation over meeting the energy needs of our population.

Lowe’s Woeful Interview

The Governor of the Reserve Bank of Australia was interviewed on our public broadcaster recently.
I think the dynamics of the class conflict can be highlighted by the framework and commentary made by the RBA Governor.

“Well I think Australians need to prepare for higher interest rates. We had emergency settings during the pandemic – that was the right thing to do – but the emergency is over and it’s time to remove the emergency settings and move to more normal settings for monetary policy. “

This is a statement of intent. The RBA chooses the cash rate and can set the yields on government bonds. It is literally the decision of the monetary policy committee at the RBA which is chaired by Lowe. So if Lowe thinks rates need to be higher, they will be higher.

The question remains as to whether higher rates will bring down the current rate of inflation (see previous posts). And I remain doubtful that they will. The Governor himself admitted there are households that will struggle.

“We certainly are and we spend a lot of time looking at the disaggregated data because we know that even the increases in interest rates so far are putting pressure on some families’ budgets. They’re coping with higher interest rates, higher fuel prices, higher food prices, so we know already for some households they are finding it difficult.”

As a unionist and someone that feels we need to empower the working class, why would we use a framework that places real pressures on individuals and families to help bring down a general price level. The RBA strategy of hiking rates will cause unemployment in the hope it curtails enough demand off our energy usage it drives prices down!

There are regulatory tools we can be using to control prices. A cut to real wages (via bargaining processes and increasing mortgage rates) causes a multitude of social costs. This method (real wages cuts) was tried over the 1930’s with disastrous results. Have a read of The Struggles of the Unemployed published in the UK’s ‘The Labour Monthly’ in 1932!

Real Wage Cuts For the Working Class

This is the first time since the post war boom Australian workers have experienced real wage cuts.(wages adjusted for movements in the CPI) It will be interesting to see what happens. Over this neoliberal era ad wages failed to rise with productivity (but maintained real growth) Capital maintained sales growth (and profits) by deregulating the financial markets and foisting more debt onto workers. That becomes more difficult in an environment where your real wage is falling.


Sometimes people speak of inflation as an abstract phenomena. It is important to remember the current inflationary pressures are caused by Capitalists able to pass on increasing costs. Inflation is a redistribution of purchasing power. If I am paying more, someone is getting more. It isn’t necessarily because there is ‘too much’ spending. If anything, we need more public expenditure as we are well below full employment.

I am supportive for the responsibility of full employment (more hours of work available than demanded) to be given to Treasury (with a Job Guarantee in place) and removing it from the responsibility of the RBA. I’d then have a zero interest rate policy and for the RBA to monitor inflationary pressures in supply chains, labour underutilisation, and to manage the payments system because our current institutional arrangements are benefiting the wealthy!

Inflation is a Conflict

I’ve seen texts written by progressive economist on the sources of inflation being driven by supply side issues and not because of demand-pull (wages). They’d be correct!

Their articles detail how rises in rates won’t assist with prices rising from supply side issues. However, one ended by stating the RBA needs to be clear why it is hiking rates and it is for financial system stability. There are issues with the way they are thinking about inflation and the role interest rates play in our society.

Inflation is viewed in terms of rising prices and economic instability. The raising of rates is supposed to ‘cool’ down the rate of inflation. It is often juxtaposed within a context of rising housing costs as the commercial banks often increase their mortgage rates by the same amount. Rising rates are supposed to mean subdued house price growth. Low rates over the last decade have been seen as abnormal which has sometimes been interpreted as one reason for our current high housing costs and a contribution to our inflationary problem. The reality (I think) is very different. The fact that the cost of housing is so entrenched in the public discourse and tied to the cash rate rises makes it difficult for regular people to seperate the two concepts and seek alternate policy for what can be done about rising prices (and housing). There isn’t a level of ‘normal’ rates that needs returning to; nor is there a particular cash rate needed to create some sort of ‘system stability’.

Inflation needs to be viewed by more than just rising prices. It is a conflict between labour and capital over national income. Pat Devine penned Inflation and Marxist Theory, in Marxist Today, 1974 describing inflation as a conflict over competition resources.

Competing Claims on Real Resources
Thus, whether through trade price effects on the real wage, through the influence of international competition on the extent to which cost increases can be passed on or through international influences on aspirations for higher real wages, the international character of the capitalist system impinges on the struggle between capital and labour—the fundamental cause in post-war conditions of chronic inflation.

Inflation and Marxist Theory, Marxist Today, 1974, p.84

I stated in my previous post that we couldn’t know what the net outcomes of the distributional changes of a rise in the cash rate would be. Businesses who have borrowed to fund capital may pass on increasing cost to consumers, we also see an increase to those holders of government debt, as consumers cutback to service increase mortgage costs. So as to whether an increase is deflationary is circumspect.

Today we discuss inflation within a framework where it is the responsibility of the Central Bank to target a particular inflation range.(2-3%) The tool used to do that is monetary policy (interest rates). Historically central banks have not targeted an inflation rate.

In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of monetary policy

  • the fixed exchange rate period, which lasted until the early 1970s;
  • a period of monetary targeting between 1976 and 1985;
  • a transitional period which followed the demise of monetary targeting and lasted until the early 1990s; and
  • the inflation targeting regime, in place since around 1993.

The first point shows the first regime was to ensure an exchange rate parity

“As was the case for most other countries, the Bretton Woods System of ‘fixed but adjustable’ exchange rates was operated in practice in Australia in the 1950s and 1960s as a firm commitment to fixed parities. The fixed exchange rate was effectively the linchpin of the monetary policy regime.”

The rate wasn’t altered because inflation was deemed ‘excessive’ rather there was a concrete goal that the exchange rate between the $AUD and $USD should remain at a particular parity. The particular ‘inflation targeting’ we see today evolved from the 1970s oil shocks that sent inflation and unemployment to high levels as the Post-Keynesian framework couldn’t offer a solution.

Devine summaries the monetarist theories that would eventually gain hold of the economics profession.

Monetarist Theories
“Most recently at the theoretical level there has been a vigorous offensive by some neo-classicals in the form of monetarism, receiving its impetus from the self-evident demise of the stable short-run
Phillips Curve relationship. An attempt has been unconsciously and influenced by what has become made to salvage the role of excess demand, in the traditional form of a long-run vertical “Phillips Curve” at a “natural” rate of unemployment, by introducing expectations, with the policy implication of the need to stabilise expectations by pursuing strictly a widely-publicised course of expanding the money supply at a rate equal to that of estimated long-run productivity growth. The ideological function of bourgeois economic theory, especially neo-classical theory, is seen here at its clearest.
The attribution of the cause of inflation to asocial abstractions like the money supply, or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “cured” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses.”

Inflation and Marxist Theory, Marxist Today, 1974, p.87

Devine was discussing the idea that monetarist believe it is the money supply that caused inflation and their solutions ignored that rising prices also meant a rising income of those charging higher prices. If the costs of goods and services increase, the labouring class would use their power to combat the rise in those prices. Monetarism was successful in its approach in taking over the profession and using its methodology to combat inflation, rising unemployment. The NZ film In a Land of Plenty provides what happened when the NZ government abandoned its role in providing full employment and targeted inflation as a goal.

Those same flawed arguments rare used today. It is assumed the raising rates will ‘cool’ spending, despite the issues not arising as a result of wage pressures (and despite commentary to the contrary) Arguments today ignore tend to ignore social conflict taking place. It is the price setting power that firms hold that sees increasing costs being able to be passed on. Today the labouring class doesn’t hold the power to ‘fight back’ as union laws have been constructed to limit bargains power and densities are at their lowest points since the post-war boom.

I am in day four of my covid isolation, trapped in a hotel room. I came across this tune I’d forgotten about. I’ve always been a fan of 1950s Jazz and the wonderfull Ella Fitzgerald. I was watching a film (that isn’t worth mentioning in) but it had a remake of the song ‘They all Laughed’ and I was reminded of the Ella and Louis version.

Capital Rule: Interest Rates, Inflation and The RBA

I’ve been absent from my blog for a while. Sometimes your intentions don’t get realised and life gets in the way! I’ve decided to recommence posting as I learn more about macroeconomics and political economy (a lot of self study) and throw my thoughts out into the public. I find it infuriating that the media has economist spouting bullshit and it just seems to be taken as gospel. If any behavioural scientist out there can explain why orthodox economics hasn’t been delegated to the bin after covid (debt and deficit fears, inflation fear mongering etc..) please share your thoughts. Plus I am trapped in a hotel room with covid. The last few days I’ve been knocked out with sore joints and muscles, a sore chest, coughing, fevers, runny nose, headaches. It’s the worst I’ve ever felt from a virus. Nothing has been ‘mild’ (as some like to make out) and I am triple vaccinated – with my last jab some 5.5 months ago.

It’s not all bad. I took this lovely shot from my room of the sunset.

Anyway…. to our topic at hand!

There is a lot of who-ha on interest rates in the media. Economists that think they should go up (or they’ve gone up too fast/slow) endless talk of inflation, printing money, government spending being too much blah blah blah…. It is safe to toss anything paraded by an economist in the media into the bin with the understanding they are full of trash.

Let us take a deep breath and look at what these decisions mean and whether they will have the desired results. First we need to understand the interest rate discussed in the media is – and how we define inflation.

What is the Interest Rate?

The interest rate referred to is known as the cash rate – and the rate the RBA targets that banks loan to each other. That is the 0.85% figure. In the same way you have an account with a financial institute your financial institute has an account at the RBA. These accounts (known as exchange settlement accounts) need to be positive at the end of each day and account holders who are short need to borrow from account holders who have surplus reserves.

The RBA has started publishing the interest rate it pays on exchange settlement accounts. This is 10 basis points below the target rate. Banks with surplus reserves won’t loan below that rate (currently 0.75%) and they attract a higher interest rate 10basis points above the target to borrow from the penalty window (directly from the RBA) This has banks loaning to each other at around the RBA’s target.

What is Inflation and why is it here?

This is a complex question. There is lots of debate, though most of it not worth listening to, about what causes inflation. I detailed some of that in the mythology of printing money part II and you can see more about inflation here and here. Simply inflation is a rise in the general price level. That in itself is an abstract concept however it’s purpose is to try and eliminate price rises so economists can determine whether real output is growing.

Orthodox economist will usually come out with nonsense around the money supply growth and ‘printing money’ being inflationary. The first thing to acknowledge is that any spending can be inflationary irrespective of who is spending it. Second ‘printing money’ is nomenclature that doesn’t apply to any spending operation in our economies today. The term has its origins when governments started banning private note issuance on notes issued by private banks and started issuing their own treasury notes. You need only look at the hansards from The Australian parliament from 1910 and the introduction of the Australian Notes Act to see the nonsense paraded how it would end the economy and be destructive! Currency is a public monopoly issued by the state. It spends by marking up bank accounts. Once you’ve disabused notions of the nonsense of printing money we can look more seriously at what is causing prices to rise.

The ABS last released CPI results on 27/04/2022

  • Fuel prices caused by easing of covid restrictions and war in Ukraine
  • Rental markets reflecting historically low vacancy rates
  • Grocery products because of transport costs
  • Rising construction costs mostly because the removal of government construction grants that had the effect of reducing out of pocket expenses for consumers.

We can see quite clearly the price increases are a result of supply side issues, due to fires and floods we’ve had, the oil companies cartel behaviour and even the removal of government spending. When you hear politicians or economist say the government should’ve spent less that is simplistic. Government spending can be deflationary – you only need to see my post on the effect of childcare being made free to see what effect that had on the CPI.

Once you break the myth of deficits accumulating debt and it needing to be paid back by our currency issuing government here are some things that can decrease our cost of living.

  • Publicly owned renewable energy infrastructure with a free quota delivered to every household
  • Universal free childcare
  • Parental leave paid at minimum wage until youngest turns 5
  • Free public transport and investment in mass public transit systems
  • Legislated work from home rights
  • Social housing for the masses with buildings built to suit location and strict environmental standards.
  • Expansion of public services to include building local communities and paying people to work in things we currently volunteer for (e.g community gardens, surf life safety, arts etc..)
  • Free Universal Broadband
  • Public Bank to regulate credit markets

My above list reflective of my value system. Our currency issuing government always has the capacity to finance those services, it is a question of whether we have the labour skill and other resources in sufficient quantities to provide them.

What does the Interest Rate have to do with Inflation?

By now the layperson is usually grappling with why the Reserve Bank would be hiking rates to bring inflation down. The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means;

1. Increased income for asset (bond) holders;
2. Rewards markets that have placed bets on rates rising;.
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits;
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

How we should think about Inflation

Inflation is a conflict between labour and capital. The labouring class has little power to negotiate higher wages because of neoliberal governments that have suppressed abilities to bargain (including striking) and abandonment of full employment where as a society we targeted more hours of work than demanded. Currently, capital has the ability to pass on cost increases (or blindly profit gouge) and workers have little legal recourse to fight for higher wages.

And to make things worse for the working class, our governments claim false fiscal constraints about needing to ‘balance books’ claiming it is too expensive to provide universal social services and allows corporations to profit the services we need!


I’ll let you draw your own conclusions on the RBAs decision to hike rates. I think increasing mortgage costs on heavily indebted households is not a great way to reduce inflationary pressures. Monetary policy is a blunt tool that should be tossed into the bin. Any increase in unemployment will be caused by the contraction in spending and may have a negative impact on the CPI, but it hardly solves any of the supply issues and creates more jobless!

We need a populist left agenda around a public bank option with low to zero interest rates on our homes and heavy regulated credit rules (to keep land affordable). I would also merge the current tasks of the central bank into treasury and create a government body in charge of monitoring supply bottlenecks and preparing the best ways to mitigate them and dare I say it use price controls to keep our essential items affordable.