What is Inflation?

We are not meant to understand an important concept.

I recently had a conversation about inflation that left me puzzled.

In my recent video, “Why Was The Debate Such An Unmitigated Disaster?” I mentioned that stimulus checks and PPP loans from Trump’s presidential term set up conditions for inflation. I had someone counter that PPP loans couldn’t have affected inflation because the money was “given to already wealthy people. They just dumped it into the NYSE.”

But why wouldn’t that affect inflation? Wall Street is a significant factor in it! I said as much and he replied, “Isn’t inflation about circulating currency? A bunch of guys hoarding their wealth seems disconnected from actual spending.”

Inflation isn’t about that.

This exchange highlighted how mainstream views obfuscate the true nature of inflation. In contrast, the Marxist perspective provides a simpler, materially grounded explanation. It focuses on the relationship between money and labor-generated value, showing that when currency increases without corresponding labor value, inflation occurs.

Understanding Value and Labor

At the core of Marxist economics is the labor theory of value, which asserts that the value of goods and services is directly linked to the labor involved in their production. All economic value stems from people’s work creating products and services.

For example, consider a chair. Its value comes not only from the labor required to design, craft, and assemble it but also from the labor involved in sourcing and refining the materials. Without human effort to find, procure, or refine these materials, they wouldn’t have value. The labor that goes into every aspect of this chair is what imbues it with value. If the chair took no effort and could simply materialize from nothing, it would be worth nothing once it became obvious that the labor needed to produce it was zero at every point of production.

In this framework, surplus value, or profit, arises when workers produce more value than they receive in wages. If a worker is paid $10 for an hour of work but produces $20 worth of goods, the extra $10 is surplus value, benefiting the capitalist (the owner of the means to produce that they pay the worker to utilize).

This perspective contrasts with mainstream views that often emphasize supply and demand as determinants of value. While supply and demand can influence prices, they do not create value. These concepts describe market dynamics but overlook labor’s prime role in value creation. Supply and demand can fluctuate due to many factors, but without labor, there would be no goods or services to exchange in the first place.

This is where we must distinguish between price and value. Value is derived from the labor invested in creating a product, while price is what consumers are willing to pay in the market. Prices can fluctuate based on external factors like scarcity, demand, or speculation, but these changes do not reflect the inherent value created by labor. Value remains grounded in the work done, while price can vary due to market conditions.

Historically, the American dollar was tethered to a specific commodity – gold. This connection enforced a specific value for the dollar because gold itself required significant labor to mine, refine, and process. The gold standard meant that currency had a tangible backing, linking it directly to the labor required to produce a valuable commodity. When the dollar was untethered from gold, it lost this direct connection to labor-generated value, allowing for currency expansion without corresponding increases in labor or goods.

When currency is introduced into the economy without corresponding value generated by labor — like printing more money without producing more goods and services — it leads to a disconnect. More money chases the same amount of (or at least outpacing the amount of) goods/value, contributing to inflation.

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Currency and Inflation

Inflation’s obfuscation in mainstream economics leads people to think it is an overly complex, impossible-to-understand concept. However, the Marxist view is actually much simpler; inflation is a result of the disconnect between the money supply and the value created through labor. It’s a simple “if this, then that.” If more currency is introduced into the economy without a corresponding increase in value (ultimately, goods and services), then the purchasing power of money decreases.

For instance, when the Trump administration distributed stimulus checks and PPP loans to boost the economy, this injected significant amounts of money into the system. These funds were not matched by an increase in overall value, so they contributed to inflation. The additional currency chases the same amount of goods, leading to higher prices.

Inflation reflects a fundamental imbalance between currency and labor-generated value. Unlike mainstream views that often attribute inflation to factors like interest rates or market speculation, the Marxist perspective emphasizes that value comes from labor. When the money supply grows faster than the production of goods and services, it creates a gap that results in inflation.

Stimulus checks and PPP loans, while providing immediate financial relief, can exacerbate this disconnect if not coupled with increased production. As seen with PPP loans, the influx of money into financial markets can further inflate asset prices without contributing to real economic value.

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Critiquing Mainstream Views

Mainstream economic theories often attribute inflation to interest rates, monetary policy, or market speculation.

Interest rates are considered a tool for controlling inflation by influencing borrowing and spending. Interest rates are the cost of borrowing money, and when loans are repaid with interest, more money enters circulation. When rates are raised, borrowing becomes more expensive, reducing consumer and business spending, which can stabilize prices. Conversely, lowering rates encourages spending and investment, stimulating the economy but potentially increasing inflation.

While it might sound like lowered interest rates — less paid back on loans — would decrease the money supply, it actually causes more loans, which increases the money supply. Simply manipulating interest rates can only control the growth of the money supply, but without tying it to labor-created value, it can’t and doesn’t address the root causes of inflation.

These explanations overcomplicate the issue and obscure the fundamental disconnect between currency and labor-generated value. The focus on interest rates only addresses growth in the money supply, which is not the actual problem. While technically accurate, it misses the full issue: money supply is growing faster than value generation.

The terminology and insider discussions in mainstream economics often detach value from labor, instead fixating on market dynamics. In contrast, the Marxist perspective provides a straightforward explanation by emphasizing the labor theory of value. It stresses that true value stems from labor and that inflation occurs when currency increases without a corresponding rise in labor-created value. This disconnect leads to higher prices, as more money chases the same amount of goods.

Interestingly, this perspective shares some similarities with libertarian calls to reinstate the gold standard, as both emphasize the importance of currency being backed by tangible value. However, the reasoning differs significantly; libertarians typically subscribe to subjective value theory, focusing on individual preferences and market dynamics rather than the labor theory of value. Despite these ideological differences, both critiques highlight the need for currency to maintain a clear relationship to real value creation, ensuring economic stability and addressing the root causes of inflation.

While I don’t agree with subjective value theory, I think it is interesting that people with completely different ideas about where value comes from land in similar places in terms of the need for a real value standard.

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Conclusion

Unlike mainstream views that focus on interest rates and market speculation, the Marxist approach highlights the fundamental disconnect that occurs when the money supply outpaces value generation.

Inflation doesn’t have to be as complicated as mainstream economists make it seem. By viewing inflation through the lens of labor and value, we strip away the jargon and focus on the core issue: the disconnect between the money supply and labor-generated value.

When currency outpaces real value creation, inflation occurs. The end.