Two issues dominated world politics as International Socialism went to press: the war in Ukraine and the developing economic crisis.1
First, the war. Russia’s initial offensive failed to topple Volodymyr Zelensky’s government in Kiev. Instead, Russian forces have refocused their efforts on the Donbas region in the south-east, where pro-Russian separatists, with support from Moscow, have been fighting the Ukrainian army for eight years. Vladimir Putin’s goals now seem to have shifted to occupying this region and connecting it to Crimea, the southern peninsular seized by Russia in 2014. Russian tactics have become increasingly reliant on bombarding urban areas to break resistance, creating scenes reminiscent of those during earlier conflicts in Syria and Chechnya.2 With the redirection of Putin’s efforts, it now seems likely that the war will grind on, killing and mutilating soldiers and civilians, with the ever-lurking background threat of escalation to a nuclear exchange.3
This journal opposes the invasion of Ukraine but also argues that the war can be understood only in the context of long-standing inter-imperialist rivalries.4 As Rob Ferguson shows in this issue, the rivalry has pitched Russian imperialism against that of the Western powers, with NATO expansion a key factor engendering conflict in the region. The war is not simply one of national self-defence but also a proxy conflict on the part of NATO. Ukraine’s rulers have solidified their identification with the Western powers since 2014. Where “pro-Russian” once meant support for integration into a Russian-led bloc, a policy espoused by some Ukrainian oligarchs, after 2014 the label was attached to anyone advocating “non-alignment” or “pragmatic cooperation with both West and East”. By 2019, the constitution was changed to make membership of NATO and the European Union strategic goals for the country.5 In this sense, the Donbas conflict and the seizure of the Crimea “ultimately helped to produce…the consolidation of a firmly pro-Western Ukraine with growing ties to the EU and NATO”.6 Zelensky himself has painted a grim picture of a future Ukraine—not as a liberal and neutral “Switzerland”, but rather a “big Israel”, integrated into the West through security guarantees and with armed forces “in all institutions, supermarkets, cinemas”.7
Recent developments have strongly reinforced the war’s proxy character.8 Most notably, in the wake of Russia’s early setbacks, the United States has bolstered its support for Ukraine. This reflects US president Joe Biden’s desire to deal a major blow to Russian imperialism, presumably to help clear a path for confrontation with the US’s more serious rival, China. In late May, Biden signed legislation authorising a $40 billion package for Ukraine, to be spent by the end of September, increasing total US support to $54 billion.9 This is intervention on a colossal scale. By way of comparison, annual Russian military expenditure for 2021 was $65.9 billion.10 Ukraine’s total government expenditure prior to the invasion was a little under $30 billion a year.11
The US and its allies are seeking to use the conflict to reboot Western imperialism after the damage done by previous wars such as those in Afghanistan and Iraq. As part of this, NATO has substantially increased its presence in Eastern Europe:
In early 2022, NATO countries began to increase their military forces in the eastern part of the Alliance… Following Russia’s invasion of Ukraine in February 2022, NATO decided to add four further battlegroups in its eastern flank, in Bulgaria, Hungary, Romania and Slovakia… Elements of the Response Force, created after the 2014 Ukraine conflict, were activated for the first time… As of 16 March 2022, NATO says it has 40,000 troops under direct NATO command, 130 allied aircraft at high alert and 140 allied ships at sea.12
There are also plans for further NATO expansion, with Finland and Sweden submitting applications to join, the former potentially increasing the border between NATO members and Russia by 1,300 kilometres. Currently, Turkey’s president, Recep Erdoğan, is threatening to veto the expansion, claiming he objects to Swedish support for the Kurdish minority persecuted by the Turkish state. If his resistance is overcome, the expansion would leave Ireland and Austria as the last EU countries outside NATO and would cement the growing security ties between the Nordic countries and the US and Britain.13
The cost of living crisis
The war is not simply a tragedy for those directly impacted. It has also escalated a rise in food and energy prices, with the consequences most sharply felt in the Global South. As Daniel Maxwell, a professor of food security, points out:
Together, Russia and Ukraine account for almost 30 percent of total global exports of wheat, nearly 20 percent of global exports of corn (maize) and close to 80 percent of sunflower seed products, including oils. The war has largely shut off grain exports from Ukraine and is affecting Ukrainian farmers’ ability to plant the 2022 crop… Global food and fertiliser prices were near record highs even before Russia invaded Ukraine in February 2022. Prices for grain and oilseed products had already reached or surpassed levels recorded in 2011, when a devastating famine in Somalia—triggered in part by extreme food prices—killed more than 250,000 people.14
A combination of wars, repeated droughts linked to climate change and Covid-19 has already pushed 161 million people, in 42 countries, into extreme food insecurity. In the Horn of Africa, the collapse in rural labour markets and of prices of livestock on local markets, coinciding with the spike in global food prices, means devastation.15
In less deadly form, inflation had also generalised across the Global North. Inflation reached a record 7.4 percent across the Eurozone in April and 8.3 percent in the US, while the 9 percent level in Britain in April was the highest since 1982, with the lifting of the energy price cap ensuring the biggest monthly rise since April 1980.16 The impact on workers’ living standards is even worse than this implies. Food and fuel are driving much of the rise, so the poorest, who spend the greatest share of their income on these, are disproportionately impacted.17
In this context, the Tories succumbed to pressure to introduce a windfall tax on energy companies. Their motivation to do so was strengthened by the re-eruption of the scandal surrounding Boris Johnson’s flouting of his own lockdown rules and his likely breach of the Ministerial Code, which outlines the expected conduct of ministers.18 As we went to press, Johnson had narrowly survived a no confidence vote by his own MPs, by 211 votes to 148, wounding his premiership, perhaps fatally. The money raised by the windfall tax will help subsidise one-off payments to households and benefits recipients. However, this will provide only limited and temporary relief in the context of an ongoing and worsening crisis.19 Even before the energy cap rose in April, a quarter of adults were struggling to pay their bills, with many borrowing to fund daily expenditure, while food banks have reported surges in demand. Further pain is expected: the energy price cap is set to rise again in October, and energy costs are starting to feed through into rising prices for other goods.20
What drives inflation?
Inflation has, then, become an ideological battleground. Indeed, the class character of mainstream economics has seldom been starker. As Economist correspondent Duncan Weldon points out, there have been two mainstream theories of inflation: “the Friedmanite monetary theory that inflation was the result of too much money chasing too few goods and the Phillips Curve theory that postulated a relationship between inflation and unemployment. Both theories have broken down empirically over the past three decades”.21 In the absence of any credible theory, figures such as the governor of the Bank of England, Andrew Bailey, have fallen back on blaming inflation on a “wage-price” spiral, demanding workers accept “painful” pay curbs. As Martin Sandbu, European economics commentator at the Financial Times, and hardly a revolutionary socialist, puts it:
It is so ingrained to ask how wage demands affect inflation that it is easy to miss the equivalent question about margin and profit protection. This is, I suppose, ideological in the sense that it unwittingly frames the problem so that the plausible answer favours the interests of one economic class. But economic class is a concept that has been largely exiled from mainstream economic debate for a long time.22
In this ideological battle, it is important we arm ourselves with better explanations for what is going on. What follows offers a necessarily compressed attempt to present a Marxist approach to inflation. This is far from straightforward: inflation is a complex phenomenon, driven by multiple interacting processes and requiring analysis at different levels of abstraction.23 Futures issues of this journal will hopefully build on the approach here, which is, at best, a first approximation.
One relatively straightforward driver of inflation would be an increase in the value contained in a substantial subset of commodities.24 A potential cause of this is the way in which capitalism pushes up against its ecological limits. For instance, climate change or the exhaustion of the most easily extracted natural resources might impose greater costs—in value terms—on production or energy generation. This will likely play an increasing role in the decades ahead. Moreover, slowing capital accumulation in countries such as China means that wider productivity gains, which normally reduce the value of particular commodities, are less likely to offset such changes. However, this long-term shift cannot be the main explanation for current rapid price rises.
To properly understand inflation, we must include money in our analysis. Inflation usually only becomes embedded in economies, raising price levels over a prolonged period, once money is no longer freely convertible into a commodity such as gold.25 This does not mean Marxism accepts the dogma of monetarism—that inflation is produced by the oversupply of money or can be tamed simply by restricting its supply. Karl Marx was himself hostile to the “quantity theory of money”, which was espoused by many economists in his day and made similar claims.26 Indeed, much of Capital assumes that money takes the form of gold, a “commodity money” with its own intrinsic value.27 This was justifiable when analysing capitalist production in its most abstract form.
However, as Marx began exploring more concrete phenomena, such as those discussed in the unfinished third volume of Capital, he had to drop many of his earlier simplifying assumptions. Later Marxists have also recognised that commodity money has largely been displaced as capitalism has developed, leading to a situation in which money predominantly takes the form of inconvertible “credit money”. This consists of banknotes and, especially, bank deposits. Today, new money is created through the financial system, primarily by banks extending credit. The supply of money by private financial institutions is made more secure through their interaction with central banks. Central banks create “state-backed money”, underpinned by the state’s promises to pay its debts. Central banks typically both monopolise the issue of legal tender and guarantee the convertibility of the money created by banks into state-backed money.28 This also allows central banks to become a key tool through which states intervene in the economy.
In this world, Costas Lapavitsas writes, “Credit money…is inherently unstable…based as it is on the volatile integration of credit with real accumulation”.29 Capitalist production typically begins with the injection into the economy of money, made up of either previously accumulated funds or newly created credit money. As Alfredo Saad-Filho argues, “If more output is produced and sold, additional income is created, which cancels out the initial shift in the relationship between money and value.” However, if the output cannot be sold or is sold at a discount, the firm should suffer a loss: “If ‘market rules’ are respected, a well-defined set of agents bears the costs, usually the firm or its bank… Alternatively the loss may be socialised if the debt is refinanced or if the firm receives a state subsidy”.30 If the loss is socialised, an imbalance can emerge between the amount of money flowing through the circuits of capital and the amount of value being generated. This will create the potential for price levels to rise, leading to a situation in which a given sum of money comes to represent a diminished claim over value. This understanding of inflation differs from monetarist approaches in integrating the generation of extra money through the activities of banks together with the action of firms producing and accumulating capital. Moreover, in this view, creating money does not automatically generate inflation. For instance, quantitative easing, through which central banks create money to purchase assets such as bonds and inject liquidity into the financial system, has been widely used since 2008. However, little of this money flowed into production or accumulation, and it appears to have had little impact on prices for goods and services; it simply generated financial asset price bubbles.31
The “extra money inflation” theory described here offers valuable insights into the conditions under which inflation can become embedded in an economy.32 However, determining if inflation will happen is another matter, requiring more concrete analysis. It also requires that we distinguish between transitory upsurges in prices, which happen for a variety of reasons, and inflation proper. Though Marxism rejects the notion that supply and demand determine the price of commodities, it recognises that these forces cause market prices to deviate from underlying values.33 A sudden shortage of a commodity—for instance, the oil shortages due to the embargo launched by the OPEC producers’ cartel in 1973—can certainly raise prices. A sudden increase in demand for a commodity with constrained supply can have the same effect. These swings are reinforced by financial speculation, which is particularly rife in markets for commodities such as food or energy.
Price surges of this kind featured heavily in the wake of the Covid-19 pandemic.34 A major trigger for rising prices has been the collision of restored demand—including pent-up demand that was unsatisfiable during coronavirus lockdowns—with shortages due to earlier suspensions of production, disruptions to logistics and labour shortages in key industries. In the case of gas, the extent to which European supply is dependent on imports is a key factor, with inflation tending to be most pronounced in economies more reliant on Russian supplies. A shift away from coal in countries such as China and India has exacerbated the problem by heightening competition for shipments of liquified natural gas from the US and Qatar.35 Meanwhile, oil producing countries in the OPEC+ group, which includes major producers outside OPEC such as Russia, have stuck to an agreement forged in 2020 to increase output only gradually. Saudi Arabia, the leading oil exporter, has rejected calls, most recently by the G7, to increase sales to offset disruption caused by the war—and has maintained a neutral position towards Russia.36 Even when oil exports rose, as they did in the early months of 2022, prices were slow to fall, prompting concerns about the role of speculation, including by traders employed by large oil firms and banks.37
If these are simply short-term shocks, we might expect the inflationary surge to pass quickly. What matters here is how firms react. At this more concrete level, the most compelling Marxist explanations focus on profitability. So, Marxist economist Guglielmo Carchedi argues that large firms can respond to the injection of new money into the economy by raising prices to offset pressure on their rate of profit.38 This tendency will be strongest in industries dominated by a small number of firms or where the state intervenes strongly to support demand.39 As I argue below, naked profiteering of this kind is heavily implicated in the current crisis. Nonetheless, capitalism remains an economic system built around competition. Firms do not generally have the freedom to raise prices at will without running the risk of being challenged and displaced by rivals. This leaves open the question of how prolonged such price rises will be. That question is at least partially answered by another radical economist, Anwar Shaikh, who provides evidence that periods of prolonged inflation tend to occur when credit creation coincides with growing strain on the economy as a rise in the rate of accumulation pushes it close to its upper limit, the rate of profit.40
If these insights are correct, two conclusions follow. First, it is quite likely that inflation will subside later this year, particularly if economies enter recession. This follows from Shaikh’s argument: there were sharp increases in investment from late 2021, but the pattern in recent decades has been for peaks in accumulation to be short-lived, soon sinking back to lower levels.41 This distinguishes the current period from that of the stagflationary crisis of the 1970s, when, according to Shaikh’s data, accumulation continued at high levels even as profit rates were collapsing. Second, we should be confident in identifying the drivers of the current cost of living crisis: companies taking advantage of the current inflationary climate to boost their own profitability.42 Indeed, economic historian Adam Tooze has compiled evidence showing how a push for profits explains surging prices far better than a supposed wage-price spiral. From the second quarter of 2020 to the end of 2021, 53.9 percent of price rises in the US were driven by increased corporate profits, with 38.3 percent due to non-labour inputs such as raw materials, energy or machinery. Meanwhile, a mere 7.9 percent of the price rises could be attributed to increasing labour costs, well below the average for 1979-2019 (61.8 percent).43
Nowhere is this corporate culpability clearer than in the case of the large oil and gas firms, who have taken full advantage of rising prices. BP’s profits in the first quarter of the year rose from $2.6 billion in 2021 to $6.2 billion in 2022; for Shell, from $3.2 billion to $9.1 billion; for ExxonMobil, from $2.8 billion to $8.8 billion.44 By contrast, wage increases in countries such as Britain are still running well below the rise in living costs, particularly in the public sector—even though workers have already suffered the longest period of wage repression since the Napoleonic wars.45
And now recession…?
Capitalism’s economic woes are not limited to the cost of living crisis. There are now widespread fears that a global recession is developing.
Over recent decades, and especially since 2008, depressed profitability across the advanced economies has made capitalism increasingly dependent on the expansion of credit. This, in turn, requires low interest rates, which must be slashed further still—and supplemented with measures such as quantitative easing—each time the economy stalls. The result has been an increasingly bloated and fragile financial system, alongside a mass of heavily indebted firms and sluggish growth, but no 1930s-style meltdown of the system.46
Inflation threatens these methods of supporting the economy. Neoliberal dogma insists on two features of central banks: they should be formally independent of government and should target inflation by manipulating interest rates.47 The danger now is that their response to the surge in inflation is to crash the economy by increasing borrowing costs. As Chris Giles, another of the Financial Times journalists to take a swing at the Bank of England (BoE), writes:
Imagine you are a policymaker and you have been given the task of controlling inflation… The tool you have is interest rates, which you raise to increase borrowing costs… This is painful medicine… There can be no doubt: the BoE is giving us all a good kicking… It wants us to feel poorer, spend less and be more fearful about demanding pay increases. It wants companies to think twice about raising prices.48
The underlying issue here remains low levels of profitability, which could ultimately only be addressed through a clearing out of unprofitable capital and the destruction of credit—on such a scale that it would destabilise the entire system. In his own vulgar way, Elon Musk captured this contradiction, responding on Twitter to a follower who asked if we are heading for recession: “Yes, but this is actually a good thing. It has been raining money on fools for too long. Some bankruptcies need to happen.” Musk, class warrior that he is, added that workers might also learn that they need to “work hard”.49
Workers in the storm
How should we respond to the developing economic war against us? Here in Britain, in the absence of serious attempts to launch a fightback by Labour leader Keir Starmer or the leaders of the major unions, there are dangers of right-wing and racist forces seizing the initiative. One government response to growing economic discontent and the scandal engulfing Johnson was the Home Office’s new policy of deporting refugees and asylum seekers to Rwanda. Judith Orr’s article on France in the current issue shows how such state racism can boost more extreme right-wing forces—to the extent that a far-right candidate could win 41 percent in the French presidential election. The left must mobilise to challenge racism and the right—as well as in opposition to the imperialist drive to war—but we should also draw hope from workers seeking to counter the rising cost of living through struggle.
The interview with Sri Lankan socialist Ahilan Kadirgamar in this issue shows how inflation can fuse with longer-term discontent and drive workers’ rebellions. In Iran, too, there are strikes and protests against prices rises. Albania has seen a new movement emerge with the slogan: “Tax the oligarchs—not the people”.50 These movements recall other upsurges of protest—the 2011 Arab Spring and the global revolts of 2019—driven, at least partly, by sharp rises in the cost of living.
Less dramatically, but no less welcome, there have been important victories for the labour movement in the US. These include the first unionisation of an Amazon depot, on Staten Island, votes in favour of unionisation at over 70 Starbucks stores and efforts to spread the new mood through the retail sector.51 Even in Britain, there has been a modest uptick in localised union struggles, which indicate how the ailing Johnson government could be brought down and workers’ declining living standards addressed. The GMB union has reported that the number of disputes from October 2021 to March 2022 was seven times the level in the same period in 2019-20; the Unite union claimed a four-fold rise in disputes.52 There has also been extensive industrial action on the railways and the London Underground. Socialists should nurture these signs of resistance—we will need them, and much more, if the gathering economic storm becomes a hurricane.
Joseph Choonara is the editor of International Socialism. He is the author of A Reader’s Guide to Marx’s Capital (Bookmarks, 2017) and Unravelling Capitalism: A Guide to Marxist Political Economy (2nd edition: Bookmarks, 2017).
1 Thanks to Richard Donnelly, Judy Cox, Sheila McGregor and Mark Thomas for feedback on earlier drafts.
2 Wasielewski, 2022.
3 D’Eramo, 2022.
4 See Choonara, 2022. New Left Review has adopted a similar approach—see Watkins, 2022.
5 Ishchenko, 2022, pp23, 25.
6 Wood, 2022, p52.
7 Zelensky, 2022.
8 For a discussion of the concept of a “proxy war”, see Callinicos, 2022.
9 Edmondson and Cochrane, 2022. Strikingly, none of the members of the left-wing “Squad” in Congress, nor left-wing senator Bernie Sanders, opposed the package.
10 SIPRI, 2022.
11 World Bank data, current US$s.
12 Brooke-Holland, 2022.
13 Stevenson, 2022.
14 Maxwell, 2022.
15 The United Nations Food and Agriculture Organisation’s food price index, composed of a weighted average of exported food commodities, is 60 percent above its 2014-6 average. During the 2011 upsurge that helped trigger the Arab Spring, it was just 30 percent above this average.
16 Leslie and Holdsworth, 2022.
17 See Tims and Caddick, 2022.
18 It remained unclear as we went to press whether the growing clamour for Johnson’s removal, not least from some of his own MPs, would succeed.
19 Kimber, 2022.
20 Leslie and Holdsworth, 2022.
21 Weldon, 2021; see also Roberts, 2022a. Weldon cites a recent paper by Jeremy Rudd, a Federal Reserve official, challenging the idea that “inflation expectations” can guide policymakers, noting Rudd’s revealing footnote: “I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable and unjust social order.”
22 Sandbu, 2022.
23 Saad-Filho, 2002, pp99-100.
24 Value here reflects the socially necessary labour time required to produce the commodities—Choonara, 2017, pp16-24.
25 See Shaikh, 2016, p696. Prolonged inflation developed in the US only once it left the gold standard in 1933, and more so from 1971 as Richard Nixon ended convertibility of the dollar into gold, which had underpinned the Bretton Woods system.
26 De Brunhoff, 2015, pp19-48; Itoh and Lapavitsas, 1999, pp4-40.
27 In a commodity money system, inflation tends to result from increases in the productivity of gold production.
28 Lapavitsas, 2017, pp113, 264, 280. Lapavitsas describes state-backed money as a hybrid between credit money (created by central banks lending to private banks) and fiat money (the circulation of which is assured by the state).
29 Lapavitsas, 2017, p41.
30 Saad-Filho, 2002, p103.
31 Harvey, 2006, p309, anticipates this situation, distinguishing between “central bank money” that is “converted into…effective demand for commodities” and that which simply feeds “the circulation of fictitious capitals and…speculative fevers”.
32 Saad-Filho, 2002, pp102-105.
33 More accurately, market prices fluctuate around “prices of production”—Choonara, 2017, pp94-99, 128-130.
34 As Kambiz Boomla shows in this issue, the pandemic is not over. Nevertheless, most economies have lifted restrictions, with the important exception of the current lockdowns in China, which are creating further supply bottlenecks for some goods.
35 Sheppard, 2021.
36 England and Al-Atrush, 2022.
37 Juhasz, 2022.
38 Carchedi, 1991, pp169-172. See also Harvey, 2006, p311.
39 Saad-Filho, 2002, pp101-102, points out that some versions of the Marxist approach to inflation have centred on monopoly power or state intervention. It is better to see these as factors exacerbating and shaping inflationary tendencies.
40 Shaikh, 2016, pp692-723.
41 Bakir and Campbell, 2010; Choonara, 2018.
42 See Roberts, 2022b.
43 Tooze, 2022.
44 Milman, 2022.
45 Trades Union Congress, 2022.
46 Choonara, 2018.
47 Lapavitsas, 2013, pp193-199.
48 Giles, 2022.
49 Journalists quickly pointed out that Musk has not been averse to enjoying the largess of the US state—Lawrence, 2022.
50 Peçuli, 2022.
51 Press, 2022.
52 Wall, 2022.