Wednesday, 1 July 2015

Capital III, Chapter 9 - Part 9

If the rate of surplus value remains the same, the general rate of profit can change as a result of a change in the organic composition of capital. But, a change in the organic composition of capital, for example, the introduction of some new machine, is inevitably accompanied by some change in the rate of surplus value, that is likely to at least offset it. Moreover,

“... such technical changes must always show themselves in, and be attended by, a change in the value of the commodities, whose production would then require more or less labour than before.” (p 167)

So, the tendency for the rate of profit to fall, attendant upon such a rise in the organic composition, will be neutralised both by a reduction in the value of the constant capital – and possibly the variable capital too – as well as a rise in the rate of surplus value. Moreover, at a certain point, where this might reach its limit, the likelihood is that any surplus value, which then risked being over-accumulated, in this particular sphere, would already have been seeking opportunities for investment elsewhere. This is indeed the very principle behind the process, which leads to the establishment of an average rate of profit in the first place.

Long before it fell to some ill-defined minimum, it would have been looking for alternative, higher profit spheres in which to invest. That might be new types of commodities, new industries, or new geographical locations. The determining factor here is, in fact, not the tendency of the rate of profit to fall, but the long wave cycle, which determines the quantity of such alternative profitable spheres of investment.

And Marx points out,

“1) On the one hand, they are the laws of the general rate of profit. In view of the many different causes which make the rate of profit rise or fall one would think, after everything that has been said and done, that the general rate of profit must change every day. But a trend in one sphere of production compensates for that in another, their effects cross and paralyse one another. We shall later examine to which side these fluctuations ultimately gravitate. But they are slow... Since the general rate of profit is not only determined by the average rate of profit in each sphere, but also by the distribution of the total social capital among the different individual spheres, and since this distribution is continually changing, it becomes another constant cause of change in the general rate of profit. But it is a cause of change which mostly paralyses itself, owing to the uninterrupted and many-sided nature of this movement. 

2) Within each sphere, there is some room for play for a longer or shorter space of time, in which the rate of profit of this sphere may fluctuate, before this fluctuation consolidates sufficiently after rising or falling to gain time for influencing the general rate of profit and therefore assuming more than local importance. The laws of the rate of profit, as developed in Part I of this book, likewise remain applicable within these limits of space and time.” (p 169)

Once again, Marx's analysis here demonstrates how remote any tendency for the rate of profit to fall must be from the cause of capitalist crises, other than at best on a purely localised basis, i.e. in relation to some specific sphere.

Tuesday, 30 June 2015

Suspended Disbelief

Writers and film makers talk about the need for a suspension of disbelief. That is, we all know that a man cannot fly, so how could we sit and enjoy a Superman film, whose central thesis is about a man who can fly? We can only do so by suspending disbelief. Having watched the film, we can go back to our belief that men cannot fly. Watching the events unfolding around Greece, and the comments of various bourgeois pundits and politicians, as well as the response to events by financial markets, it seems once again that in order to follow this story we again have to suspend disbelief.

The various bourgeois pundits are asking us to believe in things that simply, on any rational basis, are not possible. Some of the things they are asking us to believe are simply a repetition of the lies being put out by conservative politicians, but even where that is not the case, they want us to believe a scenario of how things could be resolved, which is simply unbelievable – not just difficult to believe, but logically, practically and physically impossible. What is more that is increasingly not the case just with Greece, but with what we are being asked to believe about the global financial system as a whole. For example, its not just Greece that is about to default on its debt. Yesterday, Puerto Rico announced that it simply could not repay its debt on its Municipal Bonds. Half of all US Municipal Bond Funds have Puerto Rican bonds in their portfolio.

Puerto Rico is not the only one. Detroit has also basically gone bust, Chicago is heading in the same direction, and large numbers of other cities, across the US, are in a similar position. Last week, I pointed out that the Chinese stock market is in a huge bubble, having risen by 128%, in the last year alone. I suggested that in the face of the institutions not reaching a deal with Greece, Asian markets were likely to crash when they opened on Monday. The Chinese Stock Market crashed by 7.5%, before later recovering, and closing down 3.5%, despite intervention by the Peoples Bank of China, which cut official interest rates further, slashed banks' reserve requirements, and made credit even easier.

This reflects a situation I set out more than five years ago, of a series of bifurcations in the global economy and financial system. We have a number of economies which have been acting rather like Britain did in the 19th Century, China being the most notable, in that they have been pumping out vast quantities of commodities into the global market. But, that has not been matched by an equal value of commodities moving in the other direction, at least not from a range of the economies importing those commodities, such as the US and UK. Other economies have been sending large quantities of commodities to China, in the form of the raw materials, energy and so on it has required to keep its industrial engine going. The consequence is that many of these latter economies, as well as economies like China, have been building up large surpluses. Those surpluses have been matched by large deficits in economies like the US and UK.

At the same time, those large companies, particularly in the high value areas of production, such as various forms of new technology, have themselves built up vast reserves of cash, as their rate and mass of profit has soared in the last three decades. But, workers and small capitalists have themselves built up increasing amounts of debt. In fact, in both the US and UK, one form of debt that did not even exist 30 years ago, on any kind of significant level, student debt, has taken on significant proportions. The average UK student now goes into the world with a debt of around £80,000! In the US, student debt stands at over $1 trillion, and is one of the only forms of debt that you cannot wipe away by declaring bankruptcy.

In the US, the 2008 housing crisis that acted as a spark for the financial meltdown was founded upon huge amounts of mortgage debt built up to preposterous levels, for the simple reason that house prices were continually inflated, and the reason the prices could be continually inflated was because borrowers were allowed, and encouraged, to take on ever increasing levels of unsustainable debt, to pay for houses at increasingly unsustainable prices. The same thing happened in the UK, but here the resolution of that contradiction is yet to play out, in its inevitable manner, via a violent crash in property prices, as it did in the US, Ireland, Spain and so on.

But, this is another illustration of the suspension of disbelief. In 2000, the NASDAQ stock index in the US, hit 5000. The price of technology shares had been rising often by high double digit percentages, every year from the mid 90's. The Financial Times wrote that it was a bubble, others said it was a bubble, but other financial pundits, particularly those representing the equity funds, came out to say, no this time it was different. By March 2000, the NASDAQ crashed. It fell by 75%! Its only just, 15 years later, got back above 5,000 and many believe that its once again in a bubble.

When I bought my first house in 1977, I paid £5,000. Today, the average house price is said to be £200,000 plus. That is a 40 fold increase in less than 40 years. But, wages and other living standards have not risen 40 fold during that period. Its what led even one Tory Minister to compare house prices with the price of a chicken. If the price of chicken had risen in the same proportion as house prices, he said, then a standard chicken today would cost you £47. These house prices, like stock market prices are quite obviously not unsustainable, any more than was the NASDAQ at 5000 in the year 2000. 

The Dow Jones Index rose 1300% between 1980 and 2000, but its economy grew by only a small fraction of that amount.  The Dow Jones today is 1700% higher than in 1980, and again that is many times the actual increase in its economy during that period. You have to suspend disbelief to allow yourself to accept that these astronomical prices can continue, rather than running for cover, in the sure and certain knowledge that their must be an almighty crash when appearance comes into line with reality.

If you allow yourself to believe that a man can fly, and on that basis jump off a 100 floor building, you might be able to sustain that suspension of disbelief for a while, as you appear to fly. But, eventually the reality of that flight catches up with you. Falling is not flying. And that is a good parallel with the build up of debt to sustain high house prices, and stock prices. What appears to be rapidly growing wealth, as these asset prices rise, is in reality merely growing debt.

Another example, is given by the statements of various financial pundits. At almost every opportunity in the last few weeks, they have lined up to announce that for this or that reason the Federal Reserve will not raise official interest rates until next year. Why? Because they know that the inflated level of stock and property markets is based upon these low official interest rates, and the oceans of liquidity that the banking and shadow banking system has been pumping into financial markets. And so, these prophets of the free market find themselves in the position of having to argue that central planners can dictate the price of loanable money-capital! Why because, as soon as they stop their suspension of disbelief, as soon as they stop watching the movie, and return to the real world, they have to recognise that the astronomically high levels of shares, bonds and property are not sustainable. They look down, and see there is nothing below holding them up, and so they must fall to earth.

That is not possible for such pundits, because their whole existence depends on the movie continuing, on the continuance of the suspension of disbelief. But, they are supported in that, because all of those people who have seen their fictitious wealth in the form of their shares, and property prices rise, have every reason to continue to suspend disbelief too. Why wouldn't they want to see the movie continue in which they see their apparent wealth rise year on year, without any effort or hard work from themselves? It is the movie that newspapers like the Daily Express, whose readership is made up of such people, is happy to contribute to.

And of course, the reality behind the situation in Greece is not really any different. Just like the people who were encouraged to buy houses at ridiculously high prices, or who have been persuaded to take on increasingly ridiculous levels of student debt, which many will never be able to repay, let alone recover in higher earnings, during their lifetime, so Greece, and other peripheral Eurozone economies were encouraged to take on debt, to finance their own unsustainable levels of consumption. Of course, in the case of these economies, it is not the ordinary citizens who undertook this unsustainable consumption, in large part, other than those who also thought they could get rich quick by investing in property, which inevitably crashed, it was the rich who were the ones borrowing to buy Mercedes imported from Germany, or who were making millions from shady construction schemes, often tied to corrupt politicians, an so on.

And once again, in listening to the comments of conservative politicians and pundits it is again necessary to suspend disbelief to not simply fall around laughing, or tear your hair out in despair. Greece has to suffer this austerity, because they over borrowed and overspent in the past, they say, rather like if you drink too much, you shouldn't complain about the hangover that follows. But, the trouble here is that the people who suffer not just a hangover, but the lobotomy, are not the people who overbought or over borrowed. The rich Greeks who did that, have long since taken their ill-gotten gains out of the country, along with the corrupt politicians who for decades created such a clientelist state. It is the ordinary Greek worker and peasant, who had no say in any of those decisions, and was no part in robbing the country blind, who is being asked to make good the cash in the coffers that the rich robbed out of it.

A similar thing was seen in Ireland, where property prices were again driven sky high before collapsing by 60%, and where on the back of it, the banks over lent, and lent to finance construction schemes that collapsed. It was not the banks that suffered the consequence of that. They got the Irish capitalist state to bail them out, just as the capitalist state in many other countries, including Greece, bailed out the banks that had caused this catastrophe. And, the state then asked the ordinary citizen who had been no part of this scam, to pick up the tab. If the workers in Ireland, Portugal, Spain, Italy and other countries are themselves able to step outside the movie theatre and end the suspension of disbelief, they would this week be on the streets, like the workers in Greece, demanding that an end be put to any further bailout for the banks, and thereby for the rich money lenders who for decades have gained from lending out money recklessly, but want to take none of the consequences when they fall due.

Because, what is the truth about this debt, and these banks and other financial institutions. The reality is that if all of the debt were wiped away tomorrow, it would make not one jot of difference to the ability of any company to continue to churn out whatever it produces. It would have no detrimental effect on real wealth whatsoever. What is it that a bank produces? Nothing other than debt! Nothing other than a claim to a share of future revenues, without contributing anything to the production of those future revenues. If all of the debt were simply cancelled, if all share values effectively fell to zero, if property values fell to near zero, it would have nothing but a massively beneficial effect, for the vast majority of people.

The only people who would suffer, as Marx points out, are the owners of that fictitious wealth. But, the destruction of the fictitious wealth of an infinitesimally small number of money lending capitalists is nothing compared to the beneficial effect it would have on promoting real wealth creation. And, in fact, Greece is again an example of that.

Marx talks about bankers being prepared to destroy millions of pounds of real wealth, in the form of productive-capital, just to defend the fictitious value of bits of paper. In other words, they were prepared to send the real economy into a recession in order to defend then the value of the pound, and the various debts that existed. That is exactly what we see again today. In Greece, the movie we are watching has billions of Euros being poured into a bankrupt Greek economy. But, of course, the reality is that none of this money actually even touches the sides of the Greek economy. Rather like the payment of Housing Benefit to poor tenants, which actually just goes straight to grasping private landlords, so nearly all of the money coming into Greece, from the IMF and ECB, goes straight out again to pay the interest, and repay the capital to those who recklessly lent to Greece, over the last 20 years. In other words, once again the reality is that the ordinary Greek citizen is asked to suffer increased austerity, whilst the well heeled money lenders, get bailed out with billions of Euros fed through Greece, and straight back out to those lenders! The real losers if the support for Greece stops will be those lenders who will no longer keep getting supported by this drip feed from the taxpayers of Europe.

During the last five years, real productive-capital, and the potential for creating profits in Greece has been decimated. The economy has shrunk by 25%, unemployment has soared, and instead of the proportion of debt to GDP falling, it has risen from 120% to 180%.

But, perhaps one of the greatest acts of suspension of disbelief has to be to swallow the line being pushed by the conservative politicians in Greece, and across Europe. Spokespeople from New Democracy in Greece are so brazen as to be unbelievable. They seem to have learned from George Osborne and the Tories that if you are going to lie about your opponents, make it a very big lie. It is New Democracy that was the government responsible for taking on much of this unsustainable debt, and for going along with the fiddling of the figures so as to get Greece into the Euro. Of course, they were not alone, PASOK was just as guilty, and both paid the price electorally for having done so. Syriza is only the government, today, because of the economic and financial chaos that New Democracy and PASOK created over decades.

Yet, having come to office only five months ago, it is Syriza that the conservative politicians want to blame for the current situation. That is rather like the way the Tories, in Britain, for 18 years, under Thatcher and Major, not only failed to repair the roof whilst the sun was shining, but actively stripped the roof, and oversaw the destruction of the fabric of the building, as they allowed roads, hospitals and schools to fall into disrepair. At the same time, they too drove down wages, and encouraged workers to consume by taking on debt, which created the conditions for the financial crisis of 2008.

It was Labour that began to repair that situation after 1997. Yet, Osborne and Cameron were able to not only blame Labour for the financial crisis, but also to claim that Labour had overspent! You have to have not been paying attention to what was actually going on, or else to have completely suspended disbelief to swallow that story.

And that brings me to the last example of where there is a suspension of disbelief going on. It is the idea that Syriza could in some way accept the offer that was being put to them. Over the last few weeks, conservative politicians in Greece and elsewhere have been gloating, as Syriza made concession after concession to the institutions. “You see,” they chuckled, “Tsipras has had to succumb to reality and climb down, for all his rhetoric.” They anticipated that at some point Tsipras would split Syriza and form the coalition with the centre right To Potami that they had wanted to force him into after the election at the beginning of the year.

Now, having been telling us that Tsipras was making concession after concession, these same conservative politicians now tell us that Tsipras and Syriza were making no concessions at all, that they were negotiating in bad faith, and that it is they who are responsible for the collapse of talks! But, no one can believe this nonsense, today, because the world those politicians and the right-wing media lived in has gone. For weeks, social media has been reporting what was actually going on as far as those talks were concerned.

Paul Mason reported it here. But, other journalists, including those from papers like the FT, have been reporting over the last week or so, that it has been the institutions that have been playing games. First we were told that the proposals put forward from Syriza were a good basis for a deal, and then within hours, the institutions came back with masses of red lines through the document, being described by some as though they were marking Syriza's homework.

There has been no doubt for some time that the institutions were really after regime change. Some right-wing pundits seem to believe that some form of national government could be established in Greece, but, of course, it can't, or at least not one that will stand up when the first political wind blows against it. There is no part of Syriza that could be part of such a government, the centre right around New Democracy has effectively been destroyed, PASOK has more or less disappeared. The only way such a government could come about is if there were new elections, and the people voted for right-wing parties.

But, new elections would mean several weeks elapsing before any resolution. Moreover, as things stand the likelihood is that in any new elections, it would be Syriza that would be returned with an increased majority, probably no longer needing the Independent Greeks. On Sunday, Syriza effectively wins either way. If the people vote No, it will have a strengthened mandate, and the bluff of the institutions will have been called. If they vote Yes, Syriza will resign, and new elections will be held, or else someone else will be asked to form the government. But, as things stand, Syriza will then be able to adopt a position of extreme opposition, using its majority of seats in Parliament to simply vote down any austerity measures proposed by the next government.

The conservatives across Europe and their media are running around like headless chickens trying to present the vote on Sunday as a vote to stay in or leave the Eurozone. It isn't, it is a vote to accept or reject austerity, and instead to build a better Eurozone, built on the kind of principles of solidarity that the EU was supposed to foster. Several years ago, Mario Draghi said he would do everything required to defend the Euro, but at the first real test, he has failed to do so. The conservatives have tried from the beginning to present Syriza as anti-EU, because that fits their narrative. They cannot allow an alternative narrative that breaks the spell of the idea that the only solution to the massive debt, and inflation of asset prices that their policies have created, is austerity and the continued bail out of the money lending capitalists. A No vote on Sunday will be part of breaking that spell.

Greek workers should vote No on Sunday, and in the meantime workers across Europe should mobilise against the conservative forces trying to push Greece out of the Eurozone. Syriza should feel no responsibility to bail out the Greek capitalist banks. Let them go bust along with their debts to other banks and governments across Europe. Syriza should support the workers of those banks taking them over and turning them into a Greek worker owned co-operative bank, freed of its bad debts and non-performing loans. The government, as soon as the ECB cuts off support, should instruct the Greek central bank to take government paper in return for the deposit of electronic Euros into the governments account, so that it can continue paying wages and pensions and other bills.

The problem, as Marx sets out is not a lack of money. To the extent any economic problem exists it is a lack of capital. If people have funds in their accounts, they do not need Euro notes and coins to make payments. They can be made by electronic transfer, payment by debit or credit card, or even good old fashioned cheques! Provided people in Greece, continue to produce real value, and surplus value, there is no reason why what is an externally induced liquidity problem should be turned into a solvency crisis. The insolvency of Greek businesses, and families should not be induced simply in order to continue to hide the actual insolvency of the Greek and global banking system.

Capital III, Chapter 9 - Part 8

The situation described in Part 7, in relation to individual capitals, is not the case with the total social capital, however, because there the price of production is equal to the value of the social commodity-capital. So, here to say the cost-price is less than the value is identical to saying the cost-price is less than the price of production.

“And while it is modified in the individual spheres of production, the fundamental fact always remains that in the case of the total social capital the cost-price of the commodities produced by it is smaller than their value, or, in the case of the total mass of social commodities, smaller than their price of production, which is identical with their value.” (p 165)

The formula for the price of production can then be stated as equal to k + kp', where k is the cost of production and p' is the general rate of profit.

Marx says that the price of production in any sphere changes:-

“1) If the general rate of profit changes independently of this particular sphere, while the value of the commodities remains the same (the same quantities of congealed and living labour being consumed in their production as before). 

2) If there is a change of value, either in this particular sphere in consequence of technical changes, or in consequence of a change in the value of those commodities which form the elements of its constant capital, while the general rate of profit remains unchanged.

3) Finally, if a combination of the two aforementioned circumstances takes place.” (p 166) 

But, as set out previously, the price of production could rise, even if the value of the commodity falls, if the general rate of profit rises sufficiently, and vice versa. But, the processes that lead to the formation of a general rate of profit are many and varied. Mostly, they neutralise each other, and thereby can only be detected after very long periods. This is one reason why those theories that try to explain capitalist crises on the basis of the tendency for this rate of profit to fall are way off the mark. They are like a theory that describes the cause of of every aeroplane crash by blaming gravity.

“In spite of the great changes occurring continually, as we shall see, in the actual rates of profit within the individual spheres of production, any real change in the general rate of profit, unless brought about by way of an exception by extraordinary economic events, is the belated effect of a series of fluctuations extending over very long periods, fluctuations which require much time before consolidating and equalising one another to bring about a change in the general rate of profit. In all shorter periods (quite aside from fluctuations of market-prices), a change in the prices of production is, therefore, always traceable prima facie to actual changes in the value of commodities, i. e., to changes in the total amount of labour-time required for their production.” (p 166)

From the perspective of the total social capital, the sum of values equals the sum of prices. The fact of whether these prices are measured in terms of a money commodity, such as gold, or in terms of money tokens, where credit-money also circulates, is irrelevant precisely because values are measured also by the same medium. It matters not one jot whether the value of these money tokens is devalued, therefore, by half or any other figure because the measurement of values and prices changes in exactly the same proportion. So,

“... it is evident that from the point of view of the total social capital the value of the commodities produced by it (or, expressed in money, their price) = value of constant capital + value of variable capital + surplus-value. Assuming the degree of labour exploitation to be constant, the rate of profit cannot change so long as the mass of surplus-value remains the same, unless there is a change in either the value of the constant capital, the value of the variable capital, or the value of both, so that C changes, and thereby s/C, which represents the general rate of profit. In each case, therefore, a change in the general rate of profit implies a change in the value of commodities which form the elements of the constant or variable capital, or of both.” (p 166)

Monday, 29 June 2015

Capital III, Chapter 9 - Part 7

In a sense, trying to identify the exchange value, at this stage, becomes pointless. What remains true is that the Law of Value remains in operation. But, just as this law operated in a different form prior to commodity exchange, so now it adopts a different form under capitalism as commodities exchange not at their exchange values but at their prices of production.

Society cannot escape the fact that it has limited social labour-time. Using more for the production of one commodity means less for some other. If the labour-time required to produce one commodity rises, its value still rises, but how this is ultimately now manifest depends on a series of intervening factors that determine its price of production.

Marx recognises this change and writes,

“For all other purposes, the statement that the cost-price is smaller than the value of a commodity has now changed practically into the statement that the cost-price is smaller than the price of production.” (p 165)

In other words, prices have now replaced values as the determining factor. It may even now be possible for the value of a commodity to fall, i.e. less labour-time be required for its production, and yet its price rise, depending on what happens with the prices of production of all those other commodities that make up its cost price. For example, the value of input A might fall because of the introduction of some new machine. But, the producer of A will obtain the same rate of profit on their total capital employed. If the general rate of profit rises, A's profit will rise with it, and so will the price of their commodity. Buyers of A's commodity will then see their cost prices rise even though now less social labour-time is required for its production. That will then carry through to the price of production of their own commodity.

For example,

c 200 + v 400 + s 400 = 1000;

an average rate of profit of 50%, gives a selling price, however, of 900, i.e. 200 + 400 = 600, p' = 50%, profit = 300, selling price = 600 +300 = 900.

c 400 + v 200 + s 200 = 800; 

an average rate of profit 60%, gives a selling price of 960, i.e. 200 + 400 = 600, p' = 60%, profit = 360, selling price = 600 + 360 = 960.

So, although the exchange value of A has fallen from 1000 to 800, the selling price has risen from 900 to 960.

Sunday, 28 June 2015

Greece Imposes Capital Controls. Who's Next?

The ECB has agreed to keep its funding of Greek banks through the Emergency Lending Agreement at its current level, but not to increase it.  Given a run on bank cash machines - partly encouraged by right-wing politicians and the right-wing Greek media - that means that Greek banks were in danger of running out of currency.  Some already had.  The government has, therefore, told the Greek central bank to declare tomorrow a bank holiday; banks and the Greek stock exchange will remain closed, and capital controls will be imposed to prevent excessive funds being taken out of the banks.

Let's be clear what the problem here is.  For many things, people do not need currency.  Many bills are paid by direct debit, other payments are made by credit or debit card.  Even for smaller payments today, currency is not required.  You can pay with ApplePay and similar electronic payment systems.  Across large parts of Africa nowadays, many payments are made using cashless payments systems from mobile and smart phones.  The problem is not a lack of money, or a need for currency - money in the form of notes and coins.  So long as you have a positive balance in your bank account, you can pay bills and so on as normal by these electronic means.

The reason people are taking notes and coins from the bank accounts - and why the rich Greeks have taken money out electronically in transfers to foreign bank accounts - is a fear of what happened in Cyprus.  That is, if the banks themselves go bust - and the Greek banks like nearly every other bank across the EU is really insolvent - then the money in the bank itself could just disappear.  As Cyprus showed, and as the EU decided after that, savers deposits in those banks are not then safe.  There is supposed to be the EU's €100,000 deposit guarantee scheme, but in a big financial crisis, that could be scrapped overnight.  The EU policy now is that when banks go bust, the savers as well as the bondholders and shareholders get "bailed-in" to pay for it.

With that in mind, Greeks have been trying to get their hands on their money, before someone else does.  When Cyprus went belly-up, a major cause, besides the fact that it had accumulated massive deposits, was that Cypriot banks were big buyers of Greek debt.  They are likely to be some of the first to be hit once again, as Greece defaults, especially given they have not really recovered.  But, their are numerous small countries, whose banks are at least or more exposed.  Any savers in those countries would have been well advised to have been getting Euros out of the ATM's in those countries while they could, because, come next week, its anybody's guess, which country will be next to find its banks are in trouble, as the shockwave from Greece reverberates, and those other countries follow Greece in shutting the bank doors, and imposing capital controls.

The ECB, EU and IMF seem to have shown themselves not fit for purpose.  No one can have any confidence that they will be up to the task as this crisis unfolds.  In 2008, it was Gordon Brown who provided the lead that these governments, and institutions followed.  Does anyone really believe that George Osborne can fulfil that role today.  After all he is the one who crashed the UK economy after 2010, and despite all their hype, the UK economy today, is growing at just 0.3%!  The IMF have called it wrong at almost every step, and Lagarde is just a politician put up as a PR front for the organisation, and whose stance changes with the wind, but always long after the event.

Under those conditions, its no wonder people in Greece are trying to get their hands on actual cash. The institutions are fiddling while the Treaty of Rome burns.

Capital III, Chapter 9 - Part 6

In addition, besides the variations in the rate of profit, arising from differences in the organic composition of capital, there are those differences that arise from different rates of turnover of capital. Where there are two capitals of equal size, it has been shown that the capital that turns over more frequently obtains a higher rate of profit. In consequence, then the price of production of those capitals that turnover less frequently will be higher than their exchange value, and vice versa. Capital will move away from the former, reducing supply and raising prices, and towards the latter, raising supply and reducing prices.

This movement of capital into different spheres, thereby bringing about a redistribution of the total social capital, then also raises another interesting question. In determining the average rate of profit, it is not simply a matter of taking all the individual rates of profit from each sphere and obtaining an average. If the rates of profit are A 10%, B 20%, C 50%, we can't simply sum these and divide by 3 to obtain an average 30%. If A represents 50% of the economy, B 40% of the economy and C only 10% this has to be accounted for in determining the weight of each sector in the average.

But, if as a consequence of these movements of capital to higher profit sectors, those sectors increase as a proportion of the total social capital, this will have an effect on the average rate of profit, which will thereby be raised, as I have set out elsewhere.

Suppose sphere A is a non-capitalist sector where exchange values rule. We can then assume that at these prices demand and supply are in equilibrium. The reason prices fall is because when capital invades this sphere it increases supply, so that it exceeds demand at the old price. The fact that supply is now greater than it was, i.e. output has risen, does not mean that more surplus value is produced, precisely because this increase in supply signifies an expenditure of labour-time that was not necessary on the basis of exchange values.  As the table above suggests, however, the fact that capital is being accumulated into areas with a low organic composition, does mean that a proportionately greater mass of labour-power is employed, and that means an increased mass of surplus value.

However, if sphere A produces, for example, food then the price of food will fall, if capital flows into this sphere. That means that the value of labour-power will fall throughout the economy, including in sphere A. On the one hand, profits in A will fall as prices fall, on the other they will rise as the rate of surplus value rises across the economy.

“The general rate of profit is, therefore, determined by two factors:
1) The organic composition of the capitals in the different spheres of production, and thus, the different rates of profit in the individual spheres.
2) The distribution of the total social capital in these different spheres, and thus, the relative magnitude of the capital invested in each particular sphere at the specific rate of profit prevailing in it; i. e., the relative share of the total social capital absorbed by each individual sphere of production.” (p 163)

It is clear why at this point, both historically and logically, Engels is led to say,

“In a word: the Marxian law of value holds generally, as far as economic laws are valid at all, for the whole period of simple commodity production — that is, up to the time when the latter suffers a modification through the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed according to the Marxian law and oscillate around those values, so that the more fully simple commodity production develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting from the beginning of exchange, which transforms products into commodities, down to the 15th century of the present era.” (p 899-900)

That is because from the 15th. century onwards, the invasion of capitalist production replaces the sale of commodities, based on exchange values, with their sale based on prices of production. Because these prices of production also determine input prices, market prices for all commodities become increasingly separated from exchange values. The Law of Value continues to operate in the way Marx describes in his letter to Kugelmann, that is the society has a limited amount of labour-time available to meet its needs for the production of use values, and has to allocate that time accordingly. However, that process is now increasingly mediated by prices of production rather than exchange values. Indeed, it becomes impossible to determine exchange values because all costs of production are denominated in prices not exchange-values. 

“We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it.” (p 164-5)

“The transformation of values into prices of production serves to obscure the basis for determining value itself.” (p 168)

Saturday, 27 June 2015

The Institutions Have 24 Hours To Avoid A Global Crash

In just over 24 hours from now, the Asian financial markets will begin trading. Unless the ECB, EU and IMF have come up with a deal that provides Greece with a viable solution that the Greek people can accept, there will be turmoil on those markets. Everyone wanting to get out of all those shares, bonds and other financial assets that are likely to crash, before the European and then US markets begin trading, will rush to sell first, via the Asian markets, before global prices crash. Those Asian markets, as I reported recently are already very fragile. The Shanghai Composite Index is in a huge bubble, having risen 128% in the last year alone, largely financed on cheap credit. It is forecast to drop by at least 50%. The Chinese property market is also in a huge bubble, reminiscent of Spain, with entire cities having been built that remain unoccupied. But, that will be only the spark of the conflagration, as European markets open, with bond and stock prices already heading sharply downwards. The European banks are today even more shaky than in 2010.

The Syriza government has bent over backwards to accommodate the “institutions”, but those institutions decided instead to go for regime change in Greece, in the hope that, as they did in Italy, they could force the government out, and insert a technocratic government. But, just as they seem to have failed to understand that Greece is not Ireland, and so the austerity measures they proposed could not possibly have worked, without putting in vast amounts of capital, over several years, to create sustainable industries in Greece, so they seem to have failed to understand that Greece is not Italy either. There is no possibility that Greece is simply going to succumb to some kind of bureaucratic transfer of power to a technocratic regime that will inflict even more pain upon its people. The political centre in Greece has gone; it has lost all credibility and support. Syriza was the last hope for a democratic solution to be found.

As I pointed out in the week, it is not just a matter of the €350 billion of sovereign debt that will go bad, when the Greek people vote to reject the institutions further austerity measures – and as Paul Mason says, its inevitable that the Greek people will vote to reject them in the referendum on 5th July – it is the further €350 billion of private debt that will go bad too, debt held mostly by European banks, who themselves, are insolvent.

I've pointed out previously the precarious state of banks in Luxembourg, whose exposure is far greater than was that of the banks in Cyprus, but its not alone. The banks in Malta, and in south-eastern Europe, as well as central and eastern Europe, are in a similarly precarious condition.

On top of that there is the unknown quantity of credit default swaps that will be triggered. Bear in mind that anyone can buy a credit default swap, just like spread betting on a football match, and no one knows how many rich individuals, institutions and so on, will have done so over the last few years, in the belief that ultimately this situation would arise. Good news for those who win that bet, very bad news for all those financial institutions who will be on the wrong side of the trade, bad news for all those unknown counter-parties, who, as 2008 demonstrated, have no idea that they even are a counter party, several times removed, to such a trade.

The cost of avoiding that crash is actually quite small. The institutions could effectively mothball the Greek sovereign debt, as Syriza had proposed. They could ditch austerity, as a policy that has clearly failed, and begin instead to put together a programme of fiscal expansion across Europe, to begin the much needed rejuvenation of infrastructure to make European capital more competitive in the global market. Without that, even if this crisis does not cause a financial crash greater than 2008, it is only a matter of time, before such a crash occurs.

In fact, such a crash would be beneficial to capital. It is ultimately required so that the draining effect of fictitious capital over real capital is ended, and money-capital is once again used for accumulation rather than for speculation. As Marx put it,

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

(Theories Of Surplus Value, Part 2, p 496)

None of this debt in the form of fictitious capital – shares, bonds, property – plays any positive role in capital accumulation. In fact, to the extent that it leads to these kinds of speculative bubbles, it drains potential money capital away from productive investment, and into this speculation. The fall in the value of bonds, shares or the wiping away of trillions of dollars of debt, makes not one jot of difference to the continued productive capacity of the factories, machines and other productive-capital that was previously bought with the loaned money-capital. In fact, to the extent that the firms that utilise this productive-capital thereby pay less in interest, to the owners of the fictitious capital, the more they have available for further investment.

Over the last decade or so, huge amounts of company profits have gone, at the direction of the representatives of the money lenders, to boost share prices, by buying back shares and other such measures. If the prices of shares, and bonds collapse, companies could instead buy back their outstanding shares and bonds, at these cheap prices, so as to rid themselves of the need to pay that interest and dividends.

Similarly, a financial crash, that would inevitably reduce the value of property, would make it once again affordable for people to buy to live in, rather than as yet another vehicle of speculation. It would mean that workers pension contributions would once again buy them the quantity of bonds and shares, required to provide their pension funds with the basis of meeting their future pension requirements. In doing that, it would significantly reduce the value of labour-power, and boost the rate and mass of surplus value, again providing a basis for greater accumulation and expansion.

As Marx puts it,

"... the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

(Capital III, Chapter 30)

But, the conservative governments and parties will do all in their power to avoid such a crash and a destruction of this fictitious capital, despite the beneficial effect it would have for real productive-capital. That is because, despite all of their spin about being “pro-business”, they are nothing of the kind. They are not “pro” the real businesses – the businesses made up of millions of workers, that produce commodities. They are only “pro” the money lending capitalists who leach off those businesses, by drawing off dividends and other forms of interest. That is why, rather than allowing the banks to go bust in 2008, those governments, stepped in to nationalise the banks, to provide them with vast amounts of liquidity, even at the cost of then crippling their economies, and the real productive-capital and businesses as a result of policies of austerity.

As Marx, says, a financial crisis of this kind can have economic consequences, as the financial crisis of 2008 did. Analysing a similar financial crisis in 1847, Marx indicates that a 37% contraction of economic activity followed. But, that was largely due to the fact the financial crisis itself was worsened by the effects of the 1844 Bank Act, which created a credit crunch. Once the Act was suspended, and liquidity was injected into the system, the long wave boom of the time resumed.

Today, governments have every possibility of ensuring that sufficient liquidity is made available to prevent a credit crunch, so that the circulation of commodities can continue unabated, without, as they did in 2008, propping up the banks and the values of fictitious capital. Large companies have unprecedented levels of money hoards, built up as a consequence of the massive rise in the rate and mass of profit over the last 30 years. Apple alone has around $150 billion of cash sitting on its balance sheet. Microsoft has around $75 billion dollars of cash on its balance sheet. At the end of 2013, US non-financial corporations had around $1.5 trillion of cash on their balance sheet.

Globally, around $7 trillion sits on corporate balance sheets. If stock, bond and property prices collapse, this cash will be able to pick up vast swathes of these depreciated assets. It will mean that there will be a huge centralisation of capital, similar to that which occurred at a similar phase of the long wave cycle in the 1960's. A similar process happened after the collapse of the railway bubble in 1847. It would mean a significant strengthening of the power of real productive-capital.

Marx makes this same point about the negative role played by this money-lending capital as against real productive capital. He writes,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” 

(Capital III, Chapter 33)

It is those interests, rather than the interests of actual business, or productive-capital that the conservative parties defend; it is those elements which provide the social and ideological basis for those parties. It is social democracy, which represents the true interests of business, i.e. of big industrial capital. Unfortunately, it has been the former rather than the latter that has been in the ascendancy for the last 30 years, which is why the interests of fictitious capital have prevailed over the interests of real productive-capital. But, as Marx demonstrates, economies work according to objective laws, and the contradictions which those laws have built up, as a result of this astronomical accumulation of fictitious capital, have reached their limit.

Given the nature of those conservative forces, the likelihood is they will once again attempt to defy the laws of gravity. The consequence will be the same fate as that which befell humpty dumpty.