Thursday, 11 February 2016

Capital III, Chapter 26 - Part 7

The rate of interest, as Marx has determined earlier, is a function of the demand and supply for money-capital. As he describes here,

“It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production.” (p 419)

This is true in a number of ways. If the rate of profit rises, this will tend to create a greater demand for money-capital, as producers seek to expand production to benefit from these higher profits. On the other hand, higher profits mean a greater supply of potential money-capital, as those profits are realised. Firms have more profits to reinvest. Profits that can't be used immediately go into the money market to be loaned out.

On the other hand, if the rate of profit falls, because the price of inputs is rising, this may still be compatible with rapidly rising masses of profit. If costs of production are £1,000, and profits are £100, that is a 10% rate of profit. If costs of production are £2,000, and profits are £160, that is an 8% rate of profit, yet the mass of profit is 60% higher. In that case, there may be a relatively higher demand for money-capital, to cover the purchase of these more expensive inputs, so as to obtain this greater mass of profit. As a result, the demand for money-capital will rise, relative to the supply and interest rates will rise.

“Now to Lord Overstone, alias Samuel Jones Lloyd, as he is asked to explain why he takes 10% for his "money" because "capital" is so scarce in his country.” (p 419)

Marx does not set out his case as clearly as he should in his following comments, because he fails to distinguish between capital and money-capital himself. So, he quotes Overstone,

“The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital.” (p 419)

To which Marx responds,

“(excellent! Value of capital, generally speaking, signifies precisely the rate of interest! A change in the rate of interest is thus made to spring from a change in the rate of interest. "Value of capital," as we have shown elsewhere, is never conceived otherwise in theory. Or else, if Lord Overstone means the rate of profit by the phrase "value of capital", then the profound thinker returns to the notion that the interest rate is regulated by the rate of profit!)

"or an alteration in the amount of money in the country.”” (p 419-20)


But, as Marx has just outlined, the value of capital is signified by the rate of profit, whereas it is the the value of money-capital that is signified by the rate of interest. Money-capital here, as set out in previous chapters, does not just signify money-capital itself, but also the money equivalent of productive-capital, whose use value, as capital, as self-expanding value, is loaned out for a given period.

If Overstone's use of the term “capital” here is understood to mean “money-capital” then Marx’s objections are valid. The the value of money-capital is indeed signified by the rate of interest, and is a function of its use value in being able to create profits, so that the rate of profit sets its limit.

Wednesday, 10 February 2016

Capital III, Chapter 26 - Part 6

Norman's view of capital as commodities used in production is a “vulgar conception of capital”, Marx says. They have a different value as capital than as commodities, and that value “is expressed in the profit which is derived from their productive or mercantile employment.” (p 419)

In other words, as soon as we have capitalist production, as was seen earlier, prices of production replace exchange values, for that production, and these prices of production are made up of the cost price plus the average profit. The amount of profit is now simply a function of the quantity of capital employed. If I have a quantity of capital then its value, as capital, is equal to the profit I can make on it, and this is distinct from the value of the actual commodities that comprise this capital.  (This has to be taken in the context of Marx's earlier analysis that capital, as capital, actually has no value, because it is not produced by labour.  The use of the term here merely denotes that this is what it is worth to the owner of that capital, in terms of the profit it can produce.)

The rate of profit will always be a function of what I have to pay for those commodities, as commodities, rather than as capital. For example, if I make £100 profit on my activities as a producer, then, if I only have to pay £1,000 to buy the materials and labour-power, required for production, I will make a 10% rate of profit, but if the price of these commodities rises to £2,000, I will only make a 5% rate of profit. In effect, the value of these commodities, as capital, has halved, whilst their value, as commodities, has doubled.

As described in previous chapters, this rate of profit also limits the rate of interest, because no capital will sustainably pay a higher rate of interest on capital, than the rate of profit they can obtain from its use.

“But Mr. Norman should tell us just how this limit is determined. And it is determined by the supply and demand of money-capital as distinguished from the other forms of capital. It could be further asked: How are demand and supply of money-capital determined? It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production. Instead of enlightening us on this point, Norman offers us the sage opinion that the demand for money-capital is not identical with the demand for money as such; and this sagacity alone, because he, Overstone, and the other Currency prophets, constantly have pricks of conscience since they are striving to make capital out of means of circulation as such through the artificial intervention of legislation, and to raise the interest rate.” (p 419)

And, this is significant, because today there is a similar confusion between money-capital and money, and a similar attempt, via QE, and other forms of money printing, to “make capital out of means of circulation”, except today this is done in an attempt to reduce the rate of interest. Its because money is not money-capital that these attempts will fail to reduce interest rates.

Tuesday, 9 February 2016

Six Degrees of Separation

There is a theory that everyone in the world is connected to everyone else, by no more than six degrees of separation. As I was reflecting on things recently, it struck me how true, and how strange, in some ways, that is; that we live in a world of six billion people, that covers a vast expanse of territory, and yet you can so regularly come into contact with people you know, even in the most unlikely places. Some years ago, I reflected on that, in another context, when I referred to having come across a bloke who lived around the corner from me, when he was running down Helvellyn, as we were walking up it. So, I thought I would reflect on similar such connections.

When I left school, I worked for Stoke City Council. I will come back to this link later.

In the Summer of 1971, I was going out with a gorgeous girl called Jackie, from Bentilee, who I met at the Golden Torch.  She worked as a sewing machinist at a clothing manufacturer in Normacot Road, Longton. There are a number of connections here that could be gone into, but I will go down one channel, which is that, a few months later, I was working at a similar company, in Burslem, which is about four miles from where I lived. Not a huge distance, but the company I worked for only employed a few people. Yet I knew several of them already, because they lived in the same village, some went to the same school.

As part of my job, which encompassed almost everything from looking for contracts to tender for, to buying material from suppliers, to working with Frank the cross-eyed cutter, to work out the most efficient lays and so on, I had to negotiate new piece rates with the machinists for new products. The person I had to negotiate with was the mother of one of my friends from school.

About a year after that, I was working in Longton myself. This time for Royal Doulton, in Uttoxeter Road. Longton is at the other end of the city, and about ten miles from where I lived. The Chief Executive at the factory lived next door to my school friend, John Lowndes. I went to school with his son, although he was in a different year, and some years later his daughter lived in the same road as me. One of the production managers at the factory was the uncle of another girl I went to school with, and who lived in the same street as me.

When I moved from Longton, to Doulton's main factory in Burslem, one of the people I worked with there, was the mother of someone I worked with some years later at Newcastle Borough Council, and he was friends with, and went to school with Ron Foulkes, who I knew from the Labour Party, and Trade Union activity.

Just flipping back from there to the Autumn of 1971, I went to college for a few months full-time. Although, it was a Business Studies course, besides me there was a lad from Market Drayton who turned up always with his copy of Mao's Little Red Book in his jacket breast pocket, another became a leading member of the SPGB in Stoke, and another, Paul Humphreys, became a full-time worker for the potters union, who I again met when he was working with Ron Foulkes and John Urwin at the Stoke Trades Union Studies Department. Paul who lived in Smallthorne, was also the nephew of Alec Humphreys, who owned the CnC supermarket chain, and one of his close relations also lived in a small terraced house in the next street to where I lived as a kid.

Many of these connections also came out, a few years ago, at Ron's 50th Birthday celebrations, held at Port Vale, which also combined with a Northern Soul and Motown night. There are also a whole host of connections I could spin off into there about connections between Ron and various people involved in Northern Soul, as well as my connection, some years ago, through the Labour Party with the lad who ran the Ski Slope at Festival Park, who told me about his connection with King of the Mods, Tombo, who was one of the main characters at the Torch, when I first started going there in the late 1960's.

While at college in 1971, I also worked on the Christmas post, at Leek Road Sorting Office, in Stoke, and a lad I worked with there, Mick Brown, who used to join me in nipping over the gates to go and drink at the pub across the road, was also the son of the woman who was in charge of the last office I worked in, in the bowels of Stoke Town Hall, before I got the push.

Going back to Newcastle Borough Council, one of the women I worked with there, one day, was talking about her daughter, and her friendship with another girl she went to school with, who turned out to be the daughter of a bloke I had first worked with when I left school, when I worked at Stoke City Council.

In a similar vein, when I was twenty, I was offered a job working for Hambros Bank, selling investments. I was actually a few months too young, but they offered it to me anyway. In the end, I turned it down, which could have been a big mistake financially, but “What profit it a man if he shall inherit the world, but lose his soul.” About thirty years later, when I was going to the Alsager Writer's Circle, a woman joined who lived in Holmes Chapel, and lived next door to the man from Hambros who had offered me the job, except he now spent most of his time on his yacht in the South of France.

At around this same time, I was involved as a County Councillor with the process of twinning with the French town of St Paul Du Bois. The idea had been led by a former Kidsgrove resident whose brother still lived there, and they arranged regular football matches via Ladsandads. A couple of years ago, when I was in Spain looking for villas, the bloke who ran the estate agency, and himself came from Yorkshire, also knew the same brothers, and was involved in the football matches! In the context of Spain, there have been other connections, for example, walking through Javea and seeing a car of some locals, in which there was a sticker in the rear window for “John's Motors Sandyford”. That was not surprising, as I spoke to them later, and they had moved there from Sandyford. Just as an aside, on the walk back to the villa that day, I also passed Tony Robinson. On a different occasion, looking at villas for sale, the vendor of one villa was from Silverdale.

For a long time, when people asked how to pronounce our name, we referred them to our “Uncle Frank”, that is former Grandstand and BBC Breakfast presenter, Frank Bough.  In fact, he's something like my dad's second cousin and not my uncle. However, about thirty years ago, I was sitting in a waiting room at the North Staffs Central Outpatients, and the woman sitting next to me, was his aunty, and we had a short chat about the family connections, which her daughter had been investigating.

I'm sure there are any number of other connections I could have listed, had I started from a different channel to go down. I'm about to start writing my new novel based around the Golden Torch, and the period from the mid 1960's through to about 1975. Its all of these kinds of real life connections, and the lives of ordinary people that intersect and interact, often not just once but several times, separated by varying amounts of time and space, which create the potential for such stories. I will be creating a Facebook page, for the novel, in the hope that I might be able to get contributions towards the story, in what I hope will be possible to make into a co-operative venture, as I'm also considering the potential for a kickstarter project for a film based on the novel. Look out for details in coming weeks.

Capital III, Chapter 26 - Part 5

Using the Report of the Select Committee on Bank Acts, 1857, Marx then examines the evidence given by G.W. Norman, a director of the Bank of England and others, to illustrate the general confusion about the nature of interest, money and capital that was held and which lay behind the Bank Act.

Under interrogation, Norman states correctly that the rate of interest “depends, not upon the amount of notes, but upon the supply and demand of capital.” ((p 417) But, when questioned about what he defines as capital, Norman goes to pieces. Norman says,

“I believe that the ordinary definition of 'capital' is commodities or services used in production." — "3636. Do you mean to include all commodities in the word 'capital' when you speak of the rate of interest? — All commodities used in production."” (p 417)

And, elaborating on this, he describes how a cotton manufacturer borrows money not because they want money, but because they want to buy raw cotton, or to pay the wages of their workers and so on.

But, as Marx points out, these commodities – raw cotton, labour-power – are not in themselves capital. Moreover, even if they were, its impossible to determine the rate of interest on the basis of the demand and supply for them, as Norman originally stated. All the demand and supply for raw cotton determines is the market price of raw cotton, just as the demand and supply for labour-power determines the market rate of wages.

“However, very different rates of interest are compatible with the same market-prices of commodities.” (p 418)

As Marx points out, Norman is confronted in questioning by the correct remark, "But interest is paid for the money,". To this, Norman responds,

“It is, in the first instance; but take another case. Supposing he buys the cotton on credit, without going to the bank for an advance, then the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest. Interest would exist if there was no money at all.” (p 417)

But, Marx points out the interest here does not create a difference in the price of the commodity to be bought. That remains the same at time A as at time B. The interest is rather a payment for the use of money-capital between time A and time B, and that is true whether this money-capital is loaned by a bank for the purpose of making the purchase, or whether it is advanced via the value of the commodities by the seller, who only demands payment at some later date.

“First the cotton is to be sold at its cash price, and this is determined by the market-price, itself regulated by the state of supply and demand. Say the price £1,000. This concludes the transaction between the manufacturer and the cotton broker so far as buying and selling is concerned. Now comes a second transaction. This is one between lender and borrower. The value of £1,000 is advanced to the manufacturer in cotton, and he has to repay it in money, say, in three months. And three months' interest for £1000, determined by the market rate of interest, makes up the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advanced value of cotton, of £1,000 advanced for three months, is determined by the rate of interest.” (p 418-9)

Monday, 8 February 2016

In Memory of Maurice White

There was a time in the early 1980's, when a large EWF poster adorned my living room wall above the record deck, and box of records.  I've still got the T-shirt.


Capital III, Chapter 26 - Part 4

But, when such a financial panic breaks out, it is the price of all assets that are depreciated, as part of the fire-sale. In 2008,  I predicted the scale and intensity of the financial crisis,  because I noticed shortly before that the price of oil on futures markets had taken an unexpected and sharp fall. There was no other possible reason for this fall, I deduced, other than forced selling, on a sizeable scale, by financial institutions of these futures contracts.

“In 1847 England paid at least £9 million gold to foreign countries for imported foodstuffs. Of this amount £7½ million came from the Bank of England and 1½ million from other sources (p. 245). — Morris, Governor of the Bank of England: 

"The public stocks in the country and canal and railway shares had already by the 23rd of October 1847 been depreciated in the aggregate to the amount of £114,752,225" (p. 312). 

Again Morris, when questioned by Lord G. Bentinck

"Are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same depreciated price... and that sugar, coffee and tea were sacrificed as at forced sales?”” (p 416)

But, there are further similarities between 1847 and 2008. In 2008, although some British bankers were stripped of their gongs, and others took early retirement, with multi-million pound pensions and pay-offs, the fact was that ultimately the banks, and their shareholders, were rescued from their reckless behaviour by the state and the taxpayer. In some countries, that also took the form of economically illiterate policies of austerity that further unnecessarily tanked economies, just as the 1844 Bank Act had done. But, in the aftermath, the measures taken have boosted bank profits, for the benefit of the shareholders, and the huge bonuses to the top executives have returned.

In 1847 it was similar. There were those who still believed that it would not have been preferable to prevent the panic by using the Bank of England's huge reserves, and Marx quotes the parliamentary inquiries, which showed the extent to which, during this process, the dividends paid to the Bank of England rose.

“Disraeli questions Mr. W. Cotton, a Director and former Governor of the Bank of England:

"What was the rate of dividend paid to the Bank proprietors in 1844? — It was 7 per cent for the year." — "What is the dividend ... for 1847? — Nine per cent." — "Does the Bank pay the income tax for its proprietors in this year? — It does." — "Did it do so in 1844? — It did not."— "Then this Bank Act" (of 1844) "has worked very well for the proprietors?... The result is, that since the passing of the Act, the dividend to the proprietors has been raised from 7 per cent to 9 per cent, and the income tax, that previously to the Act was paid by the proprietors, is now paid by the Bank? — It is so." (Nos. 4356-61.)” (p 416-7)


The way this purely financial crisis then impacts the real economy was again the same in 1847 and 2008.

“Mr. Pease, a country banker, had the following to say concerning hoarding in banks during the crisis of 1847:

"4605. As the Bank was obliged still to raise its rate of interest, every one seemed apprehensive; country bankers increased the amount of bullion in their hands, and increased their reserve of notes, and many of us who were in the habit of keeping, perhaps, a few hundred pounds of gold and bank-notes, immediately laid up thousands in our desks and drawers, as there was an uncertainty about discounts, and about our bills being current in the market, a general hoarding ensued."


A member of the Committee remarks:

"4691. Then, whatever may have been the cause during the last 12 years, the result has been rather in favour of the Jew and money-dealer, than the productive classes generally."” (p 417)

And Marx quotes Tooke again to this same effect that in Warwickshire and Staffordshire, many manufacturers declined orders because the cost of discounting the bills of exchange would have absorbed all their potential profit in interest.

Sunday, 7 February 2016

Oil and Equities

At the end of 2014, and start of 2015, I set out, in a series of posts, the causes of the slump in oil prices, and the prices of other primary products, and the effects these price falls would have on the global economy, and on financial markets. Despite all of the media punditry claiming that these price falls are the consequence of slowing global growth causing a fall in demand, the fact is that the global demand for and consumption of oil has continued to rise by around 2% a year. The same is true for most other primary products such as copper. Even where demand for some of these primary products has now fallen, the reduction in demand is slight compared to the fall in price. The price falls are not the result of falling demand, but of massively increased supply, as past investment, spurred by the high prices generated after 1999, led to overproduction.

In those posts, I described the way the fall in oil prices would be good for the global economy, but very bad for financial markets. Again, if you listened to the various financial and media pundits, such a dichotomy would seem incomprehensible, because they make no distinction between the two. As John Weeks, wrote recently,

“The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.” 

And yet, as I have described previously, there is an inverse relation between economic growth and financial markets. In the periods of long economic upswing, financial markets and financial assets tend to rise more slowly, whilst during the long periods of slower economic growth, financial markets rise more rapidly. Between 1950 and 1980, US GDP rose by 850%, whilst the Dow Jones Index rose by 312%. But, between 1980 and 2000, the US economy grew by just 260% whilst the Dow Jones rose by an astronomical 1300%! A similar rise could be seen for the S&P 500 Index, and for the stock market indices of other countries. 

The reason there is this inverse relation is quite simple. Typically, during periods of long wave boom, available money-capital, realised from a growing mass of profit, gets invested in real productive-capital, causing the economy to grow faster. Although, as Marx described in relation to the long wave boom that began around 1843, this mass of profit may be so great that it can't all be invested productively, immediately, and so leads to money-capital pressing down on interest rates, and fuelling speculation, these bubbles burst, allowing the economic growth to continue. As this economic growth continues, the demand for money-capital begins to outstrip the supply – which may be due to the demand rising more quickly, or the supply falling, or a combination of the two.

In either case, during such periods, typically a greater proportion of realised profits will go into productive investment. As the demand for this money-capital begins to outstrip the supply, the average rate of interest begins to rise, and this causes the prices of fictitious capital to fall, as a consequence of the process of capitalisation. That consequence is even more apparent during the Autumn phase of the long wave cycle. During the earlier part of that phase, in particular, rising wages, as labour supplies become tight, and productivity falls, cause profits to get squeezed. 

As Marx describes in Capital III, examining the relation of the interest rate cycle to the economic cycle, interest rates during this period reach their peak, because businesses demand money-capital now not to invest in additional capacity, but simply to be able to stay afloat, to pay their bills. As Marx describes, the lenders of money-capital are not at all concerned that those who borrow their money-capital do so to actually use it as capital. It is all the same to them, whether it is used productively or to finance a lavish lifestyle, or simply for a business to pay its bills. For the owner of the money-capital, they seek to obtain its market price, the average rate of interest, whatever the borrower's requirement might be.

And, that can be seen today. A country like Saudi Arabia, for the last thirty years and more has been a huge supplier of money-capital into the global money markets. It was able to do so, because high oil prices provided it with rent from surplus profits. Very little of Saudi's oil revenues went into productive investment. A large part went into keeping its population pacified, and the rest went into financial speculation, helping to boost the stock markets in London and New York, as well as making available the money-capital to buy up their government bonds, and provide money-capital to increase the growing mass of credit that kept the mass of household debt in the UK and US soaring.

Saudi and the other Gulf oil producers were not alone. Other oil states, like Norway, had huge excesses of revenues from oil rents, which they pumped into the development of sovereign wealth funds that bought up the existing stock of shares and bonds in global financial markets, pushing their prices ever higher. As the prices of other primary products soared after 1999, when the new long wave boom massively increased the demand for those products, countries supplying those products also found themselves with loanable money-capital available to speculate in global financial markets. One of the most visible, in that regard has been the influx of Russian oligarch's into London. And finally, of course, there was China whose vast treasure chest of loanable money-capital came not from such rents, but from its ever increasing volume of exports.

Over the last few weeks, there has been an almost perfect correlation between oil prices, and stock markets. Whenever, oil prices have fallen, stock markets have dropped, and vice versa. One reason for that is that in the US and UK, the stock markets are heavily weighted in favour of oil companies. The UK FTSE is dominated by large oil and mining companies. The Dow Jones is also heavily influenced by the US oil giants, and with the growth of US oil production due to shale, the sharp drop in oil prices has badly affected those producers, as well as the suppliers of capital equipment to them. It also means that a very large amount of junk bonds, used to finance those shale producers, are now in danger of default, which could have a cascading effect through debt markets. In fact, there were some suggestions last week that even some of the large oil companies could now be facing problems covering the interest payments on their debt. At the same time, some of those companies have insisted that they will keep paying out the same level of dividends to shareholders, even if they have to borrow money to do so!

The falls in stock markets are then both a consequence of the direct effect on oil companies, which have a large weighting in some of these stock markets, but also of the fact that what were once providers of huge sums of loanable money-capital, have overnight become borrowers. That has the effect of pushing up global interest rates, which then, via the process of capitalisation, causes the prices of these financial assets to drop.

At the same time, the beneficial effects from the drop in oil and other primary product prices are not so immediately apparent. The fall in these prices acts to both release capital, and to raise the rate of profit.

“Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material. This shows, among other things, how important the low price of raw material is for industrial countries, even if fluctuations in the price of raw materials are not accompanied by variations in the sales sphere of the product, and thus quite aside from the relation of demand to supply.”

(Capital III, Chapter 6) 

When the drop in oil prices began in 2014, that coincided with the onset of the three year cyclical slowdown, which began at the end of 2014, and ran through to the end of 2015, which thereby disguised some of the effect of the oil price falls, but also, with huge amounts of household debt, it is not surprising, as I suggested more than a year ago, that consumers would use some of the reduction in their necessary spending to reduce those debts. In the longer term, that is still beneficial, because as consumers reduce their debt, they also reduce their future debt servicing costs, which leaves them income available for actually buying commodities. As Marx says above, however, even without this effect in increasing demand, the lower cost of raw materials for the vast majority of businesses, leads to a rise in the average rate of profit.

But, as I suggested, nearly three years ago, the conjunctural changes we are seeing in the global economy currently, have other consequences. For the last four years, the US economy has been creating nearly twice as many new jobs as are required to absorb the increase in its working population. That has caused its unemployment rate now to fall below 5%. One of the consequences of this has been mentioned above, which is that as supplies of labour-power get used up, wages are pushed higher, and profits are squeezed, and that is exacerbated as productivity growth is slowed.

“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

(Capital III, Chapter 15)

The consequence of these structural changes is that as wages rise, as a proportion of national income – both because more workers are employed, and because wages rise – this leads to a corresponding change in the structure of the national product itself, as demand for wage goods rises.

“If the surplus wages were spent upon articles formerly not entering into the consumption of the working men, the real increase of their purchasing power would need no proof. Being, however, only derived from an advance of wages, that increase of their purchasing power must exactly correspond to the decrease of the purchasing power of the capitalists. The aggregate demand for commodities would, therefore, not increase, but the constituent parts of that demand would change. The increasing demand on the one side would be counterbalanced by the decreasing demand on the other side.”

(Value, Price and Profit, Chapter 2)

Although its true that a general sharp increase in the rate of profit may lead to a rise in capital investment, and vice versa, there is no mechanical relation between the two. For one thing profits may rise too quickly to be immediately accumulated in productive capital. Especially, as the minimum efficient technical size of investments continually rises, that becomes more so the case. In fact, its far more likely that any increase in profits after a period of large scale fixed capital investment, will take the form not of further investment in fixed capital, but in additional circulating capital, i.e. additional materials, and labour-power to process it, because as Marx says, capital becomes very elastic in its ability to expand output without such additional investment in fixed capital. A look at the continued expansion of employment over the last few years, indicates precisely such an accumulation of circulating capital rather than fixed capital.

But, similarly, a fall in the rate of profit may not at all be a cause for a reduction in investment. For one thing, firms may invest to try to boost their profits either by improving their competitiveness, or simply in the hope of capturing a larger market share. That is particularly the case where demand may be rising. In discussing the theory of rent, Marx criticised Ricardo for the view that it is only when prices, and profits are rising that a cause for additional investment is provided. Marx points out that as population grows this leads automatically to a rise in demand, and so it is natural for additional capital to be accumulated to increase supply so as to meet it. Indeed, a general precept of every business is that it will need to continually increase its supply so as to meet the requirements of a growing market.

In conditions where employment and wages are growing – US hourly wages grew by 0.5% last month – this means an expansion of demand for wage goods, which individual capitals will have an incentive to meet. In the US, that may be particularly marked, because a large part of the rise in hourly wages appears due to the rise in the minimum wage. That means lower paid workers have more to spend, and the marginal propensity to consume increases at these lower income levels. But, last week has also seen proposals for new taxes on oil to pay for much needed spending on repairing and renewing US infrastructure. Whether these taxes are implemented or not, the fact remains that the US does need to spend money on its infrastructure, if US capital is to have an adequate framework within which to operate efficiently. Moreover, its not alone. Similar expenditure is required across Europe. The consequence is that increasing amounts of money-capital are required to cover such investment, and spending.

Once again, this means that the demand for money-capital rises relative to the supply, pushing interest rates higher, with a consequent depressing effect on capitalised asset prices. The financial and media pundits continue to talk about the current market sell-offs being a harbinger of recession ahead. In large part that is them talking their own book, attempting to convince central banks to keep providing the money drugs, in the hope of preventing bubbles from bursting. But, it also reflects the misunderstanding referred to above, which equates speculation with investment. As US economist Paul Samuelson, once wrote, “The US stock market has predicted nine of the last five US recessions!”

CNBC's, Steve Liesman, last week examined the record, and found that indeed that relation between bear markets and subsequent recessions was about right. Of course, as Marx explains there is no reason why a purely financial crisis should affect the real economy. It can, in fact, be beneficial. Its only if such a financial panic causes a general dislocation, as happened in 1847, and 2008, for example, that it need impact the real economy. In reality, it has been the role of central banks in continually pumping liquidity into markets to stop the collapse of asset price bubbles, and subsequently to reflate them, which has been a major drag on recoveries, because it has meant that money-capital has continued to flow into those financial assets, in search of guaranteed, fast and significant capital gains, rather than into productive investment.

But, in the end, as Marx describes, the economic laws will impose themselves. A lack of productive investment, as resources are diverted to speculation will simply lead to yields on financial assets getting smaller and smaller. We now have the ridiculous situation of negative interest rates, for example. The replacement of yield with speculative capital gain can also only go on for so long. In the UK, most clearly, the majority now cannot afford to buy a house, and many of those with houses cannot afford to move up to a better one. The majority of mortgages are going to Buy To Let Landlords, whose rental yields are also getting squeezed, as the prices they have to pay for properties gets pushed higher, as they compete against each other, whilst tenants are unable to pay higher rents, especially as Housing Benefit is restricted or withdrawn.
There comes a point at which buying a property nominally to rent, but really in the expectation of making a capital gain, is not a wise bet, because at some point, there are no bigger fools around to bid those prices higher, and at those points the prices tend to simply collapse. But, the same applies to stock and bond markets. The reality today, as it has been for the last two or three years, is that the real threat to financial markets comes not from a recession, but from stronger economic growth, as it pushes wages higher, squeezes profits, leads to an increased demand for capital, and pushes interest rates higher.