Wednesday, 31 October 2012

Filleting Nick Rogers Latest Argument - Part 2

Nick says,

Much more important than appreciation is the question of capital depreciation. In my view, capital appreciation and depreciation have neither an equivalent nor symmetrical impact on profit rates. The devaluation of capital values - either as a result of Marx’s ‘moral depreciation’ or in an economic crisis - is not simply cancelled out. Capitalists as a whole can lose - aggregate exchange value can be wiped out and this has an impact on the aggregate economy.”

Once more, as with Nick's inability to defend his position in relation to the valuation of commodities, this smacks of running away from the argument. Marx in Capital Volume III in discussing the effects of price fluctuations on the Rate of Profit discusses both appreciation and depreciation, and does so in the same terms. If Nick's argument cannot be sustained in relation to appreciation, but only depreciation, then his theory falls. Having said that, he is correct that there is a difference between appreciation and some forms of depreciation. It is not a difference that undermines Marx’s approach of calculating the Rate of Profit based on current reproduction costs, as opposed to historic costs. Once again the difference comes down to an analysis based on Capital as opposed to Nick's analysis based on individual Capitalists.

The fundamental tenet of Nick's argument in the above statement, is not merely flawed, but it is quite clearly empirically falsified. Put simply, we can look at numerous examples, in history whereby Capital was devalued, and the immediate result was not the kind of crisis for Capital that Nick envisages, but the exact opposite. In fact, as stated earlier, one of the basic tenets of Marxist analysis, and indeed of the argument put forward by Andrew Kliman in his book -

Yet the destruction of Capital value would indeed be a solution to the systemic problems I have outlined – unless it led to revolution or the collapse of the system. A massive wave of business and personal bankruptcies, bank failures, and write-downs of losses would solve the debt overhang. New owners could take over businesses without assuming their debts and purchase them at fire sale prices. This would raise the potential rate of profit, and it would therefore set the stage for a new boom.” (Andrew Kliman – The Failure of Capitalist Production p 4.) -

is that it is the devaluation of Capital, which provides the basis for a sharp increase in the Rate of Profit, which in turn spurs Capital investment!

Cobden & Bright
It is precisely for that reason that Marx argues that Capital continually tries to devalue, i.e. reduce the price of, capital, be it Constant or Variable Capital. It was for that reason that Capital sought to abolish the Corn Laws so as to reduce the price of food, so as to reduce the value of Labour Power, but alongside the abolition of the Corn Laws went the abolition of duties on a range of imported raw materials too, like cotton. The consequence of this devaluation of Capital was not the problems for Capital that Nick envisages, but a large rise in Surplus Value production consequent upon the cheapening of Variable Capital, and a rise in the Rate of Profit consequent upon the cheapening of Constant Capital! It led not to the crisis Nick envisages, but to a boom!

If we look at the period after WWII, we see something similar. The introduction of a range of new technological developments brought about a “moral depreciation” of large swathes of existing Capital. The consequence once again was not the kind of crisis that Nick envisages, but one of the most powerful, and long lasting booms that Capital has so far experienced, based on a sharply rising Rate of Profit.

The Marxist Theory also supports the empirical evidence. If we look at the situation described above we have:

C 1000 + V 1000 + S 1000 = E 3000.

Let us assume then that instead of there being appreciation, we have depreciation as requested by Nick. Let us assume that the labour-time required to produce C halves. In that case on Marx’s method we have:

(3) C 500 + V 1000 + S 1000 = E 2500.

Now, the rate of profit is 1000/500+1000 = 66.6%. How exactly, does Nick believe that this is a bad result for Capital? The rate of profit has risen considerably as a consequence of the devaluation of the Capital! The benefit for capital is easily seen by the fact that the Surplus Value of 1000 can now buy twice as much Constant Capital as it could before its price fell. Now, of course, from Nick's subjectivist viewpoint, which focusses on the fortunes of individual Capitalists rather than on Capital itself, this situation could indeed be rather disastrous. That is the case, if the particular Capitalist borrowed the Money from a Money Capitalist in order to make the initial investment. In that case, this Capitalist will need to recover in the price of the final product an amount equivalent to the Money Capital they borrowed. But, because the Value of the Constant Capital now passed into that product has halved, they will find this impossible. Moreover, because the Value of this Capital has fallen, if they shut up shop and sell this Capital, they will make a Capital Loss on its sale, or if they are unable to pay, the Money Capitalist, who lent the money will make that loss.

Industrial Robots are an example of how new innovations
bring about a "moral depreciation" of existing Capital, thereby
making possible a higher rate of profit on the reduced
 Capital Value laid out.
However, this is only the reverse of the situation that affected individual Capitalists in the case of an appreciation of Capital, as opposed to the position of Capital itself. The reality is that some new Capitalist can now purchase this devalued Capital at its current Value, and as a consequence will make the new higher rate of profit on it. In the previous case of the appreciation of Constant Capital the owner of this Constant Capital made a Capital Gain that was cancelled by the Capital Loss of the Money Capitalist who bought it from them. Here, the Capital Loss consequent upon the depreciation of the Constant Capital, is cancelled by the Capital Gain made by the Money Capitalist who subsequently buys it. Once again when we stop trying to analyse Capitalism in terms of the individual fortunes of Capitalists, and instead analyse it in terms of Capital itself, the real situation is revealed. In fact, in Volume III of Capital, Marx describes precisely this situation. Moreover, demonstrating the falsity of Nick's argument in trying to present the situation in respect of Capital in General as different, he writes,

Appreciation and depreciation are self-explanatory. All they mean is that a given capital increases or decreases in value as a result of certain general economic conditions, for we are not discussing the particular fate of an individual capital. All they mean, therefore, is that the value of a capital invested in production rises or falls, irrespective of its self-expansion by virtue of the surplus-labour employed by it.”

There could hardly be a clearer refutation of Nick's position, or in fact of the TSSI.

But, further refuting Nick's position, Marx continues.

The individual Capitalists that owned Northern Rock
went bust.  A new individual Capitalist, Richard Branson,
was able to lay out the now much reduced amount of
Capital to operate the business at a profit.
After machinery, equipment of buildings, and fixed capital in general, attain a certain maturity, so that they remain unaltered for some length of time at least in their basic construction, there arises a similar depreciation due to improvements in the methods of reproducing this fixed capital. The value of the machinery, etc., falls in this case not so much because the machinery is rapidly crowded out and depreciated to a certain degree by new and more productive machinery, etc., but because it can be reproduced more cheaply. This is one of the reasons why large enterprises frequently do not flourish until they pass into other hands, i. e., after their first proprietors have been bankrupted, and their successors, who buy them cheaply, therefore begin from the outset with a smaller outlay of capital.”

The Abolition of the Corn Laws also brought
 abolition of a range of dutiues on imported raw
materials, like Cotton.  That brought about a
"Moral depreciation" of Constant Capital,
allowing Capital to make higher profits, buy more
Cotton, and exploit more Labour-power.
The fact is that whether the Capitalist themselves employed their own Money Capital to purchase the Constant and Variable Capital, or whether they borrowed it from the bank, the situation facing Capital as opposed to the individual capitalist remains the same. Suppose the Capitalist had borrowed the money from the Bank, and could not repay the loan. Suppose then the bank takes possession of the firm, and becomes the new owner. What situation does it face. Certainly, its original sum of Money Capital has disappeared, but that disappeared as soon as it was used to buy productive capital, just as the money spent by a worker to buy food disappears as soon as they buy the food. The worker buys food not to make a Capital Gain on it, but to reproduce their Labour Power. Capital buys means of production and labour power, not to make a Capital Gain on it, but to reproduce and expand Capital. It can only do that by being able to exploit more abstract labour, and thereby create more Surplus Value. As Marx makes clear in Volume I of Capital, the condition for that is not at all dependent upon the Value of the Constant Capital employed, but upon its physical quantity! That is with a given technical relation – say 1 worker to 4 machines, or 1 worker to 100 kilos of cotton – the number of workers that can be employed depends upon the number of machines employed, the quantity of cotton to be processed. Has the depreciation of the Constant Capital made this harder or easier? As set out above it has made it easier! It is no different than for the worker who sees falling food prices. There is no point crying over spilt milk in response to the higher price they paid for last week's food, instead they celebrate that next week's food bill will be lower, meaning they can buy more food!

The bank having taken over the firm now faces the production function described in (3) above. Although, the actual amount of Surplus Value remains constant compared to the situation prior to the devaluation of the Capital, the Rate of Profit has risen from 50% to 66.6%. The importance of this can be seen if we look at the situation in the next production cycle.

Had the Capital not been devalued then the 50% profit, if all of it had been accumulated, would have resulted in production function,

(4) C 1500 + V 1500 + S 1500 = E 4500.

However, after the depreciation it is,

(5) C 833 + V 1666 + S 1666 = E 4165

In other words, not only has the Rate of Profit risen as a a consequence of the depreciation of the Constant Capital, but as a direct result of that the accumulation of capital increases, and the actual amount of Surplus Value created also now rises from 1500 to 1666! Yet according to Nick the depreciation of the Constant Capital represents a loss to Capital!

There is a situation whereby depreciation does represent a loss to Capital as opposed to the Capitalist. It is where depreciation occurs not due to the introduction of better machines (moral depreciation) or a reduction in the labour-time required to produce it, but purely as a result of age, or lack of use. In that case, the current replacement cost of this Capital remains unchanged, but its cost cannot be recovered in the value of the end product, because the depreciated Constant Capital can only pass its depreciated value on to it. In this case, it is as though someone has simply stolen or destroyed a portion of the Capital, and taken it out of the circuit of Capital altogether.

Del Boy could buy shoddy goods at a depreciated Value, but then
had to also sell them at a lower price.  If he wanted to buy new video
 recorders to replace the shoddy ones he had sold, his Rate of Profit is
more accurately reflected in the Capital he has to lay out for the
new replacement than what he paid for the shoddy ones he is
Another capitalist who bought this depreciated Capital would only buy it at its current value, reflecting the fact that its Use Value was depreciated (Marx gives the examples of machines that have rusted, or material that has become deteriorated). But, when they come to reproduce this Constant Capital they will have to add additional Capital of their own, to purchase this replacement. As Marx describes it is to avoid this depreciation that Capital seeks to use up Constant Capital as quickly as possible. It is one reason for firms introducing Just In Time systems. But, this does not at all help Nick's argument, because the relevant Rate of Profit calculation here is not based on the historic cost of this depreciated capital – either that paid by the original capitalist or the one who buys it from them – but on the cost of its replacement! That is illustrated by the fact that, the Capitalist who buys it is still unable to cover the loss suffered by its depreciation, and in order to replace it, therefore, has to inject their own additional capital!

The same thing is true about the destruction of Capital due to an economic crisis. No one doubts that under such conditions Capital is destroyed – though properly speaking as Marx and Engels describe a crisis of overproduction, the Capital overproduced was never Capital in the true sense to begin with. But, this is not at all the same as the question under discussion of whether to calculate the Rate of Profit based on historic cost, or current replacement cost. In fact, even under these conditions, the relevant measure remains the current replacement cost, because it is this, which will determine how much Capital can be bought given the current volume of profit!

Tuesday, 30 October 2012

Capital I, Chapter 15 - Part 2

2) The Value Transferred By Machinery To The Product

In the same way that Capital can, without cost, appropriate the additional power of Labour that arises from co-operation and division of labour, so capital appropriates natural forces. However, these natural forces still require the expenditure of human labour before they can be harnessed. The power of flowing water requires a water wheel before it can be harnessed; steam a steam engine; petrol an internal combustion engine and so on.

By harnessing all of these productive forces the productive potential of labour is raised massively, but it requires an increased expenditure of labour to bring it about.

The machine creates no new value, but, like all constant capital transfers a portion of its own value to the product. Machines clearly have much more value than the tools which were used under manufacture. The machine, like a tool, has to be present in its complete form in the production process, but, like the tool, only gives up a portion of its value in wear and tear to the product. The difference between the portion given up, and the total value is much greater for the machine than the tool, because machines are made more durable and so have have longer lives. In addition, the machine is constructed so that its use is regulated according to scientific principles, so the wear and tear is more even and regulated. Finally, the amount of production, undertaken by a machine is vastly greater than that of a tool.

But, having allowed for the value of the machine, transferred to the product, by wear and tear, and the value of ancillary materials required for it to run, capital acquires all of the productive power of the machine derived from its harnessing of science and natural forces for free, just as it does the power of co-operative labour.

The greater the productive power of the machinery compared with that of the tool, the greater is the extent of its gratuitous service compared with that of the tool. In modern industry man succeeded for the first time in making the product of his past labour work on a large scale gratuitously, like the forces of Nature.” (p 366)

The amount of value added to the individual product depends upon the quantity of that product.

Mr. Baynes, of Blackburn, in a lecture published in 1858, estimates that

each real mechanical horse-power will drive 450 self-acting mule spindles, with preparation, or 200 throstle spindles, or 15 looms for 40 inch cloth with the appliances for warping, sizing, &c.”

In the first case, it is the day’s produce of 450 mule spindles, in the second, of 200 throstle spindles, in the third, of 15 power-looms, over which the daily cost of one horse-power, and the wear and tear of the machinery set in motion by that power, are spread; so that only a very minute value is transferred by such wear and tear to a pound of yarn or a yard of cloth. The same is the case with the steam-hammer mentioned above. Since its daily wear and tear, its coal-consumption, &c., are spread over the stupendous masses of iron hammered by it in a day, only a small value is added to a hundred weight of iron; but that value would be very great, if the cyclopean instrument were employed in driving in nails. (p 367)

The amount of product depends on the speed of the machines. Finally,

Given the rate at which machinery transfers its value to the product, the amount of value so transferred depends on the total value of the machinery. The less labour it contains, the less value it imparts to the product. The less value it gives up, so much the more productive it is, and so much the more its services approximate to those of natural forces. But the production of machinery by machinery lessens its value relatively to its extension and efficacy. (p 368)

Marx continues,

An analysis and comparison of the prices of commodities produced by handicrafts or manufactures, and of the prices of the same commodities produced by machinery, shows generally, that, in the product of machinery, the value due to the instruments of labour increases relatively, but decreases absolutely. In other words, its absolute amount decreases, but its amount, relatively to the total value of the product, of a pound of yarn, for instance, increases. (p 368)

I might misunderstand him here, but this seems to me the wrong way around. Because machinery is much more expensive, the amount spent on instruments of labour will rise absolutely, but precisely because the machinery increases output so greatly, the relative cost of those instruments must surely fall as a proportion of the value of each commodity, because that higher cost is spread across a much larger number of items.

He also notes,

This portion of value which is added by the machinery, decreases both absolutely and relatively, when the machinery does away with horses and other animals that are employed as mere moving forces, and not as machines for changing the form of matter.” (Note 2, p 368)

The efficiency of a machine is measured by the human labour-power it replaces.

Before Eli Whitney invented the cotton gin in 1793, the separation of the seed from a pound of cotton cost an average day’s labour. By means of his invention one negress was enabled to clean 100 lbs. daily; and since then, the efficacy of the gin has been considerably increased. A pound of cotton wool, previously costing 50 cents to produce, included after that invention more unpaid labour, and was consequently sold with greater profit, at 10 cents.” (p 369)

Marx emphasises that this saving of labour-power is not the same as the saving in wages. That is because wages only represent that part of the day for which capital pays. Suppose 1 hour of labour-time = £1. A machine costing £3,000, therefore, costs 3000 hours of labour-time. Suppose the machine does the same work as 150 workers, paid £20 each = £3000. However, if these 150 workers produce Surplus Value at a rate of 100%, then the total value they create is £6000 = 6000 hours. So, the machine, which costs 3000 hours to produce, does the work of 6000 hours of human labour-time.


The use of machinery for the exclusive purpose of cheapening the product, is limited in this way, that less labour must be expended in producing the machinery than is displaced by the employment of that machinery, For the capitalist, however, this use is still more limited. Instead of paying for the labour, he only pays the value of the labour-power employed; therefore, the limit to his using a machine is fixed by the difference between the value of the machine and the value of the labour-power replaced by it.” (p 370)

This demonstrates why, for example, the workers at Ralahine had an incentive to introduce a reaping machine, whilst capitalists were still thinking about it. When workers themselves own the means of production, all labour-time expended in production is their own. Any saving in that time is an immediate gain for them. For the capitalist, however, it is only a saving in the paid for labour-time that counts. That is why worker co-ops always have an incentive to introduce machinery ahead of capitalist enterprises. The more labour is exploited by capital, i.e. the higher the rate of surplus value, the more that is the case.

Since the division of the day’s work into necessary and surplus-labour differs in different countries, and even in the same country at different periods, or in different branches of industry; and further, since the actual wage of the labourer at one time sinks below the value of his labour-power, at another rises above it, it is possible for the difference between the price of the machinery and the price of the labour-power replaced by that machinery to vary very much, although the difference between the quantity of labour requisite to produce the machine and the total quantity replaced by it, remain constant.” (pp 370-1)

Ironically, the introduction of machinery in some branches of industry can create such a level of unemployment in others that wages are forced so low, beneath the value of labour-power that it makes it uneconomic to introduce machinery into them.

Generally, capital introduces machines to replace labour where wages have risen. An example would be the introduction of new technology in the print industry in the 1980's, or today the introduction of driverless trains on the London Underground.

Marx writes,

Hence in a communistic society there would be a very different scope for the employment of machinery than there can be in a bourgeois society.” (Note 1, p 371)

Marx gives various examples of how the Factory Acts raised the cost of employing women and children, and thereby led to them being replaced by machines.

In England women are still occasionally used instead of horses for hauling canal boats, because the labour required to produce horses and machines is an accurately known quantity, while that required to maintain the women of the surplus-population is below all calculation. Hence nowhere do we find a more shameful squandering of human labour-power for the most despicable purposes than in England, the land of machinery.” (p 372)

Monday, 29 October 2012

Filleting Nick Rogers Latest Argument - Part 1

Over the last few months, I have debated, both here and in the pages of the Weekly Worker, with Nick Rogers, over the Temporal Single System Interpretation (TSSI), and his version of it. In his latest response - in the Weekly Worker – Nick accuses me of putting forward a red herring in my argument. Its appropriate then, that in response, I should pick the bones out of his latest offering. I have already forwarded a letter to the WW setting out a response to Nick's misunderstanding of the Law Of Value, and indeed of the concepts of Value and Exchange Value, which should appear next week. However, there is so much wrong with Nick's argument, in relation to the TSSI, that it can only be adequately dealt with at more length than is possible in a letter.

Nick says,

Arthur appears to confuse the effect of an appreciation of capital values on the rates of profit of individual capitalists with its effect on the aggregate rate of profit. My point has always been - and Arthur himself says the same thing - that one capitalist’s capital gain is another’s capital loss. In measures of aggregate profits (historical cost and current replacement cost alike) such gains and losses will cancel out each other.”

This is to invert the reality of the debate so far! It is Nick who has defended the idea that the strength of the TSSI is that it deals with the rate of profit of “real” Capitalists, based on the money they have laid out, not me. My argument has been, from day one, that such an approach is subjectivist. My approach, as with that of Marx in Capital, is to argue that the Rate of Profit is most correctly measured against the actual value of the Capital employed in the production of that Profit. The actual value of the Capital, as Marx states repeatedly throughout Capital, is, as with every other commodity, not determined by what was paid for it at some time in the past, but what the labour-time required for its reproduction is currently.

For example, Marx says,

If the price of raw material, for instance of cotton, rises, then the price of cotton goods — both semi-finished goods like yarn and finished goods like cotton fabrics — manufactured while cotton was cheaper, rises also. So does the value of the unprocessed cotton held in stock, and of the cotton in the process of manufacture. The latter because it comes to represent more labour-time in retrospect and thus adds more than its original value to the product which it enters, and more than the capitalist paid for it.”

One of the fundamental aspects of the TSSI's argument, and of Nick's own arguments previously based upon it, is that the conventional Marxist calculation of the Rate of Profit, based on this current replacement cost, is wrong because the real calculation should be based not on this replacement cost, but on what “real” capitalists actually paid for it. For example, a Capitalist buys Constant Capital (let us say 100 kilos of cotton), which costs him £1,000. He employs 10 workers (Variable Capital) which costs him £1,000 to spin it. These workers work half of the day for themselves (Necessary Labour), and the other half for the Capitalist (Surplus Labour), thereby producing a Surplus Value of £1,000. This can be represented as follows:

(1) C 1000 + V 1000 + S 1000 = E (Exchange Value) 3000.

This gives a Rate of Profit of S/C+V = 1000/2000 = 50%.

Now, suppose the labour-time required to produce the cotton doubles. Marx describes this situation in Capital in the quote above. He says quite clearly that all cotton, including that already produced, and held in stock then doubles in value. In his calculations of the Rate of Profit in Volume III of Capital, Marx again then clearly uses this new value of the Constant Capital, as the basis for calculating the Rate of Profit.

He says,

Since the rate of profit is s/C, or s/(c + v), it is evident that every thing causing a variation in the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even if s and v, and their mutual relation, remain unaltered. Now, raw materials are one of the principal components of constant capital. Even in industries which consume no actual raw materials, these enter the picture as auxiliary materials or components of machinery, etc., and their price fluctuations thus accordingly influence the rate of profit. Should the price of raw material fall by an amount = d, then s/C, or s/(c + v) becomes s/(C - d), or s/((c - d) + v). Thus, the rate of profit rises. Conversely, if the price of raw material rises, then s/C, or s/(c + v), becomes s/(C + d), or s/((c + d) + v), and the rate of profit falls. Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material.”


So, with the new higher value of cotton we have,

(2 ) C 2000 + V 1000 + S 1000 = E 4000.

A poor cotton harvest raises the cost of Cotton as
Constant Capital.  More Capital has to be laid out
to buy the same quantity.  The same amount of
labour power is employed to process it, with
the same proprtion of the day required to cover the
Value of Labour Power.  So the amount of Surplus Value
remains the same, but the Rate of Profit falls, because
 more Capital has to be laid out to buy the cotton.
As Marx points out, the new higher value of the cotton is now passed on to the end product, raising its Value to 4000. But, it is only Labour which creates Surplus Value, and as the Labour-power employed has not changed, and neither has the rate of its exploitation, the amount of Variable Capital and of Surplus Value remain constant. However, the consequence is now to reduce the Rate of Profit, because it is calculated on a higher total amount of Capital laid out. It is now 1000/3000 = 33.3%. It is not a change in the amount of profit that changes the Rate of Profit, as Nick seems to think, but precisely the change in the Value of the Constant Capital, a change which Nick does not believe has occurred, because he bases his valuation of the Constant Capital not on its current value, but on what the Capitalist paid for it at some point in the past!

When you think about it, and from Marx’s standpoint of being concerned about how Capital expands, by the the reinvestment of Surplus Value, this makes sense. The Rate of Profit, calculated in this way is also equal to the maximum rate by which this Capital can expand, given the new cost of the Capital it has to buy to continue production.

However, Nick disagrees with Marx’s approach. Nick argues that the real Rate of Profit that this Capitalist makes is not 33.3%, but remains 50%, because this particular Capitalist only paid £1,000 for the cotton they have used. Nick also argues that the value of the cotton transferred to the final product is also still only £1,000, which again contradicts a fundamental aspect of the Labour Theory of Value, which is that the Exchange Value of Commodities is determined by the labour-time currently required for their production.

On this latter point, Nick was also contradicted by Andrew Kliman, in the interview Nick did with him. Andrew agreed with me that the current value of the cotton is transferred to the final product. On this point, Nick's only response now is, “I intend to spend time working through this issue”. In other words, he is unable to sustain his argument.

Having set out the basic terms of the argument, on this point, let me now turn to Nick's statement above. We can now pick the bones from it. The first obvious thing to say is that on the basis of Nick's argument, as opposed to that put forward by Andrew Kliman, there could be no Capital Gain for the individual Capitalist. According to Nick the value of the Constant Capital (the cotton) has not changed! It remains what the Capitalist paid for it, not what its current replacement cost is. The individual Capitalist could only obtain a Capital Gain, if the Value of this cotton has changed from the £1,000 he paid for it, to £2,000, its current replacement cost. But, Nick denies that any such change in its value has occurred!

Let me now turn to the question of the profit, and the Capital employed to produce it. Once again, it is Nick who is confused on this matter. Nick is absolutely right that were the individual Capitalist to be able to realise a Capital Gain, by selling the cotton to some other Capitalist, rather than engaging in production themselves, this would not add one jot of additional Surplus Value. Capital Gains can only be realised in the sphere of Distribution out of the Surplus Value created elsewhere in the realm of Production. (Actually, this is not strictly true, it could be realised as a consequence of new capital being mobilised via Primary Accumulation i.e. money hoards could be turned into Capital.)

Nick confuses changes at
the surface with changes in
the underlying reality.
But, in determining the Rate of Profit, Nick once more seems to forget that the Rate as opposed to the amount of profit, is not just determined by the amount of Surplus Value created, but also by its relation to the Value of the Capital laid out to produce it! In Nick's world, the Value of Capital is determined by what was paid for it at some time in the past. This also determines how much Value is passed on to the end product also.   On that basis, then, of course, if neither the amount of profit created, nor the value of the Capital laid out are deemed to have changed, then there can be no change in the Rate of Profit. But, the whole point is that the Value of the Constant Capital HAS changed! Of course, no one can deny Nick the right to determine the Rate of Profit on that basis if he chooses to do so. He is free to choose whatever method he likes. The point is whether this method tells you anything useful, and whether it is consistent with Marx’s method. The answer to both these questions is no.

Historic Cost implies a factor contributions theory
of Value more akin to that of the
 Neo-Austrian School than Marx's Labour Theory
of Value. 
As I've demonstrated above, Marx argues that the Value of Constant Capital, as with any other commodity is determined by the labour-time currently required for its reproduction. There are good reasons as set out above for using this method, because it means that it provides a useful basis for calculating the maximum rate of Capital Accumulation (if we set aside the potential for using Credit, or for new primary Capital Accumulation). But, as I've set out elsewhere in my posts here and in the Weekly Worker, the other consequences of using historic cost is to undermine the Labour Theory of Value itself, because it introduces a factor contributions theory of value by implication, even though this is no doubt, not the intention of its proponents.

But, as I set out in a recent letter to the WW on these points - here – the historic cost method of calculating the rate of profit produces spurious results that would cause a misallocation of Capital. Let me give another example of this. Suppose I am a capitalist Landlord. I bought a house 20 years ago that cost £50,000. The average rental income is 5%, so I rent the house out at £2,500 a year. However, today the market price of the house is £250,000. Would I continue to calculate my “Rate of Profit” i.e. my rental income as a proportion of the capital used to produce it, based upon the £50,000 historic cost, or on the current replacement value of £250,000? Its only necessary to ask this question, to realise the answer. Any Capitalist worth their sort, would base their calculation on the current value, not the historic cost.

A society of hunter-gatherers that has to devote more
social labour-time to producing tools and weapons
 (means of production) i.e. the Value of those tools
 and weapons rises, will either have to devote less time
to actual hunting and gathering (which may lead to a reduction
in their population), or else will have to work more hours in total.
  The same is true for a commodity producing society.  As Marx says in his
Letter to Kugelmann, the Law of Value operates across all Modes
of Production as a Law of Nature.  Only its form is changed.
Nor can Nick escape the logic of this argument by claiming that things are different at the level of “Capital in General”, as opposed to the level of “Many Capitals”. I have followed Marx in providing examples based on “Many Capitals”, but Marx is quite clear, as he points out in arguing against Adam Smith's “Trinity Formula”, that the production function facing the individual Capital i.e. C + V + S = E, applies equally to Capital in General. So, the example given above in relation to a single capital can simply be applied to Capital in General. In other words, if we take a period of one year, for example, we might have a situation where at the beginning of the year the total national Capital is comprised of C £1 Trillion + V £1 Trillion + S £1 Trillion = E £3 Trillion. But, similarly, if the labour-time required to produce the £1 Trillion of Constant Capital rises, even just for some of it, then the Value of that Constant Capital will rise. Let us say it doubles, in that case we will have C £2 Trillion + V £1 Trillion + S £1 Trillion = E £4 Trillion. If £1 = 1 hour of social labour time, then its clear that this society will have to have worked 1 trillion more hours to ensure that the necessary quantity of Constant Capital is produced. This is fully consistent with the Law of Value as it applies to the distribution of social labour across all modes of production. It is also consistent with this same Law of Value, that the distribution of this social labour-time is determined by the need to expend this labour-time on the production of this Constant Capital, and on reproducing the Labour-power, which leaves the amount of social labour-time expended for the purpose of producing means of consumption (V) and surplus value (S) unchanged! In the same way the overall Rate of Profit for this economy will have fallen from 50% to 33.3%.

Mass production techniques massively devalued
constant capital, making it possible to buy more means
production, and employ more labour-power absolutely,
even whilst the amount of labour-power fell relative to
total capital employed.
The conclusion from this is quite clear and consistent with the analysis above at the level of “Many Capitals”, which is that the fall in productivity which raises the Value of the Constant Capital, makes necessary an increased proportion of society's available labour-time being devoted to the reproduction of that Constant Capital. This is manifest in the fact that this society is now less able to expand at its previous rate, even though its total volume of profit remains unchanged.

It is absolutely true that at the level of “Many Capitals”, the changes in the Value of this Constant Capital, may result in some Capitalists realising a Capital Gain, whilst others will in consequence make equal Capital Losses but this does not at all change the amount of profit created, nor does it change the fact that the Value of the Capital employed has changed, demonstrated by the fact that more social labour-time is required to reproduce it. It is, in fact, that very fact, which results in the fall in the Rate of Profit.

By the same token, it is a fall in the Value of Capital, which results in a higher Rate of Profit, which can then be a stimulus for increased accumulation of Capital, thereby promoting economic growth.

It is odd, in fact, that Nick seeks to defend the TSSI, and yet rejects the argument above, because a basic argument put forward by proponents of the TSSI, and by Nick himself is that accumulation in the US did not increase substantially because the Rate of Profit had not risen, and the reason given for this is that Capital in the US had not been adequately depreciated!

Forward To Part 2

Sunday, 28 October 2012

Grey Swans

Many people are now familiar with the idea of the Black Swan event. It was developed by Nicholas Nassim Taleb. The basic concept is that it is those events whose probability has been largely discounted, which have the potential for causing most harm, precisely because no one believes they can happen. The term Black Swan goes back probably to Aristotle, and is used in Philosophical Logic to demonstrate the idea of arguments that fail because of being based on a false premise. Everyone believed that being white was a condition of being a swan, because no one throughout Europe had ever seen a swan that was not white. The argument “All swans are white”, seemed to be a consistent argument that allowed other arguments to be built upon it. That is until Europeans discovered black swans in Australia!

This also provides the basis for understanding another aspect of Philosophical Logic, the impossibility of proving a negative. For example, it may have seemed possible to prove the negative statement “No swans are black”, but that too would have been false. In fact, this forms a basic element of the scientific approach, which is that all statements are only conditionally true. That is they remain true, only so long as they have not been disproved. Another example, is Bertrand Russell's argument in relation to God. Russell argued we cannot prove that God DOES NOT exist, because it is impossible to prove a negative. However, this is different to assuming that because we cannot prove his non-existence, then God must exist. He says, we cannot prove that there is not some giant teapot orbiting the Sun, but that is not the same as believing that such a teapot exists. All the evidence we have points to the contrary, and there is no evidence either that such a teapot or God does exist. A rational response then is to base out beliefs and our actions on what the evidence suggests is most probably true.

But, its precisely for this reason that Black Swan events pose the greatest risks. They are events that all of our evidence, all of the laws of probability suggest will not happen. As a consequence, everyone's beliefs, everyone's actions are based on the principle that they will not happen. As a result, no one acts in such a way as to prepare for them. It is not the event itself, that is necessarily catastrophic, but the lack of preparedness, and the chaos that ensues, which is often what makes such an event catastrophic.

Take an earthquake. When no one understood the causes of earthquakes, then even in areas where they occurred, no one was prepared for them. People may have believed that they were some kind of punishment from the Gods, and made periodic sacrifices to assuage them, but that was hardly the kind of preparation that is of any practical use. But, today in a country like Japan, because earthquakes are commonplace, because we understood their causes, and can even predict them to a certain extent by seismic monitoring, its possible to prepare for them. Buildings can be built so as to be “earthquake proof” and so on. In fact, with the Fukushima earthquake, most of those preparations for an earthquake worked. Even the nuclear plant resisted the earthquake. What had not been prepared for, and what did for the nuclear plant was the tsunami.

Capitalism too does this. For all the talk about risk-taking and so on, the drive of both Capitalism, and of Capitalists has also been to try to remove risk. Certainly that was a central aim during the 20th century. Outright price competition was recognised by Capital to be dangerous even during the 19th Century golden age of free market liberal capitalism. Firms attempted to protect themselves against being crushed by competition, by themselves becoming the biggest, most dominant firm in the industry. When a few firms in an industry became very large, then they attempted to remove damaging competition between each other, by forming cartels and Trusts. They sought to protect themselves against foreign competition via protectionism, or the support of their nation state in the colonial markets. They also tried to protect themselves against the risks involved in market fluctuations by introducing various forms of planning, which governed their increasingly large investment plans. As Engels put it in his Critique Of The Erfurt Programme,

Capitalist production by joint-stock companies is no longer private production but production on behalf of many associated people. And when we pass on from joint-stock companies to trusts, which dominate and monopolise whole branches of industry, this puts an end not only to private production but also to planlessness.”

One problem that firms faced in making investment decisions was future prices. A firm that is considering buying a new machine, for example, looks at its price, and compares this with the potential for revenues it will crate over its lifetime. If this revenue, at current prices, will be greater than the cost of the machine, then it will be a profitable investment. But, the question is what will future prices be? The firm under a free market can only base itself on current prices. But, suppose every firm in this industry decides to invest in this kind of machine. The consequence is that the supply of commodities from this industry rises, and the cost of producing them falls due to the introduction of the machine. The result is that the price of these commodities falls, and may fall significantly. What seemed like a profitable investment decision turns out to be a loss making decision.

There is, however, even a solution for this problem available for Capital, particularly at the stage of large firms. For a long time, in relation to agricultural prices, there emerged “Futures markets”. These markets removed some of the uncertainty, and therefore, sharp fluctuations that went along with large changes in supply and demand for agricultural products caused by the weather etc. The idea of a Futures Market is quite simple. A farmer can agree to sell the proceeds of their next year's crop not on the uncertain basis of what prices might be then, but on the basis of a certain price offered to them by buyers now. The way this works then is that buyers in this Futures Market speculate on what prices will be next year. Some will think prices will be the same as today, some think they will be lower, some higher. But, out of all this variation emerges an average figure, which is then the market estimate of what prices will be in a year's time.

Returning to Taleb, and probability theory, there is good reason for believing that this estimate will be quite accurate. That is because of what is known The Wisdom Of Crowds. It has been mathematically demonstrated that a large number of people asked to guess about a wide range of things, from the number of jelly beans in a jar, to the weight of an ox were able, when the average of their guesses was taken, not only to arrive at a very accurate number, but one that was more accurate that any single individual was able to estimate. Futures markets, are made up of a large number of reasonably well informed individuals, often representing an even larger number of not so well informed people all of whom have their own view about what might happen to the weather, to people's incomes, to the economy and so on, and therefore, what will happen to demand and supply for any particular commodity, and consequently what will happen to its price.


A farmer, for example, selling Corn, will attempt to sell their Corn to whichever of these buyers will pay the highest price for delivery in a year's time. If they cannot sell it all to this buyer they will sell some to the next highest bidder and so on. The buyer, obviously hopes that the actual price in a year's time will be even higher, so they will make a gain on their purchase. If the price is higher than that, the farmer might regret they agreed to sell at that price. On the other hand, they removed the risk that the price might have been lower. In the same way, some people in the futures market might believe that prices will be much lower in a year's time. So, they agree to sell commodities they do not own. That is called short selling. Once again, if they are right they stand to make a gain. Suppose they agree to sell 1000 tons of Corn for delivery in December 2013 at £10 per ton. They do not own this Corn. They expect that the actual market price of Corn in December 2013 will be less than £10 per ton. Let us say it turns out to be £8 per ton. In December 2013, they buy 100 tons of Corn at £8 per ton, which they then deliver to whoever had agreed to buy it from them a year earlier, and are paid £10 per ton for it. They make £2 per ton gain.

But, it can be seen how this speculation by potential buyers and sellers in the Futures Market removes some of the risk for producers of Corn. It does not mean that the price of their Corn will not rise or fall from year to year, but because they are able to obtain a certain rather than an uncertain price for their output, they are able to act accordingly. If the Futures market prices for some commodities suggest prices will be lower, they can reduce their production of that crop, and increase their production of some other crop where the Futures Market suggests that prices will be higher.

But, Futures markets now exist not just for agricultural products, but for almost everything. The irony is that something that was intended to reduce risk and uncertainty, however, became the source of a considerable amount of risk and uncertainty, because of the development of further derivative markets based upon them, and the unregulated nature of those markets, which led to the sub-prime crisis. However, it could be argued that the real cause of the sub-prime crisis was not the operation of the futures and derivatives markets, but was in fact due to the actions in the primary markets e.g. the lending of vast amounts of money to people who had no possibility of paying it back!

This distribution of what, on average, people think is illustrated by the normal distribution of the Bell Curve. It shows that the majority of responses come under the bulge of the bell in the middle of the range. However, there will always be some responses at the edges – what are called the “fat tails”. It is events that occur within these regions that constitute Black Swan events.

The other way of thinking about them is in terms of the now well known Rumsfeldian “Known and Unknown Unknowns”. We might think of events occurring within the central range as being “Known Knowns”. Things further out in the distribution might be “Known Unknowns”. For example, we know that there will be another San Francisco earthquake at some point, but we also know that we don't know exactly when! On the other hand, a true Black Swan event is an “Unknown Unknown”. It is something that is completely off the radar.

On that basis its difficult to understand the markets at the present time. Its understandable that markets do not price in true Black Swan events, precisely because they are off the radar. Its like trying to price in the likelihood of someone discovering a giant yellow teapot orbiting the Sun. No one does it, because no one believes there is any possibility of it.

But many catastrophic events that could happen are not off the radar. In fact, its possible to look back – with the benefit of hindsight, of course – and see many of these events, that markets should have anticipated, should have prepared for, which would have meant they were not then catastrophic. Was it really impossible to foresee that the Tulipmania was unsustainable, for instance?

Given that all of Europe was mired in Depression during the 1920's, and the US economy and Stock Market was inflated on a sea of cheap credit, was it unforeseable that it would end in tears, before it resulted in the 1929 Stock Market Crash?

 In 1987, with the US Trade and Budget Deficits soaring out of control, with Reagan following the Voodoo Economic policies of Arthur Laffer, which, like the ideas of the Tories today, were based on the ridiculous notion that Budget deficits could be erased by cutting taxes for the rich, was it impossible to foresee that it would result in the Crash of 1987?

With Tech Companies that produced nothing, and had no discernible income, let alone profits, seeing their share prices go through the roof as soon as they were listed, was it not foreseeable, that it would result in the Stock Market Crash of 2000

When UK house prices doubled in the space of just over a year after 1988, was it unforeseeable that, as interest rates and unemployment rose, they would crash back to where they were before? 

When in the US, people who had no job, and no means of paying back the loan, were given 100% plus mortgages on expensive new homes, when people bought homes that were not built, simply in the expectation they could sell them when they were at a higher price, was it unforeseeable that these property prices would collapse by a huge amount in 2008?

The answer is, no it was not unforeseeable. Nor does it contradict what was said earlier about the wisdom of crowds. When crowds decided that the price of Tulips would rise they were, of course right. Anyone who bought tulips before they went up would have made a significant gain, if they sold them again at any point prior to them falling. The whole point about why such bubbles end, is that the crowd ceases believing that prices will go higher. The number of people who continue to believe that – the “Bigger fools” - become smaller and smaller. The buying slows down, the rate at which the prices rise slows down. At a certain point the crowd decides that rather than prices rising they will be lower in future. Everyone wants to get out. When they do prices drop catastrophically because everyone tries to avoid being trampled by the crowd.

But, there is an interesting psychological feature here. Professional investors try to ensure that they have no emotional attachment to anything they buy. Such an attachment means that you are more likely to hold on to it long after you should have sold it. It is something that amateur investors frequently do, leading them to incur losses, or bigger losses than they needed to do. But, that can have its own effect on markets when they crash, especially where large numbers of such investors have become involved. A classic example was the privatisation issue of BP shares back in the 1980's. BP shares were already quoted on the Stock Market, when the Government decided to sell off its own stake. There had been a number of privatisation issues, from which people had made significant gains. The Government, announced the price at which it would sell its shares, and this was below the market price of BP shares. A large number of people signed up to buy shares. Before the share sale took place, however, the BP share price fell dramatically, to way below the Government offer price. Yet, large numbers of people went ahead to buy the Government shares at the much higher price, when they could have saved themselves a load of money by simply buying the shares on the open market!

What was going on here. Partly, it is simply a sign that large numbers of people had been convinced to buy shares without any knowledge of basic elements of financial education whatsoever. Its rather like all the people who have no idea how much interest they are paying on their credit card, or all those people who were persuaded to buy their council house without any understanding of the implications of paying a mortgage rather than rent would mean to them, or who were conned into taking out expensive private pensions by that same Government, only to find not only was most of their money going in commissions and backhanders to people in the Pension Companies, but what was left was to become worthless when the Stock Market crashed in 2000, anyway.

But, part was also that these people had made a decision to buy these shares, confident that just as people had made money in previous privatisations, so they would make money in buying BP shares in the privatisation. They had made a decision, and were going to stick with it. That is all the more true with houses. Someone who has paid out a large amount of money for a house in the mistaken belief that house prices only ever rise, will take some convincing that they should sell it for less than the inflated figure they have for it in their mind, let alone that they should sell it for less than they paid for. That is all the more true, though less logical if they have lived in the house for any length of time. Its less logical because the longer you have lived in a house, the less you are likely to have paid for it compared to current prices. Consequently, you could well afford to sell it at a price way below current asking prices, and yet still make a gain over the price you originally paid.

In other words, psychologically people in general even when they begin to recognise that things have changed that prices instead of continuing to go up, are more likely to fall, fail to act upon that belief. They continue to hope, even if they do not believe, that the worst will not happen. So, it is impossible to prepare for a true Black Swan event because no one can see it coming, but also people in general do not prepare for those catastrophic events that can be foreseen either, because it is more in their comfort zone, to continue to believe that they will not happen. Its rather like someone who buys a house in a flood plain. They know that it means the house is likely to be flooded if there is heavy rain, but when it happens they are still surprised it happened! They only looked at the lower price for the house, without considering why it was cheaper!

Similarly, when people come to realise that house prices have stopped rising, and have started falling, and are likely to fall sharply, they may decide not to buy another house, or might expect to buy any other house at a lower price, yet they continue to expect to be paid the current inflated price for their own house! That is the situation, that Miles Shipside, the economist at Rightmove has described in respect of sellers over the last year. But, all this behaviour does, whether it is with share prices, or with property prices is to exacerbate the crash when it occurs.

With property it is worse, because it is not a particularly liquid market. In the Stock Market billions of shares are being traded every day. If you have shares you want to sell, you can go on to your online stock broker and sell them immediately to any number of willing buyers. Moreover, if you decide you don't want to sell all of your shares, you can sell just a portion of them. But, ask anyone trying to sell a house at the moment. The average house has now been on the market for about a year, before it is sold, and that time is rising, as more and more properties are listed for sale, whilst sellers go through a process whereby they start off with a totally unrealistic asking price, and only in stages reduce the price down to a more realistic figure. One share in BP is the same as another, but one house is not the same as another, so they are not so easily disposed of. Moreover, you cannot generally sell just a part of your house. Its all or nothing, and in times like these its more frequently nothing.

But, if this kind of head in the sand psychology is to some extent understandable with people selling houses, its less understandable when it comes to the Financial Markets, where those who make most of the decisions on buying and selling, are supposed to be better informed, and more dispassionate.

As opposed to the Black Swan events that like the Spanish Inquisition, “no one expects”, there are no shortage of foreseeable catastrophic events, what might be called Grey Swans, which might not be as probable as the white swans, that are sufficient in number, and sufficiently likely that they would seem to suggest that a degree of caution and preparation is warranted. To some extent, the vast amount of money that has gone into Gold, Bond Markets, and Cash Deposits is an indication that such caution and preparation exists. Yet, at the same time, Stock Markets have risen by between 20 and 40% in the last year or so, and even the Bond Markets now appear to have risen so much that its difficult to justify seeing them as “safe havens”. The same is true with Gold. Gold acts as a safe haven to protect against inflation and devaluation of currencies, but its price has also risen substantially, whilst any serious financial calamity under current conditions is likely to result in large amounts of money being withdrawn from circulation, as economic activity collapses and in deflation.

What is more concerning is that many, if not all, of these Grey Swan events are linked. That means that if any one of them were to occur, they have the potential to spark all of the others. That means the probability of some kind of catastrophe occurring is increased, whilst the potential consequences of it, are increased as well. Anyone who has undertaken a Risk Assessment knows that is not what you want to see. Looking at these Grey Swans illustrates this.

The US is facing what has been called the “Fiscal Cliff”. What it means is basically that unless a deal is done before January, the US will implement a series of tax rises and spending cuts, which will cause a 4% fall in US GDP, crashing it into recession. That will have serious consequences. For the last 30 years, at least, the global economy has had a 3 year cycle. A cyclical slowdown began towards the end of 2011, and is likely to run into 2013. As a consequence, growth in the US has slowed, the Eurozone and UK have gone into recession, whilst even China's growth has slowed to around 7.5%. If the huge US economy is driven into recession, that will impact on all of these other economies, preventing any kind of recovery.

That is probably more serious for the UK and Eurozone than it is for the US, or for China and other dynamic economies. In the US, its housing market has collapsed by around 66-75%. Its banks have largely been recapitalised. The main problem in the US will be the huge volume of private debt in the form of credit card and student debt, standing at around $2 Trillion. That is not the case in the UK and Eurozone. There an enormous amount of private debt exists alongside, a still hugely inflated property market, alongside still under capitalised banks. Private sector debt in the UK alone stands at £2 Trillion. Most of this is very tenuous. Banks have held back on repossessing property to avoid creating a firesale in the property market, but they are steadily tightening their grip on it. A third of people in the UK run out of money before the end of the month, and with the already high levels of debt, their only resort is to Usurers, and Pay Day Loan sharks charging up to 4000% p.a. interest. A fifth of all workers in Britain earn less than the Living Wage, that is not counting all those on zero hours contracts, or who are in self-employment because they can't find jobs, and whose earnings are often barely above what they would get on the dole.  With real wages falling as wages are cut, and with prices of food and energy already scheduled to rise by around 10% in the next few months, this becomes an unsustainable situation.

At least the bank will not send someone round to remove your knee caps if you don't pay, so its obvious who people will pay first. But, the consequence then will be that the Banks begin to repossess, and once that begins a stream will quickly turn into a flood given the huge number of already unsold properties on the market. As with every bubble as it bursts, the banks will not want to get trampled in the stampede, an each will try to get its money back first. That is what happened in the 1990 house price crash, it is what happened in the US in 2008 and subsequent years, and it is what happened in Ireland in 2010. It is difficult to see how UK Banks could survive such an event in their current condition, especially as it would almost certainly cause widespread defaults on other forms of credit.

But, the position of the Spanish Banks is even worse. Spanish property prices have fallen from their previous astronomic levels, but a recent survey cited on CNBC said that house prices there need to fall another 50%, and land prices by 86%! In fact, given that Spain is already in Depression, and being driven inexorably in the same direction as Greece, its hard to understand why property prices, and the Spanish Stock Market have not collapsed already! But, the position of the Spanish Banks is worse than that in the UK. Many of them are effectively broke, and the government has been trying to rescue them by promoting mergers, and their take over by the bigger banks. But, the position of the Spanish banks is still massively flattered by the valuations of property on their books; valuations that are totally unrealistic. Already, bad loans of the Spanish Banks has risen to the worst case scenario given in the Stress Tests undertaken only a couple of months ago. If Spanish property prices fall to the kinds of levels now being discussed, then the amounts of money proposed from the ECB for bailing them out will be wholly inadequate.

That will have a serious ripple effect across Europe and the UK given the interlocking nature of the loans made between Banks. It is only the huge amounts of money printed by the ECB that has prevented a renewed Credit Crunch already, and yet borrowing costs are rising, causing banks to raise mortgage rates, which in itself puts further pressure on house prices.

The other grey swan on the horizon of the US is also the possibility of a Romney victory. US big business is hoping against such an eventuality. Although, a Romney victory might avoid the Fiscal Cliff, if the Republicans control the Congress, the implications might be at least as bad. Romney is likely to be prisoner to the Tea Party Taliban, whose representative is his running mate – Paul Ryan. They are committed to no tax rises, which would mean either that the deficit escalates out of control, or more likely swingeing spending cuts, that would again crash the US economy. Romney has also said he will sack Ben Bernanke from the Federal Reserve, and oppose the current policy of money printing. That is not what US big business wants to hear. Not only does it mean reintroducing all of the risk and uncertainty they have spent a century trying to remove, it is Bernanke's money printing that has prevented the US going into deflation, which would have been highly damaging for big US oligopolies. The Fed was set up in 1913, precisely to prevent such an occurrence.

The result again would be a crisis of the US economy, and a big reduction in profits that would suggest that current Stock Market valuations are grossly over rated. Already, the economic slowdown has seen the majority of US firms report lower earnings in the last week or so, which has sent Stock markets down marginally.

But, the consequence for the UK and Europe would be much worse. That is not just because of the fact that it would mean that their exports to the US would collapse. At the moment, the Federal Reserve buys huge amounts of US Government Bonds as part of its programme of QE. If Romney and the Tea Party ended that, the consequence would be that the price of US Treasuries would fall sharply. The Yield would then rise sharply. This in itself would be another dampening effect on the US economy. However, this might be only a very short term effect. As happened when the ratings agencies cut the US's Triple A Credit Rating, people continued to buy US Bonds. That is because everyone knows, whatever the agencies say, that the US is not going to default on its debts. The likelihood is then, that the Federal Reserves purchases of Bonds would largely be compensated by purchases from elsewhere. That is particularly true if rates were marginally higher. But, that elsewhere is likely to be Europe and the UK. Money that currently goes to buy UK and Eurozone Bonds, would instead go to buy US Bonds. So, the perverse consequence of the Fed stopping buying US Bonds would be a sharp rise in the Yields of UK and Eurozone Bonds! For reasons I've set out elsewhere, the UK is more likely to suffer in that process, as the Government is seen to be incompetent, and UK inflation rising.

Its not difficult to see how this feeds back into creating the same kind of problems previously discussed. Higher Bond Yields, a crash in the Bond Bubble and so on, could lead to a renewed Credit Crunch, higher mortgage rates, a property market crash, and the bankruptcy of UK and Eurozone banks.

Ed Yardeni coined the phrase
Bond Vigilantes
Of course, a property market crash in the UK and/or Spain could occur even without either of these events. Sooner or later, the bubbles in those markets will burst. But, the ripple effects of that in terms of the UK and Eurozone economies, and the effects on Bond and Stock Markets could exacerbate the problem of the Fiscal Cliff, or the potential for QE in the US too. Similarly, the bubble in the Bond Markets could burst. Yields on UK and US Bonds are at 300 year lows, meaning prices are at 300 year highs. The likelihood, especially given all of the other potential risks on the horizon must be that some large Bond Fund will lose its nerve, and begin to sell before its left with a huge amount of rapidly depreciating paper.

All of those things can arise simply from the kind of psychological responses typical of this stage of a crisis, what has been termed a Minsky Moment or an example of Keynes' “animal spirits'. Each can feedback to provoke the outbreak of the other kind of event.

The situation in Syria, the wider Middle East and
 Turkey is very reminiscent of the situation there
and in the Balkans, described by Trotsky in 1912-13.
It eventually led to World War I.
But, there are many more potential sparks. The civil war in Syria, which is really a regional war fought out amongst proxies of the Gulf States and Iran, and their international backers standing behind them, has already spread into Lebanon, which itself experienced a similar civil war lasting around 30 years. Turkey, which has its own designs on becoming a “Neo-Ottoman” regional power is increasingly involved, and itself has similar sectarian divisions. Given the history of the Balkans, and of this area, the possibility of the current fighting spreading is high. That on its own, and with the current developments of Islamist regimes in Egypt, Libya and Tunisia, the role of Al Qaeda, and their attitude to Israel, again opens the possibility of the conflict turning into a conflagration that would affect world shipping through the Suez Canal, as well as oil prices. Once again, the potential for that to affect Bond prices, and thereby interest rates, feeding through into a property market crash, feeding through into a banking collapse etc. are fairly obvious.

There are many more of these Grey Swan events that could be listed, as well as the Black Swan events we do not know about. Given the range of threats, and their potential seriousness the present levels of global financial markets appear to have all the hallmarks of people who know that a tsunami is coming, but who instead of preparing by moving to high ground, have decided to stand on the beach to watch it arrive!