Thursday, 23 November 2017

The Tories and Housing

The Tories have said that resolving the housing crisis is their priority. Theresa May has said that she is making it her personal responsibility to end the housing crisis. But, its clear that as with every other area of policy, when it comes to housing the Tories simply do not have a clue.

A couple of weeks ago, Sajid Javed, in one of the Sunday morning politics programmes said that to resolve the housing crisis it was necessary to start with the initial cause of the crisis, which he said is the shortage of supply of houses. But, even assuming that the actual problem is a shortage of supply – which it isn't – this would not be the starting point in resolving the crisis. The starting point is asking the question why this shortage of supply exists. Unless you address that question, it is not possible to develop any kind of rational policy to address that shortage of supply. But, the real problem is not a shortage of supply, and if you address the question preceding that, of why the supply of houses is not larger, that becomes abundantly clear.  I pointed out some years ago, that, in fact, there is 50% more homes per head of population today than there was in the 1970's, and Oxford Economics have also recently demonstrated that the amount of new residential floorspace has continually exceeded the actual amount of new household formation over the last few decades.

The real problem is a shortage of housing at prices that people can afford, whether that is houses to buy or to rent. Unless you understand that starting point, it is impossible to develop any kind of rational programme, and you end up with policies such as “Right to Buy”, “Help to Buy”, “Buy to Let”, and now the abolition of Stamp Duty and so on, which simply inflate demand further whilst doing nothing to increase supply, and thereby make the crisis worse rather than better, along with the policies of continually extending Housing Benefit, which simply subsidises low paying employers, and high rent landlords, who see this subsidy go straight into their pockets.

For the Tories and other proponents of orthodox bourgeois economic theory, the fact that house prices have risen so much, and yet the supply of houses has not, is a conundrum. For the same reason they believe that an increased supply of houses must result in a fall in the market price of houses, so they believe that the huge rise in prices must bring forward an increase in house building, as builders seek to be able to sell houses at this much higher price. But, despite the fact that house prices have risen astronomically, it has not resulted in an increase in house building. On the contrary, the number of new houses being built has been at historically low levels during nearly all of the period when house prices have been soaring!

Unless you understand the reason for that its impossible to resolve the crisis itself. There are several reasons why the soaring price of houses has not brought forth higher levels of house building. Firstly, a large part of house building in the past came from the building of council houses. Britain has only ever approached levels of annual house building of more than 200,000 on a consistent basis, when it has been large numbers of council houses. Outside such periods, Britain has always struggled to build even 200,000 new houses a year. But, for the last thirty years, we had Council Houses sold off under Right to Buy, whilst councils were prevented from using money raised from sales to use for new building, and Councils have been prevented from borrowing in order to build the Council houses required.

More recently, even Housing Associations were forced to sell the homes they owned to tenants, and they have faced a similar problem of being able to use receipts, or to increase borrowing to finance further building. Indeed, if you are a Housing Association, why on Earth would you borrow money to build additional homes to rent, if the Government then forced you to have to sell off those homes, at a discount, and thereby to also lose the future rental income that you would have obtained from those homes?

But, even if councils and housing associations did not have these restrictions, they would still face the same problem that private builders face, in building homes to sell. The reason that the astronomical rise in house prices has not brought forth an explosion of private house building is quite simple. Builders only build houses to produce profits, and although the price oh houses has risen exponentially, builders have also faced a sharp rise in the cost of building new houses, because the price of land has been driven up exponentially too, as a result of the bubble in existing house prices. Because existing house prices are so astronomically high, the owners of building land know that the price of any houses built on their land, will also be astronomically high.

Its like if the existing price of wheat is astronomically high, the owner of a field suitable for growing wheat, but which is not currently being cultivated, will know that a farmer who wants to cultivate it, will sell the wheat at these current high prices. That means the landowner will be able to charge a high rent for the land, equal to the surplus profit the farmer would otherwise make, and if they sell the land to the farmer, the price they will charge for the land will be the capitalised rent. The capitalised rent is the amount of capital that would be required, at the current rate of interest, to produce the equivalent in interest, of the annual rent. That is another reason that building land prices have risen, because not only have existing house prices rocketed, pushing up the rental equivalent, but interest rates have sunk to historically low levels, pushing up capitalised values.

When a builder has taken into consideration these increased costs of buying land at these inflated prices, the profit they are left with does not provide them with any surplus profit, which then reduces any incentive they have to increase their production substantially. And the councils and housing associations are faced with a similar problem. For a council to build additional council houses, it must first acquire building land to do so. Without the ability to buy up agricultural land, at agricultural prices, within the Green Belt, or to compulsory purchase building land, at agricultural prices – which would be subject to a legal challenge by landowners in the courts – Councils would face having to pay exorbitant amounts to buy land, which would then feed through into their cost of building Council Houses, thereby limiting the quantity they can build, and also meaning they would have to charge correspondingly high rents for any such Council houses, so as to recover this cost.

The requirement to build on Brownfield sites is doubly a stupid policy, because such brownfield sites are invariably in urban areas, where the land prices are higher than for agricultural land. Secondly, those already living in these urban areas are the ones who most urgently require their living environment to be made healthier and more desirable, by having such brownfield land greened. Rather than building on these brownfield sites, local councils should be developing policies to reclaim them, as green open space for the benefit of the existing residents. They should be turned into “village greens”, and protected against any future development on them, as a more sensible means of creating not a constricting “Green Belt”, but of creating liberating green lungs. Further building on this brownfield land, only has the effect of further diminishing the environment of such urban areas, and of simultaneously pushing up further the price of building land within that area, by increasing the demand for it.

Simply building more houses, whether to buy or to rent, will not reduce house prices, or rents. Only if the issue of the massive bubble of existing house prices is tackled, and its effect on causing a huge inflation of land prices, will it be possible to build more houses at a cost that enables them to be sold at lower prices, and rented at lower rents.

That brings us to the question then of the huge bubble in house prices. Builders will not build large numbers of additional houses just because prices are high, if their profits are not correspondingly high, and their profits will not be correspondingly high, if land prices are high. But, land prices are high, because existing house prices are in a huge bubble, which along with the monopoly of land ownership, and further monopoly restrictions such as the Green Belt, means that landowners can charge high rents and land prices. But, the further issue here is the market as the housebuilders see it.

Modern capitalism does not generally produce chaotically in the way it did at the start of the 19th century. As Engels put it, even towards the end of that century, the advent of the large companies and corporations, meant that that kind of planlessness of capitalism had ended. The large companies plan their production for long periods ahead, and they do so on the basis of an understanding of the potential for future demand for their goods and services. Go to any new housing development of one of the large builders, and you will find that it is almost impossible to buy a house that they have already built. To buy a new house on such a development, it is necessary to buy the house “off-plan” that is to buy the house off the builders plans for the development, only knowing what kind of house you are buying, and where on the site it is to be located. The builder then builds the houses, as and when they have already effectively received orders for them, from buyers, and has received the deposit, the mortgage has been granted and so on. Only towards the end of the development, where it is a sizeable development, will the builder have completed houses speculatively to sell, in order to be able to get off-site, and move to some other new large development. You can often then buy these houses at a discounted price, but you have to settle for what is available.

It is generally only the smaller builders who build speculatively on the whole of the site, and usually only on smaller developments, given the limitations of their smaller capitals on the size of development they can undertake. That is why it is usually these smaller builders who suffer whenever the market changes suddenly, and they find they cannot sell the houses they have built at prices that recoup their costs, and so go bust. The larger builders having only built what they have received payment for are able to cover themselves, and simply keep the remaining land on the site in their land bank, until such time as the market recovers, or the government comes along with some new gimmick to help them start selling houses again.

But, it can also be seen here why the builders also restrict the quantity of houses they sell, irrespective of the extent to which house prices might have risen. Any capital, is only interested in the profit it can make. That depends on the costs of its production, and the price it can obtain for that production. This latter depends on the extent of monetary demand for that production. But monetary demand consists of two elements. Monetary demand of say £1 million might be comprised of 1 person willing to pay £1 million, or it might alternatively comprise 1 million people each prepared to pay £1, or a multitude of combinations of these two elements. For a builder or any other capitalist producer this is significant.

If I am a builder, and I can buy land, and build a house that costs say £800,000, I may be prepared to go ahead and advance my capital to build a house, if I know that there is a person out there with £1 million prepared to buy the house at that price. On that basis, I can make £200,000 profit. If no such person exists, it does me no good whatsoever to know that there are 1 million people each prepared to pay £1 for such a house, because they are not going to buy it form collectively! Moreover, if I build two houses, although the first buyer might have been prepared to pay £1 million for one house, they will have no reason to pay anything for a second house, which has no utility for them. But, by building this second superfluous house, I also thereby reduce the amount that the original buyer is prepared to pay for it. Knowing that it is on the market, as well, the buyer with £1 million might, if they are a speculator, agree to buy both houses now at £500,000 each. The builder will have been screwed either way. They will have expended £1.6 million of capital, and only able to get back £1 million. The more houses they build, under such conditions, the more capital they will advance, but with no potential for being able to sell the resultant houses at prices that recover the capital consumed in their production. It will be a crisis of overproduction, leading to the builder going bust, which is why the big builders do not, wherever possible, build more houses than they know they can sell at prices which enable them to make the average profit.

If we look at the real problem today, it is that although three may be lots of people who NEED houses, the number of people who can provide a DEMAND for houses, i.e. who can back up their desire for a house with the money also to purchase it, at current prices is much lower. Yet, the speculative price of houses is driven up, because there is a relatively small number of people who whilst not actually needing houses, have lots of money to buy them, and the more the price of existing houses is driven up, the more that drive to demand these houses, simply as a means of making a speculative gain, thereby drives up the price of existing houses, which then drives up the price of building land, which then pushes up the cost of building new houses built on that land, which means that builders have to charge higher prices for the houses they build, in order to make the average profit, which means the number of people who can afford to buy those houses is reduced, which means that builders cut back the quantity of new houses they build to only that number that they can sell at these inflated prices.

The starting point for resolving the housing crisis is then not the naïve idea that it is simply a matter of increasing supply. Actually, having listened to Sarah Beeny discussing this in recent weeks, I have been impressed with the extent to which she has actually understood that problem. She has quite rightly commented that any new housing supply in, say, London, will not act to bring down house prices, there, because this factor of land cost, will simply mean that the builders will seek to recoup that cost, plus their profit, so that any new supply will simply appear on the market at existing inflated prices. In fact, a look at the amount of new building in London demonstrates precisely that. London has had more building than elsewhere in the country, but it has done nothing to address the housing crisis, because the properties that have been built have usually been too expensive for the people who need housing to either buy or rent. Large amounts of the building in London, has simply been done for purposes of speculation. A small number of very rich people with lots of money, have been able to buy up, and even finance the building of properties, which then lie empty, because no one can afford to buy or rent them, and the speculators who have built them, are not bothered about that, because they have only built them with the anticipation that next year, the price of the property will be 20% higher than it is today, just like speculators buying a rare bottle of wine they never intend to drink, or who buy a painting they then lock away unseen in a bank vault.

The key to resolving the housing crisis is first to burst the speculative housing bubble. That requires several things. Firstly, it means scrapping all of the gimmicks that successive governments have introduced to try to prop up flagging demand for this overpriced housing. It means reversing the scrapping of stamp duty, for example; ending “Help to Buy”; removing all of the advantages for “Buy To Let” landlords; and so on. Secondly, it means ending the manipulation of government bond prices, and the inordinately lower official rates of interest used by the Bank of England, to encourage speculation in assets, whilst the cost of borrowing for the majority of businesses and consumers are driven much higher, where such loans can be obtained. It means reintroducing the kinds of controls on lending for property that existed in the past, where potential buyers had to save up a 10% deposit, as a minimum, and where lending for mortgages was restricted to 2.5 times household income.

A rise in interest rates would reduce the capitalised values of all assets including land. Restricting the excessive credit pumped into circulation to finance house purchase would also reduce demand for housing, and thereby lead to a fall in house prices. A fall in house prices, would further reduce the price of building land, which would reduce the cost of building new houses, whether of builders building houses to sell, or councils building houses to rent as council houses. That would reduce the price of new houses to buy or rent, which would then act to reduce existing house prices further with a further downward effect on land prices. As speculators in property saw house prices crashing, they would no longer see houses as simply a speculative asset to hold on to, whether it was used or not. They would rush to sell, driving property prices down sharply again. Landowners, sitting on land speculatively, would similarly see it as a fast depreciating asset, and would rush to throw it on to the market, for new building land, pushing down building land prices, and thereby reducing the costs of builders in producing new houses, which would reduce new house prices to levels where additional buyers would again be able to buy them, and so whereby builders would be able to produce houses profitably in much larger quantities.

But, the other means of resolving the problem more immediately is for councils to be able to utilise agricultural land, at agricultural land prices, to build new council house developments. The Green Belt is a thoroughly ridiculous idea. It is supposed to prevent urban sprawl, and to protect the rural environment. It only prevents urban sprawl by making life within already over built urban areas even more over built, and unpleasant places to live, whereas what those areas require is some of thee existing development along with brownfield sites turning into protected urban green areas. The Green Belt simply acts to protect a pleasant environment for the largely Tory voting elite able to live in desirable rural areas, and the landed aristocracy whose vast estates continue to form the majority of the British mainland.

Residential property makes up just 1% of the land on the British mainland. That is just half of the land that is taken up by golf courses! To argue that the Green Belt cannot be encroached up to build more houses, when even doubling the amount of residential property would amount to taking up no more than is currently occupied by golf courses is nonsensical. Of course, we should oppose urban sprawl, but the means to do that is to utilise the Green Belt, and vast areas of rural land, to build well planned, new towns and cities. In the US, Canada, Australia and other more recently settled countries, towns and cities could be built from the start on a more rational basis, whereas in Britain, towns and cities developed in a haphazard manner.

Some years ago, as Vice-Chair of the Staffordshire Health Scrutiny Committee, I looked at transport in the context of existing hospital facilities. A large problem exists where such large institutions are developed within existing urban developments. Where possible, it is much better to be able to develop new hospitals etc. on new sites, away from the problems that exist with built up urban town centres, so that adequate parking, public transport, and roads can be provided. A similar thing can be seen with the development of out of town shopping centres, which can be developed on the basis of adequate land, and appropriate transport routes. On a larger scale, it is much harder, and much more costly to try to deal with the problems of development in existing conurbations, than to be able to start on a clean page, and to plan out and develop a new town on a rational basis, as was done with the development of new towns such as Milton Keynes, for example.

If the housing crisis is to be addressed, it will require huge amounts of public investment in creating brand new towns on such greenfield and green belt land. We should avoid the problems of the anarchic development of urban areas in the past, by planning in advance to provide adequate amounts of green space within these urban areas, to limit the amount of development that can occur within a given land area, and providing adequate greenspace between towns. It will require public investment in the provision of adequate public services in those areas, and of 21st century communications.

The Tories have no concept of any such solutions. On the contrary, their solutions continue to make the crisis worse rather than better.

Theories of Surplus Value, Part II, Chapter 10 - Part 8

Having assumed a general rate of profit, Ricardo investigates what effect rises or falls in wages will have in conditions where there are different proportions of fixed capital to labour.

“And here of course he finds that depending on the amount of fixed capital etc., a rise or fall of wages must have a very different effect on capitals, according to whether they contain a greater or lesser proportion of variable capital, i.e., capital which is laid out directly in wages.” (p 174 – 5)

This is also what Marx set out in Capital III, Chapter 12. But, there he found that a general rise in wages causes a fall in the average rate of profit. This results in a fall in the price of production of those commodities produced with a higher than average composition of capital, and a rise in the price of production of those commodities with the lower than average composition of capital.

“Thus in order to equalise again the profits in the different spheres of production, in other words, to re-establish the general rate of profit, the prices of the commodities—as distinct from their values—must be regulated in a different way.” (p 175)

But, Ricardo continues to believe that values and prices coincide, or that market prices revolve around exchange-values. And on that basis, of his findings in relation to wage changes in conditions of different proportions of fixed capital, is thereby led to the conclusion that it is 'relative values' that are affected by these different proportions, when wages change. In fact, it is not 'relative values' or exchange values that change, but the prices of production. He should have concluded that prices of production differ from exchange values.

“Instead,’ he concludes that they are identical and with this erroneous premise he goes on to the consideration of rent.” (p 175)

The variations that Ricardo discovers in the relative values flow directly from his assumption of an average rate of profit. If capitals of equal size obtain the same amount of profit, despite different organic compositions then the prices of those commodities must differ from their values, because each produce different amounts of surplus value. A capital of 1000 may be divided 800 constant and 200 variable, whilst another is comprised 200 constant and 800 variable. Assuming a rate of surplus value of 100 per cent, the surplus value of the first is 200 and of the latter 800. The total surplus value is then 1000, which on a total capital of 2000 is a rate of profit of 50 per cent. If both capitals obtain this average rate of profit, both will sell their output for £1500, but the value of the output of the first capital is only £1200, whereas the value of the output of the second capital is £1800.

Back To Part 7

Wednesday, 22 November 2017

Theories of Surplus Value, Part II, Chapter 10 - Part 7

[4.] Ricardo’s Description of Profit, Rate of Profit, Average Prices etc.

[a) Ricardo’s Confusion of Constant Capital with Fixed Capital and of Variable Capital with Circulating Capital. Erroneous Formulation of the Question of Variations in “Relative Values” and Their Causative Factors]

“In Section III of the First Chapter Ricardo explains that the statement: the value of the commodity is determined by labour-time includes not only the labour directly employed on the commodity in the final labour process but also the labour-time contained in the raw material and the instruments of labour that are required for the production of the commodity. Thus it applies not only to the labour-time contained in the newly-added labour which has been bought, paid for by wages, but also to the labour-time contained in that part of the commodity which I call constant capital.” (p 173)

However, in his exposition, Ricardo does not actually refer to the raw materials, thereby making a distinction not between constant and variable capital, but between fixed capital and wages. In this section, he assumes that the proportions of fixed capital entering into the value of commodities is the same. But, in the next section examines the situation where different proportions of fixed capital are used. He wants to use this and the different rates of turnover of capital as his basis for arguing that values continue to constitute the 'natural price' around which market prices rotate, at the same time as recognizing the existence of an average rate of profit.

“The proportion in which constant capital enters into a commodity does not affect the values of the commodities, the relative quantities of labour contained in the commodities, but it does directly affect the different quantities of surplus-value or surplus-labour contained in commodities embodying equal amounts of labour-time. Hence this varying proportion gives rise to average prices that differ from values.” (p 173 – 4)

A commodity may have a value of 1000 comprised of 800 dead labour in the constant capital, and 200 of living labour. Or, this value may comprise 200 of dead labour and 800 of living labour. Both commodities contain the same amount of labour, despite the fact that it is composed differently in each case. But, if we assume a 100 per cent rate of surplus value, in the first case, surplus value represents 100, or 10 per cent of the total value, whereas in the second, it is four hundred, or 40 per cent of the total value. If we assume an average rate of profit, its then clear that these commodities could not sell at prices equal to their values.

Because Ricardo does not distinguish between constant and variable capital, he cannot develop the concept of the organic composition of capital. So, in Sections IV and V of Chapter I, Ricardo instead focuses on the forms of capital as fixed and circulating, and this distinction itself revolves for him around the question of durability. As Marx set out in Capital II, however, the real distinction between fixed and circulating capital is whether it is completely consumed, and its use value and value transferred and reproduced within the labour process, and turnover of the capital.

Ricardo focuses on the question of durability, because he wants to point out the role of different lengths of turnover. He assumes the existence of an average rate of profit, so that capital of the same size, in different spheres, produces the same amount of profit.

“Instead of postulating this general rate of profit, Ricardo should rather have examined in how far its existence is in fact consistent with the determination of value by labour-time, and he would have found that instead of being consistent with it, prima facie, it contradicts it, and that its existence would therefore have to be explained through a number of intermediary stages, a procedure which is very different from merely including it under the law of value. He would then have gained an altogether different insight into the nature of profit and would not have identified it directly with surplus-value.” (p 174)

Back To Part 6

Forward To Part 8

Tuesday, 21 November 2017

Theories of Surplus Value, Part II, Chapter 10 - Part 6

The two commodities linen and beer, or coffee and sugar, can be equated, and an exchange relation established between them, only because they can both be related to a third term, their value, or, what is the same thing, the labour time required for their production. But, as Marx describes in 'A Contribution to the Critique of Political Economy', and in Capital I, Chapter 3, as soon as commodity exchange commences, this creates a process whereby money arises, and money takes the form of a money commodity, whether it be cattle, copper, silver or gold, or something else. The reason is simple. An exchange value, on the basis described above, always requires any commodity that is to be exchanged to be equated to the commodity it is to be exchanged with. Any commodity, therefore, although it only has one value, determined by the labour time required for its production, has an infinite number of exchange values. The exchange value of 100 metres of linen maybe 50 litres of beer, but simultaneously it might also be 20 kilos of sugar, or 30 kilos of coffee. What makes these different quantities of all these commodities equal is that they each have the same amount of value, each represent the same amount of social labour time. Consequently, if quantities of social labour time can take on physical form, in one single commodity, every other commodity can be simply equated against it.

In that case, if 10 hours of labour time are required to produce 10 grams of gold, which is minted, and given the name Pound, this Pound now fulfils the function of abstract labour, as a means of measuring value. It now becomes possible to say that 100 metres of linen, 50 litres of beer, 20 kilos of sugar and 30 kilos of coffee are equal to £1.00. Of course, the value of this money commodity can equally change. If it becomes possible to produce 10 grams of gold in just 5 hours, then its value halves, and in that case £1 would exchange for only half the above cited quantities of linen, beer, sugar and coffee, provided the value of these other commodities did not themselves change. But, similarly, if £1 now buys only 50 metres of linen, and so on, the exchange value of linen for beer, or sugar or coffee remains unchanged, because their respective values have remained unchanged. It is then only their price, the exchange value expressed as money that has changed.

“Hence, whether the values of two commodities are expressed in their own reciprocal use-values or in their money price—representing both commodities in the form of the use-value of a third commodity—these relative or comparative values or prices are the same, and the changes in them must be distinguished from changes in their relative values in the first sense of the term, i.e., in so far as they only express the change in the labour-time required for their own production, and thus realised in themselves.” (p 171)

Ricardo's 'relative value', in the first sense, i.e. value measured in labour time, appears as "absolute value" compared with the exchange value, or relative value in Ricardo's second sense, where it is only value as measured by some other use value, or money.

“That is why the term “absolute value” occurs in Ricardo’s work, to denote “relative value” in the first sense.” ( 171)

“At times Ricardo also calls this “absolute”’ value “real value”’ or simply value (for instance on p. 16).” (p 172)

This confusion is a major weakness of Ricardo's theory, and it opens the door for Bailey's criticism, because it means that he can ignore the question of exchange value and simply focus on absolute value. Bailey's critique of Ricardo is set out in two works – “A Critical Dissertation on the Nature, Measures and Causes of Value; chiefly in reference to the Writings of Mr. Ricardo and his Followers. By the Author of Essays on the Formation and Publication of Opinions”, London, 1825. and “A Letter to a Political Economist; occasioned by an article in the Westminster Review etc.,” London, 1826. 

“In the first of the above-mentioned works, Bailey says: 

“Instead of regarding value as a relation between two objects, they”( Ricardo and his followers) “consider it as a positive result produced by a definite quantity of labour.” (Samuel Bailey, A Critical Dissertation on the Nature, Measures and Causes of Value, London, 1825, p. 30.)

They regard “value as something intrinsic and absolute” (l.c., p. 8).

The latter reproach arises from Ricardo’s inadequate presentation, because he does not even examine the form of value—the particular form which labour assumes as the substance of value. He only examines the magnitudes of value, the quantities of this abstract, general and, in this form social, labour which engender differences in the magnitudes of value of commodities. Otherwise Bailey would have recognised that the relativity of the concept of value is by no means negated by the fact that all commodities, in so far as they are exchange-values, are only relative expressions of social labour-time and their relativity consists by no means solely of the ratio in which they exchange for one another, but of the ratio of all of them to this social labour which is their substance. (p 172)

This criticism, made by Bailey, of Ricardo's concept of value, as something intrinsic or absolute is not justified, but it does apply to theories of value based upon a concept of 'embodied labour'. That suggests that value is in some sense intrinsic to the commodity, and absolute in the sense that it has embodied some given quantity of labour in its production. But that is not Ricardo's conception and it is certainly not Marx's.

“On the contrary, as we shall see, Ricardo is rather to be reproached for very often losing sight of this “real” or “absolute value” and only retaining “relative” and “comparative values”.” (p 172)

For Marx, value cannot be something embodied, absolute and intrinsic to the commodity – which is the basis of commodity fetishism – because the value of every commodity is constantly changing, as it represents constantly changing amounts of social labour time. As Marx sets out in Capital III the value of any commodity can no longer be determined in isolation from all others, under capitalism, because its own value is constantly being determined by changes in all other commodities. The value of linen can no longer be determined simply on the basis of the time that the weaver expends on its production, because it now depends on the time taken by the cotton growers to produce cotton, the spinner to turn it into yarn etc. But, that too depends on the time taken by the machine maker to produce a cotton gin, or a spinning machine, or power loom, which transforms the productivity of the above activities. Then that also depends on the labour time of the forester to produce timber, the iron maker to produce iron ore and so on, which determines the labour time required to produce the machines and on top of all these goes a multiplicity of other connections to respective inputs.

Moreover, because, under capitalism, prices of production replace exchange values, even less can the price of production of any commodity be determined in isolation, because not only its cost of production continually changes as a consequence of this constant flux, but the average rate of profit is also constantly changing, and the price of production is the sum of these two constantly changing quantities – the cost of production plus the average profit.

Back To Part 5

Forward To Part 7

Monday, 20 November 2017

Theories of Surplus Value, Part II, Chapter 10 - Part 5

[3. Ricardo’s Confusion about the Question of “Absolute” and “Relative” Value. His Lack of Understanding of the Forms of Value]

Marx describes the way Ricardo's use of the term value is confused. He essentially confuses value and exchange value. In fact, that confusion is carried forward to some Marxists. Lenin, for example, equates value and exchange value. The confusion provides an opening for Samuel Bailey to criticise Ricardo. Bailey is one of the precursors of the neoclassical school. He puts forward an entirely subjective theory of value, whereby value and exchange value are entirely equated, and the exchange value is nothing more than what a particular commodity can obtain in exchange at any moment in time.

The confusion is not helped by the fact that Ricardo also uses the same term 'relative value' to describe different things, and also uses the term 'comparative value' to refer to one of them, as well as sometimes referring just to value.

“First of all Ricardo speaks of “value in exchange” (l.c., p. 1) and, like Adam Smith, defines it as “the power of purchasing other goods” (l.c., p. 1). This is exchange-value as it appears at first. Then, however, he proceeds to the real determination of value:

“It is the comparative quantity of commodities which labour will produce, that determines their present or past relative value” (l.c., p. 9).” (p 170)

So, what Ricardo defines value correctly as,

“...the comparative quantity of commodities which labour will produce” (p 170) 

In other words, if it takes 10 hours to produce 100 metres of linen that is the value of the linen. That, of course, does not tell us what its “relative value”, or exchange value, of the linen is. The exchange value of the linen can only be determined in conjunction with knowing the value of some other commodity with which it is to be exchanged. If, for example, 50 litres of beer require 10 hours of labour for their production, then 50 litres of beer will have a value of 10 hours, and that is the same amount of value as 100 metres of linen. In that case the 'relative value'/exchange value of 100 metres of linen is 50 litres of beer.

Ricardo also calls this relative value "comparative value".

“For instance, 1 pound of sugar equals 2 pounds of coffee. Later 1 pound of sugar equals 4 pounds of coffee. The “variation” which we want to know about is: whether the “necessary labour-time” has altered for sugar or for coffee, whether sugar costs twice as much labour-time as before or whether coffee costs half as much labour-time as before and which of these “variations” in the labour-time required for their respective production has called forth this variation in their exchange relation. This “relative or comparative value” of sugar and coffee—the ratio in which they exchange—is thus different from relative value in the first sense. In the first sense, the relative value of sugar is determined by the quantity of sugar which can be produced by a certain amount of labour-time. In the second case, the relative value of sugar [and coffee] expresses the ratio in which they are exchanged for one another and changes in this ratio can be the result of a change in the “relative value” in the first sense, in coffee or in sugar.” (p 170 – 1)

If 50 litres of beer can be produced in 5 hours, the value of beer will have halved. Now, the value of 10 hours is represented by 100 litres of beer. The value of linen remains unchanged at 100 metres equals 10 hours, but the exchange value of linen has changed. Now 100 metres of linen has an exchange value of 100 litres of beer, not because of any change in its own value, but because of the change in the value of beer. If the value of linen also falls so that 100 metres are produced in 5 hours, then although now the value of both linen and beer have halved, their exchange value would have remained constant – 100 metres of linen would still exchange for 50 litres of beer.

Variations in their comparative value, that is, if the exchange-value of sugar is expressed in coffee, and vice versa, will only appear when the variations in their relative value in the first sense, i.e., the values determined by the quantity of labour, have altered to a different extent, when therefore comparative changes have occurred.” (p 171)

Sunday, 19 November 2017

UK Inflation, Interest Rates and Employment

UK CPI for October remained steady at 3%, the same as the previous month, and already 50% above the Bank of England's 2% target. Meanwhile, RPI rose from 3.9% to 4%. Although, both CPI and RPI were marginally below the forecast figures, both show that inflation is becoming entrenched within the UK economy, as low productivity compounds the effects of a falling Pound, caused by Brexit, to push up costs. The CPI figure for food and non-alcoholic drinks rose by 4.1%, the highest since September 2013. Survey data also indicates that many producers and retailers, who have so far attempted to absorb higher input costs, have now reached a point whereby the squeeze this causes on their profits is no longer sustainable, so that they must all now collectively raise prices, or some of them will start to go bust, leading to increased unemployment, whilst those remaining in business will then be able to raise prices as the pressure of competition is reduced.

The inflation figure is flattered because on a year to year basis, some costs such as for fuel are lower. That is due to the fact that having initially increased at a rapid rate, the price of oil fell back, or rose only slightly, whilst the Pound having fallen sharply on the Brexit vote, recovered somewhat as a result of the US Federal Reserve ending its QE programme, and starting to raise official interest rates, which has led to a flight of hot money into safer havens such as ECB backed Eurozone bonds and securities, and UK securities, still backed by a Bank of England that has been resisting the need to raise official interest rates, and start to unwind its QE. But, in the last couple of months those conditions have also changed.

Expectations that the US will again raise interest rates in December, keep downward pressure on the Dollar, as speculators fear a sharp sell off of bonds. There has already been a significant sell-off of junk bonds in the last week or so. By contrast, the ECB has indicated that it will continue its QE programme for the next 9 months, which provides support for Eurozone bonds and securities, which thereby acts to draw in hot money, and drives up the value of the Euro. In the meantime, the Bank of England has also been forced to double its official interest rate from 0.25% to 0.50%, which as I had predicted, led to a further fall in the value of the Pound, rather than the conventional wisdom that interest rate rises cause an appreciation of the currency.

So, far, this further weakness of the Pound has not had time to pass through into higher inflation, as a result of higher import costs, but it will in the coming months. And, at the same time, the falls in the price of oil and other primary products over the last several months, are now being reversed, as the global economy start to grow much more quickly. In the last month or so, oil has risen from the $50 a barrel it had been stuck at for some time, to around $64 a barrel, and it looks set to move up to around $70 a barrel. Given that oil is an input into nearly every commodity, in one shape or another, either as raw material, or as energy to transport goods and materials around the economy, this rise in the oil price, along with a further weakening of the Pound, will push up UK inflation in the next few months, at a time when already UK wages are lagging some way behind inflation.

The Tories, and the Tory media are praying and hoping that this month's 3% inflation figure represents the peak, but it is unlikely to be the case, as the Pound resumes its fall, especially as fears over Brexit, and particularly a no deal Brexit, intensify in the weeks up to Christmas, and as the growth in the global economy, in China, drives up raw material, energy and food prices further, and whilst much stronger growth in the EU that is now coming through, as well as in the US, drives up manufactured commodity prices, and pressure on interest rates. The rise in interest rates in the UK, itself, by being passed on into mortgage rates, implies an approximately 6% rise in housing costs for owner-occupiers, reversing the situation over recent decades when continually falling and manipulated interest rates reduced those housing costs, whilst driving up the speculative bubble in house prices, and thereby also pushing up rents. 

As inflation continues to rise, whilst Brexit fears, and a further deterioration of Britain's competitiveness, due to stagnant productivity, continue to drive down the Pound, the Bank of England will find itself inevitably driven to raise interest rates further, but the consequence will then be to cause hot money to flee the UK – especially all of that hot money deposited by oligarchs of various countries that sought to use the UK as a tax haven – and so to drive the Pound even lower, causing inflation to rise further still. 

The UK is likely to experience the same phenomena as elsewhere that as interest rates rise, and the prices of assets such as shares, bonds and property fall sharply, the money leaving these asset classes, and all other speculative assets whose prices fall, will move either into consumption, driving up aggregate demand, and causing pressure for investment to meet this rising demand, or will indeed move into investment itself, as the owners of this money-capital find it more lucrative to invest in real capital, producing an average rate of profit, than to invest in speculative assets producing much lower yields, and whose prices are falling rapidly. In itself, the movement of money from hyper inflated assets into consumption or investment, will cause general inflation to rise as asset price deflate, and as the oceans of liquidity that have been created rush into commodity circulation. It is likely to cause a traditional price-wage spiral as this increase in consumption and investment leads to a scramble for labour-power in conditions where labour-power has already started to become relatively scarce, and so where firms will be prepared to utilise all of the available liquidity to raise their prices, and to raise wages accordingly.

The difference is that in Britain, Brexit means that already a lot of that actual investment in production will be relocating to the EU. The increased consumption will lead to increased imports of manufactured goods, pushing the UK's trade balance further into the red, and causing the Pound to fall further in value, pushing inflation higher still. The answer to that might be for the UK to impose controls on capital and imports, which is always the direction of travel towards autarky that such nationalist agendas such as Brexit lead to. As the Brexiters are threatening, a no deal Brexit would see them introduce high tariffs on imported goods and services, and form many the resort to WTO terms would mean that straight away. But, given the UK's dependence on imports in many areas, the effect of that will simply to push up domestic prices further, which can only result either in UK wages rising to compensate, or else an even more sharp fall in UK living standards as prices soar, whilst wages stagnate or fall, the latter especially as businesses relocate to the EU, and UK unemployment rises.

Capital controls and import quotas could act to prevent that, but the consequence then will be that UK prices will rise even faster, and UK living standards will fall even faster. UK consumers, including businesses who consume imports as components etc. buy imported commodities because they are cheaper. If they can no longer do so, and have to buy more expensive UK produced commodities, that will push up the prices of those goods and services. Moreover, if the UK were to go down such a route, it would certainly cause a response from other countries as it did in the 1930's, as they would establish import quotas and tariffs on UK goods and services. The major effedct of capitalism, in general, of reducing production costs is by producing on a large scale so as to enjoy the economies of scale, and indeed that is why larger economic units such as the EU we established in the first place. Having left the EU, Britain will already have lost a good part of that advantage of scale, but if it then faced further constraints as a result of other countries imposing sanctions on it as a tit for tat response to UK import quotas, etc, it would suffer much more.

As I wrote more than a year ago, Britain is head for stagflation, and that process which has unfolded over the last year is set to continue and intensify in the year ahead.

Theories of Surplus Value, Part II, Chapter 10 - Part 4

As a consequence of such an honest scientific analysis, Ricardo exposes not only the contradictions within the economic system, but the contradictions in the interests of the different social classes that arise from the economic relations, created by the system. Unlike Smith, who analyses the system in its early period, and for whom the major conflict of interest arises between the landed aristocracy and the productive classes, for Ricardo, writing later, those conflicting interests are extended to include also the interests of the workers.

As a result, Carey described Ricardo as the father of communism.

““Mr. Ricardo’s system is one of discords …its whole tends to the production of hostility among classes and nations… His book is the true manual of the demagogue, who seeks power by means of agrarianism, war, and plunder.” (H. C. Carey, The Past, the Present, and the Future, Philadelphia, 1848, pp. 74-75.)” (p 166)

Marx summarises the contents and structure of Ricardo's “Principles of Taxation and Political Economy” and concludes that the Ricardian theory is contained in the first six chapters of the book, with all of the other chapters really being examples of an application of theory, or supplements to the contents of the first six chapters.

“It is in respect of this part of the work that I use the term faulty architectonics. The other part (with the exception of the section on money) consists of applications, elucidations and addenda which, by their very nature, are jumbled together and make no claim to being systematically arranged. But the faulty architectonics of the theoretical part (the first six chapters) is not accidental, rather it is the result of Ricardo’s method of investigation itself and of the definite task which he set himself in his work. It expresses the scientific deficiencies of this method of investigation itself.” (p 167)

Marx examines these first six chapters slightly more closely. The first chapter “On Value” is divided into seven sections. In line with the method described earlier, Ricardo considers, in the first section, whether wages contradict the determination of value by labour time. The same approach is taken in the third section, where Ricardo shows that the fact that part of the value of the commodity comprises the value of constant capital – though Ricardo like Smith does not use that term and confuses it with fixed capital – does not contradict the labour theory of value.

Similarly, in the fourth section, Ricardo considers how varying proportions of fixed capital, in different spheres, affects exchange value, and that extends into the fifth section, where he considers the effect of different rates of turnover of capital and changes in wages.

“Thus one can see that in this first chapter not only are commodities assumed to exist—and when considering value as such, nothing further is required—but also wages, capital, profit, the general rate of profit and even, as we shall see, the various forms of capital as they arise from the process of circulation, and also the difference between “natural and market-price”.” (p 168)

Chapters 2 and 3 are on rent. Chapter 3 on the rent of mines is really just a supplement. Both again ask the question of whether landed property and rent contradicts the labour theory of value.

“In order to carry out this investigation, he introduces not only, en passant, the relationship of “market-price” and “real price” ( monetary expression of value) but postulates the whole of capitalist production and his entire conception of the relationship between wages and profit. The fourth chapter “On Natural and Market-Price” and the fifth “On Wages” and the sixth “On Profits” are thus not only taken for granted, but fully developed in the first two chapters “On Value” and “On Rent” and in Chapter III as an appendix to II. The later three chapters, in so far as they bring any new theoretical points, fill in gaps here and there, and provide closer definitions, which for the most part should by rights have found their place in [chapters] I or II. 

Thus the entire Ricardian contribution is contained in the first two chapters of his work.” (p 168 – 9)

In other words, the underlying element of the theory is the determination of value by labour time. Ricardo has the benefit over Smith of seeing the major categories of the capitalist system of production, not in their formation, but in their more or less established and mature form. Smith had to describe these categories precisely because they were new. Ricardo can effectively take them for granted, and rather than providing a description of them concentrate instead on examining their anatomy and thereby verify the extent to which they confirm or contradict the theory of value.

“They contain the whole of his critique of hitherto existing political economy, the determined break with the contradiction that pervades Adam Smith’s work with its esoteric and exoteric method of approach, and, at the same time, because of this critique, they produce some quite new and startling results. (p 169)

The sharpness and originality of the first chapters is lost in the subsequent chapters, Marx argues, because they consist either of monotonous repetitions of the earlier contents, or simply formal applications of the principles to a range of extraneous matters.

“In the critique of Ricardo, we have to separate what he himself failed to separate. [Firstly] his theory of surplus-value, which of course exists in his work, although he does not define surplus-value as distinct from its particular forms, profit, rent, interest. Secondly, his theory of profit.” (p 169)

Back To Part 3

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