Anti-Duhring, Part III – Socialism, II – Theoretical - Part 29

In other words, central banks and bourgeois economists, after 2008, defended QE on the basis that they were seeking to prevent deflation and depression, but it is quite clear that their actions were only intended to prevent a deflation of astronomically inflated asset prices, following the bursting of the latest speculative bubble, and were only concerned to prevent a prolonged depression of those asset prices. Their actions, in fact, created a deflation of commodity prices, and acted to severely impede economic expansion of real economic activity, for the reasons I have set out above, and that Marx sets out in Capital, Theories of Surplus Value, and elsewhere. A farmer, miner or builder, who must pay out £1 million to the landowner, for land, rather than £100 thousand, before they can even employ their productive-capital, sees that as £900,000 of their money-capital that cannot be used productively. It is £900,000 of potential money-capital that does not get used productively, but just goes as revenue/absolute rent to the landowner.

As I have set out, elsewhere, the same is true of all of the other inflated asset prices. Inflated share and bond prices, mean that the costs of providing pensions rises astronomically, because the monthly contributions into the funds, now buy far fewer shares and bonds. So, if wages rose so that workers could pay the required higher monthly contributions, in line with the value of their labour-power, that would mean a reduction in surplus value/profits. In fact, in the 1990's, as this began to manifest, in conditions where workers were still weak after their defeat in the 1980's, their wages did not rise accordingly, and rather, as asset prices rose spectacularly, inflating the money value of pension funds, this was sold to workers as meaning that there was plenty of money to pay their pensions, and companies, as well as public sector employers, even reduced or stopped making their contributions to the funds.

This sums up the delusion, and why it had to end. The idea that there was plenty of money in the pension funds was based on these inflated asset prices, and so the fantasy that rather than paying pensions out of the revenues accruing to those assets (interest/dividends, and rents), they could be paid by simply, instead, cashing in some of the assets, and so realising the huge nominal capital gains they had produced. It is referred to as “taking profits”, which again confuses profits with capital gains, a delusion encountered previously, and exposed by Marx, in relation to Ramsay and the use of historic pricing. As I have set out before the TSSI, makes precisely this same mistake. In my response, I set out the difference between capital gain and profit, as Marx does, and the reality that lower asset prices facilitate increased capital accumulation. (See also: this post)

Of course, having, in the 1990's, told workers that this inflated value of the assets in their pension funds meant there was plenty of money to pay their pensions – again confusing money with the actual commodities it has to buy to sustain workers in their retirement – when those asset price bubbles burst, and huge black holes in the pension funds appeared, all of the narrative about the inadequacy of pensions being due to “gold plated public sector pensions”, or workers daring to live a little longer, began to appear.

Rather than QE accelerating economic growth, and combatting a deflation of commodity prices, it caused a deflation of commodity prices, and artificially reduced economic growth, as the other side of the coin to inflating asset prices, and sucking potential money-capital into the purchase of those assets. The proof of that can be seen in the fact that, after 2010, far from acting to stimulate growth, and despite interest rates being at the lowest levels in history, they actively sought to reduce growth by introducing measures of fiscal austerity! There was a simple reason. Increased economic activity, rising demand for labour and capital, in the early 2000's is what had caused interest rates to rise, and sparked the 2008 global financial crash.

Its true that they rose to levels, which, historically, were still very low, but they rose from even lower levels that meant that, in relative terms they rose significantly. It was this big relative increase in interest rates, in conditions where asset prices were at such astronomical levels that caused them to crash in 2008. As with the situation with land prices discussed earlier, the price of these assets is a function of the capitalised revenues they produce. Lower interest rates cause asset prices to rise as simply a consequence of the capitalisation of the revenues. But, in conditions where revenues – be it profit of enterprise, interest, rents, or even wages – go into a speculative frenzy of buying of assets, more than into an actual investment in real capital accumulation, the consequence must be that the asset prices can only be maintained, by ever lower interest rates. So, we ended in the madness of huge amounts of debt – around $20 trillion, worldwide - with a negative yield!

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Burnham's Dead Cat Bounce - Part 5 – (Digression) The Era of Speculation and Gambling (2) – Capital, Profit and Capital Gain

Part 5 – (Digression) The Era of Speculation and Gambling (2) – Capital, Profit and Capital Gain

If share X costs £1 to buy, and pays a dividend of £0.10 per share, that is a yield of 10%. If the dividend remains £0.10 per share, but the price of the share rises to £2, it is a yield of only 5%. Speculators – which is what the ruling-class, today, are – can simply move money to where a higher yield is available. So, they might sell the shares of X and buy the shares of Y, or else buy bonds, land or property. The consequence of that, however, is, then, just to raise the prices of these other assets, and, thereby, to reduce the yield on those assets. The speculators that bought early, get both the higher yield, and a capital gain, when they sell.

A problem for the ruling-class owners of fictitious-capital, and its ideologists, in this respect, as Marx describes in Capital I and III, is that they do not really understand what capital is, and so, also, do not understand what profit or interest is. In Capital I, Marx goes into great detail in examining the claims of the bourgeois economists who, in the 19th century, simply represented the arguments of the private industrial capitalists. Those arguments never explained what profit was, or where it came from, but amounted to just a moral justification of its existence and appropriation by the capitalist.

In other words, even after the ideas of the Mercantilists were superseded, the bourgeois theories that replaced them were no better. The Mercantilists argued that “profit” came from “unequal exchange”. Marx notes that the Mercantilists were not as stupid as some of their later critics claimed. The Mercantilists like James Steuart, described profit as “profit on alienation”. In effect, profit arises as a consequence of the exchange of commodities, so that the seller makes a profit by selling commodities above their value. Marx sets out why this cannot be true for profit as a whole. Sellers are not only sellers but also buyers. If all sellers sell commodities at, say, 10% above their value, then, those same sellers, in aggregate, as buyers of commodities, likewise, pay 10% above their value. In aggregate, what sellers gain as sellers, they lose as buyers.

Marx points out, however, that its no coincidence that the ideas of the Mercantilists arose, and became predominant in the Netherlands and Britain, in the 17th Century, when those countries were the leading mercantile powers, and were establishing their colonial empires. As Marx notes, Mercantilists, such as Steuart, realised the limits of the idea of profit on alienation, but it could quite clearly be seen that, if you are a major colonial power, like the Netherlands or Britain, you could buy “low” from producers of food and materials, in the colonies, process those commodities, and, then, sell them “high” back to those colonies, the balance of trade being made up in money (gold or silver).

This “unequal exchange” would amass large amounts of wealth in the coffers of colonial powers. But, there was, clearly, a limit to that as well. In the period after WWII, as anti-colonial struggles spread across the globe, Stalinists and Third Worldists sought to utilise this Mercantilist theory of profit to describe the “development of underdevelopment” in the economies of the Third World. As a consequence of “unequal exchange” between the “imperialist” centre, and the third world periphery, value was incessantly dragged away from the latter and towards the former, thereby, denying the latter of the surplus value required for capital accumulation and development, whilst, supposedly, explaining the continued growth in the imperialist heartlands, rather than its predicted decline and crisis.

As an explanation of imperialism and imperialist capital, rather than as an explanation of colonialism and merchants capital, it was nonsense. Industrial capital does not make profit from “unequal exchange”, but from the creation of surplus-value in production, and imperialist capital is industrial capital par excellence. Large-scale industrial capital (imperialist capital) does not make profit from unequal exchange, but, similarly, from an ever-expanding scale of production, an ever-expanding exploitation of labour, on a global scale (i.e. capital accumulation and development, rather than underdevelopment), and the need, thereby, to create a global capitalist economy.

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Anti-Duhring, Part III – Socialism, II – Theoretical - Part 28

As I have also set out, without that huge rise in existing house prices, there would, also, have been no rise in new house prices, because, as with every other commodity, over time, rises in social-productivity leads to falling unit values. The process with houses is that set out by Marx, in relation to average industrial profit and rent. The large majority of property transactions – around 70% - are in relation to existing houses. It is the price of these houses, therefore, that determines the market price of all similar, new houses. Suppose, the cost of building a house, of a given type, breaks down as follows. Materials and wear and tear of equipment used in construction £10,000; Wages £5,000; Profit £6,000. Suppose the average industrial rate of profit is 33.3%, so that, the builder makes a surplus profit of £1,000, and this is rent appropriated by the landowner, here, capitalised as a one-off payment forming a capitalised rent/price of the land.

In this case, the house sells for £21,000. The land price accounts for >5% of the price. Now, suppose that speculation drives up existing house prices, which, as noted, determine the market price of all new, similar houses. In the 1980's, we noted that, in Britain, as a result of such speculation, house prices quadrupled. So, existing houses of this type, would now be selling for say £90,000. Even if we assume no change in social productivity, so that the values of materials, equipment, and labour-power do not fall, as, in reality, they would, the builders clearly have a huge incentive to build, because, now, the cost of building is £15,000, whilst the house sells for £90,000, giving a profit of £75,000, as against the average industrial profit of £5,000, a surplus profit, now, of £70,000, as against £1,000, previously. The builder, however, cannot build, unless they have land to build on, and so, the landowner, now appropriates this £70,000 of surplus profit as capitalised rent, in the price of the land. Its not higher land prices that lead to higher house prices, but higher house prices that lead to higher land prices, just as higher surplus profits lead to higher rents.

For the capitalist builder, the incentive to build, becomes severely dented, once this process results in all of their surplus profit being appropriated by landowners, in the form of higher rents/land prices.. In their calculation, they see that, now, before they can build any houses, they must lay out this hugely inflated price of land to the landowner. Economically, as Marx describes, rent is not a cost of production, just as interest and taxes are not a cost of production, they are all deductions from industrial profit/surplus value. But, the capitalist does not see it that way. The builder, sees that, they could sell a house of the given type at a current market price of £90,000, but, now, must first lay out, £70,000 to buy the land. They must lay-out a further £15,000 for the construction of the house, leaving them with a profit of £5,000. Instead of seeing this in terms of making the average industrial profit of £5,000, on the productive-capital they lay-out (£15,000), the builder looks at having laid out, £85,000, in order to get a profit of just £5,000. As Marx noted, this is the pernicious role that rent plays in holding back production.

This also explains why so many builders sought to keep down the selling price of the houses they built, by not buying the land, and so selling houses, leasehold rather than freehold. The attempts, now, to limit the amounts that can be charged, each year, for leasehold properties, will only further deter, new house-building on that basis.

Using potential money-capital to build new houses, rather than using it to just bid up the price of existing houses, by inflating speculative, monetary demand, would, also, have employed more construction workers, increased demand for bricks, cement and so on, as well as for workers in those industries. In short, the liquidity that central banks injected to inflate asset prices that had crashed, as bubbles burst, starting in 1987, would have flowed into real economic activity, and would, then, have led to higher commodity prices, rather than higher asset prices. The major caveat to that, of course, is that, the use of this money, as money-capital to increase supply of commodities, does not lead to a rise in their price, if the increase in their supply, is at least equal to the increase in the quantity of currency/credit thrown into circulation, as Marx sets out in A Contribution To The Critique of Political Economy.

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Burnham's Dead Cat Bounce - Part 4 – (Digression) – The Era of Speculation and Gambling (1)

Part 4 – (Digression) – The Era of Speculation and Gambling (1)

In the 1980's, conservative social-democracy encouraged workers to buy shares, houses and private pensions. As the prices of those assets rose, whilst the surplus of labour meant that wages grew slowly, it was not too hard to sell. As many workers also found themselves unable to get decent full-time jobs, and were encouraged into precarious self-employment, leading to the growth of the petty-bourgeoisie referred to earlier, this kind of individualist, mentality was further reinforced, even though it was delusional and self-destructive.

And, self-destruct it did. In 1987, as a debt spike, in the US, caused interest rates to rise, asset prices crashed around the world, including the prices of all those privatisation shares workers had been encouraged to buy etc. (An example of the delusion and hysteria was shown when, just prior to the BP privatisation, in October 1987, the market price of BP shares dropped significantly below the privatisation offer price, and yet retail speculators insisted on buying the overpriced shares.)

In Britain, workers who had lived comfortably in their council houses for decades were encouraged to take on debt to buy them. As interest rates spiked, and they could not meet the mortgage payments, they were evicted. Large proportions of the council housing stock passed not to former tenants, but to private landlords, who picked them up cheap.

But, unlike previous asset price crashes, the fact that so much of the ruling class's wealth and power was, now, tied up in this paper form, and that so much had been put into selling the delusion/lie that wealth could be created out of thin air (the same delusion is purveyed by MMT), the state was led to intervene not to rescue real industrial capital, but to prevent the collapse of those asset prices. Every time it did so, it simply intensified the underlying contradiction, which, as Marx describes, in Capital III, comes down to the antagonistic interests of interest-bearing capital (fictitious-capital) and industrial capital.

The interest of interest-bearing capital is to maximise the revenue it obtains as interest/dividends, as a deduction from industrial profit. The interest of industrial capital is to maximise the profit of enterprise/retained profits, so as to maximise the potential for capital accumulation. The collective owners of industrial capital, in the era of imperialist capital, are the “associated producers” within each company, as Marx describes them, i.e. the workers and managers. That imperialist capital is “socialised capital”, which replaced the monopoly of private industrial capital, in the process described by Marx as “the expropriation of the expropriators”.

But, other than in the worker cooperatives, the “associated producers”, i.e. the collective owners of this socialised industrial capital, are legally prevented from exercising control over that capital! The ruling-class, as it abandoned its functional role in production, and became a class of merely parasitic coupon-clippers, ensured that its state created company laws that continued to enshrine control over that capital in their hands, rather than in the hands of its collective owners.

It was this “property question” that workers had to address, but, instead, the political leadership of the labour movement, in the 20th century, ignored Marx and Engels analysis and advice, instead simply organising the workers to continue an unwinnable struggle to just improve the price of their labour-power. Consequently, when the process, described earlier, led in the 1980's and after, to asset prices rising faster than profits, the natural response of the ruling-class, as a class of rentiers, was to use that right of control to increase the share of profits that went to interest/dividends, and so reduce the share available as profit of enterprise/retained profits to fund capital accumulation.

Moreover, the same process extended to the rents extracted, and to the taxes appropriated by the capitalist state. Asset prices, be it the price of shares, bonds, property/land rose, but, as profits rose more slowly, yields, be it on financial assets or rental yields, fell. They fell, even if the actual level of interest/dividends, rent etc. did not, simply because of the rise in the price of the assets.

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Anti-Duhring, Part III – Socialism, II – Theoretical - Part 27

If workers had control of their money paid into their pension funds, they would be far more likely to see the benefit of using that money to actually invest in real capital accumulation, the use of the money to buy additional machines and buildings, and to employ additional workers, rather than to simply inflate existing asset prices.

They might, of course, use that money to finance the expansion of worker-cooperatives, especially as the shareholders that control corporations have been more concerned to inflate their own share prices, and to use that control to hand money to themselves than to invest in real capital accumulation. So, its no wonder that the ruling-class has created a legal structure that prevents workers from exercising their legitimate, democratic right to control their own pension funds, blatantly in defiance of even basic bourgeois norms of property law. Now that would be a struggle to “take back control” that would be worth supporting.

Its not just that workers having control of their own pension funds would expose all of the things described above of the vast sums siphoned off as fees and commissions, of the fact that shareholders have preferred to inflate asset prices rather than invest in real capital accumulation and so on. Even without control of our pension funds, a basic democratic demand, here, should be to “open the books” of those pension funds, and all of the banks and finance houses that control them. A Workers Inquiry would itself be a mobilising process, because we all know what kinds of practices would be uncovered by it, as even the Panorama investigation all those years ago lifted the lid on.

Workers, in a large company, might, of course, begin to ask the question why, when that money is available, the company directors do not use it for such expansion, but even if, at first, they don't ask that question, a labour and cooperative movement utilising such funds, of itself, exposes the reason. As I have set out elsewhere, one reason that the vast amounts of money tokens/credit thrown into circulation by central banks, to prop up asset prices did not lead to commodity price inflation is precisely that all this liquidity was diverted, directly, into the purchase of those existing assets. Indeed, the very fact of those inflating asset prices, over the last forty years, and actions of central banks to maintain it, created not just moral hazard but, also, a fear of missing out, in which currency was drained from general circulation into this speculation.

If all of the additional liquidity that found its way, for example, into a demand for existing houses, and so hugely inflated their prices had, instead, been directed into the building/supply of additional houses, so raising the supply rather than the demand, the astronomical rise in house prices would not have happened. In fact, analysis shows that contrary to popular belief – which also fuels racist claims about migrants taking houses – the number of homes per head of population is greater today than it was in the 1970's, before house prices began to soar.

As Moneyweek point out,

“The population has gone up, of course. But the housing stock has risen too. In fact, according to an interesting report from economic research group Fathom Financial Consulting, while the rate of building decreased over the last decade, the quantity of ‘housing per person’ has risen by nearly 50% since 1970, and is still increasing.!"

The astronomical inflation of house prices is not the result of physical supply not rising enough to meet population growth, or new household formation – and is certainly not caused by migrants taking up these already overpriced homes – it is the result of speculative demand for existing houses, driven by the huge liquidity injections that central banks have made since the late 1980's. House prices did not rise because the value of houses, as a commodity rose. Indeed, as with all commodities, on average, the unit value of them falls over time, as a result of rising social productivity. Nor, indeed, as set out above, did they rise because the physical supply did not rise in the same proportion as the physical demand from population growth. They rose, because of a huge rise in the monetary demand – as Marx notes in Capital, the only effective demand is monetary demand – a demand that was inflated, by repeated depreciation of the currency/standard of prices. The price of houses rose, not as a commodity, but as a speculative asset, just like money flocking to the purchase of shares, bonds, Bitcoin, or paintings.

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SNNS 67

 

Northern Soul Classics - Agent Double O Soul - Edwin Starr