Sunday, 14 August 2022

Inflation - Keynesians and Cost-push - Part 5 of 7

So, increases in the general price level cannot be explained by overall increases in costs of production separated from increases in liquidity and falls in the value of money tokens, because although costs of production, in some spheres, for some short periods of time, might rise, due to crop failures, natural disasters and so on, overall, social productivity rises, and overall costs of production/unit values fall.

Its undoubtedly true that, for example, in the 1970's, the actions of OPEC, caused oil prices to rise sharply, and because oil is used as auxiliary material/energy to fuel vehicles, as well as to produce petrochemicals for plastics, fertiliser and so on, this increased value passes through into a higher value of constant capital, in all other spheres. But, it is not a proportionate increase, because oil forms only a fraction of the constant capital consumed in those other spheres. If oil comprises 10% of the constant capital of firm A, and oil prices rise by 20%, that constitutes only a 2% increase in A's constant capital.

In Capital III, Marx describes the destabilising effects that such sharp rises in material/energy prices can have, because, although, in value terms, these higher prices of constant capital, are preserved and transferred into the prices of final output, in reality, because demand has to be considered, some times that is not possible, without causing demand itself to fall – demand destruction – which poses its own problems in so far as being able to continue production at optimum levels.

“This shows again how a rise in the price of raw material can curtail or arrest the entire process of reproduction if the price realised by the sale of the commodities should not suffice to replace all the elements of these commodities. Or, it may make it impossible to continue the process on the scale required by its technical basis, so that only a part of the machinery will remain in operation, or all the machinery will work for only a fraction of the usual time.”

(Capital III, Chapter 6)

So, for example, if the price of cotton doubles, as a result of, in Marx's example, the US Civil War, and the blockade of Southern ports, or today, the price of oil and gas rises, because of NATO imperialism's economic war against Russia, and attempts to prevent the sale of Russian oil and gas, and similarly of Russian, grain and other primary products, then, as elements of constant capital, this higher value should be simply passed into the value of the commodities in whose production it partakes. If we take cotton yarn, we might have:

c 100 kilos of cotton (£1,000) + v £500 + s £500 = £2,000 (100 kilos of yarn @ £20 per kilo.

If the price of cotton doubles:

c 100 kilos of cotton £2,000 + v £500 + s £500 = £3,000 (100 kilos of yarn @ £30 per kilo.

Note that, although cotton has doubled the price of yarn rises by only 50%, because cotton accounted for only 50% of the original value of yarn. However, yarn producers may see that, at £30 per kilo, the demand for yarn would fall precipitously. To stay in business, they may decide to absorb at least some of the higher cost of cotton out of their own profits. For example,

c 100 kilos of cotton £2,000 + v £500 + s £100 = £2,600 (100 kilos of yarn @ £26 per kilo.

The inevitable consequence is a squeeze on profits from these higher material costs, and some of the less profitable businesses would, also, thereby make losses, and some go out of business, reducing overall supply of yarn, allowing remaining yarn producers, to raise prices accordingly. Some of that is seen currently in recent profits reports by some retailers, and some intermediary producers. In the US, for example, the last Producer Prices Index showed input prices rising by 11%, which is higher than the latest CPI figure of 9.1%, indicating that some of those higher input costs have been absorbed by producers and retailers out of their profits.

Saturday, 13 August 2022

Inflation Stays High and No Recession

Speculators took heart from lower headline inflation data, in the US, last Wednesday, as they fantasise that it may mean that the central bank will soon stop tightening monetary policy, and raising rates, so as to return to the days of endless printing of money tokens to inflate the prices of assets. They continue to pray for a recession, so that workers will be dissuaded from demanding higher wages, and firms will desist from accumulating additional capital, so that profits may rise, and interest rates fall, so that, again, asset prices might rise to yet further dizzying heights.

Yet, despite all of the narrative presented by the media, there is no recession, and inflation remains high. As I set out, recently, the fact that the US has been creating around 400,000 additional jobs each month, and, last month, crated more than half a million, shows that there is certainly no recession, in the US, and that the slightly lower figure for GDP, was simply a consequence of a tie-up of capital, as, particularly in a period of sharply rising producer prices, a portion of profit was tied-up to cover the increased cost of replacing consumed materials, energy and so on, which had not been passed on into end prices. That fact is further illustrated when examining the results of actual companies, which, overall, shows continued increase in their sales, and the ISM data continues to show no significant reduction in orders either, nor any reduction in lead times, and the latest durable and producer goods orders reinforced that view. According to Tim Fiore, of ISM, there has never been a recession when the readings on the ISM have been this high.

What can be seen, and what was inevitably going to be the case, is that a lot of those things that did well during lockdowns, are now doing less well, and some significantly so, but that this just indicates a shift of consumption into those areas which consumers were excluded from during lockdowns, or which were constrained. So, now, we see that all of the demand for technology that soared during lockdowns, as people worked from home, consumed home entertainment and so on, has fallen back. That demand for technology combined with the supply constraints that arose from lockdowns and their aftermath, and fed into a global chip shortage. Now, it appears that the chip shortage may be ending, as those factors unwind.

However, a consequence of the chip shortage was that car producers could not get the chips required, and that impacted their own production of new cars. Lead times for new cars are still over a year, and that led many people to buy nearly new, used cars instead. That demand for used cars pushed used car prices up, over the last year or so, massively. The price of ex-showroom cars rose above that of new cars, because it was possible to get the former, and people were prepared to pay a premium for it. But, now, with the chip shortage ending, car makers, as with other consumer durable goods producers, will be able to get the chips they require, and so their own production constraints will ease. As consumers find they can get new cars without needing to wait a year for them, they will shift demand from used to new cars, and so used car prices will drop. In fact, that can be seen already in the latest US inflation data. US used car inflation that was running at 40% is now down to single digits, and rental car inflation that was at 100%, is now even negative, i.e. prices actually falling.

So, these inevitable shifts in consumer spending, and the anomalies created by lockdowns are simply causing the data to be volatile, but the underlying reality remains that, if we take the US economy, employment is expanding at a rapid pace, that means whether hourly wages rise or not, the amount of wages being paid out is increasing rapidly, and those wages are feeding into the demand for additional wage goods. Large amounts of liquidity put into circulation has created inflationary conditions, and monthly variations of some commodities rising in price, whilst others decline, does not change the overall trend. What is more, hourly wage rates are rising, and it has been the lower paid workers that have seen the largest proportional increases in wages, as well as it being in those sectors where the largest number of job openings exist, and where the highest quit rate exists, with workers quickly moving from lower to higher paid jobs.

In fact, the Federal Reserve, when they were presenting the argument for transitory inflation, used the trimmed mean measure of inflation. Using that measure, produced by the Cleveland Fed, both of its measures for the trimmed mean, continue to rise. In fact, they are at the highest level since the series started in 1984! 

Speculators are desperate to convey the narrative that economies are in recession, and so inflation is about to decline, because those are the conditions they require for workers not to get higher wages, and for interest rates to fall, so that asset prices are again inflated. The ruling class consists of such speculators, or “coupon-clippers”, as Marx and Engels described them, i.e. owners of fictitious capital, whose revenues come from interest and rents on those assets, and also from capital gains from rising prices of those assets. In other words, from asset stripping, and eating the seed corn of society.  That is one reason that the bourgeois media purveys these ideas about imminent recession, the other being that many of the middle class journalists employed by it, have themselves prospered from engaging in the purchase of such speculative assets, and from the capital gains arising from their unsustainable rises in prices, which have come purely on the back of central bank liquidity injections.

The difficulty the ruling class has had has been to limit the expansion of the real economy, so that wages and interest rates do not rise, but not to cause it to go into a serious decline, which would itself destroy capital, and undermine profits. After 2008, they sought to achieve that via fiscal austerity, when that had run its course, lockdowns took its place. The most obvious manifestation of that is the zero-Covid policy of the Chinese state, which is desperate to prevent the Chinese economy from overheating, causing its huge asset price bubbles to burst. Recently, it locked down 1 million people, simply on the grounds that just 4 people – who were probably vaccinated, and not even ill – had been recorded as infected with COVID!

More recently, the war in Ukraine has been used to try to depress consumer sentiment, and “animal spirits”. A central component of that was the sharp rises in energy and food prices that arose from NATO's economic war against Russia, and the attempts to boycott Russian exports of oil and gas, grain, fertiliser and so on. The narrative was that soaring prices of these things would lead to workers' disposable income being slashed, so that they would have no scope to continue to demand other wage goods, leading, then, to businesses holding back their own expansion plans. But, that too, like lockdowns, backfired. During lockdowns, the ruling class made sure that the vast majority of labour continued to take place, which is why GDP fell by only around 20%, rather than falling to zero. But, even to achieve that, they were forced to make furlough and other income replacement payments, which they financed by borrowing, with the borrowing itself financed by printing even more money tokens.

With money incomes continuing by these means, and with some spheres of consumption off limits, money hoards built up, and as economies reopened, those hoards began to flow into the real economy. So rising energy and food prices have not prevented workers from also continuing to spend money on other wage goods, and, as employment has increased, the additional wages feed into that demand too. The ruling class counted on the same conditions as during the last 40 years persisting, in which wages would fail to rise, but the sharp rise in demand for labour, particularly in specific areas, led to wages rising by as much as 30%, and though hourly wage rates continue to lag inflation, a series of additional retention and recruitment payments have been made, as firms scrabble for available workers. And, now, across the globe, sensing this firmer ground beneath their feet, as economies expand, workers have joined unions once more, as they see the potential for those unions taking effective action to get higher wages, wherever, employers resist the inevitable.

So, now, ruling classes are seeking another route, and reverting to the measures used during lockdowns. Across Europe, including in the UK, we hear reports that governments are planning, again, to physically shut down the economy, now using the excuse of energy shortages. But, this is nonsense, because any such shortages are deliberate and self-inflicted. As I set out some weeks ago, for example, there is no global shortage of oil, quite the contrary. Oil prices have risen simply because NATO imperialism has tried to boycott Russian oil exports. The US, of course, does not suffer from that. Its oil companies were able to sell oil at much higher prices to Europe, which is why US oil prices then rose, as it was diverted from the US domestic market. But, the main issue facing Europe is gas.

The US pressed Germany not to go ahead with the Nordstream 2 gas pipeline, and eventually Germany capitulated to US imperialism. That of itself, massively reduced potential gas supplies to Europe, so that as with the attempts to boycott Russian oil, it led to higher prices. But, then the EU was pressed by US imperialism to further boycott Russian gas, by additional measures. Some of those measures come within the remit of the wider sanctions imposed on Russia that attempt to prevent it from accessing global payments systems. In a natural response to those sanctions, and exclusions from global payments systems, Russia said that it would require payment for gas in Roubles for all supplies as contracts were renewed.

That a country supplying any commodity should demand payment for those commodities in its own currency, you would think ought to be uncontentious, let alone when that country is facing sanctions on being paid in other currencies, i.e. Dollars. Yet, the EU has made a big issue out of this demand, insisting that it will not pay for its vital gas supplies in Roubles. The consequence is inevitable. On top of having voluntarily reduced its own supplies of gas, via a bite your nose off to spite your face boycott of Russian gas, it now faces even bigger reductions in gas supply, as Russia stops supplying gas, as existing contracts end, and customers refuse to comply with the need to pay in Roubles.

That is a deliberately confected crisis being created by the EU, and European governments. There would be no shortage of gas supply, no reduction in Russian supplies of gas – why would it, its economy needs the revenues from such sales – if the EU would even just agree to pay for those supplies in Roubles! If that were the case, then the threat of businesses closing, as governments impose renewed lockdowns and lockouts over the Winter, to save gas, of people freezing in their homes, would disappear overnight, and what is more, gas prices themselves would fall significantly.

But, of course, that is not what speculators want. They want these conditions of uncertainty, and the potential of lockdowns, if required, so as to slow economies, undermine the strength of workers, as labour shortages emerge, so that they can again create conditions for central banks to stop raising interest rates, and so that they again resort to printing endless quantities of money tokens so that asset prices are inflated. It shows in stark terms the reality of just what a pernicious role the ruling class, comprised of these speculators, and owners of fictitious capital now play, even in relation to the real capital upon which the economy, and well-being of society depends. Their short term greed for paper money capital gains from asset price inflation, now leads them to demand that the real economy and real capital be sacrificed on the altar of such speculation. As Marx put it,

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

(Capital III, Chapter 33)

The talk of power cuts, of three-day weeks over the Winter, are all of a part with the hysterical comments at the height of the COVID moral panic that there would be mass burials and cremations etc. The reality is that no such closures are likely, and, as described above, certainly none are actually required, unless the conditions are deliberately created for that to be the case. Not that the speculators will be worried if they are, however, because, they will no doubt have jetted off to the sun, during any harsh Winter, or be lounging on their luxury yachts, whilst the rest of us contend with the misery they have inflicted.

Northern Soul Classics - I'll Never Forget You - Marke Jackson


Friday, 12 August 2022

Friday Night Disco - Where Is The Love - Roberta Flack & Donny Hathaway


Inflation - Keynesians and Cost-push - Part 4 of 7

But, in fact, this greater proportional increase in the quantity of raw materials compared to the fall in its unit value, also turns out not to be true either, particularly in economies as we have now, based upon service industry rather than manufacturing industry. Marx's reason for assuming that raw material prices do not fall proportionate to the increase in their consumption is that they are subject to the vagaries and constraints of Nature, rather than just the higher productivity made possible by machine industry. Marx's argument, in that context, was consistent with his materialist method, dealing with reality as it then existed. He says,

“...some kinds of raw materials, such as wool, silk, leather, are produced by animal organic processes, while cotton, linen, etc., are produced by vegetable organic processes and capitalist production has not yet succeeded, and never will succeed in mastering these processes in the same way as it has mastered purely mechanical or inorganic chemical processes. Raw materials such as skins, etc., and other animal products become dearer partly because the insipid law of rent increases the value of these products as civilisation advances. As far as coal and metal (wood) are concerned, they become much cheaper with the advance of production; this will however become more difficult as mines are exhausted, etc.”

(Theories of Surplus Value, Chapter 23)

Those conditions ceased to apply more than a century ago. Machines and technology increasingly dominate primary production too, reducing the value of primary products as much as manufactured products. And, whilst its true that, for any mine, the costs of production rise, as it becomes exhausted, because its more difficult to extract the minerals, technology has also made it possible to extend that period considerably, as well as making it possible to mine and extract minerals from places previously inaccessible.

But, as Marx sets out in Theories of Surplus Value, Chapter 9, those are only short-term rising costs, and lead to capital engaging in exploration and development of new mines, farms and so on that are more fertile and productive, and so lower cost. Secondly, as Marx describes in Capital III, Chapter 5, firms reduce the waste in the usage of raw materials, by various means. Larger scale production, means that waste products can become utilised as bi-products, and so on. And, larger scale production, brings economies of scale in the use of energy to power, heat and light buildings. Furthermore, synthetic materials have increasingly replaced natural materials, so that those limitations imposed by Nature no longer apply.

The same technological developments mean that the new machines use less power/auxiliary material. Technological development, meant that newer steam engines could produce much more power, with any given quantity of coal, than the steam engines they replaced, as a result of better engineered boilers, the use of multiple condensers and so on, and, as described above, petrol driven tractors were more efficient, cheaper to produce, and used less auxiliary material than steam driven tractors. As I have set out previously, the same applies, nowadays, with the use of oil. Oil consumption from the 1980's up to the early 2000's, increased by only a sixth of the increase in global GDP, during that time, as a result of technological developments improving the efficiency of engines, boilers and so on, as well as other means of reducing energy consumption.

In terms of raw materials themselves, technological development ensured that new synthetic materials like nylon, polyester, and so on replaced natural fibres, in the same way that new alloys, and new materials like carbon fibre replaced iron, steel and so on, and materials science ensured that not only were these new materials relatively cheaper than the natural materials they replaced, i.e. they were more durable and so on, but, frequently, were absolutely cheaper too, as with transistors replacing valves, and then microchips replacing transistors and so on, or fibre optic cable replacing copper cable. Its not the case that nylon stockings are more durable, and so relatively cheaper than silk stockings, but that it is much cheaper to produce nylon stockings than silk stockings. And, in economies in which 80% of new value is accounted for by service industry, rather than manufacturing industry, the argument about the quantity of raw material consumed being greater than the fall in its unit value, is no longer relevant anyway.

But, even in Marx's time, when those limitations of Nature in reducing the value of organic products applied, he makes clear that its effect was not enough to prevent the overall reduction in the value of the costs of production, and so prevent a fall in the rate of profit.

“The cheapening of raw materials, and of auxiliary materials; etc., checks but does not cancel the growth in the value of this part of capital. It checks it to the degree that it brings about a fall in profit.”


Thursday, 11 August 2022

Chapter 1A – Historical Notes On The Analysis of Commodities - Part 8 of 8

It was Ricardo who gave political economy, and the determination of exchange-value, on the basis of labour-time, its final form, and so its primarily against him the criticisms of later economists were addressed. Marx summarises those arguments that came under the generic heading of what Marx calls “vulgar economy”.

One. Labour itself has exchange-value and different types of labour have different exchange-values. If one makes exchange-value the measure of exchange-value, one is caught up in a vicious circle, for the exchange-value used as a measure requires in turn a measure.” (p 61)

In fact, labour does not have an exchange-value, but is an activity, the process of creating new value. What has exchange-value is not labour, but the commodity labour-power, which the wage-worker sells to the capitalist. Labour-power is not at all the same as labour. Labour-power is the capacity to preform labour, and has a cost of production, i.e. the cost of reproducing the worker. Labour, by contrast, is the actual performance of that capacity for labour. The value of labour-power, i.e. of reproducing the worker, is not at all the same as the new value created by the worker, and if it were there would be no possibility of creating surplus value, and so no basis for profit and the capitalist to employ the worker.

“This objection merges into the following problem: given labour-time as the intrinsic measure of value, how are wages to be determined on this basis. The theory of wage-labour provides the answer to this.” (p 61-2)

The second objection follows on from the first.

Two. If the exchange-value of a product equals the labour-time contained in the product, then the exchange-value of a working day is equal to the product it yields, in other words, wages must be equal to the product of labour. But in fact the opposite is true. Ergo, this objection amounts to the problem, – how does production on the basis of exchange-value solely determined by labour-time lead to the result that the exchange-value of labour is less than the exchange-value of its product? This problem is solved in our analysis of capital.” (p 62)

In other words, discounting the value of constant capital transferred to the end product, the value of output for a day is, say, 10 hours labour, but the worker is paid, say, only the equivalent of 5 hours of labour, as wages. Marx points out that the Ricardian socialists used this argument against capital, demanding that workers should receive the full fruits of their labour, a delusion that also found its way into Clause IV of the Labour Party Constitution. The idea was also taken up by Proudhon, and, later, the Lassalleans. As Marx notes, he demolished this argument in The Poverty of Philosophy, in response to Proudhon, and he did so again in The Critique of The Gotha Programme, in response to the Lassalleans.

The fact is that workers sell a commodity – labour-power – and receive for it, its value, the labour-time required for its reproduction. Having bought this commodity, the capitalist uses it, and the length of time to which it is put to work is in no way limited to the time required for its reproduction.

Three. In accordance with the changing conditions of demand and supply, the market-price of commodities falls below or rises above their exchange-value. The exchange-value of commodities is, consequently, determined not by the labour-time contained in them, but by the relation of demand and supply.” (p 62)

This begs the question of what determines the demand and supply? Will suppliers continue to produce and supply commodities at a price that does not, at least, cover their costs of production? What determines those costs of production, which are themselves prices? In fact, will capitalist producers continue to produce and sell commodities that not only cover their costs of production, but also produce for them, at least, the average annual rate of profit? For any consumer, they may or may not consider any given commodity a use-value, it being a question of utility, but, assuming they do, is not their level of demand itself a function of the price of the given commodity?

“In fact, this strange conclusion only raises the question how on the basis of exchange-value a market-price differing from this exchange-value comes into being, or rather, how the law of exchange-value asserts itself only in its antithesis. This problem is solved in the theory of competition.” (p 62)

Marx never got to set out this theory of competition, which involves an analysis of the basis of both supply and demand.

Four. The last and apparently the decisive objection, unless it is advanced – as commonly happens – in the form of curious examples, is this: if exchange-value is nothing but the labour-time contained in a commodity, how does it come about that commodities which contain no labour possess exchange-value, in other words, how does the exchange-value of natural forces arise? The problem is solved in the theory of rent.” (p 63)

In fact, its not only in the theory of rent that this issue is dealt with. It is dealt with also in the theory of interest, as the price of capital, but also in the theory of prices of production.

Wednesday, 10 August 2022

Inflation - Keynesians and Cost-push - Part 3 of 7

Moreover, as Marx sets out, this rise in social productivity that enables spinning wheels to be replaced by a smaller number of much more productive, and relatively cheaper spinning machines, also means that the other elements of productive capital – raw materials and labour-power – become cheaper too. Its not just that the higher wages resulting from a shortage of labour is reversed, as workers are replaced by machines, but that rising productivity reduces the value of wage goods too, reducing the value of labour-power, so that, for those workers still employed, although nominal wages might fall, their real wage, i.e. their standard of living rises.

That was seen clearly during the stagnation period of the 1930's, for example, particularly for workers in all of the new, and growing industries in the Midlands and South-East, producing motor cars, consumer electrics and so on. It does not rise by as much as the rise in productivity/fall in wage goods prices, which is why the rate of surplus value, and mass of profits rises. But, in addition to that, this rise in productivity reduces the value of raw and auxiliary materials, again, thereby, reducing production costs, and raising the rate of profit.

“...if simultaneously, one worker produces as much cotton as 100 workers did previously and one worker produces a spinning-machine whereas previously he produced only a spindle, then the ratio of value remains the same, that is, the labour expended in the spinning, [in the production of] the cotton and the spinning-machine remains the same as that expended previously in spinning, the cotton and the spindle.”

(Theories of Surplus Value, Chapter 23)

And, as I have set out, elsewhere, it may also be the case that the new machines are not only relatively cheaper than the machines they replace, but may be absolutely cheaper too, as a consequence of technological development, as well as rising social productivity, cheapening their production. As I have set out before, in the 1980's, as personal computers were developed, made possible by the development of the microchip, they had the equivalent computing power as many of the mainframe computers used by business, in the preceding period, that relied upon the use of electric valves, and transistors, and which occupied entire rooms of buildings, consuming large amounts of electricity not just for their operation, but to power the air conditioning required to keep them cool, and so on. Those mainframe computers cost around £2 million, and yet, the personal computers that were introduced, at that time, with an equivalent amount of power, could be bought for less than £1,000.

In the same way, when petrol driven tractors were introduced, they were much more efficient and productive than the old steam driven tractors they replaced. But, the new tractors were also absolutely cheaper than the steam driven tractors to produce, which required huge amounts of iron and steel, expensive boilers and so on, as well as being much more expensive to run using large amounts of coal, rather than petrol. The same is true today, with the use of glass fibre optic cable in telecommunications. It can carry millions of times more information than the copper cables it replaces, but it also costs only a fraction of what copper cable costs to produce.

The consequence, as Marx sets out, in Theories of Surplus Value, Chapter 23, and in Capital III, Chapter 6, is that the proportion of output value accounted for by fixed capital, and wear and tear, falls, as does the share attributable to labour, i.e. the new value created. In so far as material production dominates the economy, it is the quantity of raw material processed that increases proportionally to both fixed capital and labour, and, to the extent that its unit value does not fall proportionate to the proportional increase in the quantity processed, its value rises as a proportion of total output value, and is the cause of the Law of the Tendency for the Rate of Profit to Fall, as described by Marx.