Saturday, 24 February 2018

Theories of Surplus Value, Part II, Chapter 13 - Part 19

A farmer with a capital of £10,000, Marx says, first examines the market value of the output that will result from that investment. That market value is something that the farmer has to take as given. The various revenues, such as rent, profit and wages are a consequence not a cause of that value. In other words, the value that the farmer obtains from the sale of the output then resolves itself into the revenues that the farmer pays to the workers as wages, to the landlord as rent, and to themselves as profit. The farmer will only advance their capital, ultimately, if the value they obtain from the sale of their output is sufficient to cover what they have to pay their workers as wages, what they have to pay to cover the constant capital they have consumed in production, what they have to pay in rent, and still leaves sufficient for them to obtain the average profit. This is also the basis of Ricardo's argument in relation to the investment of the additional £1,000. However, in practice, Marx says, things are not that simple.

“If the farmer adds another £1,000, he only considers whether, at the given market-price, it yields him the usual profit. Ricardo therefore seems to think that the cost-price is the determining factor and that profit enters into this cost-price as a regulating element, but rent does not.” (p 333) 

Firstly, as set out above, profit is not a determining element of the price of production. Each capital has to take the average profit as given, which results from the action of capital on capital, via competition. The individual capitalists do not have some subjective notion of a minimum rate of profit below which they will not invest, as Ricardo is led to believe, because he has no objective basis for determining the average rate of profit. This is also a problem with all those theories of crisis that base themselves on the law of falling profits.

Unlike landed property, or interest-bearing capital, which has no objective spur to always lend greater amounts of land or money-capital, productive-capital is always forced to accumulate, because such accumulation is the only way for each capital to beat the competition, and those capitals that do not beat the competition are themselves beaten and die.

Even where additional investment leads to a lower rate of profit, therefore, industrial capitals are led to undertake such investment, in conditions where the market is expanding, because if they do not, their competitors will. As Marx says, if such investment leads to overproduction, each capital will not blame its own investment, but that of its competitors. Ricardo believes that,

“If the capitalist found that the £1,000 did not yield the usual profit, he would not invest it. The production of the additional food would not take place. If it were necessary for the additional demand, then the demand would have to raise the price, i.e., the market-price, until it yielded the profit. Thus profit—in contradistinction to rent—enters as a constituent element, not because it creates the value of the product, but because the product itself would not be created if its price did not rise high enough to pay the usual rate of profit as well as the capital expended. In this case, however, it is not necessary for it to rise so high as to pay rent. Hence, there exists an essential difference between rent and profit, and in a certain sense, it can be said that profit is a constituent element of price, whereas rent is not.” (p 334)

But, Marx says, this is only correct in this specific case, and it is only correct here, “because in this case landed property cannot confront capital as landed property, thus the very combination [of circumstances] under which rent, absolute rent, is formed, is not present—according to the assumption. The additional corn produced with the second investment of £1,000, provided the market-value remains the same, in other words when an additional demand arises only on the assumption that the price remains the same, must be sold below its value at the cost-price. This additional produce of the £1,000 thus occurs under the same circumstances as when new worse land is cultivated, which does not determine the market-value, but can provide the additional supply only on the condition that it supplies it at the previously existing market-value, i.e., at a price determined independently of this new production. (p 334)

In other words, this is a situation, as described previously, in relation to differential value. Existing supply cannot meet demand. A small additional amount of land, or in this case capital, expended on the worst existing land, provides the additional supply. Demand and supply are then in balance, at the existing market price. But, this market price is not sufficient to cover the absolute rent and average profit. For this additional land or capital, it is as though there is a negative differential rent. But, it is manifest in either a reduction, or as here, the negation of the absolute rent.

“Under these circumstances it depends entirely on the relative fertility of the additional soil whether it yields a rent precisely because it does not determine the market-value. It is just the same with the additional £1,000 on the old land. And for this very reason, Ricardo concludes conversely, that the additional land or the additional amount of capital determines the market-value because, with a given, quite independently determined market-value, the price of its product yields not rent, but only profit, and only covers the cost-price but not the value of the product. This is a contradiction in terms.” (p 334)

It is also, at heart, the basis of marginalist theories of value.

Northern Soul Classics - What's Wrong With Me Baby - The Invitations

Friday, 23 February 2018

Friday Night Disco - Jungle Boogie - Kool & The Gang

Theories of Surplus Value, Part II, Chapter 13 - Part 18

Marx gives a long quote from Ricardo (Principles, p 390-91), in which Ricardo discusses a situation where farmers face no rent, because prices only cover the price of production. A farmer, investing £10,000 will only invest an additional £1,000, he says, to meet additional demand, if he can be sure of prices at least able to cover this price of production. In the passage, Marx says, Ricardo admits that even the worst land can pay rent. For the additional £1,000 to be invested, and cover the price of production, grain prices must be rising. On this basis, Marx says, if prices initially covered the price of production, on the £10,000 capital, they must now exceed it, thereby producing a surplus profit on that £10,000. However, Marx says, the price must have risen, on Ricardo's argument, prior to the investment of the additional £1,000, so that the market value exceeded the price of production.

“In fact therefore before the second amount is invested the first amount of capital yields a rent on the worst land, because the market-value is above the cost-price. Thus the only question is whether, for this to happen, the market-value has to be above the value of the worst product, or whether on the contrary its value is above its cost-price, and the rise in price merely enables it to be sold at its value.” (p 332)

The reason that the price of production is sufficient to cover the advanced capital plus the average profit is precisely because of competition.

“That is, as a result of the action of capital upon capital.” (p 332)

If the prices are not high enough in one sphere, capital leaves it. Then supply falls and prices rise. The capital then settles in those spheres whose prices are higher than what is required to cover the price of production. Then those prices fall as this additional capital causes supply to rise. But, this cannot occur in agriculture precisely because of the existence of landed property. It is then not just a question of price being determined by competition, by the action of capital on capital, to produce an average rate of profit, and prices of production, but also of the action of landed property on capital.

“For it is precisely the competition of capitals amongst themselves, which enables the landlord to demand from the individual capitalist that he should be satisfied with “an average profit” and pay over to him the overplus of the value over the price affording this profit.” (p 332) 

In other words, when agricultural prices are high enough to produce surplus profits, over the average rate of profit, in industry, capital wants to obtain those surplus profits. Individual capitals thereby compete to be able to obtain access to land, and that competition enables the landlord to raise rents until that surplus profit is absorbed. As I have set out elsewhere, this also means that even if the organic composition of capital in agriculture/mining is higher than in industry, it is still possible to levy absolute rent, because there is no reason for the landlord to rent out their land for free. In that case, the absolute rent is derived not from an excess of the market value of the output over the price of production, but is the result of a monopoly price.

“If landed property gives the power to sell the product above its cost-price, at its value, why does it not equally well give the power to sell the product above its value, at an arbitrary monopoly price? On a small island, where there is no foreign trade in corn, the corn, food, like every other product, could unquestionably be sold at a monopoly price, that is, at a price only limited by the state of demand, i.e., of demand backed by ability to pay, and according to the price level of the product supplied the magnitude and extent of this effective demand can vary greatly.” (p 332) 

Such a closed, protected economy is an exception, though the Corn Laws attempted to create such conditions. Yet, even in an open economy, where foreign competition in agricultural prices would result in food imports, which undermined such monopoly prices, Marx says, land is frequently withdrawn artificially so as to cause rents, and land prices to rise.

“... even in England a large part of the fertile land is artificially withdrawn from agriculture and from the market in general, in order to raise the value of the other part—landed property can only affect and paralyse the action of capitals, their competition, in so far as the competition of capitals modifies the determination of the values of the commodities. The conversion of values into cost-prices is only the consequence and result of the development of capitalist production. Originally commodities are (on the average) sold at their values. Deviation from this is in agriculture prevented by landed property.” (p 333) 

Thursday, 22 February 2018

Its Not Inflation Driving Interest Rates Higher (5/10) - Wages and The Profits Squeeze

Wages and The Profits Squeeze 

But, as Marx points out, just because Smith is wrong in the longer term, that does not mean that these periods where labour-power is in short supply, causing a squeeze on profits, do not occur in the short and medium term. This is a normal part of the cycle of capital accumulation over the long wave. It's what leads to there being long periods where capital accumulation proceeds on an extensive basis of rolling out more of the existing technologies, followed by other periods of innovation, and the rolling out on an intensive basis of new technologies that replace the old technologies as well as replacing labour. Marx points to the period between 1849 to 1859, as such a period, for example, in agriculture, where wages rose due to labour shortages, which provoked capital to introduce a series of agricultural machines and innovations. 

Glyn and Sutcliffe pointed to a similar phenomenon in the 1960's, of rising wages leading to a squeeze on profits. As Bob Sutcliffe wrote, in his 1983 book, “Hard Times” 

“When some economists began to assert more than ten years ago that a long-term decline of profitability was taking place this fact was heavily contested. 

In the first place it was contested by pro-capitalist economists who wished to deny that any serious defect was showing up in the system they supported. But, secondly, it was also disputed by many socialists. The opposition to the idea came on the one hand from Marxists who had under the impact of the boom developed a semi-Keynesian view of the capitalist economy which led them to believe that it could no longer descend into deep crises characteristic of the pre-Keynesian era. Also opposition came from those whose view of socialism, revolutionary as it sometimes sounded, conceived of the anti-capitalist struggle as basically a moralistic one concerned above all with redistribution from the rich capitalists to the poor workers... 

As the weight of evidence for the fall in profitability mounted, however, the fact came to be more widely accepted apart from the few who preferred the interpretation that it was a capitalist deception to justify economic austerity to workers.” (p 38-9) 

But, this leads to the question of what caused this fall in the rate of profit. There, are in fact, two reasons why the rate of profit might fall, related, as Sutcliffe says, to two fundamental ratios, the rate of surplus value, and the organic composition of capital. The organic composition of capital is the relation of constant capital to variable capital. Because it is only variable-capital that produces surplus value, those capitals that have a high organic composition of capital will have a lower rate of profit, because the rate of profit relates the surplus value to the total capital constant and variable laid out to produce it. The rate of surplus value is the ratio of the surplus value only to the variable-capital. The rate of surplus value may be rising, therefore, whilst the rate of profit falls, and vice versa. In addition, the mass of surplus value produced is not only a function of the rate of surplus value, but also of the mass of labour employed. If the rate of surplus value is 100%, and 10 workers are employed each on wages of £10, the mass of surplus value is £100, but if the number of workers employed rises from 10 to 20, and this increased demand for labour-power leads to a rise in wages to £12, so that the rate of surplus value falls to 66.6%, with each worker now producing only £8 of surplus value, that does not stop the mass of surplus value rising from £100 to £160, a rise of 60%! A failure to understand these differences was what led Ricardo and his followers into a dead end.  As I'll show later, its also what leads current financial pundits into error over rising corporate earnings.

From what has been said earlier, its clear that, at times, the rate of profit can fall because existing technologies are rolled out more extensively, more workers are employed, which causes existing labour supplies to be used up, and thereby for wages to rise squeezing profits, whilst, at other times, in response to this squeeze on profits, capital introduces waves of new labour-saving technology, which removes this limitation of labour supplies, and pushes down wages, raising the rate of surplus value, but which, by raising the level of productivity also thereby raises the organic composition of capital, which in turn causes the rate of profit to fall. It was not the law of the tendency of the rate of profit to fall that causes crises of overproduction, but the overproduction of capital that leads to the excess demand for labour-power, which causes wages to rise, which causes profits to be squeezed, and the rate of profit to fall!  Sutcliffe points out, 

“This is often combined with an implicit suggestion that Marxist theory of economic crisis is basically an extension of what Marx called the law of the tendency of the rate of profit to fall. This is the opposite way round from what Marx himself intended.” (p 42) 

Rather than it being that law which was the basis for the fall in profits of the 1960's, and 70's, which in turn led to the repeated crises of overproduction manifest throughout the 1970's and early 1980's, the falling rate of profit was the result of rising wages. Sutcliffe says, 

“There is very powerful evidence to support the idea that once the vast pool of unemployed and underemployed labour after the war was used up by the major capitalist economies, the low level of the reserve army of labour strengthened the bargaining position of trades unions on wages and other questions to a degree which was unacceptable to the capitalist class and which threatened further profitable accumulation.” (ibid) 

Trades unions, particularly organising large concentrations of workers in the largest enterprises, facilitate this process, but as Engels points out, 

“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.” 



Part 6 Sunday

Theories of Surplus Value, Part II, Chapter 13 - Part 17

[5. Ricardo’s Criticism of Adam Smith’s and Malthus’s Views on Rent]


Chapter XXIV of Ricardo's “Principles” is, Marx says,

“...of great importance for the difference between Ricardo and Adam Smith.” (p 330)

Ricardo quotes Adam Smith's correct understanding of when agricultural prices result in rent. However, Marx points out, Smith, unlike Ricardo, believed that land used for food production always produces rent.

Marx quotes a passage from Ricardo which is significant because it highlights a number of errors in his theory.

““I believe that as yet in every country, from the rudest to the most refined, there is land of such a quality that it cannot yield a produce more than sufficiently valuable to replace the stock employed upon it, together with the profits ordinary and usual in that country. In America we all know that is the case, and yet no one maintains that the principles which regulate rent, are different in that country and in Europe” (l.c., pp. 389-90).” (p 330) 

Marx points out that the principles are substantially different in the US, where no monopoly of landed property existed, and Europe where it did.

“Where no landed property exists—actual or legal—no absolute rent can exist. It is absolute rent, not differential rent, which is the adequate expression of landed property. To say that the same principles regulate rent, where landed property exists and where it does not exist, means that the economic form of landed property is independent of whether landed property exists or not.” (p 330-1) 

Ricardo's statement about the existence of land unable to produce output “more than sufficiently valuable to replace the stock employed upon it, together with the profits”, is also confused. The value of the output is a function of the labour expended. What changes is the quantity of use values that make up the output, and, consequently, the value of each unit of output. But, whether a rent is paid depends upon the existence of surplus profit, which requires that this value exceeds the price of production for this output. That in turn depends upon the price of production of all other commodities, which determines the average rate of profit.

If the value of cotton produced with £1,000 of capital is £1200, the actual rate of profit for this capital is 20%. Then, if the average value of commodities produced, in total, in industry, is, with £1,000 of capital, £1,100, the general rate of profit is 10%, so that the agricultural capital enjoys a 10% surplus profit, which produces rent. But, if the value of all other commodities is £1200, so that the general rate of profit is 20%, there is no surplus profit, in agriculture, and no basis for absolute rent.

Wednesday, 21 February 2018

Its Not Inflation Driving Interest Rates Higher (4/10) - Interest Rates and The Demand and Supply of Money-Capital

Interest Rates and The Demand and Supply of Money-Capital 

If we look at what would be expected if inflation were the real reason for rising interest rates, now, we would expect to see longer-term interest rates rising more quickly, or what is called a steepening of the yield curve. Yet, we see the opposite. US 10 Year Treasury yields have risen significantly over the last few months, but shorter dated Treasuries have risen even faster, causing a flattening of the yield curve. It's not higher inflation that is the reason for interest rates rising sharply, but the sharp rise in global economic growth, and its effect on wages and profits. According to Mark Carney in his recent speech, 90% of the the world's economies are now growing at rates above trend. The world's economies are now growing at their fastest pace since the start of the new long wave boom in the early 2000's, which also caused interest rates to spike, and which led to the 2008 financial meltdown. 

When the financial pundits talk about rising inflation, what they are really talking about is that 2.9% rise in US wages. They are referring to the 4.3% pay rise, and 28 hour working week that IG Metall has won for 1 million German workers, and again it was the winning of similar pay rises in 2008 that sparked anxiety amongst the ranks of conservative social-democrats, and saw interest rates rise. For Keynesians, this kind of pay rise leads to inflation on the basis of higher input costs. But, Marx explains why that is not the case. The rise in wages leads to a fall in surplus value, and the consequence is that the production of wage goods rises, whilst the production of luxuries consumed by capitalists and other exploiters declines. However, in modern economies, central banks tend to respond to these higher wages and the squeeze on surplus value, by increasing liquidity, so that commodity prices rise, and consequently real wages rise by less than nominal wages. This always brings with it the potential for a price-wage spiral, as happened in the 1970's. 

But, the fundamental point is that wages had risen for a reason. Wages (at constant money prices) rise for one of two reasons. Either, social productivity falls, so that the value of wage goods rises, and so the value of labour-power rises, or else, wages rise, because the demand for labour-power rises faster than the supply of labour-power. Ricardo saw the former as the cause of higher wages, flowing from his theory of diminishing returns, as increasing output, to feed a growing workforce, led to a resort to less fertile land. It was the basis of Ricardo's theory of the falling rate of profit. But, Marx showed that this theory was wrong. Social productivity rises so that the value of commodities, including all those that constitute wage goods, continually fall. That means that the value of labour-power continually falls, so that the rate of surplus value, and mass of surplus value rises.   Wages, therefore, rise, in practice, because, at times, the demand for labour-power rises faster than its increased supply from either increased population or increased productivity.  As productivity rises, more slowly, the value of labour-power falls, more slowly, whilst the demand for labour-power rises more quickly.  These conditions are consistent with that phase of the long wave cycle where there is more extensive rather than intensive accumulation of capital.

Adam Smith believed that wages rise, because capital accumulates faster than the growth of the working-class, and so the excess supply of labour-power, which he thought was the basis of profits, is gradually removed, wages then rise, and profits fall, until eventually, he thought, they must disappear. In terms of the long run tendency for the rate of profit to fall, Smith was also wrong, because, as Ricardo and Marx recognised, whenever these periods arise when the demand for labour-power starts to exceed the supply, causing wages to rise, and profits to be squeezed, capital responds, by introducing a new wave of technological developments, of new labour-saving machines that restore the excess supply of labour-power, and thereby push wages down, and surplus value up.