Thursday, 2 December 2021

The Handicraft Census In Perm, Article I, Section I - Part 2 of 6

I - General Data

The handicraft census covered 8,991 families, excluding families of wage workers. It was spread across all uyezds in the gubernia, covering about 72% of all handicraft production.

Two types of handicraft family were identified – I which owned a farm, and II which didn't. These were divided into three sub-groups - 1) those producing for the market, 2) those working to order for private customers, and 3) those working for buyers-up. In these latter two groups, the raw material is provided by the customer or buyer-up. This can amount to different economic and social relations. In the first case, what is sold is a labour service. For example, a tailor who comes to your house, and makes a coat, or someone who cooks your dinner. What is paid for is the value of this labour-service, not the value of labour-power. Labour-power is not sold as a commodity, the labour service is.

In the second case, the buyer up provides material, not for the producer to produce a use value for their own consumption, but in order that they produce a commodity that the buyer-up will sell in the market. The only reason to do this is to obtain a profit from it. This is the basis of The Putting Out System. The merchant, who is the first form of buyer-up, makes a commercial profit, because they buy from producers at a price below the exchange-value of the commodity. The producer agrees to this arrangement, because the price they get from the merchant is more than they would have obtained from going to market themselves, after all those costs were accounted for. The merchants are always the first to enter capitalist production, therefore, because, when markets, in the towns, for manufactured commodities, have grown large enough, the merchant can always add to their commercial profit, by also extracting surplus value from the production of what then become wage labourers.

When any handicraft producer fails, it is a result of not being able to reproduce their raw material from the sale of their output. At that point, the merchant can offer to provide the materials, on condition that the output then belongs to them, and that they will then only pay to the producer the equivalent of the value of their labour-power, i.e. wages. The producer has become a proletarian, a wage labourer, and they now sell, not the product of their labour-power, but their labour-power itself. This is the start of the process of differentiation of the small producers, into a proletariat and bourgeoisie.

“The division of handicraftsmen into those who farm land and those who do not is, of course, a sound and necessary method. The large number of landless handicraftsmen in Perm Gubernia, frequently concentrated in industrial settlements, has led the authors to stick to this classification and to use it in the tables. We learn, for example, that 6,638 persons, or one-third of the total number of handicraftsmen (19,970 working members of families and wage-workers in 8,991 establishments) do not farm land.” (p 359)

As Marx discussed in Capital, and Theories of Surplus Value, the separation of increasing spheres of industrial production from agriculture is one of the first manifestations of a social division of labour, as soon as agricultural labour becomes sufficiently productive that it can produce a social surplus product. It enables a portion of society to split off and to use the product of agriculture as raw material in its own production, which becomes increasingly concentrated in the towns, which then exchanges these products with the countryside, as described in the Tableau Economique.

“This fact alone shows the fallacy of the common assumptions and assertions that the connection between handicraft industry and agriculture is universal; this connection is sometimes stressed as a specifically Russian feature. If we exclude the rural (and urban) artisans who have been wrongly classed as “handicraftsmen,” we find that 2,268 of the remaining 5,566 families, or over two-fifths of the total number of industrialists working for the market, are landless.” (p 359)

As Lenin points out, however, in The Sketch, not even this basic distinction is applied consistently. Left out is the data for households of wage workers, for example. The reason is that the census only looked at those households which represented establishments where production was taking place. If the households of wage workers were included then its likely that the majority of these would have been landless. Wage workers, employed by handicraftsmen were no less engaged in handicraft production than those that hired them, and so this omission distorts the picture. Wage workers constituted a quarter of all workers.

“This omission is due to the fact that, in general, the census registered only the establishments, the owners, and ignored the wage-workers and their families. In place of these terms, the Sketch employs the very inaccurate expression “families engaged in handicraft industries.” This is inaccurate because families whose members are employed by handicraftsmen as wage-workers are no less “engaged in handicraft industries” than the families which hire them. The absence of house-to-house information on the families of wage-workers (who constitute one-fourth of the total number of workers) is a grave omission in the census. This omission is highly characteristic of the Narodniks, who at once adopt the viewpoint of the small producer and leave wage-labour in the shade.” (p 359-60)

Wednesday, 1 December 2021

Adam Smith's Absurd Dogma - Part 22 of 52

Marx explores Smith's absurd dogma at greatest length in Theories of Surplus Value. He deals with the differences between surplus product and surplus value, as well as the illusions created by the use of historic pricing, rather than current reproduction cost, as the means for determining value, and analysing the process of social reproduction. Again the basis of Marx's analysis of the process of social reproduction is the requirement to replace material balances, or as he put it in Capital III, Chapter 49, to replace them “on a like for like basis”.

In Theories of Surplus Value, Marx examines the process, already having analysed the division of surplus value into profit, interest, rent and profit of enterprise. Profit is merely the phenomenal form first assumed by surplus value, before its division into these other revenues. The profit can only be increased if surplus value increases, or if the cost of realising it is reduced, as a result of the action of commercial capital, hence its inclusion in the calculation of the general, annual rate of industrial profit.

The issues involved, here, take in not just Smith's absurd dogma, but also the debate over the Temporal Single System Interpretation, and use of historic pricing as against current reproduction cost. It has relevance to the analysis of the changes that arose during the 1980's, and calculation of the rate of profit, involving an understanding of the role of the tie-up and release of capital, resulting from changes in social productivity.

Surplus value can only increase if either a) the rate of surplus value increases, or b) the mass of simultaneously employed labour increases – increase in the social working-day. For example, 100 hours labour with a 100% rate of surplus value produces 100 hours of surplus value, whilst 200 hours of labour with an 80% rate of surplus value gives 160 hours of surplus value. As Marx puts it in Capital III, Chapter 15,

“Given the necessary means of production, i.e., a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e., the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

Ramsay sees rising productivity creating a release of capital, and misinterprets it as an increase in profit. It is, in reality, only a release of capital, which is then converted to revenue. There has been no increase in surplus value. But, this illusion leads him into error, and a view that constant capital can also be a source of surplus value. His use of historic prices, rather than current reproduction costs, and a failure to recognise that what has to be reproduced are the material balances at those current reproduction costs. For the proponents of the TSSI, and historic pricing, a rise in productivity results in a fall in the current value of capital relative to its historic cost. They translate this capital loss into a reduction in profit, (this is seen most clearly when they discuss capital gain/losses on financial assets, and interpret them as profit or loss), which forms the basis of many of their claims that the rate of profit fell during the 1980's, or did not rise by as much as others have shown, but also from the fact that they measure the profit against the higher historic cost, rather than the lower reproduction cost. Both fail to recognise Marx's point that what has to be replaced are the material balances, and they are replaced at current reproduction cost, not historic prices.

The effect is most notable during periods of rapid technological development, such as the 1980's. During such periods, one new machine replaces 2, 3 or 4 older machines. The new machine may cost more than one old machine (or not), but is cheaper than the 2, 3 or 4 older machines it replaces. That is like a spinning wheel replacing a hand-held spindle, or a spinning machine with 100 spindles replacing 100 spinning wheels. The result is that the value of fixed capital, per unit of output, wear and teardechet – falls significantly, as Marx sets out in Capital III, Chapter 6.  It means the value of spinning wheels suffers a massive moral depreciation. That is what happens to fixed capital in the 1980's.

Marx describes the difference between the wear and tear of fixed capital, and depreciation. The former is a function of production, and the value is recovered from production; the latter is a function of time, and changes in value outside the production process, which are not recovered from production. The importance of that in terms of the process of reproduction is set out by Marx in Theories of Surplus Value, Chapter 23. When technological development is very rapid, the fixed capital stock does not have time for its value to be recovered in wear and tear. In Capital I, Marx set out the examples of periods in which some machines had to be scrapped even before they were put into production, because they had become out of date, as a result of new inventions. Some capitals, where fixed capital was bought with borrowed money, go bust, but, as Marx sets out in Capital III, Chapter 6, the real basis is then revealed, because these capitals, or their fixed capital is bought up by other capitals at prices based upon current reproduction cost, not the historic price, and it is that, which forms the basis of their calculation of the rate of profit.

Inflation Continues To Surge. Interest Rates Are Next - Part 10 of 10

Central banks have printed money tokens to inflate the prices of assets, which today is the form in which the top 0.01% hold their wealth. Alongside it, governments have implemented measures of fiscal austerity, to hold back economic growth, and, thereby, hold back the demand for money-capital, which would cause interest rates to rise, and asset prices to crash.

Shareholders who exercise control over the large-scale socialised capital they do not own, have been able to protect their paper wealth, in such conditions, by using profits to buy back shares, issuing bonds, bought by accommodating central banks, so as to use the proceeds to buy back shares, so inflating their price.

But, that also leads to enhanced contradictions and costs, in the longer term. It meant a slower growth of economies, and accumulation of capital, but, then, capitalists in developing economies were presented with an opening to fill that gap. The rapid growth and accumulation of capital in China, has been an obvious case in point. But, even in the developed economies, it meant that a greater opening for smaller private capitals was created, and, with reactionary, conservative parties increasingly dominated by the interests of those small capitalists, policies were introduced that further facilitated them. The private owner of a small business, be it a window cleaner or gardener, or be it a small engineering firm, is not like a shareholder. Their revenues, and their wealth depends, directly, upon the profitability of their business, and not on the paper market value of shares, or the interest on loaned money-capital. That profitability, in turn, depends upon them being able to win market share. It depends on them investing in real productive-capital, and being able to undercut their competitors, as well as being able to produce and sell more.

Often, these companies have been the ones that could not easily raise capital, because banks were more interested in lending money for speculation in property, by lending to buy-to-let landlords and so on. In conditions in which fiscal austerity slowed economic growth, and excess liquidity diverted money into the purchase of assets rather than consumption, the scope for rapid expansion of these smaller firms was limited. But, now, liquidity is gushing into consumption. At the same time, interest rates are rising, and that means an inevitable fall in asset prices. It creates the conditions in which these smaller private capitals can grow rapidly, especially where they can accumulate circulating capital on the basis of commercial credit. The larger, socialised capitals, therefore, are in danger that they can be squeezed by large, new socialised capitals based in developing, and newly industrialised economies, on a global scale, and by a rapid growth of smaller capitals, in some spheres, in their own domestic markets.

Of course, Roberts is right that, frequently, the big monopolies will respond to such conditions by simply using the power of their balance sheets to buy up any domestic competition, from rapidly growing smaller firms. But, all of this means that there is an unavoidable shift away from simply using profits to buy back shares, and inflate asset prices, into the use of profits to invest in real capital accumulation, either via organic growth, or via acquisition. It necessitates a higher rate of economic expansion, and an increased demand for money-capital, as against its supply, necessitating higher rates of interest – whatever central banks might do in relation to their policy rates – and a consequent fall in asset prices.

As Marx notes, and Lenin, in his analysis of the development of capitalism in Russia, sets out, the determining characteristic of all commodity producing economies is competition, and capitalism as the most mature form of commodity producing economy is also so characterised, and determined even when that competition takes the form of monopolistic competition. Marx notes,

“Socialists know well enough that present-day society is founded on competition...

In actual fact, society, association are denominations which can be given to every society, to feudal society as well as to bourgeois society which is association founded on competition...

It must be carefully noted that competition always becomes the more destructive for bourgeois relations in proportion as it urges on a feverish creation of new productive forces, that is, of the material conditions of a new society. In this respect at least, the bad side of competition would have its good points...

In practical life we find not only competition, monopoly and the antagonism between them, but also the synthesis of the two, which is not a formula, but a movement. Monopoly produces competition, competition produces monopoly. Monopolists are made from competition; competitors become monopolists. If the monopolists restrict their mutual competition by means of partial associations, competition increases among the workers; and the more the mass of the proletarians grows as against the monopolists of one nation, the more desperate competition becomes between the monopolists of different nations. The synthesis is of such a character that monopoly can only maintain itself by continually entering into the struggle of competition.”

(The Poverty of Philosophy, Chapter 2)

Roberts notes a concern that higher interest rates might hit companies with large debts, so sparking a recession. But, as I have pointed out, before, that is unlikely. If interest rates rise from, say, 2% even to 5%, this large relative increase in the cost of money-capital, will still represent only a small fraction of the rate of profit, and as economic activity increases, the increase in interest payments by firms will be insignificant compared to the increase in the mass of profit they will enjoy. It is very unlikely, therefore, to deter firms from borrowing, be it from the bank, or via the issue of shares or bonds, to finance their expansion into a rapidly increasing market. What it will do, is to slash the capitalised value of revenues from assets, and so bring about an asset price crash that will make 2008 look like the hors d'oeuvre before the main meal.

What lies ahead is not the perennially predicted economic catastrophe suggested by Roberts, but a financial crisis that central banks will not be able to cut short by yet more money printing. It will be a financial crisis that will, in fact, create the conditions, in which the economic expansion that has so far been artificially constrained, by central banks and states, will be unleashed. It will surpass all previous economic expansions in its vigour.

Tuesday, 30 November 2021

The Handicraft Census In Perm - Article I, Section I - Part 1 of 6

The Handicraft Census In Perm

In this work, written when Lenin was in exile in Siberia, during 1898, he, again, provides an analysis of the latest economic data, and examines the conclusions drawn from it by the Narodniks. Many of the economic trends highlighted by the data have already been illustrated in previous works, and also comprise part of the more comprehensive analysis in Lenin's later work, The Development of Capitalism In Russia. I will avoid replication of tables unless required for clarity, because the original tables are available in the work online, or in print in Lenin's Collected Works, Volume 2, from which the page references again are taken.

Article One  

As part of the 1896 Exhibition in Nizhni-Novgorod, the Perm Gubernia Zemstvo provided funds for a scientific survey of the state of handicraft industry in the region. The result was to be a handbook of eight volumes, amounting to over 3,000 pages, in total. In fact, only one volume was published in time, A Survey of Perm Territory. A Sketch of the State of Handicraft Industry in Perm Gubernia. It is this data that Lenin analyses, along with other data. He notes,

“For the novelty, wealth and fullness of the material on which it is based, the Sketch is a work of outstanding interest. The material was obtained through a special handicraft census financed by the Zemstvo and taken in 1894-95. This was a house-to-house census, each householder being questioned individually.” (p 357)

The questions asked were also wide-ranging, covering not only the activities of the master craftsmen, but also their family members, and wage labourers. It covered things like agricultural activity, as well as details on raw material purchases, production techniques, seasonal work patterns, sale of products, debts, and the time businesses had existed.

“As far as we are aware, this is perhaps the first time such abundant information has been published in our literature. But to whom much is given, much is required. The very wealth of the material entitles us to demand its thorough analysis by the investigators, but the Sketch is a long way from meeting this demand. Both in the tabulated data and in the method of grouping and analysing them there are many gaps, which the present author has had in part to fill by selecting material from various parts of the book and computing the appropriate data.” (p 357-8)

Lenin emphasises that his analysis is based on the data and the economic reality as it is. The point is made, because the Narodniks continually analysed data within the confines of their view of how economic reality “should be” rather than how it is. In other words, they filtered it through the prism of the moral socialist view of how Russia's development should take place, had it not been led down a wrong path of capitalist development. By contrast, Lenin looks at the data in the context of the economic realities, and also explains, from a materialist perspective, why those realities were inevitably what they were, and not something else.

“As to extending the conclusions drawn from the data on Perm Gubernia to “our handicraft industries” in general, the reader will see from what follows that such an extension is quite legitimate, for the forms of “handicraft industry” in Perm Gubernia are exceedingly varied and embrace every possible form ever mentioned in the literature on the subject.” (p 358)

Lenin emphasises that, in this work, it divides into two elements, firstly the analysis of the data, and secondly, his discussion of the Narodnik conclusions drawn from it.

Inflation Continues To Surge. Interest Rates Are Next - Part 9 of 10

In a recent post in the WW, Michael Roberts, promoting his perennial catastrophist narrative that the next recession is at hand, writes,

“Indeed, because of low profitability on productive capital in most major economies, in the first two decades of the 21st century profits from productive capital have increasingly been diverted into investment in real estate and financial assets, where ‘capital gains’ (profits from rises in stock and property prices) have delivered much higher profits.”

But, it was not low profitability on productive-capital that led to this speculation in assets. It was the fact that the capital gains – I will leave aside his description of capital gains as “profits”, whereas, for a Marxist, profits are derived only from surplus value – were in excess of even high rates of profit, and were guaranteed by central banks, in a way that profits never can be. Moreover, as Marx describes, the antagonistic relation between the owners of productive-capital (the associated producers) and the owners of fictitious capital (share and bondholders), is brought out in precisely this. If companies had invested more in productive-capital, as a result of the high rates, and levels, of profit, created by the technological revolution of the 1980's, the consequence would have been, higher levels of demand for money-capital, relative to supply, and so higher rates of interest, which would have acted to restrain the rise in asset prices, and to crash them where they had been inflated. It was precisely for that reason that the owners of that fictitious capital, i.e. the dominant shareholders, used their controlling position, to divert profits into share buybacks, and so on to further inflate asset prices, and away from productive investment!

Roberts confuses the interests of fictitious capital, and its owners, with the interests of productive-capital. The latter, does, indeed, seek to maximise accumulation, and the profit of enterprise, whilst the former's main concern is to maximise the interest they can extract from the owners of industrial capital, and, more recently to maximise its potential for capital gains, and minimise its risk of capital losses.

Roberts also says,

“A long boom is only possible if there has been a significant destruction of capital values - either physically or through devaluation, or both.”

In fact, Marx makes clear, in Theories of Surplus Value, that a physical destruction of capital is not helpful in raising the rate of profit, and creating conditions for economic expansion. It is only the devaluation of values that performs that function. The preservation of the use values, themselves, is a requirement for raising the rate of profit, or else, a portion of social labour-time, and, thereby, a tie up of capital is required to replace them, as part of the process of social reproduction.

“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.”

(Theories of Surplus Value, Part 2 p 496)

The notion that the rate of profit is enhanced, or accumulation facilitated, by the physical destruction of use values is a Keynesian notion, not one advocated by Marx. It was Keynes, not Marx, who advocated digging holes so that others could be paid to fill them in!

Its true, that the 2020's are not going to be a repeat of the 1920's, but for reasons the very opposite of those Roberts proposes in his article. Roberts correctly describes the period preceding the 1920's, as one in which a technological revolution gets underway. He says,

“By cleansing the accumulation process of obsolete technology and failing and unprofitable capital, innovation from new firms could prosper. Schumpeter saw this process as breaking up stagnating monopolies and replacing them with smaller, innovating firms. In contrast, Marx saw creative destruction as creating a higher rate of profitability after the small and weak were eaten up by the large and strong.”

Again, this is not accurate. Marx does see, small and weak firms being eaten up by larger firms, but he also sees, new small firms, particularly in new spheres of production, entering the fray, during such a process, as part of the lifeblood of capitalism being refreshed. These new firms, in new spheres, are generally characterised by a lower organic composition of capital, and so with a higher annual rate of profit. (Capital III, Chapter 14) The lower organic composition may result from employing a lot of labour relative to capital, or else may be the result of employing a relatively small number of highly skilled workers, whose labour is complex.

But, the reason Roberts analogy is wrong, is that the period of long wave boom does not result directly from the technological revolution, and clearing out of deadwood. What accompanies the latter is a period of stagnation and slower growth, precisely, because the introduction of the new technologies – intensive accumulation – is one in which labour is replaced by it. It is a period in which the gross product rises at a slower pace than the net product, as Marx describes in Theories of Surplus Value, and which is the physical manifestation of the fact that the rate of surplus value rises.

The period of long boom, by contrast, follows such a period. It comes when, intensive accumulation, and rapidly rising productivity ceases, and, so, when, in order to grab market share, driven by competition, firms have to accumulate capital extensively, rather than intensively, including the employment of additional labour. It is that, which, then, creates the conditions for the demand for wage goods to rise more rapidly, and so sets in the process by which gross output grows faster than net output. The 1920's (actually from around 1914), at least in Europe, were characterised, precisely as a period of crisis, leading into the stagnation that carried on into the 1930's. The 1920's and 30's, was a period of higher rates of profit, as wages fell, and constant capital was devalued. That created the conditions, in which, during the 1940's, 50's and 60's, economic expansion could proceed, leading again into the period of crisis of the 1970's, and early 1980's.

It is the 1980's that are the equivalent of the 1920's, and the current period is the equivalent of the 1950's and 1960's, when those conditions did result in a period of expansion and boom. The start of that was seen between 1999 and 2008. It has been deliberately hibernated since then, via measures of austerity to reduce economic growth, and measures of QE to divert money and money-capital away from the real economy, and into speculation in assets.

Monday, 29 November 2021

Adam Smith's Absurd Dogma - Part 21 of 52

In primitive society, Marx says, there are no produced means of production, and so,

“ constant capital, the value of which could pass into the product, and which, in reproduction on the same scale, would have to be replaced in kind out of the product and to a degree measured by its value.” (p 847)

But, Nature provides the means of subsistence and means of production gratis. A stone becomes a primitive means of hunting, digging, cutting, as with sticks etc. Its in these conditions that the members of these primitive societies can use surplus labour-time to produce means of production to increase productivity. But, this expenditure of resources, out of revenue, is, then, not a replacement of consumed means of production, just as with the accumulation of capital out of surplus value.

“This reconversion of profit into capital shows rather upon closer analysis that, conversely, the additional labour — which is always represented in the form of revenue — does not serve for the maintenance, or reproduction respectively, of the old capital value, but for the creation of new excess capital so far as it is not consumed as revenue.” (p 848)

In other words, this is equal to Keynes net investment, and, in no sense, accounts for the replacement of consumed constant capital.

“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.” (p 849)

So, again, what we have is social reproduction as a physical reproduction of material balances, the fact of which is plain if no change in social productivity or capital accumulation occurs. But, a change in social productivity does not change this relation, it simply means a change in the proportion of social labour-time allocated to reproduce these different material balances. A rise in social productivity, as described in Capital III, Chapter 6, and in Theories of Surplus Value, brings about a release of capital, meaning more social labour-time is available for consumption or accumulation, and vice versa. It means that the rate of profit rises, because any given mass of surplus value, now accumulates greater quantities of means of production and labour-power. This is no different than Robinson Crusoe using his excess labour-time to produce a bow to increase his hunting capacity. The only difference is that, under capitalism, it is the capitalist that owns the surplus labour capacity, and, thereby, the products of it in the form of additional capacity.

“However, what is actually transformed into capital is not profit as such. Transformation of surplus-value into capital signifies merely that the surplus-value and surplus-product are not consumed individually as revenue by the capitalist. But, what is actually so transformed is value, materialised labour, or the product in which this value is directly manifested, or for which it is exchanged after having been previously transformed into money.” (p 850)

Inflation Continues To Surge. Interest Rates Are Next - Part 8 of 10

A sure sign that market rates of interest are rising is when borrowers begin to try to lock in loans for longer periods, at fixed rates. Anyone with a bank account or savings account will have had emails from their bank or building society, in recent weeks, telling them that they can get a higher savings rate than the current near zero rate, by applying for a fixed rate bond, or other such vehicle, tying up their money for the next three years. Why? Because, the banks know that, in the very near future, they are going to be having to pay much higher rates on savings accounts, and those rates are likely to rise way above the fixed rates they are now trying to tie savers into for three years and more. Already, banks and building societies have begun to raise mortgage rates for borrowers, even ahead of actual rises in policy rates by central banks.

The standard line being pushed, in relation to these higher mortgage rates, is that they do not pose any immediate threat to house prices, because, existing borrowers are, themselves, mostly covered by fixed rate mortgages, extending out for another 3-5 years. That argument is nonsense.

It is nonsense for several reasons. Firstly, the effect of higher interest rates on asset prices, such as that of land and property is not primarily effected through that means. It is effected via the role of capitalisation. That is, with higher interest rates, the capitalised value of the revenues from any asset falls. If a hectare of land produces £1,000 of rent per year, then, if the rate of interest is 1%, the hectare of land produces as much revenue as £100,000 producing £1,000 of interest. But, if the rate of interest rises to 2%, the £1,000 of rent is equal only to £50,000, producing £1,000 of interest. One of the reasons that money started to flow into speculation in buy-to-let properties, was precisely that the interest that could be earned on savings fell to very low levels, meaning that rents from properties offered a better alternative. When, this speculative demand drove up house prices to astronomical levels, the speculators, then, had another incentive. Even the rent, as revenue, ceased being the main concern, as it became the potential for large annual capital gains from rises in property prices that took over.

The more property prices have risen, the more prospective landlords have to pay for additional properties, and the more capital they have tied up in their existing properties. Even as rents have risen, therefore, rental yields have fallen. As interest rates rise, so those rental yields become even less attractive, and as landlords, then, begin to sell to release their capital, so the prospect of capital gains from property speculation disappears, turning into the prospect of capital losses, and, so provoking even greater selling, and further falls in property prices. The landowners who were also keen to try to hold on to their land, begin to want to release it, before its price falls, and, in so doing hasten those falls.

But, even, in terms of the mortgage rates, the argument about fixed rates is false. Nowadays, the limit of how much people can offer for houses is not the house price itself, but how much they can afford to pay each month in mortgage payments. Current mortgage rates vary from around 1% to 1.25%. For ease, let's take 1%, and a repayment mortgage over 20 years. Suppose someone wants to buy a £200,000 house. That means over 20 years, repayment of the capital is £10,000 p.a., and interest is £2,000 = £12,000 p.a., or £1,000 per month. Assume, this is the most they can afford to pay each month. Now, however, interest rates rise to, say, 3% - that is not at all unreasonable as the long-term average for mortgage rates is 7%, for comparison – so that, the amount of interest p.a. rises to £6,000, or £500 per month. Given that the buyer can only afford £1,000 per month in total, this clearly means that the amount they can afford to borrow, and so pay for a house, is severely curtailed.

At this interest rate, they could borrow £150,000, meaning £7,500 p.a. in capital repayments, with £4,500 p.a. in interest payments. Immediately, therefore, the houses that buyers could previously afford to offer £200,000 for, can now only attract offers of £150,000, a fall of 25% in prices. It is not the immediate effect on existing borrowers being unable to afford to pay their mortgages, in respect of those with fixed rates - though some of them will always be coming to the end of their fixed rate periods, and need to renew at a higher rate, which many will be unable to afford – and so becoming forced sellers that causes prices to fall, but the fact that any buyers – first-time buyers or not – will, now be able to afford, and so offer, much less, that causes prices to drop, and, as seen in this example, to drop substantially. If mortgage rate rise to the long-term average of 7%, then that represents, on the above basis, a 50% fall in the price that buyers could offer, and were we to rise to the 10-15% levels seen in the early 1990's, an even bigger decimation of house prices would be inevitable. With interest rates now set to be rising steadily in the period ahead, landlords, in particular, seeing the likelihood of considerable capital losses, will begin to want to get out ahead of the rush. The fall in property prices, will be just the start of the crash in asset prices overall.