Fig 1.
What I am trying to show, in Figure 1., is the relative movement of values, between different aspects of the economy, over the Long Period. Beginning at the bottom. The individual Exchange Values, of commodities, taken as a whole, always fall over time. The reason for that is simple. Over time, the development of technique brings about improvements in the productivity of Labour. Less labour-time is required for the production of every type of commodity – with some exceptions I will come to later – and so the individual exchange value of those commodities falls. It will be objected that rarely do we see periods of deflation. I will deal with that point again later.
Similarly, we see the exchange-value of Labour-power falling over time. Again this is not surprising. The Exchange-value of Labour power as for any other commodity is the labour-time required for its production. In essence, this means all the Labour-time, required to produce the necessities, for ensuring that the workers and their families can survive, and be reproduced as workers. As we have seen the exchange-value of all these other commodities falling, then, it is clear that the cost of reproducing Labour-power itself must fall. But, we also see that the rate of fall for Labour-power is less than that for commodities in general. There are two reasons for that. Firstly, over-time the requirements of Capitalists of what they want from workers changes. The more technological work becomes, the more complicated all other aspects of life become for the worker the more the Capitalist requires workers with a basic level – at least – of education. Particularly, when workers begin to learn to control their family size, and when Capitalists require some degree of continuity, it is important for them to have relatively healthy workforces, so that they do not have to continually recruit, and train new workers. An inherent aspect of the production of Labour-power, then, becomes the increasing need to include within its cost of production these needs for education, health and so on. Secondly, as Marx sets out in the Grundrisse, workers form a major and growing part of all consumers. Although, Capital exists to produce profit it can only do so if it along the way produces commodities that can be sold. But, as the prices of these commodities fall over time, as we have seen, workers can buy more of them. Yet, there is a limit to how many sausages a worker can eat. At some point, they will be more interested in spending some of their wages on some other commodity. The Capitalists, then, cannot continue producing sausages ad infinitum without regard for the potential market. At some point, they too must allocate some of their Capital to producing other commodities for the worker to consume.
Marx calls this the “civilising mission of Capital”. It is forced to steadily increase the range of commodities available to the worker for their consumption, to continually expand his horizons. These commodities do not have to be restrained to sausages or coats, but can be other types of commodities in the form of services, of education, of culture and so on. And as Marx says, it is all this which ultimately provides the worker with the basic tools by which to become himself the ruler of society.
I have included Gold because it has for a long time acted as the stable form of Value as a measure between the relations between other values. Clearly, that is not true in terms of its price, which varies greatly, but this can be explained by that price itself being determined partly by the fluctuations in those relative values, by the representation of Value by price set in terms of widely fluctuating paper currencies, and by the short-term fluctuations in price resulting from changes in its Supply and Demand.
Next, is Capital which we see rising in Value. The reason for that is clear as Marx set out. Apart from short periods of time, Capitalist economies grow. This growth involves an accumulation of Capital. Surplus Value, created by workers is partly consumed by Capitalists as unproductive consumption, but another large part is used productively as investment in new Capacity – new machines, new buildings, additional materials to be worked up, additional workers to work them up. Every £1,000 that the Capitalists invested now has a value of say £1,200. If this Capital is represented by a certain number of shares then clearly the value of these shares rises by 20%. Because the line for the value of Capital rises whilst the line for the Value of Labour-power falls a growing gulf necessarily opens between Capital and labour.
"Capital as not-Labour" and "Labour as Not-Capital"
Again, Marx explains the relevance of this in the Grundrisse, and its something on which many Marxists have fallen into confusion adopting not the position of Marx, but the position of Lassalle and his “Iron Law of Wages”, much criticised by Marx. Many Marxists quote Marx to the effect that he predicted that Capitalism would create a growing pool of misery and poverty. In fact, Roman Rosdolsky, who carried out, perhaps, the most exhaustive study, of Marx’s Capital, concluded that in over 1,000 references there was only one passage that could be interpreted in this way. The immiseration theory is not Marx’s, it is Lassalle’s. In order to understand what Marx is saying, and to understand the diagram above, it is necessary to turn again to what Marx says in the Grundrisse, and to understand the way he uses the term “poverty” and its opposite “affluence”. What Marx says, appears contradictory, if we take the usual meaning of these terms, but, Marx often uses terms in a more precise way than in normal usage – take his usage of the term Capital for instance. Logically, it is impossible for Marx to talk about the “Civilising Mission of Capital” as he does, as continually raising workers living standards and horizons, if he had an immiseration theory. In fact, what Marx says is that no matter how “affluent” workers might become i.e. how much their quantity and quality of consumption might rise, they continually become “poorer” in so far as they are continually deprived of the means of production, which move further and further from their reach as workers. They are consumption “rich”, and Capital “poor”. Indeed, the more their consumption needs expand, and the more they are deprived of Capital, the more they are dependent upon selling their Labour-power, the more actual wage slaves they become, the more tied to and dependent on Capital do they become.
As Marx puts it on p206 “purely subjective existence of labour, stripped of an objectivity. Labour as absolute poverty”, but Marx does not mean poverty in the normal sense here the worker might be rich in income terms what Marx means is then outlined, “poverty not as shortage, but as total exclusion of objective wealth.”
Some time ago in order to make the point I quoted a Chris Rock comedy routine I heard one evening.
The routine went something like this. “There are no wealthy black Americans. There are some RICH black Americans, but they aren’t WEALTHY. Bill Cosby is RICH from all the shit he does, but he ain’t wealthy. Now the white mother-fucker who writes the cheque to pay him for all that shit he does, NOW HE’s WEALTHY.” He went on in similar vein, before “The reason we ain’t wealthy is we spend all our money on rims. We might have the worst car on the block as long as its got good rims. Shit if we hadn’t got a car we’d put rims on our toaster. Now Bill Gates he ain’t got no rims, but he owns Microsoft.”
This is precisely the point that Marx makes. Workers can have high incomes (relatively), but if all that income is spent on consumption then the worker cannot become (WEALTHY) because they can’t accrue CAPITAL. But as Marx points out (though he bends the stick) workers wages are usually so low they can’t save, when they are raised they take the opportunity to expand the sphere of consumption and culture, and, to the extent they do save, the Savings Banks pay them low interest and lend it to Capitalists who use it to make much more money etc. It is only possible to break out of this if instead the savings become Capital.
He says, "… if the worker’s savings are not to remain merely the product of circulation - saved up money , which can be realised only by being converted sooner or later into the substantial content of wealth, pleasures etc. – then the saved up money would itself have to become capital, i.e. buy labour, relate to labour as use-value. It thus pre-supposes labour, which is not capital, and presupposes that labour has become its opposite – not labour. In order to become capital, it itself presupposes labour as not-capital as against Capital; hence it presupposes the establishment at another point of the contradiction it is supposed to overcome. If, then, in the original relation itself, the object and the product of the worker’s exchange – as product of mere exchange, it can be no other – were not use value, subsistence, satisfaction of direct needs, withdrawal from circulation of the equivalent put into it in order to be destroyed by consumption – then labour would confront capital not as labour, not as not-capital, but as capital. But capital, too, cannot confront capital if capital does not confront labour, since capital is only capital as not-labour; in this contradictory relation. Thus the concept and the relation of capital itself would be destroyed.”
And this concept of Labour which is not Labour, Capital which is not Capital is precisely the solution that Marx gives to the problem. He has here subverted the starting point of the Ideal Labour and the Ideal Capital by standing them on their head and relating them not to the Ideal but the material realities. The worker cannot get out of his situation, cannot but be reproduced as Labour through saving, but only through ownership of Capital. How does the worker become the owner of Capital rather than mere savings, precisely in the way Marx refers to in Capital III, in the Critique of the Gotha Programme, and in his Address to the First International, by the setting up of Co-operatives which by their nature are transitional forms because within them Labour is at the same time not-Labour, and Capital is at the same time not-Capital.
Finally, we see the Value of Land/property rising. The reason for this is simple. Although, Land has no Exchange-Value as such – because it has no cost of production – it is bought and sold, does have a price. This price Marx explains is derived from the Capitalisation of the Rent that the land would earn. Because, over time, the total volume of Surplus Value rises, whilst the quantity of land available is fixed the rent – which is merely paid as a portion of the Surplus Value to the landlord by the Capitalist – must rise.
The Two Points
I said I would deal with two points from earlier. Firstly, on the question of the falling exchange-values of commodities. Orthodox economics has as one of its central themes the concept of diminishing returns. It is argued that, at a certain point, the economies and efficiencies, that can be gained from increasing scale, turn into their opposite, and that, at this point, the marginal cost of producing a further unit of output begins to rise. In reality, there is no evidence that capitalist industry reaches this point. If it does in relation to a particular plant then the answer is simple – to build an additional, separate plant. All the evidence we have demonstrates that as production volumes rise, marginal costs fall. However, there are clearly some commodities for which this is not true, and there are periods of time for some commodities during which this is not true. For example, if the world really has, as many oil experts believe, reached “Peak Oil” i.e. the world cannot expand its total output from current levels, then, from here on in, the cost of producing each marginal barrel of oil will rise. It will require more labour-time to discover each new exploitable oil-field, more labour-time to develop the new types of technique and of machine required to extract oil from ever more difficult sources and so on.
The same can be true, for a time, even of similar resources that are not immediately in danger of running out, but which nevertheless require exploration to find them, and long drawn out periods of investment before production can begin e.g. the discovery and operation of new copper mines.
Secondly, I referred to the fact that although Exchange-Values of commodities fall over time we only rarely see periods of deflation i.e. of such falls in the general price level. The first things to say about that is that obviously the general price level covers a whole range of prices, and within it we do frequently see the prices of some types of products falling. But, this is not the real explanation. The real explanation is to look not at absolute price levels manifested in the ticket price of goods, but to look at their relative price level. The reality is that a fundamental requirement of a modern Capitalist economy is not stable prices, but modestly rising prices, which is why the MPC is told to target inflation not at zero, but at 2%. Those rising prices do not reflect real rises in the exchange values of commodities, but only a relative price rise measured in terms of the paper currency in which they are priced. In reality, it is not that the values of the commodities is rising, but that the value of the paper currency in which those prices are denominated is falling.
Why The Capitalist Economy Requires Inflation
I have set out previously how Marx’s theory explains the recent rise in the price of Gold, and in the same blog how Marx demonstrates the nature of Gold as real money, and the inverse relation to it which paper or other money tokens have dependent upon the quantity of them produced. See: Gold
The reason the Capitalist economy requires this steady devaluation of the currency is rooted in the way modern Capitalism works. In the model of the free, Capitalist Market, taught in school, all firms have to take the market price for their products. If one firm tries to charge a higher price it will find its customers abandon it for its competitors. Because no firm is very big, its output can easily be accommodated by other suppliers. But, if this has ever been a realistic picture of the way Capitalism worked, it certainly has not been so for more than a hundred years. In place of these multitude of tiny producers, production has been dominated by a small number of very large producers – oligopolists.
The US economist, Paul Sweezy, explained the consequence of this with his theory of the so called “kinked demand curve”. See: Kinked demand Curve
The consequence is that, where a firm needs to raise prices, to cover costs, in order to maintain its profits, it will be prepared to do so even if this means it might lose some market share. In reality, it will hope that its use of branding and other advertising techniques will minimise if not prevent such loss, because consumers will not see its competitors’ products as a direct substitute for its own. However, an oligopolist firm will NOT reduce its prices for the purpose of securing a greater market share over its rivals, because it can be confident that its competitors will follow suit, and so will begin a destructive price war, which will reduce the profits of all concerned. As David Laidler in his standard texbook on Economics, “An Introduction to Microeconomics”, says, this behaviour can, in fact, be observed through empirical study. So Monopoly Capitalism has a vested interest in avoiding such falls in nominal prices, especially at a global level where they can have the consequence, now associated with deflation, whereby consumers hold off spending in the knowledge that prices will be lower in the future, thereby sparking a downward spiral of economic activity and prices.
When the age of Monopoly Capitalism dawned then, at the end of the 19th Century, one of the things that these Monopolies required was a State institution such as a Central Bank whose task it was to so manage the issue of paper currency so as to ensure that nominal prices did not fall. We see the Federal Reserve, established in 1913, which from the beginning undertakes this function. There is another reason for having a Central Bank issue sufficient money tokens to devalue them when necessary. Falling commodity values, relative to the Value of Labour Power, are all well and good during periods in which Capital is expanding, and the volume and rate of Surplus Value is increasing. But, during periods when that is not the case, it is not as easy to push down wages as it is commodity values. Not only has a certain level of consumption become enshrined in the cost of production of Labour-Power, but workers will resist nominal wage cuts, even where the prices of commodities are falling. Keynes and other economists theorised this “stickiness” of wages in a downwards direction. If commodity prices fall, whilst wages rise, during such periods, the consequence is a squeeze on profits, and on the Rate of Profit. Capital found that the trick was to use what Keynes called “Money Illusion”. Workers will resist nominal wage cuts far more than real wage cuts. If Money wages rise, but rise by less than prices, or, more precisely, if unit labour costs rise less rapidly than prices, then Capital can continue to maintain the Rate of Profit. This is what Mises and Schumpeter euphemistically referred to as “forced saving”.
In fact, that is what has been witnessed over the last 25 years. In the US and UK, in particular, real wages were stagnant or falling even though nominal wages were rising. Commodity prices were falling too, in fact quite sharply, as a result of the new production from China and Asia. Both were not apparent, because during that time a huge amount of liquidity was pumped into the economy, vast quantities of money tokens and credit oozed out devaluing the money against these other prices giving them the appearance of stability or rising money prices.
Fig. 2 Shows the difference over this period.
The picture appears similar, but rather than values shows prices. It is really a question of degree. The main feature is that the rate of rise of Capital and of Land and Property is steeper. Why? The reason is to do with the liquidity. The liquidity pumped into the market enables the money illusion to be pulled off, for real wages to fall whilst nominal wages rise thereby enabling the Rate of Profit to be maintained or even to rise. So the diagram shows nominal wages rising slightly, whilst commodity prices rise slightly faster. But, the excess liquidity pumped into the system has another consequence. It is not all used for consumption – productive or unproductive – a large proportion of this liquidity finds its way into speculation. So, speculation in shares pushes up share prices way beyond what the underlying Capital Values actually justifies. Similar speculation in Land and property brings about a similar rise in its price.
Moreover, the picture becomes even more complicated. Marx argued that the only way for workers to break out of their condition was for them to cease being “Labour”, and to become also “Not-Labour” as set out above. That meant not just accumulating savings, but accumulating Capital. He most notably argued that that should be effected by the setting up of Co-operatives, but in Capital he also proclaimed that the Joint Stock Company was also a transitional form of enterprise to the new socialist society, precisely because its ownership could become diffuse. The modern equivalent is the Public Limited Company, and today millions of workers do own shares in these companies either directly, or through a Unit Trust, or else through their Pension Scheme. During the last period, as this huge quantity of liquidity pushed up residential property prices, even workers, through these various channels, participated in the speculation that drove not just property, but also share prices higher.
But, this bubble in asset prices was just as much a money illusion as that which enabled Capital to maintain and increase the Rate of Profit, by bringing about falling real wages. And as capitalist traders know there is always, at some point, a reversion to the mean. The Bubble had to be followed by a bust.
That is the process underway. It will inevitably see those asset prices which were inflated, Shares and Property, fall significantly – probably by more than they need to before coming back. The other main form of Capitalist Property – Bonds – are also likely to fall. Bonds are issued by companies and governments against debt. In risky times the price they can sell these Bonds for falls, and hence the Interest paid on them rises. At the moment Government Bonds are selling for high prices, paradoxically, for the simple reason that investors do not want to put their money anywhere else, because the risk is too great. If some governments begin to default on this debt – for example as Russia and some Latin American countries did in the 1990’s – then investors will begin to rush out of Bonds too, forcing their prices down, and interest rates up, leaving the poor Joe Public who has been sold some Unit Trust Bond Fund nursing huge Capital losses. Already, they are likely to suffer those kind of Capital losses on such Bonds and Funds issued by some of the large, but bankrupt companies like GM and Ford. In the meantime, the smart money will have got out and bought as much Gold as it can get its hands on.
The other danger, for anyone holding such Bonds, is that once the measures being taken to stave off recession begin to take effect then the huge volumes of liquidity pumped into the world economy can have no other consequence, but to cause inflation. In every such situation in the past where Government’s have accumulated huge debts – and this is the answer to the Tories arguments about how Brown’s borrowing will be repaid – they have cleared them by effectively paying back their creditors with funny money, with currency that has been seriously devalued through inflation. The smart money understands that and already has been concentrating its purchases of Bonds not on the long term Bonds, but on the short term Bonds of 3 month duration to minimise this risk. Again it will be Joe Public, or even Joe the Plumber, who will get screwed, left holding the long bonds in his Unit Trust and Pension Scheme.
Ultimately, this Casino, like every other, is rigged in the interests of the Casino owners, in this case the Capitalist class. Workers cannot compete in that Casino on the same basis as the capitalists as things stand. But, they can establish their own card school. They can set up Co-operatives that function not in accordance with the principles of gambling, but on the firm foundation of producing real wealth, the ownership of which, being in the hands of the workers that produce it, is not available for the Capitalist jackals to bet on. Instead of gambling their own money away, in a bet on whether this piece of fictitious Capital, represented by a share certificate, Bond certificate or property deed, might go up or down in price tomorrow, they can instead invest their money in such Co-operative enterprises, in buying real machinery, real materials and hiring real workers to produce real wealth to be shared out amongst them, strengthening their economic and social position compared to the capitalists.
Let, the Capitalists gamble away their wealth if they choose. Workers should instead begin to invest their Labour-power, and their savings in their own Co-operative enterprises, in Co-operative production, and banking, and services, in the establishment of a multiplicity of forms such as Credit Unions to meet the specific needs and requirements of workers in every specific situation, proving that there is a rational, credible alternative to the lunacy of the Capitalist Casino.
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