Saturday, 31 July 2010

Northern Soul Classics - Wade In The Water - Ramsey Lewis

Actually, a piece of modern jazz that shows the range of "Northern Soul" from Country singers like Charlie Rich and Roy Hamilton, through to pop singers like Wayne Fontana! This is a classic dancer, not a roll back the carpet, all guns blazing dancer, but one that enables a good dancer to get through the full repertoir of nifty footwork.

This is the best known Norther sound from Ramsey Lewis, but he also did instrumental versions of a lot of sould classics, from Sam & Dave's "Soul Man, through to Dobie Grey's "The In Crowd".

Friday, 30 July 2010

Is The US Heading For Deflation?

Over the last decade there have been several warnings about the possibility of deflation in the world's developed economies. Its not unknown. Actual price declines were quite frequent in the 19th Century reflecting large improvements in productive capacity. In the 1930's prices declined, more than wages during the Depression, and asset prices such as houses and share prices dropped 90%. Following its bubble, Japan saw deflation for more than a decade during the 1990's, and continues to see periods of deflation, despite huge amounts of money printing by Japanese authorities alongside massive fiscal stimulus.

Its probably fair to say that without the kind of massive money printing we have seen by developed economies over the last 30 years, actual consumer prices would have fallen, a reflection of the shift of much manufacturing production to very low cost producers in China and the rest of Asia. In the US, the huge injections of liquidity, alongside its massive fiscal stimulus, managed to bring its recession ot an end quickly, and saw prices begin to rise. But, the effects of the stimulus appear to be wearing off, and there are rumours that the federal reserve once again sees the risk of deflation ahead.

Now a former Federal Reserve inflation hawk, James Bullard, has told CNBC that he now sees deflation as a much more serious threat than inflation.

The US is different to the UK, or other European countries. The UK is a small economy, which is dependent for many things on imports. As I've pointed out previously, I see a strong potential for an asset price deflation, particularly houses, reversing the previous bubble, at the same time as a spurt of consumer price inflation, fuelled by loose money, and the rising costs of imported goods from China. But, the US is a huge economy in its own right. Although it imports a large amount of goods from China, the US still has a considerable manufacturing base, as well as a large agricultural sector, not to mention its high technology industries. The US has a potential to avoid the kind of imported costs and prices that the UK, and other European countries do not. Its ability, on the other hand, to avoid deflation is not so clear. Ben Bernanke has said they could drop dollar bills from helicopters, but to be honest, the amount of money already pumped into the economy is coming close to that anyway.

Some US soothsayers think even that might be the least of the US's problems.Bob Prechter the well-known Elliot Wave theorist who predicted the 1982 on, Stock market Boom, and the 87 Bust believes that the Dow Jones could fall from its current 10,000 level down to just 1,000! He thinks that the US and Europe are in for a period of deflation and depression, which will be the worst in 300 years. Despite massive dollar printing, he believes the deflation will leave paper dollars, wherever they are appreciating in value against other assets.

The other well-known Bear Marc Faber responded in his Boom, Doom and Gloom Report to Prechter's analysis. Faber On Dow 1,000

I agree with Faber that, if the Dow falls significantly, or there are other similar shocks, Central Banks will step up their money printing. But, money printing on its own, as keynes said it would, has proved inadequate. It takes Governments to introduce large fiscal policies to spend some of that money, to get the economy going, so that the private sector will begin itself to begin to borrow and spend. The problem for Faber's position is that what is in the interests of Capital, and what the Capitalist State attempts to do, still have to overcome the problem of Governmental power. We are witnessing that in the EU now, with the inability of the European Capitalist Class to get the political backing for an EU State that is necessary for the EU wide economic solutions to work, and in Britain and other countries, where right-wing Governments having got elected on the basis of populist policies of cutting the size of the State, find themselves hostages to fortune, and having to now implement those policies against the interests of capital, and in the face of opposition from sections of the State.

We are living in interesting times as Faber's suggestions about what to do if the DOW did hit 1,000 suggest. One suggestion from Faber is buying a self-sustainable farm in the middle of nowhere surrounded by high voltage fences and barbed wire and equipped with booby traps and an arsenal of machine guns, hand grenades and armed vehicles guarded by vicious Dobermans. Workers might want to be thinking about their own solutions!

We Dive At Dawn

In my post Wages & House Prices I pointed to the analysis on BBC's “Money Watch” programme about the relation of house prices to wages being out of whack. The long term average is 3.5, but now even though we are in such dangerous economic times, and house prices were supposed to have fallen due to the credit crunch, the fact that now buyers are supposed to show that they can actually save a reasonable deposit, and that they have some chance of paying the mortgage, the relation is nearly 50% higher than that at 5. Just to get to the long-term average, prices would have to fall by a third, or wages would have to rise by more than 40%. In fact, just as such relations always spend some time above the long-term trend, in order to get that trend, to get that average, they also have to respond by dropping below it.

So, the likelihood is that when the relation is restored then its likely to drop to 2.5, or 2 for a while. That would imply a much bigger drop in house prices, or huge rise in wages. Under current conditions, its more likely there will be no real rise in wages, certainly not in disposable income, far more likely as the effects of the Liberal-Tory Budget kick in, the job losses, and cuts will see wages and other incomes fall significantly in real terms. Recessions are never caused by collapses in the housing market, it is always the other way round. But, a recession under way, that causes a house market crash, can give that recession a further downward twist. Just look at Spain now, where the housing market crashed after the Credit Crunch, and recession, burst the property bubble on which the Spanish economy had been built. That caused construction to stop, throwing tens of thousands of building workers on the dole, and has left the Cajas with huge amounts of debt on their books, for property they technically own – on the basis of mortgages to individuals and property developers – but, as with the sub-prime crisis in the US, no one is prepared to value on a true mark to market basis i.e. not what is the theoretical price of this property, but how much could you actually sell it for, here and now.

When I was in Spain a couple of months ago, I was shown some fairly new four bedroom villas, on large plots with pools, where the asking price was 230,000 euros, but the estate agent showing us round said, don't take any notice of that price, the sellers will take at least 60 – 70,000 euros less than that! According to Paul Mason, Barclays economists best guess is for a further 25% fall in Spanish prices from here, but the reality is it could well be much more than that in an economy with 1 million empty new homes, 20% unemployment, and an austerity package only just starting! But, also the question is 25% more off what? As the above shows, and this was true with the sub-prime crisis in the US, no one is facing reality, the actual asking prices bear no resemblance to selling prices, and for any kind of market to work, there has to be some chance for what economists call, “price discovery”. That is it must be relatively easy and cost free for buyers and sellers to determine within reason, what they should be asking for what they are selling, and for buyers to know if what they are being asked to pay is reasonable. Without that, what happens is, for example, a Credit Crunch. Or in this case a property crunch, sellers will be reluctant to sell, but may have to because of their financial position, but buyers not only will be reluctant to buy, but will have every reason to hold back from buying so long as there are forced sellers, and so long as prices, therefore, continue to drop like a stone into a bottomless pit.

As the graph above shows that could be the kind of scenario about to unfold here. Economists often speak about being interested in the “second derivative”. That is if you were talking about a car, not how fast it is going, but whether it is accelerating or decelerating, the third derivative being how quickly it is accelerating or decelerating. The graph shows that although house prices are higher than they were a year ago, they are lower than they were a month ago. It shows that as an annual figure the rate is falling, it is decelerating. What is more significant here, though, is that third derivative, the rate of change of how quickly it is falling. Look at the graph to see the previous fall, and you can see the trend.

But, there is a difference between these two drops. Firstly, there was a plateau in 2007 of price changes, and the fall, which reflected the tightening of mortgage and other availability of money due to the unfolding Credit Crunch after Northern Rock, is quite deep – dropping by nearly 20% by the start of 2009 – but drops fairly steadily. The reason for that is that although, the Credit Crunch really started in August 2007, after Northern Rock, the Bank of England, and other had already started throwing huge amounts of money at the problem. They bailed out Northern Rock, which was only a small bank, to the tune of half the NHS Annual budget, for instance. As a result, the UK economy was actually still growing quite strongly for the rest of 2007, and into 2008. It was still growing, just, even in the second quarter of 2008, just before the collapse of the financial system. In fact, in the Summer 2008, I was writing blogs, about the concern about inflation, and the fact that the Bank of England was raising interest rates!

So, if house prices were falling steadily due to the inavailability of credit, but whilst the economy was growing, whilst confidence was quite high – most economists believed after the shock of Northern Rock that Central Banks had dealt with the Credit Crunch – as unemployment fell, and wages rose, imagine what happens when credit is unavailable, but when confidence is low, when wages and other incomes are falling, when disposable income is squeezed hard due to rising unemployment, falling wages, and rising prices. Worse, you might say, well we had that after the Credit Crunch started, and it set off the recession, but house prices only continued to fall a bit more, and for only a few months, and then started to rise again. True, but the immediate result of the Financial crisis, was that the Bank of England, which had been raising rates in 2008, slashed them, as did every other central Bank. In the UK, down to just 0.5%. That resulted in Banks and Building Societies slashing their mortgage rates, which meant that tens of thousands of homebuyers with variable rate mortgages saw their monthly repayments cut to a fraction of what they had been. Many who had been on the point of default, were saved as a result. In fact, as I pointed out in my post, Aftershock, the average homebuyer had the equivalent of something like a 20% pay rise, just from the cut in their mortgage payments! In addition, the Bank introduced open money printing – Quantitative Easing – to push even more billions of pounds into the economy. Short of following Ben Bernanke's suggestion that they could defeat deflation by printing money and throwing out of helicopters, its hard to see how much more they could have done to give people money to spend on such things. In reality interest rates were already negative. Its no wonder that the decline was halted, just as the economy itself began to stop falling, and then recover.

But, therein lies the problem, a problem that Nouriel Roubini has referred to. If the economy continued to grow as a result of the stimulus already provided, then incomes would rise, debt would get paid down, and so on. But, if the stimulus is now taken away, before the recovery is firmly established, there is the possibility of a double-dip. The dangers of that, or even just a serious slow down, should be obvious. The very things that have propped up the housing market over the last year or, that limited the fall in prices, and underlay their recover over the last year, would disappear overnight. But, now the tools available for dealing with the problem would also disappear. When house prices were falling in 2008, interest rates were being slashed, and means of putting money in buyers pockets found. Today, interest rates can't go any lower, and with inflation rising sharply, at some point, banks are likely to raise not cut interest rates. At such minimum rates that exist at the moment, only a very small increase will result in a large percentage rise in repayment costs. As wages are cut, and inflation rises, affordability will decline.

The basic outlines of this, and the real problem/situation lurking beneath the waves has already been pointed out by RBS as I said in my post RBS & Monster money printing, and in this Independent article.

In other words all the conditions are present for a double-dip, or serious slowdown in economic activity, the pressure on wages, and disposable incomes will increase, the leeway that banks have offered – in this country as much, and for the same reasons as the cajas in Spain – will come to an end, with a consequent need to revalue their Balance Sheets, as mortgages are foreclosed and property is sold off in a firesale, causing prices to drop precipitously. This is coming at a time when the ECB has just conducted its “Stress tests” on European Banks that everyone believes was a sham, and public relations exercise to try to convey confidence in a European Banking system that everyone knows has very serious problems. As David Blanchflower told CNBC, the tests didn't pass his, “Kick it, Punch it, Poke It” test.

If RBS are correct, and that is combined with a sharp fall in Stock Markets and Commodity Markets, their prediction of 2% UK Bond Yields as opposed to the current near 4% would mean a huge rise in Bond prices which would also suck funds out of those other markets, then the fall in asset prices would have a significant wealth effect. Economists believe that as well as income it is people's perceived wealth that also plays a part in their consumption patterns. The rise in house prices was an obvious example of that, as people thought they were better off, borrowed against their house, and increased spending. But, if their wealth is declining, or they think its going to decline, they are likely to try to balance that by spending less, and saving more.

In short, even if a double-dip is unlikely – and they are very rare – the consequences of the Liberal-Tory policies is that there will be an imminent, and significant economic slowdown, in conditions where the tools to reverse it no longer exist, and where the consequentness of that slowdown on asset markets, particularly housing, will be severe, which in turn will feed back into the economy and likely lead to a double-dip, at least. Over recent months, there has been evidence that there has once more been a tightening in credit markets, though as yet nothing like that in the Credit Crunch. That is despite, though, all of the QE, the stimulus, and the cajoling and other measures by Governments and central Banks to get Banks to lend.

The suggestion by Vince Cable, who should know better, and the Liberal-Tories that the Banks are refusing to lend when they should be is ridiculous. How do banks make profits? Essentially, by borrowing money cheap, and lending it expensively. Over the last year or so, they have been able to borrow it essentially for nothing, whilst lending it out at 5 or 6%. That's why their profits have risen spectacularly! To accuse the banks of not lending when they should is like accusing Toyota of not selling cars to people they should. The reason both do not sell is because they have good reason to believe that the buyer will not pay up! In fact, as the Independent article showed, at the moment the Banks are probably sitting on a load of loans that will go bad. These are very troubling signs. The latter is just one indication of politicians wanting to close their eyes to economic realities in the hope they will go away, and in the hope that they can make the rest of us believe that everything is if not okay, then at least it is under their control. The European bank Stress tests were just another example of that. Usually, that means something very nasty is lurking beneath the surface.

Europe has a bifurcated economy with places like Germany doing well, but with some economists arguing that countries like Greece, Spain, and Portugal might have to leave the Eurozone, and that some like Greece are likely over the next couple of years to default if they don't leave. Already, the austerity packages are having an effect, Spain's unemployment is rising again according to latest figures here . As an integrated economy with the vast majority of trade internal between EU members, Northern Europe, including Germany and the UK, will be deeply affected by any slowdown in Southern Europe, and certainly by any new economic or financial crisis. The US is also slowing down, and there is discussion of a new economic stimulus package. But, Obama has lost his appeal for many US voters. Healthcare reform drained large amounts of support from workers who saw it as raising their taxes, and undermining the quality private healthcare many get through union negotiated company insurance schemes. At the same time, the bail-out of the banks, stood in stark contrast to the problems many Americans had in getting jobs, or raising wages. From the other direction the Right-wing have been able to use that to attack his “Socialist” big state measures, and to point to Europe as an example of the need to cut the budget deficit rather than introduce a new stimulus. Even in China, and Asia, where the economies are booming at around 10% - and hence Cameron's willingness to slag off Pakistan to get a few economic crumbs from India's business community – policymaker's are worrying about the opposite danger of overheating, and are tightening credit, and withdrawing stimulus.

Some “Chartists” - not the 19th century revolutionaries, or their 1970's namesakes – analysts who try to predict how markets are going to perform on the basis of looking at charts of previous trends, have referred to what is called a “Death Cross”, some arguing that the same chart patterns that exist now appeared just before the Great Depression. Personally, I think its baloney. Charts can illustrate patterns, but its necessary to study the underlying causes of the movements to identify whether those same causes repeat on some kind of cycle such as the Business Cycle, the Innovation Cycle, or the Long Wave Cycle. All of those things have material bases in production. But the Stock Markets, whilst obviously tied to what is happening in the real economy, have a life of their own, driven by psychology. Just because two lines crossed on a graph in a certain pattern in 1929, and a similar pattern appears today – and exactly what is similar – does not mean that the same economic events will play out today. They might, but only if the underlying economic and material conditions are the same, and if every economic and political actor responds to them in exactly the same way. Chances of that are slim – though it has to be said that the Liberal-Tory ideology today of cutting, and balanced budgets is remarkably similar to the same mistakes made by Governments and policy makers in 1931.

Thursday, 29 July 2010

Mondragon Co-op Increases Employment 400% in 20 Years

As an indication of the growth of Co-operative Production and Distribution, the above graph shows the spectacular success of the Mondragon Workers' Co-op, based in Spain's Basque Region.

A recent press release on Mondragon's , Technology Center Konik and Onkologikoa-Oncology Institute of Kutxa, to develop new Cancer Treatments, demonstrates the kinds of high-value, new technology areas that Co-ops can develop effectively. If we are to develop effective Consumer Co-ops, Commissioning Health and other Welfare Services from new Worker Owned Public Service Co-ops, these are the kinds of new industries that workers, particularly in high-wage, developed economies, will need to move into, both to protect jobs and wages, but also to ensure that such Co-operative Public Service provision does not suffer the same problem that the NHS and other State Capitalist enterprises suffer - that of being ripped off by the Capitalist Pharmaceutical companies and other suppliers.

Tuesday, 27 July 2010

Wages, Prices And Profits - Part 4

Once again to understand this process it is necessary to view it in terms of the Long Wave. A feature of the long wave noted by some theorists is that the during the Summer Phase of the cycle, people have become used to greater affluence, and the changes in consumption patterns, are also reflected in changes in psychology, the development of new ideas becomes more entrenched - K-Waves This is consolidated further in the Autumn, or Plateau Phase, or Crisis of the cycle. We can see in this mirrored the idea developed by Marx of the historical or cultural aspect of the value of labour-power, as embodying for any country at any particular stage a given standard seen as necessary for the reproduction of labour-power.

In the period of the last Long Wave Boom from 1949-74, we saw in Britain, for example, a rapid increase in accumulation. The demand for labour-power rose sharply. The initial demand was met partly in the 1950's by the encouragement of women into the labour market, and the introduction of large scale immigration. The Spring Phase of the cycle normally sees demand for labour-power being met out of the RAL, or these other sources, and the introduction of new production techniques that increase productivity can limit the extent to which labour can raise wages. But, as the cycle progresses these avenues dry up, and demand for labour-power pushes wages higher. Where strikes do occur, then, as was the case in the late 50's early 60's, these are often short-lived, sometimes only a matter of hours, in the form of wildcat strikes, as capital is more able, and more willing to make concessions out of rapidly rising profits. In fact, as another example of how marginal trade unions are to this mechanism, these short-lived strikes, at this phase, are in stark contrast to the long drawn out strike action typical of the later period, when far from advancing the workers position, the need is to try to limit its decline. So, the periods of long duration, more bitter industrial action occur in the late 1970's, and early 1980's, when the Long Wave cycle has turned downwards, and when capital accumulation has slowed, or even reversed.

As Trotsky describes these processes,

"But a boom is a boom. It means a growing demand for goods, expanded production, shrinking unemployment, rising prices and the possibility of higher wages. And, in the given historical circumstances, the boom will not dampen but sharpen the revolutionary struggle of the working class. This flows from all of the foregoing. In all capitalist countries the working-class movement after the war reached its peak and then ended, as we have seen, in a more or less pronounced failure and retreat, and in disunity within the working class itself. With such political and psychological premises, a prolonged crisis, although it would doubtless act to heighten the embitterment of the working masses (especially the unemployed and semi-employed), would nevertheless simultaneously tend to weaken their activity because this activity is intimately bound up with the workers’ consciousness of their irreplaceable role in production.

Prolonged unemployment following an epoch of revolutionary political assaults and retreats does not at all work in favour of the Communist Party. On the contrary the longer the crisis lasts the more it threatens to nourish anarchist moods on one wing and reformist moods on the other... In contrast, the industrial revival is bound, first of all, to raise the self-confidence of the working class, undermined by failures and by the disunity in its own ranks; it is bound to fuse the working class together in the factories and plants and heighten the desire for unanimity in militant actions.

We are already observing the beginnings of this process. The working masses feel firmer ground under their feet. They are seeking to fuse their ranks. They keenly sense the split to be an obstacle to action. They are striving not only toward a more unanimous resistance to the offensive of capital resulting from the crisis but also toward preparing a counter-offensive, based on the conditions of industrial revival. The crisis was a period of frustrated hopes and of embitterment, not infrequently impotent embitterment. The boom as it unfolds will provide an outlet in action for these feelings."

Of course, this explanation of the way in which the normal process of capitalist development results in higher real wages, without in any way contradicting the drive of capital to minimise the value of labour-power, in order to maximise profits, or the normal tendency for the organic composition to rise, applies in conditions where capital accumulation is taking place, and in particular under those conditions of rapid accumulation typical of the Long Wave Boom. In a globalised economy, capital accumulation can occur rapidly in one area, consistent with the reverse in other areas. The de-industrialisation of Britain, in the 1980's, at the same time as the industrialisation of Asian economies is a partial example, of that. Of course, even during the Long Wave downturn, there is usually still growth, and capital accumulation, just at a slower pace. The capital accumulation during such a period is intensive and labour-saving, rather than extensive.  Hence the patterns of consumption and production formerly established, and the incorporation of these into a new definition of what comprises the necessary labour-time required for the production of labour-power, are not reversed. So the living standards established during the 1950's and 60's, were not turned back to those of the 1930's, during the Long Wave downturn of 1974-99, just as, even in the 1930's, living standards established during the Long Wave boom of 1890 – 1914, were not returned to those of the Great Depression of the 1880's.

There is no theoretical reason why that has to be the case. It is quite possible that a position can be reached where capital accumulation, in Britain, for instance, becomes negative. In other words, there is net negative investment. The reasons that could occur are obvious. High rates of profit in Asia, or developing Africa, could suck in capital, whilst low profitability, in the UK, resulting from relatively high wage rates, deteriorating infrastructure, as a result of public spending cuts (which raises costs for capital due to failing roads, telecoms, broadband, as well as under-educated, unhealthy workers), high interest charges, resulting from the build up of debt, used to keep the economy afloat, during the 1980's and 90's, and so on leads to a drain of capital to more lucrative sites in Asia, Eastern Europe, Africa and Latin America. The consequence of such a process would be a reverse of the mechanism outlined above. Capital contraction would mean a continual excess supply of labour-power, and falling real wages.

As stated in previous posts, unless production is shifted to higher valued output, and the consequent employment of more complex labour, capable of competing in a global market place, occurs, some variation of this process is likely, or at least a much reduced level of capital accumulation with consequent effects on wages. Under those conditions, the extent to which trades unions and “class struggle” can raise workers wages, or even maintain them will become apparent, as is happening in Greece currently.

Back To Part 3

Wages, Prices And Profits - Part 3

Of course, a central tenet of Marx's analysis is that capital always produces a Reserve Army of Labour, a pool of unemployed from which it can draw during such periods of expansion. By taking this into consideration, we can then relax the constraint of full-employment. Examining this mechanism, the RAL clearly plays a crucial role. How crucial can perhaps be gauged by looking at the opposite case. In Capital, Marx quotes several sources speaking about the situation even in the 18th Century where capital found it difficult to obtain labour-power, because the majority of people remained employed as peasants on their own small plots of land. Those landless labourers who did sell their labour-power, still retained a connection to the countryside, and many were able to provide for many of their needs, simply through use of the common land. As a result, they only offered to sell their labour-power for such an amount of time, frequently just 3 days a week, as was enough to provide the money to meet their additional needs. This lack of supply kept wages high to the extent of making profits hard to come by, and capital accumulation slow. Marx says that during this phase, the industrial capitalists, who were forced to work themselves, were barely distinguishable from their workers, and often looked more down at heel.

The anonymous author of “An Essay on Trade and Commerce, containing Observations on Taxes etc.” 1770, comments,

”That mankind in general are naturally inclined to ease and indolence, we fatally experience to be true, from the conduct of our manufacturing populace, who do not labour, upon an average, above four days in a week, unless provisions happen to be very dear.”

He goes on demonstrating the link between this ability of the worker to work only that time he finds necessary to his liberty.

“But our populace have adopted a notion, that as Englishmen they enjoy a birthright privilege of being more free and independent than in any country in Europe. (Such notions he can never support amongst the workers in practice) …The labouring people should never think themselves independent of their superiors… It is extremely dangerous to encourage mobs in a commercial state like ours, where perhaps seven parts out of 8 of the whole, are people of little or no property. The cure will not be perfect, till our manufacturing poor are contented to labour six days for the same sum which they now earn in four days.”

This was what the 1801 General Enclosure Act achieved. It threw millions off the land, and took away use of most of the common land, so that workers had no choice but to sell their labour-power for whatever they could get for it. In the initial period of industrialisation proper, at the beginning of the nineteenth century, capital required a vast number of unskilled workers. It found them ready at hand.

The extent to which real wages were reduced can be seen in the fact that average life expectancy halved. Marx quotes one source in relation to diet,

J. Wade in his “History of the Middle and Working Classes" remarks,

“From the statement above (i.e. in relation to the Statute) it appears that in 1496 the diet was considered equivalent to one third of the income of an artificer and one half the income of a labourer, which indicates a greater degree of independence among the working classes than prevails at present; for the board both of labourers and artificers, would now be reckoned at a much higher proportion of their wages.” (Pp 24,25, and 577)

Minimising the wage bundle they consumed, was no problem, because they did not need educated workers, and as it killed off one supply of workers through under-nourishment and over work, it simply replaced them from the vast reserve army, which the land clearances had created. Marx quotes the speech by Ferrand in Parliament,

“This system had grown up unto a regular trade. This House will hardly believe it, but I tell them, that this traffic in human flesh was as well kept up, they were in effect as regularly sold to the (Manchester) manufacturers as slaves are sold to the cotton grower in the United States…. In 1860, the cotton trade was at its zenith…. The manufacturers again found that they were short of hands…. They applied to the ‘flesh agents’ as they are called. Those agents sent to the Southern downs of England, to the pastures of Dorsetshire, to the glades of Devonshire, to the people tending kine in Wiltshire, but they sought in vain. The surplus population was ‘absorbed’.” (Ferrand’s speech in the House of Commons 27th April 1863.)

This last reference to “absorbed relates to comments made by the cotton manufacturers in 1834. Ferrand in his speech gives details of the way in which the intolerable conditions of the workers was affecting their life expectancy. He commented,

“The cotton trade has existed for ninety years…It has existed for three generations of the English race, and I believe I may safely say that during that period it has destroyed nine generations of factory operatives.” (ibid.)

Faced with this shortage of labour the manufacturers had applied to the Poor Law Commissioners that they should send the “surplus population” to them with the explanation that they would “absorb and use it up” to use their own words. Hence Ferrand’s reference.

So, during the first part of the 19th century, the huge RAL means that capital accumulation can carry on apace. The increasing demand for labour-power can be met by simply “absorbing” the surplus population released from the land. The value of this labour-power falls, as a result of the cheapening of wage goods, meaning that capital not only extracts absolute surplus value through the prolonged working day, but increasingly relative surplus value. There is no need for wages to rise, because labour supply continues to exceed demand. There is no major shift in society's production function towards wage goods, and consequently it is in capital goods and luxury goods that production is driven towards. It is only when accumulation has proceeded to such a degree, and this massive RAL has been “used up”, that relative shortages of labour-power arise, and the kind of mechanism described above can begin to operate effectively.

A similar sequence can be seen in most processes of industrialisation. Certainly, the recent history of China, of drawing in vast numbers of peasants to the towns fits that pattern, and the current move towards much higher wages fits that pattern.

As David Pilling put it in the FT, the authorities are reflecting in their statements a basic reality. He says,

“The years of an endless supply of cheap labour, on which the first three decades of China's economic lift-off was built, are coming to an end. That is partly demographic. Because of China's one child policy, the supply of workers under 40 has dwindled by as much as a fifth. Fewer workers means more bargaining power.”

But, the RAL is not the end of the story. In 19th century Britain, when what was required was a mass of unskilled workers, or similarly in China today, the existence of a RAL is significant. But, as Marx points out, not all Labour is the same. Increasingly, as capital develops a process of combined and uneven development arises. More mechanised production means that formerly skilled jobs, become unskilled and also less labour intensive. But, that same process means that the demand for new types of skilled worker arise, developing the machines and techniques that facilitate that mechanisation, or else in maintenance and repair, in supervision and so on. One consequence of the specialisation of the division of labour is that workers have to be increasingly educated and trained to do specific tasks, to create specific use values. The fact, that a RAL exists, therefore, does not mean that the individual workers within it, are either of the right kind, or in the right place.

An accumulation of capital might then result in a rise in wages of specific workers even under conditions of significant unemployment. That appears to be the case in the 1930's when the development of new industries in the Midlands and South-East, led to a demand for particular types of labour-power, and saw relatively high wages, and rising living standards, including a demand for housing, and newly available consumer goods from those workers.

In short the conditions under which the RAL can affect this mechanism are limited. The kinds of size of RAL that existed in the early 19th century in Britain, or existed in China 20-30 years ago are effectively limited to the commencement of a period of rapid industrialisation, and one of the conditions of it. But, the very process of rapid industrialisation quickly “uses up” the majority of that RAL, and a situation of equilibrium is established. Once established, although capital can increase the size of the RAL, by all the methods Marx illustrates, particularly in response to rising wages, that process is drawn out, and really only capable of preventing wages from rising at the expense of capital accumulation, not of preventing real wages rising as a result of capital accumulation. Moreover, the more technological capitalism becomes, it is only where there is an excess of the required labour-power that the RAL can affect this process.  This is one reason that all developed capitalist economies developed welfare states starting towards the end of the 19th century, and why China is moving to do so today.

Back To Part 2

Forward to Part 4

Wages, Prices And Profit - Part 2

“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.”

“I think I have shown that their struggles for the standard of wages are incidents inseparable from the whole wages system, that in 99 cases out of 100 their efforts at raising wages are only efforts at maintaining the given value of labour, and that the necessity of debating their price with the capitalist is inherent to their condition of having to sell themselves as commodities. ... the working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market.”

Perhaps the most obvious empirical evidence against the idea that workers living standards rise as a result of distributional struggle is the fact that the majority of workers do not belong to trade unions. On average, the percentage of unionised workers, in Britain, is around 25%. At best, such an explanation could only account for rising living standards for unionised workers. But, even there, a look at the statistics shows that, in most years, only a small minority, even of these unionised workers, are involved in anything that might be described as “class struggle” (a misnomer because, as Lenin says, arguing against the Economists, any such struggles, are only sectional not class wide). Most of the time, wages rise as a result of straightforward collective bargaining, without workers resorting to strikes, or any other form of industrial action. That is employers concede the agreed pay rise rather than having to be forced to do so. In many cases, especially with larger employers, collective bargaining is itself seen as merely a more rational means of arriving at such agreements than having to negotiate with workers on an individual basis. But, it is clearly the case that elsewhere, workers receive pay rises even where they are not in unions, and where no such collective bargaining agreements exist.

That does not appear the case since 2008, because of the imposition of austerity, and an active attempt to hold back economic growth, and the demand for labour-power, which would have caused interest rates to rise, and again caused asset prices to crash.  But, prior to 2008, wages were rising sharply.  It may well be the case that workers in unions enjoy higher wages than non-unionised workers, but, in large part, that appears to be more due to the fact that the highest instances of unionisation are in large, as opposed to small, enterprises, which in themselves are able to pass on some of the advantages of their own size to the workers. That is clearly not always the case, as Wal-Mart demonstrates.  But, Lenin's analysis in "The Development of Capitalism In Russia" showed the same profile that the larger the enterprise, the better the wages and conditions for workers.

The other empirical evidence in relation to that is the experience where trades unions themselves have been banned. In Germany under the “Anti-Socialist Laws” of the 19th century. Yet, again workers living standards in Germany rose quite strongly during the latter part of that period as German capital experienced rapid growth. A more recent example would be China, where although “trades unions” are not banned, independent trades unions are. The state run unions have acted to control any industrial action by workers, and yet workers living standards again have risen sharply. At the beginning of the 19th century, as Marx shows in Capital, the consequence of the General Enclosure Act of 1801, was to drive millions of peasants off their land and into the towns, creating, for the first time, a mass, available working class, for capital to exploit. Living standards fell dramatically. Yet, by the middle of the 19th century, workers living standards had risen considerably. That process was by no means a continual one, as the “Hungry Forties” demonstrated when thousands of workers starved in the northern towns, as a consequence of unemployment. Yet, living standards did rise, and that rise cannot be explained by the action of trades unions, for the majority of workers, because during that period it was only the skilled workers who were unionised. Unskilled workers were only unionised as a result of the “New Unionism towards the end of the century. I would suggest that the explanation here is that it was the mass influx of peasants into the towns, which created a large supply of labour-power, which pushed down wages, and it was the reaching of a state of equilibrium in the labour market, which explains the fact that wages gradually rose. Similarly, we see in China today, workers not only demanding 30-50% pay rises, but winning such rises with the backing of the State Chinese Workers and the State, a situation, which is again due to the fact that the available supply of Chinese workers has begun to dry up.

I am not suggesting that trades unions, or industrial struggle, have no part to play in this process, I am merely reinforcing Marx's analysis that its role is marginal, and conditional upon other factors. I now want to turn to the basic mechanism by which the rise in workers living standards is effected, and then to deal with how that itself is conditional upon other factors.

In fact, the mechanism is the reverse of that which Marx set out as against Weston, in showing that workers could not simply push up wages beyond the value of labour-power. Suppose we take the position for capital as a whole as being:

C 2000 + V 1000 + S 1000 = K 4000.

Let us say that the wage bundle that makes up V consists of a “standard commodity” (X), and this V = 1000 units of it. Let us now assume that capital succeeds in reducing the exchange value of this Standard Commodity by 50%, so that the value of labour power falls accordingly. If workers continue to consumer the same 1000 units of X, then they will only need to be paid V = 500, or if we assess each of these units as 1 hour of labour-time, they will only need to work 500 hours rather than 1000, to reproduce the value of their labour power. Surplus value will rise accordingly.

C 2000 + V 500 + S 1500 = K 4000.

But, what is the consequence of this rise in S? It could be that out of much increased surplus value, Capitalists increase their unproductive consumption. More likely, seeing a higher rate of profit, Capital will accumulate more rapidly as capitalists seek to maximise their profits further. And, more than that, the higher rate of profit is likely to encourage an accumulation of capital from other sources. Petit-bourgeois, and even workers seeing the higher rate of profit, and improved position of Capital v Labour, may seek to mobilise their hoarded cash, or might seek to access credit from banks, who have acquired their own share of that increased surplus value, in order to convert it to capital, and start their own businesses. Not only will this mean that there is an increased supply of capital, but to the extent that these petit-bourgeois (in part), and certainly workers, were suppliers of labour-power, the supply of labour-power is reduced. Overall the consequence is that the Supply of Capital is increased, and the supply of labour-power is reduced, just at the moment when the increased supply and accumulation of capital means that the demand for labour-power is raised.  This is the argument Adam Smith proposed to explain the law of the tendency for the rate of profit to fall.  Its also the process Marx describes in Capital III, Chapter 15, to explain the overproduction of capital.

If we assume that we began with a situation, in which there was full-employment (a constraint I will relax later), then the consequence will be that the price of labour-power (wages) must rise. The rise in price, given full-employment, will mean that its supply will increase via the working of overtime, for example. The consequence is that wages will rise above the value of labour-power, and this will mean that workers can now consume not just 1000 units of X, but 1000 x (1+n) units where n equals the percentage rise in wages. So if wages rise 20%, then the wage bundle will now be 1200X. But, these additional 200 units of X, require production. That production is facilitated by the fact that there has been capital accumulation resulting from the preceding rise in S. The consequence is that the economy sees a shift in its production function towards a greater quantity and variety of wage goods.  That is also what Marx describes in Value, Price and Profit, as resulting from a rise in wages, rather than Weston's claim that it results in a rise in inflation.

"Instead of being limited to some branches of industry, the fall in the rate of profit consequent upon the rise of wages would have become general. According to our supposition, there would have taken place no change in the productive powers of labour, nor in the aggregate amount of production, but that given amount of production would have changed its form. A greater part of the produce would exist in the shape of necessaries, a lesser part in the shape of luxuries, or what comes to the same, a lesser part would be exchanged for foreign luxuries, and be consumed in its original form, or, what again comes to the same, a greater part of the native produce would be exchanged for foreign necessaries instead of for luxuries. The general rise in the rate of wages would, therefore, after a temporary disturbance of market prices, only result in a general fall of the rate of profit without any permanent change in the prices of commodities."

This is still consistent with a rise in the organic composition of capital, and with a growth in the production of means of production, for the simple reason that these additional wage goods, themselves require additional production of means of production for their own production. Once this shift in production is accomplished a new equilibrium is established. If all of the 1500S is accumulated, and then without the rise in wages, we would have,

C 3200 + V 800 + S 2400 = K 6400, allowing for a 20% rise in wages then,

C 3200 + V 960 + S 2240 = K 6400.

Compared to the original situation C/V (the organic composition of capital) has risen from 200% to 333%. S/V (the rate of exploitation) has risen from 100% to 233%, and the S/(C+V) (the rate of profit) has gone from 33.3% to 53.8%. Yet, workers real living standards have risen by 20%, and production of wage goods X now stands at 1920 units as opposed to 1,000 units. The rise in real wages required no element of “class struggle” to effect, but was the result quite simply of the straightforward application of the laws of supply and demand to the price of labour-power in a situation of full-employment, and with a rising demand for Labour-Power arising from increased accumulation. That rise in wages itself creates an increased demand for wage goods, which results in a shift of society's production function, to increased production of wage goods, and the means of production required to produce them.

Back To Part 1

Forward To Part 3

Wages, Prices and Profits - Part 1

I was reading a back copy of Capital and Class the other day. In an article by G.Mantega and M. Moraes “A Critique of Brazilian Political Economy”, they write,

Wage increases, when they occur, far from reflecting capital's preoccupation in guaranteeing a level of consumption, are a result of the struggle, which the working class undertakes through its trade unions, parties etc. and are the victories of this class over the Capitalists.” (p150)

They make this comment in relation to the idea put forward by some Brazilian economists that rising wage levels were not only desirable, but necessary in order that the Brazilian domestic market could grow, and so capital accumulation could proceed.

But, this statement is false. Marx in his debates with Weston – See Value, Price and Profit, shows that workers can never win ultimately from these “guerilla” struggles, as he calls them. If workers win a pay rise, higher than is consistent with capital accumulation, if they raise the price of labour-power above the value of labour power, then capital will respond by a variety of methods – speed-up, introduction of new, labour-saving machinery, a slow down in investment, and so on, in order to reduce the demand for labour power, so that its price falls back again. However, in The Grundrisse, Marx also says that workers real living standards DO rise, as a result of the expansion of Capital. He calls it Capitalism's “Civilising Mission”. Even had Marx not said that, then we only have to use the evidence of our eyes to see that workers living standards have risen, and are rising. There appears to be a contradiction here. On the one hand, Marx shows that capital has an interest in forcing wages down to the minimum level. This is a basic class conflict that lies at the heart of capitalism, between labour and capital. He shows that the actual rise in wages/living standards cannot be a result of an economistic, distributional struggle, because in that struggle workers lack the basic tools to be able to win anything other than temporary skirmishes, which will be reversed. As he puts it,

"Citizen Weston, on his part, has forgotten that the bowl from which the workmen eat is filled with the whole produce of national labour, and that what prevents them fetching more out of it is neither the narrowness of the bowl nor the scantiness of its contents, but only the smallness of their spoons."

Yet, living standards do rise. If that rise is not a result of this distributional struggle, then what is its cause? It is not enough to simply say that the cause is the fact that capital needs such a rise. Just because capital might need it, does not mean it will get it, or tell us how it is achieved, particularly given the conflict at the level of each firm, that leads capital to try to minimise wages.

In the Grundrisse, Marx sets out a basic outline of the process. Capital, in trying to reduce the value of labour-power, reduces the value of wage goods. As workers consume more of these lower priced goods they eventually reach a situation where the demand for any particular commodity is relatively sated. Orthodox economics refers to this as the price elasticity of demand, whereby to increase demand by any given proportion, requires larger and larger proportional falls in prices. Long before orthodox economics discussed this phenomena, Marx had described it. He writes, for example, in Theories of Surplus Value,

“Say’s earth-shaking discovery that “commodities can only be bought with commodities” simply means that money is itself the converted form of the commodity. It does not prove by any means that because I can buy only with commodities, I can buy with my commodity, or that my purchasing power is related to the quantity of commodities I produce. The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.” 

Capital as it expands produces new use values, which then form additional commodities that workers can consume, which then form part of the general bundle of goods that comprise the necessary consumption for the reproduction of labour-power; what Sraffian economics calls the “Standard Commodity”. As workers increasingly form the majority of consumers, capital depends on being able to sell to workers.

This might be an accurate description of the process, but it is not an explanation of it. The reason capital cheapens wage goods is to reduce the value of labour-power. That can only happen, capital can only minimise the payment to labour, if the actual bundle of use values that form the workers consumption remains the same. As Marx says in the Grundrisse, each capitalist wants to keep the wages of his workers at a minimum to maximise his profits, but wants the wages of all other workers to be as high as possible in order to create the maximum demand for his products! As, Mantega and Moraes say, wage goods are not the only form of consumption. Marx himself demonstrates that under capitalism, constant capital grows at a faster rate than variable capital over time i.e. workers share of the pie, of total production falls, whatever happens to their wages in nominal or real terms. So, capital can create demand for itself by producing more means of production. In addition, if the bundle of wage goods consumed by workers remains the same, capital can still increase the production of use values consumed by capitalists as unproductive consumption i.e. luxury goods, out of their increased surplus value.  Besides, productive-capitalists are not the only ones besides workers who consume.  Landlords, obtain large rents out of surplus value, the state derives taxes out of surplus value, and money-lending capitalists derive vast amounts of interest and dividends out of surplus value, all of which goes to fund unproductive consumption.

As Mantega and Moraes point out, the fall in the value of wage goods, means that the bundle of wage goods could be increased, whilst still enabling the rate of profit to rise. If, formerly workers had to work for 4 hours to reproduce their labour-power i.e. to create sufficient value to equal the value of the wage goods they consume, and worked another 4 hours producing surplus value, then, if workers only needed to work for 3 hours, that would mean 5 hours of surplus value. If real wages rose so that the bundle of wage goods increased to be equal to 3.5 hours, that would still leave 4.5 hours of surplus value. The rate of exploitation would have risen from 100% to 4.5/3.5 x 100 = 128%, even though workers living standards would have risen. But, again, the fact that this possibility exists does not give us an explanation as to why it should, why capital should facilitate such a rise in workers living standards, when the basic tendency is to maximise exploitation by minimising wages.

The following attempts to pick this apart, and provide an explanation of the process. The starting point is to deal with the idea that the mechanism is a consequence of distributional struggle, by going beyond the argument provided by Marx, and looking at the empirical evidence.

Forward To Part 2

Monday, 26 July 2010

Budget Affects Capital Again

Last week Cable & Wireless announced that their business had been badly affected as a result of the Budget and the Liberal-Tory Cuts, particularly in relation to the cancelling of IT contracts. Its shares fell 17% in one day on the news. Today, the BBC is reporting that Connaught, is reporting further bad news.

I blogged a while ago, about the fact that its shares had fallen after the Budget, because it had announced that the Government plans on Social Housing and Housing Benefit would hit its business as a social housing provider. Back then its shares fell by 30% on two separate days. Now it has announced even more bad news, saying it will need additional funding. Its shares fell another 70% today. Its shares are now down 90%.

Every developed Capitalist economy has a State that occupies between 40-50% of economic activity, even the home of the free market - the US. That is no coincidence. Monopoly Capitalism needs a large State for a number of reasons, most significantly it acts as a means of automatic stabilisation for Capital. These examples are just an example of that. Cut back on State spending, and one of the first casualties are all those private firms that have lucrative contracts supplying it with goods and services. That is one reason why under current conditions, drastic cuts in the State are not in the interests of Capital.

However, as a recent post by Phil over at AVPS points out, actual policy formation by Governments is a far more complicated matter than just Government Parties meeting the needs of the ruling class. Generally speaking, the ruling class exercises its power and influence through its State. Governments operate under a different dynamic. In order to get elected they have to address themselves to their core vote, and increasingly to the "middle ground". The political ground on which they stand in order to win that vote is not at all co-terminous with the interests of Capital.

The State can and will act to represent the interests of Capital, by frustrating those elements of Government policy - whether a Tory Government or a left labour Government - if they seriously undermine the interests of Capital. But, the degree to which they are prepared to do that depends upon how seriously the interests of Capital are damaged. For example, the State will only rise in open revolt if the interests of Capital are threatened to the degree where its continued dominance is called into question. But, there are plenty of ways in which the damage by Government's to the interests of Capital can be undermined without such an open confrontation. Obfuscation, embarrassing Ministers with leaks, or "mistakes", and so on. Having said that, the Tories could still do damage with their illiterate economics.

Saturday, 24 July 2010

How Robust Is The Recovery?

The flash figure for UK Q2, GDP blew the socks of estimates, coming in at 1.1% higher, as against forecasts of just 0.6%. The FTSE, however, fell on the day. Why? Firstly, the figure is not all it seems. As CNBC reported, much of the rise was due to a massive rise in Construction. However, as one contributor pointed out, not only did this figure partly reflect on the fact that in the first quarter Construction activity was depressed due to the very bad weather, but also, which not many commentators have picked up on, it also reflects the fact that the ONS have changed the way they calculate this figure.

All that being said, if you take out the Construction figure, you still get an increase of 0.7%, which is still better than forecasts. Given the period under review, it is testimony to the fact that the previous Government's policy of stimulus was working, just as it has worked in China, Brazil, the US and elsewhere. The problem is, as Paul Mason pointed out on Newsnight, a significant portion of that GDP growth came from that stimulus. The Government is now proposing to take away that very large part of where the growth came from, and under conditions where the UK's closest trading partners are taking similar actions that will contract their economies, where China is taking action to slow its economy, because it has been growing TOO fast, and where the US stimulus is beginning to unwind, and right-wing politicians in the US are taking their cue from Europe, and demanding at least no more stimulus, if not budget cuts. The GDP figure, is backward looking, nearly all the forward looking indicators are pointing in a definite downward direction. The effect of the Liberal-Tory Budget has been to severely dent confidence, because the most likely consequence is a severe retrenchment, and under those conditions no business is going to rush out to invest, which is the sole hook the Government's economic policy hinges on.

Worse still, is that the growth figure is a double-edged sword. It comes at a time when inflation is stubbornly high, and has confounded the bank of England's predictions for it to fall for more than a year. With loads of money washing around the economy, the level of increased activity that the GDP figure suggests, is likely to result in further rising prices. And, as I've pointed out previously, the inflation that will be imported from China, and the rest of Asia, along with the rising prices resulting from the Government's Budget measures on Vat etc., will push up prices even further. Already, Andrew sentence on the MPC is demanding that interest rates be raised to head off the danger of inflation. At the moment he's a lone voice, and is likely to remain that way. But, at some point unless the bank wants to risk hyper-inflation it WILL have to raise rates. Given their current level of just 0.5%, any rise will have a dramatic effect, on businesses borrowing costs, and on mortgages, which could rise 10, 20,30, or even 50%. No wonder the FTSE did not rise.

But, there was another reason the FTSE would not have risen, and that is that the European bank Stress Tests were not going to be released until after trading closed. Traders would want to see how that panned out before making any bets. In fact, the Tests were a bit of a con. As David (Danny) Blanchflower told CNBC. The one thing they avoided was the effects of a sovereign default, of say Greece on all or part of its debt. Yet, that is precisely what has been spooking markets for the last few months, and many economists believe is inevitable at some point! In fact, if some of the other factors included in the tests were to occur, its difficult to see how such a default would be avoided. Other than, as I have pointed out in the past, defaults could be avoided if the EU simply printed money to monetise the existing debts of Southern Europe. But, that would imply introducing all the other measures I have spoken about, effectively it means the creation of a single European State, the issuing of single EU Bonds, central control over Budgets and so on. It also means a Federal Fiscal Policy with massive amounts of redistribution from the centre to the periphery. With current political conditions, none of that seems very likely in the immediate future.

And, in the meantime massive problems remain in that periphery as Paul Mason sets out in his blog in relation to Spain. If as I've written elsewhere house prices in the UK need to fall by half or more, in Spain, with 1 million empty homes, and an economy that was built almost entirely on debt and property speculation, then with unemployment at 1930's Depression levels already, and more to come as a result of the austerity measures, house prices need to fall by more like 80 or 90%. In fact, under these conditions, and the same applies to Greece, Portugal, Italy and Ireland, then the last thing they need is austerity, because the only way they could deal with the debt, the only way they could rebalance their economies away from the previous dependencies, is through growth. Instead they are going to get recession and deflation.

To use David Blanchflowers phrase if the PIIGS could fly, then Europe's problems could be resolved. If instead of a fiscal contraction they could get a major fiscal boost then the existing liquidity already in the system, would begin to be taken up. Some of the construction firms that have almost completely stopped working in Spain and the rest of Southern Europe, could get work, building not more houses, but roads, schools, hospitals etc., and could provide jobs in the process, which would have a rapid effect on stimulating aggregate demand. In the meantime, it would mean that breathing space would be provided to expand investment in other industries. Spain has been developing alternative energy systems to take advantage of its plentiful sunshine. Investment in these industries could provide the basis of a significant export industry rather than reliance on Tourism – which is likely itself to be undermined in the future as Asia, and Africa become developed as tourist destinations. But, such development could also ensure that the rest of an integrated European economy had markets for investment and sales too. Without it, EU trade is likely to contract, and Europe is likely to catch a bad dose of Swine Flu from its PIIGS.

Wages And House Prices

According to the last in the BBC's Money Watch programmes on the economic crisis, the long-term relation of house prices to average earnings is 3.5. The current relation is 5. That implies that house prices would need to fall by 30%. This is a bit less than my calculation that they need to fall by 50% to return to trend. In either case in a return to the mean, just as house prices rise above the mean in a bubble, so they decline to below the mean when the bubble is burst.

There is, of course, another alternative to house prices collapsing by 30, 50 or more percent. Wages could rise. However, whilst prices would only have to fall by 30% to restore the long-term average, wages would have to rise by much more to achieve that result. Assume that the index of average wages is equal to 100. Then at the long term average house prices would be 350. They are currently at 500. If they remain at 500, what does the index of wages have to rise to for the relation to be 3.5, answer 500/3.5 = 143. In other words wages would have to rise by 43% to achieve the same result. Given that wages are pretty stagnant, given that the Government is introducing a pay freeze for the 25% of the workforce that works in the Public Sector, and given that pressure will be put on all wages as a result of the 1.3 million extra unemployed the Treasury estimates will result from the Budget, a rise of 4.3% looks unlikely, let alone 10 times that amount. Moreover, what is important is not just gross earnings, but disposable earnings. Given that workers will face a rise in VAT, and rises in prices of other commodities, disposable income is likely to fall not rise.

As the economy goes into reverse if not into a double-dip, a serious house price crash now looks inevitable, and that in itself will have serious economic consequences. At the same time, there will be some who benefit. With the crazy casino Capitalist economy, especially as it applies to housing in Britain, luck or timing can seriously affect your wealth.

In 1947, when my parents bought their house, things were similar to today. There was a massive housing shortage, and large numbers of young men, like my Dad were being demobilised from the Army, getting married and having families. Building new houses takes time. My parents, were desperate for a house. With a small daughter, they had lived with relatives and in lodgings. It was very unsuitable as many people in similar circumstances today would attest. I'm not sure what my dad was earning in 1947, but it wouldn't have been much – I've got his Army papers somewhere, and I'll have to check what he was paid as a Corporal, which was probably more than he earned as an engineer. I know his wages didn't rise to £20 a week until the 1960's.

The old terraced house they bought cost them £1,000, and like today they had to take out a separate loan with the Co-op, to raise enough of a deposit to get a mortgage. 27 years later when the house was destroyed they got exactly the same nominal amount back! By contrast had they been able to wait for just two or three years, in 1947, they could have bought a brand new semi-detached house, part of a development in the village, for just £250! The difference between paying £1,000 for an old terraced house, as opposed to buying the new semi, for £250 was huge. Not only was the cost of repayment crippling, but the price of those same semis now stands at around £90,000 to £100,000.

If house prices do crash dramatically now in that way, then anyone buying after the crash stands to be in a similarly favourable position in years to come.

Northern Soul classics - Quicksand - Martha & The Vandellas

There are two classic midsummer Northern records both by Martha and the Vandellas, one is the timeless "Heatwave", and the other is this one. In the mid 60's when the new fangled transistor radios came out, we were able to walk around the local park, or for us down at the lake at bathpool, or even on some occasions at the open air swimming pool at Trentham Gardens listening to Radio Caroline, though constantly having to retune. We could imagine the kids in America driving around in their open topped cars with this stuff blaring out. The closest we could think of here was our head teacher who had a convertible old Ford Consul.

Friday, 23 July 2010

The Politics And Programme Of The First International - Conclusion

The posts here have examined the politics and programme of the First International as outlined in the Instructions of 1866. Clearly, this does not complete an analysis of the First International's politics, which also requires some examination of the organisation's intervention into actual events. It is better to do that by looking at events themselves on an individual basis, which is a separate task. I have not attempted here to provide a history of the International, of which there are many already. What I have attempted here, by concentrating on the actual programmatic formulations is to look at the general method of Marx, who formulated these positions. I have attempted to contrast those positions with the positions that much of the left adopts today, which in themselves in large part rest upon a sort of “accepted knowledge” that for a long time has gone unquestioned. The most fundamental aspect of Marxism should be to leave nothing unquestioned. I think that looking at the positions that Marx adopted, shows that there is much to be questioned.

The Politics And Programme Of The First International - Part 8


[French and German subtitle reads: "Standing armies; their relation to production."]

(a) The deleterious influence of large standing armies upon production, has been sufficiently exposed at middle-class congresses of all denominations, at peace congresses, economical congresses, statistical congresses, philanthropical congresses, sociological congresses. We think it, therefore, quite superfluous to expatiate upon this point.

(b) We propose the general armament of the people and their general instruction in the use of arms.

(c) We accept as a transitory necessity small standing armies to form schools for the officers of the militia; every male citizen to serve for a very limited time in those armies.

I have already covered much of this topic in my blog Proletarian Military Policy. I will, therefore, restrict my comments to a basic summary of the background to the position set out here.
The idea that Marxists should not be interested in questions of how their own bourgeois state organises in this manner can be countered simply by referring to Engels excellent pamphlet The Prussian Military Question and the German Workers' Party where he makes this statement that would be anathema to today’s pacifists of the Left,

“Universal conscription — incidentally the sole democratic institution existing in Prussia, albeit only on paper — marks such an enormous advance on all previous forms of military organisation that, having once existed, even if its implementation left much to be desired, it cannot again be permanently reversed. An army today must be based on one of the two clearly defined systems: either the recruitment of volunteers — which is antiquated and only possible in exceptional cases such as England — or universal conscription. All conscriptive systems and ballots 33 are after all no more than very imperfect forms of the latter. The basic idea behind the Prussian law of 1814 is that every citizen who is physically capable of bearing arms thereby has the obligation to do so personally in defence of his country, during his years of military fitness; this basic idea is far superior to the principle of purchasing substitutes which we find in every other country having a conscriptive system, and having existed for fifty years it will undoubtedly not succumb to the bourgeoisie's burning desire for the introduction of the "trade in human flesh", as the French call it.

However once we accept that the Prussian military system is founded on universal, compulsory service without substitution, the only way it can be further improved without its own spirit being breached is for its basic principle to be put increasingly into practice. Let us consider how things stand in that respect.”

Engels goes on to take the opportunity of pointing out how the workings of Capitalism meant that large numbers were unfit for service, but also says in relation to draft dodging,

“All that is needed is to insist strictly and without mercy that men who have avoided recruitment should make up the time afterwards, and then the whole rigmarole of harassment and paperwork would be unnecessary and there would be more recruits than previously.”

Again pointing to the inefficient means by which the Capitalist state dealt with this issue.

He makes clear why for a socialist this is important.

“Whether reorganisation means some slight increase to the military burden or not, will make little difference to the working class as a class. On the other hand it certainly cannot remain indifferent to the question of whether or not universal conscription is fully implemented. The more workers who are trained in the use of weapons the better. Universal conscription is the necessary and natural corollary of universal suffrage; it puts the voters in the position of being able to enforce their decisions gun in hand against any attempt at a coup d'état
The only aspect of army reorganisation in Prussia which is of interest to the German working class is the increasingly thorough Implementation of universal conscription.”

Once again demonstrating how far Marx and Engels were from today’s Statists who masquerade as Marxists, Engels adds,

“It seems that the most advanced workers in Germany are demanding the emancipation of the workers from the capitalists by the transfer of state capital to associations of workers, so that production can be organised, without capitalists, for general account; and as a means to the achievement of this end: the conquest of political power by universal direct suffrage.”

This is another example of the attitude adopted earlier by Marx in relation to Education. We are not where we want to be, so we have to start from where we are. In the same way that Capitalism provided workers with the training and discipline, as well as the economic forms, Co-operative production and credit, which were the basic requirements for creating Socialism, so by providing universal training in the use of weapons it provided workers with the very simple method of enforcing their decisions made via Universal Suffrage, in the face of attempts to frustrate those decisions by the bourgeoisie. If only the Chilean workers under Allende all had weapons, all had had military training!

No wonder the bourgeoisie has adopted the method of creating for itself small, professional standing armies, only resorting to general conscription at times of extreme external threat. As Marx points out above, developing a Militia, is not something that can be developed overnight. The general arming and military training of the population, facilitates such a development, and means that a corps of workers can be developed with the necessary skills to be able to act as trainers for workers in such a militia, and to form its “officer corps”. In the US, the Constitution specifies the right of every citizen to bear arms, as part of a well-regulated militia, and many other countries have militia. In fact, the organisation of workers in their workplaces, and communities, facilitates the development of not just a militia, but of neighbourhood policing groups, defence squads etc. which can make the task of policing neighbourhoods, effectively combating crime and anti-social behaviour, a normal social function for all citizens.

The Politics And Programme Of The First International - Part 7

Polish question

[The French subtitle reads: "Necessity of annihilating Russian influence in Europe by implementing the right of nations to self-determination and restoring Poland on a democratic and social basis." German subtitle reads similarly.]

(a) Why do the workmen of Europe take up this question? In the first instance, because the middle-class writers and agitators conspire to suppress it, although they patronise all sorts of nationalities, on the Continent, even Ireland. Whence this reticence? Because both, aristocrats and bourgeois, look upon the dark Asiatic power in the background as a last resource against the advancing tide of working class ascendancy; That power can only be effectually put down by the restoration of Poland upon a democratic basis.

(b) In the present changed state of central Europe, and especially Germany, it is more than ever necessary to have a democratic Poland. Without it, Germany will become the outwork of the Holy Alliance, with it, the co-operator with republican France. The working-class movement will continuously be interrupted, checked, and retarded, until this great European question be set at rest.

(c) It is especially the duty of the German working class to take the initiative in this matter, because Germany is one of the partitioners of Poland.

The debates over questions of Nationalism and Colonialism were really only beginning at this time. Dealing with this question requires more space and time than is available here, and my intention is to deal with this section separately along with a wider discussion on Nationalism and Colonialism. What is important here, however, is again the basic approach. The starting point is not any question of bourgeois democratic right for self-determination. The starting point is what is in the best interests of the working-class movement. The establishment of an independent, democratic Poland is not argued for, for its own sake – a movement that is internationalist, and seeks to abolish nation states, can hardly base itself on the creation of new ones! - but, because of what that means in terms of the power of Russia (the dark Asiatic power in the background), whose continual intervention into the affairs of Europe, had set back not only the workers movement, but even the development of bourgeois democracy. It is this method of starting from the interests of the working-class, rather than abstract notions about bourgeois democratic freedoms and rights – which ultimately comes down to a question of moral judgements – which much of the Left today, which bases itself on ideas of “anti-imperialism”, has abandoned. It is one of the areas where Lenin was to not only stand in Marx's footsteps, but, to mix metaphors, to stand on his shoulders, and develop Marx's ideas for use in the twentieth century.

The Politics And Programme Of The First International - Part 6

Direct and indirect taxation

(a) No modification of the form of taxation can produce any important change in the relations of labour and capital.

(b) Nevertheless, having to choose between two systems of taxation, we recommend the total abolition of indirect taxes, and the general substitution of direct taxes. [In Marx's rough manuscript, French and German texts are: "because direct taxes are cheaper to collect and do not interfere with production".]

Because indirect taxes enhance the prices of commodities, the tradesmen adding to those prices not only the amount of the indirect taxes, but the interest and profit upon the capital advanced in their payment.

Because indirect taxes conceal from an individual what he is paying to the state, whereas a direct tax is undisguised, unsophisticated, and not to be misunderstood by the meanest capacity. Direct taxation prompts therefore every individual to control the governing powers while indirect taxation destroys all tendency to self-government.

The shortness of this section is symptomatic of the importance Marx placed on the role of taxation. In fact, its role or lack of it is set out in the opening statement, that it could provide no important change in the relationship of Labour and Capital. What is perhaps even more significant, and demonstrates the difference between Marx's attitude to the Capitalist State, and that of much of the Labour Movement, including those who call themselves Marxist, over the last 100 years, is the reasons he gives for favouring “direct taxes” i.e. taxes applied directly to individuals, rather than individuals actions. For the last 100 years, the Left has raised basically the same demand contained in the radical Liberal demands of the Communist Manifesto for “A heavy progressive or graduated income tax.” The Left has raised this demand in the context both of a concept of redistributing income from the rich to the working-class, and also for practical purposes of financing an ever expanding Capitalist State, whose growth has been associated, in some strange sense, as being the equivalent with a development towards Socialism. Despite the fact that this latter concept, was most closely associated with the ideas of Edouard Bernstein and the Revisionists, who thought they saw a gradual evolution by these means, and the transformations taking place within Capital itself, towards Socialism, it has been effectively adopted by other “Marxists”, including those who claim to be “revolutionary Marxists” whose whole tradition arises from the opposition to Bernstein, and revisionism.

Marx has nothing in common with such an approach. He begins by pointing out that whatever form of taxation is adopted it can have no effect on the relations between Labour and Capital. Why? Essentially, for the reasons already outlined in his argument against Weston about why Labour cannot improve its position vis a vis Capital simply by wages struggle. A Tax, which raised workers wages, by some form of transfer from Capital, would be no different than if workers were to raise wages at the expense of Capital. Capital would simply respond by introducing speed-up, finding ways of reducing the value of Labour Power, introducing labour-saving machinery, and in a globalised economy, simply moving its operations elsewhere. Alternatively, Capitalists could simply reduce their future investments, and sit on their cash. The consequence would be that the demand for Labour Power would fall, and with it wages. Workers would be back to square one or worse. The distribution of income between workers and Capitalists was not accidental, and could not be taken in its own right independently of the mode of production i.e. the fact that a small number of people owned the means of production, whilst the vast majority didn't, and had to sell their Labour Power.
Setting himself firmly against such an approach, in the Critique of the Gotha Programme, Marx wrote,

“Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production itself. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of nonworkers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labour power. If the elements of production are so distributed, then the present-day distribution of the means of consumption results automatically. If the material conditions of production are the co-operative property of the workers themselves, then there likewise results a distribution of the means of consumption different from the present one. Vulgar socialism (and from it in turn a section of the democrats) has taken over from the bourgeois economists the consideration and treatment of distribution as independent of the mode of production and hence the presentation of socialism as turning principally on distribution. After the real relation has long been made clear, why retrogress again?”

Marx here does not even advocate an Income Tax, but only a Direct Tax – which could just as easily by a Poll Tax. Flowing from the above assessment, his reason for advocating Direct Taxes then has nothing to do with any idea of redistributing income from the rich to the workers. His reasons for advocating Direct Taxes are quite different, in fact more akin to those of the Taxpayers Alliance than of the Left. His arguments for Direct taxes as set out are:

1. Direct taxes are cheaper to collect.

2. Direct taxes do not interfere with production.

3. Because everyone can understand a Direct Tax

4. Everyone can see exactly how much they are being taxed (most people have no idea how much they pay in VAT, various Duties etc.)

5. Because of the above everyone will seek to minimise how much they are being taxed, they will minimise the size of the State.

6. Marx sees the minimisation of the size of the State as a good thing, because its growth “destroys all tendency to self-government.”

This same formulation was adopted in the Eisenach Programme with the only amendment being that rather than just specifiying a Direct Tax, it specified a Progressive Income Tax (i.e. an Income Tax that rose as Income rose, as opposed to a flat rate Income Tax), and was adopted by Marx and Engels when they helped write the Programme of the French Socialists. But, the fact that Marx saw nothing socialist in this demand, and nothing even that could redistribute income or wealth from Capital to Labour, was again demonstrated in the Critique of the Gotha programme, where he attacks such notions, and points out that all Taxation is nothing more than the means of financing the Government. He writes,

“That, in fact, by the word "state" is meant the government machine, or the state insofar as it forms a special organism separated from society through division of labour, is shown by the words "the German Workers' party demands as the economic basis of the state: a single progressive income tax", etc. Taxes are the economic basis of the government machinery and of nothing else. In the state of the future, existing in Switzerland, this demand has been pretty well fulfilled. Income tax presupposes various sources of income of the various social classes, and hence capitalist society. It is, therefore, nothing remarkable that the Liverpool financial reformers — bourgeois headed by Gladstone's brother — are putting forward the same demand as the program.”

Marx is clear, Economism, the struggle of workers against Capital for immediate, but necessarily temporary improvements of their condition, whether those improvements be as a result of industrial struggle to raise wages and conditions, or more general reforms can never provide any solution for the workers. At most they can act as a defensive response, and in doing so can create the kinds of organisation through which workers can develop the means of really solving their problems, the development of workers property, and the actual transfer of the existing means of production into their own hands.

The other reason that Marx argued that the form of tax could not make any difference in the relations between Capital and Labour was that he argued that Tax is a deduction from Surplus Value, as is Rent and Interest. The argument is effectively the other side of what he was saying to Weston. If we take his formula for Capital as a whole C + V + S = K, then at any one time the V, the Value of Labour Power is given as with any other commodity, by the Labour-time necessary for its production, in other words the labour-time required to produce that bundle of Use Values that go to reproduce the working class. Marx's argument against Weston, and the economists and redistributionists is that if Wages rise above V, then Capital will act to reduce it back to the value of Labour Power. The argument becomes clear if we put numbers to the above.

C 200 + V400 + S400 = K1000.

Suppose VAT is introduced at a rate on all wage goods. The price of wage goods then rises, but workers still need that bundle of Use Values, if Labour-Power is to continue to be reproduced as before. If you build a car with inferior parts compared to those used previously the car itself will be inferior. If you build workers with inferior (or fewer inputs) than previously then those workers, and the Labour Power they provide will also be inferior. The labour Power of workers who are healthy, well-fed, and well educated is both quantitatively, and qualitatively different from that provided by workers who are unhealthy, under-fed, and ill-educated. The former is qualitatively greater because even undertaking the same type of work, they will be able to work harder, faster, more efficiently and so on. In any given period of time they will produce more Use Values. It is qualitative greater, because they will be able to engage in types of skilled and complex work that the latter could not do. As complex Labour, one hour's work of the former would then be worth several hours work of the latter. If Capital does not want to see its Surplus Value fall as a result of the deterioration of its workers then the bundle of wage goods has to remain the same.

The consequence is then C200 + (V400 +T100) + S300 = K1000.

The result of the VAT is that Surplus Value falls, because the total value produced cannot change, and S is a derivative of the new value created by workers, minus the costs of reproducing that Labour-Power. In other words it could have been written,
C200 + V400 + (S400-T100) = K1000.

The same applies if a 25% Income Tax is imposed. In order to buy the same bundle of Use Values, workers would need to raise V, by 25%, so S would fall proportionately again. With either the Direct or Indirect Tax, workers remain in exactly the same position they started in. S falls by 25%, but T arises as a result. Instead, of being in the hands of Capitalists individually in the form of S, it now exists in the hands of Capitalist collectively, in the hands of their state. The relation between Capital and Labour is unchanged.

The situation is only modified where the Tax goes to cover the cost of something like Socialised Education or Healthcare. If, say education is taken as being one of those Use Values that comprises the bundle that reproduces Labour Power, then all that changes here is that workers buy this Use Value from the State in the form of Taxation rather than from Capital in the form of a price paid out of their wages. One of the reasons that Capital introduced socialised Education and Healthcare, was precisely because these Use Values, are important for it in the reproduction of the kind of Labour-power it requires for a modern economy. By socialising these Use Values, it ensures that provision is made to the level it requires, and workers devote the proportion of their Wages, it requires them to, in order that the provision made is guaranteed demand. To the extent that these payments are made via an Income Tax, whereby higher paid workers pay more than lower paid workers, whilst the lower paid workers (by and large) receive a similar amount of Use Value, the consequence is only that Capital has to pay a proportionately higher price for the higher paid Labour-Power, than it would have had to do, and a proportionately lower-price for lower-paid, Labour-power than it would have to have done had those workers bought those Use Values directly out of Wages. Overall, the relation between Capital and Labour is unchanged.